Q3 2023 Abercrombie & Fitch Co Earnings Call
Okay.
Yeah.
Good day, ladies and gentlemen, and welcome to the Abercrombie <unk> Fitch third quarter fiscal year 2023 earnings call Today's conference is being recorded.
After the speaker's presentation, there will be a question and answer session.
Ask a question. During this session you will need to press Star one why don't you touched on phone you will then you an automatic message by single Hey in this race.
At this time I would now like to turn the call over.
Please go ahead.
Thank you.
Good morning, and welcome to our third quarter 2023 earnings call.
Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott <unk>, Chief Financial Officer, and Chief operating Officer.
Earlier. This morning, we issued our third quarter earnings release, which is available on our website at corporate Abercrombie Dot com under the investors section also available on our website is an investor presentation.
Please keep in mind that 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 mentioned today. These.
These factors and uncertainties artist Scott in our 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 measures are included in the release and Investor presentation issued earlier this morning.
Finally references to Abercrombie brands includes Abercrombie <unk>, Fitch, and Abercrombie kids and reference at the Hollister brands includes Hollister, Gilly Hicks and social tourists.
That I will turn the call over to Fran.
Thanks now good morning, and thank you all for joining US. We are excited to report outstanding third quarter results, which is a testament to our global team delivering on our goal of aligning product voice and experience to our customers needs at each brand.
We continued to build on the momentum from Q2 with sequential acceleration in both sales growth and profitability.
On the top line growth trends were strong throughout the third quarter driving sales results above our expectations.
For the quarter net sales increased 20% with growth across all regions brands and direct selling channels, including both stores and digital.
We also exceeded expectations on the bottom line with a 13.1% operating margin driven by 570 basis points of gross profit rate expansion and operating expense leverage on higher sales.
The 13, 1% operating margin was an expansion of over 1100 basis points compared to third quarter 2022.
For the year to date period net sales were up 13% to last year with an operating margin of nine 3% over 900 basis points better than 2022 to the third quarter.
These results show that how the response of our customers as we continue to execute our playbook.
I'm, so impressed with what our team has delivered pushing boundaries and challenging ourselves to grow I think close to our customers and remaining agile.
As we enter the fourth quarter, we are poised to continue this momentum with our brands and regions strategically positioned to win.
As such we are raising our sales and operating margin expectations for 2023.
Capping off a significant year of improved growth and profitability for the company.
I'm proud to share with a strong quarter across our brand portfolio and the time, we've spent reinvigorating Hollister brand is resonating with our customer.
With the refresh grant aesthetic and evolved assortment Hollister brands achieved 11% growth for the third quarter, showing nice progress as we comp a disappointing 2022 back to school season, and what remains a dynamic teen apparel environment.
Hollister delivered growth in all regions showing balance as we further localize our assortment and experience.
We continue to prioritize driving a healthier business in Q3, improving the gross profit rate and lower rate and lower freight costs and higher AUR from lower promotions.
Just with the first half of the year.
Enter the peak holiday season, our inventories in a significantly better place compared to last year, giving us the opportunity to be strategic with promotions.
Turning to product wins, the Hollister women's business continued to lead the way for the brand growing nicely and showing balance of tops bottoms and dresses all helped drive sales improvement to last year.
As we discussed last quarter, we entered back to school with purpose school distortions to dresses non denim bottoms and select hub categories, all of which did well for the balance of the quarter.
Importantly, we have used these learnings to chase into winters for the holiday season.
The overall men's trend was similar to the second quarter with solid performance in non denim bottoms fleece sweaters, all of which were areas of focus for newness as we rebuilt the assortment.
This holiday season is teen customers head to them all will be ready to meet them and evolved assortment. We expect to complement the in store business with increased digital marketing, particularly on social channels, where our teams are spending an abundance of their time.
Although it's early we're pleased with housewares brands start to the fourth quarter and we remain tight we remain on a path to deliver growth for 2023, a key point for progress for the brand.
Moving to Abercrombie brands Wow, the team delivered their 11th consecutive quarter of sales growth with an impressive 30% sales increase year over year.
