Abercrombie & Fitch swings to loss; lowers outlook

Abercrombie & Fitch Co. swung to an unexpected loss in its first quarter as higher-than-expected freight and product costs took a toll on better-than-expected sales.

The apparel retailer also cut its outlook for the year, and said it expects higher costs to remain a headwind at least through the end of the year. Record-high inflation and high freight costs have weighed on the first-quarter earnings of a growing number of retailers, including Target and Walmart.

“We expect freight relief in the fourth quarter as we anniversary increased air usage last year due to the Vietnam shutdown,” CEO Fran Horowitz said in a statement.

“We will continue to manage expenses tightly and are committed to finding opportunities to offset these costs while protecting strategic investments in marketing, technology and our customer experience, which should drive sustained, long-term sales growth.”

The company posted a net loss of $16.5 million, or $0.32 per share, for the quarter ended May 1, compared to net income of $41.8 million, or $0.64 per share, in the year-ago period. An adjusted loss of $0.27 per share missed analysts’ estimates for a profit of $0.02 per share.

Sales rose 4% to $812.8 million from $781.4 million, topping analysts’ estimates for $700.3 million, driven by ongoing strength at the Abercrombie & Fitch brand. It was the retailer’s highest first-quarter level since 2014. By division, sales at Abercrombie rose 13% year-over-year while those at Hollister fell 3%.

Beginning in the second quarter, Abercrombie said it will no longer provide full-year or quarterly outlooks on gross profit rate or operating expenses, “in response to volatility in freight and other costs.

For the second quarter, the company's outlook is for a low single-digit sales decline. Analysts were looking for sales of $888.4 million, implying 2.7% growth. For the year, the retailer expects sales to be flat to up 2%, compared to estimates of $3.815 billion, suggesting 2.7% growth.

Operating margin is seen in the range of 5% to 6%, down from the previous outlook of 7% to 8% reflecting a combined 200 basis point adverse impact from higher freight and raw material costs, foreign currency, and lower sales due to an assumed inflationary impact on consumer spending. Mitigating these factors will be actions to drive AUR growth, reduce certain expenses, and adjust inventory flows by region in response to current market forces.