Q4 2021 Abercrombie & Fitch Co Earnings Call
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Good day, and welcome to the Abercrombie <unk> Fitch fourth quarter and year end fiscal year 2021 earnings call Today's conference.
France is being recorded.
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We will open the call to take your questions at the end of the presentation.
Ask that you limit yourself to one question during the question and answer session.
At this time I would like to turn the conference over to Pam Quintile Yano. Please go ahead.
Thank you good morning, and welcome to our fourth quarter 2021 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lukowski Chief Financial Officer.
Earlier. This morning, we issued our fourth 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 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 Companys filings Securities and Exchange Commission.
We will be referring to certain non-GAAP financial measures during the call additional details and a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier. This morning with that I will turn the call over to Fran.
Good morning, everyone I am excited to be here today to discuss our fiscal 2021 results.
<unk> that empowered us to achieve a nine 6% adjusted annual operating margin.
Our highest in over a decade and well above the five 8% target outlined at our 2018 Investor day.
But first I'd like to thank our global stores distribution Center and home office teams as well as our partners without you we could not have realized such significant improvements.
I'd also like to take a moment to send our thoughts and prayers to all of those impacted by the current situation in Ukraine.
Now onto our results first I'm going to discuss a substantial foundational changes made from fiscal year end 2018, which anchors to our 2018 Investor day through 2021 before turning to fourth quarter and full year results and our thoughts on 2022.
As a reminder, at our 2018 Investor day, we discussed the initiatives necessary to stabilize transform and ultimately accelerate growth. These included.
Optimizing our global store network, enhancing digital and omni capabilities, increasing the speed and efficiency of our concept to customer lifecycle and improving customer engagement through loyalty programs and marketing optimization.
As Covid hit and others were in survival mode, our balance sheet enabled us to double down on our initiatives as a result today, we are firmly in our growth states.
Let's take a moment to discuss.
Starting with global store network optimization over the past three fiscal years, we have removed one 5 million gross square feet or 23% out of our base to 228 closures, including 14 flagships.
The vast majority of closures were oversized abercrombie.
This has resulted in a reduction in annual store occupancy costs of $197 million or 31% since fiscal 2018, a huge shout out to our real estate team, who is rigorously evaluated every store in our portfolio and the role it plays.
But it's important to note that optimizing our footprint has not been solely focused on closures.
We continue to reposition each brand while evolving the experience to enhance our suite of omni tools, including purchase online pickup in store curbside pickup order in store ship from store and same day delivery.
At Abercrombie, which has a significantly higher digital penetration in hollister, reflecting the shopping preferences of its millennial customer base. We have added 65, new experiences over the past three fiscal years on average these are roughly 30% to 50% smaller than our heritage stores and better reflect the modern app.
Mcrobbie and Fitch to clean and open sight lines and improved functionality that supports the digital nature of our customer today.
Roughly 40% of Abercrombie stores are an updated format.
At Gen Z brand Hollister the team do is going to the malls as social activity with a newer and more updated store base. The number and size of stores has remained relatively stable over the past three years and our primary focus has been to open up and brighten the storefront and interior.
Currently around 60% of Hollister is around the updated format.
We also have a dedicated gilly Hicks space, each hollister globally, including 28 side by side location.
Simply put there has been a fundamental shift in how we think about the purpose of the store we no longer take a one size fits all approach with.
With tens of millions of customers in our database, we are quantitative and qualitative data to inform our approach to each market.
A great example is our recently opened Abercrombie South Port Chicago store at roughly 2300, selling square feet. It's one of our smallest footprints, yet offering only women's product, reflecting known demand in the area and thus far we are beating internal expectations.
We are excited to have added another highly productive customer centric store format will continue to explore different opportunities that reflect market specific nuances.
Needless to say I am thrilled with our progress we have shuttered under productive locations and new ways to meet our customers through enhanced shopping experiences both in stores and online.
And while closing stores took a meaningful chunk of sales out of our base. It was absolutely the right decision for the longer term health of our company and our brands.
We are ready to move forward unencumbered by a data and expensive store base that does not accurately reflect who we are today.
While there is no finish line, we have reached a pivotal moment for our company and our brands. We have exited our stabilization phase and are now on a path of growth with a continued focus on the Omnichannel brand experience, which includes both stores and digital.
In 2022 for the first time since 2008, we expect to see net store openings with a minimum of 50, new omni enabled experiences.
Set by an estimated 30 closures in square footage to be up in the low single digit range for the year. We will continue to maintain our discipline surrounding size location and economics. Ultimately, we believe that stores and digital are complementary brand experiences and that there is the opportunity to further increase digital sales, even as we introduce more store.
Occasion.
Turning to digital when Covid accelerated the shift to this channel the consistent investments we have made over the last several years enabled us to fulfill that demand.
Nancy Lee we executed against our long term plan of reducing occupancy to fund increased digital fulfillment in fiscal 2021, even as stores. We opened roughly half of our sales were digital versus about a third in 2018.
