Q2 2019 Earnings Call
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Welcome to the Abercrombie and Fitch.
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Now at this time I'd like to turn the conference over to Ms.
No.
I had ma'am.
Thank you good morning, and welcome to our second quarter 2019 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott The Pesky Chief Financial Officer earlier. This morning, we issued our second quarter earnings related to the available on our website at corporate so the Abercrombie dot com under the investors section also available on our website is an investor presentation.
Please keep in mind that any forward looking statements made on the call are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today.
A detailed discussion of these factors and uncertainties is contained in the Companys filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measures during the call additional details and a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier this morning.
With that I will turn the call over to Fran. Thank you Pam good morning, and thank you for joining us to discuss our second quarter results.
To let you know in advance I prepared remarks are going to run a little longer than usual today, we're providing detailed new information on our flagship.
With that let's get started with our second quarter results.
As you heard from many of our retail peers. This earnings season, the second quarter got off to a slow start.
I'm pleased to report that we experienced monthly improvement as the quarter progressed, enabling us to deliver on our previously issued second quarter outlook.
Momentum has continued quarter to date with a solid start to the back to school season in the us where comps are positive across France.
Equally important we are making progress on our key transformation initiatives and continue on the path to achieving our fiscal 2020 target.
I'll go into more detail on our transformation initiatives in a moment, but first let's start with a discussion on the second quarter and how we navigate escalating promotional environment to deliver on our outlook.
Our second quarter comps were flat to last year benefited from record results in gene Tam women's business offset by softness in female tops.
We made positive momentum in the U.S., the plus 2% comp, but that strength not counter our international comp was down three which although improved from Q1 levels was impacted by several well publicized external factors, including extreme weather Brexit and protest.
In Europe comp results were consistent with last quarter with weakness in the UK, Ireland offset by net improvements across other European markets in Asia improves in China helped offset weakness in Hong Kong region.
Turning to the U.S., which represents approximately two thirds of our revenue base, we achieved our eighth consecutive quarter of positive comps by ongoing drag from tourist locations and a heightened competitive environment.
To effectively compete and keep our inventories in line for back to school, we leveraged markdowns and promotions throughout the quarter.
We believe that these markdowns and promotions for measured and appropriate.
By brand and I would probably be closer to flat comps.
On the men side woven and knit for strong.
And for women dresses and soft bottoms led the way and we were able to successfully chased into these categories throughout the summer that enabled our mosquito dress category, which includes jumpsuits and rompers to achieve record sales in the quarter.
We also remain excited about our opportunity with the kids brand, which we view as a long term growth vehicle.
Well that will kind of customers are responding favorably to our our evolving assortment, our new marketing team has been supporting that effort with exciting campaign.
This began with a fierce we launched in February which represented our first fully integrated marketing effort. We've been steadily building on a successful campaign, including an event in Boston early August we're fans lined up for hours to meet Celtics forward, Jason Tatum, and our Faneuil Hall store and buying a limited edition fierce battle.
Beyond this year, we also introduced our soft at campaign as well as our 96 hours storyline, Abercrombie, which encapsulates our target 20, something customers desire for a much needed long weekend.
And how to appropriately outfit for that occasion.
More recently, we launched our curve club genes campaign, which supports our new women's jeans assortment.
Response to Kurt walk has been strong and social media and she is also voted with their dollars.
We plan on building off where these campaigns as well as introducing new ones throughout the fall and holiday season.
But we're pleased with the continued stabilization Abercrombie our results in healthcare were mixed with guys achieving another record quarter, but girls falling short of our expectations.
Record performance was driven by strong bottomed acceptance across shorts pants and jeans.
Girls delivered record performance in two must grow categories, Gilly and swim while bottoms was positive.
However, all of this was not enough to offset top challenges, where we were unable to comp our strong performance from last year.
Second quarter offering did not resonate walnut with our customer as we swung too far away from our core DNA.
The team recognize areas of opportunity early in the season and chased impact or June and July back to school sets with Crow girls tops registering a nice change in the comp trend throughout the second quarter and improvements continuing quarter to date, we expect to build on recent successes for the remainder of Q3 and into holiday.
