Q4 2020 Abercrombie & Fitch Co Earnings Call
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Please standby we're about to begin.
Good day, everyone and welcome to the Abercrombie and Fitch fourth quarter year end fiscal year of 2020 earnings call. Today's conference is being recorded.
If you have a question at any time during today's conference you may signal of what us by pressing star one on your Touchtone phone, we will open the call to take your questions at the end of the presentation. We ask that you limit yourself to one question during the question and answer session.
At this time I'd like to turn the call over to MS. Ma'am. Please.
Please go ahead ma'am.
Thank you good morning, and welcome to our fourth quarter 2020 earnings call. Joining me today on the call of Fran Horowitz, Chief Executive Officer, and Scott and the Pesky Chief Financial Officer earlier. This morning, we issued our fourth quarter earnings release, which is available on our website corporate debt Abercrombie dot com underneath us.
And also.
And also available on our website and the investor presentation.
Please keep in mind that any forward looking statements made on the call are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today.
Detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measure of certain.
Additional details and a reconciliation of GAAP to adjusted non-GAAP financial measures are included and release issued earlier. This morning with that I will turn the call over to Fran good.
Good morning, everyone and welcome to our fourth quarter earnings call I Hope you your families and your loved ones are safe and healthy.
Looking back on 2020, I'm proud of our accomplishments and the positive change we drive.
Despite the difficult operating environment, we grew digital penetration is at 4% of revenue from 33% last year.
From a one 1 million gross square feet or 17% of our global debt.
Expanded our gross profit rate by 110 basis points and fortified our balance sheet to end of year $1 3 billion of liquidity.
Today, I can confidently say that we are closer to our customer and stronger faster and smarter than ever before.
Accordingly, our brand positioning product execution and financial strength has enabled us.
US to enter 2021 on the Opex.
Before turning to fourth quarter results I want to take one to think of our global store distribution center and flow up so debt as.
And as well as our partners and the unprecedented level of creativity.
There is no other group I would rather be at on.
This journey.
Now on to the fourth quarter.
Our results exceeded our internal expectations total company revenues declined 5%.
This was at the high end upwardly revised plan provided on January four of 5% to 7% decline and flat.
And a solid finish to the quarter.
Results were driven by digital which grew 34 per se.
And 39 million 57% of sales.
We continue to realize significant year over year and traffic to our websites and apps and delivered our highest ever quarterly digital sales and stuff.
Gross margin rate in eight years.
Digital strength offset by ongoing weakness in stores and.
At the quarter was 88% of our global open of multiple countries across EMEA, and we got to of lockdown, including our largest international market the U K.
This compared to 97% open at the end of Q3.
Among our open stores, we continue to experience reduced hours and capacity restriction.
Our club channel are coupled with baas product newness and messaging.
We realized higher year over year, AUR, and <unk> third consecutive quarter, driven by on trend product lean inventory and more promotional intensity, including over the black Friday period and into the car.
And peak.
We continued to utilize our agile supply chain by us close to hustle and in the quarter of inventories down 7% on a 5% revenue decline.
These factors all contributed to gross profit rate of expansion.
230 basis points.
Overall, we were very pleased with fourth quarter performance, especially in light of continued disruptions across four factories and our transportation network.
The holiday season was uniquely challenging I am proud that we navigate it.
Listen to our customers and Paramount to our success.
Good day, all four brands of clearly defined at of points and our product voice and experience more aligned than ever before.
On new and existing customers have been responding.
Transaction value up year over year.
And dramatic digital growth, we estimate that new to file customers of the channel grew over 35%.
Turning to brand performance and continue to be places us off of Hollister, which achieved another quarter of double digit.
At this was offset by ongoing store challenges with cash.
Cost of one package and our other brands, giving us larger global store base, including over 110 locations in EMEA and lower digital penetration.
Despite these challenges how to realize and prudent average transaction value.
Focus on assortment architecture high margin must have and our top 30 items continued to pay off.
Wow us to pull back on promotions and expand our gross profit rate.
For girls leased up and the bottom for standouts.
Authors part of world of stopping some of the offering of strength and sweatshirts and platform.
And Gilly Hicks had another impressive quarter of double digit sales growth of more than 100% digital growth year over year.
Customers responded well to updated assortments, including Turkey.
Bottoms and our balance what Nasdaq.
Our asset collections really go also continued to resonate and be share last quarter, we have dedicated additional resources to this important growth.
Global growth vehicle.
Well on the fourth quarter, we continued our productive partnership with social media stores, Charlie and fix it.
And your payment systems across our sales and marketing campaigns, including the on gift guide, which drove incremental sales.
We also launched two new co creative products and offer Charlie's, new online, which generate buzz and quickly sold out.
During the fourth quarter alone Charlie Index, and 36, social posts of Hollister resulted in over 200 million.
Millions of impressions and us.
Post holiday and head of third collaborations.
Thrilled to online relationship, which has yielded quantifiable positive result, and spring of new audience at the Hollister.
Looking ahead, we are excited to find new ways to expand our relationships with Charlie index.
At eight of adults, which caters to a young millennials, we reduced our promotions leading to growth.
Net.
Results benefited from double digit digital sales growth, while we achieved record volumes and over two thirds of our category.
In addition, we also experienced sequential improvement and store sales.
Let us continue to outperform as our team constantly pushed boundaries that trend with each new delivery.
All of those category registered sales improvements over last year, net sweaters outerwear and jeans led the way with our customer responding well elevated fashion content.
Of course, gender or soft day at 96 hours of collections continues to resonate and gained traction as we look ahead and opportunity to build from both franchises.
And that's kind of kids, we experienced continued double digit digital growth and increased interest and South Dakota fabric like Sherpa core space and so far.
To capitalize on the trend we introduced are so soft collection for the holiday.
Also introduced Abercrombie and Sam and collection, featuring matching outfits at a whole family, including sweatshirts and vanities.
Turning to marketing adult and kids focused on expanding our abercrombie sadly establish us establishing ourselves as an industry leader with best in class, social selling and continuing to lean into our purpose and value.
