Why these two retail stocks are red hot

Two of the hottest stocks on Wednesday were the retailers Abercrombie & Fitch (NYSE:ANF) and Dick‘s Sporting Goods (NYSE:DKS). Clothing retailer Abercrombie & Fitch jumped 27% on Wednesday to $193 per share while sporting goods chain Dick’s Sporting Goods rose 16% to $227 per share.

Both stocks soared to all-time highs on blowout earnings reports posted Wednesday morning. Thus far, this has been a strong year for retail stocks, which are up about 20% year to date (YTD).

Blowout earnings results

Both retail chains destroyed their respective earnings estimates.

For the first fiscal quarter that ended on May 4, Abercrombie & Fitch posted net sales of $1 billion, up 22% year over year with same-store sales rising 21%. Analysts had projected about $958 million in sales for the quarter.

In addition, the retailer’s gross profit rate jumped 540 basis points to 66.4%. Meanwhile, Abercrombie and Fitch’s operating income came in at $130 million, skyrocketing some 282% year over year, while its net income per share was $2.14 per share, up from 32 cents per share in the same quarter a year ago.

“We successfully navigated seasonal transitions with relevant assortments and compelling marketing, leveraging agile chase capabilities and inventory discipline, driving sales above our expectations. Growth was broad-based across regions and brands with Abercrombie brands registering 31% growth and Hollister brands delivering growth of 12%,” CEO Fran Horowitz said in the earnings report.

Dick’s Sporting Goods also had a huge quarter, smashing earnings estimates. For the quarter that ended on May 4, Dick’s generated $3 billion in net sales, up 6.2% from the same quarter a year ago. That beat estimates of $2.94 billion.

Same-store sales climbed 5.6%, which was higher than the 3.6% increase in the same quarter a year ago. Dicks’ net income fell 10% to $275 million or $3.30 per share, but that easily beat estimates.

The retailer’s net income fell due to higher expenses, including the opening of two new House of Sport experiential concept stores.

“Our core strategies and execution are delivering strong results, and we are continuing to gain market share as consumers prioritize Dick’s Sporting Goods to meet their needs. Because of our strong Q1 performance, our expectations for continued robust demand from athletes and the confidence we have in our business, we are raising our full year outlook,” said President and CEO Lauren Hobart in the earnings report.

A brighter outlook

Investors were not only thrilled with the results from both retailers; they were also happy with the outlooks for both of these companies.

Based on its robust sales, Abercrombie & Fitch raised its guidance, calling for a 10% increase in net sales for this fiscal year. The retailer’s previous outlook had projected net sales growth of 4% to 6, so this is a significant increase. The company also bumped its operating-margin outlook up to 14% from 12%.

For the current quarter, Abercrombie & Fitch sees strong net sales growth in the mid-teens with an operating margin of 13% to 14%, up from 9.6% in the same quarter a year ago.

Dick’s Sporting Goods also elevated its outlook, raising its net sales projection for the fiscal year to between $13.1 billion and $13.2 billion, up from the previous guidance of $13 billion to $13.1 billion.

Further, the retailer boosted its same-store sales guidance to a 2%-to-3% increase, up from the previous 1% to 2% increase. Finally, the new earnings per share guidance is $13.35 to $13.75, up from the previous guidance of $12.85 to $13.25.

Should you buy either stock?

Abercrombie & Fitch received a slew of sizable price-target increases on Wednesday following the release of its earnings reports, while Dick’s Sporting Goods also got a few smaller upgrades.

Abercrombie & Fitch stock is now up a whopping $108% year to date (YTD), and it is still trading at a reasonable valuation with a P/E ratio of 24. Meanwhile, Dick’s Sporting Goods stock is also surging, up 54.7% YTD, including Wednesday’s gains. It is even cheaper with a P/E of 16.

I think these are both still reasonable buys based on their outlooks and valuations. Consumer confidence is rising, and inflation has been declining. Dick’s is probably the slightly better buy due to its lower valuation and market-share gains, but Abercrombie & Fitch could also have more room to run.