It has been about a month since the last earnings report for Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) . Shares have lost about 2.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Abercrombie due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Abercrombie's Q2 Earnings Beat on Brand Strength

Abercrombie reported better-than-expected bottom and top lines in second-quarter fiscal 2023. Sales and earnings also improved year over year. The company noted that its sales and operating margin exceeded expectations in the quarter.

Results benefited from the continued momentum in the Abercrombie brand and sequential improvement in the Hollister brand. The company noted that its efforts to improve the brand positioning of the Hollister brand have been paying off. Also, strategic investments across stores, digital and technology via its Always Forward Plan bodes well. Consequently, management has raised its fiscal 2023 view.

Abercrombie’s adjusted earnings of $1.10 per share in the fiscal second quarter improved significantly from a loss of 30 cents reported in the prior-year quarter. Moreover, the bottom line surpassed the Zacks Consensus Estimate of 13 cents by a huge margin. The robust earnings performance can be attributed to strong top-line growth, coupled with improved gross and operating margins. Higher average unit retail (AUR) and reduced freight costs mainly aided margins.

Net sales of $935.3 million advanced 16.2% year over year and surpassed the Zacks Consensus Estimate of $842 million. Net sales grew 16% on a constant-currency basis. The significant top-line beat was mainly driven by gains across the Abercrombie and Hollister brands.
Segment Reorganization

In the fiscal second quarter, the company reorganized its structure and will now report in three geographical segments, namely Americas, Europe, the Middle East and Africa (EMEA) and Asia-Pacific (APAC). All prior periods presented have been altered to conform to this reclassification.

Sales by Region and Brands

Sales were strong in the United States, up 19% year over year to $731.4 million. on the international front, sales grew 4% to $172 million in EMEA and advanced 18% to $32 million in APAC. Brand-wise, net sales improved 8% year over year to $472.6 million at Hollister and advanced 26% to $462.7 million at Abercrombie.

Margins

Abercrombie’s gross margin expanded 460 basis points (bps) year over year to 62.5% in the quarter. The margin expansion mainly stemmed from a 340-bps gain from reduced freight costs and a 400-bps benefit from AUR growth. This was partly negated by a 180-bps impact from higher cotton and raw material costs, and a 60-bps headwind from the currency rates.

Operating expenses, excluding other operating income, increased 6% year over year. Higher incentive-based compensation, store occupancy and technology expenses led to the increase. As a percentage of sales, operating expenses of 53.2% declined 480 bps from the prior-year quarter. The company reported an operating income of $89.8 million against a reported operating loss of $2.2 million and an adjusted operating loss of $0.97 million in the year-ago period.

Other Financials

Abercrombie ended the fiscal second quarter with cash and cash equivalents of $617.3 million, long-term net borrowings of $297.4 million and stockholders’ equity of $768.3 million, excluding non-controlling interests. The company had a liquidity of $974 million at the end of the fiscal second quarter, which included cash and equivalents, and borrowing available under the ABL Facility. Net cash used for operating activities was $216 million as of Jun 29, 2023.

Outlook

Driven by the robust performance, the company raised its guidance for fiscal 2023. Management envisions net sales growth to be 10% year over year for fiscal 2023, up from the prior guidance of 2-4% growth. It expects the Abercrombie brand to continue outperforming the Hollister brand in fiscal 2023. Fiscal 2023 includes a 53rd week, which is estimated to benefit sales by $45 million. Abercrombie expects an operating margin of 8-9%, an increase from the earlier stated 5-6%. This includes gains of 250 bps year over year, driven by reduced freight and raw material costs and a modest operating expense leverage.

The company expects sales growth in fiscal 2023 to more than offset the higher expenses resulting from inflation and increased investment for the 2025 Always Forward Plan initiatives. It expects a capital expenditure of $160 million and a tax rate in the low-to-mid 30% range. The tax rate replaces the previously mentioned high-30% range. For third-quarter fiscal 2023, the company expects sales growth to be low double-digits year over year. The sales guidance estimates a positive currency effect of 140 bps in the fiscal third quarter.

The operating margin is envisioned to be 8-10% compared with an adjusted operating margin of 2.4% in the prior-year quarter. The growth is expected to be driven by a higher gross margin on lower freight costs and higher AURs, as well as slight operating expense leverage on higher sales. The effective tax rate is anticipated to be in the mid-30% range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

The consensus estimate has shifted 246.49% due to these changes.

VGM Scores

At this time, Abercrombie has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Abercrombie has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

Abercrombie is part of the Zacks Retail - Apparel and Shoes industry. Over the past month, The Children's Place (PLCE Quick QuotePLCE - Free Report) , a stock from the same industry, has gained 4.1%. The company reported its results for the quarter ended July 2023 more than a month ago.

The Children's Place reported revenues of $345.6 million in the last reported quarter, representing a year-over-year change of -9.3%. EPS of -$2.12 for the same period compares with -$0.89 a year ago.

For the current quarter, The Children's Place is expected to post earnings of $3.56 per share, indicating a change of +6.9% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.2% over the last 30 days.

The Children's Place has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.