Q3 2021 Abercrombie & Fitch Co Earnings Call

November 23, 2021

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

If you have a question at any time during today's conference you may signal loss by pressing star one on your Touchtone phone, we will open the call to take your questions at the end of the presentation. We ask that you. Please limit yourselves to one question during the question and answer session.

And now at this time I'd like to turn the conference over to Pam can Toyota. Please go ahead ma'am.

Thank you good morning, and welcome to our third quarter 2021 on the earnings call. Joining me today are Fran Horowitz, Chief Executive Officer, and Scott Lukowski, Chief Financial Officer earlier. This morning, we issued our third quarter earnings release, which is available on our website at corporate Abercrombie 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 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 mentioned today.

A detailed discussion of these factors and uncertainties is contained in the Companys 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 and Investor presentation issued earlier this morning.

We will also be providing financial comparisons to the corresponding periods of fiscal 2020, and 2019, where applicable and due to the temporary COVID-19 driven store closures last year, we will not be disclosing comparable sales with that I will turn the call over to Fran. Thanks, Tim Good morning, and thank you for joining us today I am excited to share our third quarter results.

Which benefited from a strong back to school and discuss the fourth quarter, which is off to a good start but first I'd like to begin with a thank you to our global team our partners together, we actively navigated factory closures and transportation delays reduced our promotions in markdowns managed expenses and made strategic investments across.

<unk> technology and fulfillment to drive our business forward.

Due to that hard work and our ongoing commitment to delivering against our key strategic pillars, including fleet optimization digital and Omnichannel enhancements, a SaaS or concept to customer lifecycle and improved customer engagement, we delivered our best third quarter operating profit and margin in close to a decade.

Total sales rose, 10% to last year and were up 5% to Q3 2019, and we achieved our highest Q3 sales since 2014, despite industry wide supply chain constraints and the removal of $1 1 million gross square feet from our store base last year.

Our largest and most established market the U S outperformed with sales up 17% on a one year and 12% on a two year basis. It was wonderful to have more kids return to school and social activities resume for our Kid teen and millennial customer.

We executed well against the back to school and fall calendar, providing seasonally appropriate newness and outfitting options.

With compelling interpretations of the latest fashion trends, including wider leg silhouettes vegan leather and seamless body suits, all while maintaining the quality fit and value that we have become known for.

Our customers were highly engaged.

Australia by our average basket size and lapsed customer right of return both of which improved in the double digit percent range. In addition, we also acquired roughly 2 million new customers globally, all very positive signs regarding the health of our brands.

By channel store sales rose, 11% from last year and declined 20% from 2019.

Digital which for us carries a significantly higher four wall margin in stores grew 8% on a one year and 55% on a two year basis, representing 46% of total sales.

Results speak to higher AUR across brands and channels and reduced markdowns and promotions and improved full price sell throughs.

Q3 marked the sixth consecutive quarter of AUR improvement as our customers continue to adopt a buy it when you see it attitude.

This represents a major shift in mindset that has been years in the making as we have evolved each brand's positioning purpose perception and execution.

Looking ahead, we will build on our solid foundation and believe there is ongoing AUR opportunity at all of our brands.

Third quarter, AUR improvements were offset by higher supply chain related costs.

Right those pressures we grew our operating margin rate by 80 basis points on a one year basis, and 640 basis points on a two year basis.

And while we don't talk about it often publicly we could not have achieved these results without our corporate purpose of being there for you on the journey to being or becoming who you are which serves as our north star.

It ensures our associates and partners feel comfortable sharing their thoughts and evolving with us and that we listen and speak to our customers authentically, providing inclusive options for all of their lifestyle needs.

Part of that evolution with the recent hiring of a leader to drive our comprehensive ESG efforts forward simply put purpose is woven into all that we do including our critical pillars of product voice and experience.

Starting with product during the third quarter, we had Sony wins that it's hard to name just a few.

Denim, which is one of our most important categories continued to be on fire posting record breaking Q3 sales.

We received a tremendous amount of positive media headlines and publications that have billions of impressions and thousands of organic social media tagged cross platform all devoted to the fit quality and comfort of our Assortments.

Momentum built in non skinny and water leg styles, including the mom dads straightened flair for women a slim straightened taper gained popularity for guys as he continued to refresh his wardrobe.

Importantly promotions were once again down across brands with higher full price selling in addition to denim other top performing categories included dresses shorts pants, and knit tops and bottoms.

We are thrilled with the progress we've made with our product, which goes hand in hand with amplifying our voice and experience. Our marketing teams are leaders in the rapidly evolving digital space and are embracing new and emerging technology trends and engagement opportunities using voices and platforms that are centric to each of our brands.

Across the company, we continue to lead into the power of social selling and are refining strategies are tailor made for each of our brands and their target customers.

This includes live shopping events on Tictoc in Instagram exclusive social product launches in App store fronts across platforms augmented reality campaigns with Snapchat and robust affiliate Influencer program and our customer is responding.

Our unrelenting focus on digital is intertwined with providing the best Omnichannel experience for our global customers by meeting them whenever wherever and however, they choose to interact with us.

This focus is what inspires us to open our new West Coast, DC and introduce same day delivery.