And that's and successfully settled down and social selling which accelerated and was a positive contributor to the quarter, our vast influencer and affiliate network proved to be extremely powerful with our aimed at when it's high rise Super Skinny named the number one and 2020 across I'd like to note App, which is one of the popular social shopping app.
And the World in fact, I'm pleased to announce at later this month and ethylene and receiving the first ever Influencer marketer of the year award by rewards style and we'd like to know at congrats to the team.
Q4, us approving an opportunity to expand abercrombie purpose and values.
And the recent launch of the outcome of the ethylene project the brand's social and ratio adjusted initiative, we announced a partnership with Piedmont and.
Nations, leading nonprofit organization, specifically devoted to the mental and emotional well being of young people and color.
Recently, Hollister and have offered their first ever at Black history month collections, which were co designed with our associates and affiliates and model by members of our bypass and ally of Associate resource group with a net proceeds don't age of our philanthropic partners at the Academy group Defund the cadre of kit.
Today, we are celebrating the second annual world Teen mental wellness day of global events at Hollister created in partnership with the National day calendar to disrupt the stigma of surrounding teen mental health.
And support Charlie Index, and will be surprising for us with virtual mental health discussion.
Is a great example of of communities that we're fostering until we're listening closely to our customer while living by our value.
We also remain committed to our environmental and social sustainability effort and have made many advances this year and work towards our longer term goal.
We provide training to our third party factory workers, and Cambodia, India, Vietnam, and Bangladesh, and a variety of topics, including lifestyle and to human trafficking, and health and safety management and confirmed 100% commitment of our third party tier one Cambodia factories and to the pace of program.
Recently, we also executed a 100% renewable electricity contract for Ohio, and corporate office and DC to begin in 2023 that will support us while reducing total scope, one and two greenhouse gas emissions by 2030 at.
As it relates to our product and adopted eco wash the majority of our teams to continue to partner with a better cost initiatives.
We are excited by our progress, but recognize that there is much work left to do we will continue to support the communities. We serve as at work to create the future of we can all be confident about.
In addition to our focus on corporate and social responsibility is also been hard at work on our transformation initiatives.
Global store network optimization has and continues to be at top priority.
Since I joined the company and 2015, we've introduced new productive prototypes across brands of proactively we're moving 2 million under productive gross square feet of roughly 28% of our total company square footage.
As it remain on our path of strategically refine our global footprint and increase our digital penetration from 24% and 2015% to 54% of net sales from fiscal 2020.
The majority of store closures and been in and out of the customer Overindexes to digital and our legacy flow chip and mostly older larger and more expenses than that of Hollister.
And fiscal 2020, we took out one 1 million gross square feet or 17% of day, reflecting the closure of 137 location.
We closed 129, non flagship stores and moving roughly 850000 gross square feet.
This included 73 aimed at floors or approximately 25% of of space and 56 Hollister stores of 10% of at this space.
And applications averaged 8300 gross square feet of close to double our preferred prototypes of 4500 per square feet.
We also closed eight and our flagship inclusive of seven discussed on our Q3 call and one additional Dublin, Ireland ahead, but at natural lease expiration of this month.
As we move into 2021, our principles have not changed our wining square footage with digital penetration.
And most important lever to maintain and improve profitability as we continue to transform four led to a digitally led business model.
While the wall of the store continue to evolve our commitment to our customer is resolute.
And they've made it very clear they want us to have a physical presence, but that experience seamless with our digital platform user friendly and efficient.
Reflecting on our ongoing journey as well as supplier of evolution of the retail landscape and purpose.
Keep our lease terms of flexible with 50% of at least up for renewal on a rolling two year basis.
This gives us the ongoing ability to refine our base by exiting relocating of rightsize and legacy larger format flagship and mall based locations.
Continuing to find the white space and to provide our customers of exciting, particularly on brand new omnichannel experiences.
With our financial strength and digital penetration remained disciplined with our approach and look forward to working with our global landlord partners on spaces, the right Guy right location right academics.
He gives us.
For optimization strategy, as our digital and omni transformation initiatives.
We are thoughtful plans in place to continue to invest and digital and omni capabilities and enhancements to create best in class customer experiences while growing profitability across channel.
Turning to our supply chain initiatives.
At Covid reshaped customer behavior reflects their model to fulfill elevated digital demand and utilize data and analytics to offer the right product at the right time and the right price.
And 21, and we'll continue on that path as we reposition of our West Coast distribution center to a larger more automated facility that will increase capacity and improve speed to customer.
Last but certainly not least regarding brand positioning and customer engagement, we are leveraging data, including our loyalty programs to engage customers across channel and drive more efficient and effective marketing spend.
We also have made key investments and senior talent, including building, our user experience and data and analytics system.
Before I turn it over to Scott I'll summarize our mindset as we head into 2021.
Building on momentum from recent results. We are pleased with our start to the first quarter and are optimistic that up of long term global growth opportunity, we see across all four brands, including significant runway domestically and in EMEA and APAC, where we are realizing an increase of impact from our growing regional team.
We're on the offense as we work towards recapturing sales lost due to COVID-19, while we continue to operate and uncertain environment. We will focus on what we can control specifically we are planning to.
Accelerate digital data and technology investments and feasibility and improve the customer experience.
Strategically invest in marketing from momentum across brands and geographies continue to focus resources on Gilly Hicks co opt.
Optimized global per footage and be opportunistic and domestic and international store expansion and builds on our important CSR work of our associates partners and other thought leaders.
Following eighths of real 2020, I am excited for our future and more confidence and ever that we are on the right path and deliver profitable growth from 2021 and beyond.
That I will turn it over to Scott.
I'd like to first reiterate France, thanks to our global teams and better partners for their hard work and 2020 to help make an app and even stronger company for the future.
Turning to our results I'll start by covering Q4 and full year 2020 and finished with thoughts on 2021.
For Q4, we delivered net sales of $1 1 billion down 5% to last year as expected. This year's pattern was different than the past with of peaks lower and the troughs shallower.
