Q4 2019 Earnings Call
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Good day, everyone welcome to the Abercrombie and Fitch fourth quarter and year end fiscal year 2018 earnings call. Today's conference is being recorded if you have a question at any time. During today's conference you may see doors by pressing star one on your Touchtone phone well open the call to take your questions at the end of the presentation. We ask that you. Please limit yourself to one question during the question.
I would answer session.
And I was just talking about a turn the call over to pencil Giuliano. Please go ahead man.
Thank you good morning, and welcome to our fourth quarter 2019 earnings call. Joining me today on the call Fran Horowitz, Chief Executive Officer, and Scotland, Pesky, Chief Financial Officer.
Earlier this morning, we issued our fourth quarter earnings release.
Available on the web site at corporate about Abercrombie Dot com under Investor section.
No bonner websites as an investor presentation.
Please keep in mind that any forward looking statements made on the call are subject to safe Harbor provisions, but private Securities Litigation Reform Act 1995.
These forward looking statements, which include commentary on the estimated impact of accretive virus on our operating results are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today.
It was especially at least factors and uncertainties contained in the company's filings with the Securities Exchange Commission.
And we will be referring to certain non-GAAP financial measures during the call additional details in a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release of issued earlier. This morning with that I will turn call over different.
Good morning, everyone. Thank you for joining us.
We had to 29 Cabot strong note growing top line.
1% comp for the quarter sub 1% copper here, which was our third consecutive year of positive comp.
Importantly, we continue to make great progress against transformation initiatives, we laid out or 28, two investor day and expect to keep this momentum going.
Over the past two years.
In real estate, we provided 157, new store experience, but.
Reduced gross square footage by 6%.
For large but price underperforming flagship.
You mean.
<unk> cost as a percentage sales by approximately 190 basis points.
Is it dawned on me bigger DTC revenue by double digits.
Amit child capabilities across key global market and equip our store associates with handheld devices to improve shopping and checkout.
In contrast to customer product lifecycle, we reduced our product development countered by four weeks and prudently times a month when he must grow category.
Our China production exposure from 42% 27 team to 22% Twain 19, and as manufacturing capacity across southeast Asia.
In customer engagement, we opened regional offices in London in Shanghai watched personalization evolved our how's your Abercrombie Lucky programs in the U.S. and introduced are Lucky program in China.
And finally outside of our stated transformation initiative, we continue to advance our U.S.G. effort, most notably with our participation in the U.N. global contact.
We are excited about all that we have accomplished while cogs bed that there's still work ahead.
Yeah on cap as everyone knows the one of my favorite thing says Oh wait that word we're focused on our long term goals, what tirelessly driving near term results.
There will always be some challenges along the way, but our company has shown great resilience.
Recently, the Corona bars as presented in new challenge.
But we'd like to express our deepest sympathies to all of those who are affected.
Our top priority is the health and safety, our associates better partners and customers.
We're closely monitoring the situation, which seems to be changing daily if not hourly.
Well. This is created a near term headwinds longer term, we continue to view Europe and Asia as important long term growth drivers.
Scott will provide further detail on the reason that estimate impacted the chronic virus.
Now, let me turn to our fourth quarter results.
We anticipate a very competitive season, given retail bankruptcies.
Six fewer shopping days between Thanksgiving and Christmas and high inventory levels across the industry.
During the quarter, we were strategically the case of our promotion and carefully manage our inventory.
On the total company basis, we deliberately plus 1% comp.
We registered strong performance during Black Friday week, which we define as the choose the before Thanksgiving through cyber Monday.
We had the highest revenue for this period in the history of our company.
In the U.S. Hollister and she record sales over the weak and Abercrombie delivered its strongest topline in over five years.
For the holiday season, we plan to manage the anticipated Tropic peaks and valleys.
We started our marketing campaigns earlier and introduce new products and messaging throughout the quarter.
Oh planning paid off with record fourth quarter revenues and bottoms, including gene as well as outerwear and its Matt.
Also saw significant improvement in womens tops, driven by elevated fashion content and increased adoption of our new bottom silhouette.
By region, you opposed the 10th consecutive quarter of positive comp, a plus 3% and our international comp improved sequentially to a minus 3%.
International improvements were broad based across regions and channels and a cheap but it'll late quarter adverse impact are you pack business from the chronic virus outbreak.
By brand Hollister celebrity minus 2% comp at Abercrombie delivered eight plus eight.
Turning to Hollister.
Recently reported comp trends continue with U.S. outperform international guys outperforming girl and digital traffic and comp outperforming stores.
We saw sequential improvements in conversion and improved average unit retail customers responding well to do that.
I know last call, we discussed a renewed focus on a prudent playbooks, particularly on the girls side with an emphasis assortment architecture few breath and investments our top fashion item.
For the fourth quarter, we were able to impact a portion of the girls product as we progressed to the first half we expect to see ongoing improvement or certain architecture and inventory investment.
Yeah, especially excited about the opportunity girls genes in the back half of 20 My team, we continue to see respond to our fashion offerings.
Well, we chase inventory for these updated styles, we could not keep up with demand and the first quarter. We continue to flow in more newness and further increase the next a fashion debates that.
Well the composition to still not ideal you're scaling the business lay the groundwork for potential comp improvement ahead.
Looking beyond gene experience better performance in tops, she is somebody or new must have collections as a complement to our high rise and straight style fashion bottoms.