We continue to find new ways to win with our target audience, resulting in great balance of consistency in addition to growth acceleration.
Similar to Q2, we saw growth in units AUR genders regions in both stores and digital direct channels.
On the assortment, both men's and women's posted double digit sales growth in the quarter looking at women's Q3 marked the 13th consecutive quarter of double digit sales growth.
I've been impressed with how our teams have continued to build on strong franchises across tops bottoms and dresses.
From N Q3 marked our fifth consecutive quarter of growth and important milestones we strongly com at the beginning of our growth path in Q3 2022.
Following our successful playbook for womens were building into franchises in central fleets of nits, while driving newness across jeans and pants.
I'm excited about our cold weather assortment in both genders across sweaters fleece and outerwear as we approach holiday.
Abercrombie continues to find compelling ways to connect with customers a unique collaborations and brand experiences for example, a recent collections with Influencer Kathleen post in Harlem Fashion Road designer, Nicole Benefield half driven engagement with new and current customers, particularly on social media and our digital shopping platform.
An in person experience, we continue to see traction in our neighborhood stores.
And we were thrilled to open four additional locations in the quarter, including Soho in New York Brickell Street in Miami, King Street in Charleston, and Harbor East in Baltimore.
We have and will continue to use our digital and store experiences in concert to drive a seamless customer experience.
Looking forward to the fourth quarter Abercrombie brands has had a great start to November continuing a historic 2023, and we're confident our customers will love. It we have for them this holiday season.
Moving to regional performance.
Last quarter, we are seeing Pos results more evolved regional operating model, which provides better support for our local teams and a greatly improved customer experience each region delivered growth in the quarter also building on our second quarter sales increases.
Terrible sales basis, the Americas grew 16% in Q3.
<unk> grew 15% and APAC grew 32%.
And the localization efforts, our EMEA and APAC teams have made key updates to our assortments pricing and ports at cadence as they move between 'twenty three.
Contributing to our sales performance in those regions.
In EMEA, our teams also localized marketing content and prioritize spending our two largest markets the U K and Germany, where we are seeing outsized pas results compared to the rest of Europe.
We see similar progress of our APAC team as well as you know Single's day is an important retail holiday for us in the region the team tailored promotions and product positioning leading to a nice increase in sales this year.
There's more work ahead, but our improved trends give me the confidence that we are focused on the right aspects of the customer experience and that we can continue to recoup lost volume over the past few years following the Covid pandemic.
Before I turn it over to Scott I wanted to share a few additional thoughts on the upcoming holiday period.
Quarter is off to an encouraging start and we're ready and focus to compete with the large volume still ahead of us.
Our teams have worked hard to align our product and promotional messaging to set us up for a successful holiday cross brands with strong brand positioning and Holly product strategies in place for each brand we are accelerating our marketing investment in the fourth quarter to capitalize on heavier traffic and drive customer acquisition and retention.
While the macro environment remains challenging and uncertain, we've proven that we can deliver growth across brands and regions. If we stay focused on our customer and execute our playbook.
I'm so proud of what our teams have achieved so far and we expect to finish 2023, showing the strength of our customer relationships. In addition to sales growth and profitability.
I'd like to thank our global associates for making this happen through their unrelenting customer focus and unwavering commitment to our always forward plan.
I'll look forward to continue our momentum in important holiday period, and sharing our full year accomplishments with you soon with that I'll hand, it over to Scott.
Thanks, Brian I'll start with adding my thanks, and congrats to our global team for delivering a strong third quarter. We drove net sales gross profit rate and operating margin above our expectations, while continuing to manage inventory tightly.
For the quarter total net sales of $1 56 million were up 20% to last year with growth across brands and regions.
Comparable sales for the quarter were up 16% with both stores and digital contributing.
The 400 basis point spread between comps and total sales was primarily driven by net new store activity.
As a whole our new stores have exceeded our expectations and are expected to deliver productivity per square foot at a rate more than double the stores, we closed last year and will close this year.
