Q2 2022 Abercrombie & Fitch Co Earnings Call

Good day and welcome to the Abercrombie <unk> Fitch second quarter fiscal year 2022 earnings call.

<unk> conference is being recorded.

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

We will open the call to take your questions at the end of the presentation.

We do ask that you limit yourself to one question during the question and answer session in order to allow all participants the opportunity to signal for questions.

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 second 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 second quarter earnings release, which is available on our website at corporate Abercrombie Dot com under.

The Investor 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.

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

In addition, we will be referring to certain non-GAAP financial measures 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, and thank you for joining us today to discuss our second quarter results.

Before I get started I would like to take a moment to thank our global teams for continuing to bring your best each and every day.

So it's been a couple of months since our Investor day and during that time, the retail landscape has continued to evolve rapidly.

We're now in year three of one of the most dynamic environments that I've experienced in my 30, plus year career in retail.

The work we've done over the last several years to improve our enterprise wide agility has enabled us to take decisive action to navigate near term challenges, while remaining focused on executing to our long term goals.

At our June Investor Day, we provided our 2025 and long term targets and introduced are always forward plan, which is centered around the successful execution of three strategic principles.

Focused brand growth.

At enterprise wide digital Revolution, and operating with financial discipline.

During the second quarter, despite well documented consumer headwinds, we made progress against all three.

Let's start with our first principle focus brand growth I'm excited about the global opportunity of our brands and I'm confident in our positioning. However, we've recently experienced a significant divergence in sales and gross margin trends amongst our two largest brands abercrombie adults and Hollister.

When analyzing the Q2 spending behaviors. It has truly been a tale of two worlds.

Challenges at Hollister, whose customer base towards lower on the income scale compared to the Abercrombie adult brand was the primary driver of our total company sales and operating margin. This relative to the outlook, we provided on our Q1 call.

For the second quarter total company sales declined 7% and were down 4% on a constant currency basis.

Abercrombie brands, which includes kids grew 5% or 7% on a constant currency basis led by ongoing strength in our primary growth opportunity Abercrombie adults.

As many of you have witnessed Abercrombie adult has had an amazing turnaround over the last three years, we have successfully evolve the brand positioning assortment and fits to cater to the lifestyle needs of our target young millennial customer and we see additional runway ahead.

During the second quarter, our Abercrombie adult customer was actively shopping for their weekend trip weddings and going back to the office.

Sales and conversion remained consistent month to month, and our promotions and markdowns were in line with plan.

Leading adult achieved its best Q2 sales since 2015, and its highest Q2 AUR since 2005.

Congratulations to the team.

Women's remained a standout delivering its best Q2 sales in AUR since 2008 with dresses jeans and knits continuing to outperform.

Throughout this summer our dresses were popping up everywhere from viral tick tock depressed headlines all celebrating the fit comfort and style of our assortments.

<unk> results were also encouraging delivering the highest Q2 AUR. Since 2013, we are seeing more green shoots as he rediscovers the brand in all the new product that caters to his lifestyle needs such as the recent launch of our golf shop, which was very well received.

Last certainly, but not least response to our newest sub brand <unk> or your personal best remained strong across genders.

Abercrombie performance has been in sharp contrast, hollister brands, which declined 15% or 12% on a constant currency basis in the second quarter. As a reminder, this includes gilly Hicks and social tourists.

As global inflationary pressures mounted we experienced a shift in our teams shopping behavior, resulting in lower conversion and basket size.

While we tracked closely to apparel store traffic in the U S. Our customers doing more browsing than buying in targeting special occasion items like women's dresses, where we registered our best ever Q2 sales and men's woven shirts.

Outside of these trending categories, our customers was searching for and responding to promotions.

As back to school has kicked off our Hollister customer shopping behavior has continued to deviate from our expectations demand has moved out of bottoms, which is the top performing category over the last several years into tops and dresses.

As we've seen selling trends develop we've had a swift call to action, we've adjusted our fall and holiday orders shifting into a higher trending categories and out of core and.

In addition, we are re imagining our store experience and assessing our go to market strategy, including the ideal balance between stores and digital as the world has reopened and our team has returned to in person shopping.

Yes.

We're continuing to look for additional areas of opportunity and I am confident that these steps will help hollister gets back on track, even if the macro environment remains challenging.

Rounding out the conversation on brands similar to Hollister Abercrombie kids at a soft start to back to school season at Gilly Hicks active and lounge continued to outperform while social tourists, we've been leaning into higher fashion Assortments.