Net sales declined 8% per Hollister, which includes Gilly Hicks of 2% for Abercrombie, which includes kids.
The region net sales declined, 3% and U S, 8%, and EMEA and 23% and our smallest regions of APAC.
And the US store traffic declines were consistent with Q3 levels, while EMEA of worsening do renew blocked out.
Globally soft store traffic was partially offset by ongoing year over year improvements and conversion and average transaction value and 34% digital sales growth.
Looking specifically at reopened store performance fourth quarter Global store productivity was roughly 75% of prior year levels by.
By region reopened store productivity, with 75% and the us and 70% and EMEA and APAC.
As of yesterday, all stores were opened and the U S and APAC, while roughly a third of our stores were opened up on there.
We continue to be encouraged by the impact of our growing on the ground teams in both EMEA and APAC, which are focused on localizing our product industry.
As we continue to get closer to our customer we are operating regions. So think of Assortments such as part of our major collection of APAC, which was very well received.
Moving on to gross profits on a rate of 65% was up 230 basis points of the last year results were driven by higher AUR with promotions below last year across brands and slightly lower AUC.
Turning to inventory, we are comfortable with our positioning and having entered Q1 of inventories current and down 7% from last year.
Since the onset of Covid, we have transformed our inventory management mindset, and just something we will carry into the future.
With the ongoing disruption across the transportation network, we will continue to pivot and react to ensure we are delivering newness and a timely manner.
I'll now cover the rest of our Q4 results on an adjusted non-GAAP basis.
Moving from our non-GAAP results this quarter, our $60 million of pretax asset impairment charges, principally attributable to Covid. These charges adversely impacted results by <unk> 23.
Last year makes one of $2 million of pretax asset impairment charges related to certain flagships, which adversely impacted results by one.
Operating expense, excluding other operating income was $551 million versus $566 million last year, and Deleveraged 140 basis points.
Further distribution expense decrease of $1 and rate basis, driven by a decline and store payroll and store occupancy.
Putting the recognition of executed COVID-19 related rent abatements, and partially offset by increased shipping and fulfillment expense on elevated shipping costs and higher digital sales.
Marketing general and administrative expenses rose on a dollar and rate basis, primarily driven by increased performance based compensation.
We offset by lower and bond customer facing controllable expenses and in store marketing costs.
As always we remain focused on tightly managing expenses and made good progress on our cost base from 2020, putting us on a position to fund key customer facing areas and 2021.
Operating income of $131 million compared to $125 million last year and included a $15 million benefit from FX.
The effective tax rate was approximately 18%.
Net income per diluted share on an adjusted non-GAAP basis was $1 50.
Compared to $1 31 last year with $1, 48% on a constant currency basis.
Turning to fiscal 'twenty and 'twenty results for full year excluded approximately $73 million of pretax asset impairment charges principally attributable to COVID-19.
And these charges adversely impacted results by $1.
Last year, we grew at $13 million of pretax asset impairment charges related to certain flagships, which adversely impacted results by <unk> 13 for us.
Net sales were $3 1 billion and fell 14% of 2019 with Hollister declined 15% and Abercrombie decline of 12.
By region, net sales declined, 12% and U S, 14%, and EMEA and 33% and APAC.
Global store traffic was below last year impacting volumes and was partially offset by ongoing digital sales growth.
Digital sales grew 39% to a record $1 7 billion or 54% of annual revenues versus 33% last year.
Gross profit rate was 65% of 110 basis points from last year of hiring Lar and relatively flat AUC.
Operating expense, excluding other operating income was $1 8 billion compared to $2 1 billion last year, although expenses per dollar of dollar basis operating leverage declined to 190 basis points due to the reduction and net sales.
So on the distribution expense decreased on a dollar basis driven by the same factors of described for Q4.
At this year's results also included a $12 million benefit related to the exit of certain flagship stores compared with $47 million charge last year, primarily related to the exit of our Hollister Soho flagship.
Marketing general and administrative expenses decreased slightly on a dollar basis with lower non customer facing controllable expenses and in store marketing costs, partially offset by increased performance based compensation.
Operating income was 52 million sales of $83 million last year and included a $20 million benefit from FX.
Due to Covid the effective tax rates of the year was adversely impacted by the establishment of additional valuation allowances and other tax charges. These tax impact adversely on EPS adversely impacted EPS by $1 61.
Net loss per diluted share was <unk> 73.
<unk> to net income per diluted share of <unk> 73 last year and included a 29% benefit from FX.
We exited the year of strong financial position with cash and cash equivalents of $1 1 billion and total liquidity of approximately $1 3 billion.
For the year, we of capital expenditures of $102 million.
At 57 million attributable to stores and remainder of from digital technology and maintenance needs.
And on store fleet, we closed 137 locations in fiscal 'twenty, and 'twenty, including flagships, and 129, and non flagships, reducing gross square footage by approximately $1 1 billion square feet or 17%.
Of that amount approximately 240000 related to flagships and 850000 related and non flagships.
As we transform to a digitally led business model is more important than ever that our stores at the right size and at the right economics to support profitable growth into the future the.
A majority of the stores closed this year were significantly oversized compared to our current prototypes and <unk>.
On to close and look to reposition into smaller spaces and certain markets to support the omnichannel experience.
Regarding flagships, we entered fiscal 2020 was 15 and our exiting of seven <unk>.
Russell of Madrid, and Fukuoka closed and natural lease explorations, London, Paris, Munich, and Dusseldorf close as a result of early exits discussed last quarter. The last store and Dublin has been closed due to renew COVID-19 restrictions and will not reopened ahead of us lease expiration of March 'twenty and 'twenty one.
We remain committed to these markets and have opened we're currently looking for locations that better align with where our customers shop.
Please refer to our investor presentation for further details related to the flagships.
Looking ahead, we have roughly 280 locations up for renewal and 2021, we.
We will continue to be thoughtful with our approach to fleets and.
And you see more opportunity to close and rightsize, our U S Abercrombie fleet.
We remain committed to stores as they are of critical part of the omni channel experience.