Is all with you or one of our major internal initiatives to know them better and while them everywhere, which is about transforming our ways of working to ensure that everything we do is data driven and aligned to the moment that are most important to our customer in a world of endless ideas and rapid innovation.

Now moving on to the brands.

Alastair sales, which include Gilly Hicks and social tourists rose, 10% to last year and 1% to 2019 in the U S sales rose, 17% on a one year and two 7% on a two year basis.

I am proud that Hollister global Q3 sales were the strongest since 2013 and that U S sales were the strongest since 2012, especially given at Hollister in Gilly, an outsized impact on inventory receipts due to higher exposure to Vietnam production importantly sales were healthy with nice AUR growth.

During the quarter, we continued to authentically speak to our Gen Z customer about the topics that care about the most including their diverse backgrounds that identities mental wellness and one of their most passionate biggest passions gaming.

In September Hollister formally announced the launch of the Hollister good Derisk effective a long term program dedicated to supporting rising latinx creators from the fashion music and comedy verticals of Tictoc in Instagram and authentically amplifying their voices.

This first of its kind collective is meaningful given hollister is large <unk> customer base is a testament to the fundamental shift in how we engage our customers.

The launch which generate over 20 million PR impressions included a bilingual made for Tictoc album produced by the collective music creators.

The following month Hollister named Fortnite World Cup champion Bugah, its first chief gaming Scout.

That's what made waves across the gaming news cycle, garnering over 125 million PR impressions.

Gartner ship included a collection with Hollister is highly successful all day gameplay assortment, featuring a matching hoodie and sweat pants that he co created with the stance via social the collaboration boosted sentiment across our social channels and strong and saw strong sell throughs.

Looking ahead, Google work with Hollister to Scout Ryzen gamers for team Hollister, our new up and coming Gamer program. We are looking forward to a charity live streaming during giving Tuesday with proceeds going back to the Hollister confidence project and initiatives dedicated to promoting confidence in mental wellness and teens worldwide.

At Gilly Hicks, our updated brand purpose to bring our customers Theyre happy place is resonating. Our recently introduced men's products has been well received which is exciting given this a completely new and untapped customer for us at the same time, our existing customers continue to come to us for her must haves, including go active which grew to over 20% of sales.

Response to our stand alone and 23 updated side by side locations has been encouraging we.

We see runway to open additional stand alone and side by sides globally and to refresh the Gilly Hicks experience that lived within Hollister as we embark on our next phase of growth.

In addition to Gilly Hicks, we've often created results at our newest brands social tourists, which we view as another one of our growth vehicles. As a reminder, social tourists, which launched in May is a multiyear exclusive apparel partnership with social media Superstars, Charlie indexing Damelio.

In the third quarter. The Damelio series aired on Hulu, and a show Charlie Dixie and their family with social tourists into their daily lives. They highly highly viewed series, which hollister sponsored drove meaningful social impressions and engagement spikes in search demand in major PR Buzz.

Hollister also partnered with Hulu on an AD by which drove roughly 90 million ad impressions.

We've also continued to apply learnings and social tourists, particularly as it relates to tick tock and social selling to other areas of the company, making us even smarter faster and more creative.

Turning to Abercrombie, which includes kids Q3 sales rose, 12% compared to last year and 10% to 2019, representing our highest sales volume since 2015 and best gross margin since 2013.

In the U S sales rose, 19% on a one year and 18% under the two year basis. It has been absolutely amazing to experience a turnaround of this brand, which isn't a remarkably different place than it was just a few short years ago.

And kids, we had a great back to school season, we can bind insight driven marketing and paid media and towards the stress and guesswork out of shopping for parents that providing product that shine from both the fashion and a quality perspective.

We also found power and leverage <unk> affiliate parents voices with a first ever many knee collection spanning both the adult and kids brands that contains stylish pool in Agl's essentials for fall and was an immediate hit.

At adults, we launched our highly successful denim your way campaign in early August. This was the culmination of work that first again in January when we put out a call on social media to cast our customers in the campaign.

After receiving thousands of submissions, we chose 10 customers and brand fans to help drive fit and design decisions and to be predominantly featured in our denim at your way marketing.

The campaign and accompanying assortment exceeding glowing reviews as a perfect example of how we are listening to our customers to create products for their lifestyle needs.

Throughout the quarter. We also continued to leverage our relationship with Tic Toc, a highlight was our women's fall outfitting campaign flashes of fall, which generated over 140 million impressions. In addition, our abercrombie influencer team doubled down our efforts to maintain our leadership in the world of social selling.

Now looking to the fourth quarter, our customers responding well to our assortments, especially our cold weather offerings, including closing outerwear as well as occasion dressing in denim.

We've seen some early holiday shopping and also a fair amount of self purchasing as the weather has become more seasonal and our customer gears up for returned holiday activities and events.

The delays in the supply chain, we expect to deliver newness, leading up to the holiday peak, which will be a great learning around future flows and strategies.

The delays I am proud of our season supply chain team for helping us navigate these challenges and top of our great product I'm also excited about the social strategies, we have in place our stores and Dcs are well staffed and ready to go and I am confident that our store network and expanded suite of omni capabilities, including same day shipping will enable our customers to do their shopping.

Whenever wherever and however, they choose.