On a regional basis, our growth was more balanced in the quarter compared to recent past better.
Better balance was driven by an acceleration outside the Americas by.
By region net sales grew 22% in the Americas, 14% in EMEA and 13% in APAC.
On a comp basis sales grew 16% in the Americas, 15% in EMEA and 32% and APAC.
In our EMEA and APAC regions, we have seen a good response to localization efforts made this year, including product and inventory distortions pricing adjustments and timing of product drops.
On a brand basis Abercrombie brands delivered another great quarter of growth of 30%, while Hollister brands grew 11% on.
On a comp basis, Abercrombie grew 26% and Hollister grew 7%.
Similar to the second quarter Abercrombie brands growth was consistent across genders, while the women's business drove the growth in Hollister brands.
Moving on to gross profit the gross profit rate for the quarter was 64, 9% up nicely compared to 59, 2% in 2022, the 570 basis point rate improvement was driven by a few key factors. We saw approximately 250 basis points contribution from AUR growth driven by higher mix of Abercrombie business to the total.
Promotional activity enabled by lower inventory levels compared to last year.
Next we saw freight benefit of approximately 200 basis points.
And we saw a benefit of approximately 200 basis points from lower levels of inventory write downs compared to last year.
These benefits were offset by higher raw material costs of approximately 80 basis points, we expect slight raw material cost pressure in the fourth quarter of 2023 flipping to a benefit beginning in 2024.
Touching on our supply chain, we continue to see freight costs shipping times and performance at good levels inventory was down 20% to last year at the end of the quarter and we continue to chase across brands.
As we looked at year end, we expect inventories to be down to last year. Our teams have done an amazing job building agility into our inventory decisions and we are excited to see our customers respond to our holiday assortments.
Taking a look at expenses total operating expense excluding other operating income was $546 million compared to adjusted operating expense of $501 million last year.
We had no exclusions this year excluded $4 million of pretax asset impairment charges last year.
Year over year increase was driven by inflation investments in digital and technology higher incentive based compensation and marketing.
Marketing dollars were higher than last year, but we're steady as a percent of sales.
With strong sales growth, we expect or we delivered nice expense leverage in the quarter with operating expenses represented 51, 7% of sales this year compared to <unk> 57, 3% last year.
Operating income was $138 million or 13, 1% of sales compared to adjusted operating income of $21 million last year.
Operating income exceeded our expectation driven primarily by the strong flow through of better than expected sales.
Net income per diluted share was $1 83.
Compared to an adjusted net income per share of <unk> <unk> last year.
With strong earnings inventory management in the quarter, we continued to strengthen the balance sheet. We ended the quarter with cash of $649 million and liquidity of approximately $1 billion.
During the quarter, we drove $134 million of operating cash flow, we repurchased $50 million of senior secured notes at par value for a total of $51 million and ended the quarter with $250 million of senior secured notes outstanding.
Consistent with the past few years, we will continue to focus on debt and share repurchases as our primary means to put excess cash to work pending business performance share price and our ability to increase investments in the business.
For the first nine months of 2023, we had operating cash flow of approximately $350 million and capital expenditures of approximately $129 million.
We ended the third quarter with 765 stores.
Shifting to our thoughts for the rest of 2023 as mentioned we have had an encouraging start to the quarter and we are excited about the opportunity ahead as the majority of the volume is yet to come.
For the fourth quarter of 2023, we expect net sales to be up low double digits compared to fiscal fourth quarter 2022 level of $1 2 billion.
As a reminder, we have the 53rd reporting weak this year, which we expect will add $45 million or 375 basis points of contribution to sales growth this quarter.
We are assuming growth across regions and brands and we expect minimal impact from foreign currency.
For operating margin, we expect to be in the range of 12% to 14% compared to an adjusted operating margin of seven 7% last year with the increase driven primarily by a higher gross profit rate on lower freight costs and higher AUR.
For operating expense, we expect to see similar things as we saw in Q3 with higher technology and incentive compensation expense as well as increased marketing.
For tax we expect an effective rate around 30%.
