Q2 2021 Abercrombie & Fitch Co Earnings Call

August 26, 2021

Prince you may signal us by pressing star one on your telephone.

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.

And at this time I would like to turn the conference over to Pam.

Quintal Liana. Please go ahead ma'am.

Thank you.

Morning, and welcome to our second quarter 2021 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott <unk>, Chief Financial Officer earlier. This morning, we issued our second quarter earnings release, which is available on our website at corporate Abercrombie Dot com under the investors section also available on our website.

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 1095. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today.

A detailed.

Site 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 measures additional details and a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier. This morning with that I will turn the call over to Fran.

Good morning, I'm excited to be here today to share our recent results and provide insights into the start of our back to school season.

We entered Q2, well positioned to realize ongoing benefits from the work that we've done heading into and during the pandemic. This included growing our digital channel, which carries a higher four wall operating.

Good margin in stores <unk>.

Right sizing our store fleet, expanding our digital and technology teams.

Adding to our vendor and regional carrier networks and investing in marketing with an emphasis on digital and social.

So at the late spring and summer our customers took advantage of the warm weather and an increase in social activities.

Or were.

Operator for all the outfitting needs.

Product acceptance was strong across brands continuing momentum from the past several quarters.

Once again, we reduced markdowns and promotions tightly managed inventories and made strategic investments across marketing technology and fulfillment to support near and long term growth.

There are proven playbook worked and we achieved our best second quarter operating income and operating margin since 2008.

Before I turn to results just a quick PSA as we continue to lap significant impact from Covid, we will be providing comparisons to both second quarter, 2020, and 2019 where applicable.

And due to temporary Covid driven store closures last year, we do not plan to disclose comparable sales.

Second quarter total sales was 24% to last year and were up 3% compared to Q2 2019.

Our largest market the U S led with sales up 31% on a one year and 11.

<unk> percent on a two year basis.

Results speak to customer retention and spend and to new customers discovering our brands.

By Channel total global store sales rose, 55% from last year and were down 20% from 2019.

I'm very proud of our stores performance, which was achieved despite.

11 closures as well as ongoing restrictions in EMEA.

As a reminder, during fiscal 2020, we proactively closed 137 locations, removing one 1 million under productive gross square feet from our store base.

We continued to execute execute against our number one transformation initiatives.

Permanent global store network optimization to further align with our customers' shifting shopping behaviors.

Even with aggressive store sales growth digital did not skip a beat and remains a solid as stores reopened.

Digital sales held steady to 2020 levels and grew 52% from 2019.

Initial results are further proof of our ongoing evolution into a digital first global omnichannel retailer and should yield sustainable operating margin benefits.

Our total sales growth has been healthy as evidenced by our significant gross margin expansion.

For the quarter, we achieved our best Q2 gross margin rate since 2000.

At this time.

Our total company gross margin rate increased 450 basis points on a one year and 590 basis points on a two year basis.

We reduced the depth and breadth of promotions compared to last quarter and last year.

While customer reaction of products has continued to be strong we have not and will not step away from.

Inventory discipline. This is one of the key Covid learnings, we will continue to apply going forward.

Reflecting our strong topline and gross margin performance combined with ongoing tight expense controls our operating margin rate was over 1100 basis points compared to last year, and 800 basis points compared to Q2 2019.

Now we benefited from a good consumer environment, especially in the U S. Our results also reflect the body of work done by our global team to dramatically improve our product voice and experience.

Since I became CEO in 2017, our brands have evolved with our customers and we are focused on being there and supporting them for all their lifestyle needs.

<unk> of those lifestyle need, let's take a moment to talk about some major fashion wins that applied companywide.

Many have asked me about the current denim cycle Theres, a ton of newness and interest in jeans and it has been great for our brands, especially as as it is one of our top three categories on an annual basis and even more important in the back half of the.

Thank you.

Our teams have done an absolutely amazing job staying on top of current denim trends, we're viewed as the premier denim destination with newer styles, representing over 40% of our genes volume up from 25% last year and our customer is not waiting for sale to get what they want.

In the second quarter.

We reduced promotions within this category well below 4039 levels.

So lets working with high rise water legs, including mom dads straightened flare.

<unk> is still there, although becoming a smaller part of the total and there are new and upcoming trends like 90 inspired low rise something for everyone.

And lengths of changing two following years of ankle, we're starting to see interest in full.

We're encouraged that these changes are not limited to one gender customers are off to respond to the wider leg openings in men's which represents another significant opportunity as it has been long time since we've updated his silhouette.

Of course, our customer.

Needs tops to go with our new jeans, and women's we continue to see customers gravitate to slim and crop tops and oversight and body suits, which further reinforces the proportion play in bottoms dresses skirts shorts and swim were also popular.

As product acceptance has built our teams have been meeting our customers where.

In the digital landscape, we are firmly committed to our test and learn strategy and to new and emerging technology trends and engagement opportunities.

It was certainly a busy and exciting quarter for both technology and engagement and I want to take a moment to discuss some of the highlights.

We introduced an evolved Gilly Hicks brand purpose and possess.

Where are they on wheels.

We launched our newest brand social tourist.

We accelerated investments in testing across Influencer paid media and digital reaching both core and new audiences and we hired a chief digital and technology officer to further evolve and accelerate our first our digital first model.

Starting with Gilly Hicks.

<unk> on July 15th we took a huge leap forward in our growth strategy by re launching the brand globally with an evolved purpose and positioned to bring our customer to their happy place.

Given our Gen Z customer is most stressed generation. The updated purpose is very important as part of the relaunch, we introduced gender inclusive product and new sites.

On the materials, so everyone can feel welcome and comfortable regardless of size or gender identity.

In addition, we opened our first Standalone store Easton Town Center in Columbus, Ohio, and introduced updated side by side within Hollister store experiences.

This included 20 refreshes to existing side by side formats and three.

Include patients all of which incorporate elements from the Standalone store.

Wow, what can I say with an absolutely phenomenal moment for the Gilly team. We are truly feeling the love customer feedback has been overwhelmingly positive and the brand is resonating with our gen Z customer and their mindset.

Early results in the brand relaunch.

The new loan a new store concept has been very encouraging.

A step back our customers already responding well to the product and the brand, which gave us confidence to make the necessary investments to accelerate this exciting growth vehicle.

In the second quarter sales rose approximately 30% year over year with growth across digital and store channels.

Launch fifth consecutive quarter of double digit total sales gains lounge.

<unk> sleep underwear and our active collection Gilly go continue to resonate with our customer.

Post launch our guide product and matching collections also been well received.

Turning to social tourist it's hard to believe it's only been three months since <unk>.

This was the Hollister successful partnership with Tic, Toc Superstars, Dixie and Charlie Damelio, who combined have over 270 million followers across social platforms to the next level with the launch of our fifth brand.

Social tours is a great example of how we are approaching our business differently meeting our customer where they are in pushing boundaries of social.

We've taken a new and exciting ways.

Since the launch the brand has had over 700 million impressions and views and we continue to build awareness for the first collection, we had several Instagram exclusive pieces and for the second we hosted a live Tictoc fashion show featuring the <unk> and other social stars which be Tictoc.

Benchmarks.

With social tourists, we have learned so much in a short period of time that up and coming fashion trends, social commerce and the growth of the Tic Toc platform.

We are optimistic about social tourists in its future and have several more exciting events happening throughout the remainder of the year.

Now onto our remaining brands starting with our <unk>.

<unk> brand Hollister, which includes Gilly Hicks and social tourist sales rose, 20% in the quarter and we achieved our highest Q2 sales in company history, Congrats to the entire Hollister team.

Our focus on voice and experienced clearly complemented our product helping to drive higher average transaction that transaction values.

<unk> on strong average unit retail growth.

From a marketing perspective, we launched the Hollister creator collective a year long Influencer program in July we sponsored the Lago Vista Snapchat series, featuring 21, non Skippable Hollister commercials, we rounded out our efforts of the new monthly Instagram live shopping.

Sirius series with Influencers.

Hollister site and App also got a refresh during the quarter further improving the customer experience.

Gilly Hicks and social tourists now have dedicated tab, allowing users to shop between all three brands with a shared checkout. In addition, gilly Hicks and social tourists.

Launched their own unique App and we also update our membership loyalty program the customers can earn points redeem rewards across all three brands.

