Citi maintains Abercrombie stock buy rating, $98 target

Abercrombie & Fitch (ANF) reported strong Q1 earnings, with EPS of $1.59 exceeding the $1.37 consensus, driven by a 23% surge in Hollister comparable sales, although Abercrombie & Fitch brand sales declined 10%. Despite a 440 basis point gross margin decline, management raised FY25 earnings guidance to $10.00, significantly above market expectations, and anticipates Q2 sales growth of 3-5%. The company repurchased $200 million in shares, contributing to a pre-market share price increase of over 20%.

Analysis

Abercrombie & Fitch (ANF) reported first-quarter EPS of $1.59, exceeding the $1.37 consensus, largely propelled by a robust 23% comparable sales increase in its Hollister brand, which significantly outperformed the 11% expectation. This strength was contrasted by a 10% decline in comparable sales for the Abercrombie & Fitch brand itself (with the brand's total sales down 4%), a steeper fall than the anticipated 5% comparable sales decline. The company achieved overall net sales of $1.1 billion, an 8% year-over-year increase, supported by stronger-than-expected performance across the Americas, EMEA, and APAC regions. However, gross margin experienced a notable contraction of 440 basis points, wider than the guided 330-350 basis point decline, primarily due to increased promotional activity at the Abercrombie & Fitch brand, although this was somewhat mitigated by controlled expenditures.
Despite these mixed Q1 operational results, management issued a significantly optimistic fiscal year 2025 EPS guidance with a midpoint of $10.00, substantially above prevailing market projections. Furthermore, second-quarter sales are guided to increase by 3-5%, also surpassing expectations. This positive forward-looking guidance, combined with substantial capital return activity including $200 million in share repurchases during Q1 and plans for approximately $400 million in total for FY25, contributed to a pre-market share price surge exceeding 20%.
Nevertheless, certain concerns persist, notably a 20% increase in inventory levels which analysts deemed potentially excessive, and an implied second-quarter EBIT margin decline of 300 basis points, suggesting ongoing gross margin pressure in the near term. The company's guidance for fiscal year 2025, however, implies an expectation that this margin pressure will ease in the second half of the year. Abercrombie & Fitch also announced plans for 60 new store openings in 2025 and has disclosed a potential $50 million adverse impact on profitability from tariffs.

Key Decisions for Investors

• Investors should weigh the significantly upgraded FY25 EPS guidance and strong share repurchase program against the Abercrombie & Fitch brand's specific underperformance and current gross margin pressures.
• Closely monitor inventory levels, as the 20% Q1 increase alongside the Abercrombie brand's -10% comparable sales decline could indicate future discounting risk if sales do not accelerate as implied by full-year guidance.
• The projected easing of gross margin pressure in the second half of FY25 is critical to achieving the full-year outlook; progress on this front, along with the potential $50 million tariff impact, warrants careful observation.