Why Abercrombie & Fitch Shares Plunge More Than 15% Wednesday Morning

A funny thing happened on the way to Abercrombie & Fitch (ANF -15.18%) earnings report Wednesday morning. (And to be clear, I mean weirdly funny — not funny ha-ha).

Reporting on its financial performance for its fiscal second quarter, which ended Aug. 3, the teen-focused apparel handily met analysts’ consensus forecasts for revenue of $1.1 billion and also reported a profit of $2.50 per share, well above the $2.22 that Wall Street was expecting. expected. In short, it “met” and “beat” estimates.

And yet, as of 10:30 a.m. ET, Abercrombie shares were down 15.6%. Why?

Abercrombie & Fitch Q2 Earnings

Usually, when a company beats earnings estimates, its stock price goes up, not down. But that didn’t happen this time. Abercrombie reported “broad-based net sales growth across regions and brands,” with sales up 21 percent year-over-year and same-store sales notably up 18 percent. Profit margins on those sales rose nearly 6 percentage points to 15.5%, doubling earnings per share.

These are all excellent numbers and indeed “better than expected,” according to CEO Fran Horowitz. And in a positive note for investors in retail stocks in general, Horowitz pointed to the continued strength of the American consumer, citing sales growth of 23 percent — above the global average — particularly in the Americas market.

Why Sell Abercrombie Stock?

So what’s not to like about all of this? Probably nothing. Past earnings, you see, are not Abercrombie’s problem. His problem is the future.

Looking ahead, Abercrombie raised its guidance for full-year sales and profit margins, predicting that sales will rise 12% to 13% and that operating profit margins will land in the 14% to 15% range. That sounds good… but what it actually means is that the retailer’s sales growth will slow as the year goes on, and its profitability will shrink.

Abercrombie’s new forecast for 2024 sales — $4.3 billion — is well below the $4.8 billion figure Wall Street wanted to hear. Meanwhile, management’s forecast of a 14.5% profit margin is a full percentage point below the margin Abercrombie earned in fiscal Q2.

That’s not what investors wanted to hear, which is why Abercrombie shares are selling off on Wednesday.