As we look to the remainder of the back to school season, we are focused on continuing to win in jeans, we have sterling pop ups in key markets, where we have been engaging with local teams and seating product and thus far has been highly successful.

<unk>, we will also have influencers and affiliates in the U S and EMEA amplified denim across Instagram and Tic Toc.

At Abercrombie adults are Influencer affiliate and editorial programs remain one of our top priorities in the second quarter, we grew associated sales by over 70% year over year and increased our already.

Sizable network of digital brand advocates.

We also launched a capsule series with top affiliate creators and took part in Facebook live shopping Alpha test, which had fantastic engagement and insights.

During the quarter, we continued to leverage tick tock content on a year over year basis, we doubled our <unk> visits grew new.

File orders and sales by over 80%.

And continued to break Tictoc benchmarks for paid media.

Can't wait to see what the future holds on this important platform. After all according to pop sugar Abercrombie is tick tucked favorite fashion brand and we are proud to hold that title.

All the hard work connecting to our customers certainly.

We paid off on our last earnings call as Abercrombie women's had a breakout moment.

During the second quarter that momentum built with women's achieving its best Q2 sales since 2012, and total Abercrombie, which includes kids grew sales, 30% in the quarter similar to Hollister Abercrombie registered higher average.

Transaction values on strong average unit retail growth.

Heading into fall our team is energized, we recently launched our denim Youre way campaign, which features abercrombie customers from Instagram casting call. We also collaborated with wedding events experts the knot on a best dressed guest collection. In addition, we teamed up with zappos as our exclusive.

Lucid domestic third party e-commerce provider for a limited selection of genes in tops and footwear collaboration.

And Abercrombie Kids the report card for given out during summer I would say they received today, we were highly focused on driving customer acquisition through expansion into new platforms, and releasing new products and content franchises.

<unk> the.

Ultimate Summer outfit campaign contributed to sales growth in shorts, and swim, which are two important seasonal categories. While the release of the cool stuff collection and the launch of our active Assortments, both had over 70% new to file shop rates and average order values that were over 70% above our goals.

A common theme across.

The company has been our focus on digital which is critical for future growth as we continue our transformation into a digitally led operating model, we have made investments in technology and talent.

Over the past year, we've expanded our data and analytics user experience and technology team and we've recently welcomed Sameer decides the <unk> family in the newly created role.

We'll have <unk>, chief digital and Technology officer.

Before I turn it over to Scott I want to take a moment to discuss our thoughts on the health of the consumer and how we are approaching the fall season.

In the second quarter U S benefited from government stimulus and reopening as customers resumed many of their activities inter.

Internationally the reopening in many countries.

<unk>, including our largest market the U K lagged the U S, reflecting ongoing COVID-19 related restrictions.

As we think about Q3 Buffalo uncertainties remain we are cautiously optimistic we've been pleased with the U S back to school season to date and believe our customers highly engaged and actively looking to refresh their wardrobe we're expecting.

Backing to see an elongated season as many of our larger markets have yet to return in.

In EMEA the environment is improving and we have yet to start the back to school season.

Looking ahead, we will continue to execute our proven playbook, we will focus on controlling what we can control and we remain on offense, we are proactively managing through industry wide issues around inflow.

Production and transportation delays.

With our solid foundation and strong balance sheet as well as our long standing relationships with our global vendor and supply chain partners.

We are well positioned to be winners in the back half and expect to surpass our previously stated five 8% operating margin goal this year and with that I will turn it over to Scott.

<unk>, Thanks, Ryan and good morning, everyone.

As Fran mentioned, we will be providing comparisons to both the second quarter of 2020, and 2019, where applicable and will not be disclosing comparable sales.

Turning to our results in the second quarter, we delivered total net sales of $865 million up 24% to last year on a two year basis.

Sales were up 3%.

We ended the quarter with all of our 733 stores opened this compares to 92% of our base open at the end of the first quarter as of yesterday all stores remain open.

Store sales rose, 55% on a one year basis and were down 20% on a two year basis, we recouped a significant amount.

This loss sales due to Covid driven store closures last year.

At the same time total digital sales dollars remained steady compared to last year and grew 52% to Q2 2019, representing 44% of total sales this quarter.

By brand net sales increased 20% for Hollister, which includes Gilly Hicks and social.

And 30% for Abercrombie, which includes kids.

As compared to Q2 2019, net sales increased 2% for Hollister and 4% for Abercrombie.

By region net sales in the U S were up 31% and 11% on a one and two year basis, respectively. Despite having roughly 129 fewer stores.

Social to over 22% less square footage in our U S store base as compared to Q2 2019.

In EMEA sales rose, 11% on a one year basis, but were down 5% on a two year basis customers responded well to localized product voice and experience, which allowed us to reduce promotions and region. We were pleased with results in light of permanent store.

And there is an ongoing COVID-19 related restrictions.

Since Q2, 2019, we've closed 17 stores, including eight flagships as we continue to reposition to a smaller and wider store network focused on local customers during.

During the quarter the region as a whole remain in flux as we experienced intermittent temporary closures and reduced operating hours as a reminder.

Closure and region, our penetration is highest in the U K, while Germany, and France are also meaningful.

And APAC sales were down 1% to last year and down 39% in Q2 2019, we experienced continued traffic challenges in the region.

Our largest market China, we're encouraged by customer response to new products, including APAC.

Pac exclusive collections on Tmall, we saw it stabilize sales trends and improved profitability as we continue to reduce promotional activity.

Globally, we continue to see lower store traffic levels relative to Q2, 2019, but sequential improvement off of Q1.

From an Omnichannel perspective, we were pleased with year over year improvements in conversion.

Minder average transaction values.

Moving on to gross profit our rate of 65, 2% was up 450 basis points to last year and 590 basis points for Q2, 2019, driven by higher AUR across brands on reduced promotions and markdowns, partially offset by higher AUC, reflecting increased transportation.

<unk> costs.

Inventory is controlling current ending the quarter down 8% to last year.

Reflecting well documented industry related challenges, we did see delivery delays increase over the quarter as global shipping congestion continued and there were renewed COVID-19 restrictions across several of our production countries. We are managing through delays.

Of one to three weeks on average by pulling forward deliveries employing fabric platforming and leveraging air deliveries as necessary.

Also we are working through an extended closure of factories in southern Vietnam, which have been further delayed and are now expected to open the first week of September at the earliest.

We have and will continue to leverage our strong vendor partnerships.

Shifts in a similar playbook already used in other countries to ensure we get product as quickly as possible upon reopening.

I'll cover the rest of our Q2 results on an adjusted non-GAAP basis excluded from our non-GAAP results are approximately $800008 million of pre tax asset impairment charges for this year than last year, respectively.

Operating.

<unk> expense, excluding other operating income was up 11% compared to last year, while operating expense as a percentage of sales decreased to 52% from 57, 8%.

In Q2, we saw an increase in stores and distribution expense of 5% compared to 2020, and a reduction of 13% compared to 2019.

Compared to 2019.

19 store occupancy was down approximately $50 million related to square footage reductions and renegotiated leases and included approximately $9 million of benefits associated with the rent abatements and our flagship lease related item.

These savings were partially offset by increased shipping and fulfillment expenses.

Marketing general and.

Administrative expense rose, 27% from last year, and 7% compared to 2019, primarily driven by increased marketing spend and higher performance based compensation expense.

We delivered operating income of $116 million compared to operating income of $22 million last year. As Fran noted this was our best second quarter operating income and operating.

Operating margin since 2008.

The effective tax rate was approximately negative six.

In the quarter, we released approximately $30 million of previously established valuation allowances on certain deferred tax assets, primarily in the United States, Germany, and the Netherlands. Additionally, the quarter reflected a discrete benefit of approximately 4 million.

<unk>.

U K rate change enacted in the quarter, which increased the value of deferred taxes in the UK.

Net income per diluted share and adjusted non-GAAP basis was $1.70.

Compared to 23 last year. The current quarter includes a benefit of approximately 53 related to the tax items mentioned.

Our strong financial position continues to enable us to both invest in the business and return excess cash to shareholders.

We ended the quarter with cash and cash equivalents of $922 million and total liquidity of approximately $1.2 billion.

During the quarter, we repurchased approximately two 4 million shares for $100 million.