Inventory management is a key component of our strategic brand growth principle, we ended the quarter with roughly 92% of our inventory current defined us back to school in early fall product.

New goods that haven't been set or longer life items.

This is in line with historic levels, reflecting the recent sell through of summer seasonal goods at Hollister as we took markdowns to clear through warmer weather product.

Total end of quarter inventories were up 70% to Q2 2021, and as a reminder, Q2 2021 inventory marked a decade plus low due to freight delays and our exposure to Vietnam production, which was our largest country of origin last year at roughly 40% and experienced.

Difficult Covid related factory closures, which had an outsized impact on timing of receipts.

Of the 70% increase in transit inventory was the largest driver up $140 million or 130% to last year contributing 30 points of the total increase as we lapped significant product delays.

Our in transit inventory as late fall and holiday goods that we wont hear before the peak season. Unlike last year, when we were still receiving product after Christmas.

Units on hand contributed another 28 points in line with our plan coming into the quarter as we lapped our lowest Q2 on hand inventory levels since the mid two thousands.

After not being able to keep up with sales demand in the back half of last year in the spring, we decided to proactively pull forward deliveries to ensure in stock positioning for this back to school and holiday seasons. This year.

And the final piece of the total increase is higher year over year product costs, which contributed eight points.

We have taken action to ensure that our inventories move closer to our sales expectations in the back half, we expect year over year inventory growth to peak in Q2 and moderate significantly in Q3 and Q4 as we anniversary the unprecedented number of late receipts, we experienced last year and realize the benefits of recent moves taken to <unk>.

Inventory turns and reduced receipts.

We're keeping our eyes and Hollister inventory is a slightly more elevated than we would like reflecting the fall off we experienced in late June and the shift away from core categories.

Assuming recent trends remain consistent we expect to continue to leverage markdowns in Q3 to keep seasonal items turning.

We are right sizing hollister inventory levels for holiday and beyond through a series of actions that included reducing receipts utilizing box and hold strategy on certain core items and we came to the timing of inventory sets.

Beyond inventory management evolving our store experience and opening new stores is also critical to the successful execution of our strategic brand growth principle.

As a reminder, this year, we expect to open around 60 stores heavily weighted to the third and fourth quarter.

Our updated stores are an amazing representation of our brands today, new locations are smaller format in a mix of existing markets that we exited because we couldnt find the right deal as well as new markets that we have identified through data and analytics.

On an average store basis, we anticipate that the new Abercrombie adult and Hollister stores opening in fiscal 2022 will contribute at least two times the annual sales volume of our planned 30 store closures.

At Abercrombie, we recently introduced an updated store design that getaway shop, which is meant to evoke the aesthetic of the Sheik hotel lobby.

For those of you who attended our Investor day, the pop up shop, there had elements of this new design, which is roughly 4500 square feet versus the chain average of 5000 square feet.

The first two locations just opened one in Los Angeles and the other in Milan and the remainder of new Abercrombie adult locations. This year will be in the updated format.

These abercrombie stores as well as others as well others opening this year across brands stay true to our stringent real estate strategy right size right location right economics, if we can't check the box on all three we will continue to walk away and with just under 50% of our revenues drive digitally in fiscal 2020.

One we have the ability to do that.

Now turning to our second strategic principle enterprise wide digital revolution in the second quarter, we continued to make progress towards the longer term digital technology and data aspirations discussed at our Investor Day. As a reminder, we have a large sophisticated global digital operation with our digital sales, reaching roughly $1 7 billion in 2020.

One.

Our goal is to deliver a best in class seamless digital experience and that is fueling our digital evolution across the company.

And the customer experience space, we continue to listen to our customer and to our new agile ways of working we were able to deliver experience improvements across the Omnichannel shopping journey at the same time, we accelerated the pace of key multi year technology modernization efforts, including upgrading our retail merchandising system moving to the cloud and evolving our core data.

Architecture.

These efforts have and will continue to enable more organizational agility and improve our ability to leverage our rich data to drive decision, making across the company.

And last but certainly not least our third strategic principle operating with financial discipline.

As the business became more challenging in the second quarter, we managed with customer and non customer facing spend while prioritizing marketing and long term strategic investments looking.

Looking to the remainder of the year, we've made further adjustments cutting approximately $35 million from the back half on top of volume related expense decreases.

