Q1 2023 Abercrombie & Fitch Co Earnings Call

Speaker 1: You you.

Speaker 2: Good day, and thank you for standing by. Welcome to the Abercrombie and Fitch fourth quarter and year-end fiscal year 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

Speaker 2: To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To remove yourself from the queue, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Magupta, Vice President of Investor Relations. Please go ahead.

Speaker 3: Thank you.

Speaker 4: Good morning and welcome to our first quarter 2023 earnings call.

Speaker 4: Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lapesky, Chief Financial Officer, and Chief Operating Officer. Earlier this morning, we issued our first quarter earnings release, which is available on our website at corporate.abacrombie.com under the Investor section.

Speaker 4: Also available on our website is an investor presentation.

Speaker 4: Keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today.

Speaker 4: These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission.

Speaker 4: In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release and investor presentation issued earlier this morning.

Speaker 4: Finally, references to Abercrombie brands includes our Abercrombie & Fitch and Abercrombie Kids brands and references to Hollister brands include our Hollister, Gilly Hicks, and Social Tourist brands. With that, I will turn the call over to Fran.

Speaker 5: Good morning and thank you for joining us today to walk through our first quarter results. I'm excited to share that we surpassed expectations on both the top and bottom lines despite the challenging macro environment.

Speaker 5: Crombie Brands where we were up 14% to last year.

Speaker 5: As we've discussed, top line growth is one of our top priorities and I'm proud of how our teams continue to deliver incredible product and brand experiences for our customers.

Speaker 5: Additionally, our work over the last year to reduce freight costs paid off this quarter, with 570 basis points of growth profit rate improvement year over year, driving a 4.1% operating margin compared to a loss last year.

Speaker 5: Looking forward, we are increasing our outlook for the full year based on the combination of our first quarter results and second quarter expectations.

Speaker 5: We're also showing our product flexibility with inventory down 20% to last year with high confidence that we can support demand through the return of chase capabilities. We're also showing our product flexibility with inventory down 20% to last year with high confidence that we can support demand through the return of chase capabilities.

Speaker 5: And although it's early in the year, 2023 is off to a great start. We remain focused on managing the business prudently to deliver the bounce of the year while appropriately investing to position ourselves for long-term profitable growth.

Speaker 5: Sharing more on Abokrombi Brand's successful birth quarter, total brand sales for $436 million, accounting for 52% of total company sales, up 14% on top of 13% growth in the first quarter last year. This is truly the most powerful brand transformation that I've seen in my career.

Speaker 5: By listening to our customers and putting them at the center of everything we do, we are delivering product, voice, and experience that are tightly aligned and continue to resonate.

Speaker 5: Being able to deliver consistent growth quarter after quarter underlines the enormous potential we have within Abercrombie brands.

Speaker 5: It's even more special to see how we're growing Abercradi, showing strength of our customer connection. Sales improvement in the quarter was balanced across genders, channels, and geographies.

Speaker 5: As we've discussed previously, the Women's Business Letter turn around and continues its strong trend with its 11th consecutive quarter of double-digit increases. More recently, we've seen the men's business turn on, delivering its third consecutive quarter of growth. Across genders, AUR was up nicely.

Speaker 5: Representing the highest level since 2005 and meaningfully contributing to our overall growth profit rate improvement.

Speaker 5: AUR is now significantly from pre-pandemic levels, which is a clear measure of the inherent value and relevance customer see in our assortment.

Speaker 5: digitally through a genuine grand voice, supported by a seamless experience in our stores, our app and the web.

Speaker 5: On digital engagement, our team has leveraged social media platforms to showcase our lifestyle offering where we are able to highlight key must-win products for us in an authentic way.

Speaker 5: Social has proven to be a great channel for our target millennial customer. Further, we're extending these sorts with new styles and collections like best dressed guests and YPB to outfit them for professional, active or casual environments, keeping them coming back to find something new.