I'm, a guy side, we hit a new sales record in the fourth quarter, driven by Jean Outerwear have all of which had their highest fourth quarter revenue in breast historic.
Gilly Hicks Hollister intimate Sabrina also had a record fourth quarter revenues in another quarter double digit comp.
As a result with impressive sustained growth trajectory, we have invested an additional headcount as we prepare for the next day to growth.
For marketing throughout the quarter, we focused on speaking to our court gensix customer across the platforms are most meaningful to them, including you to Instagram tick tock, Spotify and Twitch pretty here, we had over 30 million views of the car pay challenge.
So are you choose office TV series and achieved double digit lift and brand affinity purchase intent and recommendation.
And it just something on the right platforms. We're also focused authentically speaking to our team.
I like second we introduced to the inaugural World Teen mental Wellness day, which was created a partnership with National day calendar is dedicated to raising awareness of team mental health issue.
In conjunction with this event, we launched the Hollister competent project a global year round initiative designed to promote gene confidence.
At Abercrombie brands 2019, with quite the or culminating in a plus 8% comp in the fourth quarter desktop 20 Ted.
Over the past two years, our teams have made great strides methodic adults and kids friend purpose and shipping product voice experience more closely aligned the neither party customers to operate relevant fashion at a compelling value.
Comps were positive for adults and kids.
At both domestic and international improvement was broad based on a sequential basis was higher traffic in stores online and you are gross.
And adult we provide our mid twenties type customers items that were perfect from much anticipated long weekend and all the associated social events.
We elevated it fabric and design, helping to drive reduced promotions I comparable products.
Women's continued to outperform mens although both delivered positive comp.
In women's we her best fourth quarter Comping over eight years was knit tops dresses outerwear, leading the way.
Jesus another highlight as I've mentioned from our recent curve what launched continued with the introduction of new washes and expansion of mom ankle straight to the collection.
And then so I can't sweaters, James Please Oh, yeah, though.
Our fears franchise its fourth consecutive quarter <unk> com building momentum theme throughout the year.
For the holiday, we offer a customized larger sized yourself as a gift sets, which were both well received.
There's a great example of a marketing teams focused on consistent story, telling the ties directly to our brand purpose.
Over the year, we've built on that with the introduction of our curve love soft, yeah, and do 96 hours and campaign, which we believe benefited traffic and conversion.
Our marketing momentum has continued into the first quarter with the introduction of our 2020 years campaign, which features 24 individuals we believe in body basing your fears.
The beer family, which includes professional athletes that can really you know in cloud who's not well sure their personal experience some self retirement by positivity and overcoming obstacles.
At Abercrombie kids momentum continued with our target customer and their parents responding to age appropriate product that was basketball functional and most importantly soft uncomfortable.
Boys and girls both contributed to the positive comp results. Looking ahead, we continue to do kids as an important growth vehicle.
We're excited about the future of our brands.
Moving to spring inventories current carried over is limited and customers are responding well to product and messaging.
Shifting gears to our transformation initiative.
Global store network optimization is a critical component to our operating margin expansion plans.
The retail environment is incredibly dynamic and the line between shopping channels have worse.
Our goal is to be there for our customer whenever wherever and however, they choose to engage our digital business grew at double digit range exceeding $1 billion annual revenues.
However, roughly two thirds of transaction will occur in store, which is why.
Doors matter.
We're committed to providing our customers that's the most seamless omni channel shopping experience.
Our stores do not take a one size fits all approach.
I need to be to rightsize, the right location the right economics, we've been updating our fleet to a combination of reductions in square footage remodels at existing footprint in store closures. We've been selected an opening new stores with roughly one third about 29 to opening Underpenetrated International markets.
With every new experience, we strive to improve health and productivity of our store fleet.
Domestically roughly half of our store basis up for renewal on a rolling to your basis, but the majority of negotiations occurring in the fourth quarter.
You are landlords is key partners and we continue to modernize evolve and invest in our stores are U.S. fleet as healthy, but roughly 90% of mall stores located and be centers, approximately 95% based profitable a four wall basis, an average remaining lease life was about three years.
This coupled with our strong balance sheet gives us flexibility to be nimble and to take advantage of previously unavailable opportunities.
I, probably fifth Avenue flashing the Great example of this.
On our third quarter call. We've now so we would the closing the store in fiscal 2020 due to a natural lease expiration moving to our smaller footprint hospital occasion, a few blocks away.
After the announcement, we remain engaged with the out of comedies that landlord, we were able to agree on a mutually beneficial short term lease extension.
Now, let's now makes sense to operate Abercrombie and Hollister fifth Avenue in the near term. In addition to Hollister, 34th Street, which remains one of our top performing stores.
This announcement does not change our long term commitment to close the majority of our flagship and repositioning within markets more intimate shopping experiences that cater to our local customers.
We entered 2019 was 19 global flagship an exit with 15.
During the year, we close enough Copenhagen, Aethlon at London Kids on cell ROE and Hollister spells out in New York City, removing 107000 gross square feet from our base.
Maybe 15 flagship, which collectively count for an additional 415000 grip gross square feet put a negative 50 points impact to calm and a negative 60 basis points impact operating margin in fiscal 2019.
In fiscal 2023 digital flagships will be available for closure, including the previously announced Abercrombie Fukuoka kick out.