And that in the fourth quarter outlook and the full year, our updated full year outlook is for net sales growth of 12% to 14% from the 2022 level of approximately $3 7 billion.
This is up to our previous outlook of growth of around 10% due to outperformance in the third quarter and our expectations for the fourth quarter.
For stores, we now expect approximately 35, new stores 20, combined remodels and right sizes in 35 closures.
For operating margin, we expect to be around 10% for the year up from our previous outlook in the range of 8% to 9%.
We continue to expect a net benefit from freight and raw materials of approximately 250 basis points for the full year.
We expect an effective tax rate in low <unk> compared to our previous expectation of low to mid <unk> due to higher expected profitability levels and we continue to expect capex of approximately $160 million.
To finish up we are pleased with the continued progress across regions and brands, giving us confidence that our playbook is working.
While we are laser focused on delivering a great holiday we are confident in our path forward and are making progress on long term strategic investments that will better enable speed agility and a seamless omnichannel customer experience as part of our always forward plan with that operator, we are ready for questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone and wait plan aimed to be announced to withdraw. Your question. Please press star one again, please stand by while we compile the Q&A roster.
And our first question coming from the line of Dana Telsey with Telsey Advisory Group. Your line is open.
Hi, good morning, everyone and congratulations on the very nice results nice to see the improvement in Hollister and when you unpack the comps mens womens what did you see in terms of performing any categories to note. How is the difference between online and physical stores.
And how you're thinking about promotions how were they in the third quarter and plans for the fourth thank you.
Thanks, Dan and good morning.
Specifically the Hollister I mean, it was really exciting to see our second quarter of consecutive growth up 11.
Led by women's again, so just like are we still happen in Abercrombie women's led the way Theyre tailwind girls is leading the way for Hollister.
What specifically worked for us non denim bottoms that we've had an expansion of our bottoms category.
They still love denim, but a lot of opportunities a lot of other non denim bottoms, which are happening actually in both the guys and the girls business.
Categories to note lots of exciting things are very balanced assortment, our inventories are very clean.
I'm excited that we can enter the fourth quarter with really fresh inventories.
And promotions as you know the fourth quarter is certainly.
Is the most promotional quarter of the year, we're prepared to compete but it'll be based on our own internal selling you know what's working what's not working we worked with the teams very closely during the fourth quarter to make sure that we're agile and focusing those promotions specifically picking up the online versus stores good balance across the total company for the quarter thinking about <unk>.
Or a little tilted towards the store business in the quarter, which is great to see.
Open some new stores throughout the year have done some remodels right sizes and good to see that store traffic coming back and that's really on a global scale, which is very very exciting.
Just one last item given that youre hitting a 10% operating margin this year.
Is a 13% to 15% in the purview in the future how do you think of the framework.
Yes, very very exciting to put a 10% outlook out there for the year, we started the year at $4 to five and as the business has improved throughout the year.
Going out there at 10% now we're not going to talk about 2024 today, we are very focused on delivering an amazing holiday, but super exciting to be putting a number out there 10% that we talked about last year in 2020 to that 8% to 10% longer term excited to get here quickly.
Thank you.
Yeah.
Thank you.
And our next question coming from the line of Cory <unk> with Jefferies. Your line is now open.
Great. Thanks, good morning.
So fran as it relates to the.
Really impressive growth that you've seen at abercrombie in the quarter what are some things that surprised you.
Think about the upside that was driven versus your original plan and what were some.
Items that really resonated with customers this quarter across products and geographies that really worked for you in the EC working into the fourth quarter and upcoming holiday season.
So hey, Corey so what's super exciting to have just finished our 11th consecutive quarter of growth for Abercrombie brands is just such a big win for the company.
We're excited and proud of the team and what they've been able to accomplish what's really terrific about that is it's balanced growth we saw balanced across.
Actually brand the brand the genders the regions the channels I could keep going.
To accomplish that was really really terrific.
