Abercrombie & Fitch Q2 2026 Earnings: Tariff Refund Lifted Profit, but Underlying Demand Also Improved

Abercrombie & Fitch delivered a stronger-than-expected second quarter, with net sales rising 5% to a record $1.27B and operating margin reaching 19.9%. The headline profit result was heavily aided by a $100M refund of IEEPA tariffs, but management said the company also exceeded its prior outlook excluding that benefit, helped by lower promotions, improved conversion and operating leverage.

The investment story is becoming more balanced across the two brands. Abercrombie returned to stronger growth, while Hollister accelerated from a flat first quarter as back-to-school demand improved. The key question for investors is whether the company can sustain healthier full-price selling and unit growth after the temporary tariff-refund benefit rolls off.

As Reported on the Call

The Bigger Story

The reported margin surge does not represent a fully recurring earnings step-up. Approximately $100M of IEEPA tariff refunds reduced cost of sales during the quarter, contributing roughly 790 basis points to operating margin and approximately $1.75 to diluted EPS.

Still, the quarter was not solely an accounting or tariff event. Management’s May outlook had called for operating margin of around 10%, and the company exceeded that level by roughly 990 basis points. After isolating the tariff refund, management attributed the remaining approximately 200 basis points of upside primarily to better gross margin and operating leverage on stronger sales.

That distinction matters. Abercrombie & Fitch is showing that its merchandising and inventory model can support lower discounting while still increasing unit sales. However, the company must demonstrate that this improvement can continue when tariff refunds no longer support reported profitability in the fourth quarter and beyond.

Revenue and Operating Performance

Second-quarter net sales increased 5% to $1.27B, ahead of the company’s prior forecast for 2% to 4% growth. Comparable sales were flat, meaning the gap between total sales and comparable sales came largely from net new stores and third-party channel activity.

Growth was geographically broad, although underlying comparable trends were uneven. The Americas, the company’s largest region, produced 5% sales growth and 1% comparable-sales growth. APAC remained the strongest market, with sales up 19% and comparable sales up 13%. EMEA returned to total sales growth, rising 2%, but comparable sales declined 4%; management said the U.K. remained strong and Germany returned to growth after inventory and receipts improved.

Abercrombie brands were the main driver of the quarter. Sales increased 8%, accelerating from 3% growth in the first quarter, while comparable sales rose 4%. Management cited stronger conversion and higher average unit retail, or AUR, supported by full-price selling in the Americas. Knits, wovens, swim and bottoms were cited as areas of strength, with management emphasizing that performance was balanced across genders and categories rather than reliant on one fashion trend.

Hollister sales rose 2% against a 19% increase in the prior-year quarter, improving from flat growth in the first quarter. Comparable sales declined 3%, although management said the brand’s sales growth accelerated during August as the back-to-school period developed. Management also indicated that Hollister demand outpaced available inventory at points during the quarter, requiring the team to chase inventory. That commentary supports demand momentum, but it also means investors should watch whether inventory availability limits sales or requires less favorable replenishment decisions later in the year.

Third-party distribution contributed to sales growth. Hollister’s Target partnership, which placed products in more than 1,500 Target locations, performed above management’s expectations and helped second-quarter revenue. The company did not quantify the contribution, and management said these initiatives remain small relative to the overall business. Still, they provide an early test of whether the brands can extend into categories and channels beyond their owned store and digital networks.

Profitability and Margins

Operating income was $253M, producing a 19.9% operating margin. On an adjusted basis, that compared with operating income of $168M and an operating margin of 13.9% in the prior-year quarter. The company excluded a $39M favorable litigation settlement from Q2 2025 adjusted comparisons.

The tariff refund was the dominant driver of the year-over-year margin expansion. The $100M refund was fully recorded as a reduction in cost of sales and accounted for approximately 790 basis points of second-quarter operating margin. Higher year-over-year tariff expense, store occupancy and fulfillment costs, selling expense, incentive compensation and G&A partially offset the benefit.

Underlying merchandising trends were also constructive. AUR increased by the mid-single digits, with lower promotional activity driving much of the improvement. Management said it did not implement incremental price increases beyond those already contemplated in its outlook. Instead, improved AUR reflected reduced discounts and stronger customer response to assortments.

The company also reported unit sales growth, rather than a sales increase driven only by pricing or mix. That is an important quality indicator for a retailer, particularly as the company maintains that lower promotions and higher conversion are occurring together.

For the second half, management expects modest AUR growth. Freight costs remain elevated and are expected to offset most of the favorable impact from current Section 301 tariff rates on gross margin. Marketing expense is expected to remain at a little above 5% of sales, with no meaningful leverage or deleverage expected in the back half.

Demand, Customers and Pricing

Management’s demand commentary pointed to improved product acceptance at both brands. At Abercrombie, conversion improved as customers responded to knit, woven and bottoms assortments, particularly with lower discounting. At Hollister, management said demand exceeded available inventory at points in the quarter and that sales growth has accelerated from second-quarter levels during August.

The company’s inventory posture appears deliberately tight. Ending inventory at cost was approximately flat year over year, while units were up low single digits and aligned with expected unit sales growth. Management said both brands are positioned to chase demand into the second half.

