Dive Brief:
- Abercrombie & Fitch Co.’s Q3 earnings exceeded analysts' and the company’s expectations. The retailer reported net sales of $1.1 billion for the quarter ended Oct. 28. That’s up 20% from $880 million last year.
- Overall comparable sales rose 16% from last year. The company’s namesake apparel brand posted net sales of about $548 million, up 30% from a year ago. The retailer’s Hollister brand reported $508 million in net sales, up 11% from last year.
- Abercrombie raised its full-year outlook. The company now forecasts net sales growth of 12% to 14%, up from 10% previously, and an operating margin of around 10%, up from a previous range of 8% to 9%.
Dive Insight:
During a Tuesday earnings call, CEO Fran Horowitz told analysts and investors that strong top-line growth trends throughout the quarter helped drive sales results beyond expectations, as did a strong back-to-school season for the Hollister brand.
“What becomes more difficult to game out here is the sustainability of Abercrombie’s more recent momentum,” analysts Dylan Carden and Alexander Vasti with William Blair said in a recent note. “The company is in a unique position where both brands are now performing well, with A&F benefiting from nearly a decade of repositioning and Hollister gaining traction following its own missteps over the last two years and likely benefiting from easing inflationary pressures.”
UBS analysts led by Mauricio Serna said that Abercrombie is likely to achieve its updated full-year guidance based on good Q4-to-date trends. “However, we think a deteriorating consumer spending environment” should result in Abercrombie's earnings-per-share growth weakening.
Overall UBS analysts said, “we continue to believe management is taking the right actions to drive sales growth,” which will enable the company to deliver sustainable high single-digit to low double-digit percent operating margins.
Horowitz said the Hollister women's business continues to lead the way for the brand, which posted a second consecutive quarter of growth. Tops, bottoms and dresses drove sales improvements versus last year. The company’s supply chain is also healthier, Horowitz said, which is also helping the bottom line.
Trends for menswear were similar to the second quarter with solid performance in non-denim bottoms, fleece and sweaters. Those categories were areas of focus for newness as the company worked to rebuild Hollister’s assortment, Horowitz said, according to a call transcript.
“As we enter the peak holiday season, our inventory is in a significantly better place compared to last year, giving us the opportunity to be strategic with promotions,” Horowitz said.
Chief Financial and Operating Officer Scott Lipesky said during the call that the company had an operating cash flow of about $350 million for the first nine months of the year and $134 million of operating cash flow for Q3. Abercrombie reported about $1 billion in liquidity, up from $617 million a year earlier.
Lipesky said the company has “had an encouraging start” to Q4, though the majority of volume is yet to come. He also noted that this fiscal year includes a 53rd week, which is expected to add $45 million to sales growth for Q4. “We are pleased with the continued progress across regions and brands, giving us confidence that our playbook is working,” Lipesky said.
