Abercrombie & Fitch earnings miss as inventory swells

Yahoo Finance Live anchors discuss first-quarter earnings for Abercrombie & Fitch.

Video transcript

JULIE HYMAN: We're just about four minutes from the opening bell, and we are taking a look at shares of Abercrombie. They are down 30%. Not keeping very good company with Snap here this morning.

The company's loss last quarter coming in at $0.27. As you can see there, analysts were looking for a gain of $0.06. Now, sales did come out and beat estimates, but it was really the gross margin here coming in at 55.3%, which was well below estimates. Inventory-- it's an inventory story again-- up 45%, Jared. And this is something we've been hearing from companies over and over again, retailers, this earnings season.

JARED BLIKRE: Yeah, you bet. And I have on the YFi Interactive-- guess what-- an apparel heat map. And we can see what's going. This is year to date, so you're going to see a lot of negativity in these numbers. And right down there at the bottom, down 30%, is Abercrombie.

So a lot of these stocks getting whacked, you can see, on a year-to-date basis. For instance, Gap is down 41%.

But let's take a look at a chart of Abercrombie, and go back three years. Now what surprised me a little bit about this, my earlier theory that if retail took such a hit last week, some of that should be baked in. This must have really been a terrible report.

And to be fair, they're not off as much as some of their other cohorts. Down 23% is a lot better than being down 40% or 50%, as we're seeing with some of these names. But just looking through the report, there's not a lot of good there.

And I'm really interested in following the inventory builds. That's a source-- that's what got-- that's what got Walmart down last week. That's what got Target.

And I think back to Brad's comments, who's on vacation this week, but Brad was saying, you know, this could lead to some discounting. It looks like the retailers and a lot of businesses just over anticipated the demand. So they over hired, and now they have to come back a little bit, and that's hurting-- that's affecting margins.

But they're making big changes. We have never seen, I think, an economy recently-- within decades, probably going back before almost all of us were born-- that changes this quickly for so many different reasons.

JULIE HYMAN: Yeah.

JARED BLIKRE: There's so many.

JULIE HYMAN: Well, and in this case what's fascinating to me about the narrative that's changed over the past couple of weeks is there was this expected shift from stuff to services, but apparel was sort of supposed to be part of the services because if you're traveling, if you're going out again, you need new stuff to wear. But now we are not seeing that narrative, at least, play out when it comes to either apparel at the pure-play apparel companies or what we were hearing from the Walmarts and Targets of the world and what people are spending on, so hence this sort of quick inventory switch.

But I think-- and I was saying this last week as well-- what's going to be really key to watch going into the latter part of the year is are we going to start to see that discounting that you referred to? What effect is that going to have on inflation, and will that actually bring inflation down much more quickly than some economists are anticipating? I don't know.

JARED BLIKRE: Yeah, it's an important question, and there's a lot to dig into. I'm seeing the potential for inflation to come down for some other reasons and economic indicators to give the Fed cover. They're going to keep-- they're going to keep raising rates but maybe back off the QT, maybe throw the market a bone. It's not coming for months, but I think that kind of action would coincide with a potential market bottom. So at that point, I'm really looking for key economic data and things in these earnings reports that could potentially give the Fed cover in the future.

JULIE HYMAN: Yeah, and as we are having this debate and kind of going back and forth about how this is going to play out-- obviously it's playing out in the market too with this sort of whipsaw up a lot one day, down a lot the next day kind of action as people try to figure out how to price all of this risk appropriately. Today we're going down.