Now onto our third area of transformation speed.
In order to be nimble and stay on top of current and upcoming trends, we refined our design calendar rebalanced, our vendors and expanded countries of origin. This.
This has enabled us to move quicker and further improve the quality of our product looking ahead, we will continue to evolve our sourcing and transportation strategies to mitigate inventory risk by further diversifying production adjusting our product calendar and adding ports and carriers.
Last but certainly not least let's discuss customer engagement, where the most critical steps. Thus far has been clearly defining the purpose and competitive positioning of each brand.
With this lens our teams have evolved how we stay close to our customer and their ever changing needs.
Well there are so many great examples let's start with Abercrombie best dress guest franchise.
For those of you who haven't heard 2022 is predicted to be a record year for weddings with our best dress guest collection, we provide opening options for other wedding shower Bachelor and Bachelorette Party needs.
For our Gen Z customer who is now preparing for wedding season, just yet we collaborated with World Fortnite champion Bugah on game or training events and associated product. These programs Abercrombie and Hollister have been highly successful and speak to the innovative ways, we are gathering customer insights and executing to them.
With the DNA and positioning solidified for each of our brands. Our marketing teams are authentic engaging with their respective customers on the channels that are most relevant to them.
We continue to unlock and realize the power of social selling through Influencers affiliates and platforms, such as Tictoc, Instagram and like to know it or L. T K.
L T K one of the top global Influencer platform recently recognized abercrombie by including two pieces on its 2021, most popular items list the seamless tank body suit and the asymmetrical snapper police.
We also launched a highly successful mini me collaboration for kids with one of <unk> top performers sister studio. Additionally.
Additionally, we have tapped into social selling that is relevant to our team with social tourists hosting tictoc first ever live fashion show made by Gen Z for Gen Z.
As our product voice and experience have clicked, our target customer has noticed at fiscal year end 2021, we had roughly $34 million combined growth global followers across brands and social media platforms, and approximately $18 million royalty accounts, and just recently Abercrombie and Hollister.
Were voted America's best loyalty programs for 2022 by Newsweek and statistics and.
And here's the punchline. These initiatives have enabled us to increase sales shift investments from occupancy into marketing and digital while growing our adjusted operating margin by 570 basis points from fiscal year end 2018.
As we've evolved our branch operating model. We've also been working on our corporate culture, We recently launched our corporate purpose.
Being here for you on the journey to being or becoming who you are.
And we were named one of Fortune's 2021, Best places to work in retail and designated a best place to work for LGBTQ equality by the human rights campaign corporate equality index for the 16th year in a row.
I know I have spoken for quite a while our transformation initiatives, but it is a critical part of our story and the foundation for how we are going to thrive in the future.
Since our 2018 Investor day, we have become stronger smarter faster and more agile with five clearly defined and differentiate brands all of which have global growth opportunity.
So focusing on 2021, we achieved the following.
19% sales growth from fiscal 2020, and 2% growth from fiscal 2019.
A gross profit rate of 62, 3% 180 basis points above fiscal 2020, and 290 basis points of our fiscal 2019 with double digit AUR growth offsetting 370 basis points of freight cost headwinds compared to fiscal 2019.
A nine 6% adjusted operating margin our best since 2008, and adjusted earnings per share of $4 35, our highest since 2007.
And this year, we also became more aggressive with shareholder returns repurchasing 10, 2 million shares for $377 million and reducing total shares outstanding by 15%.
We were faced with many unexpected challenges throughout the year, but especially in the fourth quarter with the rise of a new COVID-19 variant elevated freight costs and major inventory receipt delays to name just a few.
For the quarter total sales were up 4% from 2020 and down 2% from 2019 with U S sales up 7% and 3% respectively.
We had significant unexpected inventory receipt delays from late November into December , leaving us unable to fulfill peak holiday demand.
Following the delays in the mid January Omicron peak, we ended the quarter strong as remaining received arrived in case counts declined.
The fourth quarter marked our seventh consecutive quarter of AUR growth with all brands regions and channels contributing to improvements on reduced promotions markdown and clearance activity.
Turning to brand specific performance Hollister was the most heavily impacted by inventory receipt delays store closures in EMEA exposure our teams navigated the challenges well in a good position for the spring season.
While there are many fourth quarter product standouts at Hollister jeans remained one of the best performing categories as girls and guys embrace newer silhouettes.
Even though jean's already a top three sales driver on an annual basis. We believe there is opportunity for more growth and look forward to sharing additional detail on our plans as the year progresses.
At Gilly Hicks, our customer respond well to underwear and sleep two categories. We added newness following the brand relaunch and continue to love our active collection Gilead go.
Reaction to recently introduced mens product remains strong and our first Gilly Hicks Standalone store is exceeding internal expectations with additional locations, including in the UK and Germany scheduled to open this spring.
At our newest brands social tourists, we're learning something new with every collection, it's been an amazing ride, creating this social first brand with the <unk> family. We are leaning into social tourists unique positioning which has helped us find creative ways to engage and attract customers and have applied these learnings to our other brands.
