Q1 2021 Abercrombie & Fitch Co Earnings Call
Ladies and gentlemen, please standby.
And welcome to the Abercrombie and Fitch.
And first quarter of fiscal year 2021 earnings call. Today's call is being recorded if you have a question of at anytime during today's conference you may simple us by pressing star 1 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 1 question during the question and answer session.
At this time I would like to turn the conference over to Pam Co. Giuliano. Please go ahead.
Thank you good morning, and welcome to our first quarter 2021 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lukowski, Chief Financial Officer earlier. This morning, we issued our first quarter earnings release, which is available on our website at corporate debt Abercrombie at Dot com under the invest in investors section.
Also available on our website at an 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 of these forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions, we mentioned today at <unk>.
Detailed discussion of these factors and uncertainties is contained and the company's filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measures during the call additional details and a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier this morning.
That I will turn the call over to Fran.
Good morning at Us.
It's hard to believe that over a year of earnings cause of past since Covid first began impacting the world.
During that time, we have become stronger smarter and more nimble and have discovered new ways of uniting our teams to foster innovative thinking and stay close to our customer.
First quarter results are evidence of the progress we've made against our key transformation initiatives, which enabled us to report our best operating income since 2008.
We exceeded our pre COVID-19 results delivering significant improvements across key financial metrics on both a 1 and 2 year basis.
Sales rose, 6% compared to Q1.2019, despite removing 1.3 million gross square feet of roughly 20% of our base over the last 2 years and experiencing temporary store closures and EMEA drug our most recent quarter.
And our largest market the U S sales were up 18%, while our global digital revenues grew 81% from Q1.19 levels.
Our gross margin rate was 290 basis points higher compared to Q1, and 2019 and our operating margin rate rose 11 hundreds of basis points.
I am extremely proud of what we've accomplished we proactively invested in the business keeping an eye on our longer term goals.
And while consumer spending benefited from some well documented tailwind results reflected strong product acceptance driving substantial reduction and promotions and markdowns.
This is further confirmation that our target customers responding to our unique product voice and experience across brands all of which have been significantly refined over the last several years.
For the quarter total company revenues rose, 61% year over year, with similar growth and Hollister and Abercrombie.
This was well above our plan for of 30% to 40% increase and by region. The U S, which is our largest market was a standout with revenues rising 72% on of beat across all brands.
Digital at which has and continues to carry us follow up 4 wall operating margins above the store channel remained strong even as COVID-19 restrictions ease and store traffic improved from Q4.
For the quarter digital revenues grew 45% compared to last year to 52% of total first quarter sales.
We continue to add new customers and the channel as we leaned into our digital marketing efforts importantly, customer retention is high and spend per customer increased.
In addition to our strong digital results, we were pleased to realize improvement of our stores performance both year over year and on a sequential basis.
We ended the quarter with approximately 674 of our 731 stores open and 92% of our base with the majority of the closures and Western Europe.
This compares to 88% of our base open at the end of the fourth quarter.
For the first quarter global store sales growth, 77% compared to last year.
We continue to take a balanced approach to our omnichannel product and messaging are.
Our collections were aware now trend right and hit the Bull's eye for each of our brand's unique at at points.
From Jean to dresses to fleece Tees are kid teen and millennial customers responded to our latest product.
Genes, which is 1 of our top sales categories continued to be a huge win growing on a 1 and 2 year basis.
We leaned into key women's trends, including high rise and wider leg silhouettes and ways that were appropriate and differentiated for each of our brands and we offered them and extended sizes.
At Abercrombie and the majority of our new women's Jean styles are selling through at full price and at Hollister. We've also stepped away significantly from promotional events.
She loves of style quality and fit of our genes across brands, which allowed us to achieve our best Q1 jeans gross margin rates since the first quarter of 2012.
As our customers and adopting the latest Jean silhouettes, and we've been experiencing great full price top selling.
We are now being viewed and outfitting destination and recognize from our exceptional value equation across our balanced assortment we.
We remain disciplined with our inventory commitments, while chasing into proven successes where appropriate.
We ended the quarter with inventories down 9% to last year, and our 61% revenue increase.
We pulled back on Omnichannel promotions, and markdowns, including winter clearance category specific and entire site promotions.
After many years of hard work, we have made great progress in transitioning our customers away from a wait for sale mentality to a buy at when you see at 1 <unk>.
We are firing on all cylinders and experienced our best Q1 gross margin over a decade, and Nf Womens Hollister girls and kids boys and girls.
As a result of our gross profit rate grew by 900 basis points from last year to the highest Q1 level since 2013.
At the same time, we've continued to tightly manage expenses, while making strategic investments across marketing technology and fulfillment to support future growth and the formula is working.
And Q1, we expanded our operating margin to over 7% our best first quarter since 2008.
Our results illustrate that we are executing better than ever we've been honest packer several years and rather than slower progress the global pandemic has accelerated change.
Q1 speaks to our evolution into a digital first global Omnichannel retailer, we have enhanced our customer and brand experiences to a digital lens, which is how our customers engage with us across social media, our apps websites and our stores.