Speaker 5: We are energized about the results in Abercrombie and we are aiming to reach new heights this year. We feel great about how the brand is positioned and we are chasing inventory to support growth. Moving on to Hollister brands. Later in Q2, we'll hit the one-year mark since we saw teen apparel demand shift significantly downward. While first quarter sales were not where we need them to be, the Hollister brand is a new market for the brand.

Speaker 5: Hollister assortment evolutions on track, heading towards back to school with a fresh, more balanced perspective.

Speaker 5: As we talked about the last couple quarters, these changes are informed by the comprehensive work the team has undertaken to know our team. We're testing and collecting feedback as we evolve the product piece by piece and we'll have fully addressed the assortment as we enter the second half of the year.

Speaker 5: Hollister's first quarter sales decline of 7% was consistent with internal expectations.

Speaker 5: We focused on managing the overall health of the business in terms of gross profit rate and inventory and we surpassed internal expectations on both fronts. Hollister was able to expand gross profit rate nicely compared to last year on the combination of lower freight and higher AUR as tightly managed inventory allowed us to be more selective with promotions.

Speaker 5: In fact, Hollister inventory was down more than the total company level of 20%, which puts the brand in an excellent position to leverage Chase and invest in winning categories as we move through the summer and back to school seasons.

Speaker 5: Our Q1 results in Hollister Shore are focused on running a healthy business and a challenging team market as we lay the foundation for growth. I'm excited to see what this team can produce in the second quarter and look forward to sharing Hollister's progress through the year.

Speaker 5: We'll share our consolidated financial outlook for the business in a few minutes, but I'd like to offer some context on how we are thinking about the remainder of 2023, as well as how we'll deliver on our long-term aspirations.

Speaker 5: As you may recall, one of the three pillars of our 2025 Always Forward Plan, which we introduced last year at our investor day, is focused brand growth.

Speaker 5: We remain committed to delivering on this ambition despite macroeconomic uncertainty by leveraging our playbook and a transformed operating model. Our other two strategic pillars help support the growth ambition. The digital revolution ensures we stay closer to our customer as digital touches every aspect of their lives including how they shop.

Speaker 5: The third pillar, financial discipline, keeps us on a profitable path between best for the long term. With our playbook and our always forward plan, we believe we have the tools in place including the ability to chase inventory to show up for our customers, whenever, wherever, and however they want to engage with us. To be clear, our focus at this phase of our journey is to grow the business as a whole.

Speaker 5: by building and maintaining strong, long-lasting customer relationships.

Speaker 5: With that, we are further along and expect to use momentum we're seeing to push both customer acquisition and retention. In Hollister, we're applying customer insights and continue to focus on evolving the assortment and brand positioning. While it's early in 2023, our team's strong first quarter execution against a challenging macro backdrop.

Speaker 6: It gives us cautionism as we look to the second quarter and beyond.

Speaker 7: We will navigate this dynamic environment as we have in the past to drive progress towards our long-term vision.

Speaker 8: Before we turn to our financial review, I would like to recognize Scott for his incredible efforts helping A&F Co. transform and set our sights on growth. Congratulations Scott on becoming our Chief Operating Officer in addition to your role as CFO . I'm excited to have Scott take a broader leadership position overseeing key operational areas like supply chain and store operations to help drive connectivity and key investments to support our broader growth ambition.

Speaker 9: I'll turn it over to him now to provide some more color on the quarter. All things financial discipline.

Speaker 10: Thanks, Fran and good morning. I'll hit on a few highlights before we open up for questions. Also with the COVID-related store closures, essentially out of the base, we will once again provide comparable sales metrics. Thanks, Fran.

Speaker 11: Now on to Q1 results. On the top line, we were pleased to deliver net sales at $836 million, up 3% to last year. This marked the highest first quarter sales level since 2014 and exceeded the expectations shared on our fourth quarter call.

Speaker 12: Sales were negatively impacted by 110 basis points, or $9 million, due to changes in foreign currency.

Speaker 13: Total company comp sales for the quarter were up 3%. By region, we saw continued strength in the U.S. with total net sales up 9%, including 4% comp growth and a positive contribution from net new stores.

Speaker 14: Our international business declined 12% in total, but was flat on a calm basis.

