Q3 2022 Abercrombie & Fitch Co Earnings Call
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Good day and welcome to the Abercrombie <unk> Fitch third quarter of fiscal year 'twenty to 'twenty two earnings call. This conference is being recorded at this time I'd like to hand, the call over to Keith Bachman. Please go ahead Bob.
Thank you good morning, and welcome to our third quarter 2022 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer and Scott.
<unk> financial officer.
Earlier. This morning, we issued our third quarter earnings release, which is available on our website at corporate that Abercrombie dot com under the investors section also available on our website is an investor presentation. Thank.
But 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 mentioned today.
A discussion of these factors and uncertainties is contained in the company's reports and 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 reconciliations of GAAP to adjusted non-GAAP financial measure are included in melanoma and Investor presentation issued earlier. This morning with that I will turn the call over to Fran.
Good morning, and thank you for joining us today.
Before we dive in I'd like to thank our global team for their ongoing resiliency and focus on executing to our long term.
Navigate a dynamic global macroeconomic environment.
Against the challenging backdrop, our Q3 results beat our expectations on the top and Bottomline Abercrombie sales up 10% and Hollister showing sequential sales improvement and adjusted operating margin coming in 200 basis points higher than our expectation.
We're excited about our positioning going into the holiday season.
With that party and inventory is healthy with a year over year change cut in half from our peak last quarter.
I'm encouraged by the trajectory of our business and I'm confident the steps we've taken throughout the year will put us in a position to win in Q4 and beyond.
Onto our Q3 results.
Our global consumer continued to see significant inflation across our day to day lives. We were pleased to see our business improve our second quarter delivering flat sales in 2021 on a constant currency basis.
Throughout the quarter, we continued to execute against the key pillars outlined in our Investor day.
Focus brand growth and enterprise wide digital evolution and operating with financial discipline.
These pillars give us confidence in our approach to the holiday season.
We will enter with healthy inventory levels momentum in our key merchandising initiatives and a consumer that is engaging with us across channels.
Starting with focus brand growth, we saw sales trends improve across brands compared to Q2.
I've kind of continued to significantly outperform hollister, a bifurcation of the sales and gross margin performance continued in the third quarter.
So the third quarter total company net sales declined 3% to 2021 and as I mentioned, we were flat on a constant currency basis.
For Abercrombie brands, which includes kids, we saw third quarter net sales grew 10% or 13% on a constant currency basis.
Led by ongoing strength in Abercrombie adults importantly, third quarter sales for upcoming brands were up over 20% compared to the pre pandemic level 2019, even if we have reduced store square footage by around 40%.
During the third quarter with some of them continued abercrombie adult as our customers transition to fall.
Our assortments continue to evolve as we aspire to offer that customer from the gym to the office to happy hour and beyond.
We saw strong traffic cross child, AUR growth versus 2021 with adults to achieve its best Q3 sales since 2014, its highest Q3 AOR since 2004 I am so proud to see the team continue to push boundaries on product and marketing to deliver some of the strongest sales results in our industry.
On product performance of our women's assortment remained very strong delivering the highest Q3 sales level since 2007.
The strength was driven by our best ever Q3 sales in jeans dresses and pants as we continued to build our best dress guest franchise and chase into key trends across bottoms categories.
After seeing some green shoots in mens in Q2, we saw growth in Q3 with strength across key categories as well as outerwear.
While the overall size of men's legs out of London, we are optimistic about the growth opportunity ahead.
Across men's and women's we are well positioned for holiday are energized about emerging spring trends, we will deliver in early 2023.
On the marketing front, our team continues to deliver.
We recognize the performance marketing strategy of the year award by L. T K, which is the world's largest certain creator commerce platform.
But I haven't heard of a brand was also named to the brands that matter lists like that company for effectively winning with purpose inspiring conversation on communicating our value to all the work.
Through all of our work with Trevor project you've done okay.
Kudos to our team for their passion of all these projects all that hard work and strengths successful partnership.
