Abercrombie and Fitch (ANF)

Young adult apparel retailer Abercrombie & Fitch (NYSE:ANF) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.5% year on year to $1.1 billion. The company expects next quarter’s revenue to be around $1.18 billion, close to analysts’ estimates. Its GAAP profit of $1.59 per share was 19.7% above analysts’ consensus estimates.

Company Overview

Founded as an outdoor and sporting brand, Abercrombie & Fitch (NYSE:ANF) evolved to become a specialty retailer that sells its own brand of fashionable clothing to young adults.

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering youth-focused apparel and accessories include American Eagle Outfitters (NYSE:AEO), Urban Outfitters (NASDAQ:URBN), and The Gap (NYSE:GPS).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $5.03 billion in revenue over the past 12 months, Abercrombie and Fitch is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Abercrombie and Fitch grew its sales at a tepid 5.7% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts), but to its credit, it opened new stores and increased sales at existing, established locations.

This quarter, Abercrombie and Fitch reported year-on-year revenue growth of 7.5%, and its $1.1 billion of revenue exceeded Wall Street’s estimates by 3.5%. Company management is currently guiding for a 4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 2.3% over the next 12 months, a deceleration versus the last six years. This projection doesn't excite us and indicates its products will face some demand challenges. At least the company is tracking well in other measures of financial health.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Over the last two years, Abercrombie and Fitch has generally opened new stores, averaging 1.3% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Note that Abercrombie and Fitch reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Abercrombie and Fitch has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 14.8%. This performance suggests its measured rollout of new stores is beneficial for shareholders. We like this backdrop because it gives Abercrombie and Fitch multiple ways to win: revenue growth can come from new stores, e-commerce, or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Abercrombie and Fitch’s same-store sales rose 4% year on year. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Abercrombie and Fitch can reaccelerate growth.

Abercrombie and Fitch has best-in-class unit economics for a retailer, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 63.6% gross margin over the last two years. That means for every $100 in revenue, only $36.37 went towards paying for inventory, transportation, and distribution.

Abercrombie and Fitch’s gross profit margin came in at 62% this quarter, down 4.4 percentage points year on year and missing analysts’ estimates by 2%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Abercrombie and Fitch has been an efficient company over the last two years. It was one of the more profitable businesses in the consumer retail sector, boasting an average operating margin of 13.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Abercrombie and Fitch’s operating margin rose by 1.2 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Abercrombie and Fitch generated an operating profit margin of 9.3%, down 3.5 percentage points year on year. Since Abercrombie and Fitch’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, and administrative overhead expenses.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Abercrombie and Fitch has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the consumer retail sector, averaging 10.7% over the last two years.

Taking a step back, we can see that Abercrombie and Fitch’s margin dropped by 5.1 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

Abercrombie and Fitch burned through $54.76 million of cash in Q1, equivalent to a negative 5% margin. The company’s cash flow turned negative after being positive in the same quarter last year, which isn’t ideal considering its longer-term trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Abercrombie and Fitch’s five-year average ROIC was 21%, higher than most consumer retail businesses. This illustrates its management team’s ability to invest in profitable growth opportunities and generate value for shareholders.

Abercrombie and Fitch reported $607.6 million of cash and $1.03 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $867.2 million of EBITDA over the last 12 months, we view Abercrombie and Fitch’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $16.05 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Abercrombie and Fitch blew past analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed and its gross margin fell short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock traded up 25% to $96.41 immediately after reporting.

Updated: June 22, 2025 at 10:31 PM EDT

Before deciding whether to buy Abercrombie and Fitch or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

In our opinion, Abercrombie and Fitch is a solid company. Although its revenue growth was a little slower over the last six years and analysts expect growth to slow over the next 12 months, its marvelous same-store sales growth is on another level. And while its brand caters to a niche market, its admirable gross margins are a wonderful starting point for the overall profitability of the business.

Abercrombie and Fitch’s P/E ratio based on the next 12 months is 7.6x. Looking at the consumer retail space right now, Abercrombie and Fitch trades at a compelling valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $113.37 on the company (compared to the current share price of $78.10), implying they see 45.2% upside in buying Abercrombie and Fitch in the short term.