Abercrombie Shares Surge, but Beware of an Earnings Mirage

In its second-quarter results, Abercrombie reported earnings per share more than double Wall Street's forecast, surprising investors. The market had expected $1.99 per share, but the company actually reported $4.17. This upside surprise was the main driver of the surge in Abercrombie's shares.

According to the company, $1.75 of the $4.17 EPS came from the effect of tariff refunds. This accounts for 80% of the excess over Wall Street's forecast, and of the 19.9% operating margin, 7.9 percentage points were identified as arising from this refund effect.

In the second quarter, Abercrombie recorded total revenue of $1.3 billion, about 1.8 trillion won, up 5% from a year earlier. This extended its revenue growth to 15 consecutive quarters. By region, Asia-Pacific grew 19%, the fastest rate, while the Americas grew 5% and Europe 2%.

Results diverged by brand. Abercrombie's comparable-store sales rose 4%, showing solid growth. Hollister, by contrast, grew only 2% in revenue to $669.9 million, while its comparable-store sales fell 3%, a weak showing. This indicates Hollister is the relatively weak link in driving Abercrombie's overall revenue growth.

The CFO explained that demand was so strong that inventory sold out several times during the quarter. The company expressed optimism that it would resolve these inventory management issues and that Hollister's sales would recover in the second half.

The company said it plans to add a net 30 stores this year. This is interpreted as a strategy to supplement overall revenue with new stores and keep growing if comparable-store sales stagnate or underperform in certain brands. New store expansion is expected to serve as an important driver of sustained revenue growth.

However, analysts say this is no easy promise, because this quarter's high operating margin depended heavily on tariff refunds. Only $20 million of tariff refunds remain, so the company's own efforts to raise operating margins will become even more important next quarter. Attention is focused on whether it can hit its target through pure operating performance, excluding the one-off tariff refund factor.

Such buybacks can support the share price, but some warn that investors should remain wary of the earnings mirage. Whether the company can secure underlying operating performance and sustainable growth drivers, excluding the one-off tariff refund effect, will matter even more.