We are ready to compete and win for holiday and I am confident in our ability to deliver an operating margin between nine and 10% this fiscal year, which will be our best annual operating margin since 2008.

Looking beyond holiday, we continue to see significant growth opportunities across our portfolio of brands and we look forward to sharing more on our strategic vision of how we will scale our business at our next Investor Day, which we are planning for the first half of fiscal 2020 to stay tuned as we finalize the details and with that I will turn it over to Scott.

Thanks, Brian and good morning in the third quarter, we delivered strong results across brands and across the P&L. Our profitability continued to benefit from a transformative moves we made in our operating model and expense structure last year as the shift to digital accelerated.

For Q3 total net sales were $905 million up 10% to last year and up 5% to pre pandemic levels, while transportation delays increased during the quarter. Our teams were able to maximize the inventory on hand to deliver sales above our expectations.

Store sales rose, 11% on a one year basis and were down 20% on a two year basis at the same time total digital sales increased 8% compared to last year and grew 55% from 2019, representing 46% of total sales this quarter compared to 31% in 2019.

By brand net sales increased 10% for Hollister, which includes Gilly Hicks and social tourists and 12% for Abercrombie which includes kits.

As compared to Q3 2019, net sales increased 1% for Hollister and 10% for Abercrombie.

By region, we continue to see strong results in the U S with net sales up 17% and 12% on a one and two year basis, respectively. Despite having roughly 140 fewer stores and over 20% less square footage in our U S store base as compared to Q3 2019.

In the U S. Hollister was up 17% to 2020 and up 7% to 2019, while Abercrombie was up 19% and 18% respectively.

Outside of the U S. We continue to see a slower recovery with EMEA down 6% to last year and 7% for Q3 2019.

Our business was strongest in our largest European market, the U K, where we experienced sequential sales improvements the.

The UK customer has responded well to product has embraced our latest Nf location on Regent Street, which opened in September and is a fraction of the size and cost of our recently closed flagship.

This was offset by continued COVID-19, driven restrictions and impacts across key western European countries, including two of our largest markets, Germany and France.

And APAC sales were down 12% to last year and down 32% to 2019, as we face traffic headwinds due to ongoing COVID-19 cases inside China, and Hong Kong and slow vaccination progress in Japan.

<unk>, we believe that China was impacted further by overall geopolitical climate.

We continue to view international as a long term growth opportunity and are encouraged by the customer response to regional marketing and product distortions in both EMEA and APAC markets.

Moving on to gross profit our rate of 63, 7% was down 30 basis points to last year and up 360 basis points to 2019.

The result exceeded our expectations and included approximately 300 basis points of impact from higher freight costs and air utilization, which was at the low end of our 300 to 400 basis point expectation we.

We continue to see AUR growth across brands compared to 2020, and 2019 on reduced promotions and markdowns, while maintaining initial tickets.

We ended the quarter with inventory approximately flat to last year inventory on hand was lower than plans coming out of Q3 and was offset by higher in transit due to the extended Vietnam closures and increasing transit times.

Related to Vietnam, All factories are open and operating we are using air to catch up on these receipts and are encouraged by recent improvements moving product through the U S ports.

I'll cover the rest of our Q3 results on an adjusted non-GAAP basis excluded from our non-GAAP results are approximately $6 7 million and $6 3 million of pretax asset impairment charges for this year than last year, respectively.

Operating expense, excluding other operating income was up 8% compared to last year and up 1% to 2019 coming in at the low end of our expectation of up low single digits as we saw better than expected store and distribution expense and shifted a portion of our marketing spend to Q4 to better align with inventory flows.

In Q3, we saw an increase in store and distribution expense of 2% compared to 2020, and a reduction of 7% compared to 2019.

Compared to 2019 store occupancy was down approximately $43 million related to square footage reductions and renegotiated leases.

These savings were partially offset by increased shipping and fulfillment expenses on higher digital sales.

Marketing general and administrative expenses rose, 21% from last year, and 28% to Q3 2019, primarily driven by increased marketing investments.

Fran mentioned, we continue to drive strong customer engagement across our brands and we expect to continue reinvesting a portion of our occupancy savings and the digital media in Q4.

We delivered operating income of $79 million compared to operating income of $65 million last year and $27 million. In 2019. This was our best third quarter operating income and operating margin since 2012.

The effective tax rate was approximately 25% net income per diluted share on an adjusted non-GAAP basis was <unk> 86, compared to <unk> 76 last year.

As we continue to benefit from the evolve the operating model and the resulting higher profitability level. We're in a strong position to both invest in the business and return excess cash to shareholders.

We ended the quarter with cash and cash equivalents of $866 million and funded debt of $308 million.

During the quarter, we repurchased approximately two 7 million shares for $100 million.

Bringing year to date total share repurchases to about $6 1 million shares and $235 million.

Recently, our board of directors approved a new share repurchase authorization of $500 million, replacing the February 2021 share repurchase program.

In the fourth quarter, we expect to repurchase at least $100 million worth of shares pending market conditions and share price.

We continue to expect fiscal 2021, capex to be approximately $100 million.

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 five new stores, bringing the total to 23 for the year to date period.

And closed three stores for a total of 23 year to date.