We plan to build on the 25, new global experiences we delivered in fiscal 2020, which included 15, new stores four remodels and six right sizes.
As of the end of 2020, approximately half of our global fleet of at a moderate format with a higher percentage of Hollister stores, which introduced us updated prototypes earlier.
I'll finish up on how we're approaching 2021, reflecting ongoing.
Ongoing global uncertainty, we will continue to conservatively manage inventories and optimize our DC capacity per digital demands and positioned the business for chase and tightly manage expenses. We will also put some of the savings realized in 2020 back to work and customer facing areas.
For the year, we are planning to make progress recouping COVID-19 driven sales losses, although there is too much uncertainty regarding ongoing store operating restrictions the consumer recovery and supply chain constraints to provide an outlook today.
Our gross profit rate, we will continue to manage inventory tightly with a goal of maintaining and potentially building on 2020 progress.
For Opex, we expect to see incremental occupancy savings on top of levels reported in 2020, reflecting the aforementioned store closures and rent negotiations.
We also expect to see offsets of certain expenses come back as we lap of Covid related closures and target the acceleration of marketing digital and data of investments.
Regarding capital allocation, we expect to carry cash and liquidity above minimum levels and the first half.
And as we manage through continued store closures and restrictions that said, we're committed to putting cash to work at.
As always we will prioritize investments of the business, including capital and Opex investments.
Capex is currently planned at approximately $100 million of the year with around half of that related to digital and technology.
We will continue to evaluate other growth opportunities, including launching new brands and are acquiring brands to expand our portfolio.
We will continue to look at ways to delever, the balance sheet by paying debt down.
If the economics work.
We've increased our share repurchase authorization to a total of 10 million shares from the previous authorization of $3 2 million shares.
Our dividend remains suspended therefore, we will focus on share repurchases pending market conditions share price and our ability to accelerate investments and the business.
For the first quarter, we are planning as follows net.
Net sales of your up 30% to 40% to Q1 2020 sales of $485 million.
Currently do not expect an increase and government mandated store closures from today's levels and we do not have clarity on what certain countries may of reopening zero.
Gross profit to be up at least 500 basis points from 54, 4% last year.
As we left 2020 COVID-19 related inventory impacts, we are cautiously optimistic and our ability to drive AUR improvements through lower promotional and clearance activity and to realize potential FX benefits.
Operating expense, excluding other operating income at this plant up and the low single digits to last year's adjusted non-GAAP level of $430 million.
Reflecting lower occupancy.
Offset by the return of certain 2020, COVID-19 related savings higher fulfillment costs and higher marketing and digital projects spend.
With that operator, we are ready for questions.
Thank you Sir once again, everyone that is star one if you'd like to ask a question. Please.
Please limit yourself to one question and answer session.
And we'll take our first caller from Dana Telsey with the Telsey Advisory Group. Please go ahead.
Good morning, everyone and.
Certainly nice to see the progress that's been made as you think about 2021, Scott how much of the savings that you had in 2020 comes back into the fold as you grow and then you mentioned that you would look at acquisitions of other brands. What are you looking for that would enhance the portfolio and just.
Lastly on port congestion and what are you seeing and how you're planning inventories going forward. Thank you.
Okay, well, let's go alright on the first question. So 2021, how much savings we made great progress on the cost base and we started talking about this and Q1 when Covid hit and we really took a different lens as we look at every expense and the company and made great progress made significant progress on store occupancy and Thats, one where we will make some additional progress.
As we go into 'twenty and 'twenty, but there will be expenses that come back look we had furloughs and our stores and we went through the store closures and hopefully that will come back as we reopened and hopefully all of our stores are open. This year. So we'll see that come back and then we'll book continue to see ongoing fulfillment.
<unk> expense as we continue to see nice digital and a strong digital business.
But then we're going to make some strategic investments, we're going to continue to increase our marketing spend as we go through the year, we'd love what our teams are doing from a marketing perspective, the product is right, they're connecting that message of the products better than we ever have and so we're going to make investments there and then the last piece is we will continue to invest it and digital and data as you can imagine we have great opportunities there long term.
Okay, and we'll pivot to the acquisition of other brands. Yes. This is one opportunity that we have when you take a step back and look at the financial position that we've come into the year with $1 $1 billion of cash $1 3 billion of liquidity. It gives us the flexibility that we were looking for US. We went throughout 2020 looking at the balance sheet at a strong. This is one opportunity we have of the.
<unk>, whether it's acquired brands our launch brands due to that financial flexibility, it's about driving growth and we feel like we have growth with our core brands, specifically each brand and the us as well as Europe, recapturing that and APAC is a significant white space opportunity for us, but if we can fold and other brands or or build other new brands that could be.
An additional accelerant, Okay last piece here the port issues. It is a very difficult situation on the porch I think everybody sees the article it seems like Theres one per day now whenever you open up.
The Wall Street Journal and the morning. So it is a challenge there is no doubt about that I think everyone sees what's happening on the port on the West coast here and the U S. And there is an imbalance of round the world of containers, that's been a challenge and Theres a difficult end market out there, but all we can do is read and react and we have an amazing transportation team that is managing this day by day.
And the focus of this team has changed dramatically as we've gone throughout 2021st it was slowing down and transportation and then it was trying to deal with the supply chain constraints on the shipping to customers and Q4 and now let us really transportation of products around the world. So we'll read and react we have great partnerships around the world will flex sales as much as we can and our goal is to deliver on.
On a timely basis.
And just to underscore again and just on that last one.
Shout out at Scott good to our team that managed through.
And some challenges from deliveries and in 2020, and we are prepared for whatever comes at us agile and nimble. They did a terrific job and 2020, we expect to see the same and 21.
Thank you.
All right and our next question comes from the line of Paul Lajoie with Citi.
Hi, This is Kelly crago on for Paul Thanks for taking my question.
And that's first.
And you get a little bit further here on.
On the.
And I assume comps is it fair to say that given the significant reduction square footage debt.
Total comps overall were pretty close to positive or.
And maybe in the us.
Your statement and then any REIT.
Any color by brand would be.
