Q1 2022 Abercrombie & Fitch Co Earnings Call
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Ladies and gentlemen, please standby good day.
And welcome to the Abercrombie <unk> Fitch first quarter fiscal year 2022 earnings call today's call is being recorded.
If you have a question at any time during today's conference you may see the laws by pressing star one on your Touchtone phone.
We will open the call up to take your questions at the end of the presentation. We ask that you limit yourself to one question during the question and answer session.
At this time I would like to turn the conference over to Pam quicker Leandro. Please go ahead ma'am.
Thank you good morning, and welcome to our first quarter 2022 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lukowski, Chief Financial Officer earlier. This morning, we issued our first quarter earnings release, which is available on our website at corporate 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 mention today.
Detailed discussion of these factors and uncertainties is contained in the company's filings with the 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, Thank you for joining us today to discuss our first quarter results.
<unk> earnings were going to approach things a little different.
Since 2018, we have dedicated a portion of our call to talking about the progress made in our key transformation initiatives.
Which we're anchor to our goal of doubling our operating margin from 2017 levels.
Last year, we not only achieved that goal, but we significantly surpassed it more than tripling our operating margin.
At our upcoming June 14th Investor Day, we will discuss the next phase of our corporate journey and how we will execute our forward plan from there we will update you regularly on our progress.
In the first quarter, we navigated another period of global volatility we remain focused on controlling what we can control and never lost sight of what's important to drive our business our customers associates communities and partners.
We exceeded our sales plan delivering our best Q1 revenue since 2014, despite several major headwinds, including the lapping of stimulus and a return to in person learning for much of the U S last March <unk>.
Global inflationary pressures significant COVID-19 restrictions in China, and the conflict in Ukraine.
For the quarter total company revenues rose, 4% year over year above our outlook for a low single digit increase.
<unk> continued to outperform rising 13% on top of 60% gain last year.
By region, our largest market the U S registered a 6% increase while international was flat.
EMEA accelerated from last quarter and last year benefiting from the reopening of our largest country in that region. The UK and APAC, China remained challenged due to COVID-19 related lockdowns.
Our global revenues were healthy customers continue to respond favorably to our product voice and experience and we achieved our eighth consecutive quarter of AUR improvement as we benefited from higher tickets and slightly lower promotional activity.
As a reminder, we implemented targeted ticket increase in the first quarter based on competitive pricing analysis.
We took advantage of colder weather conditions to push through the delayed Q4 receipts to ensure we were clean for spring Scott.
Scott will discuss this pressures in more detail, but we remain focused on navigating through these near term challenges, while delivering the right product at the right time at the right price.
Looking ahead, we expect freight and raw material costs to remain elevated we plan to tightly manage inventories and expenses in our accident opportunities to offset a portion of these costs.
We are carefully evaluating these opportunities and do not plan on trading areas that support our longer term growth strategies.
Now onto the brands.
Q1 represented a continuation of the Abercrombie brand's remarkable turnaround.
Abercrombie adults delivered its best first quarter sales since 2014, its highest Q1 EUR in brand history.
Benefiting from higher tickets and lower discounting.
Results were led by ongoing strength in North America, which posted its highest sales since 2012.
Although we did also experience a sequential improvement on international basis.
And while we have heard that the consumer is spending more on experiences.
Our millennial abercrombie customers coming to us to refresh their wardrobe as states get back out there.
And with an unwavering dedication to listening to our customers about the new trading styles and fits or looking for we've been able to expand market share.
And we're not just winning in one or two areas strength was broad based with multiple categories registering growth in women's denim dresses and knits were standouts, all delivering our highest Q1 sales AUR at over a decade.
In men's our target customers also take note of the changes we have made.
<unk>, which is our largest men's revenue driver were strong with growth in graphics sweaters and woven.
There is so much more market share opportunity to Abercrombie in March we launched <unk> or your personal best after hearing from customers. They want us to deliver our performance active line same dedication to fit comfort and competence experience in our regular assortment.
<unk> has received high praise from customers Influencers affiliates and media efforts fit fashion and function.
The launch is truly serves as a reflection of our personal best far exceeding expectations.
We sold out of over 25% of our Skus within weeks of the launch and have been quickly working to replenish.
