Up 175% This Year, Will Abercrombie & Fitch (ANF) Continue Its Hot Streak

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While most of the market commentary over the past few years has been lauding technology stock, particularly NVIDIA ( NASDAQ: NVDA) and AI stocks, Abercrombie & Fitch ( NYSE:ANF) have quietly minted a fortune for shareholders. Over the past 5 years, Abercrombie & Fitch is up 736% (and 175% the past year alone) as management continues to grow year-over-year sales in addition to creating a culture of financial disciple and stretching operating margins upwards of 15%.

Looking forward to future quarters, will Abercrombie & Fitch continue to reward shareholders or has the stock reached it's peak? Lets look at the recent quarterly earnings call to pick out what management had to say.

ANF 2025 Outlook

"After our historic success in the first half, our teams are energized and we've entered the second half ready to deliver for our global customers. I am thrilled with our start to August and we are raising our full-year sales growth and profitability expectations." - Fran Horowitz, CEO and Director

Abercrombie tipped off analysts that the company will be increasing full year sales, with net sales growth coming in higher than 2023. Operationally, the company will also be at the top of its range, with operating margins beating 2023.

However, there are a few reasons investors have reason for concern.

"We continue to further strengthen all aspects of the customer journey, developing a consistent, enduring business that can grow and succeed even in these dynamic and often uncertain times." -Fran Horowitz, CEO and Director

Fran Horowtiz has ANF in a great financial position, but is bracing for an uncertain economy in the coming quarters and tips investors that there could be hiccups as the company navigates economic uncertainties. In addition to external factors, Abercrombie will also have some freight pressure in the near term:

"We expect the gross profit rate to be consistent with 2023 now that we are through the majority of the cotton benefit and we expect to see year-over-year freight pressure in the quarter." - Scott Lipesky, Executive VP and COO & CFO

Complete ANF Transcripts Call for the 2nd Quarter, 2024

Operator: Good day, and thank you for standing by. Welcome to the Abercrombie & Fitch Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Mo Gupta. Please go ahead.

Mohit Gupta: Thank you. Good morning, and welcome to our Second Quarter 2024 Earnings Call. Joining me today on the call are Fran Horowitz, Chief Executive Officer; and Scott Lipesky, Chief Financial Officer and Chief Operating Officer. Earlier this morning, we issued our second quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our site is an investor presentation.

Please keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission.

In addition, we'll be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and the investor presentation issued earlier this morning.

Finally, references to Abercrombie brands include our Abercrombie & Fitch and abercrombie kids brands, and references to Hollister brands include our Hollister and Gilly Hicks brands.

With that, I will turn the call over to Fran.

Fran  Horowitz: Thanks, Mo, and thank you all for joining us this morning. I am incredibly proud to report our financial results exceeded the expectations we provided in May and set second quarter company records for both net sales and operating profit. We delivered strong second quarter net sales growth of 21%, reaching $1.1 billion with an operating margin of 15.5%. We achieved these outstanding results while also funding long-term growth priorities across regions and brands.

After our historic success in the first half, our teams are energized, and we've entered the second half ready to deliver for our global customers. I am thrilled with our start to August, and we are raising our full year sales growth and profitability expectations. For more context, in 2024, we've set out to demonstrate sustainable profitable growth on top of the defining fiscal year results in 2023. I'm so proud of how we're showing up for our customer, and we are clearly seeing respond.

In addition to record second quarter sales, this was our seventh consecutive quarter of net sales growth in a dynamic, often uncertain consumer environment, which underlies the strength of our brands, our team and our playbook. We work every day to satisfy new and returning customers' needs across product, voice and experience.

I believe our global brand portfolio is as strong as it's ever been. Combined with an agile, modern supply chain and a culture of financial discipline, we believe we have all the pieces in place to deliver on our goals across a variety of macro environments.

Sharing a bit detail on Q2, I want to call out a consistent theme we've demonstrated over the last 5 quarters. We are delivering strong time results while also maintaining balance in how we're growing. Our second quarter sales growth was broad-based, fueled by expansion across regions, brands and genders. We also saw growth in both units and AUR consistent with the past 5 quarters. There's balance in our product, too, with growth across key categories as our teams are delivering lifestyle assortments with increasing relevance to our local customers.

On the gross profit line, we saw 240 basis points of rate expansion compared to last year. This was driven by higher AUR and improved product costs, partially offset by higher freight costs. We also delivered operating leverage in the quarter while funding important marketing, digital, technology and people investments to support our long-term aspirations. All this great work led to operating income of $176 million for the quarter, nearly double the second quarter results from the prior year.

Continuing the theme of balance. We delivered growth across regions in the second quarter. The Americas continued to lead the way with 23% net sales growth, consistent with the first quarter. The Americas grew across markets with nice increases in traffic across direct selling channels.