Quarter to date sales are running consistent with Q2 levels, although trends have improved sequentially each week.

As we look to the back half, we expect inflationary pressures to continue and potentially heightened in EMEA.

We have taken action across brands and at a corporate level, reflecting these assumptions.

While we are cautiously optimistic that inflation will moderate we are not baking improvement into our updated outlook at Abercrombie, we've tweaked back half receipts to reflect the potential for that customer to become more impacted by inflationary pressures.

If the trend accelerates, we will be able to fulfill demand to chase and preposition future set items at Hollister, we are assuming our customer will continue to be faced with tough decisions on where and how to spend their discretionary dollars as mentioned for the back half to chase into trending categories reduced receipts adjusted promotions and are employing box and hold where.

Appropriate.

As we've consistently done over the last few years, we will continue to control what we can control and we will remain flexible to quickly respond to unknowns, we remain committed to executing to the 2025 and longer term goals. We provided at our Investor day and are confident in our ability to achieve these goals, including sales of four 1% to $4 3 billion and a sustainable.

Operating margin rate at or above 8% by the end of fiscal 2025.

At that time, we provided our targets we assumed at Hollister customer it would be more impacted by inflationary pressures in the near term and annual growth would not be linear that has not changed and to be clear we have multiple paths to achieve our goals.

This fall and holiday as we respond to the dynamic environment, we have the balance sheet to protect investments in the key areas that support our always forward plan and they include.

Judiciously investing in digital talent and tools to revolutionize how we approach the customer experience.

Modernizing our core platforms across merchandising and data.

And investing in marketing and store openings to drive brand awareness and enhance our ability to drive topline growth in the months and years to come.

I am excited about our future we've been faced with challenges in the past and we've consistently overcome them from when I first arrived in late 2014, and we turned around Hollister to late 2009, when the reinvention of Abercrombie adults first began to gain traction.

In closing flagships and right sizing our store footprint to our performance during the pandemic, we have proven time and again, our ability to evolve with our customer and with that I'm going to turn it over to Scott to provide more detail on the quarter and our Q3 and updated full year outlook.

Thanks, Ryan and good morning.

For the second quarter, we delivered net sales of $805 million down 7% to last year on a reported basis and down 4% on a constant currency basis.

Sales were below our expectation for a low single digit decline as the Hollister business softened as the quarter progressed.

By brand that fills a abercrombie, which includes kids rose, 5% compared to 2021 on a reported basis and 7% on a constant currency basis largely in line with internal expectations.

Hollister, which includes Gilly Hicks and social tourists declined 15% or 12% on a constant currency basis, reflecting mounting macro pressures on its core consumer a shift in shopping behaviors versus last year and lower demand for core back to school categories.

This compares to prior year growth of 30% and 20% for Abercrombie and Hollister, respectively.

By region net sales decreased 4% in the U S and declined 14% internationally or 5% on a constant currency basis.

By region EMEA was down 13% on a reported basis and 4% on a constant currency basis, but APAC was down 33% on a reported basis and 25% on a constant currency basis.

In EMEA strength in the UK and Middle East was offset by softness in Western Europe .

In China, we experienced COVID-19 related pressures throughout the quarter, but have seen a nice trend change as the country has reopened and mostly stayed open.

Our gross profit rate was 57, 9% versus 65, 2% last year.

Key drivers of the year over year change for the adverse impact of exchange rates of 30 basis points and higher product costs of 750 basis points rare.

Relative to our expectations FX was slightly worse than anticipated while product cost pressure was in line.

These impacts were partially offset by higher AUR driven by the Abercrombie adult brands.

Looking to the back half of this year, we are modeling freight rates to remain relatively steady with Q2 levels. We expect to see freight flip to a tailwind as we anniversary elevated error rates and error usage due to Vietnam closures last year.

This will be offset by rising product costs as we continue to see higher commodity costs flow through Cogs. This fall.

We are encouraged by recent trends across rates and commodities, giving us cautious optimism that this year will be the peak and then we will begin to realize benefits in fiscal 2023.

Moving on to inventories, we ended the quarter with inventory up 70% to last year, 92% of which is current.

As Fran mentioned, our Q2 'twenty one total inventory at cost was the lowest in over a decade and on hand inventory the lowest since the mid two thousands as we saw shipping times lengthened and experienced significant delays from the Vietnam shutdowns.

Overall, our inventories current and we intend to keep it that way.