Moving on to Abercrombie kids as discussed last quarter kits at a soft start to the back to school season, but we saw sequential improvement as we move through the quarter. We saw the best performance in our Super soft sweatshirts and sweatpants.
Turning to Hollister, which includes Gilly Hicks and social tourists, which was selling trends improved slightly compared to Q2.
Third quarter sales declined 12% or 9% on a constant currency basis.
Consistent with Q2, we tracked closely to apparel store traffic in the U S. We saw lower conversion basket size compared to 2021 as we lap the lingering effects of the notes last year and our customer gets a significant inflation this year.
As we work through the remaining back to school period into September and October we continue to see our customer ships that in towards the top and other bottoms as compared to 2021.
We were pleased to see stronger performance in higher fashion special occasion items like women's dresses and men's woven shirts.
What we can get these categories as leading indicators of our ability to improve conversions have chase's related categories. The past few months.
We're seeing nice performance of our women's tops business and will work to spread the success to other categories.
I'll start with the teen apparel space have seen softness in the back to school season, we continue to look inward at opportunities to improve the business.
From an organizational perspective towards the end of the second quarter. We made several key personnel moves at the senior levels of our Hollister merchandising team.
We have also shifted ownership with Hollister marketing to carry crude lifted our head of Abercrombie marketing for the past four years, where she has built a great team and instrumental in driving amazingly enough turnaround.
Terry just moved into a new role as Chief Marketing Officer is now responsible for marketing strategy and creative across all brands.
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We look forward to seeing carry on the work of Hollister team has done over the past few years.
From an operational perspective, we are continuing with inventory actions discussed which includes adjusting for receipt plans in terms of total level in that category with.
With these adjustments we are determined to improve cost performance in the quarters to come.
I feel like <unk> as we continue to build awareness around active lifestyle brand. We took a big step forward in opening additional freestanding stores as of today, we have 14 freestanding daily stores with 11 in the U S and three internet.
Team and are excited to bring our updated positioning and product offering to our global customer as we continue to test and learn.
Outside of Italy, we continue to support our brand growth principle with new store openings across our brands. We opened 19 stores in the quarter and continue to track towards opening around 60 for the full year, which will make us a net store open up for the first time in more than a decade.
It's great to see our brands deliver updated experience and new centers as well as we enter key locations, we exited over the past few years.
For the year, we expect to open 18, Abercrombie adults 20 per holsters 15, Gilly Hicks and three kids store.
Yes.
For Abercrombie adult our customers responded well to the new store consequence from your last quarter that featured elevated fixtures and furnishing that'll spaces dedicated key merchandising categories and updated fitting room for customizable lighting.
Financially, our new Abercrombie stores are delivering 60% higher sales per square foot compared to the average Abercrombie adult store.
For Hollister, we are excited to start rolling out a revolve store concept this quarter, the new format creates optimistic and welcoming environment that omni focus and complements our digital shopping experience.
In consequence here, it's designed to be agile and adaptable, allowing for merchandising flexibility.
Across all brands, we remain disciplined in our real estate approach with a new stores checking each required box the right size, the right location and the right economics.
Shifting to inventory the year over year inventory trend is playing out as planned with inventory growth moderated in Q3 after a peak in Q2.
We ended the quarter with inventory up 36% to <unk> 2021 because we've made good progress selling to summer and back to school inventory at Hollister.
Consistent with last quarter, 92% of our inventory with current defined this fall and holiday product <unk> haven't been set or longer life items.
As we move through Q4, we expect year over year inventory growth to moderate further we're planning to be relatively flat to 2021 by year end as we fully anniversary the late receipts, we experienced last year.
Turning to our second strategic principle enterprise wide digital evolution.
During the quarter, we delivered share to pay a new way for Hollister customers to pay on the mobile app share.
Sure. It was completely developed in house and I'm. So proud of our internal teams many of whom we've hired over the past 18 months as we add talent to accelerate our digital evolution.
