Abercrombie & Fitch's Q2 2025 Earnings Call: Contradictions Emerge on Tariff Mitigation, Inventory Management, and Store Strategy

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: $1.21B, up 7% YOY (100 bps FX tailwind)
• EPS: $2.32 adjusted diluted EPS, down from $2.50 prior year
• Operating Margin: 13.9% of sales; operating income $168M vs $176M last year

Guidance:

• FY25 net sales growth 5%–7% vs $4.95B in 2024; ~50 bps FX tailwind.
• FY25 GAAP operating margin 13%–13.5%; tax ~30%.
• FY25 diluted EPS $10.00–$10.50; diluted shares ~49M.
• FY25 tariff impact about -$90M (Q2 $5M, Q3 $25M, Q4 $60M), ~-170 bps OM at midpoint.
• Capex ~ $225M; target ~ $400M share repurchases.
• 2025 stores: ~60 openings, ~40 remodels/right-sizes; ~20 closures (net openers).
• Q3: sales +5%–7% vs $1.2B; OM 11%–12%; tax ~31%; EPS $2.05–$2.25; marketing +100+ bps; at least $50M buybacks; diluted shares ~48M.

Business Commentary:

* Strong Financial Performance: - Abercrombie & Fitch reported record net sales of $1.2 billion for Q2 2025, reaching a 7% increase over the previous year. - This growth was driven by a strong first half and increased full-year net sales forecast, supported by regional performance and brand momentum.

• Hollister Brand Success:
• Hollister brands delivered record sales, with net sales growing 19% in Q2 2025, and comparable sales also increasing 19%.

• The brand's success is attributed to dialed-in marketing strategies, effective brand activations, and customer engagement, particularly among the team demographic.

• Abercrombie & Fitch Challenges and Recovery Plan:

• Abercrombie & Fitch's net sales decreased by 5% in Q2 2025 compared to last year, with comparable sales down 11%.

• This decline was due to managing inventory levels and lower AUR, but the company anticipates returning to growth by year-end through trend analysis and strategic product offerings.

• Regional Performance Variances:

• The Americas region achieved a 12th consecutive quarter of growth with 8% increase in net sales, while EMEA experienced a decline of 1%.
• The different regional performance is attributed to strong traffic in the Americas and softness in European markets, particularly in Germany.

Sentiment Analysis:

• Management reported record Q2 net sales up 7% YOY, the 11th consecutive quarter of growth, with traffic positive across stores and digital. They raised full-year sales guidance to 5%–7% growth and outlined strong balance sheet flexibility, ongoing share repurchases, and clean inventory positioning to chase demand. While tariffs are a headwind (~$90M in 2025), the team emphasized proven mitigation playbooks and sustained brand momentum, particularly at Hollister, and expects Abercrombie to return to growth by year-end.

Q&A:

• Question from Dana Lauren Telsey (Telsey Advisory Group): What gives you confidence Abercrombie can reaccelerate, and how are you handling the credit card settlement in guidance?
  Response: Abercrombie has clean inventory, strong traffic, and new partnerships (e.g., NFL); they expect a return to growth by year-end. Guidance is GAAP and includes the $39M settlement benefit, largely offset by higher 2025 tariff impact (now ~$90M).

• Question from Dana Lauren Telsey (Telsey Advisory Group): How is abercrombie kids performing in department stores, and could other brands enter that channel?
  Response: Kids licensing launch in department stores is performing well, expanding reach; current focus is on kids, while Hollister/A&F have ample scale via existing channels.

• Question from Corey Tarlowe (Jefferies): What’s driving Hollister’s 19% growth and can momentum persist into back-to-school?
  Response: Broad-based strength across genders and categories with heritage/Y2K and Collegiate collections resonating; momentum continues into the back half.

• Question from Corey Tarlowe (Jefferies): Inventory update and impact of tariffs on inventory/costs?
  Response: Inventory is clean; cost up 10% and units up 7%, with ~1 pt cost impact from early tariff-related receipts; positioned to chase in H2.

• Question from Matthew Robert Boss (JPMorgan): Traffic cadence and what drove Abercrombie’s Q2 miss; how do comps progress in H2?
  Response: Traffic was strong globally across channels; Abercrombie’s miss was lower AUR due to clearing carryover inventory; early Q3 reads are encouraging in denim and Boho/Western.

• Question from Matthew Robert Boss (JPMorgan): How should we think about Q3 gross margin relative to the 11%–12% operating margin guide?
  Response: Expect YOY margin pressure: ~$25M tariff headwind (~couple hundred bps), slight freight tailwind, and >100 bps higher marketing, leading to 11%–12% operating margin.

• Question from Paul Lawrence Lejuez (Citigroup): Detail the $90M tariff impact and mitigation levers; update on Europe performance.
  Response: Tariffs are fluid; mitigation via sourcing shifts, vendor negotiations, OpEx efficiencies, and selective pricing (most effects in 2026). U.K. remains strong; Germany softer but applying the U.K. playbook; third-party timing to normalize.

• Question from Marni Shapiro (The Retail Tracker): What drives the Q3 marketing step-up and how balanced is spend across channels/events?
  Response: Q3 marketing rises >100 bps to support NFL and fall campaigns across regions; spend remains balanced between social/digital and experiential events.

• Question from Alexandra Ann Straton (Morgan Stanley): Why pursue A&F store growth and what is the store plan for 2025?
  Response: Stores are critical to omnichannel acquisition and brand experience; 2025 plan is ~60 openings and ~20 closures (net openers), with ~37 openings skewed to A&F.

• Question from Mauricio Serna Vega (UBS): Clarify A&F third-party channel headwinds and Q2 gross margin drivers; any freight or unit color?
  Response: Third-party headwinds were order timing and should normalize; Q2 gross margin pressure reflected lower AUR and selling through higher-cost carryover plus ~$5M tariffs; freight normalized; no brand-level unit disclosure.

• Question from Adrienne Eugenia Yih-Tennant (Barclays): Tariff timing/India update implications and potential pricing; perspective on denim assortment/pricing?
  Response: Guidance reflects tariffs as of Aug 25 with ~$90M 2025 impact; using sourcing/vendor/OpEx levers and avoiding broad price hikes; denim strength spans multiple fits and price points supporting both brands.

• Question from Janet Joseph Kloppenburg (JJK Research): How to think about comps for Hollister vs. A&F into easier/tougher compares; AUR outlook for A&F?
  Response: Outlook implies 5%–7% Q3 sales growth on a strong base; expect Hollister to outperform near term while A&F improves; goal is to hold multiyear AUR gains via tight inventory and selective promo pullbacks.