Abercrombie & Fitch Q3 2025: Growth Divergence and Holiday Momentum Analysis

Abercrombie & Fitch reported Q3 2025 earnings of $2.36 per share, surpassing analyst expectations of $2.16 according to CNBC. Revenue grew 7% to $1.29 billion, slightly exceeding the $1.28 billion Wall Street anticipated. The performance was driven by strong results at the Hollister brand, which posted 16% sales growth led by a 15% surge in comparable store sales. Meanwhile, the Abercrombie brand struggled with a 2% sales decline, including a 7% drop in same-store sales. Net income fell to $113 million from $132 million in the prior-year period, pressured by higher marketing investments and a 210-basis-point hit from tariffs. While Hollister's holiday momentum provides near-term tailwinds, the Abercrombie brand's underperformance and tariff costs remain near-term headwinds for profitability. The company's upcoming strategy discussion will examine how it plans to rebalance its portfolio for sustained growth.

Profitability Pressures Eroding Growth Upside

Abercrombie & Fitch's gross margin slipped to 62.5% in Q3 2025, hampered by a 210 basis point hit from tariffs. This cost pressure comes as operating expenses surged to $1.00 billion in the quarter, marking the highest level year-to-date and up sharply from $958 million in Q3 2024. The tariff burden alone is projected to cost the company approximately $60 million in Q4, compounding existing margin challenges.

The rise in operating costs reflects broader trends since 2022, with annual expenses climbing from $3.80 billion in 2024 to $4.21 billion in 2025. The Q3 2025 figure represents the peak of this recent upward trajectory.

. While tariffs are a significant immediate headwind, management emphasizes they are actively implementing offsetting strategies. These include holiday inventory preparations, strategic collaborations like the Taco Bell partnership, and targeted price optimizations designed to cushion the margin impact.

Despite these pressures, the company maintains a strong cash position of $606 million and continues share repurchases, having bought back $350 million year-to-date. Management remains confident in achieving flat Abercrombie brand sales for Q4 while looking forward to growth in 2026, suggesting these cost management efforts are part of a longer-term strategy to preserve profitability amid inflationary pressures. The effectiveness of these measures will be tested as global trade dynamics and consumer spending patterns evolve.

Holiday Momentum and Strategic Catalysts

Abercrombie & Fitch's outlook brightened significantly, with the company lifting its full-year 2025 profit forecast to $10.20–$10.50 per share, up from $10.00–$10.50. This upgrade signals strong confidence, primarily fueled by robust demand for Hollister apparel and successful holiday promotions that boosted sales across key categories like dresses and jeans. Management attributes this optimism to favorable early holiday shopping trends and an in-demand product mix, suggesting their retail strategy is resonating with teens despite a competitive market landscape.

However, the holiday playbook reveals a stark brand divergence. While Hollister continues to drive growth, Abercrombie's performance remains a challenge. For the critical fourth quarter, Abercrombie & Fitch projects flat sales at the Abercrombie brand, a clear contrast to the overall company guidance of 4-6% sales growth. This divergence was evident in Q3 results, where Hollister comps jumped 15% while Abercrombie comps fell 7%. The CEO openly acknowledged the slowing growth at Abercrombie, confirming the strategic shift of focus towards Hollister as the primary holiday season performer.

To capitalize on this momentum and counterbalance the Abercrombie weakness, management is deploying tactical catalysts. They are emphasizing holiday inventory readiness to ensure product availability during peak demand. Furthermore, they highlighted a high-profile collaboration with Taco Bell as a key promotional driver, alongside ongoing price optimizations. These efforts are designed to absorb the expected $60 million hit from tariffs in Q4, which pressured gross margin by 210 basis points in Q3, aiming to keep overall margins stable despite the tariff cost.

The holiday optimism, therefore, hinges on Hollister's strength and these tactical plays succeeding. While the inventory prep and Taco Bell collab offer potential upside, the risk remains that the Abercrombie brand continues to lag, potentially requiring deeper markdowns or limiting the overall holiday sales upside against the 4-6% guidance. The divergence between the two brands is the central risk factor for the near-term outlook, setting the stage for a deeper look at the associated challenges.

Risks to Growth Thesis and Guardrails

The company's growth story faces headwinds as core brand relevance at Abercrombie itself remains fragile, with comparable sales slipping 7% year-over-year while the broader Abercrombie & Fitch segment declined 2% in Q3. This decline contrasts sharply with the 15% comparable sales growth at the Hollister brand, which now drives nearly all the company's performance as management shifts focus away from the struggling core brand. The sales weakness threatens the company's long-term positioning as a lifestyle retailer, particularly as Gen Z consumers increasingly gravitate toward more trend-forward competitors.

Management's cautious Q4 guidance of 4-6% sales growth falls short of the 5.6% consensus estimate, reflecting concerns about sustaining momentum after the core brand's struggles. While the company targets flat Abercrombie sales in Q4, the guidance gap suggests lingering uncertainty about whether the turnaround plan will bear fruit in the near term. The sales pressure compounds margin challenges as the company reported gross margins of 62.5%, already pressured by a 210 basis point tariff impact in Q3.

Operating expenses present a more structural risk, reaching $4.21 billion annually in 2025, up from $3.80 billion in 2024. Quarterly, Q3 2025 expenses hit $1 billion-the highest in the year-to-date periods-putting further pressure on operating margins at 12%. This upward trajectory in expenses has been consistent since 2022, creating a headwind to profitability even as revenue grows.

Tariff costs remain an ongoing pressure point, with management expecting approximately $60 million in Q4 impacts. These costs have already eroded margins by 210 basis points in the third quarter alone. While management emphasizes holiday inventory preparedness, strategic collaborations like the Taco Bell partnership, and price optimizations to offset these pressures, the persistent tariff impact limits the effectiveness of these tactical responses.

Management's balance sheet strength offers some protection against these headwinds. With $606 million in cash and a disciplined approach to capital allocation-including $350 million in share repurchases year-to-date-the company maintains flexibility to pursue strategic opportunities while navigating these challenges. The expansion plan of 36 new stores by year-end represents continued commitment to growth, though the effectiveness of new locations in offsetting declines at existing Abercrombie stores remains unproven.

Looking ahead, the company must demonstrate that Hollister's momentum can sustain growth as Abercrombie declines, while simultaneously addressing the margin pressures from elevated expenses and ongoing tariff impacts. Without meaningful progress on these fronts, the core growth thesis faces continued execution risks despite management's tactical responses.