Q3 2020 Abercrombie & Fitch Co Earnings Call

I spoke with an assortment architecture continue to pay off with several of our high-margin must have top 3 items outperforming helping to drive our best Q3 gross margin. Hollister 8008 to a category perspective. We still have to strengthen girls dresses Fletcher shorts and bottoms and guys shorts and underwear.

Actually text we experienced double-digit sales growth including once again, achieving over one hundred percent digital growth from last year our customer continue to embrace our new active collection Gilligan as well. As our company Lounge Intimates offerings, including bralettes cozy sleep and a refined underwear assortment. We're excited about the significant white space that we see for Gilly based on track record of sales and margin expansion. We are dedicating additional resources to accelerate growth.

throughout the quarter who spoke with

Hollister and Gilly customer and how to make their unique voices heard every further shifted messaging away from promotions into storytelling remain heavily into our volume on series and our show up for 2012-13 campaign both of which focused on amplifying T voices during the quarter. We also built in a recently-introduced partnership with social media Stars Charlie and Dixie d'amelio.

And like July Charlie Victor help launch our back-to-school jeans campaign along with fellow influencer. No approve liano and teen favorite Bill Nye. The Science Guy is highly successful campaign has less than five point. Four billion views on Tik Tok and has been the number one Tick Tock brand campaign of the Year based on brand lift metrics in September. We introduced exclusive electric designed by the sisters, which sold out the girls now make up 9 at the top ten posts on Hollister Instagram account and have driven strong fan growth on both Instagram and tick tock.

Our partnership was trying Dixie illustrates how our house our team is proactively communicated with our customer on the global platform for they sent the most time. We are building on this for Holiday off the recent launch Our Charlie and Dixie edits and our Hobbies go grab campaign where they have handpicked gifts based on a feeling that you want to give in addition. We will have two more exclusive product designs by the sisters set to off in December now turning to Abercrombie updated merchandising and marketing adults and kids also resonated with combined sales declining 2% in the quarter, which is internal expectations.

An adult swim experienced double-digit sales growth strength was broad-based with denim top and bottom fleece sweaters and skirts. All legit double-digit sales gains in men's we saw a great response to our new and growing 96-hour assortment including the traveler jogger.

Across both genders thought the app and 96 hours to continue to resonate these are part of our strategy to build premium franchises within a broader brand. We see runway for these collections, which have been serving a strong traffic generators attracting both new and last customers and providing a broader Halo.

Abercrombie Kids significantly improve September and October trans partially offset 8th of August performance is driven by summer. We're now and our back-to-school Essentials, including short sleeve shirts and jeans and sleeves tops in September and October.

During the quarter we shifted marketing to create excitement around product specific moments and events for both adults and kids. Well further reducing their dependence on storewide discounts. We continue our powerful influence. Our network is according to them as well as our other key moments from the estimate that are influencers generated over a billion social media impressions in Q3 are August and June the highest DTC category that in history while our fear stay in police weekend, both drug sales and brand awareness.

Adulting kids marketing leans heavily into our corporate values. We launched the Abercrombie Equity project with to video content series of conversations for adults and hang out with Abercrombie for kids most of which focus on racial and social justice. Most recently introduced Megan Rapinoe by a f conversation series and Instagram which explores the stigma of mental illness off to date just had roughly $47 million impressions the series complement our existing work including kind crew kids, which has had over 17 million impressions since it's late February launch

We're excited about the global growth opportunity. Cuz all four of Our Brands would be meaningful Runway domestically and and a pack where our local teams are continuing to gain traction by delivering more targeted Regional message critical to our Global success is the marriage of digital and stores to offer authentic intimate and compelling experiences that are meaningful to our loyal local customers.

Oh the past several years we've made significant progress on the key transformation initiative. We outlined at our 2018 investor day, which include Global store Network optimization money investing in digital omni-channel capabilities increasing the speed and efficiency of our supply chain and continuing to evolve brand positioning while improving customer engagement.

We remain committed to these initiatives and today are thrilled to announce another big step forward on store optimization with the early exit of four additional a mess flagships.