This first of its kind payment solutions based on the need we saw among our teen customer to eliminate the barrier a key barrier to conversion.
The feature allows our hollister customer to easily share their digital shopping bag with a parent for example to complete their purchases. Many don't have access to credit cards to transact digitally.
The early response has been positive <unk> to pay transaction, showing higher conversion and basket size and the average will continue to get feedback on our <unk> technology with the goal of finding more use cases beyond hollister.
This feature is one example, the work our teams are doing to support our digital evolution, which is necessary to grow our digital business called the 2021 base of roughly one 7 billion.
In addition to rolling out customer facing technology. We also made progress on multiyear technology modernization efforts in this area.
Like merchandising and data.
Which will enable us to be smarter and faster in the future a huge thanks to our team and I can't wait to see what's next.
Our third strategic principle operating with financial discipline, we're focused on imagine controllable expenses in the third quarter. We currently manage head count adjusted marketing to better match demand patterns as discussed last quarter, we reduced inventory buys for holiday and go forward to better align with sales trends and to ensure all brands are in a position to chase receipts in strong performing category.
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Despite the challenging macro dress macro backdrop, we remain cautiously optimistic as the holiday season ramps up in a big way this weekend.
Quarter to date sales are running consistent with Q3 levels across France, I am pleased with our Assortments and we've seen good early reads in cold weather categories also much different than last year, we have inventory on hand for our customer this year due to our efforts to deliver inventory earlier than normal to mitigate potential supply chain delays.
Our teams are working to deliver a great holiday. We also remain laser focused on the long term as we move through Q4. It is 2023, we expect to continue to leverage our strong balance sheet to fund a multiyear strategic investments necessary to execute our always forward plan and with that I'm going to turn it over to Scott to provide more details on the quarter and our updated outlook. Thanks, Rob.
And good morning.
For the third quarter, we delivered net sales of $880 million down 3% to last year on a reported basis and flat on a constant currency basis.
We saw foreign currency pressure accelerate in quarter, driving approximately 300 basis point adverse impact of sales.
Sales results were above our expectations, we saw trends improved sequentially at both Abercrombie and Hollister.
Net sales at Abercrombie, which includes kids rose, 10% compared to 2021, a reported basis and 13% on a constant currency basis.
This compares to reported and constant currency growth of 5% and 7% respectively for Abercrombie and Q2.
Hollister, which includes Gilead can solfatara declined 12% or 9% on a constant currency basis. This compares to the reported and constant currency declines of 15, and 12% respectively for Hollister in Q2.
By region net sales increased 3% in the U S and declined 18% internationally or 8% on a constant currency basis.
By region EMEA was down 22% on a reported basis and 11% on a constant currency basis, and APAC was down 26% on a reported basis and 19% on a constant currency basis.
In EMEA, our strongest performance was once again on the UK Middle East and we continue to see softness in other key countries in Western Europe .
Obviously, there are many unknown Europe as winter. So our focus is on controlling our inventory and expenses are quickly reacting to the environment.
In China, our trend remained negative but improved significantly from Q2.
Our gross profit rate was 59, 2% compared to 63, 7% last year.
Drivers of the year over year change, where the adverse impact of exchange rate of 60 basis points and higher product cost of 370 basis points.
On a constant currency basis, AUR was up slightly with abercrombie higher than last year, and Hollister were lower than last year as we worked through back to school inventory.
On product costs, we are optimistic the recent pullback in freight in crop prices will stick, we expect to see freight flip to a tailwind in Q4, as we anniversary elevated error rates and error usage to go to Vietnam closures last year and start to see lower ocean rates materialize in cost of goods sold.
For cotton and we will continue to see year over year cost pressure in the fourth quarter.
Looking ahead, assuming current prices hold we expect to see a benefit from lower cotton starting in the back half of 2023.
Moving on to inventory, we ended the quarter with inventory up 36% to last year, 92% of which was current.
During the quarter, we made good progress clearing through Hollister back to school inventory that was bought at a level higher than trends.