Well, that's just aren't important piece or square footage rationalization story and so it was the rightsizing of large format Abercrombie stores and favorite smaller more productive omni enabled spaces for.
For context stores, there were rightsized over the past two years have roughly 30% to 40% lower gross square feet than older format at year end, 20% as a combined Abercrombie kids fleet what updated format.
In addition, Abercrombie and Hollister is also an active at yearend roughly 53% of its fleet was in the news in the newer format.
These remodels have consistently deliver a high single digit let themselves versus control stores.
In total we provided our customers with 90, new experiences during 2019 anything yet with 41% of our base updated formats as compared to roughly 30% in the previous year.
For 2020, we're planning for another 75, new experiences, including 30, Abercrombie and kids and 45, Hollister, Some which will include Gilly Hicks carve outs and side by side.
[laughter] truck since early 2018, we've taken about 6% or gross square footage out of the base I mean do store occupancy as a percent built by roughly 190 basis points. Our plans continue to lower store occupancy by reducing gross square footage in the low single digit range annually, primarily out of probably rightsizes influx of closure.
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We're pleased with the progress we've made against our global for network optimization initiative bring us closer to achieving the long term target introduced at April 20 team Investor Day.
At that time, we laid out the goal of doubling our adjusted non-GAAP operating margin from 2017 level to 5.8%.
The top rely on a successful execution of our transformation initiative.
Over the past few years, we have made great progress, but often been impacted by some unanticipated external factors, including a strong dollar China terrorists a protest in key markets across Europe and Asia.
I can tell the greatest impact the operating margin at 80 basis points.
On a constant currency basis. This brings our 5.8% target to five point out before factoring in the estimate impact of the current a virus.
We are managing through these challenges remain focused on meeting ultimately, surpassing our 5%, 5.8% operating margin target, albeit on a slightly different timelines initially expected.
On page one for future growth is in place and based on our fourth quarter employers all customers are responding to our updated product voice and Omnichannel brand experience.
Looking ahead.
We are confident that we have a clear path to achieve our goals including.
Total sales growth through ongoing U.S. comp growth and increased market penetration in Europe, and Asia benefiting from our local teams in these markets.
Gross margin expansion on lower APC, reflecting strategic sourcing efforts and improved assortment architecture, and slightly higher 80, or some data analytics and data helots tools, including work done in size optimization.
And operating expense leverage.
Ongoing reductions and square footage, which coupled with expected sales growth will further improve occupancy and fund ongoing investments in customer facing efforts.
As always we remain focused on controlling what we can control and mitigating what we cannot and with that I'm going to try to call. It biscuits discuss our recent results in more detail as well the outlook for 2020.
Thanks, Brad.
For total net sales of 1.2 billion rose, 3% from last year on a reported and constant currency basis.
Adverse impacts of approximately $3 million related to change that FX.
Formulary, primarily from store closures in mainland China due to the CRO virus.
Comp sales came in at plus one versus plus three last year.
Marketing and loyalty investments continue to drive positive cross channel traffic that support ongoing digital growth.
Ultra post the Miocene called versus plus six last year, and Abercrombie was plus a person's biased to last year.
Overall, our digital performance served to offset store traffic, which remained negative.
By geography, the U.S. achieved its 10th consecutive quarter of positive comp sales plus three on top of a plus five last year.
Well costs, while still negative registered significant sequential improvement in both Europe and Asia coming in at minus three versus minus eight in two three and minus two last year.
Gross profit rate declined 90 basis points to 58.2% 59.1 last year with higher you are offset by higher as you see.
This included the adverse impact from changes in FX, a 50 basis points asked from try to terrace up 30 basis points.
Ill recap the rest of our results for the quarter after year compared to last year adjusted non-GAAP basis.
Excluded from our fourth quarter operating results. This year were approximately $2 million a pre tax charges related to flagship store asset at Paris.
Operating expenses, excluding other operating income was up 2% as compared to last year, primarily due to volume related costs from higher digital net sales increased marketing.
This was partially offset by a reduction in store payroll consulting expenses.
Operating expense as a percent of sales leverage 30 basis points as compared to last year.
Operating income was 125 million compared to 130 million last year.
In year over year adverse impact from FX of 7 billion and China tariffs afford it.
The adjusted effective tax rate for the quarter was 29%.
Net income per diluted share was $1.31 cents compared to $1.35 last year with FX adversely impacting year over year results by approximately seven cents.
For the full year, excluding are excluded from our 2019 operating results were approximately $13 million a pre tax charges related to flagship store asset impairments.
This compares to approximately 11 million of excluding charges last year related to certain legal matters and flagship store asset apparel.
Net sales were 3.6 billion up 1% on a reported basis up 2% on a constant currency basis compared to last year.
Sales of plus one versus plus three last year.
Gross profit rate was 59.4% down 80 basis points last year with flat you are offset by higher APC.
Results include adverse impact from changes in FX, a 30 basis points and from trying to tariffs up 10 basis points.
Operating expenses, excluding other operating income rose, 2% from last year, primarily due to $47 million a flagship exit charges.
Mostly related to our Hollister Soho flagship as both increased volume related expenses from higher digital net sales and investments in marketing.
These increases were partially offset by benefits from changes in FX decreased compensation consulting costs and produce store occupancy expense, that's resulting in operating expense deleverage of 60 basis points.
Other operating income contributed 20 basis points of the leverage.
