Abercrombie & Fitch's Q1 EPS Challenges: Why the Street Could Be in for a Surprise

Investors in Abercrombie & Fitch (ANF) are bracing for a potential earnings stumble as Morgan Stanley warns that the retailer’s strong performance streak may face headwinds in Q1 2025. While the company has delivered a stunning 503% total return over the past year, analysts caution that lofty expectations, valuation concerns, and macroeconomic risks could lead to an EPS shortfall. Here’s why the road ahead is anything but smooth.

The Bulls Are Already Bidding Up the Bar

Morgan Stanley highlights that Abercrombie’s recent success has been accompanied by “bullish expectations already held by the buy side.” This optimism, however, sets a high bar for future results. The stock’s Price/Book ratio of 8.97—far above peers like Ralph Lauren (RL) at 3.2 and PVH Corp (PVH) at 2.1—suggests the market is pricing in sustained growth.

The risk? If Abercrombie fails to deliver, investors may reassess the stock’s valuation, leading to a sharp correction. “The company’s recent performance has been extraordinary, but the market’s high expectations could make a miss costly,” says a Morgan Stanley analyst.

Margins Under Siege

Abercrombie’s 64.07% gross margin over the past year has been a key driver of its profitability. Yet analysts warn that this metric may come under pressure. Rising input costs, supply chain disruptions, or a slowdown in sales growth could force margins downward.

Morgan Stanley points to “ongoing margin reversion” as a critical risk. The firm’s Q3 2025 results will be pivotal in determining whether management can sustain margins amid these headwinds.

The Cyclicality Conundrum

As an apparel retailer, Abercrombie is highly exposed to consumer spending trends. If economic growth slows or inflation persists, discretionary purchases could decline—a scenario that would hit Abercrombie’s top line.

The company’s recent success has been fueled by a robust economy and a “return to normalcy” post-pandemic. Yet with the Federal Reserve’s policy path uncertain and recession risks rising, Abercrombie’s reliance on consumer confidence could backfire.

The Bottom Line: Monitor Q3 and Valuation Metrics

Morgan Stanley maintains an Equalweight rating on Abercrombie, signaling caution despite upgrading its price target. The firm’s concerns center on three key areas:
1. Valuation Sensitivity: The stock’s RSI (Relative Strength Index) is in overbought territory, suggesting a pullback may be near.
2. Margin Sustainability: Q3 results will test whether Abercrombie can maintain its 64% gross margin.
3. Macroeconomic Risks: A potential downturn could reduce demand for trendy apparel.

Investors should watch these metrics closely. If Abercrombie’s Q1 EPS misses estimates—a real possibility given these risks—the stock could face a significant sell-off. For now, the 503% rally over the past year has likely priced in perfection. Any stumble could remind traders that even the most fashionable brands aren’t immune to reality.

Conclusion: A Fashionable Risk

Abercrombie & Fitch’s Q1 2025 results are a litmus test for its ability to balance growth with profitability in an uncertain environment. With valuation stretched, margins under threat, and the economy teetering, a miss could unravel the recent rally. Investors should heed Morgan Stanley’s warning: the company’s success hinges on navigating these risks with precision—or facing a fashionably late reckoning.