Abercrombie & Fitch Stock Surges 87%: What’s Driving the Growth?

This year, Abercrombie & Fitch (NYSE: ANF) has been on a roll. The company’s shares were up 87% this year, before its Aug. 28 earnings release. That was more than every other large-cap company in the specialty retail industry in the U.S. besides Carvana (NYSE: CVNA).

The consumer discretionary stock posted a massive earnings beat on May 29, and shares rocketed up 24% in one day. The rise has been particularly impressive, as apparel companies like Nike (NYSE: NKE) and Lululemon (NASDAQ: LULU) are deeply in the red.

Let's get a better understanding of the firm’s overall business and look at its financial results over the past few years to understand why it has been performing so well.

Abercrombie & Fitch’s Operations and “Always Forward” Strategy

The company divides its operations by store brand and geography. The company’s brands are Abercrombie and Hollister. Abercrombie clothing is higher priced, has a “preppy” style, and caters to young adults. Hollister clothing offers lower prices, a more laid-back beach look, and targets teenagers. 

In 2023, the company’s Hollister brand accounted for two-thirds of its 750 retail locations; however, it accounted for slightly less than half of the firm’s total revenue. The Abercrombie brand made up the rest of the store locations and over half the revenue. This difference reflects the fact that Abercrombie gets around 60% of its sales from its digital, direct-to-consumer channel, compared to only 30% for Hollister.

The Americas segment accounted for 81% of net sales. Europe, the Middle East, and Africa (EMEA) accounted for 16%, and Asia-Pacific (APAC) accounted for 3%.

The company laid out its long-term plan in 2022, the “2025 Always Forward Plan." The plan lays out some key objectives investors might expect. They are driving sales growth, investing in digitization and analytics to improve the customer experience, and exercising financial discipline. Although unremarkable, focusing on the basics is often a great way to improve a business.

Impressive Strategy Execution Has Turned the Company Around

It appears that ANF is executing its plan to a tee. As of Q1 2024, the company’s last 12 months’ gross margin, operating margin, revenue, and net income were all the highest they had been in the last 10 years.

These metrics have spiked significantly from their lows in late 2022 and early 2023. Operating margin jumped an astonishing 900 basis points from Q1 2023. This shows how the firm is succeeding in driving top-line growth while also being smart about where it expends resources.

The company delivered solid growth in all its geographic regions over the past year. Abercrombie brand growth has been particularly impressive, increasing an average of 19% annually from Q1 2022 to Q1 2024. It seems like efforts to listen to its customers more are paying off.

Significant marketing changes took place in the Abercrombie stores, transitioning from dark and mysterious showrooms to bright and welcoming spaces that appeal to a much wider audience.

Abercrombie Posts Great Results, but Markets Run in Fear

In the company’s Q2 2024 earnings, it continued to jump over nearly every hurdle placed in front of it. Adjusted EPS more than doubled from the previous year, coming in at $2.50. This was an earnings surprise of 13%. Revenue also came in higher than expected at $1.13 billion, an increase of 21%.

The company substantially raised its full-year sales growth guidance to a mid-point of 12.5%. This surpassed Wall Street’s high expectations, which predicted a full-year sales growth rate of 11.8%. The operating margin of 15.5% was also 70 basis points above expectations. Yet, shares were down over 17% in Wednesday trading as of 11 AM EDT.

The drop may be due to the divergence in margin guidance compared to analysts’ predictions. For the full year, the midpoint operating margin guidance of 14.5% is right in line with expectations.

However, Q3's operating margin guidance was 13.5%, which is 167 basis points below expectations. Wall Street predicted margins would continue to rise throughout the year, while the company sees them falling.

While both parties predict full-year operating margin to land in the same spot, declining margins show decelerating momentum, a negative sign for future earnings. However, with all the good news in this report, it’s certainly arguable that this selloff is overblown.

The article "Abercrombie & Fitch Stock Surges 87%: What’s Driving the Growth?" first appeared on MarketBeat.