In addition, top Weve also Jason to denim business strong reaction to our recently introduced curvy fit and continued demand for them on gene.
Similar to Anup Hollister is marketing also continued to resonate with our target customer.
Leaning into making teams feel comfortable and confident in their own skin.
We built other our first quarter swim collective momentum with record second quarter sales across both genders.
We also launched another successful Pride campaign first time Pride guide with ongoing partner Glisten and organization is devoted to creating state inclusive K through 12 schools for LGBTQ.
Finally, I want to discuss genes to the collective good which is all about positivity and giving team competence for back to school.
The content is resonating across all channels with strong engagement, an initial performance reads and entered Chamberlain back to school genes video, reaching over 1 million views to date.
Taking a step back while there are always things, we could have done better I am proud of our second quarter results across brands, which speaks to benefit we're already realizing from our transformation initiatives.
Looking to the back half our confidence in the health of our core newest customer tempered by an uncertain global macro outlook.
In the second quarter, we believe for the domestic promotional environment was elevated reflecting the challenging start to the quarter for many a desire to get the summer product ahead peak back to school, rather than a dramatic shift in our core customer shopping habits.
Our outlook for the remainder of the year takes into account potential global volatility and assumes that similar to every year back to school and holiday will be promotional.
Let's move onto an update on our transformation initiatives.
As a reminder, these include optimizing our global store network.
Enhancing our digital and omni capabilities.
Increasing the speed efficiency throughout our concept to customer product lifecycle, and improving our customer engagement through our loyalty programs and marketing optimization.
So let's start with global store network optimization as discussed at our 2018 Investor Day, a key driver to our fiscal 2020 goal of doubling our fiscal 2017, adjusted non-GAAP operating margin is reducing and leveraging our fixed costs mainly through store occupancy.
We believe in stores and our customers do too, but the majority of our sales occurring in this channel is highly relevant, especially to Gen Z, which represents our largest target customer base.
Research showed that Gen Z visit stores more often than millennials.
However, with the evolution of digital and Omnichannel capabilities their expectations have shifted.
We remain focused on providing the right experience for them and being there whenever wherever and however, they choose to engage with us.
Reflecting our commitment to providing the best seamless omni channel experience Global store network optimization is and has been one of our top priorities.
There are several key components to this strategy, including.
Rightsizing remodeling opening and closing stores.
Since 2010, we have closed over 475 underperforming locations.
Over the same period, we provide our customer with approximately 300 productive new store experiences.
While reducing gross square footage by roughly 17%.
This has been achieved while growing digital revenue to over $1 billion in fiscal 2018.
This year, we remain on track to deliver 85, new experiences, including 36 in the first half and close up to 40 locations ending the year with company wide gross square footage down to last year, our updated store formats continue to perform well, both quantitatively and qualitatively across brands and we view them as a critical step in our ongoing evolution.
At Hollister, approximately 50% of our global store fleet and updated we've been able to meaningfully impact Hollister given the size of its existing stores, which on average are more closely aligned with the new build outs.
The modernize how stores on average generate high single digit sales lift against older format control stores.
At Abercrombie approximately 10% of our global fleet has been updated leaving significant runway.
When the stores were built they tend to have very large footprints, averaging eight to 10000 square feet.
New stores or roughly 30% smaller it is early days and we are taking learnings and applying them. Thus far the modernized smaller footprint stores generally chief sales they are comparable to or slightly below larger format control stores.
Unfortunately, we've been limited with how many we can do annually as it requires partnership with our landlords to move within the mall or the car with our existing space.
Recently, there have been increasingly more locations available for lease which could give us the opportunity to prudently accelerate openings are introduced 10 stores.
Looking at our US split across brands. We are proud of the health of our base. We are primarily located in a and b centers and our traffic has outpaced the North American mall average over the past 12 months.
In fiscal 2018, approximately 95% of our non flagship locations opened for one year generated positive four wall operating margins.
Importantly, we've kept our lease DECT highly flexible with roughly 50% of locations up for renewal the remainder of 2019 and into 2020, and we expect to continue to leverage partnerships with landlords to further modernize our stores.
