Abercrombie & Fitch shares plunged 17% on Wednesday after the company's CEO warned of an “increasingly uncertain environment ahead,” the first time in four quarters that the company cited cautious consumer sentiment.
The company reported better-than-expected quarterly earnings and raised its full-year sales target, but its shares tumbled even as investors were banking on even bigger expected increases from the booming retailer.
Chief Executive Officer Fran Horowitz warned that Abercrombie & Fitch's growth could slow later this year.
“While we continue to operate in an increasingly uncertain environment, we remain committed to executing on our global strategy and maintaining inventory and expense discipline,” Horowitz said.
“Abercrombie & Fitch's past rapid growth has been linked to higher gross margins due to supply chain cost savings and higher retail prices,” retail analyst Hita Herzog told The Washington Post.
“A decline in operating profit margins is a [that] “Gross margins may take a hit due to rising inflation and increased freight costs. Information like this will inevitably spook investors in the short term,” she said.
Abercrombie's revenue jumped 21% in the second quarter, an unusual retail success at a time of sluggish spending amid rising prices.
The New Albany, Ohio-based apparel company's sales increase mirrors a 16 percent increase over the same period last year, continuing a remarkable recovery over the past year.
The company has rebranded from its longtime tradition of selling trendy teen clothes in dimly lit, cologne-scented stores to target Gen Z and millennial women with simpler stores selling neutral colors and work wear.
“Abercrombie's rapid growth over the past two years is due in part to a successful rebranding that has largely abandoned its aspirational youth culture image,” Herzog, principal retail analyst at H Squared Research and an adjunct lecturer at Parsons School of Design, told The Washington Post. “The company is targeting the millennial demographic with a broad product mix of work and everyday essentials at affordable prices.”
Herzog said Abercrombie has also pivoted to capitalize on post-pandemic consumer trends, focusing more on digital sales than brick-and-mortar stores.
The company's shares have risen 53.9% so far this year and are up 182.8% from a year ago.
The company reported earnings per share of $2.50, beating the $2.22 LSEG analysts had expected. Earnings were up from $1.10 per share a year ago.
Abercrombie reported sales of $1.13 billion, beating LSEG analysts' forecasts of $1.1 billion.
The retailer saw same-store sales increase 18% as the summer and back-to-school shopping seasons boomed.
Abercrombie expects sales to grow by a low double-digit percentage this quarter, faster than the 8.9% increase expected by LSEG analysts.
Abercrombie raised its full-year sales forecast to 12%-13% growth from 10%, in line with LSEG analysts' prediction of 12% growth.
The retailer's fiscal 2024 will have one fewer week than fiscal 2023, which will likely impact its full-year guidance.
The week's loss is expected to result in a holiday quarter loss of $80 million and a full-year loss of $50 million.
Strong sales at Abercrombie stores have prompted the company to focus on struggling Hollister stores.
The company hopes to replicate the same successful rebranding at Hollister, a sister brand of Abercrombie, the historically Californian surf-style retail chain.
After marketing Abercrombie to Gen Z and millennials, the company is now trying to market Hollister to today's high-spending teens and pre-teens.
Hollister's second-quarter sales jumped 17 percent, while same-store sales rose 15 percent. International sales at Hollister's Europe, Middle East and Africa division also rose 16 percent.
Abercrombie has paid a heavy price in the past for trying to expand its brand internationally, so it is now focusing instead on expanding its customer base.
Earlier this month, the company announced a partnership with children's clothing maker Haddad Brands.
The company plans to expand its Abercrombie Kids brand, originally marketed to children ages 7 and up, to include a line for babies and toddlers.