We're keeping a close eye on Hollister inventory based on the greater expected greater than expected falloff in trend in Q2, we chase in the areas of strength reduce receipts on slower moving categories and put plans in place to Boston hold certain items.

We will utilize markdown as necessary to ensure the remaining inventory turns appropriately.

Looking ahead, we expect to see total year over year inventory growth moderate in Q3 and approach 2021 levels in Q4, as we lap all late receipts from last year.

I'll now cover the rest of our Q2 results on an adjusted non-GAAP basis.

Excluding $2 million and $1 million of pretax asset impairment charges for this year than last year, respectively.

Q2 operating expense, excluding other operating income was $465 million compared to $450 million last year, driven by inflation and higher digital fulfillment expense, partially offset by lower incentive based compensation.

Our digital fulfillment, we are seeing temporary cost inefficiencies as we ramp up our new West Coast distribution Center, we expect these inefficiencies to moderate in Q3.

We are breakeven on the operating income line compared to operating income of $116 million last year.

For tax we recognize tax recognized tax expense on a pre tax loss due to our inability to obtain a tax benefit for certain losses incurred outside the U S.

Net loss per share was <unk> 30, compared to net income per diluted share of $1 70 last year.

Our balance sheet remains strong we ended the quarter with cash of $370 million and liquidity of $729 million.

During the quarter, we repurchased 1 million shares for approximately $18 million.

At quarter end, we had $49 5 million shares outstanding down 21% from the start of 2021 with approximately $240 million remaining under our previously authorized share repurchase program.

We remain committed to putting excess cash to work and expect shareholder returns to focus on share repurchases pending liquidity levels market conditions share price and our ability to accelerate investments in the business.

Turning to investments we continue to expect fiscal 'twenty, two capex of approximately $150 million with about half supporting digital and technology that have supporting stores and maintenance.

We continue to expect to be in that store opening this year with approximately 60, new stores globally weighted towards the back half.

This year, we have approximately 250 leases up for renewal, which gives us great flexibility to react to the macro environment.

We expect to close around 30 locations this year pending negotiations with our landlord partners.

I'll finish up with our thoughts on the remainder of the year and.

And our updated outlook, which replaces our previous full year guidance, we assume inflation related pressure on consumer demand continues and that freight rates remain at current levels through year end.

For the full year, we are planning as follows.

Net sales to be down mid single digits for 2021 level of approximately $3 7 billion.

Embedded in this outlook is an estimated adverse impact of approximately 200 basis points from foreign currency slightly worse than our prior expectation.

Operating margin in the range of a range of 1% to 3% down from our previous range of 5% to 6%, reflecting deleverage from lower sales and the potential for margin degradation to turn Hollister back to school inventory.

For the effective tax rate, we are withdrawing our previous outlook of mid thirties as there could be a higher rate due to our inability to recognize a tax benefit for certain losses incurred outside of the U S.

For the third quarter, we are planning as follows net sales to be down high single digits for 2021 level of approximately $905 million.

Embedded in this outlook is the estimated adverse impact of approximately 220 basis points from foreign currency.

The down high single digits assumes quarter to date sales trends continue we are not assuming an improvement or falloff and that trend in.

And finally operating income around breakeven.

As we move through the back half, we intend to balance near term profitability with long term strategic investments.

For 2022, we expect around $250 million or 700 basis points of cost pressure due to inflation compared to 2021.

While we will not fully offset these headwinds this year, we're driving efforts to reduce the impact on profitability, including but not limited to tightly managing inventory receipts.

Select increases in Abercrombie adult and reducing certain expenses.

To date on top of the volume related savings, we will realize on lower sales, we have reduced planned expenses for the back half by around $35 million through the following initiatives.

Slowed hiring while maintaining focus on areas necessary to support our aspirations in digital data and technology.

Reduced or eliminated spend on non critical projects and travel.

And negotiated key contracts based on the current business environment.

As we look to 2023 and beyond we are cautiously optimistic that we will start to see relief on product costs that will help us recoup a portion of our operating margin loss to inflation. This year. We are confident in the strategies, we have in place to execute our always forward plan and build towards our 2025 goals and we look forward to leveraging our strong liquidity to fund our investments through the month and quarter to come.

With that operator, we are ready for questions.

Thank you and as a reminder, it is star one to ask a question.

Our first question today comes from Dana Telsey Telsey Advisory group.

Good morning, everyone, what a changed environment as you think about the inventory levels.