We recently closed Dusseldorf and this January will be closing our London Paris and Munich Flagship location. These foreclosures are well ahead of their natural lease expirations, which range from 2020 to 2031 in February Dusseldorf, London and Paris will be transferred to a new tenant and Munich will be subleased. These transactions have contributed to an eight million dollar gain in Cuba. I'm do not expect material Tina impact from these locations going forward this announcement combines the three previously disclosed Crystal twenty-twenty natural lease expirations believe I ate flagships at the end of the year down from 15 at the beginning of the year Brussels Madrid and Fukuoka will all closed in January.

Well, at least seven locations out of our store base with 849. This announcement is Meaningful on many levels these Flagship which combined are roughly two hundred thousand square feet or 10% of the Abercrombie and Fitch Grand Global square footage have taken an outside portion of our time and resources for years and are not an accurate representation of Abercrombie and Fitch brand today. And this is the 2019 the 7th Flagship contributed a combined 1% of revenues for a 20 basis-point drag too, and were a ten States is going direct operating margin restored accounted for roughly 30 million dollars at store occupancy and payroll expense and 2019 and its result of our actions. We have removed roughly $85 million dollars of lease liabilities from our balance sheet.

For the date performances and uniquely worth of these locations which are heavily dependent on tourism due to COVID-19 and Associated traffic constraints.

The critical part of our ongoing work to reposition our store networks to more internet on the enabled stores to better serve our local customer and represent our updated brand positioning. Although we are exiting a store excluding committed to Market play operate in

Across the rest of our Fleet they have approximately 25% of our Global lease is up for Renewal as we approach year-end. This gives us the opportunity to continue to level set are square footage and occupancy as we realize ongoing a meaningful increases in our in our already digital penetration, which as a reminder accounted for a roughly a third of our revenues last year and contract be a much higher percentage this year. I continue to believe in stores and that mindset has not changed. But if we have said before they must be the right size in the right location with the right economics.

Before trying to call over to Scott. I want to take a moment to share my thoughts in the holiday season this year. There's obviously a considerable amount of uncertainty due to global coverage bikes and related store closures off well as shipping and handling constraints and ongoing political and social unrest

As we've done he just started the pandemic. We are focused on controlling what we can control and stopped responding to what we cannot.

We have remained conservatives our inventory commitments and if they key move to maximize digital throughput well increasing, capabilities, including curbside shipping store and pop in capacity.

Well, we are encouraged by quarter-to-date Trends. It is still early on historically largest volume weeks are ahead and may be facing further coded related restrictions and closures month despite. Its uncertainty. Our customers have been responding well to new products and we continue to seek ongoing double-digit digital growth while we expect this holiday season be promotional as it always is we've stopped Oakland placed a recent successes. We also have the financial flexibility in a strong team to react to unknowns.

It made key technology supply chain and count Investments heading into this year that it's fortified our foundation. I firmly believe that our company is better positioned today than it was coming into this country and I remain optimistic as ever about the future growth potential of our Global Brands. We will continue to stay close to our customer and utilize our proven Play books and we are confident in our ability to gain both mindshare wage market share. And with that I turn the call over to Scott. I'd like to start off by also signed in to our Global teams and our vendor partners with your perseverance and partnership. We were able to achieve our third quarter operating income since 2012 and generate $63 of operating cash flow now on the Q3 results net sales of 820 million were down 5% off paired to last year.

Buy brand net sales declined 70% for house.

Sir, which includes Gilly Hicks and 2% for Abercrombie which includes kids by region net sales declined 4% in u.s.

1% and 22% in a pack which is our smallest region globally store traffic improved sequentially but remain below last year. This was partially offset by year-over-year Improvement in conversion in a transaction value across channels and 43% digital sales growth looking specifically at reopen store performance third-quarter Global store productivity is at roughly 75% of Prior level vibrant on a global basis Hollister stores out the form Abercrombie as Abercrombie generally has a higher digital penetration.

breaking down reopen Trend further by region starting with our largest market the US third-quarter reopen store productivity was at 75% of last year with all but one store off at your end productivity with wickets and August with the delayed back to school and roughly 80% of our California stores closed as of Monday all before of our stores are open

annamayya reopen for productivity was that approximately 75% of last year with 83% of stores open at the end of the quarter more recently we have experienced closures in several countries on renewed COVID-19 as of Monday roughly 50% of our may have surveys would open with closures in England France and other countries a stores have re closed digital sales have accelerated looking I said we will continue to maximize digital demand ship-from-store and curbside pickup we're available in our smallest Market a pack our reopen store productivity was roughly seventy percent with all stores open up the quarter we've been encouraged by improvements and Trend if we realize benefits from our growing team and Shanghai recently Hollister with selected among 55 top-tier cross-industry brand to have a dog in subway stations across Beijing and Shanghai and other major cities for two weeks in October this marked Hollister's largest media exposure ever in the region and drove and drove increased traffic to our team all School

Sure, as a Monday all stores are open in the region.