Bringing the year to date total.

Share repurchases to about $3.5 million shares and $135 million.

At the end of Q2, we had approximately $6.5 million shares remaining under our previously authorized share repurchase program.

In addition, we spent $47 million to purchase 42 million at par value of our senior secured notes on the open market as a way.

To deleverage the balance sheet and deploy excess cash.

Looking ahead, we will continue to focus on returning excess cash to shareholders, primarily through share repurchases pending market conditions share price and our ability to accelerate investments.

Looking ahead, we continue to expect fiscal 2021 capex to be approximately $100 million with about.

Half of that related to digital and technology and the other half related to real estate and maintenance items.

During the quarter, we opened 14, new stores, bringing the total to 18 for the year to date period and closed 12 for a total of 20 year to date in the back half we expect to open roughly 20 stores, bringing the total for the year to approximately 40.

This year we.

We have about 240 leases up for renewal, we look forward to having thoughtful conversations with our landlord partners defined stores that are the right size in the right location at the right economics.

I'll finish up with how were planning the remainder of the year, we will stay on offense and leverage a portion of our structural cost savings to support top line growth including investments.

In marketing across brands.

Digital experience and growing Gilly Hicks and social tourists.

Reflecting ongoing global uncertainty, we will continue to maintain inventory discipline as we manage through supply chain disruptions and the cost and delays associated with it as well as read and react to the operating environment in each market around the world.

Recently, we have been encouraged by back.

To school result in the U S, where we expect to see an extended back to school season. We're excited for some of our largest school districts, including New York to return in the weeks to come.

For the third quarter, we are planning as follows using 2019 as our comparison period.

Net sales to be up 2% to 4% from 2019 level of approximately 863.

$3 million we.

We expect the U S to continue to outperform EMEA and APAC at this point our plan assumes a modest impact on sales due to supply chain constraints with a larger impact coming from cost inflation, which I'll cover momentarily.

We will work to manage through the disruption using all available tools in our toolkit, including <unk> inventory and shifting.

<unk> as necessary and if possible.

Gross profit rate to be up at least 300 basis points to 2019 level of 61%, including an expected negative impact of approximately 300 to 400 basis points of freight cost pressure.

We remain cautiously optimistic in our ability to drive AUR improvements through lower promotion and clearances.

Clearance activity to offset this headwind.

Operating expense, excluding other operating income to be up low single digits to 2019, adjusted non-GAAP level of $494 million.

Lower store expenses will be partially offset by higher fulfillment costs.

We also plan to increase marketing spend compared to 2019 as we look to further drive moment.

Rental social and digital media across brands, we expect to see benefits from this marketing throughout the back half and into 2022.

And the tax rate to be in the low 20.

Looking to the full year as compared to 2019, we are planning as follows net sales to be up low to mid single digits for 2019 level of $3 six.

$6 billion.

Gross profit rate to be up around 300 basis points of 2019 level of 59, 4%.

Operating expense, excluding other operating income to be down 3% to 4% to 2019 adjusted non-GAAP level of two point <unk> 7 billion.

Assuming we deliver against these expectations, we would expect operating margin at or above.

9% for the full year, which is well above our 2018 investor day target of five 8%. We are excited about the significant progress we have made on our operating model and cost structure, while plenty of hard work remains we are optimistic about our future and we will provide additional detail on our 2022 assumptions on our year end earnings call with that operator.

We are ready for questions.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, just keeping in mind, if you're using a speaker phone. Please make sure. Your mute function is released so that didn't go through each of our equipment. We ask that you limit yourself to one question. During this question and answer session. We will begin with Paul the Hughes with Citi.

Hey, Thanks, guys.

Wondering if you could talk a little bit more about the Gilly Hicks brand and just how you're thinking about that brand in 'twenty two how big it can be for you guys. Both near term and long term I'm also curious what you're seeing on the promotional environment. As you began in back to school what you.

For the second half and then Scott I think you still have some pricing that just curious how you're thinking about.

What to do as far as using cash.

Whether you use it to pay down debt buy back more stock.

Hey, Paul Good morning would love to talk about Gilly, what an exciting quarter for Gilly were.

We are building off momentum that we were already feeling in Gilly team has been hard at work.

Building that brand over the past couple of years, and we had an opportunity to really get closer to the customer understand that this is the most stressed out generation. This gen Z generation and to come up with a brand purpose that really helps them find their happy place.

Place has been just a huge win the brand is resonating the product is resonating we opened up a freestanding store and as a test and learn in eastern just as a couple of weeks ago. There has been really well received we also took some of those assets and use them in our side by sides around the world about 20 of them and have seen a nice pickup from that as well.

So adding this agenda inclusive in size inclusive too. It has just been an all around win.

We are excited about where we're headed and we have.

<unk>.

Not declared as part of its part of the Hollister number today.

I think your second question, what's the promotional environment for the second half.

We are thrilled.

<unk> progress that we've made I think you have been on this journey with us for quite some time and being able to actually reduce our promotions to the extent that we have thus far this year has been just a huge huge win for US we are holding our inventory tight as we've said that's the one of the biggest learnings coming out of Covid and we intend to remain there so the back half.

With the promotional than the first half we will continue to monitor the situation, but we expect to continue to make progress alright, I'll grab the third piece here on cash usage, yes year to date, we have put some cash to use we put about $250 million of our cash to use $135 million in share repurchases and around.

Is more of a $10 million to delever the balance sheet back in Q1. It just as a reminder, we paid about $65 million to settle a multiyear obligation related to our Soho Hollister store and then we bought back in some of that pricing that you mentioned there Paul in the second quarter here for about $45 million. So as we think about that debt in the future first good opportunity.

<unk> there is a we have a non call provision on that debt that comes up here in 2022, I can't believe it's happening already sneaking up on us. So thats been our first decision point there will be so in the meantime, it it makes sense for us to buy a little bit of that in here in Q2, so more to come there as we get into first quarter of next year as we look.

100, and the back half in cash usage mentioned, we're going to be focusing on share repurchases pending stock price.

The ability to invest in the business.

Okay. Thank you guys. Good luck.

Jim.

Next we will hear from Susan Anderson with B Riley.

Look forward to good morning, nice job on the quarter.

I guess just to touch on the gross margin I think you mentioned the highest since one nine and if you look back historically it looks like it's been even higher than that for <unk>. So I'm. Just curious if you think theres more room, there and how confident you are maintaining that margin level as we look forward and then.

Just for third quarter it looks like you.

<unk> gross margin to be a bit below second quarter is that really just all increased freight costs.

Hey, Susan it's Scott I'll grab this one so you're thinking about gross margin the highest since 2009 extremely pleased with the progress we've made and pulling back on promotions, obviously, we learned a ton through COVID-19.

On inventory levels and just the product acceptance has been great and a huge thanks to our merchant and design teams.

In the past I don't think we'll get back to our peak the business was very different back end of 4013 than it is today.

But we are making great progress on that gross margin.

Thinking about let's see the second part of the question.

Was the third.

Third quarter gross margin.

The second yes, yes to bring it back to the third quarter, yes. So we are seeing the increased freight.

Coming into us on the third quarter. So it started to build here in the first half some of that gets booked.

And your inventory and then will start to flow that through here in the third quarter. So it will be a little bit down there versus Q2, but the great thing is we're still talking about 300 basis points up versus 2019, and Thats baking in three years to 400 basis points of pressure from hopefully transitory freight inflation that will hopefully.

Sort itself out in the future, but we'll see when that happens so really pleased with progress on gross margins.

Great.

Thanks, a lot good luck in the back half.

Yes.

Well now move to a question from Jay sole with UBS.

Great. Thank you so much Brian you mentioned that Theres.

So newness in denim and lots of styles are working for both women's and men's can you give us a sense of what you think this fashion trend has meant for the growth rate for the category. So in other words, if before the pandemic. It was growing at 1% do you think it's growing at 5% now at 10% now and secondly, do you think that growth rate can persist for.

Theres last quarters.

Hey, Jay good morning, so what an exciting time for denim.

It doesn't happen very often where our industry sees such an incredible trend happening so the newness in denim.

Skinny jeans, we'll just start there and they've been around for a decade. So to talk about all of this newness in denim, we see a long.

A few more anyway and there are so many things happening between.

