Abercrombie & Fitch posts record sales – Stock surges 14%

Is the clothing stock a buy?

Clothing retailer Abercrombie & Fitch (NYSE: ANF) blew away earnings estimates with a record quarter, propelling the stock 14% higher.

The retailer generated net sales of $1.1 billion in the quarter, a record for the first quarter. It not only topped its own outlook but was better than the $1.06 billion estimate by Wall Street analysts.

Net income dropped 29% year-over-year to $81.7 million, or $1.59 per share. However, this crushed Wall Street estimates of $1.36 per share. Earnings were lower year-over-year on significantly higher cost off sales, which rose 18% to $417 million, and selling expenses, which increased 15% to $400 million.

“For the first quarter, we delivered record net sales of $1.1 billion on growth of 8% to last year, above our expected range of 4% to 6%. Operating expense leverage partially offset lower gross margin and marketing investment, resulting in an operating margin of 9.3% and earnings per share of $1.59 for the quarter, both above the ranges we provided in March,” Fran Horowitz, CEO, said on the earnings call.

Hollister brand drives sales

In the first quarter, the revenue increase was driven by a huge increase in sales for its Hollister brand. Hollister sales jumped 22% to $549 million, with comparable store sales rising 23%.

The Abercrombie brand saw sales decline 4% in the quarter to $548 million, with comparable store sales down 10%.

For Hollister, it was the eighth straight quarter of yar-over-year growth.

“Growth was balanced across genders and categories with strength in fleece, jeans, and skirts. Cross channel traffic was strong in the quarter, and we continue to ramp marketing investment year over year to support growth,” Horowitz said on the call.

Also, sales in the EMEA region grew 12% to $185 million, while U.S. growth was 7% to $875 million. In the APAC region, sales increased 5% to $37 million.

Outlook must factor in tariffs

Factoring in 10% tariffs across the board and 30% tariffs for China, Abercrombie & Fitch altered its outlook somewhat. It actually increased its sales expectations for the full fiscal year to 3% to 6% growth, up from the previous 3% to 5% growth.

However, it lowered its operating margin range to 12.5% to 13.5%, from the previous 14% to 15%. It also reduced its net income per share to $9.50 to $10.50, from the previous $10.40 to $11.40.

Also, it still plans to have 40 new stores, with 60 opening and 20 closures, and 40 remodels, with capital expenditures remaining at $200 million.

Tariffs are projected to have a $50 million cost impact on the company, net of mitigation efforts. That is anticipated to reduce the full year operating margin by roughly 100 basis points, thus the reduced guidance.

“Globally, we remain nicely diversified across 16 countries, Horowitz said on the call. “We’ve been leveraging our agile playbook to build a list of mitigation strategies with our primary focus on the combination of supply chain footprint changes, vendor negotiations, and operating expense efficiencies.”

The sourcing volume from China, specifically, will be low-single digits, as the company has worked to relocate resources of supply.

Is the stock a buy?

It’s a little unusual that Abercrombie & Fitch stock had its best day in two years, according to Barron’s, based on this report. But, the stock is dirt cheap, with a P/E of 7, as the stock has nosedived 41% year-to-date. So, it appears that investors were buying low.

But the stock has been a perennial winner. With a 5-year annualized return of 42% and a 10-year annualized return of 16%, investors know this specialty retailer has a track record of success – and the solid report and cheap price were too good to pass up.

The stock has a median price target of $111 per share, which is up 27% from the current price of about $88 per share.

It may not be the best time to jump on board, especially with today’s run up and a somewhat blurry outlook, clouded by tariffs.