Moving out in gross profit rate of 64% was up 390 basis points the last year results benefited from higher Aur with promotions and clearance below last year and lower a month. In addition. We saw a hundred basis point benefit from shrink and another 90 basis point benefit from favorable FX.

Inventory, we ended Q4 with inventories current and down 8% to last year, you're comfortable with our positioning heading into holiday as we move through the quarter. We plan to continue to balance gross profit rate within Monday through

And I'll cover the rest of our results and then adjusted non-gaap basis excluded from our non-gaap results this year or six million dollars of pre-tax an impairment charges principally attributable to Covent off these charges adversely impacted results by $0.09 last year. We excluded $10 of pre-tax and impairment charges related to certain International flagships, which adversely impacted results back sense.

Operating expense excluding other operating income was $459 as compared to $494 Million last year and leveraged 120 basis points stores and distribution expanse decrease in a and rape cases driven by a decline in store occupancy and store payroll partially offset by increased shipping and fulfillment expense on higher digital sales.

In addition, we recognize a pre-tax benefit of approximately eight million dollars in the current quarter primarily due to a gain on lease assignment and updates to previously established accruals for asset retirement and Severance obligations related to the for early Flagship taxes.

Our Marketing in general and administrative expenses rose on a dollar and rate basis primarily driven by increased performance-based compensation partially offset by reductions in on customer-facing and in-store marketing costs money. We were made focus on tightly managing expenses. We will continue to look for additional savings to enable reinvestment in our transformation initiative as well as key customer-facing areas, including marketing websites and apps off build momentum and Achieve our longer-term goals

operating income was $65 compared to $25 billion last year and included a $7 benefit from that fax. In fact, the tax rate was 11% Net income per diluted share with $0.78 compared to $0.23 last year or 37% on a constant currency basis. Our balance sheet remains strong. We ended the quarter with cash and cash equivalents of 813 million bucks in total liquidity of approximately 1.2 billion dollars.

We will continue to hold higher than average cash balances preserve flexibility and it's uncertain environment our dividend and share repurchase programs remain suspended.

We now expects Capital expenditures of approximately 110 million for the year with about half of that attributable to stores and the other half the digital technology and maintenance needs.

If you experience profitable accelerated digital growth we have continued to invest in stores because they are a critical part of the omni-channel brand experience fiscal year to date we have open 12 stores and closed 17

Does he approach to your end we have about a quarter of our Global store base up for Renewal or rubber 200 leases. We've been partnering with our landlords to find a mutually beneficial and agreeable path forward. We are excited about the opportunity to further optimize our Global sports store square footage through a combination of all base and Flagship closures and the right-sizing of large format stores.

We will continue to stop playing. From smaller on the enabled experiences that align with our local customers shopping preferences.

With roughly 50% of our lease is up for renewal on a rolling two-year basis. We have the ongoing opportunity to re-evaluate our store base as we continue to evolve. I'll finish up with how we are planning the fourth quarter worth reflecting on going global uncertainty. We are conservatively managing inventories shifting good between reason and channel. We're optimizing Distribution Center capacity for increased digital demand positioning the business to chase inventory and tightly managing expenses while not starting our business.

We'll manage the New York.

Well not taking her eyes off of our long a significant long-term Global growth opportunity across brands.

For the fourth quarter. We are planning the business as follows net sales to be down 5 to 10% which assumes a deceleration from current trends, although pleased with quarter-to-date results including on a strong digital growth. There are a lot of unknowns as we head into what are traditionally our highest volume weeks of the year with COVID-19 driving. There is the potential for a change in apparel demand and customer will not enter physical Source. Also, there's a looming possibility of renewed store restrictions enclosures. We do not have certainty on one countries May reopen in Europe wage planning gross profit rates be flat up slightly from 58.2% last year. We are cautiously optimistic in our ability to drive Aur Improvement to the fourth quarter through lower promotional clearance activity. However long we do not expect to realize the effects and shrinks benefits at the same magnitude as Q3.