The leg openings the high rise low rise because of the nineties influence I mean, I could just I could go on and on and I'll, let all the exciting things are happening and what's great is that they're happening across brands and are happening across genders. So our expectation is that we expect to see on this newness.

Continuing well into the future.

Got it and then maybe if you talked about increasing some marketing expenses, which sort of implies you're really like how the hollister and Abercrombie and Fitch and also social choice in all the different things Gilly Hicks that you're doing with brands are positioned but specifically on hollister and Abercrombie given all the work that you've put in over the last five years to reposition.

These brands what are the Kpis that you're looking at to tell you that these brands really are where you want to be and are ready to be.

It really invested in a big way to continue to increase the engagement youre already seeing with consumers.

Hey, Jay it's Scott I'll grab this one yet loving where the brand positioning are for each of our brands all four of them all five of them, including kids.

So we are we're increasing marketing this is a great great position, we have with a strong balance sheet, having that cash and seeing that expense savings across the store base. It's what we've been trying to do over the years is to move from more fixed into more variable and marketing is our number one variable costs and we love to spend it so that the teams that we have built across our brands.

<unk> are just firing in all cylinders like brands that earlier, and we're going to give them more cash to fund that marketing, we love, what's happening across social and across digital we're finding great new partnerships, we're seeing tick tock explode. So we can put more money to work for all of our brands and to drive those kpis, we want new customers, we want to drive retention and so on and so forth.

And Thats, what our teams have been executing on and we appreciate that.

Great. Thanks, Kevin.

And once again, ladies and gentlemen star wondering if you have a question we will now move to Matthew boss with JP Morgan.

Great. Thanks, and congrats on the continued momentum.

Thank.

Don't maybe relative to your second quarter net sales up 3% relative to 2019, what have you seen in August or how best to peg. The continued momentum that you cited.

Scott just on profitability what are some of the puts and takes maybe as we think about the bottom line operating margin this year relative to maybe how best to.

Think about it moving forward.

I'll take that so we are pleased with the momentum that we've seen on heading into August back to school for the Hollister and the kids brand because abercrombie, we've really called back to fall. So its really focusing on Hollister and kids from the back to school, we are seeing nice reception to the product the early states like Texas and.

And Georgia have seen a nice start to back to school, our expectation is a nice I guess slow and steady wins the race rates. So we're looking for a longer season for back to school in the past, we've always talked about these big peaks and valleys that we've seen throughout the country as the states peak.

It's a bit different this year the consumer.

Tumor was spending a lot more time and vacationing in their social activities that they got back to so we saw a lot more wear now selling and now we're seeing them go into more wear forward selling so excited about what we're seeing so far.

But on the puts and takes for profitability. It comes down to really three levers for us it's the store expenses its fulfillment.

<unk> and then it's marketing and we've taken out a significant amount of occupancy coming into this year and through this year. We expect to make continued improvements in occupancy as we go forward and whenever we close stores reduced stores, we do see a savings come through with other store expenses on the fulfillment side, we've seen inflation, there and we've seen.

The higher volume so we'll see how that plays out in the future, but that will offset some of those stores savings somewhat and then marketing is really where we want to accelerate our spend to grow the brand because I think what we've seen more recently specifically is that when we can grow that top line Im thinking about the plus three we just talk about the 2019 and Q2, we can see an amazing flow through and we've seen.

Great profitability here in the first half and Thats. Our goal go forward is to continue to elevate that profitability to drive the top line and see that flow through.

Well now move to a question from Janine Stichter with Jefferies.

Hi, Good morning wanted to ask about the complexion of the sales guidance, 2% to 4% versus 2019 would you expect that the sales growth would start to improve in Europe, and maybe a bit of a moderation in the U S. And then also just curious what you saw within the quarter in Europe as stores reopen are interested in the cadence there. Thank you.

Forgive me I'll grab this one so thinking about the two to four you know go back in history, a little bit up five ish in Q1 up three ish in Q2, and so we're kind of right around that same range here in Q3, a couple of things happening here in Q3, we're hopeful and optimistic that Europe will slowly reopen it's been slowly reopening it certainly.

Lagged what's happening here in the U S. So optimistic then you'll kind of vaccine rollout will continue on and people will start to get out a little bit more on the other side of it is inventory challenges and supply chain supply chain challenges that we have seen so inventory is kind of dribbling in here as we go through the quarter and we expect to see a little bit of a hit there.

He has three our in stocks are not exactly where we want them to be so we're doing everything in our power and a huge thanks to our transportation teams to get our products here as quickly as possible. So those things are kind of balancing in and it just keeps us right on track with where we've been for the first half.

Okay, Great and then just on the gross margin the 300 to 400 basis points.

In Q mental straight did you quantify what that was in either <unk> or the first half just curious how that I'm just trying to get a sense of what the underlying merchandise margin improvement you're expecting in the back half versus what you saw in <unk>.

We didnt put in there, but I'd say in Q2, a couple of hundred basis points drag on gross margin from the freights.

So you know a little bit of a growth here as we see that really start to flow through the inventory of as those higher rates were bringing the product into spring and selling into fall. So it's been a drag but the great thing is is that underlying margin. How you merchandise margin. How you framed it is we're seeing great aur's and we're seeing through the product acceptance in the inventory.

<unk> and the marketing, it's all working together to seek rates AUR is to offset that cost pressure and so that's our expectation here in Q3, and we'll update Q4 whenever we get there.

Great. Thanks, so much.

Now.

Moving to a question from Janet Kloppenburg with J J.

K research.

Hi, everybody can you hear me.

Yes.

Congratulations on a great quarter.

Thank you.

And I just wanted to ask.

About store productivity levels one.

If you could sort of discriminate between the U S and Europe.

In the second quarter and second as the E. Com business. You know continues to be pretty steady how we should think about getting back to pre pandemic productivity levels in the stores, particularly the mall based our mall based stores.

And Scott and.

Relation to the supply chain constraints and the transportation costs.

It feels like it's getting a little bit worse and I'm wondering how you think we should think about the fourth quarter.

And maybe the first quarter two are you cautious there that things could actually worsen from Sweden.

We do or do you think and I understand these are just temporary headwinds, but I'm just trying to get the model right. What do you think that.

We could get some improvement as we move through the rest of the year and into next year. Thank you.

Okay, so starting from the top.

Our productivity levels, yes, clearly the U S.

Currently are more productive than EMEA and we've seen continued restrictions across EMEA and as Scott mentioned earlier you know we're excited that we're starting to see some green shoots in a little bit more consistency tomorrow, but we had lots of COVID-19 restrictions throughout the countries, particularly the U K, which is our largest.

Country.

Throughout the whole second quarter, so productivity in the U S has been stronger than we were actually very pleased with our U S performance, you know being up 11% to pre pandemic levels in total.

We see as a big big win on your <unk>.

Second question, let's see.

Getting back to pre Covid.

And I guess.

Same answer we are you know we continue to focus very closely on our leases Janet and making sure that our stores are in the right location, the right economics and the right size, it's been a big Big initiative of ours.

I mean for years now.

Continuing on that we closed the 100 <unk>.

30 stores and took out a 1 million square feet out of our base. We've got a lot of leases coming up in the back half and we'll continue to stick say focused on it.

Hollister just as the last step right before I turn it over to Scott we have.

Most of our Hollister most of the stores in Europe, and our Hollister business.

So with that I'll.

And nobody I'll, just I'll tack on a little bit to that last one they're janice when we think about the new normal I Wonder if you think about store productivity in store traffic. Some malls have regained that traffic from 2019, but a whole lot of malls habits and so we're.

I would say back to school with kind of the first test of people coming back and really seeing how that store traffic looks versus 2000.

19, and it was solid.

But definitely not back to those levels on average so we'll get through a holiday season and understand that so we're all still learning on what the productivity levels of these stores will be in where that traffic settles in and to France point, we have flexibility in our leases to make sure that we can either continue to shrink our stores to drive productivity that way.

Wei.

Rent deals that better fit the new sales level for that store and so on and so forth on the supply chain constraints, yes, I'd say right now it's tough out there all the articles you read are real.

Those of US on this side of the fence are living through it every day. So those costs are.

And our inventory it hit us in Q2, it's going to hit Us in Q3, it's going to hit us in Q4.