In EMEA, putting aside a pandemic-related sales rebound in early 2022, we demonstrated growth on growth for the first time in over 10 years, delivering 16% growth on top of 4% in the second quarter of 2023. Customers in both the U.K. and Germany continue to respond to the localized assortments, and we're engaging with them to increase marketing and brand presence.

Finally, APAC grew 3% in the quarter on comparable sales growth 21%, where we continue to be led by our focused markets of China and Japan as we engage that customer in new and different ways. We are energized to see the progress we've made to localize our playbook across regions this quarter, but we know there's more runway ahead of us.

On to the brands. Abercrombie brands had another outstanding quarter with net sales growth of 26% on top of 26% growth in the second quarter of 2023. Balanced growth continued in men's and women's and across categories with seasonal shorts, swims, skirts and dresses performing well. We also saw balanced growth in both AUR and units as well as new and existing customers.

As a follow-up to our highlights in the first quarter, The Wedding Shop continued to contribute nicely and has proven to be a great assortment extension. The reaction from customers has exceeded our expectations, and we have now entered the men's sizes and suiting options to complement our dresses.

We continue to prioritize customer acquisition at Abercrombie, funding effective marketing campaigns across digital and social channels. We're excited to enter the back half with more customer activations planned.

In the U.S., we released our latest NFL collection, further expanding on what has been a great partnership. Related to the collection, we have a number of exciting social and digital campaigns planned throughout the season to drive engagement. It's just one example of how Abercrombie brands is working to win with both new and current customers in the second half of the year.

Moving on to Hollister brands. We continue to build momentum. Net sales growth of 17% exceeded our expectations and accelerated sequentially from 12% growth in Q1. Importantly, the balance continues from first quarter with both men's and women's growing as well as expansion in both unit sales and AUR, the latter driven by lower promotions.

On the product side, women saw balanced growth across categories with particular strength in skirts and dresses. In men's, we saw shorts and graphic tees contribute to the growth.

With the additional week of back-to-school selling in the second quarter, we were pleased to see consistent growth trends, and I'm very happy with how back-to-school is going for us so far.

With great product, our goal now is to amplify the brand. On top of new store locations and refreshed store experiences, we're investing in incremental marketing to increase engagement and reintroduce Hollister brands to our target audience. This increased marketing investment spans across digital and social channels as well as through authentic real-life experiences and activations. One example is our Feel Good Fest, which is a concert and festival put on in partnership with high schools across the country.

More recently, as back-to-school and fall school sports have kicked off, we launched a Hollister Collegiate Graphic Shop. The collection of quality basics, including crew necks, sweatshirts, hoodies and tees, touting vintage-inspired university logos and graphics represents more than 30 universities across the United States. Hollister brands is building nice momentum, and we believe product collections like this can help bring new customers into the brand.

As we reflect on our team's success and strong second quarter results, I am as confident as ever in our global growth potential and our ability to make continued progress on growth and profitability in 2024, as reflected in our increased expectation for sales and operating margin. As we enter the back half, our team remains on offense while looking forward to the holiday season, and I'm thrilled with what we've seen in the third quarter so far.

Looking further out, with a strong family of brands, a proven playbook and evolving regional operating model, I believe our relationship with the customer continues to improve, and we all see tremendous opportunity ahead. We continue to further strengthen all aspects of the customer journey, developing a consistent, enduring business that can grow and succeed even in these dynamic and often uncertain times. A huge thank you to our associates around the world, whose hard work, dedication and support of our customer, have put us well on our way to sustainable profitable growth in 2024.

And with that, I'll hand it over to Scott.

Scott D. Lipesky: Great. Thank you. To echo Fran, we were very pleased with the first half of the year. Our teams continue to execute at a high level across the business, managing the day-to-day while continuing to make progress on our long-term investment plan.

Getting into the results for the second quarter. We delivered record net sales of $1.13 billion, up 21% compared to last year with growth across regions and brands. Similar to the first quarter, this is the first time in the history of the company we delivered over $1 billion in net sales in a fiscal second quarter.

On a reported basis, we saw a 320 basis point benefit from the calendar shift from the 53rd week in 2023, consistent with our expectation. Comparable sales grew 18%, representing the fifth consecutive quarter of double-digit comp sales growth in both the stores and digital direct selling channels.

On a regional basis, we again delivered growth across regions. Net sales grew 23% in the Americas, 16% in EMEA and 3% in APAC. On a comp basis, sales grew 18% in the Americas, 17% in EMEA and 21% in APAC. In the Americas, similar to last quarter, we saw balanced growth across markets. In EMEA, the U.K. and Germany continued to lead the way, and we've now delivered year-over-year growth for 5 consecutive quarters in the region. In APAC, we saw a large spread from comps and net sales growth which was primarily driven by foreign currency and net store closures.