Helpful.
Hey, Kelly, we Havent talked and comps. This year are the majority of our stores closed here in late January so we've been talking and total net sales and that's been very very close to comp for us. So nothing much to add there in terms of brands performance not too much to add there outside of what we puts and.
Of the lease at.
<unk> outperformed hollister of beds in the quarter of the U S continues to outperform outperform Europe as you can imagine with the renewed lockdowns across Europe. So I'd say things are playing out.
Distantly as we've gone through the back half.
Yeah, and just taking a quick reminder.
Alastair has a larger store base business and Abercrombie is a larger digital penetrated business and so thats also.
And influencing the business because of the majority of the stores in Europe as Scott mentioned.
Yeah, and I guess.
And why exactly is hollister stores less digital focus I would assume that customer was at pretty.
Digital oriented customers.
Bigger picture about Hollister and it has kind of consistently underperformed and up here on.
Pre COVID-19. So could you just talk about what you think is happening and that business that are perhaps me.
To address going forward.
Part of that you've made so far and where.
And overall margins.
You think that most of it out in F. 'twenty, one relative to peak at Hollister.
Okay. So let's start off Kelly, we our guidance based on our Hollister business and the.
Product and the marketing is resonating incredibly well with our consumer in 2019 I think of what you are referencing we had a renewed focus on IR top 30, and our key items of the team went for that and we're seeing really strong success and those items. The difference is the size of the store base and Hollister has a larger store base.
And Abercrombie guide and the kids are very digitally savvy to Hollister key customer, but they offer firstly I'd like to go to the mall. So our expectation as we head into features of both digital brands, both digital and parts of the business will grow as they certainly did through 2020 and that was across brands and regions.
And so we're very pleased with where we're at with Hollister and.
And just close it up on the last piece of margins all brands are performing quite well from an AUR perspective, and expanding gross margin. So that's our expectation go forward and we continue to have opportunity across our brands to recapture some of that margin that we've lost over the years and that really starts with product and it starts with lean inventory and strong inventory management, that's what we're focused on.
And so hopefully we can build on the progress we made in 'twenty, one and two.
<unk> and 'twenty as we move through 2021.
Got it. Thank you and just last question. Thanks for the update on the on the flagship exposure.
And certainly when you could quantify what the drag of those eight stores.
And that you closed this year, where on the P&L and.
And I think you'd mentioned, one more opportunity and F. 'twenty one day to close what budget just want to make sure.
And right about that at any other opportunities and see in the near future and ultimately.
And I'll be getting out of every single flagship or.
And where that ultimately lands at schools.
Long term, we'll likely get out of the large majority of flagships and there might be one or two that hang with us across Europe base. This year. We've closed eight we talk about seven on our last call. We had one more that we added there and Dublin, Ireland on due to renewed Lockdowns and Ireland's we close that store of mother.
To back end of it will not reopen ahead of its exploration and best months of the collection of those stores that had a drag of about 10 basis points on our op margins and Thats looking at 2019 levels clearly things are a little tougher here in stores and 2020, but we haven't updated that at this point, but we're excited about the opportunity of this this is for us it frees up.
<unk> expense of $1. It gets rid of some pretty big boxes, and lets us reposition and these markets to more local areas I'd like to say, we can spread more bets across these markets versus having one giant store at a very tourist heavy.
Tourist dependent location. So we like what this does for the fleets and we're right now looking for locations and each of these markets.
Got it thank you.
Next question comes from Ryan Vaughan with Needham.
Hi, Scott.
Got it got it thanks, so much and great great job on the quarter of the year on interest.
Interest rates.
Two questions for you one great to see the store square footage rationalization, I think Craig and I heard you say 8300.
The average store size.
And your career types of at or 45 100.
And just touch on improved productivity that either you're seeing or you expect to see with a smaller store.
And then number two dot.
And sitting on affiliate of one of cash generated from free cash flow this year.
This would be explosion online.
And then Doug the platform today.
The distribution and infrastructure.
Is it.
Set up and ready for 2 billion and two 5 billion over.
The next couple of years. Thanks.
Okay, I'll kick off with the second one and then kick it over to <unk> for the first so yeah, great great cash balance coming into the year $1 1 billion at.
It was nice to see our infrastructure supports of the big growth that we saw in 'twenty and 'twenty didn't expect that sitting on the first tee there in March of last year, but it was amazing to see that flex up as we saw the growth and 2020 as.
And as we go forward, we are expanding into a new facility on the west coast and the US that was plans and at the beginning of 2020 and will open at facility. Here later in 2020, and so that's part of expanding our infrastructure and make sure. We can keep up with US demands we're always looking at.
Good.
Transportation network and the DC network globally to make sure that we can fulfill our customers' needs and we will continue to do that and we're constantly studying and if we need to add capacity, we have the financial flexibility to do that and we will do it and a smart way of profitable profitability wise.
And regarding the productivity of the stores, we have opened over the past couple of years several hundred.
And really exciting prototypes for both brands and we're seeing strong customer acceptance to them.
Waller of the omni enabled they're efficient and as we head into 2021, we will continue to be opportunistic about signing some of those opportunities.
Alright, and the next question will come from Susan Anderson with B Riley Securities.
Hi, good morning, nice job on the quarter and managing through the year.
And I was wondering if you could give some more color on the opex side for first quarter, how much well FX benefit and then occupancy deleverage significantly last year than with those of other items being higher I guess, how much of the deleverage and Opex can you get back from first quarter of 2000.
Hi, Susan and they'll grab this one yes Q1 is going to be at very interesting opex and it's always the full year lots of things were happening, but the good thing about Q1, you will continue to see some nice pickup and store occupancy as you can imagine with the store closures the rent negotiations that.
We have done last year at we'll contingency of nice pickup year over year and Q1 on store payroll is one where we will start to see some expenses come back and with the closure of the stores and mid March last year.
Many of our employees on furlough there towards the end of March. So we picked up at months of benefits Opex Wise and April So we will see that come in and we hope that means the stores are open and will also increase of investments and marketing and and some digital projects. So all and we're looking at that is and up low single digits to last year's $430 million there could have been.