The speed with which customers have embraced WPB gives us even more confidence in its future.
A big part Abercrombie success can be attributed to our marketing team.
Throughout the quarter that continued to tap into human powered brand buildings, our Influencer and affiliate network, which we view as a vital social commerce revenue stream.
In Q1, Abercrombie was the recipient of LTE case, most loved product awards in multiple categories.
Social commerce quarter ever with significant double digit year over year growth and achieved volumes that beat our previous record, which we just hit last quarter.
And we are not satisfied we intend to continue building on the rapid rise of this channel as the team innovates and events new possibilities.
We're excited for Q2 stay tuned for the third annual Abercrombie product collection co designed with our partners to Trevor project, an organization that provides a central services benefiting LGBTQ use in June we're set to launch a getaway inspired collaborations with two influencer friends of the brand Champagne and Chanel and dress up buttercup and <unk>.
To come will be bringing our popular curve was fit to both tops and bottoms and our <unk> line.
Now on to Abercrombie kids during the quarter, we experienced strong conversion in our record setting basket size are comfy dressy Assortments for Easter and spring break drove results. In addition, we had our best Q1 swim season ever and our franchise collections. The cool stuff ready for play active in midlife made for life Essentials were.
Well received.
Turning to Hollister, which includes Gilly Hicks and social tourists in North America, We delivered our second best sales results in 2012 behind only last year, even as we lap stimulus and the many back to school season in March internationally other trends improved dramatically from last year and last quarter. The business has not yet returned to pre.
Pandemic levels taken.
Taken together global sales were in line with our expectations declining 3% for the quarter.
We continue to emphasize our top 30 items and must win categories, which led the way in the first quarter and we experienced strength in women's dresses and fleece and men's woven woven and swim and denim our customer embrace newer wider leg fashion assortments, although skinny remains an important part of her wardrobe.
Social Commerce and affiliate growth continued to be key drivers of our success in February we wrapped our respected jeans campaign, which was done in partnership with lack of star and Gen Z favorite Marseille Martin.
Campaign outperformed benchmark goals drove an 11 million impressions and also one gen Z over on Tictoc with benchmark, beating engagement and comments such as now this is how you do an add.
During the quarter, we also launched our monthly Facebook likes shopping event, which drove social commerce sales up an average of 20%.
Now, let's talk about Gilly Hicks, where we continue to be excited about the global growth opportunity ahead customer response to our updated carve out and side by side locations, which incorporate key elements of our Standalone store has been very encouraging with these locations outperforming the balance of the chain. We're also bringing our updated through a concept to a global customer.
We recently opened our first Gilly Hicks Standalone Emas door, a few weeks ago in central overheads in Germany and plan to introduce more source throughout the year, including Carnaby Street in London. This summer.
Last but not least social tourists our newest brand hasnt hasnt engaged fan bases, providing valuable insights into up and coming fashion trends in the shopping habits of social first customers, which we've applied to the brand into our broader portfolio.
Looking ahead, there is a lot of excitement all three brands under the Hollister umbrella.
Partnership with Glisten and organization that works to make K through 12 schools safe and inclusive LGBTQ plus students, we will be launching our sixth annual Hollister Pride collection.
At Gilly Hicks, we have plans to expand our active lifestyle collection Gilead go which has consistently been our top performer since its launch and its social tourists. We are set to open a pop up shop on Melrose Avenue in Los Angeles, which will be the brand's first standalone experience. The pop up will feature always on social content and programming monthly activations, including.
Omar Influencer events, and PR engagements and visits from Dixie and Charlie to meet customers so exciting.
Before turning it over to Scott I want to take a moment to discuss our thoughts on the health of our global consumer.
It is an interesting time the weather has started to become more seasonal and collectively it seems as though we are ready to return to some form of normalcy.
In our largest market. The U S. Unemployment is currently low wages are high energy hungered to participate in many of the social activities that were missed over the last two plus years.
However, we are in an extremely inflation next year.
Thing from food to gas is costing more and we expect those pressures to weigh on consumer confidence.
We are keeping a close eye at each of our respective consumers and how they are being impacted and responding with five distinct brands. We will not take a one size fits all approach, we will stay close to our customer and have the ability to quickly recalibrate, reflecting their unique stage life activities and pressure points.
