Abercrombie & Fitch's Q2 2026 Earnings Call: Contradictions Emerge on Carryover Inventory, Tariff Impact, and REIT Spin-off Timing

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

Date of Call: None provided

Financials Results

• Revenue: $1.21B, up 7% YOY (FX +100 bps); comparable sales +3%
• EPS: Adjusted EPS $2.32, vs $2.50 in the prior year
• Gross Margin: Down 230 bps YOY; ~40 bps impact from ~$5M tariffs; remaining pressure from clearing higher-cost carryover inventory and lower AUR; freight normalized
• Operating Margin: 13.9%, above May outlook; operating income $168M vs $176M last year

Guidance:

• Full-year 2025 net sales +5%–7% vs $4.95B 2024 (~50 bps FX tailwind)
• FY GAAP operating margin 13.0%–13.5%; tax ~30%; diluted shares ~49M; EPS $10.00–$10.50
• Tariffs: ~$90M 2025 headwind (~170 bps OM at midpoint); no broad-based price increases; mitigation actions underway
• Capex ~$225M; ~60 new stores and ~40 remodels/right-sizes; ~20 closures; targeting ~$400M buybacks in 2025
• Q3 2025: sales +5%–7% vs Q3 2024 $1.2B; OM 11%–12%; ~$25M tariff impact; slight freight tailwind; marketing +>100 bps; tax ~31%; EPS $2.05–$2.25; ~48M diluted shares; ≥$50M buybacks

Business Commentary:

* Record Sales and Growth: - Abercrombie and Fitch reported record net sales of $1,200,000,000 for Q2, up 7% year-on-year, outperforming expectations. - Growth was driven by strong performance in Hollister brands and regional growth in The Americas and APAC.

• Hollister Brand Momentum:
• Hollister brands experienced record sales growth, with net sales up 19% in Q2, attributed to strong cross-channel traffic and a 19% increase in comparable sales.

• This success was fueled by effective brand activations and engagement with the target customer base.

• Tariff Impact and Mitigation:

• Abercrombie faced a $5,000,000 tariff impact in Q2, with $25,000,000 expected in Q3, affecting gross margin.

• The company is employing strategies such as adjusting global production and enhancing supplier contracts to mitigate costs and maintain pricing stability.

• Inventory Management and Strategy:

• Inventory levels were managed effectively, with cost of goods sold increasing due to higher carryover inventory and tariff pressures.
• The company cleared excess inventory and adjusted promotions to align with consumer response, enhancing inventory positioning.

Sentiment Analysis:

• Record Q2 net sales of $1.21B, up 7% YOY. “We are increasing our full year 2025 net sales growth expectations.” Management entered H2 “with momentum” and can “chase for the fourth quarter.” Raised FY OM to 13%–13.5% and guided Q3 sales +5%–7% with OM 11%–12%, despite a ~$90M 2025 tariff headwind.

Q&A:

• Question from Dana Telsey (Telsey Advisory Group): What gives you confidence Abercrombie can accelerate after last year’s Wedding Shop success, and how are you treating the credit card settlement in guidance?
  Response: Abercrombie remains healthy with strong traffic, clean inventory, new partnerships (e.g., NFL), and store growth; management expects A&F to return to growth by year-end. The ~$39M interchange benefit is included in GAAP OM guidance; uplift is largely offset by higher tariff impact.

• Question from Dana Telsey (Telsey Advisory Group): Update on Abercrombie Kids’ entry into department stores and potential for other brands?
  Response: Kids’ licensing in department stores is expanding reach with positive early feedback; it supplements a small store base. No broader wholesale plans for A&F/Hollister now; focus is discovery and funneling to owned channels.

• Question from Cory Tarlow (Jefferies): What’s driving Hollister’s 19% growth, and how is momentum trending into Q3?
  Response: Growth is broad-based across genders and categories; heritage/Y2K and homecoming activations and the Collegiate collection resonated. Momentum has continued into back-to-school.

• Question from Cory Tarlow (Jefferies): Inventory update and unit plans for the back half, including tariff/freight effects?
  Response: Inventory is clean; cost up 10% and units up 7%, with ~1 point tariff impact on cost; positioned to chase demand while tightly managing units.

• Question from Matthew Boss (JPMorgan): Q2 traffic cadence and what missed at Abercrombie; outlook for comps in H2?
  Response: Traffic grew consistently across regions/channels. A&F missed due to AUR pressure from clearing carryover; early Q3 reads (denim, Boho, Western) are solid.

• Question from Matthew Boss (JPMorgan): How to think about Q3 margins given the OM guide down to 11%–12%?
  Response: Expect gross margin pressure mainly from ~$25M tariffs (a few hundred bps); slight freight tailwind; marketing up >100 bps to support partnerships/campaigns, yielding 11%–12% OM.

• Question from Paul Lejuez (Citi): Tariff headwind details and mitigation; update on Europe by country and outlook?
  Response: Tariffs are fluid; mitigation via sourcing shifts, vendor negotiations, OpEx efficiencies, and selective pricing—no broad ticket hikes; most benefits land in 2026. UK strong; Germany softer, but playbook being exported across EMEA.

• Question from Marni Shapiro (The Retail Tracker): Scope and mix of increased marketing (NFL, fall, holiday) and channel balance?
  Response: Back-half marketing is increasing to support NFL and fall campaigns; Q3 deleverage >100 bps and back-half slightly >5% of sales; approach balances social/digital with select events.

• Question from Alex Stratton (Morgan Stanley): Why expand A&F stores and what’s the store plan for 2025 (by banner)?
  Response: Stores are essential to omnichannel and show strong productivity/paybacks; plan is ~60 openings and ~20 closures in 2025 (~37 A&F), plus ~40 remodels/right-sizes.

• Question from Mauricio Cerniga (UBS): Clarify A&F third-party headwinds, quarter-to-date trends, and Q2 gross margin drivers.
  Response: Third-party headwinds were timing-related and should normalize in H2; A&F is off to a good Q3 start. Q2 GM fell on lower AUR and higher-cost inventory, plus ~$5M tariffs; freight normalized.

• Question from Adrienne Yih (Barclays): Tariff timing/mitigation and any pricing actions; thoughts on denim assortment and price spectrum?
  Response: Guidance includes tariffs known as of Aug 25 (~$90M in 2025: $5M Q2, $25M Q3, $60M Q4); avoiding broad price hikes while pursuing sourcing/vendor/OpEx levers. Denim demand spans multiple fits with strong response at both brands.

• Question from Janet Kloppenburg (JJK Research Associates): With tougher Hollister and easier A&F compares, how should comps evolve; can A&F AUR improve?
  Response: Expect Hollister to outperform A&F in Q3 while driving total sales +5%–7%; aim to hold multi-year AUR gains by managing inventory and dialing back promo days where possible.