Investors have been concerned about the state of the U.S. economy lately, with particular attention to ailing consumers. With high inflation eating away at the purchasing power of their earnings, consumers have had to make some difficult financial decisions, and that has weighed on investor sentiment about the prospects for the companies that serve those consumers.
Yet on Tuesday morning, stock markets moved modestly higher, and the retail sector had a lot to do with the better mood on Wall Street. Strong quarterly financial results from Abercrombie & Fitch (ANF -3.67%) and Best Buy (BBY -0.30%) not only sent their respective shares soaring but also set a more positive tone for the key holiday shopping season. You can find the details below.
A&F gets an A
Abercrombie & Fitch saw its stock jump 19% early Tuesday, as investors digested the teen and young-adult apparel retailer's third-quarter financial report for the period ending Oct. 29. The numbers indicated A&F's continued recovery from the shutdowns of the pandemic and inspired some optimism about the coming months.
Key business metrics were mixed. Revenue of $880 million was down 3% year over year, with the strong U.S. dollar proving largely responsible for the decline. Higher freight and materials costs were major contributors in sending gross margin levels down 4.5 percentage points to 59.2%, and adjusted earnings dropped to just $0.01 per share, down from $0.86 in the year-earlier period. But investors were actually surprised to see any profit at all, having expected losses even on an adjusted basis.
The retailer saw much different results from its two main store brands. Hollister suffered a 12% sales drop, but the namesake Abercrombie store chain enjoyed 10% growth in its top line. Geographically, U.S. sales were up 3%, while revenue from the greater European and Asia-Pacific regions dropped 22% and 26%, respectively.
Despite elevated inventory levels, A&F was cautiously optimistic about the holidays. It expects fiscal fourth-quarter sales to be down 2% to 4%, again due largely to foreign currency weakness, but investors are much happier to see the retailer with enough supply of new styles to meet shopper demand over the next several weeks.
Best Buy charges up
Elsewhere, shares of Best Buy moved higher by 10%. The electronics retailer's fiscal third-quarter financial report for the period ending Oct. 29 confirmed consumer weakness but featured metrics that were better than many had feared.
Numbers for the third quarter weren't pretty. Total revenue dropped 11% to $10.59 billion, with comparable-store sales (comps) falling 10.4%. Declines came from physical store locations and from Best Buy's e-commerce channels, as both suffered double-digit percentage drops year over year. Moreover, higher costs weighed on operating margins and led to adjusted earnings of $1.38 per share, down by roughly one-third from year-ago levels.
Yet CEO Corie Barry was pleased with how Best Buy did. With performance that was better than expected, Best Buy is now focusing on the holiday shopping season, and Barry believes that the electronics retailer has managed inventory and planned promotions that will produce more success in the six weeks ahead.
Best Buy investors still need to be prepared to see a 10% drop in comps for the full fiscal year. Yet if the company can return to a more normal holiday experience even with consumers under financial pressure, it could be a long-term win for Best Buy and its shareholders for years to come.
