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Freight rates have been on such a roller coaster ride since late 2023 that apparel retailers have to keep their heads on a swivel.
“No one really can predict where the freight rates are going to go,” said Scott Lipesky, chief financial officer of Abercrombie & Fitch, in second-quarter earnings call on Aug. 29.
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By all metrics, Abercrombie & Fitch had quite the successful quarter, with sales jumping 21 percent to $1.1 billion on net income of $250.5 million. The company also raised its sales and operating margin guidance for the second time this year, illustrating its ability to outperform expectations amid softer consumer spending.
But even as the retailer’s gross margins improved, the freight costs are continuing to hold it back. According to Lipesky and CEO Fran Horowitz, the expenses partially offset lower cotton costs and lower promotions on well-controlled inventories.
Abercrombie’s gross profit rate saw 2.4 percentage points of expansion to 64.9 percent compared to last year.
The freight pressures are expected to continue into the third quarter, Lipesky said, with gross profit rates expected to be “consistent with 2023” since the apparel seller has already passed the peak of the cotton price benefit.
When asked whether he thought freight rates would retreat further in the fourth quarter, Lipesky was unsure.
“They’ve been bouncing around a lot this summer. So for us, what we are doing is we are baking in elevated freight,” Lipesky said. “We assume that continues into and through the fourth quarter. We’ll talk about 2025, and we’ll obviously learn a lot more as we get through kind of the holiday peak of deliveries here in that September, October time frame and see what 2025 looks like. But at this point, we are baking in higher rates for Q3 and Q4.”
Even with the headwinds, the denim purveyor expects operating margin to be in the range of 14 percent to 15 percent, increasing the high end compared to the prior outlook of just 14 percent due to the lower cotton costs, lower clearance selling and higher average unit retail (AUR) prices.
Ocean freight rates spiked throughout much of the company’s second quarter, which began April 30 and ended Aug. 3. According to Drewry’s World Container Index (WCI), these rates increased 119 percent from April 25 to July 18, where 40-foot container prices peaked at $5,937.
On a year-over-year basis, those numbers saw an even more pronounced 286 percent gap from the $1,537 per container figure.