Looking to Q4 and beyond Hollister inventory receipts have been reduced to match with summer and back to school trends and to reflect Boston hold inventory that will set this coming spring.
And we continue to chase in key categories for Abercrombie.
More recently, we have seen greater stability in the supply chain with transit times coming in better than our expectations.
In total we are targeting inventory levels relatively flat to last year by year end.
I'll now cover the rest of our Q3 results on an adjusted non-GAAP basis, we actually had $4 million and $7 million of pretax asset impairment charges for this year than last year, respectively.
Q3 operating expense, excluding other operating income was $501 million compared to $498 million last year. The increase was driven by inflation and higher digital fulfillment expense, mostly offset by lower marketing and incentive based compensation and foreign currency.
Operating income was approximately $21 million compared to operating income of $79 million last year.
Foreign currency adversely impacted operating income by approximately $8 million.
Net income per diluted share was <unk> <unk> compared to net income per diluted share of <unk> 86 last year.
Changes in foreign currency adversely impacted EPS by approximately 10.
Moving on to the balance sheet, we ended the quarter with cash of $257 million and liquidity of $617 million.
We expect cash and liquidity to build nicely in Q4, as we sell through inventory during the holiday period.
During the quarter, we repurchased 510000 shares for approximately $8 million.
At quarter end, we had 49 million shares outstanding down around 20% from the start of 2021 with approximately $230 million remaining under our previously authorized share repurchase program.
We also repurchased $8 million of senior secured notes at a slight discount to par value.
We remain committed to putting excess cash to work pending liquidity levels market conditions, and our ability to accelerate investments in the business.
Turning to investments, we expect fiscal 2022, capex of approximately $170 million up slightly to our previous outlook as we accelerate certain technology investments.
In total we expect half of our capital spend to be for digital and technology and half our stores and maintenance.
We continue to expect to be in that store opened this year with approximately 60, new stores globally with the majority of the U S.
We opened 31 stores through Q3, and the remaining 29 are set to open in Q4, we have approximately 220 leases up for renewal by year end and we continue to expect to close approximately 30 stores, depending on negotiations with our landlord partners.
As we look to the remainder of the year, we assume inflation related pressure on consumer demand continues and that our brand and regional performance will be relatively consistent with Q3 with Abercrombie outperforming Hollister and U S outperforming international.
Our updated outlook replaces all previous full year guidance for the full year. We are planning as follows net sales will be down 2% to 3% to 2021 level of approximately $3 7 billion, an increase to our previous outlook of down mid single digits.
Embedded in this outlook is an estimated adverse impact of approximately 250 basis points from foreign currency slightly worse than our prior expectation.
Operating margin in the range of 2% to 3% with a lower end up slightly from our previous range of 1% to 3%, reflecting better than expected results in Q3.
We continue to expect a total inflationary impact around $250 million across product costs and operating costs compared to 2021.
For the fourth quarter, we are planning as follows net sales to be down 2% to 4% for 2021 level of approximately 1111 9 billion consistent with the Q3 trends.
Embedded in this outlook is an estimated adverse impact of approximately 300 basis points from foreign currency.
For operating margin, we expect a level between 5% to 7% and an effective tax rate in the mid to high forty's as the rate remains sensitive to earnings levels by geography.
As we manage through the holiday season, we're also keeping an eye on the long term. This <unk> a pivotal years as we accelerate our digital evolution and evolve our omni channel experience across brands.
We are mindful of the macroeconomic environment and are managing expenses and inventory tightly with a goal to maximize cash flow to fund key investments.
Looking to 2023, while we are closely monitoring consumer demand, we remain cautiously optimistic that we will see significant relief on product cost and some stabilization.
<unk> across other key expense categories.
We will learn a lot more in the months to come and we'll discuss assumptions for 2023 on our Q4 earnings call with that operator, we are ready for questions.
Thank you, Sir ladies and gentlemen, if you wish to ask a question. Please signal by pressing star, one and I'll get telephone keypad.
