Abercrombie & Fitch is the latest retailer to signal better clothing demand. But investors are wary.

By Ciara Linnane and Bill Peters

Teen clothing backdrop remains 'dynamic,' but 'our pants business is very strong, both in men's and women's,' executives say

Clothing retailer Abercrombie & Fitch Co. reported better-than-expected third-quarter earnings on Tuesday and raised its full-year outlook, after a strong back-to-school season for its Hollister brand and an "encouraging start" to the holiday season.

Still, shares were down 3.5% in afternoon trade.

The results follow a long run higher for Abercrombie's (ANF) stock price this year, and caution from Wall Street and other retailers over holiday clothing demand.

During Abercrombie's earnings call on Tuesday, one analyst noted that the chain's fourth-quarter forecast marked a "pretty meaningful deceleration" from the 20% year-over-year sales gain put up in the third quarter. But management said they liked the company's positioning. They highlighted a tighter, more relevant product assortment in stores, continued growth at its namesake stores and efforts to turn around Hollister in a "dynamic teen apparel environment."

"This holiday season, as teen customers head to the mall, we'll be ready to meet them with an evolved assortment," Chief Executive Fran Horowitz said on the call.

Retailers like Gap Inc. (GPS) and Target Corp. (TGT) have rallied off of low expectations after reporting results. Gap said it didn't have to cut clothing prices as aggressively attract shoppers, and its Old Navy same-store sales were positive. And Target noted "accelerating" clothing demand that could strengthen on easing prices for necessities.

But fourth-quarter forecasts from those retailers suggest consumers are still wary, as prices for basics remain high compared to pre-pandemic levels and temper holiday spirits.

For its third quarter, Abercrombie posted net income of $96.2 million, or $1.83 a share, for the quarter, after a loss of $2.2 million, or 4 cents a share, in the year-earlier period.

Adjusted per-share earnings also came to $1.83, well ahead of the $1.18 FactSet consensus.

Sales for the New Albany, Ohio-based retailer rose to $1.06 billion from $880 million a year ago, ahead of the $981 million FactSet consensus. Same-store sales rose 16%.

"Net sales growth of 20% accelerated from the second quarter and was once again led by Abercrombie brands with exceptional growth of 30%," Horowitz said in the company's earnings release. "At Hollister brands, we had a solid back-to-school season, delivering 11% net sales growth for the quarter as our assortment and brand evolution is resonating with our teen customer."

During the call, executives said the results at Hollister were led by demand for women's apparel, with tops, non-denim bottoms and dresses helping give sales a boost. Fleeces and sweaters helped drive demand for men's clothing. They said they would work off of those trends to "chase into winners for the holiday season."

Abercrombie said it now expects sales to grow 12% to 14% for the full year, compared with prior expectations for growth of about 10%. Executives also forecast operating margins of around 10%, up from an earlier outlook for 8% to 9%, helped by easing shipping and raw material costs.

For the fourth quarter, the New Albany, Ohio-based retailer said it expected sales growth to be up in the "low double-digits" compared to last year.

Chief Financial Officer Scott Lipesky, when asked about the potential sales deceleration from the third quarter, called the outlook "reasonable," with the heavier portion of the shopping season still yet to play out.

"We talked about an encouraging start to the quarter," he said. "I wouldn't say these three weeks don't matter, but they're very small in the grand scheme. The game really starts today into tomorrow, into the next 40 days through Christmas. So that's how we're sitting here today."

"We think this is a reasonable outlook," he said. "Happy to be putting up another low double-digit outlook coming into the quarter. Inventory's in a great place."

Executives also said the efforts of Abercrombie & Fitch stores to target older crowds -- shoppers in their early 20s and into their 40s -- had helped broaden its appeal.

"We have really expanded Abercrombie to be a lifestyle brand, and that has afforded us the opportunity to add many new categories, things that we never were able to sell in the past," Horowitz said. "Non-denim bottoms is one particular one. I mean, our pants business is very strong, both in men's and women's."

"There's a lot of fashion happening today in that category, and he and she continue to choose that category," she said.

-Ciara Linnane -Bill Peters

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11-21-23 1320ET

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