The Rally
Abercrombie & Fitch shares soared 30% in morning trading Tuesday. The company showed investors it's set to keep growing, even as its namesake brand slows down.
During the fiscal third quarter, Abercrombie brand sales fell 2%. But for at least the third quarter in a row, Hollister saved the retailer. Sales climbed 16%.
Companywide, sales rose 7%, beating expectations.
The Numbers
The company earned $2.36 per share versus $2.16 expected. Revenue hit $1.29 billion versus $1.28 billion expected.
Net income for the quarter was $113 million, or $2.36 per share, compared with $131.98 million, or $2.50 per share, a year earlier.
Sales rose to $1.29 billion, up about 7% from $1.21 billion a year earlier.
The Brand Split
The company's namesake banner has fueled its comeback in recent years. But now that Abercrombie brand's growth has started to moderate, Hollister has picked up the baton.
During the quarter, Abercrombie's sales fell to $617.35 million. Comparable sales declined by a staggering 7%. Sales came in far below the $631.8 million analysts expected.
Meanwhile, Hollister's revenue rose to $673.27 million, well above the $649.7 million analysts expected. Comparable sales rose 15%.
Hollister's Moment
"Hollister's exciting campaigns and collaborations planned will highlight some must haves," CEO Fran Horowitz said on a call with analysts. "We are just getting started and importantly, our team has been reading and reacting and has the right product to support sales throughout the season."
Abercrombie is investing more in the Hollister brand. The company is on pace to open 25 stores and refresh 35 others this year.
The Abercrombie Problem
Last quarter, Horowitz said the slowdown was related to old inventory the company needed to mark down. She expected the brand to be back to growth by year-end, but that no longer seems to be the case.
During the conference call, executives didn't answer when asked when the brand will return to growth. They spoke about "sequential improvement" after a 5% decline in revenue in the previous quarter.
Horowitz pointed to recent collaborations with the NFL and luxury retailer Kemo Sabe as bright spots for the brand.
The Holiday Outlook
For its holiday quarter, Abercrombie expects companywide sales to climb between 4% and 6%. That's largely below Wall Street expectations of 5.6% growth.
It anticipates earnings per share will be between $3.40 and $3.70, roughly in line with expectations of $3.55 per share.
For the full year, it now expects sales to rise between 6% and 7%, beating expectations of 6.2% growth.
The Bottom Line
Abercrombie shares jumped 30% as Hollister's 16% sales growth offset the namesake brand's 7% comparable sales plunge, with the teen retailer expected to carry the company through the holiday season while executives avoid saying when Abercrombie brand will return to growth.