From a brand perspective, Abercrombie brands delivered strong growth with net sales up 26% to last year while Hollister brands growth accelerated to 17% as our customers responded favorably to our assortments and our marketing. On a comp basis, Abercrombie grew 21% and Hollister grew 15%.

For gross profit, we delivered rate of 64.9% for the quarter, up 240 basis points compared to the 62.5% rate in 2023. We saw year-over-year benefits from lower cotton costs as well as a benefit from lower promotions across brands on well-controlled inventories and strong product acceptance. These benefits were partially offset by higher freight costs. We ended the quarter with inventory up 9% to last year with all brands in a clean position entering the fall season.

Moving on to expenses. Operating expense, excluding other operating income, was $561 million for the quarter compared to operating expense of $497 million last year. We continue to drive operating expense leverage with operating expenses as a percent of sales of 49.4%, an improvement of 380 basis points compared to last year.

We saw similar themes to the first quarter in terms of year-over-year OpEx growth with higher variable expenses on sales growth, as well as inflation and increased investments in marketing, digital and technology and people. For marketing, second quarter expense was in line with expectations, finishing at around 4.5% of sales.

Operating income was a record $176 million or 15.5% of sales compared to operating income of $90 million or 9.6% of sales last year. Net income per diluted share was $2.50, up from $1.10 last year. EBITDA totaled $215 million or 19% of sales compared to EBITDA of $126 million or 14% of sales last year.

On the balance sheet, we ended the quarter with cash and equivalents of $738 million and liquidity of approximately $1.2 billion. We delivered operating cash flow of roughly $165 million and had $43 million of capital expenditures. We repurchased $15 million worth of shares, ending the quarter with $202 million remaining on our current share repurchase authorization.

During the quarter, we fully redeemed the senior secured notes at par value with cash on hand, ending the quarter with no funded debt. We also amended and extended our asset-based credit facility. The maximum size of the credit facility was increased from $400 million to $500 million, inclusive of the new $100 million European sub-facility.

Moving forward, with the redemption of the senior secured notes behind us, we expect to prioritize share repurchases, to put excess cash to work in the back half, subject to business performance, share price and market conditions. At a minimum, we expect to buy back shares to offset net dilution from stock compensation.

On the store fleet, we ended the quarter with 757 stores. For the first half of the year, we opened 18 new stores, remodeled or rightsized 30 stores and closed 26 stores. New and remodeled store performance has exceeded our expectations, and we are excited to deliver many new store experiences in the weeks and months to come. For the full year, we expect to deliver approximately 60 new stores, 60 remodels and rightsizes and 40 closures.

Shifting to our expectations for the rest of fiscal 2024. We've had a strong start to the year, delivering record net sales in the first half, and the momentum has continued in the first few weeks of the third quarter. For the third quarter, we expect net sales to be up low double digits compared to third quarter 2023 level of $1.06 billion, including a year-over-year headwind of around $10 million or 90 basis points due to the calendar shift from the 53rd week in 2023. We expect growth across seasons and brands and minimal impact from foreign currency.

We expect operating margin to be in the range of 13% to 14% compared to 13.1% in 2023. We expect the gross profit rate to be consistent with 2023 now that we are through the majority of the cotton benefit, and we expect to see year-over-year freight pressure in the quarter. We also plan to continue investing in our brands and infrastructure, which we expect will moderate potential OpEx leverage, keeping expected operating margins around 2023 levels. And we expect an effective tax rate in the mid-20s.

For the full year, we now expect net sales growth in the range of 12% to 13%, up from the 2023 level of approximately $4.3 billion, an increase in the previous outlook of up around 10%. This outlook continues to include an adverse impact of around $50 million from the loss of the 53rd week in 2023. We've included a table in the press release to provide more detail on expected sales and comparative growth impacts by quarter and for the full year.

For operating margin, we expect to be in the range of 14% to 15%, increasing the high ends compared to our prior outlook. We continue to expect the year-over-year improvement to be driven by gross profit rate expansion from the combination of lower cotton costs and higher AURs on lower promotions and clearance selling, slightly offset by higher freight costs.

We also continue to expect full year expense leverage while executing our agile funding process to find ways to accelerate investments in the business in the months to come. We expect an effective tax rate in the mid-20s and capital expenditures of approximately $170 million.

To finish up, we are very happy with how our teams are executing across the business. We delivered record financial results in the first half, improved our balance sheet with the elimination of funded debt and continued to invest in our brands and infrastructure. We look forward to executing our plans in the back half to deliver sustainable, profitable growth this year.
Operator, we are now ready for questions

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