Ill tediously, improving our lease terms.
Well, we have made significant progress in optimizing our mall based stores, our flagship which are mostly abercrombie have been harder to impact these flagships.
The first of which opened in 2005 in the last in 2014 represents a different era at that time, we built large format beautiful stores and highly traffic premium tourist locations.
These are incredibly successful, but came with the considerable price tag in the form of elevated construction costs high rents well above average operating costs and unfavorable lease terms that tends to be significantly longer than those of our mall stores.
When evaluating our flagship fleet today, many are large and outdated the old model in terms of size location build and tenor does not make sense for the majority of remaining flagship the cost involved to modernize and significant and oftentimes without promises a return.
As we continue to move closer to our customer our strategy is to open smaller format omnichannel occasions shorter and more flexible lease terms that cater to both local and tourist customers alike.
Heading into 2019, we had 19 flagship comprised of 17, Abercrombie and two Hollister.
As a reminder, we closed our per store street are coming in 2017, while the actual number flagship locations is small compared to our total store count. These stores have had an outsized impact on our operating results.
To better frame its impact in 2018, our 19 flagship represented approximately 5% of sales of returnable company comp and four wall operating margin perspective, we're responsible for a 120 basis point drag on comps and over a 110 basis point drag on operating margins are roughly $33 million.
With that backdrop. It is imperative that we stay in our top exiting these locations and repositioning within existing markets, where it makes sense.
At each flagship has its own unique set of circumstances do not take a one size fits all approach.
The goal is to thoughtfully engage with our landlords rather than exiting any cost.
After many years of behind the scenes work in the first quarter, we announced three flagship on top of the Q1 Copenhagen closure.
The Hollister Soho, New York, New York location, which shut its doors in Q2.
And Thats, Milan, Italy, which is expected to close by year end and a net Fukuoka, Japan, which is scheduled for fiscal 2020 closure.
As a reminder, the three announced closures plus Copenhagen contributed under 1% to fiscal 2018 revenue.
The closing of Copenhagen in Q1, so in Q2 and the lot in Q4 are expected to benefit total operating margin by approximately 30 basis points all of our 2018 run rate or $11 million and will bring our flagship counts to 16 at year end.
Looking to 2020.
In addition to Fukuoka, we have three additional flagship available for closure through natural lease expirations, giving us the ability to reopen within these markets.
For a variety of reasons, we cannot provide store level detail at this time.
Well, we can't disclose is that this combined groups four wall operating margin contributed approximately 10 basis points or $2 million of 110 basis point drag to operating margin last year.
To be clear a scenario analysis for potential closures with contemplated when we provide our fiscal 2020 operating margin outlook at our 2018 Investor day, and we remain on track with our anticipated closures.
These closures along with ongoing progress in our other transmission initiatives for us closer to achieving our target.
Beyond fiscal 2020, we are committed to closing additional flagship we have a summary lease stack in today's investor presentation on page 24 to provide further clarity on future lease expirations to fiscal 2020 and beyond.
As a reminder, the majority of potential future closures are expected to occur primarily through natural lease expiration and the exercise a kick out clauses provided in our leases accelerated by us for exercising go dark provisions as we recently did with our Soho store should be the exception.
I know we spent a lot of time talking about global store network optimization, but it offline quickly touch on our other key initiatives all of which are tracking to our long term goals.
Starting with enhancing our digital and Omnichannel capabilities, our cross channel traffic was once again positive driven by digital which grew at a double digit range. During the quarter. We continue the global rollout of in store handheld devices and implemented network and plant cell technology upgrades in our top U.S stores.
Trends turning to increase its being efficiency throughout our customer product lifecycle. We are now live with our size and price optimization tool.
These machine learning program build as we gather data.
Given we just launched though we expect to learn this year and realign inventory efficiencies and margin benefits in fiscal 2020.
Lastly, on improving our customer engagement through loyalty and marketing optimization. We're in the early stages of a series of personalization investments that will enable us to leverage the rich data, we have from our loyalty program, which experienced ongoing strong growth numbers of accounts from last year across brands, we expect to see an impact to our business in fiscal 2020.