We have a playbook that we are focused on delivering that product voice and experience, it's aligning really well for our consumer and most excitingly. We built this business to run with speed and agility and that's what the team is doing this year and they've really been able to test and react and learned about our assortment and excited for fourth quarter. We've got a lot of known product in there that the consumer is already loving.
And lastly, as you know, we've really expanded the addressable market for Abercrombie and so we're seeing the opportunity to.
Had that customer from 20 to 40 shop with us as well as these expanded category so lots of exciting things happening.
Great.
And then Scott on the gross margin that you saw in the quarter close to 65%. That's the highest we've seen in quite a while.
Quite impressive as well as you think about the drivers of that and as we look ahead. Just qualitatively is there any way to think about within that.
Construct what is perhaps sustainable going forward and what may come out just to get a sense for.
The puts and takes of the gross margin as we look ahead.
Yeah, Great question and this is something we've talked about a lot over the last couple of years really is the sustainability of the AUR and we always say is if we have great products and lean inventory you have a great chance of delivering strong AUR and that's really what we've done last year, but a little step back the hollister inventory as that business fell off pretty abruptly in Q2, but we've gotten.
Through that in each of the brands is in chase. So what youre seeing this year is another freight coming back in and normalizing cotton getting kind of to the end of the tailwind and really strong AUR is in a really great Abercrombie business that trend just explained so we want this margin to be sustainable we're working hard at that and the pieces that we can control will be the inventory levels in <unk>.
And we feel confident in that.
Great. Thanks, so much and best of luck.
Thank you and our next question coming from the line of Matthew Boss with Jpmorgan. Your line is open.
Great Thanks, and congrats on another nice quarter.
Thanks, Matt.
So fran at the Abercrombie brand, if we take a step back could you speak to product versus pricing, meaning how have you repositioned the assortments and maintain competitive pricing and then what elements of this turnaround are you applying the Hollister brand today, and then Scott with inventories down 20.
Exiting the quarter could you just speak to the ability to chase into continued demand momentum in holiday.
Hey, Matt So, let's not forget it is really exciting so as you watch the evolution with us of the brand we've gone really from jeans and T shirt brand to a lifestyle brand and that has afforded us the opportunity to expand both our age demographic as well as the categories that we are offering the journey, reaching our 11th.
Consecutive quarter of growth is probably less based on reduced promotions for anr, because we've made a lot of progress over the years and Theres a lot of mix happening.
The consumer is responding to categories like outerwear and dresses and we're seeing her respond based on obviously the value in the fashion that we put out there for the price point, because I like to say the product plus voice is X series actually equals AUR and what the consumer is willing to play and pay for their goods.
How do we apply that to Hollister, we work on Playbooks here. So we had a playbook for enough. We start with women's. We then went to men's same thing in Hollister, we are seeing nice progress and girls now we're working on the geis business and.
We will continue to roll that playbook out now geographically right, we're rolling into international and seeing success across all of our regions as well.
On the inventory side, our ability to chase we've been doing it all year. When we started the year with us our sales outlook kind of low single digits, one to three and now we're talking about 12 to 14 for the year and we've been able to chase into that inventory as we've come throughout the year huge thanks to our team's planning merchandising sourcing it's hard to run the business. This way and we put up a lot of process and it takes a lot.
Hard work, but the teams are just chased into millions and millions of units this year and so if there's upside to be had here in Q4, we will go get it we will turn our inventory faster will bring in the next and so I'm confident in that ability.
Congrats again.
Thank you.
Thank you.
And our next question coming from the line of Marni Shapiro with retail tracker. Your line is now open.
Hey, guys, congratulations and if I forget best of luck this holiday weekend.
You talk a little bit just about two quick things how are you thinking about store growth for next year with the success of these smaller neighborhood stores for Abercrombie and then could you also just talk a little bit about dipping back into Hollister really great improvement in the assortment there I guess.
What are the thoughts on the on the guys side has not been as strong or is it just a harder customer to sell to because they're so picky and difficult and so trying to figure out what they want.
Let's start the first question on store growth. So we as you know had been on a journey with our stores.
For many years.