We've also refined our messaging to speak to our customers authentically on of topics that they care about the most and February Hollister introduced its first black history month collection with Academy group of Great organization that supports and helps us unlock opportunities for teens from the most resilient communities.
And March we had our second annual World Mental Health Day campaign, where we partnered with Tictoc stores and mental health podcast teenager therapy to host pop up virtual mental wellness discussions for high school students across the country, including of surprise session from Dixie familiar.
At Abercrombie adults kicked off the quarter with a black history month for Justice collection of capital designed by our <unk> Associates at spoke about racial equity and their own words.
This was launched with our partners at the Steve Fund to do amazing work devoted to the mental health and emotional well being of young people of color and was part of the Abercrombie equity project.
For Kids and April we launched the second season of our successful bolt social content series of kind crew, which appears on Nickelodeon and Youtube channel and.
In line with last year. The purpose is to inspire others to lead with kindness and help to make the world of more kind of accepting and compassionate place.
Turning to brand specific performance, we continue to be pleased results at Hollister, which includes Gilly Hicks, where our global team customer remains highly engaged.
We drove higher average transaction value on strong AUR growth.
And for Hollister girls dresses fleece tops knit tops and bottoms were standouts.
Our guidance continue to live and stop and cozy product, including sweat pants.
For both guidance and growth, we realized significant sales improvements and jeans.
By channel and digital revenues grew roughly 35% over last year, while stores experienced sequential improvement as more restrictions were lifted.
A key driver of Hollister success has been it's on target marketing and February we kicked off of partnership with flight House to launch our Hollister Tictoc channel and introduced a new group of gene focused Influencers, which helped solidify our gene business, even further and in April we hosted our first fortnight gaming challenge with mission.
<unk>.
At Gilly Hicks momentum continued to build with total sales up approximately 9%, including roughly of 100% digital growth from the prior year.
Customers responded well to lounge, let matchbox sleep underwear and our active collection Gilly go.
We're excited about gilly future and we'll share more with you throughout the year and how we will continue to thoughtfully scale.
Moving on to end up adult fashion newness resonated with our evolution to a more modernized version of the brand continuing to gain traction.
As a result of phenomenal product acceptance across genders, we achieved strong full price sell throughs.
Women's in particular truly had a breakout moment the kind of I have rarely seen in my 30, plus years of the merchant achieving its best Q1 revenue since 2008, and the third largest Q1 and brand history.
<unk> success was broad based across categories, including jeans dresses intimates and swim and from men's jeans shorts and swim were all well received.
By channel and digital sales grew approximately 60% over last year and there was sequential improvement and store sales.
At Abercrombie kids, we experienced roughly 25% digital growth and a sequential improvement and store traffic, our assortments and stay true to our players life motto and our customer responded.
Popular categories include of boys and gross short gross net and swim and boy sweat pants.
Turning to marketing.
At adults, we focused on being there to alpha at our customer for other activities, including travel going out and spring and summer celebrations, we've been nimble and anticipatory of their needs and our campaigns have reflected that successfully targeting our 20% to 30 year old customer with first and new product and messaging.
We built and our social media momentum leveling up of our partnership with creators on tick tock and Instagram to promote our denim soft at men's essentials and spring fashion collections and.
We also completed our social media and our model cast and call response was great and the campaign will roll out later this year.
The power of social selling is clearly a key theme for us and 1 that we are actively leaning into across brands and is helping us identify those new and first trends are happening faster than ever, especially with ubiquity of platforms like tictoc.
It's also allowing us to say super close to and communicate with our customers and real time.
The recent launch of our latest brands and social tourist is a great example of our commitment to being an innovator at the forefront of this shift in consumer behavior and also encapsulates how much we have evolved and how we're thinking about our brands and our consumer differently with an eye towards the future.
As our customers continue to shift of digital shopping and exploration across social channels. It made sense to introduce of brand inspired by that world and by the experience of 2 of the biggest social media starts Charlie and Dixie Damelio.
Those of tourists has taken our already successful relationship with Charlie and Dixie, who combined have over 250 million followers across social media platforms to the next level.
It is a ground breaking multiyear exclusive apparel agreement that has of sisters working side by side with our design teams, creating aspirational top of the SaaS impairment of product that speaks directly to Charlie and Dixie digitally led lifestyle.
Working with humility us has just been amazing.
And of departure from our other brands the majority of the product of lip online with select skus available and Hollister stores.
And there'll be limited edition monthly drops that are brought to create excitement and buzz and to sell out.
With social tourists, we tap into the power of social selling and of new and unique way and are positioning ourselves as a leader in this space.
We've been very pleased with receptions of the brands and it was introduced on May 6 thus far of social tourists has had over 85 million estimate of impressions, including over 25 million views of the brand video the.
And the brand will also be features and familiar of families. New series of Damelio show, which is coming soon to Hulu.
We're extremely excited about the long term opportunity and view the brand as another growth vehicle.
We also believe it will provide a halo for hollister offer insights into up and coming team oriented trends and help inform other social strategies.