At <unk> adults the young millennial customer continues to rediscover the brand elevated fashion content in size inclusivity have been key drivers of success in the fourth quarter women's remain on the path to accelerated growth driven by must win categories, including genes, where sales were more than doubled and we see additional opportunity as well as <unk>.
<unk> sweaters and knits.
Mccormick brand Love is strong with customers in press continuing to support the theme that Abercrombie is back and we could not agree more.
Just last week, we had a soft launch of our active sub brand your personal best and response has been amazing. This is another great example of taking an accident on customer feedback.
At Abercrombie Kids are players life mindset continued to drive our product and our company dress assortment for holiday proved to be a standout.
Now onto marketing.
Over the last few calls we've discussed increased investments and I want to take a moment to highlight some of our successes.
At Hollister, we owned Black Friday on tick Tock, with 185 million impressions and a whopping 75% of Gen Z on Tictoc seeing an AD for Hollister ore Gilly Hicks.
We also hosted Hausers first virtual store on Snapchat, which launched on Black Friday and had a total of 30 million impressions and had eight weeks of storytelling with influencers and affiliates across tictoc in Instagram, including weekly Instagram live shops for holiday.
At Abercrombie adults Abercrombie and Fitch search volume grew 250% over the last year and 150% in Q4 alone we had our best social selling quarter ever with triple digit year over year growth, including a record cyber week for digital.
We are at such an exciting point in our journey and have the foundation firmly in place to accelerate growth.
To date, we've had a nice build in sales trend from Q4 levels and have seen a strong response to our spring assortments.
While we faced several near term headwinds, including ongoing Covid unknowns, the lapping of stimulus supply chain input cost pressure and the potential impact of geopolitical uncertainty, we believe that our target customers currently healthy engaged and hungry for the new fashion content, we are offering across brands.
Operationally, we are thoughtfully executing to growth we have the balance sheet to support our long term strategic view and are committed to profitable global expansion. We look forward to sharing more detail on our three year plan at our Investor Day. This June .
With that I'm going to turn it over to Scott to discuss our recent results in more detail and our outlook for 2022.
Thanks, Ryan and good morning, with 2021 coming to a close we wrapped up a critical multiyear period, where we made significant progress in transforming our operating model and improving our profitability profile like Fran I am extremely proud of how our teams have accelerated our transformation, while navigating a tremendous amount of personal and professional challenges over the past two years.
Turning to our results I'll start by covering Q4 and full year 2021 with references to 2020 in 2019, where applicable all finished with thoughts on 2022.
For Q4, we delivered net sales of $1 6 billion up 4% to 2020 and down 2% to 2019 as mentioned in our January business update we experienced significant unforeseen inventory receipt delays for the peak holiday selling period, primarily impacting Hollister and Gilly Hicks.
We are caught up on receipts and do not anticipate significant inventory supply issues for the first quarter.
We continue to execute against multiple initiatives to mitigate go forward inventory disruptions, including updating our product calendar and diversifying our ports carriers and countries of origin.
Compared to 2020 net sales were up 2% for Hollister, which includes Gilly Hicks and social tourists at 6% for Abercrombie which includes kits.
By region net sales increased 7% in the U S and decreased 4% and our international regions.
Compared to 2019 net sales were down six at Hollister up 4% at Abercrombie up 3% in the U S and down 14% internationally.
We continue to see stronger trends in the U S as compared to EMEA and APAC, where we saw ongoing disruptions from COVID-19 related lockdowns and restrictions.
Our largest market the U K was impacted throughout much of the quarter, while the Netherlands, and Austria experienced COVID-19 related closures at <unk>.
Northern markets have reopened sales have rebounded nicely.
Moving on to gross profit our rate of 58, 3% was down 220 basis points to 2020.
And up 10 basis points of 2019.
Compared to 2019, we saw approximately $80 million of freight inflation or 700 basis points up slightly from our previous $75 million estimate.
We fully offset these freight headwinds through higher AUR is across brands and channels, while reduced promotions and markdowns.
Excluding these headwinds the gross profit rate would have been up 710 basis points compared to 2019.
I'll now cover the rest of our Q4 results on an adjusted non-GAAP basis excluded from our non-GAAP results. This quarter are $2 million of pretax asset impairment charges, which adversely impacted results by approximately <unk> <unk>.
Last year, we excluded $16 million of pretax asset impairment charges, which adversely impacted results by 23.
Operating expense, excluding other operating income was $581 million versus $551 million last year and 566 million in 2019.
Compared to 2019 operating expense increased by 3% due primarily to investments in marketing higher digital fulfillment expense higher incentive based compensation, partially offset by savings in store related expenses.
Operating income was $100 million compared to $131 million last year and $125 million in 2019.
The tax rate was approximately 25%.
Net income per diluted share was $1 14, compared to $1 50 last year and $1 31 in 2019.