First question comes from Dana Telsey Telsey Advisory Group. Please go ahead your line is open.
Good morning, and nice to see the progress can.
Can you expand on the enhancements that you've been making to Hollister and how you expect the branch unfold and progress go forward given the people changes that have occurred there and then any comments on we've been hearing about October and into November how your trends have been exiting the quarter and into the other core into this current quarter.
And then lastly, Scott you mentioned about product cost opportunities, how do you see it with supply chain in the first half of 'twenty three compared to the second half. Thank you.
Hey, Dana good morning.
So as you mentioned, we were pleased to see the sequential improvement from Q3.
In fact, we were pleased to see it in both of our brands.
If you do take a step back the Hollister customer as we've talked about recently is definitely been more impacted by inflation than our abercrombie consumer seems to be at the moment, but we are controlling what we can control. The leadership changes came towards the end of Q2. The inventory changes you know we got on those as soon as we started to see.
See some opportunities hit us as back to school kicked off at the end.
The last quarter.
It's exciting to see our tops business is very strong and chased into those you know our theory there when we talk to the consumer is that perhaps they can't buy you know a couple of pairs of jeans. This year, but they want their outfits to look new so they are putting new tops with those.
We are determined to continue to see these improvements in the quarters to come and the team is working very hard on adjusting your inventories and really leaning into categories that are working.
Let's see question to October and November .
I'll grab that one so similar trends than what we've been seeing across the industry. It sounds like it was pervasive across the industry a little bit of softness there late October and maybe end of the first week of November Super warm there in the Midwest and northeast and obviously thats not optimal for selling cold weather products have seen those trends improve like others.
As exciting we are seeing.
Good early selling through our cold weather categories of outerwear fleece sweaters in places, where we need to win in Q4. So we're happy with the results there results in those categories on product cost opportunities as we look through look to next year. They are a great thing to see these these costs coming back in significant reductions in freight through the ocean and air as well.
As you'll see in the cotton prices stabilize here and down pretty significantly year over year, I would say, it's going to take a little bit longer as he got caught in the flow through so first half of next year cotton will be pressure and then we will start to see the benefits in the second half of next year optimistic that we'll see the freight benefit throughout the entire year, assuming those those ocean cost stay where they are so good.
News coming hopefully on the on the product cost part.
Thank you.
Thank you. Our next question comes from Corey Tuttle from Jefferies. Please go ahead.
Hi, good morning, and congrats on the progress here and thanks for taking my question. So.
Maybe if you could just start talking a little bit about how you feel about the health of inventory going into the holiday it sounds like a lot of the inventories for it in the office.
And it seems to look really good.
So maybe just talk a little bit about the assortment and the health of the inventory.
Okay holiday here, and then I have a follow up.
Alright, so good morning, Cory Yeah. So yeah, we've been inventory has been a hot topic this year and we've been talking about it.
And every quarter and we kicked off the year by saying that we had a strategy on our inventory, which was related to pull it forward and get ourselves set up for the most important quarter of the year last year, we were struggling with both closures in Vietnam with our product as well.
A lot of supply chain issues that we were not going to disappoint our customers again.
So we were able to get to about 36%, which is what I mentioned in my script half of where we were last quarter, but to your point that inventory is current it's 92% current we did a lot of adjusting of our inventory as we start to see the consumer respond to our product in the second quarter. So we're pleased by category and by brand.
On where we currently are.
And we'll be flat by the end of the year, which is what we had said as we set out our strategy.
I think you said you had a salary.
Yeah could you just talk about how you're thinking about the promotional environment as we head into holiday. It seems like people have been.
Talking about more promotions that are expected to see.
Could you maybe just talk about how that is baked into the guide and then Scott How you bridge that.
Five to seven operating margin, maybe some of the puts and takes for the Q4 there associated with that.
Sure. So you know we're heading into this is this is a big week of the quarter.
