ABERCROMBIE & FITCH Q2 FY27 earnings call ANF

The company is diligently executing on four core priorities for the year: growing sales across brands with continued investment in owned/operated stores and digital businesses while adding growth in partnerships and new product categories; stabilizing gross margins by mitigating external cost pressures; investing in tools and technologies, including AI, to improve speed and efficiency; and maintaining strong profitability to return excess cash to shareholders. Management highlighted meaningful progress across all these objectives in the first half of 2026, setting the stage for continued profitable growth.

Both Abercrombie and Hollister brands achieved record second-quarter net sales. Abercrombie Brands saw 8% growth, accelerating from 3% in Q1, with comparable sales up 4% driven by improvements in conversion, AUR, and full-price selling, particularly in the Americas. Growth was balanced across gender and categories, with knits, wovens, and bottoms performing well. Hollister grew 2% on top of a 19% increase last year, with strength in knits, shorts, and non-denim bottoms, and saw accelerated growth in August. The denim cycle is healthy, with low-rise popular for Hollister and varied styles for Abercrombie.

New distribution channels and product categories are emerging as key growth levers. The Hollister partnership with Target, its first meaningful wholesale and category expansion in the U.S., has performed very well, providing access to new customers and categories like dorm products. The Abercrombie NFL partnership is expanding its distribution to nflshop.com, NFL Stadium stores, and official team e-commerce sites. Initial reads on footwear and accessories across both brands are also positive, supporting a head-to-toe dressing strategy.

Inventory remains tightly managed, with ending inventory at cost approximately flat to last year and units up low single digits, aligned with expected unit sales growth. This discipline, combined with strong customer demand, led to lower promotional activity and better-than-expected average unit retail (AUR) in Q2. The company expects modest AUR improvement in the back half of the year, driven by product resonance and continued controlled discounting, which is seen as a demand story with balanced unit sales growth.

The Q2 operating margin of 19.9% was significantly above outlook, benefiting from a $100 million tariff refund which contributed approximately 790 basis points. The remaining 200 basis points of outperformance came primarily from favorable gross margin and operating leverage on stronger sales, indicating underlying business strength. For the full year, total tariff refunds are expected to be $120 million, contributing approximately 220 basis points to operating margin, though this benefit is largely offset by higher freight costs.

The company continues to leverage its strong cash flow and balance sheet to return capital to shareholders. It repurchased $177 million in shares during Q2 and $282 million year-to-date, representing approximately 7% of shares outstanding at the beginning of the year. The full-year share repurchase target has been raised to at least $500 million, demonstrating confidence in sustained profitability and a commitment to consistent shareholder returns, marking its tenth consecutive quarter of share repurchases.