Turning to full year, 2021 results, which I'll cover on an adjusted non-GAAP basis due.
Due to the Covid driven impact on fiscal 2020, I will be using 2019 as the primary comparison year.
Full year results exclude approximately $12 million of pretax asset impairment charges, primarily attributable to COVID-19 .
Charges adversely impacted results by <unk> 15.
In 2019, we excluded $13 billion of pretax asset impairment charges, which adversely impacted results by <unk> 13.
For the year net sales were $3 7 billion up 2% to 2019, driven by record high digital sales, partially offset by lower store sales.
For the year digital sales penetration was 47%.
Gross profit rate was 62, 3% up 290 basis points in 2019.
For the full year freight inflation adversely impacted gross profit rate by approximately 370 basis points.
We fully offset this impact through higher AUR is on reduced promotions and markdowns as.
As a reminder, we did not increase ticket prices in 2021.
Operating expense, excluding other operating income was $1 $97 billion compared to $2 7 billion in 2019.
2019 results included $47 million of flagship charges, primarily related to the exit of our Soho Hollister flagship.
In 2021, we continue to tightly manage expenses, which represented 52, 9% of sales our lowest rate since 2007.
Compared to 2019 store occupancy was lower due to store closures and right sizes. This reduction was partially offset by higher digital fulfillment marketing and incentive based compensation expenses.
Operating income was $355 million or nine 6% of sales our highest operating margin since 2008.
The effective tax rate for the year was 13% net.
Net income per diluted share was $4 35.
Turning to the balance sheet, we ended the year with inventory of $526 million up 30% to last year.
Of the increase 10 points came from higher in transit due to extended shipping times and around 20 points came from higher freight costs.
Units on hand were approximately flat to last year.
Moving through 2022, we plan to continue to maintain a disciplined approach to inventories, while optimizing receipt timing with the assumption that the supply chain will remain challenged for the foreseeable future.
We exited the year in a strong financial position with cash and cash equivalents of $823 million and total liquidity of approximately $1 1 billion.
The cash balance at year end was $280 million lower than last year as we aggressively returned excess cash to shareholders in the form of share repurchases.
In the fourth quarter, we repurchased $4 1 million shares for $142 million, bringing the total for the year to $10 2 million shares for $377 million.
At year end, we had 53 million shares outstanding down 15% from the beginning of the year.
Capital expenditures were $97 million with roughly one third of the spend attributable to stores in the remainder of digital technology and maintenance needs.
While the store fleet for the year, we closed a total of 44 locations and opened 38, ending the year with 729 stores.
We continue to evolve our go to market strategy as we increasingly leverage with data unknown shopping behaviors of the respective local consumer and are excited about our planned store count growth in 2022.
I'll finish up with our thoughts on 2022.
In our outlook, we make assumptions on inflation for the year based on our current knowledge.
For the full year, we expect net sales to be up 2% to 4% from $3 7 billion in 2021 with the U S continuing to outperform EMEA and APAC.
We are cautiously optimistic we'll see a trend change in these regions as COVID-19 restrictions continue to abate.
As a reminder, our largest international exposure is the UK, followed by Germany and France.
Gross profit rate to be down around 200 basis points for 2021 level of 62, 3%.
Compared to 2021, we expect to see 300 to 400 basis points of freight and raw material inflation weighted towards freight in the first half and raw materials in the second half.
Our expectations assume we will offset a portion of these headwinds through higher AUR and a balance of select ticket increases and further reductions in promotional depth and breadth.
Operating expense, excluding other operating income to be up in a range similar to sales of about 2% to 4% for 2021 adjusted non-GAAP level of 197 billion also.
Outside of inflation expense increases are planned to be focused primarily on improving the digital experience modernizing technology and opening new stores.
Finally, we expect an effective tax rate in the high 20.
Assuming we deliver against these expectations, we expect our full year operating margin to be in the 7% to 8% range.
Regarding capital allocation, we expect capital expenditures of approximately $150 million with about half related to digital technology and half related to stores and maintenance.
For excess cash we plan to continue to focus on share repurchases pending market conditions and share price.
Entering 2022, we have $358 million remaining on the $500 million share repurchase authorization established in November 2021.
As Fran mentioned, we are pleased with our quarter to date performance for the first quarter. We expect net sales to be up low single digits for Q1 2021 level of $781 million.
Gross profit rate to be down around 400 basis points to 2021 rate up 63, 4%, reflecting around $65 million of incremental freight costs compared to Q1 2021, partially offset by improved AUR.
Operating expense, excluding other operating income to be up around 6% for Q1 2021 level of $436 million with approximately half of the increase due to lapping COVID-19 related rent abatements and government assistance recognized in Q1 2021.
We entered this year in a position of strikes and are excited to build on our recent success, while we expect to see high levels of inflation, we have evolved our gross margin and expense structure to a place where we anticipate absorbing a significant amount of this pressure and once again delivering operating margins well above pre pandemic levels.
