Why these two retail stocks are hot

Two of the hottest stocks on Wednesday were among retailers Abercrombie & Fitch (NYSE:ANF) i Dick‘Sporting goods (NYSE:DKS). Apparel retailer Abercrombie & Fitch jumped 27% to $193 a share on Wednesday, while sporting goods chain Dick’s Sporting Goods rose 16% to $227 a share.

Both stocks surged to all-time highs on Wednesday morning. It’s been a good year so far for retail stocks, up about 20% year-to-date.

Earnings results blow up

Both retail chains destroyed their earnings estimates.

In its fiscal first quarter ended May 4, Abercrombie & Fitch reported net sales of $1 billion, up 22% year-over-year, with same-store sales up 21%. Analysts had forecast sales of about $958 million for the quarter.

Additionally, the retailer’s gross profit rate increased 540 basis points to 66.4%. Meanwhile, Abercrombie and Fitch’s operating income was $130 million, up sharply by about 282% year-over-year, while net income per share was $2.14 per share, up from 32 cents per share in the same quarter a year ago .

“We successfully coped with seasonal changes with the right product range and attractive marketing, leveraging flexible pursuit opportunities and inventory discipline, increasing sales above our expectations. Growth was across multiple regions and brands, with Abercrombie brands growing 31% and Hollister brands growing 12%,” CEO Fran Horowitz said in the earnings report.

Dick’s Sporting Goods also had a great quarter, crushing earnings estimates. For the quarter ended May 4, Dick’s generated net sales of $3 billion, up 6.2% from the same quarter a year ago. That’s up from the estimate of $2.94 billion.

Same-store sales increased 5.6%, up from the 3.6% increase in the same quarter a year ago. Dicks’ net income fell 10% to $275 million, or $3.30 per share, but that easily beat estimates.

The retailer’s net income declined due to higher expenses, including the opening of two new House of Sport concept stores.

“Our core strategies and execution are delivering strong results, and we continue to gain market share as consumers prioritize Dick’s Sporting Goods to meet their needs. Due to our strong first quarter performance, our expectation of continued strong athlete demand and the confidence we have in our business, we are raising our outlook for the full year,” president and CEO Lauren Hobart said in the earnings report.

A brighter perspective

Investors were not only delighted with the performance of both retailers; they were also pleased with the prospects for both companies.

Based on strong sales, Abercrombie & Fitch raised its guidance on the call for a 10% increase in net sales this financial year. The retailer’s previous forecasts were for net sales growth of 4% to 6%, so this is a significant increase. The company also raised its operating margin outlook to 14% from 12%.

In the current quarter, Abercrombie & Fitch is reporting strong net sales growth over the medium term, with an operating margin of 13-14%, compared to 9.6% in the same quarter a year ago.

Dick’s Sporting Goods also raised its outlook, raising its fiscal year net sales forecast to $13.1 billion to $13.2 billion, up from its previous guidance of $13 billion to $13.1 billion.

Moreover, the retailer raised its same-store sales guidance to growth from 2% to 3%, up from its previous growth of 1% to 2%. Finally, new earnings per share guidance is $13.35-$13.75, compared to previous guidance of $12.85-$13.25.

Is it worth buying any of the shares?

Abercrombie & Fitch saw a number of significant price target increases on Wednesday following its earnings reports, while Dick’s Sporting Goods also received some smaller upgrades.

Abercrombie & Fitch stock is currently up a whopping 108% year-to-date (YTD) and continues to trade at a reasonable valuation with a P/E ratio of 24. Meanwhile, Dick’s Sporting Goods stock is also up a whopping 54.7% YTD year, including Wednesday’s increases. It’s even cheaper at a P/E of 16.

I think both of these are still reasonable buys given their prospects and valuations. Consumer confidence is rising and inflation is falling. Dick’s is probably a slightly better buy due to its lower valuation and market share gain, but Abercrombie & Fitch could also have more room to operate.