Abercrombie & Fitch (ANF) Reports A Surprise Loss, Is Latest Retailer To Sell Off On Inflation

3:23 pm Tuesday, May 24th, 2022

Abercrombie & Fitch (ANF) is trading sharply lower today, becoming the latest apparel retailer to take a hit on earnings. Analysts had been expecting the company to post a modest profit in Q1 (Apr), but ANF reported a fairly large loss. It also guided revenue lower for Q2 (Jul) and the full year. The one positive metric was that the company’s revenue for the quarter exceeded expectations.

The company’s mixed performance suggests that while consumers are still shopping, cost pressures have escalated more quickly than expected. The company’s top-performing segment was Abercrombie, which posted sales growth of 13% despite lapping last year’s huge, stimulus-supported 60% growth number. Hollister’s performance was not as strong; segment sales fell 3% yr/yr.

The Abercrombie brand has been in turnaround mode, aiming to refine its store environment and shopping experience while increasing its focus on adult shoppers. Abercrombie has also aggressively committed to building up its digital channels and has been increasing its footprint of non-mall locations. Abercrombie adults delivered its best Q1 sales since 2014 and its highest Q1 AUR (average unit retail) in brand history. Importantly, ANF’s efforts to raise prices and reduce discounting have paid off.

So, what went wrong? Extremely high inflationary trends, impacting everything from food to gas, are expected to weigh on consumer confidence. Also, freight and raw material costs remain elevated and are expected to remain elevated or a while, contributing to operating margin compression. Finally, China was a weak spot due to prolonged COVID lockdowns in Shanghai, which is one of ANF’s largest markets in the region.

Overall, most investors were likely bracing for a weak result given the recent misses that were posted by other retailers, but a loss of this size may be more than investors were prepared for. We have been fans of ANF’s turnaround efforts, especially for its Abercrombie segment. It is also notable that ANF expects to be a net store opener this year for the first time in over a decade. However, achieving that turnaround is clearly going to take more time amid the pressure of higher costs. Nevertheless, we commend ANF for aggressively buying back stock: the company reduced its share count by 15% last year and in Q1 repurchased 6% of shares outstanding.