We've actually been able to open up these neighborhood stores that is probably not something we could've done years ago, but with the where the plan is to say we are.
Seeing nice growth.
Just actually in New York last week walking, our Soho and our Flatiron store in it. So I think it is local customer coming in.
Targets are coming in and they're continuing to come in we have an opportunity as you mentioned.
I'll start.
Throughout the U S.
Possibly internationally on we haven't declared total stores for 24, but what I can tell you that we've been a net store openings for the last couple of years with.
With the expectation that we'll continue to do so.
Now for Hollister.
It does.
We're open and excited about testing and trying new things. So she did turn first for us for Hollister, just like she didn't an app.
Right.
Nice improvement, though in Hollister guys I mean, the non denim bottoms have been very strong our fleet business, our sweaters business. So we're seeing category improvements and our expectation is to continue to push at it and continue to see that continue to see that growth great and would you consider like your personal best store or side by side or is.
Gilly Hicks really the vehicle with which you would grow that part of the business.
Yes, so IPD your.
Your personal faster active line for Abercrombie, we're seeing really nice growth in it we have opened up some.
I guess I would call them.
Expanded assortment.
Thank you for example, like in our fifth Avenue store, we just opened one up down in Aventura. So again, you know us Marni, we are a test and learn culture, we're going to understand what the appetite is for this product and we're going to continue to continue to push on it.
Fantastic Thanks, guys. Thanks, Alright.
Thank you.
Our next question.
And our next question coming from the line of Alex <unk> from Morgan Stanley. Your line is now open.
Great. Thank you.
So do you view this as a hollister inflection and.
And what processes have you put in place or change to kind of keep the brand from devolving back to where it was before thank you.
Yes, I mean, it's exciting to see two consecutive quarters of growth, we're seeing lots of opportunity within the brand. We as you know we've repositioned it and we had certainly.
And that was a nice new marketing that the consumers are really responding to we have a playbook that is working where we focus on our.
Assortment architecture, our product our voice our experience and our expectation is to stay close to that customer and continue to see growth. Yes also for Hollister just like Abercrombie we've been talking in the inventory is in a great place down nicely. The last year that brand is chasing so as we're trying new things and then broadening that assortment globally, we were able to chase into those winners and that's been part of the driver of <unk>.
<unk>, having that plus eight and then having that plus 11. So we're excited about going forward with clean inventory.
Great. Thank you and congrats.
Thank you.
And our next question coming from the line of.
Mauricio Serna with UBS Your line is open.
Great. Good morning, Thanks for taking.
The question I guess, just on the <unk> guidance.
Should we assume kind of like the similar growth trend in terms of.
Our Abercrombie outperforming Hollister and then maybe could you elaborate on the inventory decline by brand like just wanted to understand like which brand has like.
Higher decline or.
We see like a.
Sure.
A more moderate inventory levels on a Brian perspective, and then when thinking about fiscal year 'twenty four I know youre, not giving guidance, yet, but just thinking about the raw material cost.
Recapture or tailwind that you expect or that you have for 2024, maybe you could quantify that.
And then just maybe lastly.
Could you talk about maybe the growth opportunities are.
Across each Brian.
Particularly interested in Hollister, because I remember you had talked about the international business still being.
Well below pre pandemic levels I, just want to understand where we stand on that front. Thank you.
Retail is good to hear from you alright lets start with the Q4 guidance. So yes, similar trends as what the expectation would be as we've seen throughout the year.
Outperforming Hollister, we do expect growth across regions good to see a nice acceleration in the Europe and APAC regions in Q3 and optimistic we can see continued trends there in Q4 inventory by brand is where we want it to be holsters down much more than Abercrombie is down obviously.
With the Abercrombie growth trend, where it is we've been adding inventory for that brand chasing throughout the year and Hollister is down we were stock last year with some of that carry forward inventory and really through year end last year on the Hollister side, but very clean now and excited about moving forward on the 24 raw materials. You noted it we're not going to talk in detail.