As we've nurtured our established brands and our growth vehicles. We remained laser focused on our transformation initiatives, which were first introduced at our 2018 Investor day.
Global store network optimization remains 1 of our top priorities aligning square footage with digital penetration is the single most levered to long term operating margin expansion. Looking ahead, we will continue to interest to transition away from larger format locations to smaller and more intimate omni enabled ones and.
And London, we closed our Abercrombie flagship and Savile row last year and are set to open a significantly smaller store on regent Street, where more of our local customer shop.
Dislocation at better economics is and our updated prototype and is a more accurate representation of the brand and we cannot wait for customers to see at in August.
In addition to global store network optimization, we also remain committed to our other transformation initiatives, including investing in digital omni channel capabilities, increasing the speed and efficiency of our supply chain and evolving brand positioning while improving customer engagement and we'll update you on each throughout the year.
Before I turn it over to Scott I want to take a moment to discuss our thoughts and health of the consumer.
And the first quarter the us benefited from government stimulus and many back to school season, and easing of Covid restrictions.
Internationally, there was the reopening of certain markets, although many large countries remains closed.
As we think about Q2, we expect to realize benefits from the further lifting of COVID-19 restrictions and hopefully of reopening of key countries in western Europe. Thus.
Thus far our momentum has continued quarter to date as more countries and states begin to open and we look forward to further engaging with our global customer base and at all and are cautiously optimistic that we will see at more normal back to school and back to fall period compared to last year.
And while we hope at August smoothly, we're not walking away from this past year's key learnings and disciplines. We will continue to expect the unexpected and will quickly pivot no matter what may come our way.
And I'm excited about the future and more confident than ever and our ability to drive sustainable long term operating margin expansion and with that I will turn it over to Scott.
Thanks, Brian and good morning, everyone as we lap of the start of Covid, we will be providing comparisons to both last year end of Q1 and 2019 applicable.
Due to temporary Covid driven store closures, we do not plan to disclose comparable sales this year.
Now onto Q1 results and the quarter, we delivered net sales of $781 million up 61% of last year as we lap the onset of the pandemic and associated widespread temporary store closures beginning mid March 2020.
On a 2 year basis sales were up 6% as compared to Q1.2019.
We continued to experience strong digital demand across brands with 45% digital sales growth to last year and 81% growth from Q1.2019.
Global digital sales for the quarter were $403 million or 52% of total sales.
By brand net sales increased 62% for Hollister, which includes Gilly Hicks and 60% for Abercrombie, which includes kids.
As compared to Q1, and 2019 net sales increased 3% for Hollister at 11% for Abercrombie.
By region net sales in the us were up 72% and 18% on of 1 and 2 year basis, respectively. As a reminder, we ended 2020 with a significantly transform business model and had roughly 130 fewer stores and over 20% less square footage and our U S store base this quarter as compared to Q1.2019.
The reduction of square footage was purposeful and continued our multiyear efforts to optimize our global store square footage to align with growing digital penetration.
And EMEA sales rose, 41% on a 1 year basis and were down 9% on a 2 year basis.
<unk> has continued to be adversely impacted by COVID-19 related restrictions and temporary store closures and western Europe with nearly 60% of our European store base closed for the majority of the quarter.
As the UK us recently reopened we've experienced an uptick and trend and.
And APAC sales were up 42% of last year and down 30% to Q1 and 2019.
Throughout the quarter, we saw COVID-19 related restrictions and Japan, and China, We continue to build out of our local teams and reset the foundation to enable long term growth. We are committed to the APAC region and are following the successful playbook, we put in place and the U S and EMEA.
And the U S and APAC, we saw sequential store traffic improvements over Q4, while EMEA levels were consistent with Q4 as lockdown of closures continue.
Globally, we realized sequential improvements in conversion and average transaction values.
As of yesterday, and 95% of our stores were fully open with 36 stores closed 22 of which are located in Germany are and are only open for shopping by appointment.
Moving on to gross profit our rate of 63, 4% was up 900 basis points to last year and 290 basis points of Q1, 19, driven by higher AUR across brands on reduced promotions and markdowns.
As a reminder of last year's gross profit rate included approximately 300 basis points of inventory write down charges, primarily as a result of COVID-19 and the unexpected store closures.
Inventories remained tightly controlled and our current ending the quarter down 9% to last year.
I'll now cover the rest of our Q1 results and on an adjusted non-GAAP basis excluded from our non-GAAP results are $3 million and $43 million of pretax asset impairment charges for this year and last year respectively.
Operating expense, excluding other operating income was up 2% as compared to last year, while operating expense as a percentage of sales decrease of 55, 9% from 88, 6%.
We've made great progress and our cost base and are seeing the benefits of stores and distribution expense decreased 2% compared to last year and 11% on a 2 year basis, reflecting significant savings and store occupancy related to square footage of reductions, partially offset by increased shipping and fulfillment expenses on digital growth.
This is the formula we have been discussing for the past couple of years and we are pleased to see at play out.
Marketing general and administrative expenses rose, 12%, primarily driven by increased performance based compensation and digital media spend partially offset by lower non customer facing controllable expenses and in store marketing costs.