Internationally, while encouraged by recent improvements in EMEA, we're cognizant that our European customers faced with similar inflationary pressures and is more directly impacted from the situation in Ukraine.
Across the globe. We know there are a lot of options on where to spend and as always we will focus on offering a compelling and inclusive product voice and experience for each of our respective customer bases with a commitment to fashion fit and quality.
We remain focused on profitable growth leveraging strategic plan promotions and we intend to tightly manage expenses with the Gulf offsetting a portion of freight and raw material inflation.
In closing I would like to reiterate my confidence in our future. We are staying close to our customer and executing to our proven playbook with our strong balance sheet. We are well equipped to navigate the current environment and its challenges with clearly defined positioning in each of our brands remain focused on our long term opportunities.
Collecting the successful execution of our key transformation initiatives, we believe that we are stronger smarter and faster than ever before and have it foundation firmly in place for the next phase of our corporate journey and are always forward plan, which we look forward to sharing in more detail at our June 14th Investor Day.
That I will turn it over to Scott.
Thanks, Brad and good morning.
Over the past several years, we have been providing financial comparisons on a one and two year basis.
This quarter, our discussions will only focus on the year ago period.
Now onto Q1 results in the first quarter, we delivered net sales of $813 million, our highest Q1 since 2014.
Sales were up 4% to last year ahead of our expectation coming into the quarter for a low single digit increase despite an estimated combined 100 basis point adverse impact from foreign currency volatility and the Covid driven lockdowns in China.
Net sales were above expectations at Abercrombie, which excludes kids.
I think 13% compared to 2021 and in line with our expectations at Hollister, which includes Gilly Hicks and social tourists declining 3%.
This compares to prior year growth of 60% and 62% respectively.
By region net sales increased 6% in the U S and we're flat internationally.
Our international EMEA sales increased year over year as Covid related restrictions were mostly lifted in our larger markets.
Our biggest country in EMEA the U K led results. Although we were pleased to see year over year improvements in Germany, and France later in the quarter.
In APAC, China remained a challenge with the prolonged COVID-19 related lockdown in Shanghai, which is one of our largest markets in the region.
Moving on to gross profit our rate was 55, 3% versus 63, 4% last year, we continued to increase AUR registering our eighth consecutive quarter of AUR gains driven by reductions in the depth and breadth of promotional activity and selective ticket increases.
We talked for the first time this quarter.
Thank you our growth was more than offset by higher AUC is reflecting two factors.
First higher than expected freight costs.
In total freight costs were approximately $80 million above last year, and roughly $15 million above our estimate.
In the current highly volatile global supply chain environment, the estimated freight rates in our outlook proved to be lower than actual rates.
Second we made the decision to take advantage of the unseasonably cold temperatures to proactively accelerate the sell through of late holiday goods in Hollister, and Gilly Hicks, which as a reminder has the highest exposure to Vietnam related receipt delays.
These clearance sales came with a lower gross margin than our spring goods, causing a reduction in our Q1 rate.
Ending the quarter, our inventory is in a good position in all brands.
Looking forward, we expect the impact from both of these factors to moderate in Q2 and beyond as we lap rising freight rates from last year and carryover inventory inherently becomes a significantly smaller portion of our sales mix.
Moving on to the health of our inventories we came into Q2 with our in stocks in a much better place as we realize the benefits of the multiple adjustments made to our product and sourcing playbooks to ensure timely deliveries.
These efforts include diversifying carriers in ports of entry adjusting our product calendars and further diversify our countries of origin.
We expect these collective efforts to result in a more predictable inventory flows pending additional unforeseen shocks to the supply chain.
We ended Q1 with units up 10% off a multiyear low last year and total inventory up 45% with higher freight costs and in transit inventory each contributing around 17 percentage points to the increase.
As we look to the rest of the year, we expect inventory levels to remain above last year as we flow product and early to guard against potential supply chain disruptions. This compares to last year, where we saw inventory receipt delays increase throughout the year.
I'll now cover the rest of our Q1 results on an adjusted non-GAAP basis excluded from our non-GAAP results. This quarter are $3 million of pre tax asset impairment charges, which adversely impacted results by approximately <unk> <unk>.
