What happened
Shares of apparel company Abercrombie & Fitch (ANF 0.45%) skyrocketed on Wednesday after the company reported financial results for its fiscal first quarter of 2023. As of noon ET, Abercrombie stock was up 26%.
So what
Abercrombie's Q1 ended in April. In Q1, the company had net sales of $836 million, which were only up 3% year over year. But that was solidly ahead of management's guidance of $813 million. Moreover, its Q1 operating margin of 4% exceeded management's guidance for a 2% operating margin, at best.
Importantly for a company like Abercrombie, it was able to reduce its inventories by 20% year over year and is now approaching normalized levels after spiking to unusually high levels in the second half of 2022. For an apparel company, too much inventory can lead to clearance sales, write-downs, and lower profits. So it's encouraging that Abercrombie grew sales while lowering inventory.
Abercrombie stock beat guidance and expectations and the market was excited today.
Now what
Abercrombie's management raised its full-year guidance in light of Q1 results. It now expects net sales to grow between 2% and 4% year over year whereas it was previously expecting just 1% to 3% growth. It also bumped its operating margin expectations up to between 5% and 6% instead of 4% to 5%.
In my opinion, Abercrombie stock looks fairly valued right now. If it hits the high ends of management's guidance, it could earn about $230 million in operating profit in fiscal 2023, meaning the stock trades at about 6 times this year's operating profit. While that may sound very cheap, that's a fairly common multiple for this company and investors might not see a higher valuation unless it can post better growth.
Therefore, Abercrombie is off to good start this year but it's not a stock I would rush to invest in.