We delivered operating income of $60 million compared to an operating loss of $166 million last year.
As Brian noted this is our best first quarter operating income and operating margin since 2008.
The effective tax rate was approximately 13% net.
Net income per diluted share and adjusted non-GAAP basis was <unk> 67, compared to a net loss of $3.29 last year, which reflected adverse impacts related to valuation allowances of deferred tax assets and other tax charges of $1.45 per diluted share.
As a reminder, we exited fiscal 2020, and a strong financial position with cash and cash equivalents of $1.1 billion and total liquidity of approximately $1.3 billion.
This enables us to make investments to fuel sustainable growth and to deploy excess cash and strategically on.
On the latter during Q1, we finalized an agreement with our Soho, New York Hollister flagship landlord to settle all remaining obligations related to the store, which we closed in Q2.2019.
Prior to this agreement, we had roughly $80 million of payments remaining through fiscal 2028 with the agreement we received a discount to accelerate payments, resulting at a cash outflow of approximately $64 million.
The settlement served to reduce our operating lease liabilities by approximately $65 million, resulting.
At resulting and a $900000 gain and eliminated all future cash obligations obligations related to this location.
As a result of of settlement, we will avoid incurring interest expense of a total of approximately $3 million for the rest of 2021.
Looking ahead, we will continue to search for ways to deleverage the balance sheet, where the economics work.
During the quarter. We also resumed our share buyback program repurchasing approximately 1.1 million shares for $35 million as of the end of Q1, we had approximately $8.9 million shares remaining under our previously authorized share repurchase program.
We are committed to putting excess cash to work and we will continue to focus on buybacks pending market conditions share price and our ability to accelerate investments and the business.
We expect fiscal 2021, capex to be approximately $100 million with about half of that related to digital and technology.
Taking a moment to discuss our Omnichannel philosophy as we of all of our model the line between stores and digital continues to blur.
We believe that stores are a critical part of the Omnichannel brand experience and remain committed to investing and smaller omni enabled locations that better serve our local customers.
This includes of restarting our store remodel program and delivering more off mall formats and the future as we continue to meet our customers where they shop.
This year, we have roughly 250 leases up for renewal and we look forward to having thoughtful conversations with our landlord partners to find stores that are the right size right location and economics.
I'll finish off with how we are approaching the remainder of the year, we will put some of the cost savings realized in 2020 back to work and customer facing areas to fuel growth opportunities.
Reflecting ongoing global uncertainty, we will continue to conservatively manage inventories to position the business to chase optimize our DC capacity for digital demand and tightly manage expenses.
We're not providing an outlook for the full year consistent with our comments last quarter. We are planning to make progress recouping COVID-19 driven sales losses and the year is off to a great start.
For gross profit rate, we will continue to manage inventory tightly with the goal of maintaining and potentially building on 2020 progress keeping in mind, we're likely to see cost headwinds for the remainder of the year.
For Opex, we will manage tightly and focus on using a portion of our occupancy savings to fund increase fulfillment marketing and digital investments.
For the second quarter, we are planning as follows net sales to be at or above 2019 level, which was approximately $841 million.
We do not expect an increase and government mandated store closures from today's levels and are awaiting full clarity on 1 remaining countries and EMEA will fully reopen.
Our plan also reflects the expectation that we will continue to successfully manage through ongoing supply chain constraints and labor shortages.
Gross profit rate to be up at least 200 basis points from 67% last year, we remain cautiously optimistic and our ability to drive AUR improvements through lower promotion and clearance activity and to realize potential FX benefits there.
And this should be partially offset by elevated product costs.
Operating expense, excluding other operating income to be up 15% to 20% to last year's adjusted non-GAAP level of $404 million, reflecting lower occupancy offset by the reversal of certain 2020, COVID-19 related savings and higher fulfillment costs and higher marketing payroll and digital projects spend.
With that operator, we are ready for questions.
Ladies and gentlemen, if you would like to ask a question you could simply by pressing star 1 on your telephone keypad keep in mind, if youre using a speakerphone mature the mute function is released so that simple can reach of our equipment. We ask that you limit yourself to 1 question to allow everyone an opportunity to participate and this Q&A session.
And once against our 1 for questions and we will begin with Dana Telsey with Telsey Advisory group.
Everyone and congratulations on such a nice progress.
And to sales.
On the product side, social tourist is very exciting.
<unk> already had 215 year olds rage about at in terms of the excitement there.
Are you seeing for that brand and what are you seeing and each and Hollister and Abercrombie and mens and womens will it be as big of denim back to school season, as well expecting it to be and then Scott can you just unpack expenses port congestion or labor cost and how you're how you're planning for for those expense elements. Thank you.
Good morning, Dana. So we are also incredibly excited about social tourist I mean, it truly is a groundbreaking opportunity for us and for the industry frankly to partner with Charlie Index.
Damelio 2 of the largest.
Influencers out there and social media today with over 250 million followers as an incredible partnership I think I think that partnership with them started back in 2008 and back to school and the work that we've done with them has been successful from that point and forward. So we thought what better time and now coming out of Covid kind of end of 2020 of stronger faster smarter.