Operating income was $83 million fell from 139 billion last year, reflecting the $47 million a flagship store exit charges this year than a $19 million adverse year over year impact from FX.
The effective tax rate for the year was 28%.
Net income per diluted share was 73 cents compared to 115 last year.
Year over year decline was primarily driven by 53 cents a flagship store exit charges. This year and 20 cents from changes in FX.
Turning to cash flow in the balance sheet, our fourth quarter performance was a key driver of our full year operating cash flow of approximately $301 million compared to 353 million last year, which helped fund 203 million of capital expenditures.
Great and 15 million of returns to stockholders for share repurchases and dividends.
$20 million of debt repayments.
We ended this year to 671 million to cash compared to 723 million last year.
Gross borrowings outstanding were 233 million compared to 253 million and 28.
Total inventories ended the quarter down one compared to last year. This was better than our expectation discussed on a third quarter call about low to mid single digits are over our overall inventory position entering the quarter was well balanced across brands with strategic investments that are must wed and must grow categories. We expect to end the first quarter.
Inventory low single digits, excluding potential supply chain disruptions, resulting from the cost of ours.
Moving onto our fiscal 20 outlooks as we looked at a four year, there's significant uncertainty across our industry as we attempt to assess the potential impact of the crowd of hours on the global consumer and the global supply chain.
We are providing a full year outlook the takes into account the estimated impact our operations in the first half of the year based on the information available today.
Given the fluid nature of the situation this is subject to change.
When evaluating our outlook, we considered several factors, including store closures consumer travel and demand production delays.
Raw material availability and freight congestion.
Regarding store closures in consumer travel demand, we note that roughly 10% of our revenues were derived from a APAC region in fiscal 2019 and about half of that from mainland, China and Hong Kong Special administrative region.
Okay, APAC, we have begun to see temporary store closures ever do store hours in other regions.
We have also experienced weakening trends are tourist heavy location, even when stores have not closed.
On the supply chain side, and 20, Nike approximately 22% of our total merchandise receipts were sourced from China and 15% of the total proceeds for sourced from China and imported into the U.S.
We expect to producing these percentages in 2020 to the low teens and roughly 10% respectively.
In addition to these factories most of our favorite mills are at China today, we have not seeing meaningful delivery disruptions.
All factories and mills are now operational although running with delays, which may cause increased short term freight costs.
We can tend to be in close contact with our partners are evaluating all options to try to ensure that we do not disappoint our customers.
For the year, including our estimated first half impact to the crowd of ours, we expect net sales to be flat to up 2%, including an approximate $60 million to $80 million adverse impact related to the client of ours.
$10 million adverse impact from FX.
Sales to be down low single digits, reflecting a 200 basis point impact from across the virus.
Gross profit rate for the year feet down 50 to 70 basis points from the 2019 rate of 59.4%, including a 50 to 70 basis point adverse impact from across the bars any adverse impact from changes in FX of approximately 30 basis points.
Operating expenses, excluding other operating income to be approximately flat to the fiscal 2019 adjusted operating expense of 2.7 billion.
Our effective tax rate in the mid.
Sorry, the upper Twentys to low thirtys.
Capital expenditures of approximately 175 million.
For the first quarter, we expect net sales to be down in the mid single digits compared to last year, including an approximate 40 to 50 million dollar adverse impacts related to the crowd of ours and a 5 million dollar adverse impact from FX.
Sales to be down in the mid single digits, reflecting a 600 basis point impact from the caught a virus.
Gross profit rates to be down 102, 150 basis points from last year, 60.5% rate.
I think a 100 basis point adverse impact from the krona virus and the combined adverse impacts on changes in FX and anticipated try to tariffs of approximately 50 basis points.
Operating expenses, excluding other operating income to be flat to up 2% from 29 seating adjusted operating expenses of 472 million.
And an effective tax rate any upper twentys.
A detailed walk of our pre and post Corona virus earnings expectations is available on pages 32, and 33 of our investor presentation.
With that I will turn the call back over to France.
Before she would add just would like to take a moment to thank our global store team for all of your hard work this year into our global partners fierce help and support during this period of uncertainty.
Operator, we're ready for questions.
Thank you if you'd like to ask a question. Once again that has started 100 telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to a lot of your signal to return.
Well take our first question from Paul graduate with Citi.
Hey, Thanks, guys.
Sure. It's just a high level in within the U.S. market, what you're seeing around the competitive landscape.
Well as competitors store closings.
Whether that has had any sort of a near term impact and some of your stores would you think store closings provide a market share opportunity and about 20 anymore. So then that's my team and then Scott maybe you could talk a little bit about the puts and takes on a machine and maybe come through.
We are the big S., Gionee buckets, which are moving into right direction, which are moving in the long direction to get a little color there.
Sure I'll take it off and then trend can chime in if we think about the competitive landscape in the fourth quarter. It was competitive. It always is we were very happy with how we perform through the quarter delivering a positive comp with Abercrombie a plus states.
It's mark compared to last year, we had a plan Fran mentioned now we have to pay a plan coming into the quarter, we knew that the peaks really get higher in the troughs and get lower and that's how it played out.
Specifically on store closures is not something that we looked at and said that was a driver of our business one of the good things about store closures in the industry is it gives us more opportunities from a real estate perspective to maybe get into a mall, but didn't have space available before maybe gives us an opportunity to remodel or right size of store. So we like seeing so.