Last year, we excluded $3 million of pretax asset impairment charges, which adversely impacted results by <unk> <unk>.
Operating expense, excluding other operating income was $460 million compared to $436 million last year with approximately half of the increase due to lapping COVID-19 related rent abatements and government assistance recognized in Q1, 2021, and the other half related to investments in marketing and higher digital fulfillment expense.
We had an operating loss of $6 million compared to an operating income of $60 million last year.
The effective tax rate was nine 3%.
Net loss per share was 27 <unk> compared to net income per diluted share of <unk> 67 last year.
Taking a look at the balance sheet, we ended Q1 with cash of $468 million and liquidity of $783 million.
During the quarter, we made further progress in utilizing excess liquidity with continued returns to shareholders through share repurchases in the first quarter, we repurchased approximately three 3 million shares for $100 million.
At quarter end, we had 54 million shares outstanding down 19% from the start of 2021 and approximately $258 million remaining under our previously authorized share repurchase program.
We remain committed to putting excess cash to work and expect to continue to focus on share repurchases pending market conditions share price and our ability to accelerate investments in the business.
On investments, we expect fiscal 2022, capex to be approximately $150 million with about half related to digital and technology and the other half related to stores and maintenance.
As a reminder, we expect to be a net store opening this year for the first time in over a decade and now expect to open approximately 60, new stores. This year up from our prior assumption of 50 new stores.
These openings will be weighted towards the back half.
This year, we have roughly 250 leases up for renewal around 33% of our base, which is higher than the last few years, when we were closer to 25%.
In line with our prior projections, we expect to close around 30 stores. This year pending negotiations with our landlord partners.
I'll finish up with our thoughts on the remainder of the year as noted in our press release, we are updating how we provide guidance going forward, we will provide a sales and operating margin outlook.
The reasoning is twofold first this approach better aligns with our industry peers second with the current and likely continued volatility in freight and raw material costs, we expect to flex operating expenses in response to unforeseen swings whether positive or negative.
In our updated outlook, which replaces our previous full year outlook, we are making an assumption for inflation related pressure on consumer demand and also that freight rates will remain at peak levels for the remainder of the year.
From a supply chain perspective, our outlook does not anticipate a similar magnitude of inventory delays as experienced last year due to the Vietnam shutdown, but.
But we are closely monitoring the lockdowns in China.
For the full year, we are planning as follows net sales to be flat to up 2% to 2021 level of approximately $3 7 billion.
Embedded in this outlook as a combined estimated adverse impact of approximately 200 basis points from foreign currency and inflationary pressure on consumer demand, partially offset by outperformance in Q1.
Operating margin in the range of 5% to 6% down from our previous range of 7% to 8%, reflecting an estimated combined 200 basis point adverse impact from higher freight and raw material costs foreign currency and lower sales.
And an effective tax rate in the mid thirties.
For the second quarter, we are planning as follows net sales to be down low single digits to 2021 level of approximately $865 million.
Embedded in this outlook is an estimated adverse impact of approximately 300 basis points from foreign currency and Covid related Lockdowns in China, and an approximately 300 basis point adverse impact due to an assumed inflationary pressure on consumer demand.
Operating margin in the range of 3% to 4% with a year over year decline driven by higher freight and raw material costs.
And an effective tax rate in the mid to high Thirty's as the rate remains sensitive at lower levels of income.
As we look to the remainder of the year, we intend to balance near term profitability with long term strategic investments.
While we do not expect to fully offset freight and commodity headwinds real time, we do expect to drive efforts to reduce the impact on profitability, including but not limited to managing inventory flows by region to ensure we maximize topline during our peak selling periods strategic.
Strategically increasing tickets and reducing the depth and breadth of promotions to drive AUR growth and.
And prioritizing customer facing spend and strategic long term investments, while reducing non customer facing expenses. We believe we must continue investing for the long term specifically in our people store experience and advancing our capabilities in digital data and technology.
To finish up we believe our brands are positioned well for the summer season and beyond we are confident in our evolved business model and our current expectation to deliver an operating margin above pre pandemic levels despite significant inflation.
We look forward to sharing more with you at our Investor day in a few weeks with that operator, we are ready for questions.
Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad just keep in mind, if you're using a speakerphone make sure. Your mute is released so that should look for each of our equipment. Once again for questions Today's star one.
We will begin with Dana Telsey with Telsey group.
Good morning, everyone.
You think about the Hollister business I think down around 3%, what's the game plan and how you're looking at Hollister and growth go forward and then you talked about the inflationary impact on demand that Youre planning go forward in this.
The challenging environment now, how you're breaking that out how you're thinking about promotions and markdowns going forward given the uncertainty of when inventory arrives and does it differ by brand or region. Thank you.
Alright, Savannah, Hey, it's Scott I'll kick this one off alright lets start with the inflationary impact on demand. So yes, as we think about coming through Q1 happy with our results in Q1 plus four two.
Last year solid growth we.
We did see some of that some of those impacts that we talked about sneaking in late in the quarter. One is foreign currency, which we've also in the U S. Dollar strengthened pretty materially recently, so that started to get us towards the end of the quarter.
Around a point off of that Q1 growth as we think about Q2, we have some of those same impacts carrying over we have the foreign currency impact and China will hit us for about 300 basis points in Q2 versus last year, and then we're adding about 300 basis points based on this inflationary impact on the consumer and what that does is it backs us into.
Kind of where we're operating quarter to date here.
With all of those factors embedded in were just slightly negative here coming into the quarter for the first three weeks. So we're going to make the assumption that things are going to stay the same not get any better not get any worse because that's the data that we have today, obviously, the consumer is up against pretty dramatic inflation here and we'll see how that how that plays through and we will be doing everything we can deliver in gray.
Products, great marketing and great experience to offset that but we'll see how that plays out and then before I kick it over to Fran just on Hollister.
Minus three in Q1 was expected Hollister did have a tough comp as we think about last year up against that many back to school in March that March time period. So that was the start and I'll kick it over to Fran.
Scott So data on Hollister, just to I guess sort of echo a little bit with Scott said. So we are we continue to be pleased with our U S performance in Hollister.
It was up 6% and we are seeing strong acceptance from the consumer.
Product so as Scott said, you have to parse the brand apart a little bit we have our U S business, which has been strong with good through 'twenty one.
Much higher penetration for Hollister from an international perspective, so APAC clearly.
A tough go there with the shutdowns from Covid in EMEA coming coming back and we're starting to see some some nice opportunity happening there as well. So we're focused on the consumer we're focused on our top 30.
And more to come we're looking forward to back to school.
Thank you.
Now moving to a question from Cory <unk> with Jefferies.
Hi, good morning, and thank you for taking my questions. Firstly can you discuss some cost savings initiatives that you have in place to help mitigate margin pressures that you are witnessing and then secondarily, how should we be thinking about the EBIT margin cadence throughout the rest of the year. It would seem that youre embedding an improvement in the outlook given the <unk>.
Performance the <unk> guide of three.
3% to 4% and the full year guide of 5% to 6% EBIT margins. Thanks.
Yes, Hey, Cory I'll grab this one so I think I'll start with EBIT margin really all ties together. So Q2, yes, so 3% to 4% down from last year really driven by those year over year freight cost as we think about the full year being at 5% to 6% based on the seasonality of our business. We tend to have more sales in the back half and we can get much better leverage on the expense base in the back.
Specifically in Q4, so what we are focused on is number one.
Looking at expenses anything that is non customer facing those discretionary expenses and pausing some of those but we are not going to step back from some of the key expenses, we need to drive the top line is that that is marketing and then also some of these strategic investments that we're making for the long term in digital and technology and people, we're going to continue on the path with making those those investments because.
There are key to the long term in the midst of short term inflationary issues. We're also going to look up and down the P&L, you're going to continue to drive AUR growth. We just had our eighth consecutive quarter of AUR growth.
Costs are coming in faster than we can take up the AUR, but very pleased with the AUR growth that we've seen this year. So far on top of strong double digit AUR growth back in 2021. So we're going to continue on that path, but it really comes down to number one great product, great marketing and let's keep our inventory balance and check and we feel comfortable with our inventory levels at this point.
Understood. Thank you very much.
Now moving to a question from Paula Hughes with Citi.
