Rising Costs Ahead: Can Abercrombie Hold the Line on Margins?

Abercrombie & Fitch Inc. ANF entered the first quarter of fiscal 2025 with strong sales momentum but with a strain on gross margins. Despite posting record net sales of $1.1 billion, up 8% year over year, the company saw its gross margin decline 440 basis points (bps). This deterioration was primarily due to elevated freight expenses and markdowns from carryover winter inventory within the Abercrombie brand. These factors forced ANF to lean more heavily on its operating leverage and efficiency gains to deliver an operating margin of 9.3%, down from 12.7% a year ago.

The tariff environment added further weight to the company’s profitability. ANF now assumes a 10% tariff on all global U.S. imports and a 30% tariff specifically on Chinese imports, resulting in an estimated $50 million margin headwind for fiscal 2025 despite mitigation efforts. While the company is not planning broad-based price increases, it continues to adjust its sourcing footprint and negotiate with vendors to preserve margins. Still, these adjustments will take time, and until then, the company’s gross margin remains vulnerable.

On the bright side, ANF's Hollister brand continues to outperform expectations, reporting a stellar 22% net sales growth driven by strong category performance and cultural alignment with its core teen customer. The strength of Hollister helped offset some of the weakness seen in Abercrombie brands, which faced a 4% decline in net sales due to promotional pressure and a tough comparison against last year’s launch of the Wedding Shop. The company’s agile operating model and ability to chase demand helped minimize inventory risk and position it for an expected rebound in the second half.

Looking forward, management expects sequential improvement in gross margin as freight-related cost pressures ease and carryover inventory is worked through. While the road to margin normalization is challenged by factors like tariffs, ANF’s strong brand equity, flexible supply chain and disciplined inventory management could enable it to weather the storm. However, with limited room to maneuver on pricing, any further cost escalation may pressure the company’s ability to sustain recent profit growth.

How ANF’s Peers Navigate Rising Costs

Like Abercrombie, American Eagle Outfitters AEO and Gap Inc. GAP are managing the pressures of elevated input and operational costs through agile supply chain strategies and margin-protection initiatives.

AEO is taking a disciplined approach to inventory and cost management, much like ANF. The company has tightened its inventory buys and continues to reduce reliance on promotions by focusing on trend-right assortments and faster product cycles. To mitigate rising freight and sourcing costs, AEO is shifting more of its supply base closer to home and investing in logistics efficiency. AEO’s ability to flex inventory levels and chase demand in-season mirrors Abercrombie’s “Read & React” playbook, enabling it to maintain healthy sell-throughs while minimizing markdown exposure.

Gap, facing similar cost inflation challenges, is emphasizing supply-chain transformation and product margin enhancement. It has diversified its vendor base, accelerated nearshoring and focused on SKU rationalization to improve forecasting accuracy and lower logistics costs. Gap has prioritized full-price selling and cleaner inventories, particularly in brands like Banana Republic. In addition, the company is leveraging scale and technology to find cost efficiencies, aiming to rebuild margins without significantly raising prices.

ANF’s Price Performance, Valuation & Estimates

Shares of Abercrombie have lost around 4.5% in the past three months against the industry’s growth of 7.6%.

From a valuation standpoint, ANF trades at a forward price-to-earnings ratio of 7.32X, significantly below the industry’s average of 17.32X.

The Zacks Consensus Estimate for ANF’s 2025 earnings implies a year-over-year decline of 4.9%, whereas its 2026 earnings estimate implies year-over-year growth of 3.9%. The estimates for 2025 and 2026 have been southbound in the past seven days.

ANF stock currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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