Inventory come on from a real estate perspective.
On the puts and takes on the S DNA outlook.
As we think about next year full year, it's kind of similar theme, you'll see some inflation as we look at store payroll and we look at some some try to some freight and transportation.
Also see a little bit of inflation come at us on the digital side, one from a mix shift into digital but also from some of that freight we're going to continue to invest in marketing, we're going to continue to invest in our people and really the funding is going to come from occupancy reductions, it's something that we've been working on significantly over the past few years, we're seeing the benefits of that year after year.
So that's going to be a funding impacts.
We're also continuing to look at our transformation initiatives, we had a good ramp in the last couple of years that will stabilize a little bit inherent 2020. So that's what's kind of takes us to some of those SGN investment and some of the funding that we have internally.
Just a rough.
So just echoing what Scott said just extremely proud of the team really we did go in anticipating a competitive quarter, we were ready to compete they align their product there voicing their experience and the customers responded and we're very proud of our results.
Thank you and I'm, just a follow up I'm curious.
The last couple of weeks your inventory planning or expense planning has changed at all.
Result, though the Coronado bars, you guys are.
And the ones from on the first to really try to estimate the impact.
From this whole thing so I appreciate that.
But I'm curious if you could actually make changes already to inventory buys expense planning.
You're welcome.
Our process hasn't changed we actually look at inventory expense planning on a weekly basis.
For every year that we have existed here.
That hasn't changed with co bid a little more focus on the inventory a huge thanks to our or global supply chain partners and our sourcing team here. It's been a 24 seven conversation with our suppliers to understand where they are in ramping up post CN why and what that means to our inventory flows as we go through the quarter.
We always have a piece of our expense base that is variable we trigger into that during the year and that's a process. It will continue week after week.
2019, part was a complicated year.
Lots of credit to the team globally that helped us managed to that's a very effectively.
Expected do the same as share.
Great. Thank you good luck of.
Thank you.
Alright, and your next question comes from Dana Telsey with Telsey Advisory group.
Good morning, everyone I do you think about the international in the U.S. business and obviously you saw a bit of improvement.
Lee and meet the international business compared to the third quarter.
What would the puts and takes with Abercrombie and Hollister, what do you see domestically from Abercrombie and Hollister that might have been the same are different from last quarter. Thank you.
Hey, good morning, it's Brad so what we saw.
Hey, what we saw domestically we also saw internationally and the results were essentially.
We're very similar so we start with soda enough. Yeah, we had a strong U.S. fourth quarter, we had a strong quarter overall asthma product perspective, exciting wins and not brands on outerwear, which was a big topic I think we discussed it I see our I'm very proud of the Assortments, we drove through fashion as well as core from.
End to end for wind is very very strong <unk> nice denim business that quite a few record for that brand in Hollister again same thing you know domestically and internationally very similar when you.
<unk> Hollister had another record year, we have some opportunities in the into growth business, which we discussed on the call last time, we were addressing those product opportunities that was 72 key ones were in denim and in top what we're seeing progress in both of those let's start with denim.
We thought they really significant shift from our girls' denim customer out of corn into fashion and we're catching up as quickly as we can on those inventory and then the tops business, which across the industry. You know had been top we're seeing nice sequential improvement and upcoming women and girls and we've got some big winners on in girls that we're going to really.
Work on for the second quarter and shape as quickly as we can because we're seeing some some good wins, particularly in the new must have let me just landed so that's got adding a little bit on the international. So we did see nice improvement in our key markets in Europe.
Three corona virus in APAC also.
We did see is something that macro disruption that we've been talking about throughout the year like Brexit and some of the protest settle down a little bit in the fourth quarter and our comps kind of got back onto that trend that low single digit negative trend. After the drop in Q3, so a little more stable environment in Europe again pre Corona virus.
Thank you.
Next question comes from the line of Matthew Boss with Jpmorgan.
Great. Thanks for taking my question, Steve is going on for Matt today.
Maybe to start wanted to better understand the comps outlook. So we think about trends outside the virus impact what's driving the change in comp growth outlook to approximately flat versus the prior commentary as positive comps, but you talked about at your analyst day plant a along those same lines how should we think about the performance of the two concepts.
Within the guidance.
Let me take this one off Steve Yes, we think about 2020, the put out there of the approximately flat comps, it's kind of where we ended up in 20 and 29 plus one for the year, what some of the call kind of right around flat as we think about full year outlook.
It's a little bit hard to really break parana virus out of our results as we're thinking about it we've given you the table to do that but it's part of our business. We're living it today, we're a global business. We operate in 20 countries around the world and each of them is seeing some level of impact what we've tried to deal with our outlook is to give you a baseline of what we think that impact.
He is going to be globally, and that best Apacs that Europe and you asked as we see lower travel lower global travel. So that's how we set up the outlook.
Ended the year and what we're trying to do right now is controlling the controllables as we go through the quarter.
Yeah understood. Thanks for that then out one on gross margin can you just talk a bit more about expectations for a long I know you see as we progressed through the year.
Excluding the adverse impact of Corona virus in FX seems like your gross margin guidance for the full years like a 30 basis points increase. So just you know what's the expectation for a you aren't you see within that guide.
For 2020, you we are optimistic on the are you are and how you see fronts. We came through 2019 and saw increasingly strong performance on a you are a nice performance in Q4 on the upside.