For the full year, we expect the store count to remain roughly flat to last year pending ongoing negotiations with landlords.

I'll finish up with our thoughts on Q4, which we are planning as follows using 2019 as our comparison period.

Net sales to be up 3% to 5% from 2019 level of approximately $1 185 billion.

We expect the U S to continue to outperform EMEA and APAC.

On inventory, we are optimizing AUR on current inventory in our distribution center teams are quickly replenishing as inventory flows in a.

While the inventory receipt pattern will be different in the past, we have and we will continue to work diligently to minimize the impact on sales for the quarter.

Gross profit rate to be around flat to the 2019 level of 58, 2%, including an expected negative impact of approximately $75 million of freight cost pressure due to rising ocean and air rates as well as higher air deliveries necessary to catch up on the Vietnam factory closures.

Based on early customer response to holiday, we are optimistic in our ability to continue to reduce markdowns and promotions to drive AUR improvements to offset this headwind.

Operating expense, excluding other operating income to be up low to mid single digits for 2019, adjusted non-GAAP level of $565 million we.

We expect to continue to see lower store expenses, partially offset by higher fulfillment cost.

Similar to Q3, we plan to increase marketing spend compared to 2019, as we look to maximize holiday sales and build momentum heading into 2022.

Finally, we expect the tax rate in the low twenties.

We deliver against these expectations, we expect our full year operating margin to be in the 9%, 10% range our highest since 2008.

In closing we are excited to have delivered another quarter of profitable growth in Q3, and our laser focus on our focus on executing our strategies for holiday and beyond we will provide additional detail on our 2022 assumptions in our year end earnings call and with that operator, we are now ready for questions.

Thank you Sir once again, everyone that is star one if you'd like to ask a question. We will take our first question from Paul virtually with Citigroup.

Okay.

Hey, Thanks, guys curious within that gross margin guidance for the fourth quarter.

What are your AUR.

And how does that compare to <unk> in the third quarter and maybe if you can also kind of run through the the freight pressure that you're expecting in <unk> versus <unk>. Thanks.

Sure Paul I'll grab that one so yes, the gross margin for Q4, we'll see a little bit accelerated pressure versus what we saw in Q3 number one it's just a larger quarter. So we have more units flowing through and we will also see more of that Vietnam reopening pressure, where we're putting a lot of that product on air to get it here by the holiday peak. So in the outlook for Q4, we're calling it flat to <unk>.

<unk> thousand 19, Q3 was up about 360 basis points of 2019 and getting back to the AUR question. We believe that we can get the AUR.

On lower markdowns and promotions to offset that $75 million headwind in Q4 products has resonated well coming into the quarter from October and we're seeing that here in the November time period. So feel confident that we can offset that headwind here in Q4.

Got it thanks, Scott and I think you mentioned the shift in marketing can you just run through kind of what shifted out of <unk> and into <unk>.

As we learned more about the inventory flows in Q3.

We made a decision to move some of that marketing into Q4. So we shipped a small chunk of our marketing out of Q3 into Q4 to better align with those flows. So as Fran mentioned, we're loving what our teams are doing on social and we're going to continue to fuel those efforts. We love. The response that were getting in each of our brands, we called out Abercrombie and we will see some great things on snap and Tic Toc.

This week, so we're going to continue to fuel those efforts so that should help us here in Q4, but it's also going to give us a nice setup heading into 2022 and the important thing just had one last thing that you know as we are seeing a different flow of our inventory this quarter, which is kind of exciting and lots of things to learn from it that marketing will help.

Noticed by the customer that we're going to surprise and delight them all the way from Black Friday through Christmas with them with new deliveries and fresh new product.

Great. Thank you guys. Good luck. Thank you.

Next we'll go to Jay sole with UBS.

Great. Thank you. So much I was just wondering if you can give us an update on denim you mentioned some.

Denim is really strong you mentioned some styles that were.

Non skinny denim that really were working but I mean, where do you think we are in the denim resurgence I mean, this is sort of like the peak of it I mean do you think it could last another quarter or two the last another year or two how do you think about it.

Jay I would love to talk about denim is on fire, we just reported our highest.

Denim quarter in history, which is across all the brands and genders I mean, its super exciting. There's so many things happening in denim, it's hard to even pin them down but between to your point between the wider lags the lighter washes keys adopting them she's adopting them. This kind of a trend in denim has legs.

Unintended, but it is going to last quite some time and if you look at what happened with the skinny Jean that trend went on for a decade and we are just at the beginning of this trend we've been seeing such positive response to consumer and he and she both need newness in their wardrobe. So we expect it to continue for quite some time.

Got it okay, and if I can just ask one more about the <unk>.

Buy back.

With the authorization that's out there and where the stock prices I mean do you feel like now is a good time with the margins have really bounced back.

So far it's a good time to buy back stock, where do you feel maybe a little bit cautious Heather next year with tough comparisons lapping stimulus and all that that maybe it's better to hold onto that cash for that.

Yeah, Jay we have fundamentally changed this business started back with Covid last year in the middle of the year and the expense we were able to take out of the business and then the store occupancy that we removed in the back half. So our goal has been for years to reset the profitability of this company and we have done that so we are bullish on the stock.