Speaker 15: The spread between total sales and comps was driven by lower wholesale revenues and year-over-year adverse impacts from changes in foreign currency.

Speaker 16: In APEC, we realize the benefit of the China reopening, delivering 22% comp sales growth.

Speaker 17: realize the benefit of the China reopening delivering 22% comp sales growth.

Speaker 18: Moving on to gross profit, our rate was 61% compared to 55.3% last year. Looking at the key drivers of the 570 basis point improvement, approximately 230 basis points came from AUR growth with better than expected performance across brands as we benefited from select tick and increases initiated in the second half of last year.

Speaker 19: as well as more controlled promotions. We also saw a benefit of approximately 760 basis points from lower freight cost as we realized lower freight rates and laughed the impact of increased air usage last year. We also saw a benefit of more controlled promotions. We also saw a benefit of more controlled promotions.

Speaker 20: These benefits were partially offset by 320 basis points of higher cotton and other raw material costs and an adverse impact of around 100 basis points from foreign currency.

Speaker 21: We are pleased with the state of the supply chain with freight cost decreasing and shipping times improving compared to the past couple of years.

Speaker 22: The improved consistency in the supply chain and tight inventory management enabled us to decrease our inventory levels by 20% compared to the first quarter of 2022 when we front-loaded inventory to avoid supply chain disruptions.

Speaker 23: We expect to run inventory lower than last year for the second and third quarters, and in line with last year by the end of the fourth quarter.

Speaker 24: And I'll cover the rest of our first quarter results and an adjusted non-gap basis.

Speaker 25: Excluded from our non-GAAP results this quarter are $4 million of pre-tax asset impairment charges, which adversely impacted results by approximately 6 cents.

Speaker 26: Last year, we excluded $3 million of pre-tax acid impairment charges, which adversely impacted results by five cents.

Speaker 27: Operating expense, excluding other operating income, was $474 million, compared to $460 million last year with the increased driven by investments in digital and technology and higher incentive based compensation expense, partially offset by lower marketing and digital fulfillment expense. Operating income was $38 million, compared to an operating loss of $6 million.

Speaker 28: to a net loss per share of 27 cents last year.

Speaker 29: On the balance sheet, we ended the quarter with cash of $447 million and liquidity of $758 million.

Speaker 30: As we look to the second quarter and the rest of 2023, we expect to continue to manage a strong liquidity position as we work through this period of macro uncertainty. To help ensure we can invest for the long term through any cycle. If we're seeingindeers

Speaker 31: As Fran mentioned, we remain cautiously optimistic about consumer demands, and updates to our full-year outlook are driven by the first quarter performance and our current view of the second quarter.

Speaker 32: This updated full year outlook replaces all previous full year guidance.

For the full year, we are planning net sales growth in the range of 2 to 4% from the 2022 level of approximately 3.7 billion. This is up slightly to our previous outlook of up one to 3% due to the outperformance in the first quarter and our expectations for the second quarter.

Adjusting for these first half changes are implied second half sales outlook remains consistent with the prior outlook due to the high level of macro uncertainty.

As mentioned last quarter, we expect to support growth with net new store openings in 2023. We expect 35 to 40 openings and 20 to 25 closures, along with approximately 15 store remodels and right sizes. Opening will be tilted to the US and the Abercrombian Fish Banner.

For operating margin, we expect to be in the range of 5 to 6%, up from our previous outlook of 4 to 5%.

We now expect a gross profit rate benefit of approximately 250 basis points from the net impact of lower freight costs and higher cotton costs and higher than expected AUR in the first quarter.

This compares to a previous estimate of 200 basis points. We expect an effective tax rate in the high 30s compared to a previous expectation of mid-40s due to higher expected profitability levels and CAPX remains at approximately 160 million.

For the second quarter of 2023, we are planning net sales growth to be in the range of 46% compared to the fiscal second quarter 2022 level of 805 million.

Embedded in this outlook is the assumption that Abercrombie continues on a growth trajectory, and Hollister makes the quenchedal progress off the first quarter sales trend of down seven.

