Retail's taste test

Abercrombie & Fitch has had its share of bad PR lately. Fortunately for investors, the company delivered some good news today: Abercrombie shares surged 35.67% after the retailer blew past quarterly expectations and raised its full-year guidance:

• Adjusted earnings came in at $4.17 a share, more than double Wall Street’s $1.99 estimate.
• Net sales rose 5% to a record $1.27 billion, marking the company’s 15th consecutive quarter of growth.
• Tariff refunds added $1.75 a share to quarterly profit

Increased momentum in the Americas, along with improving trends across Europe, the Middle East, and Africa, helped both Abercrombie and Hollister post record sales. Same-store sales at the Abercrombie brand rose 4%, though Hollister comps fell 3%.

A sneaker slump

The rally comes just one day after fellow retailer Dick’s Sporting Goods went in the opposite direction. Shares plunged 31% for its worst day on record after missing earnings expectations and slashing its full-year outlook. Most of the weakness came from Foot Locker, which Dick’s acquired last year for $2.4 billion: Dick’s core comparable sales rose 4.9%, while Foot Locker comps fell 3.6%.

Executives say the footwear industry is dealing with a “hangover,” as brands like Nike, On, and Hoka reset their product lineups and clear out older styles with heavier discounts. Those markdowns help move product, but they also squeeze margins. Dick’s now expects Foot Locker to lose $40 million to $80 million this year, versus its prior forecast for a $110 million to $150 million profit.

A choosier consumer

Abercrombie and Dick’s are two pieces of the same puzzle: Consumers are still spending, but stubborn inflation has forced them to become much more selective about where their money goes. It’s no coincidence that as PCE came in slightly hotter than expected in July, inflation-adjusted consumer spending was flat after rising 0.4% in June.

For retailers, that means the winners may not be the companies with the most stores or the biggest brands, but the ones that can figure out what increasingly picky consumers actually want. So don’t dismiss those unemployed TikTok lurkers devoting half their waking hours to the internet’s latest microtrend—they may have exactly what retailers need: taste.—SY