Abercrombie & Fitch Co. (NYSE:ANF) delivered a powerful second quarter, which led to a nearly 36% one-day gain in its shares and a sharply higher full-year outlook. During the August 27 episode of Mad Money, Jim Cramer said the operating performance can give way to optimism but added:
This is an industry that can change on a dime, people… With that caveat in mind, I’m actually going to admit that I’m pretty optimistic on this one.
Earnings Beat Expectations as Margins Surge
Abercrombie & Fitch Co. (NYSE:ANF) reported second-quarter net sales of $1.3 billion, up 5%, and diluted earnings per share of $4.17, compared with $2.91 a year earlier. Operating margin reached 19.9%, versus 17.1% a year earlier. The Abercrombie brand’s sales increased 8%, while Hollister sales increased 2%. The earnings beat was partly driven by approximately $100 million of International Emergency Economic Powers Act tariff refunds. The refunds contributed $1.75 per diluted share and approximately 790 basis points to operating margin. Importantly, management said the company exceeded its prior earnings and operating-margin outlook by more than the amount of the tariff refund.
Management raised full-year net sales growth guidance to 5% from 3%-5% and diluted EPS guidance to $13.10-$13.60 from $10.20-$11.00. Full-year operating-margin guidance increased to 14.5%-15% from 12%-12.5%, with approximately 220 basis points of favorability from $120 million of IEEPA tariff refunds. The company also expects to repurchase at least $500 million of shares.
Tariff and Hollister Risks
The biggest risk is that investors treat tariff-assisted profitability as structural. The second-quarter 19.9% operating margin included approximately 790 basis points from the tariff refund, while full-year guidance incorporates approximately 220 basis points of tariff-related favorability. Once those benefits roll off, Abercrombie & Fitch Co. (NYSE:ANF) will need to preserve its gains through merchandise margins, pricing discipline, and operating leverage.
The sales picture is also less compelling than the headline earnings beat. Companywide comparable sales were flat, and Hollister comparable sales declined 3%. The Abercrombie brand’s 8% sales growth is carrying the portfolio, increasing the importance of sustaining its momentum while management attempts to revive Hollister.
Institutional Positioning and Short Interest
Insider Monkey’s tracking of more than 1,000 hedge funds shows 36 hedge funds held ANF in Q2, down from 39 in Q1. As per Insider Monkey’s data, AQR Capital Management was the most prominent hedge fund shareholder in the quarter even though it reduced its position by 30% to over 2.4 million shares. Additionally, it has a short interest of approximately 9.31% to 9.85% of its public float. Cramer noted that investors should wait for a better entry point rather than chase the initial surge:
It might need some time to digest yesterday’s gains… If the stock gives you a pullback, may I suggest that you do some buying?
Abercrombie & Fitch Co. (NYSE:ANF) is generating strong earnings growth even after accounting for the tariff benefit and has considerable room to benefit from continued share repurchases, but Hollister remains weak and a meaningful portion of this year’s margin outlook is tied to tariff refunds. After the post-earnings surge, investors have less margin for disappointment. Cramer’s suggestion of buying on a pullback offers a safer approach than chasing the rally.
READ NEXT: Jim Cramer Questions AEVEX (AVEX) Stock Sell-Off and Jim Cramer Highlights Sandisk’s (SNDK) Massive Buybacks After Stock Surge.
Disclosure: None. Follow Insider Monkey on Google News.
Hedge Fund Resource Center