Abercrombie & Fitch's (NYSE: ANF) stock price plunged 17% on Aug. 28 after it followed up a strong quarterly report with a cautious outlook for the rest of the year. For the second quarter of fiscal 2024, which ended on Aug. 3, the apparel retailer's net sales rose 21% year over year to $1.13 billion and exceeded analysts' estimates by $40 million. Its adjusted EPS jumped 131% to $2.50 and also cleared the consensus forecast by $0.28.
A&F now expects its net sales to rise 12% to 13% for the full year, which was up from its prior outlook for "about 10%" growth and in line with analysts' expectations for 12% growth. However, CEO Fran Horowitz warned that the company was still operating in "an increasingly uncertain environment" -- and those comments seem to have rattled the bulls.
Data source: Getty Images.
But even after its latest pullback, A&F's stock is up about 770% over the past two years. Should investors consider its post-earnings dip to be a good buying opportunity?
How Abercrombie & Fitch revived its ailing business
For many years, A&F was considered a dying mall-based apparel retailer. It had grown rapidly during its heyday in the 1990s and early 2000s, but its sales tumbled as the "retail apocalypse" wiped out malls and new fast-fashion competitors like Inditex's Zara and H&M carved up the market. Its dated marketing campaigns, dimly lit and heavily scented stores, and big-logo apparel were also poorly received by a new generation of teen shoppers.
That all changed after Fran Horowitz, the president of A&F's faster-growing Hollister brand, took over as the company's CEO in 2017. Under Horowitz, A&F shuttered Abercrombie's weaker brick-and-mortar stores and refreshed the banner with inclusive marketing campaigns, modern store renovations, and more apparel for older shoppers. It also expanded Abercrombie Kids and ramped up its e-commerce and social media investments.
A&F then expanded Hollister to offset Abercrombie's slower growth, and it nurtured the growth of its smaller Gilly Hicks lingerie brand to compete more effectively against American Eagle Outfitters' Aerie and Victoria's Secret's Pink. It also right-sized its international business and streamlined its spending.
As a result, A&F's net sales -- which had declined every year from fiscal 2014 to fiscal 2017 -- finally grew at a compound annual growth rate (CAGR) of 4% from fiscal 2017 to fiscal 2023. The company achieved that growth even as the pandemic shut down its stores from fiscal 2020 to fiscal 2021 and the inflationary headwinds throttled its growth in fiscal 2023. Its adjusted EPS increased at a whopping CAGR of 46% during those six years.
Can Abercrombie & Fitch maintain its momentum?
In fiscal 2023 (which included an extra week), A&F's net sales rose 16%, its gross margin grew 600 basis points to 62.9%, and its adjusted EPS jumped from $0.25 to $6.28. Here's how its core businesses fared over the past year.
Period | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 |
|---|---|---|---|---|---|
Abercrombie sales growth (YOY) | 26% | 30% | 27% | 31% | 26% |
Hollister sales growth (YOY) | 8% | 11% | 6% | 12% | 17% |
Total sales growth (YOY) | 16% | 20% | 16% | 22% | 21% |
Total gross margin | 62.5% | 64.9% | 62.9% | 66.4% | 64.9% |
Data source: Abercrombie & Fitch. YOY = year over year.
Those headline numbers are impressive, but the company's full-year outlook for 12% to 13% sales growth to about $4.3 billion implies it will gradually lose its momentum in the second half of the year. It will also lose an extra week of sales compared to fiscal 2023. But despite that near-term slowdown, A&F still aims to grow its annual revenue to $5 billion over the "long term."
A&F's top-line growth is decelerating, but management expects the operating margin to rise from 11.3% in fiscal 2023 to 14% to 15% in fiscal 2024. It attributes that expansion to rising gross margins (which suggests the business still has plenty of pricing power) and improved operating leverage. Analysts expect its adjusted EPS to grow 57% for the full year.
It looks undervalued relative to its growth potential
At $138, A&F's stock trades at just 14 times this year's earnings. American Eagle Outfitters, which is growing slower, trades at 12 times forward earnings. A&F operates in a fickle industry and still faces intense competition, but its stable sales growth and rising margins indicate it won't become another victim of the retail apocalypse. Its low valuation also indicates it's undervalued relative to its growth potential, so its recent post-earnings pullback looks like a great buying opportunity.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.