As you can imagine on the company. So we have repurchased about $235 million. So far this year, we expect to continue that here in Q4, and as we mentioned our board put a new authorization for $500 million out there. We're in a great position to have the balance sheet to be able to do it with higher profitability levels, we're generating more cash and we continue to put that cash to work in the business and for shareholders.

Got it thanks, so much.

All right next we'll go to Susan Anderson with B Riley.

Hi, good morning, nice job on the quarter.

And I was wondering if maybe you could talk about your thoughts on your longer term EBIT margin goals as much as you can and Youre doing your analyst day next year.

But just wondering how much of the margin gains seen this year is sustainable longer term and is there still more opportunity to drive that EBIT margin over the next couple of years.

Sure Susan I'll kick this one off and then Frank can chime in but our goal back in 2017 was to take our 2017 margin of 3% and double that to six we're going to about triple that in more this year, if we deliver on our Q4 outlook. So it feels good here at Abercrombie to be talking about operating margins in the 9% to 10% range and we're not.

To talk too much about the long term, but we believe that a lot of these gains are sustainable but getting back to what I. Just mentioned, it's about this fundamental shift in our operating model. This acceleration of digital has been good we have done a great job cleaning up our store fleet a lot of those stores that were too big whether it's a chain store in a mall or a store in a flagship so pulling down that.

That occupancy has given us better profitability and also the ability to invest in marketing efforts as we become more of a digital business. So we like where the business is set up from a expense perspective, and we believe that these gains are sustainable.

Yeah, I would add to that is.

<unk> is driven by the transformation of this company and this company has a very different company than it was just a few years ago and the fact that our brands are firing in all cylinders and that their brands are just resonating getting that product voice and experience right.

Really it's proof point to the delivery that we're going to do for third quarter and the future that Scott just discussed.

Great. Thanks for the details and then if I could add one follow up just curious what youre expecting out of the international business for fourth quarter are you expecting similar trends as we saw in the third quarter.

It sounds like U K things are resonating there as things open up I know part of the other parts of Europe, we're starting to see that shut down and then Asia, obviously still having some issues.

Yes.

Now that we do expect the trends to continue heading into fourth quarter. We expect the strong performance in the U S to continue first three quarters of the year, we had double digit growth off of 2019 in the U S and that's with less 140 less stores than we had in 2019, so great progress there and the U K is our strongest country, which is good because it's art.

Largest country outside of the U S and I would say the.

The environment in the UK in the UK is the most similar to what's happening here in the U S. So we're excited to see some of those other countries in western Europe to open up.

You saw Austria in the in the news recently, we have a handful of stores in Austria. So those stores will be closed for about 20 days here, but in the meantime, as we're looking at that European and APAC business, we're going to continue to leverage that strength in the U S and we believe in the long term growth of both the APAC and EMEA regions. In fact, we just recently opened up a new store on Regent Street.

Abercrombie, which we're already seeing nice response to and that store is very much. The prototype of our go forward. It's a smaller location much less expensive build out and yet.

The customer experience is really resonating so we're excited about.

The opportunities in both EMEA and APAC.

Great Thats good to hear good luck this holiday thank you.

Next question comes from Dana Telsey with Telsey Advisory group.

Good morning, everyone. As you think about the occupancy expense leverage from the reset where are you in that how do you see that progressing through 2022 and are there any stores that you thought you would close that maybe weather sales pick up or more favorable lease negotiations is helping you keep that thank you.

Hi, Dana we made great progress last year, we got through a significant amount of those oversized abercrombie is within the mall as well as a big chunk of those flagships looking at this year, we're going to be around flat on store count. So a lot of that progress was made last year will be around flat. This year and we do expect as we go into next year and beyond will likely.

The net store openings, but the good thing is we're going to continue to reposition our fleet globally, whether it's the U S or international and make sure that we're getting rid of some of those larger sized stores and replacing those with smaller stores more of those omnichannel stores that we've been talking about so as we do that even as net openers of stores. Our goal is to keep our square foot.

Relatively flat or just increasing slightly in the years to come to keep that occupancy where it is today.

Thank you and just one quick follow up on price where are you in terms of raising prices is it across categories. How much is it and how do you see the promotional environment, how you're planning it for 2022. Thanks.

So I'm very proud to tell you that we actually have not raised our prices. This year, nor do we plan to for the fourth quarter, but we've been able to do is really reduce our promotions and what we referenced as discount to ticket has been we've made considerable progress in that we haven't been working on that for a long time to see six consecutive.

Quarters of AUR growth is really a testament to all of that work and how it's coming together.

<unk>.

I think the second part of your question was.

Q4 2022, yeah.

2022 we will discussing our fourth quarter call. Obviously, we're looking at things like inflation and the opportunities that are out there. We haven't made any commitments to that yet. So we will get back to you in the fourth critical for that one.

Thank you.

Alright, and once again Thats star one if you'd like to ask a question. We'll next go to Janet Kloppenburg with J J code a research associate it.

Good morning, everyone and congrats on a good quarter.

Yes.

I got on a little late I think you said that was $75 million in.

Yes.

Pressure in the fourth quarter did you say, what thats compared to the third quarter.

And I was wondering if you will.

You're guiding to a flat gross margin on a two year basis I was wondering if you're expecting.