Everybody knows it's the most promotional quarter of the year.
Our promotional strategy as we've stated many times is based on what is and isn't working for us that what is happening relative to other retailers that are out there I'm very proud to say that our promotions are considerably less than where we were pre pandemic and flat to where we were last year.
We're seeing some nice selling already from some categories and some cold weather categories. So we are we are positioned to compete and I'm personally looking forward to being out in the malls and seeing all the consumer energy. This weekend as we think about that promo environment kind of bridging to the operating margin. We will see we expect to see Abercrombie AUR is up again there.
Were up nicely there in Q3 at Hollister was down in Q3, as we continue to push on that back to school inventory again that was inventory that we bought.
Earlier in the year before that trend fell down kind of in that June time period. So we expect to see the same thing play through in Q4, Abercrombie AUR up Hollister down a little bit as we continue to push through that clearance. So that carryover clearance as we think about bridging the five to seven operating margin now. The good thing is if we're getting closer to last year whenever we really started to see that.
Freight come in so we're still be below 2021 levels and in the way I'd think about it is your gross margin will still see some pressure there year over year and while we see freight being a nice tailwind in Q4 cotton will absorb most of that is that fully comes into the P&L and flows through.
On the other cost should.
Not much else happening in AUC that we've talked about it you are and then other operating costs, we want to keep them relatively flat to last year. So.
For Q4 year over year, it can be a margin story and we'll work through the promo environment.
As Frans said, we're targeting that inventory to be flat at year end to last year and move cleanly into 2023 and again. So the first question earlier it really excited about what we're seeing from product costs and hopefully seeing that benefit throughout 2023.
Great. Thanks, so much very helpful and best of luck.
Thank you.
Paul Nick makers from Citi. Please go ahead.
Hi, This is Kelly crago on for Paul So just wanted to follow up on uncertain of what Youre seeing from us.
Promotional standpoint, so I guess, you're saying that the Hollister brand is more promotional year over year, and then I guess I'm just curious relative to 2019 with those AUR looked like and then on the other side <unk> was also well it was less promotional year over year, which is driving the higher.
And then I would assume that there was an E ours are up relative to 2019.
Yeah, Let me, let me I just wanted to.
Clarifying the first point on the on the first line. So when we talk about Hollister were not more promotional you know our promotions. This year for Black Friday will be consistent to last year that promotion has started which is good and where we might see some additional promotions or pricing actions versus last year will just be to continue to clean up that carryover inventory. So that's where we're at.
<unk> will be down a little bit on a constant currency basis, we do have FX as a continued hurts established here in Q4, so that's going to hurt you or just on a currency basis as we think about 2019.
Actually we'd like where the AUR is are there up across brands. So even for Hollister in Q3, where we had to put some more promotions on to move that back to school inventory those are still higher than 2020, or I'm, sorry, 2019, pre pandemic and Abercrombie up nicely as we've kind of fully evolved that brand and that assortment. So loving the AUR is that we're seeing.
Across brands, even in light of what we've had to do for Hollister and more recently and then getting back to that cost that's coming back and so see gross margin going in a good direction to go forward.
Got it.
When you're talking about yes, sorry, just on an app as we've been going through we've been much less promotional year over year that brands you know the momentum that we've seen there has just been amazing and we've been able to pull off promotions, both depth and frequency.
Got it and then just secondly on <unk>.
On your comments around the quarter to date trends. So I guess youre, saying that you did see a little bit of a slowdown in October but trying to kind of stabilize maybe improving as we get closer to the holiday and I'm. Just curious so no damage to the 4% is pretty consistent with <unk>. So is that kind of what you're seeing quarter to date and then just curious on the kind of the comparisons as we move through the quarter.
I know on the Congress was an issue last year. There was simple we think there is.
Maybe some pull forward of demand.
Holiday last year. So just curious how the rest of the quarter it looks on a year over year basis.
