Shares of Abercrombie & Fitch soared more than 25 percent Friday, after the struggling teen retailer reported another quarter of same-store sales gains over the previous three-month period.
The results included adjusted earnings per share that doubled Wall Street's expectations, helped by a boost from its California-centric Hollister label.
More importantly — in a sign that consumers are responding to its redesigned merchandise and new brand positioning — the company's sales improved despite fewer and less aggressive promotions during the quarter.
"We believe Abercrombie & Fitch's momentum is sustainable," said Stifel Nicolaus analyst Richard Jaffe, following the report.
Both the Abercrombie and Hollister labels have been making big changes as they fight to get teens back into their stores. The strategy includes reducing the amount of its assortment, making its stores brighter and easier to navigate. Its marketing plan is also less driven by sex appeal.
Abercrombie & Fitch Executive Chairman Arthur Martinez said the company's third-quarter results are the "strongest validation yet" that these initiatives are taking hold.
The company's turnaround has thus far been led by its Hollister brand and stores. The Abercrombie label is working to adjust its brand positioning away from one that only "cool kids" can participate in.
During the third quarter, Hollister's same-store sales increased 3 percent, marking its first period of comparable sales growth in nearly four years. While Abercrombie's comparable revenues logged yet another loss, they continued their recent trend of improving over the previous quarter and fell 5 percent.
Trends at the company's international business, which accounts for more than one-third of its sales, also turned positive.
"With market expectations reduced after hearing earnings reports from other retailers over the last several weeks, today's number was impressive," Citi analyst Paul Lejuez said.
Though Abercrombie's results continue to improve, it still faces challenges. These include consumers' interest in fast-fashion labels such as H&M, as well as excess inventory across much of the space. This influx of product is expected to lead to acute pricing pressure in the fourth quarter.
Cowen & Co. analyst Oliver Chen added that the high amount of short interest in the stock is likely contributing to its spike. So far this year, Abercrombie shares are down roughly 20 percent.