With the exit of the Abercrombie and Fitch flagship store closures. We anticipate markdown pressure as we clear through inventories at these locations.

Clarence pressure should be isolated to the fourth quarter and to those locations which will be closing operating expenses, excluding other operating income is planned up 1 to 2% to last year's adjusted non-gaap level five hundred sixty-six million reflecting higher fulfillment, including elevated shipping and handling expected continued strong digital demands and carrier surcharges for Holiday, which could more than offset expected ongoing store occupancy and for payroll savings with that operator. We are ready for questions.

Thank you, and if you would like to ask a question signal by pressing star one if using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment as a reminder. We ask that you limit yourself to one question again, please press star one to ask a question and we'll take our first question from Paul with a city.

Hey, thanks guys. Nice job getting out of the the flagships and helpful info provided on the Fords regulating curious Scott. If if you can share some info on the seven that remain just in terms of size for sales and events. Also curious, you know, you guys talked a little bit about where on your Ghillie a bit faster. How should we think about you know, what form that takes. How big is that brand today? And and how fast you're looking to ground? Thanks.

Hey Paul, I pick it off with the flagship question. Yeah, we were very excited to get through seven more closings this year or planning for seven more closings this year. As you know, we've been on this path for many years of our goal in these markets is to reposition from these large expensive stores and very tourist heavy locations into smaller more local locations that are more on the enabled. So this is a great step forward for that off the remaining seven or eight we have that will carry into twenty Twenty-One and Beyond looking at 2019 numbers that they eat at margin drag that we called out last year and I will still have about fifty basis points and that drag a 2019 levels carrying with us into the future. We continue to remain in contact with our landlords, but nothing to announce at this point on the future locations, but a great step forward position these card markets super exciting type also on the silly question. We are really pleased with the growth that we're seeing in Gili to have another hundred percent digital gross.

Quarter, you know two quarters in a row.

I was super exciting of telling us that the consumers really responding to our product and to our marketing as far as growth goes, you know, we are continuing to test and learn with this with this brand am currently, you know with the I guess I would say with the inconsistency of the store base until we know for sure that the stores, you know, we'll be back to running as normal we're going to do a test and and test and see approach with God we have added about a year ago. We mentioned we added a general manager to this business. We're also adding additional Merchants planners and marketers as well. So excited about what we're seeing particularly the launch of Gili go as well as Auto V Lounge where that's really resonating.

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Thanks.

Up next we'll take a question from Susan Anderson with B Riley securities.

Hi, good morning. Nice job on the quarter. Obviously a very strong margin in the quarter. How are you? Thinking about the long-term opportunity now, I know it's kind of unsung environment. But cuz this performance give you increased confidence in your longer-term guidance for double-digit margin and then how much of the benefits seen in third-quarter. Do you think we'll stick with the term? Thanks. Yeah, we we are as confident as ever in in the long-term profitability and and that margin Target we threw out there in 2018 clearly kobita as press a little bit of a pause here and not just the business this year. But you know the p&l that we've been seeing here in the income statement and the last couple of quarters is the one that we set out to build a few years ago. We want to reduce the the fixed cost in this business. We want to shift model more towards variable and what you've seen the last couple of quarters is lower store payroll, you know fix pieces to our payroll you've seen lower store occupancy. Now how we've gotten there has been a little interesting through the code of situation.

But you know, that's the future and with that you see, you know, some of those variable costs that are coming along and shipping and handling but as we talked about in the past, you can leverage, you know, these fixed assets of the digital business and have a nice day digital business which we do so we're excited to see growth in that channel. We're also excited to see that p&l shaping up a lot of work to do, you know kind of takes us toward year end and we have over 200 lease is coming due off. We're we're working with our landlords, you know, we're trying to get the right deal is in place. They have to be the right deal and the right size of store for us to move forward. So excited about the opportunity ahead of us in the rest of the quarter off as we think about the benefits Q3 for long-term, you know, kind of on the on the same theme there we want to take in these themes of less fix and more variable. That's what we're working on. We've since COVID-19 out a lot of expense up in the base. We talked about the couple of hundred million that we will be took out since the beginning of the year plan. And the goal is to make a lot of that stick, especially the fixed costs and then move some of that and reinvest it back in the variable side. Especially e