Sorry, what will start backwards on that one so yeah, I mean, our expectation interestingly, but this holiday is that it probably wouldnt mere more pre pandemic, so last year and the year before you're going to sell a bit more of a flattening demand throughout from black Friday through the holiday prior to that and are used to see these big spikes on the most traffic days, which would be you know black Friday week.
Through giving Tuesday, and then some of the key Saturdays. So we are expecting a little bit more of a cadence similar to pre pandemic Kelly like you kicked off with quarter to date trends consistent with Q3. So feel good where we are a couple of weeks of October little tough there at the end. These are small weeks in the quarter same thing with November week, one so back on <unk>.
Once the weather turn saw some great selling in those cold weather categories. I mentioned earlier, so feel good sitting here today and as we go through the quarter. We had of light inventory last year, we have the inventory this year and we're excited to compete as we go through the quarter.
Thank you.
Car like I say, a J P. Morgan. Please go ahead your line is open.
Well I wanted to ask you about your company bought back 8 million of bonds in the quarter in the open market Whats your thought in terms of just your capital structure and whether you would consider calling those bonds or at what point, you'll take another look at the structure.
I call her thoughts about back some bonds in the quarter $8 million, we had done about $40 million middle of last year.
And we have excess cash we look at the capital allocation stack, we increased capital investments we've taken them for this year from 150 million to 170, so continuing to invest back in the business about a little bit soft back and bought the bonds back when we think about our capital structure, we're comfortable holding but that said, we're holding when we see opportunities like we have seen more re.
And really where the debt trades below par or we can go in there and buy a little bit of that back in the open market save a little bit interest expense nice cash payback going forward. So no big picture, though comfortable with the debt and as we have excess cash we will continue to look at that capital allocation stack and see where we put the cash to work.
Okay, Great and then if I could you've seen on one more question on shipping costs can you just talk about freight rates and kind of where they peaked and where they are now relative to where you expect them to be in the next quarter and next year.
Yes, the peaks I would say happened probably earlier this year and shipping costs are tough to pin down there.
Indices, all over the place, but when you don't shift from just the index points somewhere in China that maybe the west coast, we shipped for multiple countries in southeast Asia. So Theres no. One index that I can just grab but what I would say is they're down pretty significantly from the peak and with the demand environment that we're seeing out there a lot of retailers including us.
Pull back on Q4 receipts whenever the businesses fell off earlier. This summer. So the demand environment is good hopefully that's tilted back in the favor of the retailers, we're seeing that come in the pricing and optimistic that that will stick in Q4 and beyond.
Thank you Janet Kloppenburg J J K Research Associates. Please go ahead.
Good morning, everybody and congrats on the great progress.
Plan just a couple of quick well first of all a clarification I think you're saying you expect your promise to be flat for the fourth quarter.
And with a higher than the year over year in the third quarter declare a hollister product, but improved at an F. As.
Driven by the AUR gain as first question second question.
What's going on with Ams mens I am and.
Should we have any concern there and then secondly, when you look at Hollister Assortments for go forward into spring are you.
We're encouraged that we could see an inflection in hollister comps.
Sometime in the first half thanks, so much.
Hi, Jerry I'll clear up the first one real quick and then Fran can get into it.
Hum.
For Abercrombie in Q3, and it was down for Hollister, we pressed on pricing.
Clear.
Back to school inventory.
As we think about going into holiday our main promotions the percent op stores or the promotions that we're running outside the store should be relatively consistent year over year. As a reminder, we right size that Q4 and forward inventory buys for Hollister.
We will focus any excess markdowns in Q4 will be on Hollister carryover inventory. So we'll see how that plays out in the selling mix in Q4, and then I'll kick it over to France circuit.
Lately.
Thank you Naomi.
What about what about policy promos just for Mike just for my notes.
I just wanted to clarify that almost were up would you say meaningfully Scott for for Hollister and <unk>.
I wouldn't say meaningfully.
Okay earn through our holiday our back to school inventory little more clearance pricing taken a little bit lower on the markdowns, but I wouldn't call it meaningful.