About 24, what we've said throughout the year is holding well see a little bit of freight benefit there in Q1 rolling into next year, and then raw materials to become a tailwind as we get into 'twenty. Four so we'll talk a lot more about that on the Q4 call and then the last piece was growth opportunity by brand.
Hollister International Yes, we feel like we have an opportunity all COVID-19 was tough for us we've talked a lot about having a slow recovery coming out of Covid more recently, it's nice to see that business pick up starting in Q2 Q3, we're seeing nice traffic back to our stores. We've done a lot of localization efforts this year pricing marketing inventory and we're seeing that play.
One example is we've been focusing on UK and Germany, two of our biggest countries in that region.
Localizing, our content, putting more marketing dollars, there and we've seen a really nice response on an omnichannel basis. So we have some optimism there outside of the U S for the Hollister business going forward.
Great. Thanks, so much and congratulations on the results.
Yeah.
Thank you.
Our next question coming from the line of Paul <unk> from Citi. Your line is open.
Hi, Thanks. This is Kelly on for Paul.
Just curious to your <unk> guidance is a pretty meaningful deceleration in sales relative to the strengthening straightens Don. Thank you. So just curious what's driving that.
If you could provide any more color on the <unk> quarter to date comp trends and any color by brand would be helpful. And then I have a.
Sure Hey, Kelly, it's Scott I'll grab this one yes. So Q4 guidance. We are sitting here, we talk about an encouraging start to the quarter I wouldn't say three weeks don't matter, but they are very small in the Grand scheme. The game really starts today and tomorrow into the next 40 days through Christmas. So that's how we're sitting here today. We think this is a reasonable outlook happy to be putting up.
Another low double digit outlook coming into the quarter inventories in a great place excited about pressing our bets in marketing as we go through the fourth quarter and our profitability has afforded us the opportunity to do so so really excited about the opportunity ahead of us and we think about brands and we're not going to talk about brands for the last few weeks, but just on the last question.
<unk> Hollister or abercrombie to outperform hollister in the quarter and growth across brands and regions.
Got it and just Q2 quick follow ups just on the strength Youre seeing in E&S. Just curious if you could just maybe talk more about the customer new customer and you bring into the fold in.
So the new categories that the customer's is giving you permission to offer and it just what gives you confidence that you can comp the comp at E&S next year and then just on cash usage any thoughts on share repos given.
The submitted significant cash youll likely generated a fourth quarter. Thank you.
Okay I'll take that one so as I mentioned, just a couple of minutes ago. So we have really expanded abercrombie to be a lifestyle brand and that has afforded us the opportunity to add many new categories things that we never were able to sell them in the past non denim bottoms as one particular, one I mean, our pant business is very strong both in men's and women's is a lot of fashion happening today.
Day in that category and he and she continued to.
To choose that category they can wear that.
For many different wearing occasions, and that's also a big win for us so expanding the addressable market as far as who's buying from us.
Late teens early twenties, all the way up to 40% 40, plus we're seeing a very varied customer in our stores, which is super exciting.
As far as franchises go we just talked a little bit about why PB or best guess business is also very good our fleece and licensing business has been very strong. So we continue to learn.
What's that what the customer is looking for and continue to offer that to them on the cash piece, yes, so great to see the cash flow generation. This year $350 million of operating cash flow through the first nine months as the business and profitability has improved inventory is obviously nice and lean we're seeing that cash flow come in we did put $50 million to work we bought in some of.
High yield bonds this quarter $50 million there so excited to put that cash to work going forward. It's really the same story, we've talked about over the past couple of years, we're going to look at debt and share repurchases, our main ways to put excess cash to work.
Thank you.
Okay.
Thank you.
And our next question coming from the line of Janet Kloppenburg with JK Research Associates, Inc. Your line is open.
Can you guys hear me good morning, Yes, good morning Janet.
Congratulations on really exciting.
Results and trends.
It's thrilling to see this come back.
Couple of questions.
Hollister men do look for that momentum to.
To pick up just as we look out I'm not talking about any particular timeframe, but given what you see in them and the merchandising execution going forward and the opportunities that Youll appreciate and then four.