Going into 2020, we feel like we have opportunities on are you see on the cost side. So we can keep that stable as you are and pick up a little bit on the cost side as we get back to some of those fundamentals that we've been talking about through the year on SKU breadth and assortment architecture, we feel like that's going to give us some benefits and AC again, putting the krona virus in the FX aside.
With somebody uncontrollable, so optimistic coming into the year for for gross margin expansion outside of those factors.
Great. Thanks very much.
Next we'll go to keep determines with RBC capital markets.
Yes, hi, good morning. Thank you for taking my question No Scott I guess building upon the question. There you know when we're looking at the full year revenue outlook. A you know certainly appreciate there are lot of moving pieces with the Corona virus, but you are looking for some pretty nice improvements into the back half.
For the guide can you just speak to you know optimism on driving those gains will there be by brand category region or you know channel. Just you know what initiatives should we think of ads on deck. In 2020 that you know you think can drive those sequential gain I guess, you know assuming these headwinds or more so coupon.
Turning to the first half year. Thank you.
Right, because we said we set up the outlook for the year, Yeah. We're thinking about this on a first half basis today with the information we have a hand looking at the full year. We do think we can grow sales are our outlook, including the 60 to 80 million dollar adverse impact from quarter viruses slots up 2%, we're starting to see some of that benefit other spread between Q.
GAAP sales and net sales as we get through more remodels, we get to gruesome some rightsizes of our stores. We continue to open stores on a global basis opened 40 stores last year I've been opened 40 more this year is our expectation. So we're optimistic that we'll see a positive spread there on the net sales versus comp and when we think about.
Our brands, we don't give an outlook by brands, but our outlook or our goal is to challenge both brands to be positive throughout the year. We go into every quarter thinking that way in every year.
From a geo perspective, we assume that the same trends will continue with the U.S. outperforming international Thats kind of been our trends here for the last couple of years. It from a channel basis, we would assume that digital would outperform stores. So a lot of the same of what has been happening over the last couple of years and looking forward to seeing some of the benefit from comping up sell spread.
Yeah.
Yes, just underscore I mean, we we've done a lot of transformation the business me Bill good fundamentals.
Good building blocks in places we have moved through the air.
Great that's helpful.
All right and your next question comes in light of month, Mark All chartered which Baird.
Good morning, Thanks for taking my question I wanted to touch on the real estate side are you talked about taking advantage of some opportunities.
Sounds like the leasing environment and has turned more favorable based in your comment said I'm at some firms from your competitors. So with that in mind could you just update us on how you're thinking about the potential for the pace of the Cnf right sizes over the next one to two years I know availability had been a has been a constraint there.
I think you're the slide in your outlook.
Looks like you're planning on actually fewer in 2020 versus 2019, so maybe just touch.
Touch on that and potential for acceleration.
And I'll kick off and I'll, let seconds wasn't where the detail so.
Yes, we just came through the already negotiating with our landlords and as you know we are one of the few global retailers. This investing in stores and we were able to have very constructive conversations with them. We were we were pleased with the outcome. I also mentioned more specifically on the on my former comment even on a enough fifth Avenue that we're going to keep that opened for.
Another year, because they're able to come up with a mutually agreeable opportunity for ourselves.
I'll, let Scott gets a little bit more of the detail about the pace ahead, you're thinking about the new experiences that will deliver we had 90 in 2019, our expectation is for around 75 2020, the total new stores around 40, each year. There. It's a very consistent the availability of Remodels and right size is really what swinging it a little bit year over year.
Sure. So we're excited to have 20 more rightsizing opportunities. This year as we've talked in the past. These are hard to come back you know because we need more partnership from our landlords in order to move out of our space or the carve up our large store into a smaller space on the remodel side that the pace at Hollister slowing a little bit we've gotten through a pre.
Good chunk of the fleet, so that we expect that to to slow down a little bit as we go through year after year.
It really excited about delivering another 75 this year.
Thank you and it's got just a quick model, we follow up a lot of moving pieces. There could you just speak specifically and how you're thinking about a free cash flow for 2020, and just any detail how you're planning inventory through the year.
Starting with inventory so on that we try to keep it right around sales so coming into this quarter, we were down one than sales in Q4, we're we're off to bid on a constant currency basis.
Are up three on a total basis up too for the year on a constant currency basis. So feel good about our inventory planning on a free cash flow. It goes down our normal capital allocation walk investing in the business from there its share buybacks or debt repurchases, we did a little bit of both the in 2019, we returned 115 million to.
As shareholders through buybacks and dividends and we also brought down about $20 million of our debt. So excited to use the liquidity and a strong balance sheet that we have to continue to return cash to shareholders and de leverage the organization.
Thanks for all the detail.
All right. Your next question comes from the line of Susan Anderson with B. Riley FBR.
Hi, Good morning, Thanks for taking my question and I was curious maybe to get your thoughts looking out. The next few years just on your longer term operating margin goal you know, it's taking a step back this year to either trend of Iran. But how are you thinking about that as we kind of look out over the next three years and the opportunities there.
It's not kick off so.
Thank you letters that we talk about are still in the three key levers that we're focused on so clearly on driving our topline is opportunity number one we see that you know from a comp perspective domestically and from a net sales opportunity internationally as we continue to build our market share and outside of outside of the U.S.
