What happened

Shares of Abercrombie & Fitch (ANF 2.89%) plunged 28.7% on Tuesday after the apparel retailer reported an unexpected quarterly loss and slashed its full-year sales forecast.

So what 

Abercrombie's revenue rose 4% year over year to $813 million in its fiscal first quarter, which ended on April 30. A 13% rise in the company's namesake brand sales, to $383.9 million, was partially offset by a 3% decline in its Hollister brand sales, to $428.8 million.

Abercrombie's revenue in its Asia Pacific region was particularly hard hit by coronavirus-related lockdowns in China. Net sales in the segment fell 35% to $29.8 million.

A person is shopping in an apparel store.

Image source: Getty Images.

More concerning was a steep decline in Abercrombie's profitability. Like many retailers, Abercrombie is suffering from inflationary pressures, including higher freight and product costs. These costs contributed to an 8.1-percentage-point decline in its gross margin, to 55.3%.

Abercrombie, in turn, generated an operating loss of $10 million, compared to an operating profit of $57 million in the year-ago quarter. Its adjusted loss per share checked in at $0.27 versus adjusted per-share profits of $0.67 in the prior-year period.

Investors were startled by the shortfall. Analysts expected Abercrombie to report adjusted per-share profits of $0.08. 

Now what

Worse still, Abercrombie cut its full-year financial guidance. Management now expects the company's net sales to be flat to up 2% in fiscal 2022. That's down from its previous estimate of 2% to 4% sales growth. The retailer also lowered its operating margin target to 5%-6%, down from 7% to 8%.

Abercrombie attributed its guidance reduction to an anticipated negative impact of inflation on consumer demand for discretionary goods, as well as continued freight and raw material cost pressures.

"Looking forward, we expect higher costs to remain a headwind through at least year-end," CEO Fran Horowitz said.