With all that detail on our transmission initiatives hopefully, it's clear that with every quarter. We further strengthen our foundation and move closer to our fiscal 2020 goals.
Next I want to quickly touch on our ongoing efforts environmental social and governance or ESG as is commonly called.
We take our work on MSG very seriously that matters to us and it matters to our customers.
Last week, we announced that we become a participant in the UN global compact the world's largest purposes and ship and sustainability initiatives.
That time also provided our new fiscal year 2025 inability targets.
Before I turn the call over to Scott I would like to welcome two new members to our team.
At our Investor Day in April 2018, we discussed our significant growth opportunity in Europe and Asia.
Critical to these operations building into team each region that understands our customer and execute our proven playbook on a more localized basis.
Earlier. This morning, we issued a release announcing key hires for both regions.
Our Europe team will be led by Dan will discuss today, Dan has 20 plus years of relevant experience. Most recently as Doc Martens over who will be leading the charge in Asia. Olga has over 30 years of relevant experience joining us from the EPC work, where she was a general manager for China Timberland.
Since they joined both Dan Olga have been hard at work running our business and creating strategic priorities. Our expectation is for both to have a positive impact on our results in 2020 with that I will turn the call over to Scott to discuss our second quarter results in more detail.
Thanks, Brad before starting I want to highlight that we are now providing sales operating margin and EPS on a constant currency basis to add clarity to our fundamentals.
Now onto our second quarter results net sales of $841 million decrease 0.2% from last year and were up 1% on a constant currency basis, reflecting a $10 million adverse impact from changes in foreign currency.
Cost came in flat versus plus three last year, driven by positive cross sell traffic offset by lower conversion.
Pablo Cross channel traffic reflected strong digital interest with traffic to the channel up double digits and accelerating from last quarter. This helped offset challenging mall traffic trends by brand.
Hollister and Abercrombie posted flat comps. This compares to plus four and plus two respectively in Q2 2018.
By geography, we achieved a plus to copy us on top of a plus seven last year with each brand in positive territory.
Our international comps were minus three and compared to minus four last year.
Our gross profit rate of 59.3% was down 90 basis points from last year, reflecting higher usage driven by product mix and slightly lower as you are.
On a constant currency basis gross profit rate was down 60 basis points.
As Fran previously discussed the promotional environment will tighten during the quarter in order to effectively compete and not lose share with our respective target customers, we offered calculated promotions and markdowns.
Looking at the rest of our results on an adjusted non-GAAP basis.
Adjusted operating expense, excluding other operating income was $538 million.
This included the previously disclosed $45 million of flagship store extra charges incurred in the quarter, which reflected our decision to close both the Hollister Soho and ANS crude oil locations.
These charges were primarily these charges primarily represents the present value of undiscounted future cash obligations for lease payments through 2028, less a portion of the cost associated with these payments, which was previously charged to retained earnings as operating lease right of use asset impairment adoption of new lease accounting guidance at the beginning of fiscal 2019.
The majority of these charges related to the host for the solid coaster Soho location.
On an adjusted non-GAAP basis operating expense, Deleveraged 470 basis points, including 530 basis points of flagship exit charges.
Results were slightly better than our expectations, primarily due to lower store occupancy and lower consulting expenses.
There were no excluded items in Q2 this year, while in the comparable period last year, roughly $9 million of pre tax charges related to asset impairments were excluded.
Other operating income declined approximately $1 billion contributing 10 basis points of de leverage.
Our operating loss was $39.5 million compared to adjusted operating income of $9 million last year and included $45 million of flagship charges and a $4 million adverse impact from changes in foreign currency.
Excluding asset impairment charges from last year, adjusted operating loss margin declined 580 basis points or 530 basis points on a constant currency basis with 530 basis points of the decline attributable to flagship charges.
The adjusted effective tax rate for the quarter was approximately 28%.
Net loss per diluted share was 48 cents compared to adjusted net income per diluted share of six cents last year or one cents on a constant currency basis.
The flagship exit charges are estimated to have adversely impacted EPS by approximately 50 cents.
We ended the quarter with total inventory of approximately 7% to last year, which was slightly above our mid single digit outlook.