I Hope you can hear me.

As you think about the inventory levels and positioning as we go through the balance of the year. How are you. How are you planning for in transit unit units on hand, and product cost and how will it differ by brand.

Certainly in this promotional environment. Thank you.

Hey, Dan Good morning, I'll kick that one off so it is really important for everyone to understand where we are with our inventory levels. So to begin with 92% of our inventory is current and we define current inventory buy.

Goods that are long life goods that are early that actually have not even been set yet as well as current goods.

Now if you take the 70% ahead of last year and you break it down.

Half of that to your question is in transit to a $140 million or 130% more than last year. Because we are anniversarying from last year, probably our lowest inventory levels in over a decade to.

Everyone managed through all of the supply chain pressures from last year.

But additionally, we had 40% of our goods coming out of Vietnam last year at this point last year those factories were all close during due to COVID-19.

Now if you take the balance of the 70 points you take 28 of them, which is our on hand units and then <unk>, which our production costs. So it's very important to really break down and understand why we are where we are we disappointed our customer last year in the back half we were not able to get goods. In fact, we started receiving goods.

Still after Christmas last year, So I hope that helps them know Scott is there anything else that you'd like I'll just add so looking forward. We expect Q2 here on a year over year growth basis to be the peak will moderate in Q3, and then will moderate moderate significantly in Q4 as we lap like trend just finished with all of those late receipts from from Vietnam last year is it.

Remainder, we were receiving goods holiday goods into the last week of January and we are not going to do that this year. So we will see good moderation in inventories that go through the back half.

Thank you.

Our next question comes from Cory <unk> of Jefferies.

Hi, good morning, Thanks for taking my question.

Fran first I think we called out in the release that you have seen a little bit of an improvement so far in back to school, maybe can you talk a little bit more about what youre seeing there.

Any trends either at Hollister or <unk>.

And then specifically, maybe some merchandise thats resonating really well with the consumer right now and then Scott as it relates to the promotional environment. What have you embedded in your outlook from a markdown perspective, as we look throughout the back half.

Hey, good morning, So yes, a couple of things will start we'll start with with Abercrombie.

Citing that second quarter really <unk>, continuing to grow and see some nice AUR growth in the Abercrombie brand and as we headed into the third quarter continuing to see those key categories still resonating such as jeans and dresses and Hollister there was a significant shift in this consumer greater than we have honestly seen quick quick shift.

At a bottoms and into tops during Q2 and dresses, particularly this customer has really pressed on inflation and what they have can spend their money on we're seeing the consumer come in and be very judicious on their spending as we got into August so he and she started buying more tops, maybe perhaps to go with some of those bottoms that.

That they are waiting waiting to buy on <unk>.

What we're seeing is it is a consumer shift much quicker in hollister than we saw in Abercrombie, but what's resonating I would say number one our dresses Q2, we saw the best Q2 ever in Hollister dresses as well as Abercrombie, some exciting things happening and shifting consumer behavior.

Alright, let me grab the promo piece. So as we went through Q2 once we saw the Hollister business soften a little bit like many others. We've heard that kind of back of June into July we saw the same exact trend here specifically in the Hollister business and once we saw that we turned on some markdowns and promotions kept that inventory curve current and kept.

Turning at the same time, we have reduced receipts for holiday and beyond so we feel good about the right size to the level of the receipt by for Hollister for holiday and beyond so what we're going to focus on as we go through Q3 is just keeping that back to school inventory turning part of our reduction in the operating margin outlook is reflecting.

A little bit of margin pressure there in the Hollister business to keep that inventory, turning but feel good as we get to Q4 and beyond that we have right size that inventory level.

Great. Thank you very much best of luck.

Thanks.

And we can go to Paul <unk> of Citi.

Okay.

Hi, This is Kelly on for Paul Thanks for taking my question just curious if maybe we could take a step back and just talk a little bit more about the Hollister brand I know that certainly inflation to have any impact. It does seem like Hollister has been underperforming.

For a while so is there is there anything any diagnosis you have of the brand or the other changes that need to be made to <unk>.

We repositioned the brand and then also just on Europe .

Did underperform.

Is that is that mainly in the Hollister business and just any any color there because we have heard from others that Europe has actually been strong. So just curious your thoughts there. Thanks.

Hey, I'll kick off with Hollister. So you recall just a couple of months ago, We had our investor day, and we talked about our always forward plan and within that we've discussed hollister to the past four years Hollister in the U S saw a 4% CAGR growth. So it continue to really resonate with that with the team.