AUR trends to continue to improve between a tweak huge waned or if you thought that maybe that was modest moderate because of us being in holiday in <unk>.

Promotions, perhaps picking up.

And as you look into next year I was wondering how.

You felt in the first quarter in the second quarter about freight headwinds some of the companies I'm talking to think that there'll be higher.

There'll be higher than the fourth quarter sequentially, others like urban last I felt that there would be some relief.

If you could help there would be great. Thanks.

Okay nice to hear from Janet Alright, let's start with the first question. The freight pressure in Q3 was around 300 basis points. So if you do the math are call. It $25 million 75 million you did catch that in Q4.

As you said, we expect to be flat on gross margin for the Q4 period. So yes, we assume that the AUR trends that we've seen throughout the first few quarters of the year here will continue into Q4, so that we can absorb.

Margin pressure here in Q4, not a lot to say about 2022, theres still a lot a lot to figure out here in Q4, as we finalize some of the air as we get the inventory in from Vietnam. So we'll see how much flows through here in Q4, and then we'll talk about the spring period I do see.

Forget which companies you have mentioned, but I do think that freight will moderate at some point I think we've seen some of the ocean rates coming down more recently in some of the indices that we look at so more to come a lot a lot of variables and a lot of moving parts here heading into the spring.

Okay, and just one per plan if that's okay.

It looks like this marketing investment is really paying off plan and Im wondering if you feel like.

At a level now that's appropriate or if you're seeing continued investments would be give you a nice return unless we can see.

Yes, you're absolutely spot on we are just thrilled with the results of our marketing I think you'll remember when I first got here, we barely had a marketing department and now we are industry, leading in both Abercrombie and Hollister and the results and the innovation that we continue to see is just incredibly exciting as we continue to see returns.

We'll continue to invest.

Stay tuned for today, we are going to have a tick tock takeover. It's the most important social media platform, that's out there and we're going to own it but the most important week of the year. So we are thrilled with what the teams have been doing and we will continue to monitor the investment relative to return.

Great Happy Thanksgiving.

You too.

Next we'll go to Mark all Shredder with Baird.

Hi, Good morning. This is Terry Goldberg on for Mark. Thanks for taking our question I wanted to ask further on the recently launched same day delivery across the U S stores that might have been the early learnings there and then how should we think about the longer term impact of digital sales and margins versus the other digital options such as buy online pick up in store ship from store.

Alright, so let's say, we are a leading omnichannel retailer and the most important thing that we do is listen to our customer and they told us at the same day delivery with a very important option for them just like last year. When they told us that curbside was important for them. So we're continuing to evolve all of our Optionality for our consumer we've seen week over week gains in same day.

<unk> in a really nice early response to it.

And the impact on margins longer term. This specific offering we will not have a material impact on those margins really like Fran just mentioned, it's just another option for our consumers to engage with us if they need something quick they have that option. So really excited about that rollout this year.

Great. Thanks for the clarity.

It looks like we have one more question, we'll take that from Marni Shapiro with retail tracker.

Hey, guys. Congratulations two questions first one is very important when does that you've talked about takeover start.

Now I'm going to be all right.

It starts today for both brands.

Excellent and then could you talk a little bit about you've done some really interesting things on product drops very aligned to this generation.

<unk> had to deal with all of these product delays did where any of the drops are new products and marketing that were supposed to hit for the fourth quarter will they not hit in the fourth quarter, where you are you able to repurpose some of this stuff into the first quarter what their product cancellations can you just talk a little bit about I guess, what kind of business you may have.

Left on the table because of the product delays in Vietnam.

It's exciting that the team can pivot honestly on a moments and thats the beauty of having obviously a digitally driven business. So we do not believe we have not had any specific delays on special product drop them, possibly referring to one of the most exciting ones that we did for Q3, which was booger.

Partnering partnering with <unk>.

<unk> at night World Champ, and having a product that's sold out within.

Very very short period of time was super exciting, but to the point being we have not had to delay any of the drops because of these deliveries.

Then test that's fantastic and then just one follow up are you seeing both.

Abercrombie, specifically lapsed shoppers and new shoppers come back to the brand yes.

Yes, we are both there.

I'm sure I know youre on social media, all the time, but hearing all the customers talk and all the social chatter about how excited abercrombie being back in all of the positive response that the brand has been incredibly exciting.

It's been a very warm welcome and best of luck for the holidays you guys. Thanks appreciate it marni.

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

I just want to thank everybody for joining us today I hope you all have a great holiday season, and we look forward to catching up in the new year.

And that does conclude today's conference we thank everyone again for their participation.

Okay.

So.

Sure.

Okay.

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Thank you.

Okay.

Yes.

Okay.

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

If you have a question at any time during today's conference you may signal loss by pressing star one on your Touchtone phone.

I'll open the call to take your questions at the end of the presentation. We ask that you. Please limit yourselves to one question during the question and answer session.

And now at this time I'd like to turn the conference over to Pam Quint Toyota. Please go ahead ma'am.

Thank you.

Morning, and welcome to our third quarter 2021 on the earnings call. Joining me today are Fran Horowitz, Chief Executive Officer, and Scott Lukowski Chief Financial Officer.