Company and to kick off and new brand, what we've seen so far and.
25 million views just on their brand and video 85 million impressions. So as you know it just it just launched we will update everybody throughout the year on the excitement, but so far lots of excitement around the brand.
Regarding denim, we are in and exciting denim trend at star.
And probably within about a year ago. When we saw the shift both from a rise perspective as well as from a leg perspective, and the consumer is responding quickly and it's funny today with Tic Toc.
And 1 of the leading influencers of fashion out there as soon as the kids and young millennials saw this shift they were excited to get out there and buy these new denim choices. So we believe across both brands back to school for Hollister, and we call back to fall for the millennial customer for Abercrombie, we see denim opportunity.
And with that I'll give it to Scott to go through the UK and I will unpack some expenses and so on the first 1 of port congestion and transportation costs. Yes. There is definitely inflation here at pretty much and every mode and channel.
And also some delays on top of that is getting product and we have an amazing and supply chain team and they are doing everything they can to us pretty much every tool and the tool kit to enable us to get our products here at the best cost, but we do expect to see inflation, there and the product cost on the <unk>.
Transportation side, but also on the commodity side as we've seen cotton prices tick up.
And to put more importance on the AUR side of the business, it's going to force us to deliver amazing product, which is what we try to do every day and also keep our inventories in line. So that we can deliver a great AUR to offset some of these costs on the labor side.
And are seeing some labor inflation theres always inflation with labor as rates go up each year, we are seeing some shortages in certain markets around the country. Our store teams are managing that on a case by case basis of city by city basis as well as the ongoing inflation, we've seen and the distribution center, so more inflation at booked into.
Our outlook and it's something that we feel we can lap and the great thing is with all of the progress we've made around store occupancy we can absorb some of these shocks to the system and the near term.
Thank you.
We will now move to our next question that will come from Paul The Hughes with Citi.
Yes.
Hi, This is Kelly crago on for Paul Thanks for taking your question and.
And just curious if you could provide any color on <unk> trends and whether you're seeing an acceleration.
And trends versus the first quarter and.
And any chance you could provide more color on how the brands did and the U S versus international and <unk>.
And obviously performance for both brands is and practice price of just curious at Hollister underperformance versus Ansi's until you do it.
And Theyre extort closure in Europe and.
And where there were store closings.
Hey, Kelly, it's Scott I'll kick us 1 off so thinking about the acceleration and Q1, so a great great business and Q1 and have seen that momentum continue here into Q2 won't give number per se on Q2, but just would say that it's given us the confidence even though may is the smallest month of the quarter to put us put a target out there for Q2.
That is at or above 2019 levels, which is a good thing because of coming into this year. We were all wondering and this company I am sure and others. When we get back of those 22019 levels. So so good progress here.
The brands in the US both both brands performed quite well and the us and Q1 of <unk>.
Really outperformance, 18% up versus Q1, 2019 was just stellar and really all the work that we've done around the product and the marketing really came through as the customer started coming back out here in Q1 thinking about Europe continues to be very lumpy and Europe I would say some countries have reopened as those countries.
We're close we really shifted to digital kept out of inventory moving and saw some nice results on the digital side have seen a nice acceleration as countries reopen there's definitely some pent up demand out there but.
But still at some clarity youll Germany's of big country for Us and we still have a chunk of stores that are of shop by appointment only so it will be nice to see those stores get open and stay open hopefully that'll happen here in Q2, but in the meantime, we'll just read and react.
Got it thanks and just.
I'm curious of the strength and margins Youre seeing this year kind of.
And thinking about the long term margin opportunity since it seems and be at.
Could exceed your sort of 6% EBIT margin target this year. Thanks.
Yes, getting back of that 6% margin target out there we remain committed to that target and we obviously took a little pause last year and our progress with Covid, but we're excited to get back on track and the great thing.
Last year, as though even though we lost a big chunk on the top line, we made great progress on controlling what we can control, which is the expense side of the business and the inventory side of the business. The inventory of enabled us to expand gross margins last year and again into Q1 and the expense side really set up for a great flow through that you saw there in Q1, so we're confident of that.
As we move forward and we can get that top line comes back to those 2019 levels and keep that gross margin where it is AUR is up at offsetting some of those costs that are coming at us we have the right cost base to have a great flow through and hopefully deliver that not giving a full year outlook at this point just Q2, but we remain on track.
Thank you.
Susan Anderson with B Riley has the next question.
Good morning, nice job on the quarter nice to see the strong sales there and.
I'm curious, how you're thinking about back to school this year as kids get back to school and then cycling of virtually no back to school last year are you planning that to start off in July. This year and then also are you expecting to see of benefit as a child tax credit rolls out. Thanks.
Good morning to us and so we are looking forward to a more normalized back to school. This year, but we're still waiting to hear obviously from a lot of states and whether or not that is actually going to happen. So we're continuing to be cautiously optimistic about the back half we're continuing to really take those disciplines that we learned from last year on managing our inventory.
