Why Abercrombie Stock Slumped After Beat-And-Raise Quarter

Outside of an Abercrombie & Fitch store in New York's Soho neighborhood — (Image credit: Yuki Iwamura/Bloomberg via Getty Images)

Abercrombie & Fitch (ANF) stock is spiraling Wednesday even after the parent company of the Abercrombie and Hollister retail brands beat top- and bottom-line expectations for its second quarter and raised its full-year outlook.

In the 13 weeks ended August 3, ANF's revenue increased 21.2% year-over-year to $1.13 billion, driven by 25.9% growth at its Abercrombie brand to $582.4 million. The company said earnings per share (EPS) more than doubled from the year-ago period to $2.50.

"The strength of our brand portfolio and improvements we've made in global capabilities resulted in broad-based growth across regions, brands and channels," said Abercrombie & Fitch CEO Fran Horowitz in a statement. "Consistent with the first quarter, we delivered improved profitability driven by gross profit rate expansion and operating leverage, with a second quarter operating margin of 15.5% and record second-quarter operating income of $176 million."

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The results surpassed analysts' expectations. Wall Street was anticipating revenue of $1.1 billion and earnings of $2.22 per share, according to Yahoo Finance.

As a result of its strong performance in the first half of the year, ANF raised its outlook for the full fiscal year. The company now anticipates revenue growth in the range of 12% to 13% and an operating margin of 14% to 15%. This compares to the retailer's previous forecast of revenue growth of roughly 10% and an operating margin of about 14%.

For the third quarter, ANF said revenue should grow in the low double-digits compared to the year-ago period, while its operating margin should arrive between 13% to 14%.

Some media outlets are pointing to Abercrombie's operating margin forecast as one reason why the stock is selling off today, considering it is slower than Q2's operating margin of 15.5%.

Others are suggesting Horowitz's comments that the retailer continues "to operate in an increasingly uncertain environment" as another catalyst. Still, the executive added that the company remains "steadfast in executing our global playbook and maintaining discipline over inventory and expenses. We are on track and confident in our goal to deliver sustainable, profitable growth this year, while making strategic long-term investments across marketing, digital and technology and stores to enable future growth."

Is ANF stock a buy, sell or hold?

Heading into Wednesday's session, Abercrombie & Fitch shares were up nearly 90% for the year to date, making the retailer one of the market's top-performing consumer discretionary stocks.

Even with today's drop, ANF is still up roughly 60%. And Wall Street sees further upside for the stock. According to S&P Global Market Intelligence, the consensus analyst target price for ANF stock is $192.50, representing implied upside of about 37% to current levels. Meanwhile, the consensus recommendation is Buy.

But not everyone is a bull. William Blair analyst Dylan Carden is "encouraged by everything Abercrombie has done to add relevance and age up the Abercrombie brand, all of which are likely very real and sustainable." He adds that the company's "strategy of getting better product in front of more customers and messaged in a more thoughtful and relevant manner is a wholesale DNA shift that is not a fleeting trend."

However, Carden has a Market Perform rating on ANF stock, which is the equivalent to a Hold, on concerns over how long the retailer can maintain its recent momentum both on and off the price charts.

Joey Solitro is a freelance financial journalist at Kiplinger with more than a decade of experience. A longtime equity analyst, Joey has covered a range of industries for media outlets including The Motley Fool, Seeking Alpha, Market Realist, and TipRanks. Joey holds a bachelor's degree in business administration.