Looking ahead, we plan to utilize our strong balance sheet and cash generation make ongoing investments in our customer experience and in the modernization of our systems to improve agility speed and further embed data and analytics in our decision making.
We view these investments along with our ongoing focus on our customer is critical to enabling long term global growth across our portfolio of brands we.
Look forward to discussing these themes as well as our multi year financial targets in more detail at our Investor Day. This June .
With that operator, we are ready for questions.
Thank you as a reminder, ladies and gentlemen, it is star.
Wanted to ask a question.
Our first question today comes from Paul <unk> of Citi.
Hey, Thanks, guys curious if you can give any more color on the sales guidance in terms of.
What you assume by geography or concept, just trying to understand which pieces of the business are likely to outperform versus on the perform that topline guidance.
For both first quarter and full year any quantification, there and I'm curious if you if you've seen any recent impact in your view.
European business, just with everything going on over there curious how the European customer is responding and then last just also curious if youre seeing any change in the promotional.
Cadence out there amongst the competition.
From your customer.
They might be resisting the higher AUR.
Yeah, Hey, Paul good to hear from you I'll start with the color on the sales guidance, so thinking about the year in total so up 2% to 4% this year thinking about that in two ways there'll be a balance new store. So it will be a net new store growth. This year, which is a great thing for the company, we've been reducing our store count for years and years and we're at a point now where we are turning that up the other.
Way, so really exciting on that side and then we'll have a balance of comps when we think about growth that we expect growth from both of our brands Abercrombie and Hollister likely Hollister will continue to or I'm, sorry, Abercrombie will continue to outperform hollister a bit, but we expect growth by both brands and really the same trends continuing across Geos expect the U S too.
Outperform the international regions again, we're cautiously optimistic that the international business will inflect here as we get through the worst of Covid, but time will tell and we're not going to we're not going to forecast that until it actually happens. So that's how we're thinking about the sales outlook and I would say those themes pretty consistent as you think about Q1.
I'll jump in on promotional cadence Paul So we look back on 'twenty one.
What an exciting year for us to reduce the promotions that we were able to take out of the business in 'twenty, one we're quite exciting.
Exciting accomplishment for all of US So we did see the consumer to your point.
Seven quarters of AUR growth and for recent quarters of double digit AUR growth. So he and she have shown some elasticity that is clearly based on the fact that our product voice and experience are resonating and we are keeping tight control on inventory, we will keep both of those things as.
As part of our strategy as we head into 'twenty, two and we'll continue to monitor this customer on a weekly basis like Scott and I deal with the teams just.
Just to close the loop on the EMEA current climate, Paul a lot going on obviously in the European region, It's a horrible situation with what's happening in the Ukraine.
We do not have a large exposure to that part of the world in eastern Europe and on the Western European side, we're kind of Comping. The reopening this year versus a pretty shutdown economy last year. So a lot of moving parts, there and our hearts go out to what's happening in that region.
Thank you guys. Good luck.
Thanks, Paul.
And we can now move on to Susan Anderson of B Riley.
Hi, good morning, Thanks for taking my question.
I'm wondering if maybe you can talk a little bit more about gilly Hicks on maybe give some color on the size of the brand now.
It's material and then the growth Youre expecting over the next few years and number of stores Standalone stores.
Potentially other new product categories, you Canadians that expand into such as like <unk>.
As we look forward.
Paces and love to talk about Gilly. So as you know we launched Gilly back in July and established.
A nice new platform for it which is finding you're happy place, which is really resonating with our consumer and we introduce guys into the brand as well so starting with that we carry guys now in our side by sides in our freestanding store in eastern and that is resonating nicely in selling nicely.
Gilead go we added during the pandemic and that has also been a nice growth vehicle for us. So gilly had a strong year excited about.
The product acceptance that were seeing as you mentioned so we did open up to eastern and have seen a nice response to that store, we're a test and learn culture here. So what we're learning from that store is enabling us to open up to that we named this morning. So we're opening up a store in the UK and Germany as well and we have a few more on the docket, we get to our Investor day in June .
<unk>, we're going to give more specificity about gilly.
Okay, great. Thanks, and then maybe you could talk about.
Have you seen I guess it sounds like denim is still very strong maybe dresses are coming back but have you seen I guess it is everything is selling very well, including fashion now or have you kind of seeing that pendulum swing towards more fashion and.
Is that what youre expecting for this year for maybe dresses to kind of take the strength.
Denim is still strong, but maybe not as strong as it had been.
Yes, it is actually our denim business and our dress business has been strong for quite a few years now we even talked back during the real height of the pandemic that we were selling fashion in both denim and dresses couldn't tell you exactly where everybody was where I get to but we certainly talked about the fact that that.
They were both resonating today that continues to be so we had a strong year in both those categories in both of our brands for 'twenty. One we're still seeing strength in both of them I mentioned during my script that we are looking at it could be a record year and weddings and so dresses are resonating in both brands. There is so much fashion and exciting new things happening.