Earlier. This morning, we issued our third quarter earnings release, which is available on our website at corporate Abercrombie 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 1095.

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.

Which benefited from a strong back to school and discuss the fourth quarter, which is off to a good start but first I'd like to begin with a thank you to our global teams. Our partners together, we actively navigated factory closures and transportation delays reduced our promotions in markdowns managed expenses and made strategic investments across Mark.

<unk> technology and fulfillment to drive our business forward.

We executed well against the back to school and fall calendar, providing seasonally appropriate newness and outfitting options.

With compelling interpretations of the latest fashion trends, including wider leg silhouette, vegan leather and seamless body suits, all while maintaining the quality fit and value that we have become known for.

Our customers were highly engaged as illustrated by our average basket size and lapsed customer right of return both of which improved in the double digit percent range. In addition, we also acquired roughly 2 million new customers globally, all very positive signs regarding the health of our brands.

By channel store sales rose, 11% from last year and declined 20% from 2019.

Digital which for us carries a significantly higher four wall margin in stores grew 8% on a one year and 55% on a two year basis, representing 46% of total sales.

Results speak to higher AUR across brands and channels and reduced markdowns and promotions and improved full price sell throughs.

Q3 marked the sixth consecutive quarter of AUR improvement as our customers continue to adopt a buy it when you see it attitude.

This represents a major shift in mindset that has been years in the making as we have evolved each brand's positioning purpose perception and execution.

Looking ahead, we will build on our solid foundation and believe there is ongoing AUR opportunity at all of our brands.

Third quarter, AUR improvements were offset by higher supply chain related costs, but those pressures. We grew our operating margin rate by 80 basis points on a one year basis, and 640 basis points on a two year basis.

It ensures our associates and partners still comfortable sharing their thoughts and evolving with us and that we listen and speak to our customers authentically, providing inclusive options for all of their lifestyle needs.

Starting with product during the third quarter, we had Sony wins that it's hard to name just a few.

Denim, which is one of our most important categories continued to be on fire posting record breaking Q3 sales.

Momentum built in non skinny and wider leg styles, including the mom dads straightened flair for women, while slim straightened taper gain popularity for guys. As you continue to refresh his wardrobe.

Importantly promotions were once again down across brands with higher full price selling.

In addition to denim other top performing categories included dresses shorts pants, and knit tops and bottoms.

Across the company, we continue to lead into the power of social selling and are refining strategies are tailor made for each of our brands and their target customers.

This includes live shopping events on tick tock, and Instagram exclusive social product launches in app storefronts across platforms augmented reality campaigns with Snapchat and robust affiliate Influencer program and our customer is responding.

Our unrelenting focus on digital is intertwined with providing the best Omnichannel experience for our global customers by meeting them whenever wherever and however, they choose to interact with us.

This focus is what inspires us to open our new West Coast DC and introduce same day delivery is all withdraw one of our major internal initiatives to know them better and while them everywhere.

Which is about transforming our ways of working to ensure that everything we do is data driven and aligned to the moment that are most important to our customer in a world of endless ideas and rapid innovation.

Yeah.

Now moving on to the brands Hollister sales, which include Gilly Hicks and social tourists rose, 10% to last year and 1% to 2019 in the U S sales rose, 17% on a one year and 7% on a two year basis I am proud that Hollister Global Q3 sales were the strongest since 2013 and that.

U S sales were the strongest since 2012, especially given at Hollister in Gilly, an outsized impact on inventory receipts due to higher exposure to Vietnam production importantly sales were healthy with nice AUR growth.

During the quarter, we continued to authentically speak to agenda customer about the topics they care about the most including their diverse backgrounds and identities mental wellness and one of their most passionate biggest passions gaming.

In September Hollister formally announced the launch of the Hollister good Derisk effective a long term program dedicated to supporting rising Latin next creators from the fashion music and comedy verticals of Tictoc in Instagram and authentically amplifying their voices.

This first of its kind collective is meaningful given hollister is large Latin X customer base is a testament to the fundamental shift in how we engage our customers.

The launch which generated over 20 million PR impressions included a bi lingual made particular <unk> album produced by the collective user creators.

The following month Hollister named Fortnite World Cup champion Bugah, its first chief gaming Scout.

<unk> made waves across the gaming new cycle, garnering over 125 million PR impressions.

<unk> included a collection with Hollister is highly successful all day gameplay assortment, featuring a matching hoodie and sweatpants that he co created with the stance via social collaboration boosted sentiment across our social channels and strong and saw strong sell throughs look.

Looking ahead, we will work with Hollister to Scott Ryzen gamers for team Hollister, our new up and coming game. A program. We are looking forward to a charity live streaming during giving Tuesday with proceeds going back to the Hollister confidence project and initiatives dedicated to promote and confidence in mental wellness and teens worldwide.

At Gilly Hicks, our updated brand purpose to bring our customers Theyre happy place is resonating. Our recently introduced men's products has been well received which is exciting given it is a completely new and untapped customer for us at the same time, our existing customers continue to come to us for her must haves, including go active which grew to over 20% of sales.

Response to our stand alone and 23 updated side by side locations have been encouraging we.

