Investing.com -- S&P Global Ratings has revised its outlook for Abercrombie & Fitch Co. (NYSE: ANF ) to positive from stable, affirming its ’BB’ issuer-credit rating. The change in outlook follows strong sales growth and improved profitability for the company in fiscal 2024, which S&P attributes to successful execution of transformation initiatives.

The company’s overall revenue grew by 15.6% in fiscal 2024, following a 15.8% increase in the previous year, thanks to average unit retail expansion and higher consumer traffic. The growth was partially offset by the 53rd reporting period in 2023. S&P expects the company’s growth to continue in 2025, albeit at a more normalized pace.

The positive outlook also reflects the potential for a higher rating over the next 12 months if Abercrombie & Fitch demonstrates consistent operating performance, despite weakening consumer confidence and reduced spending on discretionary items.

The company’s two main brands, Abercrombie and Hollister, saw strong performance in 2024. Comparable sales for Abercrombie increased by 15% from the previous year, while Hollister’s sales rose by 19%. This growth was driven by the company’s transformation initiatives, which included optimized inventory management that led to reduced promotions and better operating margins over the past two years.

S&P expects Abercrombie & Fitch’s revenue to grow about 5% in 2025, supported by continued strengthening of brand positioning. Revenue is forecasted to increase further by 3.8% in 2026 as growth trends continue to normalize.

ANF’s adjusted EBITDA expanded more than 30% to about $1.2 billion in fiscal 2024, led by improved profitability and revenue growth. The company’s digital channels increased to almost 50% of sales, which helped to optimize its store fleet, increase its productivity, and improve the company’s margin profile by reducing fixed costs as a percentage of total costs. S&P forecasts a modest decline in margins in 2025 due to higher freight costs and carryover inventory, but expects the company to maintain adjusted EBITDA margin in the 24% area over the next two years.

The company’s optimized inventory management has been a key component in improving its operating performance, according to S&P. Inventory levels increased 22% in 2024 due to unit growth, freight costs, inventory carryover, and merchandise mix. S&P will monitor the company’s ability to sustain consistent operating performance, given the expected limited margin impact in 2025.

ANF’s conservative financial policy and sizable cash balance, which stood at $889 million as of Feb. 1, 2025, provide a cushion to its credit metrics. The company has no funded debt following its senior secured notes redemption in fiscal 2024. S&P expects adjusted leverage to remain at similar levels over the next two years due to continued low levels of adjusted debt and improved profitability.

The company’s free operating cash flow (FOCF) improved to $527 million in fiscal 2024, up from $496 million the previous year. S&P expects FOCF of about $540 million this year, increasing to $603 million in 2026.

Abercrombie & Fitch plans to invest in 100 stores, expand operations through franchise, wholesale, and licensing partnerships, and repurchase about $400 million in shares in 2025, which is in line with its guidance. These actions are expected to contribute to better FOCF generation over time.

The positive outlook could change to stable if the company’s adjusted leverage rises above 2x, if it cannot sustain the operating performances of its two main brands, or if it shifts to a less conservative financial policy. However, S&P could raise its ratings on ANF if the company continues to strengthen and expand its brands, demonstrates consistent operating performance, and maintains its conservative financial policy.

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