Tightly we can react very well 2 of our business, we're working still weekly with the team to read and react to what's happening and be able to chase the business, which is an amazing place for us to be.
Yeah, I'll grab the child tax credit rollout and hopefully, we'll see a bit of and impact on our business. We do have a younger and we told to the younger side of the spectrum on the customer base looking back to Q1, we feel like we saw an impact positively on our business from stimulus.
Hard to value of that and put a number of around it but if we continue to see that and the child that is.
<unk> tax credit does rollout and we'll hopefully we'll see that.
Back to school is happening all at the same time.
Great and then just to follow up on inventory it sounds like Youre still of planning very conservatively should we expect that to be down also the rest of the year and then just if you could talk about your expectations around the promotional environment as we kind of go throughout the year, if youre expecting that to remain very lean and rationale and thanks.
Yes, and as far as inventory goes and as I had mentioned we are going to plan lean inventory, we have learned that theres, a real pivot happening and our industry and it's very exciting at the supply and demand is proving out that we can grow our margin and get higher AUR for our product. So we will continue to be lean. The best news is that we can chase the business.
Agile supply chain, we produced in 17 countries around the world.
Excuse me and the team is very agile and being able to respond with my voice here site.
And I'll grab it and promotional and emotional part D and the promotion environment has been good you can see that and across the industry, which is exciting but you still have to have great products and keeping the inventory and line is very necessary to make that happen and the future and we'll see what happens and the future we're going to play our hand, that's for sure whereas deliver great products.
Awesome marketing campaigns and keep our inventory in line and that puts and that puts us and control of our promotional cadence and that's how we're going to plan. It to your first question there around inventory, it's really all connected.
Sorry about that and I thought you kind of jump.
Before at before our next question operator, I guess theres been some incoming questions about Gilly Hicks Gilly Hicks was up 90%. There was some confusion that they thought I said, 9%, but it was up 90% and to the next question. Thank you.
We'll now move to the next question from Jay sole with UBS.
Great. Thank you so much.
My question is just on the margins.
Just curious about the sustainability of the EBIT margin and Q1 guidance for Q2 suggests the EBIT margin will get close to where you did in Q1 and then typically the second half of the year. The EBIT margin seasonally are higher than Q1.
My question is really how do we think about the.
The EBIT margin and the second half of the year, given what you've delivered in the first half of the year and I guess, Scott specifically on the on the Soho Hollister store was that of what was the profitability of that store was at negative profitability store any color on that would be also I. Appreciate it. Thank you.
I'll kick off of Soho, So that that store was a drag we close that store and we went dark and that store back in Q2, 2019, but we still had of rent stream going forward and so.
It was nice to put some cash and work we had the excess cash and our balance sheet to be able to pay off debt that lease liability in full at a discount. So it's good to get that out of the cash flow base and at the liability side of the ledger as we think about EBIT margins for the second half we're not talking about the second half at this point, we're only going to focus on Q2, and our outlook, but to your point around sustainability.
And that's really what we've been trying to do as a company for the last 3 years reduce occupancy expense reduced the fixed side of that is expense as our customer continues to shift over to the digital side, which brings along much more variable and so with last year store closures and rent negotiations, we've taken out of 100 plus million dollars of store occupancy versus 2019 level.
All of which should enable us to have more consistent operating margins go forward, if and it's a big if.
If you can keep getting that top line and keep good stable gross margin. So that's the formula that we're working with and good progress on Q1 and the outlook that we've laid out there for Q2 it puts us in that same range. So that's what it's all about for us closing the gap.
Some of our peers, which we've owned our investors for a long time.
Got it okay. Thank you so much.
At your boss with Jpmorgan has the next question.
Great Thanks, and congratulations on the improvement across both brands.
Thanks, Matt.
And maybe Fran could you just speak maybe on that topic to the balanced strength that youre seeing across both of your brands and with that the merchandising and marketing initiatives that I know over the past few years that you've put in place to really differentiate the concepts and then as we look forward how best or is there any way to think about.
And market share opportunity that you see and just where do we go from here.
Okay. So let's take that back at the start so it is pretty exciting to see debt that we have strength and all of our brands today and across genders. The balance that we're seeing and our businesses is super exciting and it is of results to your point and out of a lot of years of hard work and really setting each of the brands on their own path.
So where we have abercrombie resonating really modern new version of the brand and it's resonating with debt and young millennial and appealing to their to their lifestyle that coupled with the voice and the experiences we like to say when those things come together, we see a true win the women's business, particularly is just a complete industry stand out at us.
Fantastic whats happening and that business. She is responding to everything from our 96 hour collection, which is more about.
Cozy stay at home to dresses, which are just terrific. So she is getting ready to also to go out. So we're providing her candidly with a balanced assortment and it's appealing to each part of her of her lifestyle and Hollister again product voice and experience coming together, both girls and boys are resonating the.
Girls business as well has a nice dress business happening so she's obviously getting ready to go out and and see the world again.
And denim denim across both brands and across all genders has been strong lots of exciting things that are happening.
