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Abercrombie & Fitch CEO on surprise earnings beat: ‘We really changed the brand’

Abercrombie & Fitch CEO weighed in on first quarter earnings for Abercrombie and Hollister as well as return-to-office apparel trends.

Abercrombie & Fitch (ANF) shocked a few in the market with its first quarter results.

The apparel retailer's stock exploded 31% as of the market close on Wednesday as sales and earnings far surpassed analyst expectations. The surprise results — which come against the backdrop of weak sales in the past week from Target (TGT) and Kohl's (KSS) — reflect a resurgent Abercrombie & Fitch business and an improving supply chain cost backdrop.

Abercrombie & Fitch CEO Fran Horowitz told Yahoo Finance Live (video above) that millennial shoppers are tapping the namesake brand for return-to-office clothes. Sales trends are turning slightly at the more economically sensitive Hollister chain.

"We really changed the brand from what people used to reference as a T-shirt and jeans brand to a lifestyle brand," Horowitz said. "The consumer is coming to us for so many more categories today, which is really what’s driving the momentum in our business."

Horowitz added the company is off to a "great" start for the second quarter and that she is hopeful about the crucial back-to-school shopping season.

The earnings rundown

  • Net sales: +2.9% year over year to $836 million vs. estimates for $814.4 million

  • Gross profit margin: 61% vs. 55.3% a year ago and estimates for 58%

  • Adjusted diluted EPS: $0.39 vs. a $0.27 loss last year and estimates for $0.03

What else caught our attention

  • Inventory fell 20% from a year earlier. Execs said on the earnings call they are "chasing inventory," meaning new merchandise is being sold as it's brought into the stores. This is a positive retail indicator.

  • Abercrombie & Fitch brand comparable sales are up 14% on double-digit percentage sales gains in the women's business. The men's business saw sales increase for the third straight quarter, execs said on the earnings call.

  • Hollister comparable sales fell 6% as the company continued to work to improve its styles to a more economically sensitive shopper.

  • Full-year guidance raised: 1) Net sales growth is seen in a range of 2% to 4%, up from 1% to 3% previously; 2) Operating profit margins are seen in a range of 5% to 6%, up from 4% to 5% previously.

  • Second quarter sales are off to a "great" start, execs called out on the conference call.

FILE- In this May 24, 2018, file photo, items are displayed at an Abercrombie and Fitch retail outlet in New York. Abercrombie and Fitch reports financial results Thursday, Nov. 29. (AP Photo/Seth Wenig, File)
FILE- In this May 24, 2018, file photo, items are displayed at an Abercrombie and Fitch retail outlet in New York. Abercrombie and Fitch reports financial results Thursday, Nov. 29. (AP Photo/Seth Wenig, File) (ASSOCIATED PRESS)

What Wall Street is saying about ANF

Citigroup analyst Paul Lejuez: "1Q was an all around great quarter with Abercrombie & Fitch beating expectations on both sales (+3% versus consensus flat) and gross margin (+540 basis points versus consensus +310 basis points). While many were bracing for guidance to be lowered, management raised 2023 guidance to ~$2.30 at the midpoint versus ~$1.50 prior and consensus $1.40. The A&F brand is growing beyond expectations, growing +14% in 1Q, in line with 4Q despite a general slowdown in consumer discretionary spending in 1Q."

"And while Hollister is weak and decelerated versus 4Q (sales -7% versus -4%)," Lejuez added, "it is performing better than we expected in this environment. Trends have not slowed second quarter to date with management guiding 2Q sales +4-6% (versus consensus +1%). 2023 operating profit margin guidance was raised from 4-5% to 5-6% as management now expects freight/lower product costs to be more beneficial (~250 basis points vs 200 basis points prior). Stepping back, this was a great quarter all around and we expect shares to trade higher."

Jefferies analyst Corey Tarlowe: "1Q top- and bottom-line results were above Street expectations, driven by strong year over year gains at A&F. Hollister missed slightly on revenue but posted AUR [average unit retail] growth and has right-sized its inventory. We expect momentum at A&F to continue. Abercrombie guided Q2 above consensus and raised its full year outlook. To this end, we believe Abercrombie is resonating well with its customers and has further opportunity to gain share."

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email brian.sozzi@yahoofinance.com

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