Some wild swings and there, but the great thing is when you when you take a step back is that we're reducing the fixed cost side of our business by taking out that occupancy and increasing that variable side. When you talk about adding back store payroll fulfillment expense as well as marketing.
Great. That's helpful and then I'm curious on Gilly Hicks.
And you could maybe talk about what percent of Hollister Gilly Hicks US now not sure if it's gotten to any significant size, but then how big do you think it can be longer term and maybe if you could give some color on your plans to drive the growth there in 2021.
And we are excited about the customer response to Gilly both on a car.
Product and of messaging perspective, as well as some of the new categories that we launched this year like Gilly Gov has been really well received we have not discussed.
What percentage of Gilead at the end of the Hollister business, obviously, it's a smaller percentage, but we have not.
At this point, but nonetheless super excited about how the brand is resonating.
Decided to I would say relaunch Gilly at was based on a lot of feedback from our consumer and our associates strong affinity for the brand. So we're excited at where we're headed and we're going to continue.
New offerings and most of the key update you. This year is the income statement.
And we're just one thing to add we're excited about the investments we've been making Gilly. We're building. Our teams we are building our marketing plans and this is a global opportunity.
And always says and we're excited to see the future ahead for Gilly.
Great. That's helpful. Thanks, So much good luck this year.
Thank you.
Next we'll go to Jay sole with UBS.
Hi, Good morning. This is Marty just on on behalf of Jason just wanted to ask a couple of questions.
Provide some color on your performance so far and.
And you know on February.
Maybe compared to 2019 levels.
And then if you could talk a little bit more about.
Digital growth has been exceptional over the last year.
How has that translated into the profitability of the business I know you don't disclose.
The margins compared to stores, but just to get a sense of whether that has made us.
I asked me at the business more leverage in terms of.
Okay. Thank.
Thank you.
So good morning, we are pleased with our darts for the quarter kind of off of some nice momentum for the fourth quarter, where our product and our messaging continues to resonate with the consumer and.
At the smallest month of the quarter and we still certainly have some unknowns ahead of us but.
We're pleased with where we are.
Scott will kick in to the second yeah on the on the second piece, we've been pleased with the profitability of we've seen over the last three quarters of the way. We've gotten there is really the path that you would expect we've reduced store occupancy we've seen digital fulfillment flex up and the nice kicker is that we've been able to expand gross margin and so the profitability has been solid.
And we're pleased with the way to us.
Transpired here on the back half and that's the Formula and we're going to take into the future. We want to continue to reduce the fixed side of the business around store occupancy and try to make the model more variable and so we feel that we can be profitable we can be more profitable as we become a digitally led business model and Thats what were focused on we feel that we are building the right P&L for that we're building the right call.
Structure, Great progress made in 2020, and we look to take that into 2021 and beyond.
Great. Thanks, and if I may just one last one how should we think about I mean your view on.
And the reopening of the stores that remain closed and maybe now region.
I wish we knew when these stores have reopened and clearly out of our control and what we're doing right. Now is the same playbook that we've used throughout the past almost a year now sadly us when stores close we quickly shifted digital and we work to keep that inventory moving and store through ship from store or click and collect or pop ins.
So that's the playbook, we will continue to leverage that playbook until the stores hopefully stay open for the long term.
Got it thank you very much congratulations.
And next we'll go to Matt boss with Jpmorgan.
Great Thanks, and maybe.
And how do you feel about the brand positioning today at Hollister versus Abercrombie and.
With that and I guess my question is where do you think the largest from opportunities by category and gain market share as we exit the pandemic each of the true content.
Hey, good morning, so I feel better than ever about where our brand positioning us at Hollister and and we've worked for the past several years of solidifying and both of those positions and Hollister at really the global team consumer and E&S is appealing to that young millennials, but we are very steadfast and where we are the teams are doing at.
Great job staying close to the customer and really.
And our product is resonating and that was our that was our marketing.
At first categories go Oh gosh, there's some of the opportunities I would tell you that today, our Abercrombie women's denim business is terrific. She is responding to all of the new fashion that we're putting out there.
And there is a shift now and non denim and.
And fashion, which is exciting for that category. The skinny Jean has become less important and always has to be a balance of taking on less important straight gene and the different rides are becoming even more important so debt and certainly has been and continues to be and opportunity for us. We had a strong. Another. Good example, how can they went into strong outerwear business coming out of fourth quarter outerwear.
We've been on.
And last one category for us because.
We had to 'twenty, one and our cross brand.
And lots of opportunities and just one last one dresses.
Our Abercrombie women's dress business and 20 of the very strong once we get into the back half and theres opportunities for our consumer to be even more social.
We expect that business to continue to grow so lots of exciting opportunity.
And then and then maybe Scott to us as a follow up on gross margin at two part question. What's your comfort with inventory on hand is number one and then as we think about the product margin puts and takes I guess, what's the best way to peg gross margin. This year as we think about 2019 was 59.
Basically in 2018 was 60 and change what's the best way to think about gross margin. This year as we think about some of the puts and takes.
Alright on the first party and we are comfortable with inventory coming into the quarter, we were down 7% coming into the quarter on sales down five we continue to have lower clearance levels and last year. We are in chase mode across our brands and genders and we're very excited about that and the margin puts and takes it it'll be at.
And interesting year and 2021, there is a lot of things happening out there and the market. We've already discussed transportation cotton has come up a little bit more recently, but then on the other and that will be.
Headwinds I would say and then on the other side the supply demand dynamics I would say of still tilted in favor of the retailer demand is still down and apparel and general across the markets. A lot of volume has fallen out of the market hopefully we can recoup some of that across the industry and across our company and 2021, but the way we're thinking about <unk>.
Big picture is.
We did 65% and 'twenty 'twenty and the way we're thinking about 2021 is we want to maintain that and hopefully build on top of that 65% with inventory and the right place for and as mentioned the brand positioning us and a great place our product and messaging as and a great place and we want to leverage all of that to continue to push at EUR is higher.