For Hollister, Imentori's controlled, we expect to run a healthier, more profitable business as we lap significant promotional activity last year.

Our teams are ready to compete and chase and up side demand across key categories.

For operating margin, we expect a range of 2 to 3% compared to a approximately break even last year. With the year of year improvement driven by a higher gross profit rate, do a net benefit from lower freight and higher cotton costs.

And an effective tax rate around 50%, with the rate being sensitive to the jurisdictional mix and level of income.

To finish up, we were pleased to return to profitability in the first quarter. We are managing our inventory tightly and believe our brands are in a flexible position to chase potential demand in the months to come.

Behind the scenes, we look forward to making another quarter of progress against strategic investment plans in digital technology and stores. With that operator, we are ready for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. We ask that you limit yourselves to one question with one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question.

From the line of Dana Telsey with Telsey Advisory Group, your line is now open.

Hi guys, congratulations on the night progress and Scott, congratulations on the elevator roll. Can you talk a little about Hollister Fran, what you're seeing there, and how you think about it to the back half of the year and the cadence there?

And Scott, can you talk about any of the under the hood puts and takes on gross margin, particularly in reference to the promotional environment? Thank you. Thanks, Dana. Yeah, so Hollister met our internal expectations for Q1. We brought it back to being a healthy business, which we're very excited about, you know, to see.

Some AUR growth in there was an important Opportunity for us for with our with our customer the inventories being under control But I just want to step back from it and just kind of take out a little bit of a journey as you know That the teen you know, a lot of the teen retailers got a bit press last year during Q2 during back to school

Our team has been hard at work. They have been very focused on evolving their assortments, getting close to that customer, working on their assortment architecture, and I'm really proud of the progress that they've made. We're seeing some nice green shoots in the business. You know, the shift, you know, a little bit out of denim into some non-dynamadens is working, the cargo trend continues.

Our dress business in girls is really terrific. So some exciting things and I'm looking forward to what they can deliver for back to school. Hey Dana, thank you first off and on the gross margin. So obviously a lot going on here in Q1. Made great progress year over year. We got a lot of that freight back that hit us last year. You know that air usage that we had in Q4.

Of 21, a lot of that carried over into Q1. So you add that with with good freight rates that we're seeing an ocean and elsewhere. Really nice improvement in gross margin and I'd say the 1 outlier for us in Q1 was beating our forecast coming into the quarter as we think about the rest of the year. We're not assuming growth the rest of the year. That would be upside to our plans. Obviously.

and get it at a nice cost. And the other piece are the assortments. Fran just mentioned Hollister, we're testing, we're learning, we feel good. Abercrombie is in a great rhythm and rolling. So those give us good opportunities long term. Thank you. Thank you. One moment for our next question, please.

And the next question comes from the line of Matthew Boss of D.P. Morgan. Your line is now open.

Thanks and congrats on a great quarter. Thanks, Matt. So, Fran, at Abercrombie, could you speak to the cadence of the 14% comp maybe touch on customer traffic trends and just customer behavior that you've seen more recently in the second quarter?

And then Scott, on inventory, what is your ability to chase this season and even into the back half of the year if top line trends were to continue?

our brand.

What is driving that is a lot of exciting things. You know, it's no longer just a genes and t-shirt business. We've been able to expand into dresses and to all sorts of occasions to satisfy this consumer from our Pant Business is very strong. The men's business, third quarter of positive comp there as well. So as you know, we started this turn.

Our teams are literally chasing every day. The stability in the supply chain is making that easier than it has been in the past few years. Ocean shipping has been good. We can chase through ocean and there's also a lot more air capacity out there. And the rates have come down pretty dramatically since the peak back there in 2021 and early 22. so we have the ability. Our teams are using that ability. We're running the inventory lean and as we see wins, we're able to chase them pretty quickly.

Thank you.

And our next question comes from the line of Corey Tarlo with Jefferies. Your line is now open.

Hi, good morning, congrats on the strong quarter and Scott congrats on the new role.