Roughly half of the increase was driven by higher in transit inventory flows reflecting updates to our August and September floor set strategy as well as lower accounting inventory reserves.
We are comfortable with our end of quarter inventory positioning, including our seasonal carryover.
Looking ahead, we expect to end Q3 with inventories up low to mid single digits and remain focused on tight inventory controls.
Our balance sheet remains strong we ended the quarter with cash and cash equivalents of $500 million during the second quarter, we repurchased approximately 3.5 million shares at an average cost of $16.31 per share for roughly $58 million.
We currently have 5 million shares remaining under existing authorizations.
Last week, our board of Directors also declared a quarterly cash dividend of 20 cents per share.
Before turning to our outlook I want to provide an update on our flagship strategy as well as our plans for Brexit and an update on China tariffs.
Since our last earnings call as many of you reached out to better understand our thought process around flagship closures.
These decisions are difficult.
But we have a comprehensive process in place that evaluates many factors qualitatively, we look at the strength of the local local shopping area. The condition of the store at our preferred long term positioning within the market.
Quantitatively, we look at the remaining term and lease liability EBITDAR comp trends and the cost of operating through maturity versus exiting the store.
For Soho, we checked all the boxes that support a closure Alternatively, we recently invested in our Nf Amsterdam location as we saw an opportunity to improve productivity of the store, which is located on a great quarter.
Corner of a highly relevant and traffic shopping district.
Thank you about our flagship strategy longer term to reiterate what Frans said earlier, we expect the overwhelming majority of our flagship leases to expire naturally or through the exercise of kick out clauses.
Turning to Brexit, we are assuming a hard Brexit on October 30, Onest, we had been planning for this for a while and we have been testing our systems to ensure we are as prepared as possible based on all available information.
Last but certainly not least China tariffs, we have been proactively reducing our dependence on China for several years in fiscal 2018, roughly 25% of merchandise receipts were imported into the U.S from China, and we expect to be below 20% this year.
As a reminder, roughly one third of our revenues are derived outside of the U.S.
Over the last several years, we have been able to lower our exposure. Thanks to strong partnerships with our vendors many of whom have also been shifting production out of China.
We believe that there is an opportunity for further diversification moving to low teens penetration and 2020.
As we look at other countries quality remains a top priority and thus far we have not been disappointed.
Near term as we contemplate the impact of lift three and lift for tariffs on our results. Our full year outlook assumes that we'll have a roughly $6 million negative impact to our cost of goods sold and gross profit.
This assumes a list for starting rate of 15% on September Onest.
We currently do not plan to raise tickets this fall and will evaluate the spring season as we move forward.
I'll finish up with our outlook for the full year in the third quarter regarding fiscal 2019 our outlook.
Reflects anticipated additional adverse impacts from changes in foreign currency and continued macro headwinds in Europe and Asia.
For fiscal 2019, we now expect net sales to be in the range of flat to up 2% driven by comparable sales and net new store contribution partially offset by an adverse impact of changes in foreign currency rates of $45 million. This compares to our prior outlook for 2% to 4% growth in an adverse FX impact of $30 million.
Comparable sales to be flat to up 2% versus plus three last year and our prior low single digit outlook.
Gross profit rate to be down approximately 50 to 90 basis points from the 60.2% in fiscal 2018.
Changes in foreign currency in China tariffs are expected to adversely impact results by a combined 60 basis points.
The high end of our outlook allows us to compete at the environment becomes more promotional.
Operating expense, excluding other operating income to be up to the 3% from fiscal 2018, adjusted non-GAAP operating expense of $2.03 billion better than our prior outlook for an increase of 4% to 5%.
This continues to include approximately $45 million or 220 basis points and second quarter flagship store exit charges.
Capital investments of approximately $200 million and a full year tax rate in the mid twentys.
Regarding our third quarter, our outlook assumes net sales to be up approximately 1% from last year, including a $10 million adverse impact from foreign currency comp sales to be approximately flat versus plus three last year, reflecting the uncertain macro environment in Europe and Asia.
Gross profit rate to be down approximately 100 basis points from last year, 61.3% rate with changes in foreign currency and China tariffs adversely impacting results by a combined 90 basis points.