I'd say the one thing that we're thinking about is just the reopening of Vietnam and getting those units in here September into early Q4, and there'll be some air that comes along with that and as we think about the Q4 or the kind of the full year outlook that we put out there we have.

Isn't there, but we'll see how it plays out out.

Out of our control at this point.

Thanks, so much.

<unk>.

And once again, everyone Star one if you have a question we will now move to Mark <unk> with Baird.

Hi, good morning necessary Goldberg on for Mark Thanks for.

That big question and congrats on the quarter.

It's impressive to see the digital sales hold flat despite significant strength in 2020 and I'm. Just curious how you are thinking about the sustainability of these digital trends moving forward and then maybe any further implications they would have on that fleet optimization program.

Sorry go ahead.

I'll kick this one off and Fran can chime in but we are very happy with the digital sales hanging up that was one of our first big learnings coming through is the world kind of reopened specifically here in the U S is what was going to happen to digital it whenever the stores reopened so with the fleet work that we did last year and the huge jump that we saw last year and digital sales because of the.

Okay Covid related closures it was great to sustain that this year and what I love from a finance perspective, and you'll see that flow through and to see our difference.

P&L and operating model flow through at a much greater profitability with that sales mix being at 44% of digital versus back in 19, where it wasn't so as we think about.

Forward it.

Does have an implication on the store fleet I mean this business is about Omnichannel now we need to make sure. We have the right size stores in the right locations to support a bigger digital halo within a certain market and thats. How we look at each market that were entering we want to maximize that omni business. So absolutely has an implication.

And we'll be thinking about that as we go into the back half of this year. When we have those 240 leases up for renewal.

Great. Thank you.

And it looks like that's all the time, we have for questions today, I will turn the call back over to Fran for any additional or closing remarks.

Thank you for participating.

Supporting our cloud today I look forward to speaking with you in November when we report our third quarter results.

With that ladies and gentlemen, this does conclude your conference for today, we do thank you for your participation you may now disconnect.

Okay.

[music].

Good day and welcome to the Abercrombie <unk> Fitch second quarter fiscal year 2021 earnings call Today's conference is being recorded.

If.

A question at any time during today's conference you May signal, that's by pressing star one on your telephone.

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.

And at this time I would like to turn the conference over to Pam <unk>. Please go ahead ma'am.

Thank you good morning, and welcome to our second quarter 2021 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott will hefty Chief Financial Officer earlier. This morning, we issued our second quarter earnings release, which is available on our website at corporate so that probably is dot com under the investors section.

Also available on our website is 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. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today.

A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission and.

Good morning, I'm excited to be here today to share our recent results and provide insights into the start of our back to school season.

We entered Q2, well positioned to realize ongoing benefits from the work that we had done heading into and during the pandemic.

This included growing our digital channel, which carries a higher four wall.

Operating margin in stores right.

Right sizing our store fleet, expanding our digital and technology teams.

Adding to our vendor and regional carrier networks and investing in marketing with an emphasis on digital and social.

Throughout the late spring and summer our customers took advantage of the warm weather and an increase in social activities.

We were.

We're there for all their outfitting needs.

How does the acceptance was strong across brands continuing momentum for the past several quarters.

Once again, we reduced markdowns and promotions tightly managed inventories and made strategic investments across marketing technology and fulfillment to support near and long term.

Growth our proven playbook worked and we achieved our best second quarter operating income and operating margin since 2008.

Before I turn to results just a quick PSA as we continue to lap significant impacts from Covid, we will be providing comparisons to both second quarter, 2020, and 2019 where applicable.

And due to temporary Covid driven store closures last year, we do not plan to disclose the comparable sales.

Second quarter total sales was 24% to last year and were up 3% compared to Q2 2019 our.

Our largest market the U S led with sales up 31% on a one year and 11.

<unk> percent on a two year basis.

Results speak to customer retention and spend and to new customers discovering our brands.

By Channel total global store sales rose, 55% from last year and were down 20% from 2019.

I am very proud of our stores performance, which was achieved despite.

11 closures as well as ongoing restrictions in EMEA.

As a reminder, during fiscal 2020, we proactively closed 137 locations, removing one 1 million under productive gross square feet from our store base.

We continued to execute execute against our number one transformation.

Permanent global store network optimization to further align with our customers' shifting shopping behaviors.

Even with aggressive store sales growth digital did not skip a beat and remained a solid as stores reopened.

Digital sales held steady to 2020 levels and grew 52% from 2019.

Results are further proof of our ongoing evolution into a digital first global omnichannel retailer and should yield sustainable operating margin benefits.

Our total sales growth has been healthy as evidenced by our significant gross margin expansion.

For the quarter, we achieved our best Q2 gross margin rate since 2000.

Nine.

Our total company gross margin rate increased 450 basis points on a one year and 590 basis points on a two year basis.

We reduced the depth and breadth of promotions compared to last quarter and last year.

While customer reaction to product has continued to be strong we have not and will not step away from.

Cory discipline. This is one of the key Covid learnings, we will continue to apply going forward.

Reflecting our strong topline and gross margin performance combined with ongoing tight expense controls our operating margin rate rose over 1100 basis points compared to last year, and a 200 basis points compared to Q2 2019.

Inventory benefited from a good consumer environment, especially in the U S. Our results also reflect the body of work done by our global team to dramatically improve our product voice and experience.

Since I became CEO in 2017, our brands have evolved with our customers and we are focused on being there and supporting them for all their lifestyle needs.

<unk> those lifestyle need let's take a moment to talk about some major fashion wins that applied companywide.

Thank you.

Our teams have done an absolutely amazing job staying on top of current denim trends, we are viewed as the premier denim destination with newer styles, representing over 40% of our genes volume up from 25% last year and our customer is not waiting for sale to get what they want.

In the second quarter.

The year was promotions within this category well below 4039 levels.

So what's working with high rise water legs, including mom dads straightened flare.

<unk> is still there, although becoming a smaller part of the total and there are new and upcoming trends like 90 inspired low rise something for everyone.

And lengths of changing two following years of ankle, we're starting to see interest in full.

We're encouraged that these changes are not limited to one gender customers, our author respond to the wider leg openings in men's which represents another significant opportunity as it has been long time since we've updated his silhouette.

Of course, our customer.

We reduced to go with our new jeans, and women's we continue to see customers gravitate to slim and crop tops and oversight and body suits, which further reinforces the proportion play in bottoms dresses skirts shorts and swim were also popular.

As product acceptance has built our teams have been meeting our customers where.

Where they are in the digital landscape, we are firmly committed to our test and learn strategy and to new and emerging technology trends and engagement opportunities.

It was certainly a busy and exciting quarter for both technology and engagement and I wanted to take a moment to discuss some of the highlights.

We introduced an evolved Gilly Hicks brand purpose and positioning.

Positioning.

We launched our newest brand social tourist.

Starting with Gilly Hicks.

On July 15th we took a huge leap forward in our growth strategy by re launching the brand globally with revamped purpose and positioned to bring our customers to their happy place.

Given our Gen Z customer is most stressed generation. The updated purpose is very important as part of the relaunch, we introduced gender inclusive product and new sites.

<unk> materials, so everyone can feel welcome and comfortable regardless of size or gender identity.

In addition, we opened our first Standalone store Easton Town Center in Columbus, Ohio, and introduced updated side by side within Hollister store experiences.

This included 20 refreshes to existing side by side formats and <unk>.

Include patients all of which incorporate elements from the Standalone store.

Early results from the brand relaunch.

New loan a new store concept have been very encouraging.

Taking a step back our customers already responding well to the product and the brand, which gave us confidence to make the necessary investments to accelerate this exciting growth vehicle.

In the second quarter sales rose approximately 30% year over year with growth across digital and store channels. This.

Launch a fifth consecutive quarter of double digit total sales gains lounge.

<unk> Matchbox sleep underwear and our active collection Gilly go continue to resonate with our customer.

Post launch our <unk> product and matching collections have also been well received.

Turning to social tourists, it's hard to believe it's only been three months since we've.

Social tours is a great example of how we are approaching our business differently meeting our customer where they are in pushing boundaries of social.

Commerce, and new and exciting ways.

Since the launch the brand has had over 700 million impressions and views and we continue to build awareness for the first collection, we had several Instagram exclusive pieces and for the second we hosted a live kicked off fashion show featuring the <unk> and other social stars, which Pete tick tock.

