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Abercrombie & Fitch (ANF -16%) rolled up its sleeves in Q2 (Jul), posting top and bottom-line beats, robust same-store sales growth, and lifting its FY25 revenue growth outlook. The numbers were sound across the board, with the Abercrombie and Hollister brands, as well as all geographies, registering double-digit comp growth.

Why are shares selling off then? ANF warned of an increasingly challenging macroeconomic environment, which will coincide with unfavorable yr/yr comparisons in Q3 (Oct) and Q4 (Jan). ANF's FY25 revenue growth outlook, albeit up 2-3 pts from its previous forecast, incorporates a significant slowdown compared to the first half of the year, reflecting the more difficult comparisons and a stubbornly uncertain economic backdrop. Meanwhile, ANF's projected Q3 operating margins fell modestly below street estimates, largely due to higher-than-expected freight costs. When combining these weak points with a +35% run in the stock since August 5 lows, investors are locking in profits today.

• ANF's Q2 performance carried many of the highlights over from last quarter, expanding its EPS by 127% yr/yr to $2.50 on revenue growth of 21.2% to $1.13 bln and same-store sales growth of +18%. ANF focused on trimming its inventory late last year to be better positioned in FY25 to reduce markdowns and preserve margins. On that note, operating margins swelled by 590 bps yr/yr to 15.5% in the quarter.
• Abercrombie comps ballooned by +21%, while Hollister trailed but still posted comps of +15%, an acceleration from +13% last quarter. Abercrombie growth remained balanced between men and women, as well as with new and existing customers. The Wedding Shop, which launched last quarter to provide customers with a curated set of dresses and other wedding-related apparel, continued to contribute nicely to overall comps. At Hollister, upward momentum continued to mount, aided by a healthy back-to-school season, which is trickling into Q3.
  • Geographically, the Americas, EMEA, and APAC regions each delivered excellent comp growth at +18%, +17%, and +21%, respectively. The outsized gains outside of the Americas reflect ANF's success with localizing its playbook.
• Following another impressive quarter, ANF projected upbeat Q3 and FY25 growth, targeting low double-digit revenue growth yr/yr in Q3, higher than analyst expectations, and +12-13% growth for the year, up from +10%, which was already raised from +4-6%. Management added that it is looking forward to the holiday shopping season and improving profitability throughout the year.

At a surface level, ANF's Q2 report was solid. The company continued to benefit from its appealing brands domestically and abroad. As we have mentioned in the past, ANF has done a tremendous job transforming itself from a stale T-shirt and jeans company to an organization offering attractive brands with a more diverse assortment that has expanded its age demographic. However, a continuously conservative outlook, with FY25 growth guidance implying around a +7% sales lift in Q4, well below the over +20% jumps registered in Q1 and Q2, amid an increasingly challenging economic environment, is enough to spark concern amongst investors, fueling a significant pullback today.