and customer-facing

question comes from J soul with UBS

great. Thanks so much your friend. You talked about customers responded favorably to new product and messaging specific on the new product. Can you tell us about what you're seeing in Denham? Obviously such a key category. Have you seen the tracks were talking about last quarter continue to improve in terms of use Silhouettes and maybe some new trends happening there which could be, you know important for that business and then Scott keeps talk about the markdowns as a piece of the 390 basis points am moving the gross profit how much did lower markdowns improve it and where do you sort of see markdowns right now in terms of like, you know percentage of total versus where you want to be, you know, when you get sit next to your weather your thoughts. Thank you. Sure. Let me pick up the second one first and I'll pick it up with Fran on markdowns. We break apart that 390 basis points. We had a hundred basis points at shrink and and 90 basis points of foreign currency. So what kind of kick that aside the remaining two hundred basis points in the quarter was really do to lower markdowns, you know versus last year and a lot of this goes back to the day one whenever COVID-19

It's and the great work that are planning merchandising and forcing teams have done to get our inventory in the right place. We feel great with where our inventory is. We've taken our receipts down to a comfortable level and a level here for the fall season. And you know what we talked about last quarter has played through it. We saw demand outstripping Supply a bit and that puts us in a nice position to to raise Aur and take down markdowns wage are so very excited about what the response we're seeing from our consumer regarding our product. You know, it really nice third quarter across all four of Our Brands you asked specifically about Genesis. We've seen tremendous response to our den Amar Abercrombie women's specifically we just came off of one of our biggest events that we've ever run digitally for Abercrombie women's Denim and the customers responding to all sorts of newness and denim just like you mentioned the last call that we talked about but key fashion fit straight leg is coming on strong, you know, Mom and skinny continue to remain as part of our key Silhouettes wage.

Overall, you know nice start as well to the to this quarter encouraged by what we're seeing the response to our marketing and our and our product you're going back again just to certain quarter a little bit our Hollister Public School campaign with Charlie and Dixie was one of the best that we've seen, you know over five billion views on our campaign and the number one Tick Tock campaign on brand lift. So far year-to-date wage a lot of exciting things for the third quarter and more to come to the fourth quarter.

Got it. Thank you so much.

And up next we will hear from Carla Casella with JPMorgan.

Hi my question. I have one question. I was working capital. It was an unusual source for the third quarter and I'm wondering if you expect it to reverse in fourth quarter and what the key drivers month would be in terms of timing of payments on a cruise or a payable et cetera.

Yeah, Carlos. I'll grab this one. So yeah, we've been very pleased with our our working Capital Performance this year and a huge thanks to our vendor Partners, you know, both merchandising and non-wage guys. They've been great getting that extended terms. You know, our goal is to get these terms in a more permanent nature. So there could be some reversal here in the future. But our goal is to make these these pick up stick. Also, I'm working capital and no inventory. It's something that we've been focused on since day one and remaining lean on inventory. Our receipts are down year-over-year. So as as we see a little bit of benefits, they're on inventory, you know less of a drag and then we've seen on the past so things that we want to take into 2021 and beyond for sure.

Okay, and can you just update us with how many of your stores today are all small?

A very small percentage of our stores are off Mall. We're primarily in Mall outside of our Flagship stores. We got a handful of Street stores around the world primarily in Europe.

Okay, great. Thanks.

Amex we will hear from Dana telsey with telsey Advisory Group.

Good morning. Everyone a nice to see the progress as you think about flagships. How do you think about the remaining flagships? Do they have that you have do they stay part of the store network box. Do you renegotiate those leases and then on supply chain and delivery costs thoughts on that any extended expanded thoughts on that for this season given the increased emphasis on digital and how planning for next year. Thank you.

Hey, good morning peanuts fan. So, you know large expenses flagships are really not part of our go forward strategy and we've been working really diligently with our landlords over the past few years was so exciting for the company to make that announcement this morning. Your real goal is to deliver intimate omni-channel brand experiences that we really know closely aligned with our customers needs and how they shop today. So we will continue those negotiations with the balance that remained over the next couple of years, but ultimately it is not part of our go forward strategy. I'll pick up the supply chain. So yeah, it's going to be an interesting quarter when it comes to delivery to the customer number one and then the cost that come along with that shipping and handling expense will be a more of an outsized impact this quarter than we have seen in the past couple of quarters even a strong growth a couple of differences here in Q4 just a sheer volume of the digital business biking up in Q4 just on a dollar basis. We're going to see these carrier rate increases, you know across our arcade carriers. Yep.

