The retailer’s fiscal Q2 report had good news for investors — and some bad news, too.
A funny thing happened on the way to the Abercrombie & Fitch (ANF -15.18%) earnings report Wednesday morning. (And to be clear, I mean funny strange — not funny ha-ha).
Reporting on its financial performance for its fiscal Q2, which ended Aug. 3, the teen-centric clothier easily met analysts’ consensus forecast for $1.1 billion in revenue, and also reported a $2.50 per share profit, well ahead of the $2.22 that Wall Street expected. In short, it “met” and “beat” estimates.
And yet, as of 10:30 a.m. ET, Abercrombie stock was down 15.6%. Why?
Abercrombie & Fitch Q2 earnings
Ordinarily, when a company beats earnings estimates, its stock price goes up, not down. But that didn’t happen this time. Abercrombie reported “broad-based net sales growth across regions and brands,” with sales rising 21% year over year, and same-store sales in particular up 18%. Profit margins on those sales rose nearly 6 percentage points to 15.5%, causing profits per share to more than double.
These are all excellent numbers and, indeed, “better than expected,” according to CEO Fran Horowitz. And in a positive note for investors in retail stocks generally, Horowitz highlighted the continued strength of the American consumer, citing 23% sales growth — above the world average — in the Americas market in particular.
Why sell Abercrombie stock?
So what’s not to like about all of that? Probably nothing. Past earnings, you see, aren’t Abercrombie’s problem. Its problem is the future.
Looking ahead, Abercrombie raised its guidance for full-year sales and profit margins, predicting that sales will grow by 12% to 13%, and that operating profit margins will land in the 14% to 15% range. That sounds good… but actually, it means that the retailer’s sales growth will slow as the year progresses, and its profitability will shrink.
Abercrombie’s new forecast for 2024 sales — $4.3 billion — falls well short of the $4.8 billion figure that Wall Street wanted to hear. Meanwhile, management’s prediction of a 14.5%-ish profit margin is a full percentage point below the margin Abercrombie earned in fiscal Q2.
This isn’t what investors wanted to hear, which is why Abercrombie stock is selling off Wednesday.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