That approach has supported full-price selling, but it creates a trade-off. Tight inventories can protect margins and reduce markdown risk, yet sustained stock-outs could constrain revenue during the critical back-to-school and holiday periods.

Abercrombie & Fitch is also expanding its customer reach through external channels. In addition to the Target relationship, the company plans to broaden distribution of its NFL products to nflshop.com, NFL stadium stores, official team e-commerce sites and fanatics.com. Management views these partnerships as incremental channels that can extend brand reach without significant capital deployment, though it did not provide revenue or margin targets.

What is Abercrombie & Fitch’s guidance and outlook?

Management raised its full-year outlook following first-half execution and a strong start to August.

For fiscal 2026, Abercrombie & Fitch now expects:

• ·Net sales growth of around 5% from $5.27B in fiscal 2025, with growth across brands and regions.
• ·Operating margin of 14.5% to 15%, including approximately 220 basis points of benefit from IEEPA tariff refunds.
• ·Diluted EPS of $13.10 to $13.60, including an estimated $2.10 benefit from tariff refunds.
• ·A tax rate of around 29%.
• ·Modest AUR improvement and approximately 30 basis points of sales benefit from foreign currency.

The company expects to recognize another approximately $20M of IEEPA tariff refunds in the third quarter. That amount is expected to add roughly 160 basis points to Q3 operating margin and approximately $0.35 to Q3 EPS. Management expects no comparable refund benefit in the fourth quarter.

For the third quarter, management guided to net sales growth of 5% to 6% from the prior-year level of $1.3B, operating margin of 13% to 14%, and diluted EPS of $2.90 to $3.20. The outlook assumes growth across brands and regions, modest AUR growth, slight tariff favorability more than offsetting freight pressure, and slight operating expense deleverage from payroll and ERP-related amortization.

Balance Sheet, Cash Flow and Capital

The company ended the quarter with $628M of cash and cash equivalents, approximately $1.1B of liquidity and $10M of marketable securities. It repurchased $177M of shares during the quarter and $282M year to date.

Year-to-date repurchases represented approximately 7% of shares outstanding at the beginning of the year. The company had $568M remaining under its current authorization at quarter-end and now expects to repurchase at least $500M of shares during fiscal 2026.

Capital expenditures are expected to be approximately $250M for the year. The company plans approximately 130 net new store experiences, including 50 new stores and 80 remodels or rightsizings, offset by roughly 20 closures. New stores are expected to be relatively balanced across brands and weighted toward the Americas.

What Investors Should Watch

1. Full-Price Selling After the Tariff Refunds

The second-quarter margin result was inflated by the $100M tariff refund, and another $20M benefit is expected in Q3. Investors should focus on AUR, promotional activity and underlying gross margin in Q4, when the refund tailwind is expected to end.

2. Hollister’s Back-to-School Momentum

Hollister’s total sales growth improved to 2% and management said August growth accelerated beyond the Q2 pace. Sustained improvement would support the case that the brand is regaining momentum, but comparable sales were still down 3% in Q2 and inventory availability remains a variable.

3. Abercrombie Brand Comparable Sales

Abercrombie comparable sales returned to 4% growth as conversion and full-price selling improved. Continued positive comps would indicate that the brand’s growth is being supported by its core customer proposition, rather than primarily by store expansion and third-party revenue.

4. APAC and EMEA Execution

APAC remains a major growth engine, with 19% sales growth and 13% comparable-sales growth in Q2. EMEA improved sequentially, but its 4% comparable-sales decline shows the region has not yet fully stabilized. Management’s strategic review of APAC also remains an item to monitor, though the company did not provide further detail.

5. Third-Party Channel Economics

Target, NFL distribution, footwear, accessories and licensing broaden the company’s addressable market. These initiatives are currently too small to materially affect consolidated margins, according to management, but investors should watch whether they add profitable sales without diluting the brands’ pricing power or requiring heavier inventory investment.

AlgovestIQ Takeaway

Abercrombie & Fitch produced a strong second quarter, but the reported earnings growth needs to be read in two layers. The 19.9% operating margin and $4.17 EPS included a substantial, non-recurring tariff-refund benefit. Those figures should not be treated as the company’s normalized run rate.

The more encouraging part of the report was the underlying performance. Sales exceeded guidance, promotions were lower than expected, AUR improved, unit sales increased and Abercrombie returned to positive comparable-sales growth. The company also indicated that Hollister’s back-to-school momentum strengthened into August, which could be important after the brand’s flat first-quarter result.

The central investment question is whether the company can sustain mid-single-digit revenue growth and healthy double-digit operating margins without tariff-related support. Management’s full-year outlook implies confidence in that outcome, but the fourth quarter will provide a cleaner view of underlying profitability because it is not expected to include IEEPA tariff refunds.

Evidence that would strengthen the thesis would include continued positive comparable sales at Abercrombie, a further inflection in Hollister comparable sales, disciplined inventory levels and stable gross margin as freight costs remain elevated. Evidence that would weaken it would include renewed promotional pressure, inventory constraints that limit sales, or a sharper-than-expected slowdown in EMEA or APAC after recent momentum.