Okay.
Hey.
Thanks, guys I'm curious, how you would characterize the pricing environment in each of your regions and your ability.
<unk> to pass through higher prices compared to how you were thinking.
About that opportunity just three months ago.
And then just curious on the inventory.
Give a little bit more detail, Scott, where you expect that number to shake out at the end of <unk> and what we should expect for the balance of the year.
Hey, Paul Good morning, I'll start with the first question on pricing. So it's exciting we just finished our eighth quarter of consecutive AUR growth.
And in fact that was on top of last year's double digit growth. So that really tells us that our consumer is responding to our price.
Product, our voice and our experience. So we have been able to see that pushed through we've also seen an opportunity to be less promotional than pre pandemic, which has us an exciting opportunity for us.
We believe that we have continued opportunity to see AUR growth through the balance of the year.
Alright, let's move onto inventory, so thinking about inventory I, just want to pause real quick and reiterate Q1 levels. So up 45% to last year, we have units up around 10% that is absolutely purposeful we are bringing in units faster earlier than we've wanted to in the past because of the supply chain delays, so happy with where our inventory is too.
Today, our best in stocks that we've seen since back in 2019, as we think about going forward that trend will continue we will continue to bring in inventory early to make sure. We can hit the peak selling period, specifically in back to school and holiday. So I expect inventory levels to be up in Q2, and Q3, and then start to right size more towards Q4, whenever we lap really.
Catching up those significant delays that we saw in the back half of last year, so comfortable with the the receipt plan that we have in place in the end whenever you take a zoom out that's really what matters and we're going to bring that inventory in a little earlier than we would have in the past based on what's happening in the supply chain.
Got it and Scott just to follow up on when we look at your full year guidance for sales how much of that is AUR driven versus versus units.
Yes, there's a piece of AUR and there's a bit of units I'd say, it's a little more tilted towards AUR and units will kind of bounce around.
The inflationary demands on the consumer here, we're going to be prudent in how we forecast both top line and the ability to pass through AUR and look at those items as upside to our plans as we've laid out.
Thanks, guys. Good luck.
And as a reminder, everyone if you'd like to ask a question you can press star one on your telephone keypad.
We'll now move to our next question, which will come from Janet Kloppenburg with J J K research.
Good morning, everyone.
Thank you for all the detail this morning.
A couple of questions Fran you seeing AUR gains at Hollister as well as <unk>.
And we're seeing.
The trend towards slightly dressier product sales being stronger than casual.
Like shorts and Tees, maybe I was wondering what you saw in your business and if you think that better positions <unk> versus Hollister and first Scott.
Just wondering.
If you expect it.
Any AUR pressure coming from the competitive environment. I know you said you expect AUR to be up for.
For the rest of the year, but it does feel like promotions in the U.
Youre sectors are starting to tick up around you and I am wondering.
Given what I see in the inflationary pressure that you referred to whether or not you think that that may impact.
The.
While opportunity and just lastly on <unk> do you expect it to remain elevated in the second third and fourth quarter as it was in the first quarter.
What's the trend outlook there. Thank you.
Okay, let's see where we want to let's see what we wanted to get started and let's start on the dressing room product versus agile. So what's exciting about our brands is that we have various categories in both of our brands and opportunities to really wanted Alan those categories right, depending upon what we're hearing from our consumers staying close to our customer. So if you start with Abercrombie.
Your point, we're selling lots of different categories that point to that customer wanting to get back out there.
That 96 hour weekend that we always reference for that consumer and really dressing them for all of those occasions as well as getting back to work. So we have an opportunity in dresses and our woven pant in our woven top all resonating really nicely the hauser customer as well so he and she may be more casual shorts and T shirts, but you know what they have events to go to.
Also they have graduation, they have prime weekends. So we're seeing a nice dress business and there is another good support to both businesses having opportunity okay.
Okay, Jay and I will take through the other so AUR gains at Hollister. So AUR was down in Q1 at Hollister and really getting back to that point around taking advantage of the cool weather and really pushing through some of that carryover inventory.
Then we expect it to in our outlook. So that's a good thing we finished the quarter inventories in a good place at Hollister in Gilly got through a big chunk of that late arriving inventory as we think about freight I'll go to that one next.