We did see a significant fall off for Q2, and we think part of that is macro this tumor who was on the lower end of the income scale is definitely selling a lot of pressure from inflation, but theres part of it that of course, we own and we have to inspect and continually.

Look through our business and really understand what's happening. So we saw a shift from bottoms to tops as I mentioned, a little bit earlier and the team got to work they really got to work on the receipts. They made sure that those trending categories are in line for fourth quarter, you'll get a very agile and flexible supply chain here and we can react to what's happening in the business. So.

We're controlling what we can control and we are confident in the future of Hollister.

Whats grabbed the EMEA side second question.

What I would say with EMEA as it is.

Bifurcated, we've seen great results in the UK more recently, we talked about that last quarter. We've also seen strong results in the middle East, where we haven't seen strong results are in our next two biggest countries, so Germany and France. So while we're excited about the results we're seeing in U K and Middle East, we do have opportunity in Germany in France, and our team.

Our focused on that and we will be looking to address that as we go forward Q3 into Q4, we are committed to EMEA. Our long term. It is our second largest region and we do have opportunity there as we go forward and we will address.

Okay.

Got it and just to clarify is that that's mainly on the Hollister brand, where you were seeing that that weakness or is it kind of across the board.

Across the board Hollister is more highly penetrated into the EMEA region, but it's a similar trend across the board. Both brands are strongest in the U K and Middle East and then seeing softness in Germany and France.

Got it.

Thanks, Greg.

As a reminder, if you would like to ask a question. Please press star one.

Our next question comes from John Joseph Kloppenburg of JK Research.

Hi, everybody.

Can you hear me.

Yes, good morning, Jim.

Hi.

Hi, Scott.

I just wanted to.

Dig a little bit deeper on this change in platforms as Hollister and maybe get your views plan on what's going on in denim and extended kind of slowed in that category.

As Scott if you could talk a little bit about.

<unk>.

The outlook for inventory.

At the end of the year.

And how do you how youre planning it go forward given the trends at Hollister. Thanks.

Thanks, So much also plan love to hear about denim trends that ASF as well. Thank you.

Sure.

Okay, let's take this all the way back up to the top here again so.

The shift the shift that we saw in Hollister as you know back to school is traditionally a strong bottoms business and we did see a very quick very significant shift.

Thanks have been trending quite some time the past three years of consumer does have a lot of those newer fashion bottoms and.

In their closet, and they're wearing occasions have shifted a bit so dresses were as we mentioned a record for us for Q2 Super Super exciting as we headed into August what we saw in Hollister girls tops, we saw a nice shift in the trend. She is really responding to the tops that were giving her and with a limited amount.

Money to spend they are making very judicious decision these decisions could be short term.

We could see the bottoms open up as we as the weather changes and we head into the back half of the third quarter, but with the information that we have today, we had to put our outlook based on what we currently know.

And we continue to see growth in that in that brand and in jeans.

And the opportunity there is that consumer is actually going back to work and continuing on this 96 hour exciting weekend that we always talk about and they're wearing occasions have shifted as well. So the offices have gotten more casual they're going back to the office, they're wearing some of our fashion and dressed up denim to go back to the office and so to the car.

So those are diverging the brands or divergence, we're seeing different behavior between the two.

Hey, Jade.

I'm sorry.

Lori plan go forward. So we will the year over year growth rate will peak here in Q2 will moderate in Q3, and we will get close to last year levels 2021 levels as we get to Q4 at that point, we'll be lapping all of those late receipts from last year and transit will be down units on hand will get pretty close to last year as we lap receipts.

As we think about 2023, we are thinking about that today as the business softened specifically at Hollister. There in Q2 in that June July time period, we have reduced receipts for Q4 have reduced receipts for Q on Q2 production here in the spring season, because we want to get our brands into Chase mode. It's something that we talk about it.

Internally a lot of there is capacity out there you've seen across the industry. Many people taking out receipts for the back half and planning conservatively. So what we are doing the same thing. So we feel good about our inventory plans for Hollister, specifically Q4 and into Q1 of next year, we will chase if we need to in there like I said there is.

<unk> out there to do that.

Thank you.

Thanks Janet.

We can go to <unk> <unk> of UBS technology.