Operating expense, excluding other operating income to be up approximately 1% to 2% for fiscal 2018 third quarter adjusted operating expenses of $493 million and an effective tax rate in the mid to upper Twentys with that let me turn it back over to Fran. Thank you Scott and thank you to our global associates for all your hard work, we're planning our business for the future and as we successfully execute to our key initiatives, including making meaningful progress against our flagship opportunities Im excited about the significant global run rate that we have across brands.
Thanks, Randy that concludes our prepared comments, we will now be happy to take your questions. As a reminder, please limit yourself to one question. So that we can speak with many of you as possible. Thank you.
And once again.
At this time.
Using a speaker phone.
Please make sure your mute function is turned off.
We'll take our first question from Omar Saad.
Hi, Good morning, Thanks for taking my question. Thanks for all the information, especially on the flagships. So just want to make sure I understand are you guys, saying that the flagships most of the flagships, you're going to let expire natural the leases expire naturally. It's also fair to assume that those locations are less of a drag because you're not paying to get out of there.
Early and then maybe if you could also talk about the.
Obviously strong front another strong performance in the us.
The international business still seems to be a little bit of a drag would be great too.
Get you to get your thoughts on what you can do to kind of have more of a coordinated kind of consistent positive performance as things in your control or is it all macro issues. Thanks guys.
I'll, let Scott kick off with flagships and I'll pick up the second part Omar.
On flagships Omar we are expecting that the majority of these will expire naturally as we move forward.
We did provide in the Investor presentation, I think it's page 20 for a summary leaseback of our expirations as we go forward.
Through 2020.
We've talked about the three that will you we expect to close this year too that Weve already closed and then Milan, Italy that will close the end of this year, we have an additional three stores coming up for expiration next year, which will give us the opportunity to reposition within those markets. The remaining drag of the stores that are out there. We will continue to go through that check list that I talked about and evaluate if it makes sense for us financially and qualitatively from a brand perspective to exit those stores early so we'll remain in contact with our landlords and will continue to try to improve the operations of the profitability of those stores.
Thanks, Scott as far as our international performance Im going to kick off actually first Omar with us to your point, we were very pleased with our U.S performance and it does remain strong.
Internationally, we actually saw slight but sequential improvement from first quarter to second quarter. It clearly is a complicated landscape that is out there today, but we did announced this morning, we very exciting news. The addition of two new associates, Dan Let us gone today in London and logo will in Shanghai.
We will be opening up regional offices for the first time you know in the past we've been a very centrally controlled.
Business here, we are building teams underneath them those teams will be focused on very important issues, such as assortment pricing and promotion marketing, they're going to help us get really close to our customer we've had great success domestically with our playbooks, bringing cutting voice experience together those teams will be helping us export those playbooks across the world and we're looking forward to them really impacting our business in 2020.
Thanks, Thanks, a lot good luck.
Thanks Omar.
Next question comes from Paul those rate with Citi Research.
Hi, This is Kelly on for Paul.
Just wanted to talk a little bit more about your comments on.
Back to school seems like it's off to a strong start right. Your guard your guidance implies.
But you know.
There is no sequential improvement in comp growth.
Second quarter to keep it.
Talk about that a little bit is being from the.
Our national market or is there just some conservatism baked in and then did.
Secondly, could you talk about and yes.
The expectation for markdowns in the third quarter.
It seems like your gross margin guidance here for the back half theory is down above and beyond the tariff impact. So could you just talk about not changing your thinking there. Thank you.
Hi, Good morning. So we are pleased with what we delivered.
For the quarter and we do have a nice start a solid start to back to school in the US get back to school does start later on outside the US. So we are currently talking about us back to school positive comps across the brand on it in the second quarter. We continued to see very strong reaction to our brands. We continue to have positive cross channel traffic.
Our mall traffic is above the average U.S. mall traffic and as you know over the past couple of years, we've seen nice increase in our brand health.
Regarding the kick off to Q3 exciting things happening our denim business is very strong Q2, we had a strong denim business. We launched two new genes are Kirby for both Hollister and Abercrombie.