And as part of that question inventory managed and Taiwan at Best Learning, we took out at 2020 from Covid and tightly managing our inventory and really close with our team to make sure that we are agile and nimble and how we're reacting to the business is a very important learning if we head into 'twenty, one and one that we're going to stay very diligent.
No.
Great color best of luck.
Thank you.
And once again, a reminder to everyone. Please limit yourself to one question and one follow up and we'll take our next caller on JD and Fitzgerald with Jefferies.
Hi, Thanks, so much and congrats on the progress and.
I wanted to dig a bit deeper into the inventory comments about the change in mindset you've had from Covid, maybe just talk a little bit about some of the backend workings around the supply chain, where you've gotten quicker and how that's enabled you to chase better ads and to the inventory that you need.
Yeah of keeping our team very fluid and when they think about their open to buy and our inventory management has been the biggest one and it's something that we focused on candidly can even before COVID-19, but really excelled as we headed into the year, Scott and I would normally work with the team for example on a monthly basis, we got into weekly <unk>.
Tori meetings with the teams because it was so much happening and changing all at one working very.
Mostly with our sourcing teams at set us up 17 countries around the world incredibly agile and how we can react to the business regarding chase, it's a part of how we run the business.
By product every literally every single week and we see the results after active previous expense just ingrained.
Ingrained and what we do.
Alright, Thanks, very much and then and I'll just give us a follow up on the Remodels. It sounds like Youre planning to do more new experiences. This year any update on the remodel performance at Hollister and how it compares to Abercrombie and thank you.
We delivered 25, new experiences and 2020, we will do more of than that in 2021, we continue to work through opportunities.
At closing our stores are reopening and some of these markets. So there'll be more to come as we go through the year. There. The remodel performance 2020, it was a tough measuring stick with the impact of the stores with Covid, but we are still as positive as ever on the Remodels.
We need our stores to be and this more modernized smaller digitally enabled on <unk>.
Matt because that's what the customer demands and as we shift to become a digitally led model and these stores are there to support that digital business. So we're building our formats and make sure that they can do that.
Fighting us heading into 'twenty, one on the offense and the balance sheet that we have and will continue to be opportunistic globally on when the right size right location.
Come available.
Great. Thanks, so much.
Take our next question from Kate Fitzsimons with RBC capital.
Yes, hi, thanks, very much for taking my questions and congratulations on a nice quarter I.
And I guess I wanted to circle back to earlier comments that were made about the promotional environment. Scott you said.
Net inventories far below demand I guess at a higher level of Fran or Scott and your experience. One was the last time you saw the environment. This rationale with demand really outpacing inventories just be curious on your perspective, there and then Fran in your prepared comments you noted again analytics data.
No clear focuses for the business into 2021, what are some investments that you are making and the coming quarters to allow us to get that much closer to the customer maybe give us an update on some of the loyalty initiatives that would be helpful. Thank you.
And we'll start up at the first question. So the answer is it's been a long time [laughter] that as I mentioned earlier today.
And the outperformance of the inventory has been a really big win for US that's off of coupled with the fact that we're seeing very strong product acceptance and as you mentioned the closer to our consumer is certainly helping us identify what the what those opportunities are but the opportunity is to take those learnings and they cut into 'twenty. One so it's been rational is exciting.
Fourth quarter tends to be on those promotional quarter of the year, yet we were able to reduce our promotions and even during the black Friday week and into on holiday peak, So a big one very exciting opportunity for us.
Sure.
The second part, let's see regarding getting closer to our customer and as we did mentioned you know we're building up those teams of building up our user experience team of our data analytics team and we are using.
Those opportunities to continue to get closer to the customer we've got at strong customer insights team that helps us talk to our consumer I'm on it.
Adjusted basis.
Strong and our.
Social channels and digitally where we can also.
Constant conversations with them on.
And we have a continued opportunity to evolve our digital experience, that's where we'll continue to invest dollars will also be building and we're modernizing our data infrastructure enabled us it gives us a quicker customer feedback loop that we can react on a more agile way whenever we are updating our experience. So excited about the infrastructure that we're building again this.
As necessary as we continue to shift this model to a digitally led business model and we're excited about the opportunities ahead.
Thanks very much.
Alright. Your next question comes from Janet Kloppenburg with J J K Research associates.
Good morning, everyone. How long you congrats on at Goodyear.
And how quick question on.
Scott.
And what's happening with the inventory and in Europe that maybe is trapped or may be you.
Move to the digital channel and just wondering whats going on there and.
And.
If you.
Thanks at the mid March opening schedules that they're talking about in the U K.
Lipstick on.
So on Occupancies kind of down I think about 400 basis points and the fourth quarter should we look for that tailwind and the first second and third of this year offset by an equal level of payroll and marketing hikes, just want to understand how that balances out and.
And Fran.
Our APAC business is accelerating there from many brands and I'm just I know you've opened an office in Shanghai, and maybe you could give us a perspective on what's going on in that region and the outlook. Thank you.
Yes, I think I'll start backwards and it.
Kind of a body.
Regarding APAC.
It is our smallest and it's our newest region and as you mentioned, we did open up and Opex, we put some really terrific talent and there and excited at how we're getting closer to the customer and that team is in charge of product and pricing and messaging and we're making progress we have and opportunity for brand awareness and that particular region and we are.
Working hard on improving that we did do a lunar new year collection. This year through that team, which was very successful and well received by consumers. So I continue to be optimistic about that region as we head into the future.
Alright, I'll start with inventory and EMEA are comfortable with those levels. Our teams throughout the pandemic have been holding back on allocations to stores and knowing that we don't know what's coming in the next day and so we've been working through that so many of these countries have been locked down kind of pre Christmas. So we've been living through this for a while so we've right sized that inventory and store.
And at flexing up and digital at the mid March reopening and who knows.
As is my answer.
It's clearly out of our control and we'll react as we learn more hopefully things are going and the right way and it seems like the vacuum and distributions and the UK are going well, but we only see what you see so we'll react and never we learn more.