Scott.
When we think about the AUC opportunity should we think about that building starting in the fourth quarter, and then going through fiscal 'twenty for like each quarter consecutively better.
So as you sell so higher cost of goods I just wanted to understand.
And about how we should think about that and for Scott as well when the freight benefits might start to wane. Thanks, so much.
Thank you I will start with Hollister guys. So it's exciting to see the progress and the entire brand right. The second quarter of total growth and as you know led by the girls business, which is exactly the same pattern that we saw when we turned the AF business.
Okay.
But what's good today, though is that our supply chain and our ability to chase is back in the business and that is really the win for us. So for Hollister guys. We're going category by category. We're testing we're learning we're chasing after those opportunities. So we saw progress in non denim bottoms and fleece sweaters those categories, we expect to continue into the fall.
Quarter, and we're going to go category by category as we head into 'twenty, four and continue to put Eric earn and drive that business.
Yeah on the AUC piece Shannon, so as we think about Q4.
We'll continue to see freight benefits here in Q4, and then like I said cotton and raw materials, just a little bit of a herd here and then turning into a tailwind next year.
Im going to break apart.
24 in a big way, but we talked about freight being kind of a first half Q1 benefit tailwind coming into 2024, and then on the cotton side, we'll talk more about that on Q4 call.
Congratulations thank you very much.
Yes.
Thank you.
Our next question.
And our next question coming from the line of Dylan Carden with William Blair. Your line is now open.
Thank you too.
<unk>.
First is just kind of trying to get.
Particularly on the AE brand.
How many remodels repositioning.
I feel you have left on.
The timeframe.
Liberal.
Yeah on that one we have some opportunities left we've actually made a lot of progress on the <unk> fleet and it was really through the closures that we did back in 2020, we closed a bunch of those legacy oversize Abercrombie stores and we've just come back into those markets with newer leaner more modernized stores. So we make it.
Progress there. So we have some more remodels left yes, we do but not in a huge way the path to the future for Abercrombie is really about opening new stores in markets, where we don't have a presence we've talked about these neighborhood stores in street stores that are a new thing for Abercrombie and we're probably about eight or 10 in at this point and there is a nice opportunity.
<unk>.
Heading forward in that regard.
While those add to the total fleet saw sandoz or incremental it sounds like as opposed to those would be.
<unk> when you think about this year, we're talking about 35 opens in and 35 closes it will be kind of net flat.
Also doing 20, Remodels right sizes, so the way I like to look at it is we have 55, new experiences coming to the customer this year and that's really exciting.
Got it.
And then Scott I know you are not going to talk much about this but to the extent that we're trying to sort of underwrite earnings power of the model.
That has come a long way.
As it relates to operating margin.
I'm trying to catch the question.
Sort of I guess in relation to the 8%.
Longer term target.
How much of this kind of low double digit margins that you're seeing.
No.
Can you kind of attribute perhaps outperforms.
Relative to the cost environment.
What do you feel like you sort of.
Great.
Anything to kind of help us.
We strategically think about on the earnings call.
Yeah.
Yes, I'll go back to 'twenty, two whenever we had our Investor day, we talked about getting some growth on the top line a little bit of leverage and then getting some of that cost back in on the gross margin line and what we've seen is both of those things happen in a bigger way than we expected back in 2022. This quickly.
Really solid sales growth this year talking in that range of 12% to 14%, we're going to see great leverage fall through to the bottom line. There and then on the gross margin side, just seeing that freight costs come in pretty quickly and then getting to the end of the tail here in cotton. So it's just the same formula as we go forward you have seen a really strong flu.
Through in the business on growth. This year. So our goal is going to be the same for next year, we want to grow we want to see some of that cost come back in and that's what we that's what we're thinking about for 2024 were in the middle of our budget process right now and we want to set this business up for long term growth and sustainable growth.
Awesome.
Great.
Thank you and I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Fran Horowitz for any closing remarks.
Yes, just want to thank everyone for joining the call today, and we look forward to providing some more updates to you soon.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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