Those which have been well received by the consumer onwards chasing into those to continue to drive that trend through the back half of the year. So there's lots of exciting things with that I'll turn it over to Scott you can talk about the cubic markdowns beyond the gross profit rate outlook for third quarter and the full year I'll cover both on the third quarter. If you look at the outlook, it's down a 100 basis points 90 basis points of that down as coming from foreign currency and the addition of the list for tariff so.
Call it the the majority of that down 100.
Coming from those two items as we look at the full year our range that we put out there is down 50 to 90 basis points looking at those same two factors of currency as well as the tariffs that's going to get us about 60 basis points. So it puts us right within that outlook.
The high end of that outlook. It gives us the opportunity and it allows us to be more promotional if it gets more competitive in the back half. So as we look around the industry and we read the same calls and listed the same calls you do.
It appears that inventory is a little heavy across the industry. So we're giving ourselves the ability to compete with others get more competitive throughout the quarters.
All right great. Thank you one more question could you just give the markdown rate by brand in the in the second quarter and was there anything different there not a big difference.
Okay, great. Thank you.
Let's go to Kate Fitzsimmons with RBC capital markets.
Yes, hi, good morning, Thank you for taking my question.
I guess my question would be.
Looking out to that 20% to 25.8% EBIT margin target, obviously speaking to some headway on the occupancy front. This year with the flagship closures, but just how are you thinking about that target into next year. What are the levers you see at your disposal that you think can help you make progress towards that in the next in the coming quarters. Thank you.
Sure Hey, Kate it's Fran we are laser focused on those targets.
There have been some curve balls the currency the carriage the geopolitical environment that we talked about we are controlling what we can control the real estate optimization benefits golf get into a little bit more detail, that's a significant lever for us.
But we've also been investing we are investing in some key tools to drive our business size optimization markdown optimization personalization.
On those will start to benefit us in 2020 as well.
These are all laying the foundation to achieve our 2020 goals and we remain on track across all our key transformation initiatives.
On the flagship charges, specifically that $45 million charge that we took this year will not repeat.
Next year, that's that's more of a bracket adhere and 2019 and to just Echo Fran sentiment. There. We do have a lot of opportunity remaining on store occupancy. This is and has been a key priority for us as it is really the key lever for us to get there to our 5.8 and 2020. So a lot of work left to do over the next six quarters on occupancy and we're happy with the progress we've made so far.
Great guys best of luck.
Thank you.
Mark Altschwager with Baird.
Good morning. This is conor on for Mark. Thanks for taking my question can you just give a bit more color on the updated as Jenny outlook, where you are seeing incremental savings can you maybe talk about the balance between inc. incremental marketing to drive comp.
Protecting EBIT margins as you bring back half of the year.
Opex on the Opex points.
This is part of our DNA tight expense control is part of our culture. It has been.
I was pleased with how we finished Q2, beating our outlook coming into the quarter on Opex.
The team across this campus has done a lot of great work on continuing to find efficiency across our business. That's enabled us to take down our outlook or improve our outlook for opex for the full year, we were plus four to five on our last call. We've taken that two plus two to three breaking that two to three years apart a little bit we have that 220 basis points from the flagship charge in Q2 that leaves us at more or less flat to up a little bit.
We're investing in the business Fran mentioned, we're laying the foundation for the long term, we're not going to stop investing in the business.
We're making key investments in our transformation and to drive digital growth. She mentioned personalization markdown optimization couple tools there marketing on your direct question. We are investing in marketing. This year, we made a nice leap last year in our marketing spend and we'll continue to lease this year it will be a little more measured than it did when it was in 2018, but at the same time, we've been doing some great work through our transformation efforts to really measure our marketing spend so while our increase won't be as dramatic last year from a dollar perspective, we are spending smarter than we ever have our teams and all of our brands are using these tools and they're just driving great effect of spend so pleased with our outlook for Opex and we'll continue to try to find more opportunities throughout the year.
Great. Thanks best of luck in the back half.
Your next question comes from the line of Susan Anderson with B. Riley FBR.
Hi, good morning, Thanks, so much for taking my question.
If you may be give a little bit more color around just the lower comp outlet for the rest of the year, especially given the fact that you're comping positive quarter to date.
