Abercrombie & Fitch (NYSE: ANF), a specialty retailer selling casual clothing and footwear, is scheduled to report its fiscal Q2 2024 results on Wednesday, August 28. (ANF’s FY’23 ended on February 3, 2024) We expect ANF stock to likely see little to no movement post-Q2 results with revenue beating but earnings missing expectations marginally in fiscal Q2. ANF stock has increased almost 2x from around $88 to a whopping $165 this year, outperforming the broader indices, with the S&P growing about 18% over the same period. Notably, ANF’s peer American Eagle Outfitters (NYSE: AEO) has seen its stock rise only 6% during the same period around $22.

To begin with, ANF’s FY’23 earnings came in significantly higher than expected at $6.22 per share compared to a mere 5 cents in FY’22. Its operating margin also grew from 2.4% in FY’22 to 11.5% in FY’23. The gains came as ANF reported stellar results in its high-margin namesake unit and better-than-expected momentum in its Hollister brand. In addition, ANF started FY’24 on a strong note. Abercrombie was expected to earn $1.73 per share on $963 million in sales in the first quarter (which is a seasonally low quarter). Instead, it earned $2.14 per share and generated more than $1 billion in sales. It should be noted that ANF trades at a P/E ratio of 21x when comparing the company’s current market cap with net income derived from the company’s FY’24 guidance. We believe that this valuation is excessive both in terms of absolute and comparative terms and will likely be difficult to sustain at the current elevated growth rate in the near future. ANF stock looks fully valued after a strong run. That said, the apparel sector is a highly discretionary category, suggesting a high level of sensitivity to macroeconomic conditions.

ANF stock has seen extremely strong gains of 725% from levels of $20 in early January 2021 to around $165 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in ANF stock has been far from consistent. Returns for the stock were 71% in 2021, -34% in 2022, and 285% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ANF underperformed the S&P in 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including H, WMG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ANF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that ANF’s valuation is around $156 a share, which is around its current market price. Our interactive dashboard analysis on ANF‘s Earnings Preview: What To Expect in Q2? has more details.

(1) Revenues expected to come in slightly above consensus estimates

Trefis estimates ANF’s Q2 2024 revenues to be around $1.2 Bil – slightly above the consensus estimate. In Q1, ANF grew sales by a strong 22% year-over-year (y-o-y) to $1.02 billion driven by a 21% growth in comparable sales across the company. The company benefited from good pricing management and the right product assortment. In terms of revenue, Hollister saw 12% gains and the namesake brand saw 31% y-o-y growth in Q1 thanks to its strong student demographic and growth in its women’s business.

It is worth mentioning that while Abercrombie continued its impressive multi-quarter growth trend, Hollister delivered a fourth consecutive quarter of sales growth. The parent brand has closed on the Hollister brand as the biggest revenue generator for the first time in FY’23. In the Q1 call, management raised guidance for FY’24. It now expects sales to reach about $4.7 billion (10% above FY’23), and operating margins to reach 14%. This represents an operating profit of about $560 million.

2) EPS likely to beat consensus estimates marginally

ANF’s Q2 2024 earnings per share (EPS) is expected to come in at $2.20 per Trefis analysis – marginally missing the consensus estimate. In Q1 2023, robust top-line growth, along with gross profit rate expansion of 540 basis points to 66.4%, led to an operating margin growth of a record 860 basis points y-o-y to 12.7%. Consequently, the company’s GAAP EPS came in at $2.23 compared to just 33 cents a year ago.

(3) Stock price estimate aligns with the current market price

Going by our Abercrombie & Fitch’s Valuation, with an earnings per share (EPS) estimate of around $8.37 and a P/E multiple of 18.6x in fiscal 2024, this translates to a price of $156 – roughly in line with the current market price.

It is helpful to see how its peers stack up. ANF Peers shows how Abercrombie & Fitch compares against its peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.