- Abercrombie & Fitch and Foot Locker stocks were down big on Wednesday.
- Both stocks beat earnings estimates, but investors may have drawn negative conclusions about their outlooks.
- The dip presents a buying opportunity for one of these stocks.
Two specialty retailers, Abercrombie & Fitch and Foot Locker, had solid quarterly results, yet their share prices were plummeting Wednesday.
A couple of retail stocks, Abercrombie & Fitch (NYSE:ANF) and Foot Locker (NYSE:FL), had better than expected earnings in the most recent quarter, but their stock prices were down big in early trading Wednesday.
Abercrombie & Fitch stock was down about 15% in morning trading, while Foot Locker stock was off about 12%. Let’s examine why the stocks were down. Should investors view this as an opportunity to buy on the dip? For one of them, yes.
Both Retailers Beat Earnings Estimates
, the clothing retailer, had a strong second quarter, with net sales rising 21% year-over-year to $1.13 billion. That included an 18% jump in same-store sales. The Abercrombie brand saw sales spike 26% while the Hollister brand climbed 17%. Analysts had estimated net sales of $1.10 billion.
Net income more than doubled to $133 million, from $57 million in Q2 of 2023, with earnings came in at $2.50 per share, which was higher than the $2.22 EPS that analysts projected.
The company improved its efficiency and expense management, as the cost of sales was 35.1% of net sales, compared to 37.5% in Q2 of 2023. Also, gross profit of $736 million was 64.9% of revenue, up from 62.5%.
The story was not quite as good for Foot Locker, but it was still a solid quarter. The athletic shoe and apparel retailer has been struggling, but the second quarter results were a step in the right direction as it grew revenue for the first time in six quarters.
Foot Locker generated $1.9 billion in revenue, up 1.9% year over year, with same-store sales rising 2.6%. This exceeded analysts’ expectations for $1.89 billion in revenue.
On the bottom line, Foot Locker reported a net loss of $12 million, or 13 cents per share. On an adjusted basis, the net loss was 5 cents per share, which bested estimates of a 7 cents per share loss.
CEO Mary Dillon attributes the improvement to the Lace Up Plan to streamline operations and become more efficient. That involved reducing inventory by 10%, increasing quarter-end cash by 61% to $291 million, and closing some stores to focus on core regions.
The company closed 31 stores in the quarter and opened 5 stores, with most of the closures in weaker international markets, including Asia-Pacific and Europe.
Why the Stocks Were Tanking
The significant drop in price for these stocks is a bit of a headscratcher, as neither reduced their outlook for the second half of the fiscal year.
With regard to Foot Locker, the company maintained its -1% to 1% sales growth outlook, as well as its 1% to 3% same-store sales projection. These are not numbers to write home about, but they are unchanged.
The company also maintained its adjusted earnings per share in the $1.50 to $1.70 range. The one concern may be the company lowered its gross margin range slightly to 29.5% to 29.7%, from 29.8% to 30.0%, citing pressure in international markets.
Abercrombie & Fitch actually raised its net sales growth outlook for the full fiscal year to 12% to 13%, up from 10%. It also raised its operating margin outlook to 14% to 15% for the full year, from 14%. However, this is still down slightly from the Q2 margin of 15.5%. The company also calls for low double-digit sales growth in Q3.
CEO Fran Horowitz said the company is increasing its guidance, despite an “increasingly uncertain environment.”
Investors may have overreacted to those comments and the slightly lower operating margin.
Which Stock is the Better Buy?
Abercrombie & Fitch stock has been a stellar performer this year, up 54%, including Wednesday’s sharp 15% drop.
I think it’s an overreaction. The stock still has a reasonable valuation with a P/E ratio of 20 and, despite an “uncertain environment,” the company still expects sales growth.
Abercrombie & Fitch also has a proven track record of success, as the stock has averaged a 53% annual return over the past 5 years and a 12.2% annualized return over the past 10 years.
Analysts set a median price target of $193 per share, which is 37% higher than the current price. This massive dip on Wednesday looks like a pretty good buying opportunity for Abercrombie & Fitch.
As for Foot Locker, it seems to be on the right path under Dillon, but it still has quite a way to go, as it is still not profitable, and its growth projections are muted, at best. It is cheap, but not a ton of upside there.
Of the two, Abercrombie & Fitch is the much better stock and is one worth considering after this dip.