Particularly in the denim area that the more newness in the more fashion, we keep sending out to our consumer the hungrier and excited they are about the product. So again just to sum that up both our strong and expect to continue to see that.
Great that sounds good good luck this year.
Thanks.
And we can move on to Dana Telsey of Telsey group.
Good morning, everyone. As you think about the digital business, which I believe is around 48% of sales or so where do you see that going in now that youre shifting to being a net store opened.
How do you.
How do you see the percentage is in the U S business mall versus off mall and go forward is your rent expense going forward lower than what it had been in 2019 or how you're thinking of occupancy costs. Thank you.
Hey, Dana good morning, I'll kick this one off.
Exciting digital business has grown tremendously for us from a third as you said to close to half of our business as.
As we think about the future of our business. Both are important digital will grow in stores will grow that is clearly the magic that makes our omni business.
As the stores have reopened we are actually seeing the channels rebalance a bit. So we haven't declared exactly where we think thats going but today at about 50% for both in growth for both.
Is how we see it.
As we think about on mall off mall, the south toward the Chicago example, we gave is a good one we're going to continue to evolve our toolkit as it comes to stores and how we approach each market. So more to come there I think we'll start to see a little bit more off mall than we've had in our past.
Going to the occupancy question, which was the last question we've been on quite a journey here on occupancy you've been on that journey with us our occupancy dollars are down close to $200 million. When you look back a couple of years, so that 2019 level at.
At this point, where we're baking that into our outlook for next year. It's a great starting point, our occupancy dollars will tick up a little bit as we become net openers of stores, but we're not going to lose that discipline that we've had here for the past couple of years, it's got to be the right size at the right location and the right economics, and if we get that we will sign the deal and so we don't.
Specs large oversized expensive stores like we've had in the past, but we're going to maintain that discipline go forward.
Thank you.
The next question comes from Matthew Boss of Jpmorgan.
Great. Thanks.
So Fran you sited topline acceleration in February relative to the fourth quarter.
Could you elaborate on trends that you're seeing across your brands any early reception that youre seeing just spring assortments.
And then Scott what is embedded this year for AUC or freight as we think about shaping the margin structure. This year.
Hey, Matt Good morning, So yes, we are excited to see.
Where are we where we are for February that's coming off of two.
The specific things, we talked a lot during ICR about the delayed receipts those continue to sell through from our consumers. So excited to see that in the reception to our early spring receipts have been strong and that's across brands and genders.
On the AUC as we think about the full year, we're looking at about three to 400 basis points impact on margin from AUC and I'd say that the front half is going to be weighted more towards freight as we lap lower freight last year. The freight really started to spike up in Q3, and Q4 last year. So we'll lap that with higher freight this spring and then the back half will start.
To see some of that cotton inflation flow through so in total, we're saying about $3 to 400 basis points from from cost increases into the AUC. We do expect gross margins to be down approximately 200 basis point. So our expectation is that we will offset a portion of that 3% to 400 basis points freight and raw material cost.
Headwind with higher AUR.
That's great color best of luck.
Thanks, Matt.
And our next question comes from Jonathan Kloppenburg of J, J K Research associates.
Hi, everybody good morning.
Morning.
Yeah.
Hi.
Just wondering about the freight assumptions for the year.
Thank you said Scott that the $65 million impact in the first quarter, how do you see in your 7% to 8% EBIT margin.
Assumptions.
For this year, how do you see fleet for the rest of the year is there is some opportunity for moderation later in the year.
And plan.
Sounds like Abercrombie is has really got some sharp momentum.
And it feels like it's a little bit better than Hollister.
I was just wondering is that just because productivity levels of being recaptured a enough or do you think that.
There's some other issues confronting haulage to perhaps the impact of Europe , having more restrictions in the U S. I'd just love to understand your view on the sales momentum.
Policy versus <unk>, and how we should think about that going forward. Thank you.
Youre welcome Okay. So let's start we'll go backwards, yet so starting with NF, Yes. The brand is on fire and it is so awesome that the brand is back I am sure you have been with us for it looks like it looks like.
It looks like many of the things I mean.
It's just it's really slow.
Quite well done.
So it's obviously hollister got to start much earlier in this journey and I will tell you that we're actually really excited about our hollister business.
Our U S business, specifically, let's focus on that for a minute. We were 6% ahead of 2019 in the U S and Hollister has a different composition to it so to your point, it's more store based it's more <unk>.
National based and we did see the delays that we incurred in December and January a higher penetration on Hollister and on Gilly. So both brands are resonating Nf <unk>.
Trend is a bit stronger than that Hollister, but hollister is still strong and we're excited they got their assortment architecture right. There denim business is terrific. So lots of good things happening in both brands.
Alright, Janet on the freight so that $1 million.
The 65 million that we called out for freight as it related to Q1, so year over year growth in freight in Q1 zooming out to the year getting back to that 300 to 400 basis points is our estimate right now for freight and raw material impact for the year I think we as well as pretty much everyone that shifts product across the ocean. We're all hopeful for some kind of moderation.