We see runway to open additional stand alone and side by sides globally and to refresh the Gilly Hicks experience that lived within Hollister as we embark on our next phase of growth.

In addition to Gilly Hicks with awesome results at our newest brands social tourists, which we view as another one of our growth vehicles. As a reminder, social tourists, which launched in May is a multi year exclusive apparel partnership with social media Superstars, Charlie indexing Damelio.

Hollister also partnered with Hulu on an AD by which drove roughly 90 million ad impressions.

We've also continued to apply learnings from social tourists, particularly as it relates to tick tock and social selling to other areas of the company, making us even smarter faster and more creative.

Turning to Abercrombie, which includes kids Q3 sales rose, 12% compared to last year and 10% to 2019, representing our highest sales volume since 2015 and best gross margin since 2013.

At Kids, we had a great back to school season, we can find insight driven marketing and paid media and towards the stress and guesswork out of shopping for parents that providing product that shine from both the fashion and a quality perspective.

We also found power and leveraging affiliate parents voices with our first ever many knee collection spanning both the adult and kids brands to contain stylish pool in Agl's essentials for fall and was an immediate hit.

And adults, we launched our highly successful denim your way campaign in early August. This was the culmination of work that first again in January when we put out a call and social media to cast our customers in the campaign.

After receiving thousands of submission, which was 10 customers and brand fans to help drive fit and design decisions and to be predominantly featured in our denim your way marketing.

The campaign and accompanying assortment receiving glowing reviews as a perfect example of how we are listening to our customer to create product for their lifestyle needs.

Throughout the quarter. We also continued to leverage our relationship with Tic Toc, a highlight was our women's fall Outbidding campaign flashes of fall, which generated over 140 million impressions. In addition, our abercrombie influence her team double down our efforts to maintain our leadership in the world of social selling.

Now looking to the fourth quarter, our customers responding well to our assortments, especially our cold weather offerings, including closing outerwear as well as occasion dressing in denim.

We have seen some early holiday shopping and also a fair amount of self purchasing as the weather has become more seasonal and our customer gears up for returned holiday activities and events.

With the delays in the supply chain, we expect to deliver newness, leading up to the holiday peak, which will be a great learning around future flows and strategies.

On the delays I am proud of our season supply chain team for helping us navigate these challenges and top of our great product and also excited about the social strategies, we have in place our stores and Dcs are well staffed and ready to go and I'm confident that our store network and expanded suite of omni capabilities, including same day shipping will enable our customers to do their shopping.

Whenever wherever and however, they choose.

Thanks, Brian and good morning in the third quarter, we delivered strong results across brands and across the P&L. Our profitability continued to benefit from the transformative moves we made in our operating model and expense structure last year as the shift to digital accelerated.

By brand net sales increased 10% for Hollister, which includes Gilly Hicks and social tourists and 12% for Abercrombie which includes kits.

As compared to Q3 2019, net sales increased 1% for Hollister and 10% for Abercrombie.

In the U S. Hollister was up 17% to 2020 and up 7% to 2019, while Abercrombie was up 19% and 18% respectively.

Outside of the U S. We continue to see a slower recovery with EMEA down 6% to last year and 7% for Q3 2019.

Our business was strongest in our largest European market, the U K, where we experienced sequential sales improvements the.

The UK customer has responded well to product it has embraced our latest Nf location on Regent Street, which opened in September and is a fraction of the size and cost of our recently closed flagship.

This was offset by continued COVID-19, driven restrictions and impacts across key western European countries, including two of our largest markets, Germany and France.

And APAC sales were down 12% to last year and down 32% to 2019, as we face traffic headwinds due to ongoing COVID-19 cases inside China, and Hong Kong and slow vaccination progress in Japan.

<unk>, we believe that China was impacted further by overall geopolitical climate.

We continue to view international as a long term growth opportunity and are encouraged by the customer response to retail marketing and product distortions in both EMEA and APAC markets.

Moving on to gross profit our rate of 63, 7% was down 30 basis points to last year and up 360 basis points to 2019.

The result exceeded our expectations and included approximately 300 basis points of impacts from higher freight costs and air utilization, which was at the low end of our 300 to 400 basis point expectation we.

We continue to see AUR growth across brands compared to 2020, and 2019 on reduced promotions and markdowns, while maintaining initial tickets.

Related to Vietnam, all factories are open and operating.

We are using air to catch up on these receipts and are encouraged by recent improvements moving product through the U S ports.

In Q3, we saw an increase in store and distribution expense of 2% compared to 2020, and a reduction of 7% compared to 2019 compared to 2019 store occupancy was down approximately $43 million related to square footage reductions and renegotiated leases.

These savings were partially offset by increased shipping and fulfillment expenses on higher digital sales.

Marketing general and administrative expenses rose, 21% from last year and 28% for Q3, 2019, primarily driven by increased marketing investments.

Fran mentioned, we continue to drive strong customer engagement across our brands and we expect to continue reinvesting a portion of our occupancy savings and the digital media in Q4.

The effective tax rate was approximately 25% net income per diluted share on an adjusted non-GAAP basis was <unk> 86, compared to <unk> 76 last year.

As we continue to benefit from the evolve the operating model and the resulting higher profitability level. We are in a strong position to both invest in the business and return excess cash to shareholders.