Some of the costs of the the efforts that we put into place we've mentioned a pop-up DC regional carriers. These are bits and pieces of cost. We're going to add up here in Q4, I'd say, you know looking forward to 20 21 and beyond your destination is good as ours at this point and and how that's going to play out and some of these surcharges into q1. So we're focused on on holiday right now and getting through this pink and delivering to our

Customers as quickly as we can and then we'll we'll dress that once we get through that the peak season.

Thank you, very helpful.

Thanks, Dennis.

And next we will hear from Cape Fitzsimmons with RBC Capital markets. Yes. Hi. Thanks very much for taking my questions and I'll add my congrats as well. So I guess you know quickly on Europe. I believe in Prior quarters. You said productivity was at 50% in your commentary. I believe you said it's now, you know, 75% obviously understanding a lot of volatility in that market with restrictions, but I am curious on that sequential Improvement in Europe and just as we look out the holiday how you're feeling about your ability to meet digital demand and that market wage and did it to that channel and then I guess, you know next Fran just at a higher level, you know, you guys and exited last year with digital lab roughly Thirty, you know, a third of your business digital running up to date, you know call at 50% of the business, you know, you're exiting more flagships, you're speaking to 50% of the stores up for Renewal, you know curious of any of the learnings in the last year are making you think about how long

Can you push this business to be online know even compared to twelve months ago and certainly with the strong profitability? You're seeing on the gross margin fun at least in that channel, you know curious if you've got the next shift associated with digital, you know can rebates here at a higher level with emerge margins and that channel and maybe absorb some of the incremental delivery costs. You know, when we look Beyond I guess some of these surcharges thank you. All right, perfect. Let me pick up your up for I'll pick the friend on the the digital business. So you're a nice to see sequential Improvement in the European store business, you know things were starting to suck in a little bit in Europe as we went through Q3 good to see that more recently. We mentioned seeing some of the closures in some of our key countries like England and France. So at this point, you know, we're reading and writing every day. I hopefully they'll be some positive news here coming out soon. But you know, we're not certain on one of these stores might reopen. The nice thing is these in these countries where we've seen closures we've seen a spike in a digital business as you could emerge.

And we feel good sitting here today about fulfilling that demand or supply chain teams have been planning for this. Um, we have been planning for this as an organization really since you know, March and April playing for this next wave ahead. So hopefully all the things that we put in place will help their fruit here in the quarter. I think that's it already. Sure. So regarding our digital business, you know, we are incredibly that's what we're seeing. I think the expression goes but you know crisis accelerates change and that's certainly what we've seen throughout this whole year. We've really been able to lean into our Omni capabilities and build on the strengths of business as you mentioned catered to you know, over over a billion dollars in 2019 a growth of you know, 47% of the third quarter. So the answer is that we have to continue to watch what's happening, you know, we don't really know where the stores are going to end up. We've got a lot of leases do at the end of the year. So ultimately our goal is to be you know, a global omni-channel retailer balancing both didja.

As well as stores.

Stores do matter cuz you need both in order to be effective and on me, so we're going to continue to lean in certainly for the fourth quarter and as we head into the first half next year.

Great rest of your holiday. Thank you. You too.

And once again to ask a question, please press star one on your telephone keypad. Next we'll hear from Janet kloppenburg with jjk research. Hi everybody and congrats on an iceberg order for and I'm wondering how you're thinking about the photos opportunities particularly. Will they will continue to have a strong visual on there and come back in the existing stores, or will you start to think about Standalone stores as well? Maybe you could just talk a little bit about how that model looks for you and I was wondering on the bus my hand up guide and I think the AUC opportunity might be pretty significant not sure less summer swing opportunity. Does that way against it out look for increased competitor promotions in fourth quarter and and also dead.

The liquidation of the of the flagship closing maybe maybe you can just help me understand why it couldn't be better than Plus. Thank you. Yeah, I'll pick it up on the on the other question that the gross marks God. So yeah flat up slightly you mean this is historically the most promotional quarter of the year. It will be I think an interesting quarter the sales that are going to be on a different pattern than than we ever have with the Peaks and then what's going to happen in December in stores. So a lot of uncertainty out there and that's really how we're thinking about the quarter with where our inventory is, you know, we're hopeful that the demand is out on a trip our supply we feel good with how we planned into the The Fall season here and then the point you brought up about store closure. There will be some liquidation there and that'll be a little bit of a hurt potentially to that ability to raise Aur but you know, we're excited about the assortment. We're excited about our our inventory positioning but you know, it's going to be a very interesting quarter on how it plays out around the world.

