What happened

Shares of apparel company Abercrombie & Fitch (NYSE:ANF) surged higher on Thursday, after the company announced financial results for the second quarter of 2020. The company beat very low expectations from analysts on the top and bottom lines, and even turned in a surprising net profit.

Investors feared the worst and are relieved with today's news. As of 12:45 p.m. EDT, Abercrombie & Fitch stock was up 10% for the session.

A businessman rides a rocket ship expelling cash exhaust over a multi-colored bar chart.

Image source: Getty Images.

So what

Abercrombie & Fitch's net sales fell 17% year over year to $698 million in Q2. This included a 15% drop in sales at the company's Hollister brand, and a 20% drop in sales at Abercrombie. With retail locations closed or limited for much of the quarter, digital sales picked up the slack, growing 56% and accounting for more than half of total sales.

With a furloughed workforce and reduced occupancy expenses, Abercrombie & Fitch counterintuitively gained some leverage thanks to these strong e-commerce sales. It reported net income of $5.8 million, or $0.09 per diluted share. This was a sharp improvement from last year when it reported a loss of $29.5 million.

While Abercrombie & Fitch stock is rallying today, I wouldn't necessarily say investors are getting ahead of themselves. The stock is still down about 30% in 2020, reflecting the company's still-challenged retail business.

ANF Chart

ANF data by YCharts

Now what

Give credit to Abercrombie & Fitch's inventory management. Some retailers have significantly reduced inventory, and are now underprepared for returning consumer demand. Others have seen inventory levels rise, which will likely result in sharp discounting later in the year. By contrast, this company's inventory is only down 7% year over year. That's pretty stable management in a very unstable economic situation.

While Abercrombie & Fitch's stores are mostly reopened now, sales continue to lag. For the upcoming third quarter, management expects sales to be down 15% to 20%.