Benchmarks.

With social tourists, we have learned so much in a short period of time that up and coming fashion trends, social commerce and the growth of the Tic Toc platform.

We are optimistic about social tourists in its future and have several more exciting events happening throughout the remainder of the year.

Now onto our remaining brands starting with our long.

Just brand Hollister, which includes Gilly Hicks and social tourist sales rose, 20% in the quarter and we achieved our highest Q2 sales in company history, Congrats to the entire Hollister team.

Our focus on voice and experience clearly complemented our product helping to drive higher average transaction the transaction value.

<unk> on strong average unit retail growth.

<unk> serious series with Influencers.

Hollister site and App also got a refresh during the quarter further improving the customer experience.

Gilly Hicks and social tourists now have dedicated tab, allowing users to shop between all three brands with a shared checkout. In addition, gilly Hicks and social tourists.

Your own unique apps and we also update our membership loyalty program, so that customers can earn points and redeem rewards across all three brands.

Launch we.

We will also have influencers and affiliates in the U S and EMEA amplified denim across Instagram and Tic Toc.

<unk> Global network of digital brand advocates.

We also launched a capsule series with top affiliate creators and took part in Facebook live shopping Alpha test, which had fantastic engagement and insights.

During the quarter, we continued to leverage tick tock content on a year over year basis, we doubled our <unk> visits grew new to.

Sigh of orders and sales by over 80%.

And continued to break Tictoc benchmark for paid media.

Can't wait to see what the future holds on its important platform. After all according to pop sugar Abercrombie is tick tucked favorite fashion brand and we are proud to hold that title.

All the hard work connecting to our customers certainly.

File off on our last earnings call as Abercrombie women's had a breakout moment during the second quarter that momentum built with women's achieving its best Q2 sales since 2012, and total Abercrombie, which includes kids grew sales, 30% in the quarter similar to Hollister Abercrombie registered higher average.

We paid off some values on strong average unit retail growth.

Heading into fall our team is energized, we recently launched our denim Youre way campaign, which features abercrombie customers from Instagram casting call. We also collaborated with wedding events experts the knot on a best dressed guests collection. In addition, we teamed up with zappos as our exclusive.

Transit domestic third party e-commerce provider for a limited selection of genes in tops and footwear collaboration.

At Abercrombie Kids report cards or given us during summer I would say they received today, we were highly focused on driving customer acquisition through expansion to new platforms, and releasing new product and content franchise.

Lucid is the.

The ultimate summer outfit campaign contributed to sales growth in shorts, and swim, which are two important seasonal categories. While the release of the cool stuff collection and the launch of our active Assortments, both had over 70% new to file shop rates and average order values that over 70% above our goals.

A common theme across.

The company has been our focus on digital which is critical for future growth as we continue our transformation into a digitally led operating model. We have made investments in technology and talent over the past year, we've expanded our data and analytics user experience and technology teams and we recently welcomed Samir decides the <unk> family in the newly created role.

<unk>, Chief digital and Technology Officer.

Before I turn it over to Scott I want to take a moment to discuss our thoughts on the health of the consumer and how we are approaching the fall season.

In the second quarter. The U S benefited from government stimulus and are reopening as customers resumed many of their activities inter.

Internationally the reopening in many countries.

<unk>, including our largest market the U K lagged the U S, reflecting ongoing COVID-19 related restrictions.

As we think about Q3, while global uncertainties remain we are cautiously optimistic we've been pleased with the U S back to school season to date and believe our customers highly engaged and actively looking to refresh their wardrobe we are expecting.

Backing to see an elongated season as many of our larger markets have yet to return in.

In EMEA the environment is improving and we have yet to start the back to school season.

Asian production and transportation delays with our solid foundation and strong balance sheet as well as our long standing relationships with our global vendor and supply chain partners, we are well positioned to be winners in the back half and expect to surpass. Our previously stated five 8% operating margin goal this year and with that I will turn it over to Scott.

Thanks, Fran and good morning, everyone as.

As Fran mentioned, we will be providing comparisons to both second quarter, 2020, and 2019, where applicable and will not be disclosing comparable sales.

Turning to our results in the second quarter, we delivered total net sales of $865 million up 24% to last year on a two year basis.

<unk> sales were up 3%.

We ended the quarter with all of our 733 stores open. This compares to 92% of our base open at the end of the first quarter as of yesterday all stores remain open.

Store sales rose, 55% on a one year basis and were down 20% on a two year basis, we recouped a significant amount.

Out of lost sales due to Covid driven store closures last year.

At the same time total digital sales dollars remained steady compared to last year and grew 52% to Q2 2019, representing 44% of total sales this quarter.

By brand net sales increased 20% for Hollister, which includes Gilly Hicks and social.

Worst and 30% for Abercrombie, which includes kids.

As compared to Q2 2019, net sales increased 2% for Hollister and 4% for Abercrombie.

By region net sales in the U S were up 31% and 11% on a one and two year basis, respectively. Despite having roughly 129 fewer stores.

<unk> and over 22% less square footage in our U S store base as compared to Q2 2019.

In EMEA sales rose, 11% on a one year basis, but were down 5% on a two year basis customers responded well to localized product voice and experience, which allowed us to reduce promotions in region. We were pleased with the results in light of permanent store.

Closures and ongoing COVID-19 related restrictions.

Since Q2, 2019, we've closed 17 stores, including eight flagships as we continue to reposition to a smaller and wider store network focused on local customers during.

During the quarter the region as a whole remain in flux as we experienced intermittent temporary closures and reduced operating hours as a reminder.

In region, our penetration is highest in the U K, while Germany, and France are also meaningful.

And APAC sales were down 1% to last year and down 39% for Q2 2019.

We experienced continued traffic challenges in the region and our largest market China, we're encouraged by customer response to new products, including APAC.

Minder exclusive collections on Tmall, we saw stabilized sales trend and improve profitability as we continued to reduce promotional activity.

Globally, we continue to see lower store traffic levels relative to Q2, 2019, but sequential improvements off Q1.

From an Omnichannel perspective, we were pleased with year over year improvements in conversion.

The average transaction values.

<unk> costs.

Inventory is controlling current ending the quarter down 8% to last year, reflecting.

Of one to three weeks on average by pulling forward deliveries employing fabric platforming and leveraging air deliveries as necessary.

Also we are working through an extended closure of factories in southern Vietnam, which have been further delayed and are now expected to open the first week of September at the earliest.

We have and will continue to leverage our strong vendor partnerships.

Similar playbook already use in other countries to ensure we get product as quickly as possible upon reopening.

I'll cover the rest of our Q2 results on an adjusted non-GAAP basis excluded from our non-GAAP results are approximately $800008 million of pretax asset impairment charges for this year than last year, respectively.

Operating.

<unk> expense, excluding other operating income was up 11% compared to last year, while operating expense as a percentage of sales decreased to 52% from 57, 8%.

In Q2, we saw an increase in stores and distribution expense of 5% compared to 2020, and a reduction of 13% compared to 2019.

Compared to 2019.

These savings were partially offset by increased shipping and fulfillment expenses.

Marketing general and.

Administrative expenses rose, 27% from last year, and 7% compared to 2019, primarily driven by increased marketing spend and higher performance based compensation expense.

We delivered operating income of $116 million compared to operating income of $22 million last year. As Fran noted this was our best second quarter operating income and operating.

Operating margin since 2008.

The effective tax rate was approximately negative six.

<unk>.

<unk> U K rate change enacted in the quarter, which increase the value of deferred taxes in the UK.

Net income per diluted share and adjusted non-GAAP basis was $1.70.

Compared to <unk> 23 last year. The current quarter includes a benefit of approximately 53 related to the tax items mentioned.

Our strong financial position continues to enable us to both invest in the business and return excess cash to shareholders.

We ended the quarter with cash and cash equivalents of $922 million and total liquidity of approximately $1.2 billion.

During the quarter, we repurchased approximately two 4 million shares for $100 million.

Bringing the year to date total.

Share repurchases to about $3.5 million shares and $135 million.

At the end of Q2, we had approximately $6.5 million shares remaining under our previously authorized share repurchase program.

In addition, we spent $47 million to purchase $42 million at par value of our senior secured notes on the open market as a way.

To deleverage the balance sheet and deploy excess cash.

