This week has seen two of the biggest clothing retailers in the US – Abercrombie & Fitch and American Eagle – suffering from deeply disappointing earnings reports.
The shocking news was enough to send the stock price of Abercrombie & Fitch plummeting by 28.7% while American Eagle’s shares fell by 6.99%. So is it bad news all round for US retailers?
A disaster for Abercrombie & Fitch
Abercrombie & Fitch had a nightmare of a week as its share price was slashed following a surprise quarterly loss and a dramatically reduced sales forecast. While the brand’s revenue grew by 4% on a year-by-year basis, Abercrombie & Fitch’s profitability appears to be a big problem.
The retailer is having to deal with immense inflationary issues that have hit its freight costs as well as the basic price of its products. This has had the negative impact of causing Abercrombie & Fitch’s gross margin to slip by over 8%.
The really bad news is that this is looking like it’s just the start of the retailer’s problems. This is because Abercrombie & Fitch has said that it only expects its net sales to be 2% at best in 2022. Such a result would be hugely disappointing as previous estimates had sales growth to be somewhere in the region of 4%.
With inflation in the US continuing to have a negative impact on the consumer demand for discretionary products like clothing, it’s going to be hard to see how Abercrombie & Fitch are going to be able to ride the storm. All of which means that the actions of the forthcoming Fed meetings about interest rates will be hugely important.
Higher costs hit the profits of American Eagle
Things weren’t quite so bad for American Eagle, but the retailer still missed its earnings targets by some way. Analysts had predicted that sales would be $1.14 billion, but the actual figure came in at just $1.06 billion.
American Eagle stated that there were a number of different reasons for the sales miss. Firstly, there was a lower consumer demand for clothing in the quarter which meant that total sales were only up by 2%, having a big knock-on effect for its profit margins.
This is because the operating costs have continued to rise in the uncertain economic conditions. Alongside higher freight costs, there has been spiraling labor costs alongside an increase in administrative expenses.
Like many other retailers, American Eagle has suffered from a big problem in properly maintaining its inventories. A shocking statistic showed that the brand’s inventories were up nearly 50% compared to the same time last year. Obviously, the modest sales increase was nowhere near enough to cover this.
As a result, many investors will be expecting American Eagle to offload the excess stock in some fairly heavy markdown promotions in the coming months. While this will do some good to make amends for the difficulties, it’s still expected that the current financial quarter will be another tough one for American Eagle.
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