And within denim and let me grab the second parts here on market share. We do feel like we have of market share opportunity to across our brands. When you think back to where we peaked and sales back in 2012, we've seeded margin within the industry to other apparel retailers, but we've also seeded at outside the industry to technology and experiences and things like that so we do have an opportunity.
Entity to go grab share to grab share, it's about delivering amazing product and an awesome marketing message. We have built at marketing muscle over the past couple of years and we feel great about how each of our brands all of our brands are positioned from a marketing perspective, and the things we're doing on social media very innovative social tourists is just some of our recent example of that.
And so we think the combination of that product voice and experience at the right Formula If we can deliver at we can go get share.
Great to hear and best of luck.
Thank you.
Janine Stichter with Jefferies has our next question.
Hi, good morning, and congrats on the progress and.
Wanted to ask a bit about marketing and it seems like youre definitely earning return on the spend there and I'm wondering if there's any way to quantify the higher spend this year and maybe talk a little bit of at the plans and it sounds like a lot of it is going towards digital but maybe any more color of by by brand. Our channel and then also wanted to ask about pricing and AUR is obviously very strong wondering if you've taken price step at all unlike for <unk>.
Product and if not if that's something you would consider just as we start to get and.
And from some of these raw materials costs coming in and thank you.
Yes, I'm going to start that 1 backwards steamer and it starts with the pricing we are actually very comfortable with our product pricing across all of our brands.
Were exciting is that we've talked about for years and being able to reduce our discount and ticket and being less promotional and that's really what we're seeing out there. So we're again, we're pleased with our ticket pricing and very happy to see that we've been able to reduce a lot of the promotions back of the marketing. This is an area of investment for the company, we will be above <unk>.
Last year and also above 2019.
And I, just mentioned and the last 1 that we have built great marketing teams and each brand is very dialed into how their marketing to their direct customer. So as we think about spending plans going forward, we're kind of at where test and learn culture here, we continue to test different opportunities across the marketing spectrum of cross digital channel different digital channels and platforms and we are.
We're excited about the returns we've seen and we're going to continue to fuel that topline growth with more marketing.
Great. Thanks very much.
We will now take a question from Mark all sugar with Baird.
Hi, Good morning. This is Sharon Goldberg on for Mark, but things are taking a question and it's.
Been great to see that high level of engagement and behind that social tourists launch 2 questions. There. How are you thinking about the incremental <unk> of this brand or is the current offering at Hollister and then are there any differences in terms of gross margins. Our overall profitability, we should be mindful of given that the new collaboration structure.
Yes, I mean look the way that we look at social tourists and thats, creating a really exciting halo for the Hollister brand. What we saw he started to partner with <unk>.
Charlie and Dixie early last year, we saw that and bring in of new customer base for us they tend to growth tend to have a more forward.
And we talk a lot here about the trend pyramid, so they're a little bit more top of the period and a little bit more advanced and our customers today. So a lot of what they will be doing will be showing new trends a little bit earlier on we can then take that information and apply it to our Hollister brand. So there's lots of exciting angles with with working with social tourists from these girls or very close to.
Of the Gen Z consumer as are we they've learned a lot from us and we've learned a lot from them and that's how we're going to continue to look at it as Lee and move forward on the financial side of it at the gross margin is relatively consistent with the other brands and when we think about the operating margin there'll be a bit of a start up cost here as we continue to ramp that up from zero this year.
Year, so there'll there'll be it'll be less of a operating margin generator than the other brands, but like Fran just mentioned the halo that we expect to see around the Hollister brands should be a good benefit.
Great. Thank you both.
And Janet Kloppenberg with J J K research associates have the next question.
Hi, <unk>.
Buddy.
Congratulations on the strong improvement.
I have a little bit Lee Scott So forgive me, but can you talk about us towards.
At the top level, what we're seeing month by month and how that May change your view on digital games as we go forward.
<unk> and <unk>.
And as of <unk>.
And takes on margin associated with that mix change and also of US wondering about the.
And so on full price selling Fran and.
And if you thought that maybe some price increases could take place.
And given how.
How much of your product is resonating and.
And just lastly on facility what are the margin look like there and could that be of spin out concepts. Thank you.
Okay.
Beginning yet.
All right at the store traffic levels by months, not going to kind of get into the details by month, but what I would say is that store traffic remains negative.
And look back to 2019, and obviously positive versus 2000 twenty's since they were barely open.
Yes.
And it kind of is what it is you know the economies reopening slowly faster and some places you see of pretty much of a.
Very scattered response across the us and Europe, and that's fine does not change our view at all on digital gains so our customers of digital first mindset.
On the younger side of the age groups, so everything starts and digital and sometimes it ends and the stores and sometimes it ends online. So no change there as we think about margins and for US. The formula has been at the customer continues to shift online we need to pay less rent and have less store expense if theyre not there. So that's a lot of the work that we had done last year.
And so all of that play out here in Q1, so longer term no change and our thinking about that balance.
And regarding I think the question was full price selling and and taking prices up so regarding full price selling.
And as we've mentioned and we could not be more excited about the product acceptance that we're getting from our consumer at.
