Abercrombie & Fitch Co. ANF has posted strong second-quarter fiscal 2024 results, with sales and earnings surpassing the Zacks Consensus Estimate and showing year-over-year improvement. This marks the sixth consecutive quarter in which Abercrombie has outperformed top and bottom-line estimates.

The strong performance was fueled by substantial growth across regions and brands, especially in the Americas and the Abercrombie brand. The company’s earnings were supported by robust revenue growth, and enhanced gross and operating margins. However, the gross margin missed expectations this quarter.

Abercrombie’s earnings per share (EPS) of $2.50 in the fiscal second quarter improved 131.5% from the adjusted EPS of $1.08 reported in the year-ago quarter. Moreover, the bottom line beat the Zacks Consensus Estimate of $2.14. The robust earnings performance can be attributed to strong top-line growth, coupled with improved gross and operating margins.

Net sales of $1.13 billion advanced 21% year over year on a reported basis and 22% in constant currency. The metric surpassed the Zacks Consensus Estimate of $1.09 billion. ANF’s comparable sales improved 18%. The top-line beat was driven by broad-based net sales growth across regions, brands and channels, led by the strength of its brand portfolio and improved global capabilities.

Abercrombie shares fell 10% in pre-market trading on Aug. 28 despite the company reporting strong second-quarter fiscal 2024 results and raising its fiscal 2024 outlook. The negative response from analysts likely stemmed from the gross margin lagging expectations and the projected impacts of having one less week in fiscal 2024. Despite this, shares of this Zacks Rank #2 (Buy) company have soared 88.9% year to date compared with the industry's 9% growth.

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Abercrombie’s Regional & Brand Sales Drive Growth

Sales in the Americas improved 23% year over year to $901.2 million. Additionally, sales grew 16% to $199.7 million in the EMEA and rose 3% to $33.1 million in the APAC. Comparable sales grew 18%, 17% and 21%, respectively, in the Americas, EMEA and the APAC regions.

Net sales improved 26% year over year to $582.4 million for the Abercrombie brand. Moreover, sales increased 17% to $551.6 million at Hollister, reflecting strong sequential gains, and benefits from a better-than-expected summer and back-to-school selling season. The Abercrombie brand contributed 51% to the total company sales, whereas Hollister represented 49% of sales. Comparable sales grew 21% for Abercrombie and 15% for Hollister in the reported quarter.

Our model predicted sales growth of 18.7% for the Abercrombie brand and 9% for Hollister for second-quarter fiscal 2024. We estimated sales to increase 17.4% in the Americas and 6.4% in the EMEA, with a decline of 0.1% in the APAC for the fiscal second quarter.

Abercrombie & Fitch Company Price, Consensus and EPS Surprise

Abercrombie & Fitch Company price-consensus-eps-surprise-chart | Abercrombie & Fitch Company Quote

ANF’s Quarterly Performance: Improved Margins & Expenses

Abercrombie’s gross margin of 64.9% in the fiscal second quarter expanded 240 basis points (bps) from last year’s reported gross margin. Moreover, the gross margin expanded 230 bps from last year’s adjusted gross margin. The increase was driven by higher average unit retail, and lower freight and raw material expenses. While impressive, gross margin growth lagged our expectations of a 360-bps expansion to 66.1%

Operating expenses, excluding other operating income, increased 12.9% year over year to $561 million. As a percentage of sales, operating expenses, excluding other operating income, of 49.5% declined 380 bps from the year-ago quarter.

The company reported an operating income of $176 million compared with a reported operating income of $89.8 million and an adjusted operating income of $88.4 million in the year-ago period. It reported an operating margin of 15.5%, up 590 bps from a reported operating margin of 9.6% and 600 bps from the adjusted operating margin of 9.5% in the year-ago quarter.

We estimated a 20-bps decline in the adjusted operating expense rate to 53% for the fiscal second quarter.

ANF’s Financial Health Looks Stable

Abercrombie ended the fiscal second quarter with cash and cash equivalents of $738.4 million, no net long-term borrowings, and stockholders’ equity of $1.2 billion, excluding non-controlling interests.

The company had a liquidity of $1.2 billion at the end of the fiscal second quarter, which included cash and equivalents, and $430 million of borrowings available under the ABL Facility. Net cash provided by operating activities was $260 million as of Aug. 3, 2024.

Abercrombie’s 3Q & FY24 Outlook Shows Promise

Abercrombie is on track to achieve its 2024 target of demonstrating sustainable, profitable growth. The company expects to continue benefiting from strength in its brands, driven by its focus on delivering high-quality, on-trend assortments for new and retained customers across regions and brands. It has also been focused on making strategic investments across stores, digital and technology, which are slated to strengthen the company in the long term.

Backed by the strong first-half fiscal 2024 results, Abercrombie has raised its sales and operating margin views for fiscal 2024. It anticipates net sales for fiscal 2024 to increase 12-13% from the $4.3 billion reported in the prior year. It earlier expected net sales growth of 10% for fiscal 2024.

The company's fiscal 2024 is one week shorter than fiscal 2023. Abercrombie anticipates this lost selling week to reduce fourth-quarter sales by $80 million or 5.5 percentage points. For the fiscal year, the retailer expects a sales impact of $50 million or 1.2 percentage points.

Abercrombie expects the Abercrombie brand to continue outperforming the Hollister brand in fiscal 2024, with the Americas region leading the regional performance.

The company expects an operating margin of 14-15% for fiscal 2024 compared with the 14% mentioned earlier. The increased operating margin is likely to be driven by higher gross margin expansion and operating expense leverage. Abercrombie anticipates an effective tax rate in the mid-to-high 20s for fiscal 2024. Capital expenditure is estimated to be $170 million for fiscal 2024.

For the third quarter of fiscal 2024, net sales are projected to rise in the low-double digits from the $1.06 billion reported in the year-ago period. The operating margin is expected to be 13-14%, an increase from the operating margin of 13.1% delivered in third-quarter fiscal 2023. The effective tax rate is likely to be in the mid-20s.

Other Solid Picks in ANF’s Sector

We have highlighted three other top-ranked stocks from the Zacks Retail-Wholesale sector, namely Boot Barn BOOT, Deckers Outdoor DECK and Wingstop WING.

Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently flaunts a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 7.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn’s current financial-year sales and earnings per share suggests growth of 10.7% and 8.9%, respectively, from the year-ago reported figure.

Deckers is a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports and other lifestyle-related activities. The company presently carries a Zacks Rank of 2.

The Zacks Consensus Estimate for Deckers’ current financial-year sales and earnings suggests growth of 11.5% and 8.4%, respectively, from the year-ago reported figures. The company has a trailing four-quarter earnings surprise of 47.2%, on average.

Wingstop, which franchises and operates restaurants, currently carries a Zacks Rank of 2. WING has a trailing four-quarter earnings surprise of 21.8%, on average.

The Zacks Consensus Estimate for Wingstop’s current financial-year sales and earnings suggests growth of 36% and 51.2%, respectively, from the year-ago reported figures.

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