So, yeah, so maybe if you could just talk a little bit more about the –

Fran, you walked us through the journey for Hollister, maybe a little bit more on Abercrombie specifically. The reason I ask is because I think this is the first quarter in quite some time where you've actually seen higher sales volume at Abercrombie in totality than you've seen at Hollister. I think you'll say things in the world.

Maybe could you put that into context for us? How you think about the sales trajectory for the A&F business, things like things are going really well overall, maybe relative to the size of Hollister on a go-forward basis. Any color there would be particularly helpful.

Sure, so to your point, we've been on a journey with Abercrombie as well. You know, we really started the turn focusing on the women's business. That was step one, getting that business back to being a healthy business. We've seen some really exciting things happen there. We've built some franchises, Corey. You know, so off of our traditional business, we've been able to build, for example, the best...

the team and they keep on including you know people watching more franchises you know YPD just had its first anniversary which is our active brand that came out of feedback directly from our consumer what they wanted from us and now we have a men's business going so third consecutive quarter of men's business some exciting things in there for example our pants business

We've diversified, you know, not just the denim business, the non-denim business. The consumer for Abercrombie.

Has many different, you know, wearing occasions and now that many of them are back to the office They're coming to Abercrombie to help them help service them for that need as well So lots of exciting things and thrilled about the momentum that we're seeing Yeah, just to add on at the end if you think about the Abercrombie business you mentioned the size You know It was actually a little bigger than the Hollister business here in Q1 as we think about the future of Abercrombie that gets us really excited

The addressable market now that we've aged up with this consumer, you think about post-collegiate up to 40s and beyond, that is a very large addressable market versus a teen space where we've operated in the past with that brand. So really excited about the unlock there. Like Fran said, we have both genders working right now. Huge market and the fashion is working. Our team is out there leading fashion trends and that's exciting.

be in line with last year by the end of the first quarter and also down in the second and third. As you think about inventory being in line, is that on a nominal basis? Therefore, you're actually likely to still be down on a unit basis, which I think also and you've proven your ability to run a little bit more efficiently on leaner inventory.

Just curious if I'm correct in that and any thoughts there. Yeah, I'll just clean that up a little bit. So we were down 20 here in Q1. Our expectation is that we'll run down in Q2 and Q3. And by the time we get to the year end, we'll be more in line with the end of 2022. If you remember last year, we are obviously front loaded there in Q1, Q2 and Q3 and then we really worked that down.

basis, the un-dominal basis, yeah, reported inventory. Yep. Got it. Great. Thank you so much. Really appreciate all the help, and best of luck.

Thanks, please. Thank you. One moment for our next question, please.

And our next question comes from the line of Marnie Shapiro with the retail tracker, your line is now open.

Hey guys, congratulations! This story looks fantastic. Fran, I want to dig in a little bit to what you just said in describing Abercrombie and being able to build upon certain pillars and launch things like best dressed guests. Over time I guess what should that look like at Hollister? Because it seems like this has been a really...

strategic and

very successful path at Applecrombie and other than denim, which is probably the core, I'm assuming, at Hollister. What would this look like at Hollister? Is you guys are looking to improve that brand as well?

So we have, so great point, Monty. We work with Playbooks here and we're taking a lot of the learnings from Playbooks from Abercrombie and applying that currently to Hollister. Keeping in mind, we've done a lot of work here over the years to make sure that these two brands are very separate.

and Hollister is focused on that teen consumer, and Abercrombie is focused on that millennial consumer. With that said, as you all know, there's a lot of trends that do overlap, and you have to make sure that you interpret them for the appropriate customer. So what we've learned at Hollister over the past year is that he and she, they're evolving as well, and they're evolving from denim. You know, denim is important. It remains important. There's some exciting things happening in denim, which is...

how they're dressing and the different occasions that they have. We've seen some green shoots in our assortment and it's really giving us confidence as we head into back to school, which is when the team really feels like the assortments have evolved considerably from last year. So I'm looking forward to it. At this point, we're screwing it up along with the obside defense we saw today with

You know, obviously it's much more promotional out there. Historically, back to school is a promotional time of year. I honestly, the whole back half of the year seems promotional at this point. You guys have been able to really focus on...

balancing maintaining, I don't want to say full price, but the perception of full price, but being able to promote to grab the customer for the back half of the year and keep the margin still improving.