We're assuming it's going to remain where it is for the rest of the year I think a lot of a lot of us are optimistic that we'll start to see a little bit of relief in the back half, but who knows we've all been thinking that for the last couple of years. So we're just going to assume it stays where it is the one benefit we will see on freight is that we will start to lap the heavy air usage that we were call it forced.
Into with the Vietnam closures last year, so that'll be a tailwind as we get into Q4 and beyond because we saw a lot of that airfreight hit in Q4, and then actually a lot of that airfreight from an accounting perspective hit US here in Q1 as you flow it through the inventory balance and the last piece is AUR pressure from the competitive set.
I would say is we're looking at it it's not something that drives our decision, making we have been promotional throughout this entire cycle and have still been able to take up our AUR on a double digit basis, we will remain promotional going forward that is part of the business that we're in it's just being smarter with the promotions, reducing some depth.
Reducing some breadth and being able to pick up AUR to offset some of this inflationary pressure.
So we have separate anytime yep.
But we've said this many times.
Our AUR pressure promotional stance is based on our consumer right our supply or demand, what we're seeing with our customer and not really based on what's happening with the competition might staying close to our customer is what's most important in keeping that inventory in line are the two real key pieces.
And if I could just sneak one more in you talked about the late deliveries impacting the assortments at Hollister and you took care of that.
He liquidated that product do you feel now that the assortments at Hollister.
<unk>.
Our structured light that the architecture of that assortment is where you want it to be.
Yes, I mean, the short answer to that is yes, we feel very comfortable with where we are heading into summer with where swim and shorts and tees are and as well as I mentioned, just a few minutes ago, but the dress business also.
Really pleased with that business as well so yes.
Great. Thanks, So much talk to you guys later.
Thanks, Bob.
And next we have Marisha sirna with UBS.
Great. Good morning, and thanks for taking my questions I wanted to ask if you could provide some details on how sales performed when stores versus digital and also.
If you could talk maybe about how the quarter progressed from month to month and lastly, you could just.
Repeat.
About portion from you know from your remarks at the beginning when you were talking about the two drivers for the AUC I know you mentioned the freight.
Kind of missed the second part so just want to make sure I got it.
Got that part.
Correctly.
<unk>.
Sure, let's start with the last question. So the two drivers for AUC. So we saw some incremental freight versus what we assumed coming into Q1 that hit us for about $15 million more than we thought the other piece was accelerating the sell through as we just talked about the Hollister and Gilly Hicks late receipts. So we pushed those through those fall goods come with a higher AUC than the spring goods.
That we are selling a little heavier.
Apparel, so that comes with a higher AUC, so that hit us from a margin rate perspective in Q1.
Backing up into the quarter on a monthly basis I would say our trends were consistent with what we've heard in the market. Our February was a good month and then March was a tough month for a couple of reasons. We had the many back to school here in the U S and kind of that reopening at a lot of people going back to school in person last year and we also had the Easter shift out of March so.
Whenever you add that and then ill became came back there in April and then thinking we have already talked about how were trending here in the beginning of May.
The last piece is performed stores versus digital digital yes stores have continued to clawed our way back we did see the benefit in Q1 of reopening in Europe , and a lot of those stores getting back up to kind of full hours or at least we're moving some of those restrictions and we continue to see the traffic to your stores in the U S continue to climb so nice to see that.
<unk> balance coming back between digital and stores and we continue to see kind of that 50, 50 balance and we'll continue to track to that.
Thank you and if I could just.
One last one just any amount.
No.
<unk> sequential recovery would still like below the U S. I was just wondering you know.
From a market perspective, you talked about UK.
And Germany and France.
How much to roughly how much does each represent of your sales and given what the reopening I would've expected, maybe a higher growth rate. So I just want to understand like what kind of dragged down the performance in your mail.
Sure we haven't provided the percent of sales for each but those are the kind of the one two or three biggest countries for us in EMEA. So good to see the UK performed well in Q1, and then Germany, and France really turned on later or they had some pretty heavy restrictions. It's really started to kind of pull off as we went throughout the quarter.
About the results in total.
EMEA customer is dealing with even more inflation would likely than the U S. Because of what's happening with the situation in Ukraine.
