Holiday Forecast For Abercrombie & Fitch: Analyst On How Improved Inventory Management Could Fuel Q3 Earnings

Telsey Advisory Group analyst Dana Telsey reiterated an Outperform rating on Abercrombie & Fitch Company ANF, raising the price target to $62 from $56.

According to the analyst, the ANF story remains compelling and intact with topline growth and margin expansion opportunities through increased digital penetration, improved square footage productivity, and further international development. 

On the strength of the recently reported 2Q23 and a better-than-expected third-quarter guide, ANF expects to reach its prior 2025 target of an 8%-plus operating margin in FY23, given its YTD performance and expectations for 2H23, the analyst notes.

The momentum from Q2 has carried into Q3, ahead of the holiday season, which leads the company to expect the holiday period to be relatively normal and more closely aligned with pre-pandemic trends.

Ahead of the holiday this year, inventories can flow better, and products can be chased to be more closely aligned with consumer demand.

Telsey thinks the A&F brand remains healthy with a more resilient customer base and robust assortment. In 2023, with tighter inventory, ANF can chase winners and not be left with losing styles and products on shelves, which can support gross margin expansion as more products are sold at full price. 

The analyst adds that the Hollister brand is also improving as the product offering is better tailored to teen demands. 

Telsey thinks that recent trends are showing an inflection point internationally, with both brands growing in both regions last quarter (EMEA up 4% YoY, APAC up 18% YoY) and benefiting from a resumption of mall shopping and increasing awareness. 

Improved inventory management has supported cash flow generation through the first six months of the year, the analyst adds, and beyond investing in the business, the cash is being used to pay down debt and buy back shares. 

Overall, Telsey thinks that topline growth, gross margin expansion, and some expense growth have been the formula for success for ANF, with efforts to raise AURs supporting margin expansion and improving freight and raw materials costs as a tailwind in the near term. 

Telsey sees 2023 same-store-sales growth of 9.7%, estimating full-year EPS of $4.29.

For 2024, the analyst predicts same-store-sales growth of 3.5%, projecting the full-year EPS of $4.71.

Price Action: ANF shares are trading lower by 0.42% to $54.75 on the last check Thursday.