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Why American Eagle, Gap, and Crocs Dropped Today

Motley Fool - Tue May 24, 4:17PM CDT

What happened

A disastrous earnings report from retail clothier Abercrombie & Fitch(NYSE: ANF) reverberated across the retail industry Tuesday, pulling down shares of rival clothing chains such as American Eagle Outfitters(NYSE: AEO), Gap(NYSE: GPS), and Crocs(NASDAQ: CROX) as well.

Abercrombie suffered the greatest damage of the four, falling 28.8% today. But by the time the closing bell rang, American Eagle stock had lost 6.3%, Gap was down 8.4%, and Crocs got crushed 8.9%.

Three stock arrows trending down against a cityscape and global map background.

Image source: Getty Images.

So what

What caused this retail rout?

Heading into fiscal Q1 2022, analysts had forecast that Abercrombie & Fitch would earn $0.08 per share on sales of $799.3 million -- down significantly from one year ago, but at least still profitable. But Abercrombie shocked investors when instead of a profit it reported a loss for the quarter -- and a big one: $0.27 per share, adjusted for one-time items, and $0.32 per share, GAAP.

Inflation was the culprit, with Abercrombie pointing particularly to higher costs of goods sold, and higher transportation costs adding to its costs in Q1. Worse, Abercrombie warned that its costs will remain elevated at least through the end of this year, although higher freight costs may begin to subside by Q4. As a result, the company warned its full-year operating profit margin will be at least 1%, and perhaps as much as 3 full percentage points lower than what it had hoped. And in Q2 in particular, margins will be even worse.

All of the above, by the way, has echoed throughout the retail sector this earnings season. What's happening to Abercrombie, therefore, is likely to affect many other retailers as well.

Now what

This may be of particular concern to investors in Gap and American Eagle, both of which are expected to report their own quarterly numbers on Thursday, May 26, and both of which may be vulnerable to the same kind of sell-off that Abercrombie & Fitch shareholders are suffering today. Analysts on average are forecasting a loss for Gap -- $0.13 per share. They still think American Eagle can eke out a profit, but at $0.25 per share, it will be barely half what the company earned a year ago.

It's also worth pointing out that on Monday, investment bank Citigroup downgraded shares of all three of Abercrombie & Fitch, Gap, and American Eagle, too. And if Citigroup called Abercrombie right, then investors may be betting it's right about Gap and American Eagle.

In short, it's understandable that investors in Gap and American Eagle are feeling nervous today. It's curious, though, that Crocs stock is also selling off, despite the fact that (a) it's not reporting this week, and (b) it's not reporting because it already reported a blowout quarter three weeks ago, in which sales surged 44% year over year and earnings were up 38%!

As you may recall, though, I warned at the time of Crocs' earnings that its costs were rising just like everyone else's, and that while its sales and "adjusted" earnings still looked strong, GAAP profits were likely to take a big hit this year. Ever since I pointed that out, Crocs stock has been sinking -- and now the damage is spreading even further.

I fear it's shaping up to be a long, hot, summer for retail stocks, and not in a good way.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.