Looking ahead, we will continue to focus on returning excess cash to shareholders, primarily through share repurchases pending market conditions share price and our ability to accelerate investments.

Looking ahead, we continue to expect fiscal 2021 capex to be approximately $100 million with about.

Is that related to digital and technology and the other half related to real estate and maintenance items.

This year we.

Half of the 240 leases up for renewal, we look forward to having thoughtful conversations with our landlord partners defined stores that are the right size in the right location at the right economics.

I'll finish up with how we are planning the remainder of the year, we will stay on offense and leverage a portion of our structural cost savings to support top line growth including investments.

In marketing across brands, the digital experience and growing Gilly Hicks and social tourists.

Reflecting ongoing global uncertainty, we will continue to maintain inventory discipline as we manage through supply chain disruptions and the costs and delays associated with it as well as read and react to the operating environment in each market around the world.

Recently, we have been encouraged by back.

We have about <unk> in the U S, where we expect to see an extended back to school season. We're excited for some of our largest school districts, including New York to return in the weeks to come.

For the third quarter, we are planning as follows you think 2019 as our comparison period.

Net sales to be up 2% to 4% from 2019 level of approximately 863.

To school.

We will work to manage through the disruption using all available tools in our toolkit, including <unk> inventory and shifting production.

$3 million as necessary and if possible.

Gross profit rate to be up at least 300 basis points to 2019 level of 61%, including an expected negative impact of approximately 300 to 400 basis points of freight cost pressure.

We remain cautiously optimistic in our ability to drive AUR improvements through lower promotion and clearances.

<unk> activity to offset this headwind.

Operating expense, excluding other operating income to be up low single digits for 2019, adjusted non-GAAP level of $494 million.

Lower store expenses will be partially offset by higher fulfillment costs.

We also plan to increase marketing spend compared to 2019 as we look to further drive moment.

Clearance that social and digital media across brands, we expect to see benefits from this marketing throughout the back half and into 2022.

And the tax rate to be in the low 20.

Looking to the full year as compared to 2019, we are planning as follows net sales to be up low to mid single digits to 2019 level of three six.

<unk> 1 billion.

Gross profit rate to be up around 300 basis points in 2019 level of 59, 4%.

Operating expense, excluding other operating income to be down 3% to 4% to 2019, adjusted non-GAAP level of $2.7 billion.

Assuming we deliver against these expectations, we would expect operating margin at or above.

6% for the full year, which is well above our 2018 investor day target of five 8%. We are excited about the significant progress we've made on our operating model and cost structure, while plenty of hard work remains we are optimistic about our future and will provide additional detail on our 2022 assumptions on our year end earnings call with that operator.

<unk> not ready for questions.

Hey, Thanks, guys.

Wondering if you could talk a little bit more about the Gilly Hicks brand and just how youre thinking about that brand in 'twenty two how big it can be.

For you guys, both near term and long term also curious what you're seeing on the promotional environment.

You began in back to school what you.

<unk> for the second half and then Scott I think you still have some some pricing that just curious how you're thinking about.

What to do as far as using cash.

Whether you use it to pay down debt buy back more stock.

Hey, Paul Good morning would love to talk about Gilly, what an exciting quarter for Gilly.

We are building off momentum that we were already scaling in Gilly team has been hard at work and.

So, adding this gender inclusive in size inclusive too. It has just been an all around win.

We are excited about where we're headed and we have.

<unk>.

Not declared as part of part of the Hollister number today.

I think your second question, what's the promotional environment for the second half.

We are thrilled.

<unk> progress that we've made I think you have been on this journey with us for quite some time and being able to actually reduce our promotions to the extent that we have thus far this year has been just a huge huge win for US we are holding our inventory tight as we've said that the one of the biggest learnings coming out of Covid and we intend to remain there so the back half.

It's more of a $10 million to delever the balance sheet back in Q1. It just as a reminder, we paid about $65 million to settle a multiyear obligation related to our Soho Hollister store and then we bought back in some of that pricing that you mentioned there Paul in the second quarter here for about $45 million. So as we think about that debt in the future first good opportunity.

100, <unk> there is a we have a non call provision on that debt that comes up here in 2022, I can't believe it's happening already sneaking up on us. So thats been our first decision point there will be so in the meantime, it it makes sense for us to buy a little bit of that in here in Q2, so more to come there as we get into first quarter of next year as we look.

Tuning to the back half in cash usage mentioned and we're gonna be focusing on share repurchases pending stock price.

The ability to invest in the business.

Got it. Thank you guys. Good luck.

Jim.

Next we will hear from Susan Anderson with B Riley.

Look forward to good morning, nice job on the quarter.

Third quarter it looks like you.

<unk> gross margin to be a bit below second quarter is that really just all increased freight costs.

Hey, Susan it's Scott I'll grab this one so youre thinking about gross margin the highest since 2009 extremely pleased with the progress we've made and pulling back on promotions, obviously, we learned a ton through COVID-19.

Just for inventory levels and just the product acceptance has been great and a huge thanks to our merchant and design teams thinking about the past I don't think we'll get back to our peak the business was very different back end of 4013 than it is today.

We are making great progress on that gross margin.

On and thinking about let's see the second part of the question.

Third quarter gross margin.

Yes, yes to bring it back to the third quarter, yes. So we are seeing the increased freight.

Coming into us on the third quarter. So it started to build here in the first half some of that gets booked up.

Inventory and then will start to flow that through here in the third quarter. So it will be a little bit down there versus Q2, but the great thing is we're still talking about 300 basis points up versus 2019, and Thats baking in three to 400 basis points of pressure from hopefully transitory freight inflation that will hopefully.

Great.

Thanks, a lot good luck in the back half.

Yes.

Well now move to a question from Jay sole with UBS.

Great. Thank you so much Brian you mentioned that Theres.

Sorts of newness in denim and lots of styles are working for both women's and men's can you give us a sense of what you think the fashion trend has meant for the growth rate for the category. So in other words, if before the pandemic. It was growing at 1% do you think it's growing at 5% now at 10% now and secondly, do you think that growth rate can persist for.

Last quarters.

Hey, Jay good morning, so what an exciting time for denim.

Doesn't happen very often where our industry sees such an incredible trend happening so the newness in denim.

Skinny jeans, we'll just start there and they've been around for a decade. So to talk about all of this newness in denim, we see a long.

Long runway and Theres, so many things happening between.

The leg openings the high rise low rise because of the nineties influence I mean, I could just I could go on and on about all the exciting things are happening and what's great is that theyre happening across brands and are happening across genders. So our expectation is that we expect to see this newness continues.

Continuing well into the future.

Got it and then maybe if you talked about increasing some marketing expenses, which sort of implies you're really like how the hollister and Abercrombie and Fitch and also social choice in all the different things Gilly Hicks Youre doing with brands are positioned but specifically on Hollister and Abercrombie given all the work that you've put in over the last five years to reposition.

These brands what are the Kpis that you're looking at to tell you that these brands really are where you want to be and are ready to be really invested in a big way to continue to increase the engagement youre already seeing with consumers.

Hey, Jay it's Scott I'll grab this one yet loving where the brand positioning are for each of our brands all four of them all five of them, including kids.

So we are we're increasing marketing this is a great great position, we have with a strong balance sheet, having that cash and seeing that expense savings across the store base. It's what we've been trying to do over the years is to move from more fixed and to more variable and marketing is our number one variable cost at and we'd love to spend it so that the teams that we have built across our brands.

<unk> are just firing on all cylinders like brands that earlier, and we're going to give them more cash to fund that marketing, we love, what's happening across social and across digital we're finding great new partnerships, we're seeing tick tock explode. So we can put more money to work for all of our brands and to drive those kpis, we want new customers, we want to drive retention and so on and so forth.

And Thats, what our teams have been executing on and we appreciate that.

Okay.

Great. Thanks, Kevin.

And once again, ladies and gentlemen star one if you have a question we will now move to Matthew boss with JP Morgan.

Great. Thanks, and congrats on the continued momentum.

Thank.

So maybe relative to your second quarter net sales up 3% relative to 2019, what have you seen in August or how best to attack. The continued momentum that you cited.

Scott just on profitability what are some of the puts and takes maybe as we think about the bottom line operating margin this year relative to maybe how best to.

Think about it moving forward.