In the back half, but who knows when that might come we're not planning for it.
We're all hoping for it when we think about the operating margins for the year. Our sales were up 2% to 4% expenses will track against that so call. It expense leverage deleverage essentially nil and then we look at that gross margin in the middle we're expecting around 200 basis points decrease from 2021, So that's really what's driving the up the <unk>.
<unk> operating margins down from this year into next year, and we will see we're putting a realistic AUR out there we've had a really strong run on AUR seven straight quarters double digit for last year, we're expecting more on top of that but at this point, we're not expecting we would overcome all of that inflation.
Thanks, so much and good luck.
Thanks, John The next question comes I'm sorry. The next question comes from Kimberly Greenberger of Morgan Stanley .
Oh, great. Thank you so much good morning, I wanted to ask about.
The outlook for gross margin here in 2022 are you contemplating any return of some promotions either across the industry or in your stores or do you think you'll be able to hold all of those AUR gains that you bought last year and build upon those with.
The additional price actions in 2022.
Our expectation is that we will be able to hold those gains our expectation for the year just mentioned AUR to be up off of 2021 levels. We are increasing tickets in select places and we also think we have an opportunity to pull back on some additional promotions you know better than anyone I read your tracker very nice.
We were promotional all year last year, we are in a promotional business. So what we are trying to do as a company has pulled down our promotions what used to be a $40 to 50 are now a $30 20, and we've had great success with that so what we're going to do stepping back looking at the full year, we're going to deliver great product, we're going to keep our inventory and control and thats going to put us in the best.
Control of our promotional calendar. So the short answer is yes, we think we can hold those gains and build on them in 2022.
Okay, great. Thank you Scott and.
That.
It's a great segue to my second question, which is just on inventory how should we think about inventory levels.
Throughout the year 2021 do.
Do you expect a similar kind of increase to what we're seeing here in at the end of Q4 to be relatively durable over the next three quarters.
Yes coming into this year, just breaking apart that inventories were up 30, which have seen a lot of that across the industry Theres. Some interesting things happening out there in transit we all know the transportation lag now versus the past. So we're seeing higher in transit. This year and then we're also seeing some of those higher freight cost baked into that inventory level as we think about the units on hand, our units on hand.
And starting the year with flat to last year. So we're in a really good place continue to be clean as we look towards the rest of the year.
As we've gone through last year, specifically back to school and more into holiday. We left some business on the table due to some of those late receipts. So we're going to make sure that some of those receipts are here.
A better timeline than last year, all of the efforts that our supply chain and sourcing team have been making to ensure our receipts are properly timed in place and received so we're optimistic that we'll have better on hand inventories as we start some of these peak peak quarters in the peak holiday selling period.
Thanks, so much.
Our next question comes from Corey Carlo of Jefferies.
Yes.
Good morning, and thank you for taking my question.
I've mentioned that I believe 40% of Abercrombie stores are in updated format can you talk about the comp performance of these updated stores versus some of the older stores.
Hey, Chris It's Scott I'll grab this one yes. The performance of these stores has been good and it's been interesting to read I'd say, it's hard to read during COVID-19 here because of the wild nature of our stores in each region. So going back to 2019, when we were talking about this the store performance was really strong in these stores and <unk>.
Regardless of the performance. This is a significant step for the brand to modernize the experience in the stores to match whats happening on social and to match whats happening on our sites and our apps whenever we're marketing. So we will continue to remodel. These abercrombie stores will continue to close some of the legacy stores and repositioning the new stores. So excited about.
<unk> raising that 40%.
Rates of the modern store experiences because we just love where this brand is and where this brand is going.
Great and then just to follow up on stores.
Should we be thinking about the.
Idea that youre going to be a net store opening this year after years of closing stores.
Some flagships.
I believe remaining to be closed and the.
Continued evolution of digital.
<unk>.
The <unk>.
Continued expansion of your store fleet, just any color as it relates to.
Expectations for store growth this year.
In the context of kind of continued flagship closures and expansion of digital that'd be very helpful. Thank you.
Sure Hey, Greg the way to think about as being a net store open or is that it is an exciting new chapter for us we have not been a net store openings since 2008.
<unk> for us equal stores, plus digital and we believe that we have an opportunity to grow both our capital is invested in both as Scott just talked about I mean, these new smaller more efficient stores for us which are omni hubs right. The consumer comes to bring their pop in or do their DTC return our shop for new product is a winning formula for us.
So we need to have stores in order to be omni capable. So the way I would think about it just to sum it up is that being a net store opening for US is an exciting new chapter and it talks about the fact that our balance sheet is strong and that we have growth ahead of us.
Great. Thank you very much.
As a reminder, ladies and gentlemen.
I wonder if you'd like to ask a question.
Our next question today comes from Marie <unk> of UBS.