It really speaks to 2 key things right product and then there's the opportunity to really manage our inventory much tighter than we ever had and the path. So we are not looking to currently raise our prices, but we've been able to do is reduce our promotions and our discounted ticket and that has really been something we've been working on and trying to get to for quite some time since and exciting.
And to realize that.
And on Gilly Hicks the last piece margins have been improving which is great. So we built a great team within Gilly Hicks theyre, expanding the assortment and with that assortment expansion, we've seen margins come up which is good.
At spinoff concept and we're not thinking about at that way at this point, we think it's a nice growth vehicle and we're putting the resources behind that from people and from a marketing side as well as the assortment and inventory like we just talked about so we look at that as a growth vehicle for the company and we will focus on at that way.
Thank you so much best of luck.
Thanks Janet.
And we'll now hear from Marni Shapiro with retail tracker.
Hey, guys congratulations everybody at the stores have looked at absolutely fantastic.
And I have a couple of product questions. If you wouldn't mind there quick shortly.
And since restrictions have been eased across the country and and parts of Europe have you seen the shift and the type of products that are selling or has that been pretty consistent to the first quarter and could you talk a little bit also about your product quality.
You guys have always had that part of quality. There was a period of time, where maybe it got a little bit less at some point and I think even before your time, maybe I'm, a while ago, but its really improved across some of the categories and the stores, especially at Abercrombie if you could touch a little bit on that.
And then just a follow up on all of the social tourists commentary, which I'm obsessed with.
Is there an opportunity to partner with and Influencer or somebody like Charlie and Dixie at the Abercrombie brand and would you consider that.
Sorry for so many.
Okay. So let me.
And go back to.
The first question.
And starting have we seen a shift and the product.
It's interesting we have seen and incredible acceleration of our dress business across both brands, but with that said the marni. We saw a strong dress business throughout 2020 and throughout throughout the shutdowns and so we have seen of shift but our team is focused on really as you know staying as close as consumers, we kind of really understanding what he and she.
Up to and their lifestyle and they still need of balance Theres still some work from home there now theyre starting to get out and I would say at the biggest shift is.
As dresses was strong is even stronger now and that's true for both brands.
Thank you on your from your comments on quality and when I first got here that was probably 1 of the very first initiatives I took on the brand had both brands Hollister and Abercrombie had really lost their focus on the quality, which had been inherently part of our legacy and our DNA. We are absolutely back to that commitment the product that we're putting out there and then.
<unk> equation that we provide for our consumer is terrific and we're hearing it from he and she all the time and social media and how much debt Eric that theyre realizing itself. So thank you for that.
Regarding your third question on and.
It's a partnership and we actually have partnerships across all of our brands. Currently we have terrific partnerships as an example, and Abercrombie women's we work with a lot of affiliates that sell our product on social channels, they're introducing a lot of new consumers to our brand through that vehicle. So it is something that goes to our wheel.
Industry, leading social commerce opportunity that we've talked about all the time and what we're doing here with social commerce.
Would you consider doing of product launch with any of them or is it more of just the affiliate marketing and things like that.
Yes at this point.
And what's working for US is working with them as affiliates and that's kind of of our focus at the moment fantastic. Thanks, So much guys.
Sure. Thank you.
And as a reminder, ladies and gentlemen task of your question. Please press Star 1 we will now hear from Dylan.
Carden with William Blair.
Awesome. Thank you.
And I was just curious I appreciate for acknowledged and it might be a little bit early for this question, but just on the on the retail footprint.
You guys have been ahead of the curve, there and you kind of highlighting some of the culmination of those efforts.
Here on this print just any commentary about how you are feeling about.
And closures go forward.
Given take between the 2 channels now that you've made a lot of efforts to kind of link them up.
We'll just be appreciated.
I'd appreciate any sort of comments you can provide there. Thanks.
I Didnt done at it is early.
We're excited about the progress we were able to make and 2020 as you noted closing an additional 130 plus stores and really taking that very unproductive square footage out of our store base.
And we still have an opportunity we keep 50% of our leases up for renewal over the next couple of years and keep a very fluid lease stack. Those negotiations candidly haven't started yet for for this year. So as we head into the back half of the year and we start those negotiations with our landlord. We will have more to report at that point and just to add on a little bit as we think about more broadly.
And how the store network plays of digital it's really about supporting the Omnichannel experience and a certain market and that's really how we look at at how many stores do you need and a particular city or a catchment to to drive the total omni channel business and what size of those stores be we've been shrinking our stores you've been on this journey with us for years.
And we need to continue to do that we still have some stores that are oversized. So we still have an opportunity to thin out that square footage, but really when you take a step back it's about supporting that Omnichannel brand experience within each market.
Makes sense, thanks, guys nice work.
Thank you.
And with that ladies and gentlemen, this will conclude your question and answer session for today I will turn the call back over to Fran Horowitz for any additional or closing remarks.
So thank you everyone for participating in our call today I Hope you all enjoy your summer and I look forward to speaking with you in August when we report our second quarter results.
With that.
We will conclude today's conference. Thank you for your participation and you may now disconnect.
[music].
Okay.
And.
Okay.
And.
[music].