There's pretty significant inflation at that local consumer is seeing whether it comes to heating bills or gasoline just multiples of scenes of what we're paying here in the U S. So part of the reason for our outlook that we have set up like looking at that and deflationary demand on the consumer as we're seeing it in the U S. We're all seeing that real time, but also in the in the EMEA region that is happy.
And in a big way so feel good about the big three countries. We are laser focused on these countries on the reopening and looking forward to them getting even closer to normalcy and kind of catching up here to the U S.
Got it thank you very much and good luck.
Our next question will come from Kimberly Green Burger with Morgan Stanley .
Great. Thank you so much.
I wanted to dig in a little bit more on freight cost if I could.
Scott have you renegotiated contracts for this year.
And are you seeing.
Any sort of relief in.
Or still some inflation in <unk> and.
And those contract negotiations and I just wanted to check if you are largely in.
Contract or your freight needs or are you also availing yourself of the spot market.
And then you mentioned that you might experience some relief from the very high use of air freight as we get later in the year, particularly I think.
The fourth quarter.
<unk>.
Assuming that does happen would you expect to begin to see some benefits of lower freight lower airfreight usage in the fourth quarter gross margin or would we not see those benefits flow through the P&L until we get into the first half of 2023. Thanks. So much.
Okay, let's start with the freight costs. So we are actually in the midst of finishing up some contracts are cycle is happening real time, so not going to provide too much there.
We are trying to do is lock in more than we have in the past and contracted rates to try to avoid some of the fluctuations that we've seen in the spot market. We've added some new carriers, which is exciting. So our goal is to have optionality and flexibility and hopefully that will result in lower rates as we go forward, but this market remains.
Pretty tough out there on the air freight yes, we do expect to see some benefits flow through in Q4 and Q1 of next year now on the other side of that fence is the commodity costs. So when you think about.
What's happening in the cotton markets, that's starting to flow through the P&L, so there'll be a little bit of an offset to some of the savings we see there in the air freight with some of those commodity costs starting to flow through because it does take a pretty healthy time to have them lag through the P&L since you for what you buy so forward into the future. So that's what we're thinking about for air freight So we're optimistic that.
We're not going to see big disruptions like last year, and assuming that happens we should see a really nice benefit from air freight in the back half.
Okay, great. Thanks, so much.
And as a reminder, once again star one if you have a question now moving to Marni Shapiro with retail tracker.
Hey, guys just two quick ones. If you could just talk a little bit about was the traffic.
What was the traffic patterns like in the first quarter are you seeing a more traditional traffic patterns driven by weather or when you run a promotion in the store she is coming into buy promotions, specifically at Hollister as well and then you've had some good results from this active business and I'm curious if you could just talk a little bit about it is it bringing a new customer into the store is is that helping to drive.
Traffic to the site into the store.
Hey, Marni I'll start the first one so traffic patterns in Q1. So you are right. We are starting to get back to more normalized traffic clustered around Easter in Q1, there were some spring breaks happening. So I'd say, it's more normal last year was very abnormal with what we call. Our many back to school. So we are definitely getting closer to normalized trap.
Patterns and we're expecting that as we go forward for the rest of the year.
And regarding YTD, Yeah, we're very excited about the initial response to IPD, which was created by a requested by our customers as I was talking about how closely are to a consumer and it is actually bringing in new consumers, which is even more exciting about it so driving traffic and bring in new customers. So excited to see what that's going we're busy chasing goods.
We sold out of almost a quarter of the skews very quickly. So we'll talk about more of it at our Investor day on June 14th.
Well, that's a nice highlight and did you guys break out what percentage of sales are online versus in store.
I'm just looking for the number wasn't sure if you broke that out.
Now we have not we're going to we're not going to give that on a quarter by quarter basis as we start to normalize in but we'll keep you posted if theres any large swings fantastic. Thanks, so much.
Thank you.
And ladies and gentlemen, that's all the time, we have for questions today, I'll turn the call back over to Fran for any additional or closing remarks.
Thank you for participating in our call today I hope, you're all enjoying memorial day weekend and I look forward to seeing many of you in New York City at our June 14th Investor Day.
Okay.
Okay.
Ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation.
And you may now disconnect.