Great. Thanks for taking my question I wanted to ask about the store the new stores. You mentioned you plan to open 15, new stores and close 30 does that store closure include any flagships.
And then you also mentioned about the sales growth expectations being.
Being a mix of a higher comp store sales and expansion could you provide a little bit more details on that breakdown.
And lastly, <unk>.
Regarding marketing I mean, how much should we think.
Marketing as a percentage of sales should increase.
This year it was I mean.
Is the intention to continue investing.
At a higher pace than sales growth I think.
Alright, let me click down through these so let's start with the closures. We will have a couple of flagships runoff this year more than likely pending.
Pending any kind of short term extensions, but.
Told the estimate on the rest of the closures of around 30 will be across brands. We will continue to target those malls, where the landlord is not investing in our customers moving away from those centers as well as oversized stores and legacy stores. So.
Part of the Great thing about closing stores and opening more stores is repositioning that fleet into the question. We just discussed being able to close legacy stores and opened more modernized experience is a great thing for all of our brands I'll hop to the marketing question. So as a percent of sales we did increase marketing nicely. This year versus 2019 that was fun.
<unk> by those reductions in occupancy that almost $200 million that we talked about so really really nice to be able to position from a fixed cost to a variable cost number one but also give us the best chance to grow and win with our brands. So our marketing as a percent of sales we feel good where we were in 2021, so we'll probably keep that pretty level as we go forward.
On the sales comp as we think I missed the middle question can you repeat that again.
Yes.
Sales growth for guidance for the year I recall, you were mentioned you mentioned.
There's some contribution from comp store sales, but also the store expansion.
Could you give us an idea of how does that balance.
Yeah sure I'd say, it's a balance probably down the middle well get some comp growth half of it and some of that will come from.
New store expansion, we did close 38 stores last year, a 44 stores last year. So we'll see we'll lose those sales and we'll offset that with new store openings. This year, so call it about half and half.
And just very quickly the stores that youre closing are they bigger than the ones that you're opening.
Individual store basis more of that more than likely we have an estimate for the year not exactly a targeted store list, but we still have a portion of the fleet that is oversized and we will continue to work through that as quickly as we can.
Great. Thank you so much.
The next question comes from Marni Shapiro of retail Pritzker.
Hey, guys stores really looks fantastic and congrats on the new lunch in activewear it looks great.
Brian talk a little bit about what you've talked a little bit about this omni enabled I'm curious from your perspective, what that means to the company it sounds a little bit like using those sources of hub, what does that mean to the shopper or are there also.
Things happening in the stores the cash up still there for example, tinchy scan items or what's the long term thought about the omni and then I have one follow up question just on inventory.
So kicking off with omni I mean, what does it mean to us marni. It is our it is our future rate having a <unk>.
Right.
Our brand experience for the consumer so every touch point that he or she comes to the brand on it they have a seamless consistent experience is our is our angle and that's what we're that's what we're working to Scott brought up a little bit about this store.
So are we just opened up in Chicago, the South corridor.
A couple of things first it speaks to data analytics right, telling us that this consumer we had a big digital consumer in that market and she needed a place to pop and I've been at this point.
Your line or return or DTC purchases or just come in and shop. So as we continue to build out our data analytics and our omni.
Two things kind of hand in hand, and will help us continue to grow the business.
Yeah, Mike just to add on when you think about a store I would call. It maybe 80% of the functionality is going to be similar but then it's really on the build outs that other 20% how do we tailor that market to the local consumer.
Depending on the store or the market, we see pop ends at a much higher rate in some places and a lot of places, it's smaller and theres not a lot of digital returns and it's purely a shopping experience. So what we do as we tweak the store format to match that market. We have all the same functionality in those stores, but it depends on how much space, we get to those that functionality, where we put the cash rep. How many fitting rooms, we have.
So that's the technology, we put in the fitting rooms. So that is all the work that we're doing and really tailoring that experience for each market.
What does it allow you I know this is kind of a silly question given how lean inventories are right now, but what does it allow you to longer term carry less inventory in those stores as well.
Yes.
Okay, Okay, and then in some cases more right exactly okay, and then just a follow up on the inventory I know Hollister was more severely impacted than abercrombie.
As the inventory start to flow into the stores was highly seasonal if there's something you had to pack away or is that something you were able to flow through when the customer responded a full price anyway.
The ladder, so what's exciting about Ireland.
Brian We don't do a lot of skill.
Seasonal product, we do some mostly probably in our sleepwear category and so we made those decisions before we bought the product and we did have to pack away a little bit nothing nothing significant but the exciting thing was that we knew the receipts that were coming in and we had some testing on them and the consumer responded accordingly, so we are selling through those nicely as well as our new spring receipts. So both.
They're working fine.
Fantastic Best of luck with spring.
Thanks Marni.
As there are no further questions at this time I would like to turn the call back to Fran Horowitz for any additional or closing remarks.
Just want to thank everyone for joining us today.
Ladies and gentlemen that concludes today's conference call. We thank you for your participation you may now disconnect.
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