And then I'll kick off so we are pleased with the momentum that we've seen heading into August back to school for the Hollister and the kids brand because abercrombie, we've really called back to fall. So its really focusing on Hollister and kids from back to school, we are seeing nice reception to the product the early states like Texas and.

Florida, and Georgia have seen a nice start to back to school, our expectation is a nice I guess slow and steady wins the race rates. So we're looking for a longer season for back to school in the past, we've always talked about these big peaks and valleys that we've seen throughout the country as the state peak.

A bit different this year the consumer.

Tumor with spending a lot more time and vacationing in their social activities that they got back to so we saw a lot more aware now selling and now we're seeing them go into more wear forward selling so excited about what we're seeing so far.

But on the puts and takes for profitability. It comes down to really three levers for us it's the store expenses its fulfillment.

And then its marketing and we've taken out a significant amount of occupancy coming into this year and through this year. We expect to make continued improvements in occupancy as we go forward and whenever we close stores reduced stores, we do see a savings come through with other store expenses on the fulfillment side, we've seen inflation, there and we've seen.

<unk> volume so we'll see how that plays out in the future, but that will offset some of those stores savings somewhat and then marketing is really where we want to accelerate our spend to grow the brand because I think what we've seen more recently specifically is that when we can grow that top line and thinking about the plus three we just talked about the 2019 and Q2, we can see an amazing flow through and we've seen.

Great profitability here in the first half and Thats. Our goal go forward is to continue to elevate that profitability drive the top line and see that flow through will now move to a question from Janine Stichter with Jefferies.

Hi, Good morning wanted to ask about the complexion of the sales guidance, 2% to 4% versus 2019.

<unk> would you expect that the sales growth to improve in Europe, and maybe a bit of a moderation in the U S. And then I was just curious what you saw within the quarter in Europe as stores reopen interested indicated there. Thank you.

Certainly I'll grab this one so thinking about the two to four.

Go back in history, a little bit up five ish in Q1 up three ish in Q.

Q2, and so we're kind of right around that same range here in Q3, a couple of things happening here in Q3, we're hopeful and optimistic that Europe will slowly reopen it's been slowly reopening. It certainly has lagged what's happening here in the us. So optimistic then youll kind of vaccine rollout will continue and then people will start to get out a little bit more.

On the other side of it is inventory challenges and supply chain supply chain challenges that we have seen so inventory is kind of dribbling in here as we go through the quarter and we expect to see a little bit of a hit there in Q3, our in stocks are not exactly where we want them to be so we're doing everything in our power and a huge thanks to our transportation.

Teams to get our products here as quickly as possible. So those things are kind of balancing in and it just keeps us right on track with where we've been for the first half.

Okay, Great and then just on the gross margin the 300 to 400 basis points of incremental straight did you quantify what that was in either <unk> or the first half just curious how that I'm just trying to get a sense.

Underlying merchandise margin improvement you're expecting in the back half versus what you thought in <unk>.

We didn't put it in there, but I'd say in Q2, a couple of hundred basis points drag on gross margins from the freight. So you know a little bit of a growth here as we see that really start to flow through the inventory of as those higher rates were bringing the product into.

The spring selling into fall so it's been a drag but the great thing is is that underlying margin how you merchandize margin.

Aimed at is we're seeing great Aur's and we're seeing through the product acceptance in the inventory and the marketing. It's all working together to see great AUR is to offset that cost pressure and so thats our expectation here in.

And we will update Q4 whenever we get there.

Great. Thanks, so much.

Now moving to a question from Janet Kloppenburg with J J K research.

Hi, everybody can you hear me.

Yes.

Q3s relations on a clean quarter.

Yes.

And I just wanted to ask.

About store productivity levels one.

If you could sort of discriminate between the U S and Europe in the second quarter and second as the E Com business continues to be pretty steady.

Congrats think about getting back to pre pandemic productivity levels.

In the stores, particularly the mall based mall based stores.

And.

In relation to the.

Supply chain constraints and the transportation costs.

Got it.

How we should just getting a little bit worse and I'm wondering how you think we should think about the fourth quarter.

And maybe the first quarter of two <unk>.

Cautious there that.

<unk>.

Actually worsen from Sweet Kale or do you think and I understand these are just temporary headwinds I'm just trying to get the model right. When do you think.

Think that.

We could get.

Some improvement as we move through the rest of the year and into next year. Thank you.

Okay, so starting from the top.

Our activity levels, yes, clearly the U S.

Currently are more productive than EMEA.

<unk>.

<unk> restrictions across EMEA and as Scott mentioned earlier, we're excited that we're starting to see some green shoots in a little bit more consistency of demand, but we had lots of COVID-19 restrictions throughout the countries, particularly the U K, which is our largest country.

And throughout the whole second quarter, so productivity in the U S has been stronger and we're actually very pleased.

With performance being up 11% to pre pandemic levels in total.

We see as a big big win.

Second question, let's say it was strong.

Getting back to me.

And I guess.

Same answer we are we continue to focus very closely on our leases Janet and making sure.

With our stores are in the right location, the right economics and the right size, it's been a big Big initiative of ours.

I mean for years now and we're continuing on that we closed the 130 stores and took out $1 million.

Square feet out of our base.

Got a lot of leases coming up in the back half and we'll continue to stay.

That say focused on it.

Hollister just as the last step will add before I turn it over to Scott we have.

Most of our Hollister most of the stores in Europe are in our Hollister business.

So with that I'll I'll, just I'll tell you on a little bit to that last one they're janet's when we think about the new normal I Wonder if you think about store productivity in.

Patrick some malls have regained that traffic from 2019, but a whole lot of malls habits and so we're.

I would say back to school is kind of the first test of people coming back and really seeing how that store traffic looks versus 2019 and it was solid.

But definitely not back to those levels on average so we will get through a holiday season and understand that so.

And we're all still learning on what the productivity levels of these stores will be in where that traffic settles in and so France point, we have flexibility in our leases to make sure that we can either continue to shrink our stores to drive productivity that way.

Rent deals that better fit the new sales level for that store and so on and so forth on.

On the supply chain constraints, yes, I'd say right now it's tough out there all the articles you read are real and we're all those of US on this side of the fence are living through it every day. So those costs are in our inventory it hit us in Q2, it's going to hit us in Q3, it's going to hit us in Q4, I'd say the one thing.

Thinking about is just the reopening of Vietnam and getting those units in here September into early Q4, and there'll be some air that comes along with that and as we think about the Q4 or the kind of the full year outlook that we put out there we have that baked in there, but we'll see how it plays out.

Out of our control at this point.

Thanks, so much.

Welcome.

And once again, everyone Star one if you have a question we will now move to Mark <unk> with Baird.

Hi, Good morning. This is Sharon Goldberg on for Mark. Thanks for taking my question and congrats on the quarter.

It was impressive to see the digital sales hold flat despite significant strength in 2020 and I'm just curious how youre thinking.

About the sustainability of these digital trends moving forward and then maybe any further implications they would have on that fleet optimization program.

Okay I'll kick this one off and then Fran can chime in but.

Very happy with the digital sales hanging up that was one of our first big learnings coming through is the world.

Kind of reopened specifically here in the U S is what what's going to happen to digital whenever the stores reopen so with the fleet work that we did last year and the huge jump that we saw last year and digital sales because of the COVID-19 related closures. It was great to sustain that this year and what I love from the finance perspective to see that flow through and to see our difference.

The P&L and operating model flow through at a much greater profitability with that sales mix being at 44% of digital versus back in 19, where it wasn't so as we think about going forward. It does have an implication on the store fleet. I mean this business is about Omnichannel now we need to make sure we have the right size stores in the right locations.

Patients to support.

Bigger digital Halo within a certain market and Thats, how we look at each market that we're entering we want to maximize that omni business. So it absolutely has an implication and we'll be thinking about that as we go into the back half of this year. When we have those 240 leases up for renewal.

Great. Thank you.

And it looks like that's all the time, we have for questions today, I will turn the call back over to Fran for any additional or closing remarks.

Thank you. Thank you for participating in our call today I look forward to speaking with you in November when we report our third quarter results.

With that ladies and gentlemen, this does conclude your conference.

For today, we do thank you for your participation you may now disconnect.

Q2 2021 Abercrombie & Fitch Co Earnings Call

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