Yeah, if you look at what we did for the 1st quarter, there's a couple of key points to it. So. Primarily magic or inventory, right? I mean, that's a, that's a key component to making sure that we can manage our promotions, but there's just a lot more to it. We came into this year with double digit growth in our for both brands from Pre pandemic. I mean, that was a big win for us. We tried for a long time, right? To drive the.

and the outlook is to hold the AR for the balance of the year, but excited about what we can deliver for the first quarter.

Operator, I think we're ready for our next question.

Our next question comes from Paul Lewis with City, your line is now open.

Hi, this is Kelly on for Paul. Thanks for taking your question. So the two Q sales guidance, it looks like you're looking for an acceleration versus the first quarter, which is different than what we're hearing from a lot of other retailers and setting some consumer weakness out there. So could you talk about with driving that maybe any color on the two.

second quarter and Hollister we're assuming is going to make some sequential progress off of the Q2 or the Q1 trend of down seven. So you know sitting here today 25 days into the quarter you know we have the confidence that we need to put that outlook out there for growth of up four to six percent. As you mentioned it's a little bit better than what we saw in Q1 and you know the big test here at the end of the quarter is always back to school and we'll see how that plays out but sitting here today that's our outlook.

headwind in the second quarter and in the back half of the year. And just to confirm, that 250 basis point freight had our tailwind for the year, is that just the tailwind from freight, or is that kind of what you're guiding your total gross margin to for the year? I know there's some other moving parts there with that.

And there you are. So if you could just provide a little bit more color, that might be great. Thanks. Yeah, the 250 basis points is the full year gross margin benefit that we're talking about and that is net. So we're going to have benefits from freight that will trickle throughout the year. I had a nice, nice pick up here in Q1, which I'll get to in a 2nd. And then the cotton costs, as we talked about last quarter. Little heavier hit to us here in the 1st, half and then those will start to moderate, but will be a hurt for the year. So the net for the year.

Continue each quarter, but we will see that that cotton hurt continue each quarter. So, like we said, up 50 basis points from our previous outlook of 200 basis points on the year up to that 250 basis points. And just like where the trends are right now, we talked about the supply chain costs are coming down lead times are improving and that's good for all of us.

Great, thank you.

Thank you. One moment for our next question, please. The next question comes from the line of Janet Klopenberg with the JK Research Associates. Your line is now open. The next question comes from the line of Janet Klopenberg with the JK Research Associates.

Hi, everybody, and congratulations on a great quarter and congratulations to Scott. Nice to see you. I wanted to ask a couple questions because it looks like the email region got a little bit...

worse in the first versus the fourth. And yet Hollister's overall revenues improved from minus nine to minus seven. So it makes me think that maybe North America comps that Hollister will once again.

in the positive territory. Love it if you could talk about that. And for the EMA region, what guidance assumes as we move through the rest of the year. And Fran, you touched on this a little bit, but I am hearing that Jenim...

trends are starting to improve and I'm wondering if you know that could help Hollister's business accelerate globally as we look to the back half. Thanks so much.

Hey, Jan, I'll pick it off. First off, I'm thinking about the international business. We have a little different, we have kind of spread this quarter versus normal where our total sales change of down 12 was very different than our comp of flat. And if we break apart the regions, thinking about Ameya, we have a...

Small wholesale business in Amaya, you've seen all the headlines on wholesale. We're not immune to that. So we've taken a little bit of a hit on our wholesale business in Amaya. But when you look at the comps in Amaya of the down four, we're calling that relatively stable. But the story hasn't changed much for us in Amaya. The UK remains our strongest country. Middle East is also strong.

As I shift over to APAC, our comps were 22%. Saw a nice reopening in China and Hong Kong and excited to see how that plays out for the rest of the year. So our punchline on international right now is stable. We know we have work to do there, but we're optimistic as we go to the back half. Seeing nice traffic into our stores and...

international business. Obviously Q1 was the the toughest comp that we'll have this year because kind of lapping the fall off in Q2 last year. So as Fran mentioned we're pleased with the Hollister performance in Q1 specifically in North America. It met our expectations coming into the quarter.