Occupancy and when we think about 2021 in total we should continue to see some progress versus 2020 levels at all.
Be a little bit different as we go throughout the quarter I'm not going to go into detail, there, but likely a bigger opportunity here as we step into Q1 as some of those abatements that we saw as we've gone through the closures in 2020 hit towards the back end so.
A nice nice benefit here in Q1 versus last year.
Your next question comes from the line of Mark on stronger with Baird.
Hi, Good morning. This is Gary Goldberg on for Mark. Thanks for taking our question and first I was hoping you'd give an updated view on the longer term EBIT margin potential of the business given all of the learnings over the past year and changes to the store fleet and then second waves of positive update on the social selling front and if you could just elaborate further on the steps you're taking there and maybe.
Some try and just being on the customer acquisition cost and channel.
Good morning, and Sarah.
And our EBIT margin potential we are still committed to the five 8%. We are excited to your point about the progress that we were able to make in 2020, we've not put US a date out there on that because 21 store had a lot of uncertainty to it as we manage through continued closures and and.
And consistency and the business though.
And I still on that number just not with US a set date at this point.
Actual selling incredibly incredibly exciting for us in fact, we are using it and all of our brands today Abercrombie is at a very successful quarter, particularly at the built into these affiliate to sell our seller caught us.
And on Instagram and other social channel at the very exciting new way to do business. Another Great example, at Hollister is our partnership of Charlie and sexy and how well that.
And that product has resonated.
And then selling on their social channel. So just at the new way to do business is very exciting for us.
Alright, and next well go to Marni Shapiro with retail tracker.
Hey, guys congratulations the source of.
And just so much fun to be on on a regular basis lately.
Could you just talk a little bit about.
I guess two things regional trends are you seeing.
In regions, where restrictions are less onerous are you seeing a change and her behavior already and what she's buying and is that helping to inform how you set the stores into other regions and.
And then could you just also talk about I think the companies at 54% is that right DTC for the year and does that imply that that's amazing and I guess not surprising with stores closed as well, but I guess does that imply abercrombie was higher than that and which is that and I guess post COVID-19, which is so hard to really look at that.
In your mind, what should that shake out at us.
So we are incredibly excited about our digital business money.
And the investments that we made prior to Covid and then we were able to lean into this year to drive to drive those results Super exciting.
And are going to learn this year the customer is going to going to teach us as we go into more consistent store openings and some of these restrictions being lifted. So we are of digitally led business two of 54% we're going to continue to make those investments.
But we can learn of lots of shares the answer to that.
Regarding regional trends.
The U S business has been and continues to be our strongest business.
And more consistent.
And with art with the stores open.
Obviously as Scott discussed a couple of times this morning.
Hitting those stores reopened at some point during the quarter.
And you don't see regional differences within the us though.
Not dramatic when you look at some of the states that are a little I'd say more open like the Texas and the Florida.
Youre seeing different dynamics, there you do see some strength and some of the stores, but you also see Florida, specifically theres still not of lot of international tourism coming into those key markets, so and some of those giant malls.
There is still down pretty dramatically because youre missing that international tourists and of a local customer is there maybe a little bit stronger than some of the other places.
And Texas similar some of those border stores, where there's less movement across the border. We will have some impacts versus the local customers. So the good thing is the digital business has remained strong across all of these regions and our teams are managing and kind of a store by store its been kind of a roller coaster at each of these stores openings and markets go hot and cold.
And so thats all we can do is read and react and hopefully at some point it will get to a point, where the capacity restrictions are lifted or softened a little bit and that'll give us a better feel.
Fantastic Thanks, guys.
And we will take our last question from Don Carson with William Blair.
Great. Thank you very much.
Just curious Scott and you kind of quantified the drag from the flagship closing any way you could do either sales or EBIT margin drag from the sort of stores you closed this year.
Do you have that handy.
Yes, sorry, we have not provided that number at this point on what I would say is that we're we're happy with the progress. We made this year on occupancy and the stores that we have closed or under productive versus other stores.
Majority of the Abercrombie stores are oversized and a majority of the stores are less productive and the rest of the fleets and so it was a good time for us to close some of these larger stores and put us and put ourselves in position to hopefully quickly react and some of these markets and reopened smaller digitally enabled stores. So the right time per.
US to make us move as we continue to flex up digital.
We'll see as the market starts to normalize when people come back out and go back of the malls, we'll see what the productivity shakes out, but we firmly believe we are doing the right thing for the fleets as we continue to balance the P&L between occupancy and fulfillment expense.
Sure and I guess, the natural follow up there is.
And more of a clarification when you talk about kind of filling and some of these markets, where we've closed stores.
Does that go beyond just the flagships and.
Does that of way, particularly on the Abercrombie side kind of more efficiently build out kind of and the prototype stores.
Kind of at least.
Exactly exactly you nailed it and some of these markets we've been talking for years that we haven't made us much progress right sizing the Abercrombie and Fitch fleets. So we are going to try to accelerate that process. We've closed the stores. Some of these larger stores, we're willing and able financially to reopen and some of these markets, but we need to have the right location at the right economics. So we.
Continue to talk to our landlords about opportunities as we go forward and we're hopeful that on some of these moves will help us accelerate that evolution for that brand.
Okay great.
Squeak, one more on here Sean.
I'm curious you spoke too strong and strong margins strong margin improvement on the digital side. This quarter was that just a factor of scale and gross margin are there some tangible things kind of behind the scenes.
And that allowed us to be more profitable business book.
Those are by far the two biggest levers and that business and there is a fixed cost base and then the rest is pretty much variable.
And nice to see the gross margin and that flows right at the bottom line and then just balancing the fulfillment expense, but again leveraging those expenses as you said those are the two of those are the two ways to grow at.
Awesome.
Thank you very much.
Alright. Thanks.
Alright, and with no further questions I'd like to turn the call back over to Fran for any additional or closing remarks.
Alright. Thank you all of assisting on our call today and look forward to sharing more with you on our progress on our first of all right.
And that does conclude today's conference we thank everyone again for their participation.
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