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What happened

Things are looking up for apparel retailer Abercrombie & Fitch (NYSE: ANF) and that’s why the stock is up a whopping 25% as of 10:45 a.m. ET and hitting its highest price in a decade. The boost to investor enthusiasm came after the company reported financial results for its fiscal second quarter of 2023.

In Q2 (which ended in July), Abercrombie & Fitch generated net sales of $935 million, which was a strong increase of 16% year over year and driven by particular strength in its Abercrombie brand.

So what

Expectations were low to start Abercrombie’s fiscal 2023. Management only guided for 1% to 3% year-over-year net sales growth for the year. But so far, the business is crushing those expectations.

By exceeding expectations for net sales, Abercrombie is also much more profitable than previously expected. In Q2, the company had an operating margin of 9.6%, significantly exceeding its original guidance of 4% to 5% for the year.

Ultimately, it’s the company’s improved profitability that’s driving the incredible 122% year-to-date gain for the stock.

Now what

Abercrombie & Fitch’s management raised its full-year guidance at the end of the fiscal first quarter. But with today’s hot results, it’s raising guidance again. The company now expects to grow net sales 10% for the year — a far cry from the high end of its original guidance. Moreover, it expects a full-year operating margin of 8% to 9%.

In short, Abercrombie & Fitch’s full-year expectations for its operating profit are now more than double its original expectations. Therefore, considering the stock has more than doubled since the start of 2023, I believe its gains are justified.

The thing to watch from here will be Abercrombie’s ability to sustain success. Right now, it’s delivering some of its best growth in years. If it can keep building on this, it suggests that management is doing something right. By contrast, reversion to the mean would suggest that present results are just normal ebbs and flows in the apparel industry, and nothing special that Abercrombie is doing.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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