Hi, Good morning, Thanks for taking my questions I guess I wanted to talk a little bit about freight I mean, what are you thinking in terms of the potential for recovery of freight costs that you have experienced the pressures that you've experienced over the last year, how much do you see that could be like.

Permanent and how much do you think you can recover probably.

Next year, and maybe if you could talk a little bit about.

The monthly sales progression you saw throughout the quarter and how.

How is that exit rate.

Compares to July , particularly thank you.

Let's start with freight so we are cautiously optimistic about what we're seeing in the freight markets.

Into Abercrombie, specifically with the inventory issues, we had coming out of Vietnam last year, we had a significant amount of error that we needed to use last Q3 Q4.

Those higher rates and that higher usage hit us in Q4 last year and even carried over into Q1 and a little bit into Q2 of 2022. So we expect at Abercrombie for freight to actually become a tailwind. This year. That's been planned throughout the year, we expect to see that come in this year and when we zoom out and think about freight rates and.

General optimistic again that what we're seeing in the ocean shipping market and the air market those rates have been coming in.

So we're optimistic that they'll stay there and continue at least stay there and can maybe continue to come in and then we'll see that start to flow through in 2023, So no forecast yet as we go into the future, but optimistic that we have hopefully seen the peak here next question on the monthly sales progression I would say our progression specifically in Hollister looks looks kind of split the two.

Brands are Hollister progression is really the progression you've been hearing out in the news at this point falloff in June into July period, we just talked about seeing some nicer trends here more broadly over the last couple of weeks seeing a little bit of week over week improvement, we're not assuming that thats. The start up of new trends, we're going to assume in our outlook.

The trends that we've seen in Q2 are carrying forward for the back half of the year and we're assuming they're going to be out there until they change abercrombie on that side saw consistent strength as we went throughout the quarter in Q2. So excited to see the momentum continue in that brand plus five or plus 7% in the quarter on a <unk>.

Instant currency basis, with the Abercrombie adult brand actually being higher than that in kids, bringing that down a little bit. So really optimistic that we'll continue to see that momentum continue in abercrombie and Fitch.

Great. Thank you very much.

Okay.

Our next question comes from Marni Shapiro of the retail tracker.

Hey, guys.

I'm, hoping I wanted to dive a little bit more into Hollister and then I have a quick customer final question, but in Hollister, it looks like or it sounds like the fashion is selling well, where you have it and I noticed in the stores do you have some really exceptional fashion for back to school.

Only a very small portion of the overall assortment. So I'm wondering if I'm seeing that right.

As much about a matter of this customers under pressure and it is getting the balance right in the store and then if you could just touch on at Abercrombie with the customer file are you seeing that continue to grow at Abercrombie and are you getting the attention of the older Gen Z customers into the store as well as well as just lapsed shoppers that maybe came back.

Yeah.

I'll kick off with the question on Hollister pay money.

So what we saw as an example in the second quarter dresses, where are the best quarter, we've ever seen and dresses for Hollister. So yes, the fashion to your point is selling well and the consumer is responding to it but theyre very pressured right now they have to be very judicious on what they are spending and how much they're buying.

So we're continuing to monitor that as Scott just went through on our receipt and as we got into the third quarter. It is nice to see that our girls tops have really started to accelerate so yes to answer your question I'm seeing nice selling on the fashion, just a bigger shift out of bottoms than anticipated.

On the customer file we continue to see growth in the Abercrombie and Fitch part of the comeback story of Abercrombie.

Pressed up our bets here in marketing for Abercrombie in the back half of last year, we're continuing to focus marketing this year, even in light of what's happening more broadly in the industry Abercrombie continues to be a standout and we're going to continue to protect investments in marketing to Abercrombie, we love the products, where the assortment as we loved the brand positioning is in <unk>.

Goal is to get more people more eyes on that brand and so well, we're happy with continued customer and new brand customer growth are new.

Customers coming into the brand we want to continue to accelerate that because we love the story we have.

Fantastic vessel off the back to school I will take the rest offline.

Thanks, Mike.

Yeah.

Unless there are no further questions at this time I would like to turn the conference back to Fran Horowitz for closing remarks.

Thank you everyone for joining the call today, Scott and I would also like to thank our head of Investor Relations Pam Quint Giuliano Sadly. This is her last call with us as she will be leaving Abercrombie and Fitch to pursue another opportunity and we wish her the best of luck.

Yeah.

Yes.

Ladies and gentlemen that concludes today's conference call. We thank you all for your participation and you may now disconnect.

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