Gross margin expansion would be Weber number two and then three would be operating expense leverage driven primarily through these opportunities that we have with our global.
We'll see optimization strategy I'll just add onto the international piece, we are Super excited long term, we believe in that business. We're investing in our teams. It's something we've talked about through 2019, and we will continue to invest in our teams. So we have to high aspirations for the international business. There's clearly a lot of noise out there in key markets in Europe, and what the Corona virus.
In Asia moving west.
We are optimistic long term and thats going to be a key driver for us long term Fran mentioned the U.S. piece of this we had our 10th consecutive quarter of positive comps. The brands are getting stronger year. After year. The foundation of the company is getting stronger year. After year. We believe that we can keep that going in the U.S. and then we have a ton of white space to fill in international markets. So optimistic Walter.
And we're going to link on our teams on these local markets to help us build.
Great. That's helpful. If I could just add a follow up on just the passion our product side of things, maybe if you could talk a little bit about how you see 2020 do you still see significant opportunity on the didn't inside the beat with new fits their washes and then do you see any other opportunity within pants going forward. Thanks.
Our bottoms.
Sorry, so the answer to both especially just yet and we're excited about whats going today to happen in denim in both brands in all genders and there's so many exciting new things happening at the high rises continues to get more and more importantly, the customers responding now to a straight gene as well, which is something a little bit newer for for her.
Our our curve loves continues to grow and those brands and amended as well men done business has been strong.
Super excited as far as bottoms that there's lots of things happening in bottoms. If we had throughout the year not not just in denim, but in short that its skirt. So we're seeing some units happening as well. So we're capitalizing on August all the signs that we're seeing today.
Great. That's helpful. It's good like this year.
Thank you.
Next we'll go to Tiffany Kanaga with Deutsche Bank.
Hi, Thanks for taking my questions and thank you for all the very helpful detail around the crowd a virus intact.
I understand a little better what level of disruption from today, it's folded into your full year projections in terms of cry to virus, what do you assume any incremental worsening conditions in particular regions where for past the deepest impacts in your view what does incorporate a timeline for moving beyond four and supply chain disruption area.
It already affected and especially when you factor then with respect to perpetual challenges in Europe.
Okay I get after this one.
So thinking about how we set up the year. The 60 to 80 million is based on a first half impact. So we have looked at this is more about six months phenomenon at this point again.
No one knows there's tons of uncertainty out there the way we've broken out that's 60 to 80 is we have we're living what's happening in EMEA APAC region right now Youre seeing store closures from day, one of the quarter in mainland China is seeing some significant impacts on the Hong Kong business also so that's a big piece of this is what's happening in the APAC region as we think about.
So what's happening versus what's going to happen, we've given ourselves. Some some a provision I guess I would say on the European tourism business to continue to suffer a little bit as the travel restrictions I get more and more intense I think we've seen that more and more out of China into Europe, but also global travel from Corporation. So I think.
The travel is continuing to slows we have a provision in there for that same impact would happen in the U.S. as we think about our stores up and down the coast on the east and West side.
That we're seeing an impact to those stores already from the productive reduced to travel and we would expect that to continue so lots of moving pieces. As you said I'll move on to the supply chain I went to supply chain, it's getting back up and running I think we're optimistic that we can get pass any significant amount of delays we are seeing some delays right now I think.
They are pretty consistent with what others have said in kind of that 234 week period, we're going to look for different options on transportation in order to accelerate.
The travel back here to the U.S. or European DC, So optimistic that we can work through that.
Your next question comes on line of Janine Fitzgerald with Jefferies.
Hi, good morning, Thanks for taking my questions I'm, what that's a little bit about Gilly had another strong quarter and as I cant investing a little bit more in that business. There can you give us an update on how many side by sides and carve outs. You currently have on what the mix looks like next year because anymore color you can get line I kind of where you see the opportunity in and where are you seeing everything Chad. Thank you.
I was on second is the detailed besides I said just real quick on on a high level and we are seeing really nice product acceptance for gilly on and we were able to open up several side by sides in part about this year and have several planned on as we head into 20 for the consumer globally is responding nicely to both the intimates.
For that business as well to sleep piece that business, we do have some exciting new product launches coming up later in the years I can't share yet, but it's an exciting new things happening.
And with lots of separated the team, which was some news that we talked about earlier today, because the hollister team and that Gilly team in order for both of them to grow we separated the team's been named a new lead for for Gilly, which were excited about.
Got it is just quickly looking up the number 29 scene, we opened additional 15 carve outs or I'm, sorry, but side by sides for Gilly, an additional seven it's something that we will continue to do this year, we have more slated we'd love what's happening in that box for the side by side. It is improving the productivity of the box and really having that special entrance for gilly or that space.
Well ruminant carve out for Gilly really helps that kind of isolate as a separate brands and so were excited about the response from the customer it's something we're going to remain on track as we go through 2020, but you get a chance you have to garden City Plaza. It's a good. It's a great example revenue side by side that we opened in the fourth quarter 2019.
Great I'll take it out thank you very much thanks.
Next we'll go to Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much I'm kind of follow up on your bring your comments with regard to women's denim selling out and I'm wondering if you feel like youre kind of speech level in stocks hidden in some of your evergreen denim styles might be.
The on the lights tried it you're planning on making some investments Darin and might we see that slow in 2020, and then it sounded like you were.
