A&F Stock: Earnings Soar, But Why The Slump?

Core Insights - Abercrombie & Fitch's Q1 results exceeded expectations, leading to a 15% increase in shares, although the stock remains 44% below its year-to-date peak [1] - The stock has more than doubled in the last three years, driven by a 155% increase in earnings per share, with Q1 FY25 EPS at $1.59 on $1.10 billion in revenue, surpassing expectations [2] - The company's operational performance is strong, but investor concerns about sustainability and external risks are reflected in the declining valuation multiples [2] Group 1: Earnings Growth Drivers - The resurgence of the Abercrombie brand is attributed to store redesigns, broader market appeal, and a focus on digital and global expansion, with Abercrombie brand sales growing at an 18% CAGR from 2021 to 2024 [3] - Hollister's sales increased by 22%, benefiting from Gen Z enthusiasm and a stronger women's collection, while operating margins rose significantly [3] Group 2: Q1 Performance Overview - Abercrombie brand sales fell by 4% in Q1, with comparable sales down 10%, while Hollister achieved its eighth consecutive quarter of growth [4] - The operating margin for Q1 was 9.3%, lower than the previous year's 12.7%, but above expectations, with inventory value rising by 21% [4] Group 3: Guidance and Valuation - Full-year guidance has been revised, with EPS now forecasted between $9.50 and $10.50, and operating margins adjusted to 12.5%–13.5% due to anticipated tariff expenses [5] - The company expects 3%–6% net sales growth in 2025, with a $1.3 billion stock buyback program in place [5] Group 4: Stock Performance and Valuation - ANF's stock has experienced significant fluctuations, with a notable decline in 2025 amid macroeconomic risks and tariff challenges [6] - The current P/E ratio of 8x is below the four-year average of 14x, indicating potential upside if management effectively addresses headwinds [6]