Okay. Thanks, so much.
Men.
So in my script actually get it it's exciting second quarter for events, we talked about seeing some green shoots but in the third quarter. We actually saw some growth. So we are encouraged that the men's consumer is seeing how it probably is back like the women's consumer has been saying it for quite some time now and responding to some good categories in our top strong our outerwear business.
Is strong so we're actually very encouraged with what we're seeing and events in the men's business.
That's one aspect.
Exactly yeah, and then for Hollister.
To see some improvement this quarter, our expectations to continue to see.
Sequential improvement, we're seeing good business on the top as I mentioned, the consumer is looking to update their outfits. So they are buying a new top perhaps to go with their genes at Aqua a lot happening in non denim bottoms, we chased into categories like cargo pants, which the consumer responded to quite well during back to school, we didn't have enough suite chased into those.
Our expectations to continue to see sequential improvement in hollister quarter by quarter.
And do you expect a lag in Europe plan.
Yeah, I mean, the international business has been challenging as you know theres a lot of uncertainty still in Europe . We are managing what we can in the short term right we're controlling our inventory.
And to open up first and we do believe in the long term opportunity there so.
Let's see what the fourth quarter brings its been challenging.
Okay. Thanks, so much.
Youre welcome.
Thank you.
A reminder to ask a question please signal by pressing star one.
Ill take question from Mauricio Serna from UBS. Please go ahead your line is open.
Great. Thanks.
Thanks for taking my questions and congratulations on the progress just wanted to ask if you could elaborate a little bit more on category performance.
The two brands, particularly interested in seeing how denim house trying to.
During the quarter and then maybe if you could talk a little bit about Europe , and what are the pockets, where youre seeing some weakness in the markets.
And lastly on freight on the Q4 outlook I mean, I think I recall from last year, there was like a three.
370 basis point impact so you just Wanna.
I wanted to ask if you expect that to be more fully revert in in this quarter or maybe just a more gradual pace.
Thanks.
Alright, so let's go back up to the top here so.
For denim, so we're seeing actually a little bit of a different by brand. So abercrombie had another I don't know anyone in particular had another record quarter in denim and Hollister are intended.
The business has gotten sequentially better what we're really seeing from the consumer though is.
Our move into non denim bottoms, there's a lot happening we set another record in Abercrombie women womens, where we sold but that Panther I think in over a decade or something's got rid over yet.
And.
The Hollister often onto the bottoms are doing very nicely as I mentioned is quickly before about cargo pants and things of those opportunities. So we are shifting our receipts into and leaning into what's working and we're going to continue to do that.
Alright, let's go to Europe or pockets of weakness, so where we are seeing strength that's been relatively consistent we've seen it in the U K and we've seen it in the Middle East and then kind of our next few countries. When you think about Germany, France, Italy, that's where we've seen a softness obviously, Germany.
Has some significant uncertainty right now with the gas situation over the winter so like France had a minute ago, but we're just keeping our eyes on the region. We will control what we can control of keeping inventory lean and we're just gonna read and react because we go through the winter on the freight side and thinking about the outlook. So yes last year, we had about $75 million hit us with freight when we had significant.
Ara usage high error rates high ocean rates coming in we're going to get a big chunk of that back. This year you don't get all of it back that's going to take a little bit of time for those lower rates to flow through the P&L. So again, hopefully some some good things coming there in 2023, but then some of that offset of the good pickup in freight year over year, we'll be seeing that carton flow through and it was higher.
So yeah, we're kind of working through the inflation in the input costs freight hopefully it seem to peak and we're on the good side of it cotton still we've got to get through the peak there and then hopefully in the back half of 2023, we'll see some benefits coming in.
Okay.
Got it thanks, so much.
Thank you and as there are no further questions in the queue I'd like to hand, the call back over to Fran Horowitz for any additional or closing remarks.
Just wanted to thank everyone for joining the call today and wishing you and your families are safe and happy holiday season.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.
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