What happened

Shares of teen basics retailer Abercrombie & Fitch (NYSE:ANF) dropped 15.5% as soon as trading opened on Nov. 23. That decline was precipitated by the company's third-quarter earnings release, which hit the market before the open today. It was a mixed bag, with the real problem likely tied more to investor sentiment around a key headline-grabbing topic.

So what

Abercrombie & Fitch's third-quarter 2021 sales came in at $905 million, up 10% compared to the same quarter of 2020 and 5% compared to 2019. That's not bad at all, and suggests that the company's brands are still resonating with consumers. On the bottom line, the retailer posted adjusted earnings of $0.86 per share, up from $0.71 per share in the third quarter of 2020 and $0.37 per share the year before that. Digital sales rose 8% year over year and now make up 46% of the company's top line. So far the earnings update looks pretty good, noting that the company beat analyst expectations on both the top and bottom lines.

A hand swiping a credit card through a credit card machine.

Image source: Getty Images.

The problem is that Abercrombie & Fitch commented about logistics issues, which is a red flag for investors. That's a pretty common thing right now, since the headlines have detailed problems across the global supply chain. In the case of this retailer, however, rising costs led to a slight year-over-year profit margin decline in the third quarter. Management noted that it was dealing with the problem well, but specifically highlighted "production and delivery delays and elevated costs" as issues. The impact wasn't small, either, representing a 300-basis-point headwind to the gross profit margin. Although Abercrombie & Fitch was able to largely offset that hit with higher pricing, it's an issue that's likely to linger through at least the fourth quarter if not longer. 

Now what

Wall Street is almost as mercurial as the teens who shop at Abercrombie & Fitch's stores. And today, despite decent sales and earnings results, investors chose to focus on the negatives. That's not shocking, given the top of mind nature of the logistics issues facing the company. The big question from here, however, is whether or not the retailer can keep offsetting the hit via higher prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.