And we're all very excited to come up on the lapping of the business fall off in the next few weeks here. So lots to learn. Thank you. Go ahead. And I'm sorry. No worries. So denim is an important part of our business and that you know is true in both brands and both genders. It has been exciting though to see the consumer diversify somewhat out of denim. And this non denim bottom trend that we're seeing is really terrific and that's also interesting.

continue to be important as well. So we're looking forward to back to school. And thinking about the denim trends by brand, the trend really hasn't changed. It's a little weaker in Hollister and much better in Abercrombie. I mean as Fran just mentioned the cleaner cleaned up denim, you know with Abercrombie you can wear denim to work and so we're seeing those continued trends.

At this point we're really looking at it denim plus pants and the bottoms business has been good across brands.

at it, Denim plus Pants and the bottoms business has been good across brands. Thank you.

Thanks, Janet. Thank you. One moment for our next question, please. And our next question comes from the line of Mauricio Serna with UBS. Your line is now open. Great. Good morning and thanks for taking our questions. Congratulations on the results as well.

Maybe we could talk a little bit more about the fashion trends on Abercrombie across the different consumer you target, meaning the ages that you target. And then on AUR, did you see AUR growth across both brands, or how did that look? And lastly, on the operating expense…

What are you thinking about the growth trajectory of year over year or the next few quarters given you're doing store openings, but you're probably going to see also some moderation on inflation? Thank you. Let's start with the first private question, Rocio. So as far as Abercrombie goes, the exciting thing about the brand is it's really become a lifestyle brand.

And we're seeing lots of different trends happening, as I've mentioned. I mean, I could just say dresses, dresses, dresses all day long. You know, we have become a destination for the consumer looking for dresses, whether that's special occasion, whether that's where to work, whether that's going out. It's really been a big win for us. We've also diversified, you know, our bottoms. So denim is a very important category for us, but so are non-denim bottoms.

for all of those occasions.

Regarding AUR, that's a really exciting story for us because

As we came out of the pandemic, we talked a bit about the fact that our group double digits in both brands heading into 2023. And our goal was to maintain that. And in fact, we did beat that in both brands coming out of the first quarter.

3rd piece on the operating expense, so I'd say relatively consistent story with what we've seen in Q1. We'll continue to see the rest of the year. On operating expense, we are making key investments. We talked about an ERP program that we've put into place multi year. So we're seeing some higher expenses due to the digital and technology investments that we're making.

On top of that, there is the inflation. I would say it's not yet abating in our P&L. The inflation, I'll call it up everything, labor through systems, tools, everything that we're buying, that's flowing through the P&L. We are able to offset that. We do have some efficiency plays year over year, specifically in our supply chain area. But net net, we're still calling for some moderate deleverage on the year due to really the investments that we're making and then that inflation.

Thank you so much for taking my question and congrats on a super nice report. I really just have two to round it out here. It sounds like you're not seeing any pressure on going out or occasion categories, despite what I think is a relatively hard comp. So any commentary on that would be helpful. And then second, on your ability to take ticket, it sounds like across the business.

Can you just give us some insight into how you assess where that's possible and then gauge consumer sensitivity on it? Thanks so much. Good morning, Alex. On the first part of your question, we are not seeing any change in the consumer's behavior currently. Again, we're taking share and we are becoming a destination for all those different occasions for her and for him, and particularly in our dress business, which just continues to set records quarter after quarter.

take tickets up last year in certain places. We don't have any aspirations to continue to take tickets up as we go through the year. There's always some changes here and there, but we are happy to see that flow through here in Q1, and it just speaks to the power of the Abercrombie & Fitch brand and the momentum that we've seen.

Thanks a lot. Thank you. And at this time, I'd like to hand the conference back over to Fran Horowitz for closing remarks.

I just want to thank everyone for joining us today and we look forward to continuing to update you at the end of August . This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

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