Have you increased the Motions? I would say just like we have people have pulled for promotions a little bit to try to Spring and we've done a little bit of that. We've been comfortable with the promotions that we've pulled forward to do some of that demand spread. The biggest constraint here is digital shipping. So spreading out the promotions is a good thing to do for the industry.

Regarding Philly Janet regarding Kelly. So we are excited about what we're seeing as I mentioned a hundred percent growth in digital is really helping us a lean into our army capabilities regarding the card out the stand-alones at this point, you know, we have obviously taken a pause for the moment on on where we are with our store base because of the uncertainty out there. We will continue once that gets to some normalized days that we will continue certainly with the car doubts with the in-store shop and shop and at some point we will have stand-alones.

Great. Thanks and good luck.

Thank you.

And up next we'll take a question from Volkswagen with bared. Hi. Good morning. This is Sarah Goldberg on for mark. Thank you for taking our question took into the product. How are you? Thinking about marketing spend for the holiday?

Yeah for Holiday we are our goal is to protect digital media. Number one and what we've done this year is we've taken out some costs on the back end mentioned that about two three months in the prepared remarks where we some of that back office type cop on marketing we've been able to reduce. So the goal is is to protect that digital customer-facing media mentioned the great program with Charlie and Dixie in Q3 that will continue into Q4 here and then the great work we've done on the Abercrombie brand with influencers. So really excited about the marketing we've seen and that is absolutely an expense that we want to project here in Holiday.

thank you

up next we'll hear from David Buckley with Bank of America

good morning back to the channel he talked about how much improved profitability in the channel contributed to the quarter operating margin expansion and then using multiple vaccines are you putting the business for the first half of mixture like you

yeah David I'll grab this one so the improved profitability yes it came primarily from the e-com Channel with the the great growth that we saw in the quarter I talked a lot about leveraging those assets so, we were able to leverage those fixed assets even further with the big spike the 43% digital growth that we saw we also saw benefits in the quarter obviously on the store side of the mentioned store activity in store payroll as saving money that helped you know soften the blow on some of those productivity numbers that we talked about from the store side and think about the vaccine is this is this is great news for us it's great news for the industry many Industries but you know the timing of which this will hit we really don't know so at this point we are cleaning the business and twenty Twenty-One just like we plan throughout twenty we're going to be conservative inventories are our number one investment in this company for we're going to plan a conservatively and we're going to stay in Chase mode for as long as possible we've seen the benefits from being in Chase mode as we've gone through 2020 here with the ability to take up Aur and see some gross margin growth wage

The bottom line so that's going to be our plan that we go into 2021.

Thank you.

Next we'll take a question from Marnie Shapiro with retail tracker. Hey, guys, congratulations the stores look really beautiful for the holiday too quick Abercrombie question as I walk through the stores it seems as if the age and the Really the style of the Shopper feels different than it used to a year ago or even two years ago. Have you been successful reactivating a lot Shoppers who are now in their late teens or twenties and also in attracting new Shoppers and along those same lines. Could you talk a little bit about your loyalty programs? Cuz as we come out of hand emack that could be important heading into twenty Twenty-One as the have some sort of normal life again. We hope off my thank you for the compliment on the store is incredibly proud of the teams and what they've been able to accomplish with all the complexities added to our business this year. Yes the job

Abercrombie brand is really focused on that young Millennial we are getting a

A strong reaction from the consumer both in product as well as marketing. We have actually reactivated some of our Shoppers. We're seeing nice new new to file growth as well and our loyalty programs continue to grow so those will be to your point important as we head into two Twenty-One, but exciting what we're seeing in the brand that's fantastic.

Thank you guys best of luck for Holiday. Thanks.

That concludes our question-and-answer session. I will turn the call back to Fran Horowitz or any additional or closing remarks.

Thank you all for participating in our call today. I hope you all have a safe and happy and healthy holiday season, and I look forward to talking to all of you in the new year.

And that concludes today's call. We thank you for your participation. You may now disconnect.