You know sort of reflecting back on that type of 20% long term operating margin target and saying I'm you know that the like for like a comparison is it's 5% people added on a constant currency basis.
So should we take that as a 5% is youre sort of new long term operating margin targets and you do you feel like that is realistic and achievable in the timeframe originally presented think summit.
So just for clarity on the women's denim, let's break down women and girls the starting at starting with Hollister, what we have seen its an outsized [laughter] moved from our customer from what we call our core to our fashion.
Which I imagine what you're referencing to on the evergreen styles to the core piece of the business, we've been transitioning into more fashion inventory, we've been doing that since the third quarter and into the fourth quarter. The demand for the fashion just continues to outpace the amount that we keep bringing in but we are we're currently working on catching those inventories up women's then specifically for an EPS also.
Ben a nice transition into into the fashion business, but did not they did not have as much core transition through.
Scott answer the second part of your question on the long term the 5.8 that it's still a target for us long term and based on how our peers have been operating we feel like we should be beyond that it's something we talked about since our April 18, Investor day, we have a lot of work to do from our transformation in our store optimization work specifically to get to that 5.8 as the first points.
But we believe long term, we can be above that so the 5.0 is meant to give a little I guess clarity around how impactful. The FX has been over the past 18 24 months. So just a level set there.
Okay. That's helpful. Thank you.
All right next question comes from Janet Kloppenburg with J K research.
Good morning, everyone.
Well I wonder if you could catch on.
Progress and polyps or.
Focus on both Europe and.
Oh, My God, you talked about some categories, improving but I can you confirm that haulage. So comps were positive in North America and the fourth quarter. I think you said that but I may be mistaken and also the European performance was better than expected in the fourth quarter. So I wondered if you could talk about the new work.
And I think team and the progress being made fair and lastly, moving.
Moving a kalona virus I was wondering if you could.
There was an idea of how U.S. turns back here and the early spring historical quite quite good. Thank you.
Okay, [laughter], let's start with the progress at Hollister. So number one the guys business was a record on for for the quarter against the strong guys business domestically and internationally. The girls business did make progress and it made progress in certain categories both intern.
Ashley and domestically those the kind of the two down, but I highlighted which was making progress in top to making progress in denim and we're seeing progress in both of those across both channels.
On the top we didn't give regional by brands comps.
Thank you yeah. Okay go ahead with the progress in Europe.
I'll just reiterate what I said a bit earlier progress in Europe, specifically was was across brands with talk a little bit Isle started the macro and frac can chime in on some products.
Seeing some of the macro stabilization Brexit is something that we talked about as being an impact in Q3 as it was really ramping up having a little bit of clarity. There has seemed to help us in the UK business Hollister is a little more impacted by that with the the bigger store counts a across the UK something that was a bit of a helper and then just seeing some of the stable.
In addition, as you think about France, and Italy, and Spain, as we got through the quarter and then as the weather got a little more seasonal in Europe in Q4, our products were aligned with what the customers looking for so again across the business and across brands.
Some of that product improvement quarter over quarter also.
Alright, and your next question comes from the line of Marni Shapiro with retail tracker.
Hey, guys congratulations to source, that's really fantastic.
Thank you you invested behind marketing and they did you talked about the numbers were up spending was up a little bit in 29 team, we see a the numbers going to be up investments must bidding up to 2020 on top of what was up in 2019 and are you investing both in the U.S. the same way as international or is it.
We did in one area.
Marketing will be up in 2020 off of an increase in 19, we made a really nice step up back in 2018 with with marketing continue to 19 and will continue in 20, we are investing in both some of that's incremental spend in both the U.S. and international markets. We've been building our teams in your.
Up in Asia on the marketing side, and we're excited to feed them a little bit of marketing dollars in 2020 to get to our localization efforts rolling.
So I was just so you have the team on the ground because the marketing in Asia is very different than it is here Joe you've built the team there to tackle it's something done other U.S. necessarily.
That's it that's the transition that were in making on it because we talk this year mine. That's how we've launched the regional offices in EMEA and APAC, London in Shanghai Respectfully and we're building. We're currently building those teams they'd be working with the global team here in the U.S. and then they will be responsible for their own individual local campaign.
Fantastic. Thank you just remind me as far as T mall in you those businesses, where you guys stand and how that's how that works.
T Mall is the biggest piece of our digital business in China. The business has been good.
More recently has been impacted by the Corona virus.
We're really excited about some merchandising and marketing talent that we put into the Shanghai office, and really building and assortment for Timo and building a better strategy for T mall versus what we had the past. So we think it's a huge long term opportunity for the company. We've had nice growth to this points, but looking forward to accelerating out of the future.
And that's it thanks guys.
Thank you.
Right and we're one of my question, we'll take that from David Buckley with Bank of America.
Hi, guys. Good morning, Thanks for taking my question.
Question on the kids business sounds like it was another strong quarter for you there how large is the category now and what have been a key drivers of the momentum.
We didn't have a nice quarter for kids the product reception to kids, it's really been very strong.
Coal Montreign on life display and letting could be kids is really resonating from marketing perspective, and we don't break the category outs. We report on the advocacy brand and in total.
Okay. Thank you.
Right. It looks like we have no further questions at this time for the turn it back over to friend for any additional for closing remarks.
If I say, thank you very nice everybody for this morning, and we look forward to updating you on our continued progress on our next call.
That does conclude today's conference we thank everyone again for their participation.
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