Raymond James reiterates Abercrombie stock with $90 target

Abercrombie & Fitch (ANF) reported strong Q1 FY25 earnings, exceeding expectations with EPS of $1.59 versus the $1.37 estimate, driven by an 8% revenue increase and better SG&A control. Hollister's sales surged 22%, offsetting a decline in the Abercrombie brand, while revenue guidance for Q2 remained consistent, and full-year earnings guidance was widened. Despite a 440 basis point drop in gross margin and a lowered EBIT margin guidance for FY26 due to tariffs, analysts remain optimistic, as evidenced by Raymond James maintaining an Outperform rating with a $90 price target.

Analysis

Abercrombie & Fitch (ANF) demonstrated robust financial performance in its first-quarter fiscal year 2025, reporting earnings per share (EPS) of $1.59, significantly exceeding the anticipated $1.37. This outperformance was primarily driven by an 8% year-over-year revenue increase, which surpassed Raymond James and Street estimates of a 4% rise, and effective control over selling, general, and administrative (SG&A) expenses, which leveraged by 90 basis points to 52.7% of revenues, more favorable than the forecasted increase. A key contributor to this success was the Hollister brand, accounting for nearly half of company sales, which saw a remarkable 22% increase in net sales, well above projections of 9% to 11%, thereby offsetting a 4% sales decline in the Abercrombie brand. Geographically, performance in the Americas and EMEA regions exceeded expectations, while the APAC market met predictions. Despite these strengths, the company experienced a notable 440 basis point decline in gross margin to 62.0%. Looking ahead, Abercrombie & Fitch provided Q2 revenue guidance consistent with Q1 and widened the upper end of its full-year fiscal 2025 earnings guidance due to the Q1 beat. However, the company reduced its EBIT margin guidance for fiscal year 2026 by 150 basis points at the midpoint, with approximately 100 basis points attributed to current tariffs, and faces a potential $50 million impact from these tariffs. Strategic initiatives include opening 60 new stores in 2025 and aiming for $400 million in share repurchases. Raymond James maintained an Outperform rating and a $90.00 price target, viewing the overall guidance as more favorable than anticipated despite margin pressures, suggesting that the Hollister brand's strength has alleviated concerns regarding the Abercrombie brand's impact.

Key Decisions for Investors

• Investors should consider the sustained strength of the Hollister brand and effective SG&A management as key positive drivers, supporting the current Outperform rating and $90 price target.
• Monitor gross margin trends closely, as the significant Q1 contraction and potential for increased promotions could impact future profitability, despite better-than-expected SG&A leverage.
• Assess the implications of the reduced FY26 EBIT margin guidance, particularly the impact of tariffs, and evaluate the Abercrombie brand's performance for signs of stabilization or improvement.
• Factor in the company's capital allocation strategy, including share repurchases and store expansion, as potential value drivers, while remaining cognizant of the macroeconomic headwinds posed by tariffs.