Maybe are you seeing a little bit more pressure globally, maybe the rest of the year any thoughts.
Just around that outlook and then really quick on the gross margin guidance for the third quarter. So it sounds like most of that China in FX. So just curious if you're factoring in also the potential for increased promotional environment. Thanks.
I'll start with the Q3 gross margin outlook.
I'd say, it's a stable promotional environment you nailed it there we are our comp our guide of down 100 basis points is essentially all factored in through FX and the China tariffs kicking in as we think about the comp guide for the year coming out of the spring we're moderately positive for the six months year to date period.
Thinking about our outlook for the full year, we bracketed that we have a flat to a plus two for the full year on comps and assuming the trends continue as they are coming out of the spring season that would put us closer to the flat side of that and if we can reaccelerate growth here in the back half baked based on some of the product changes we've made in the Hollister business and continued acceleration in Abercrombie that would take us towards the towards the top half. So we are laser focused on returning to growth in the back half of what our outlook does as brackets that specifically on your back to school points. We've seen a nice response on early back to school here in the us, but we're certainly cognizant of the geopolitical environment in the macro environment, we're seeing around the world. So that's what's baked into our outlook.
Great Thats helpful. Thanks, so much.
Janine Stichter with Jefferies.
Hi, good morning, Thanks for taking my question.
And ask a little bit more about the Hollister girls business can you just give us a little bit more color on where you think you maybe went off course, there and then you mentioned besides the change in trend in top during the quarter. How did you feel about the assortment broadly and when do you kind of be backward anyway. Thank you.
Sure Jay So we are pleased with our Hollister business, particularly our us business remains strong.
Our cross channel traffic remains strong we had an exciting quarter, we had another record quarter in guys.
We've had a nice record quarter in girls swim lots of really positive things happening.
The one place where we did see an opportunity in growth top I will tell you that started probably late Q1.
We had a tough may I think as most in the industry. The good news is is that with the agility of our supply chain. We can course, correct very quickly we've seen sequential improvement in those top ever since we identified what those issues were great proof point for us.
You talked on the Q4 call about the difficulty for example in Abercrombie.
In dresses and then we proceeded we ended up having a record quarter in dresses in Q1 and Q2. So it just really support the team's ability to identify issues move on them work with our sourcing team and adjust them. So we're excited to compete in the back half and we feel excited about our product.
Great. That's helpful color. Thank you.
Our next question comes the line of Janet Kloppenburg with JJ.
Hi, everybody. Thanks.
Just a couple of points of clarification.
Plan.
So.
Sounds like the U.S. market.
Perhaps the celebrated as events at back to school.
But.
European markets perhaps.
We are waiting for that to happen as soon.
Great.
Cools open.
Ill at a at a later date is that is that wide better performance in the U.S., maybe not grow in Europe , and that's why your comp guidance is what it looks like.
And Scott and just a little confused on that yet.
Fiscal 20 operating margin goal.
I think this year adjusted will be somewhere in between.
And it sounds like you'll get about 10 basis points.
We store closings next year.
So if you could just walk me through the bridge to that by mid fives level I appreciate that thank you.
Hey, Dan I'll kick off in the first part of that question. So we did see nice acceleration throughout the quarter may as I mentioned was difficult industry wide, but we did see sequential improvement on that momentum has continued into the third quarter.
The back to school right the back to school peak definitely different timing here in the U.S. and it is around the world. So thats all really commenting on today on is that were seeing the momentum continue into the third quarter and excited to see the reaction that we have.
Two our products.
On the walk into your plan you have no sorry on the walk to the 2020 goal of 5.8%.
Yes, depending on how we finished this year, there's a lot of business left in this year were going on towards the peak of the season, we obviously peak in the fourth quarter with holiday. So a lot of business ahead of us and depending on where we end up versus our outlook depends on where that operating margin ends up here for for 29 team as we think forward to our bridge I mentioned, a little bit earlier store occupancy continues to be another or a huge opportunity for us go forward. We'll have our next wave of renewals at the end of this year and we'll look to make further progress on that line will continue to evaluate expense and then we look forward to some of the tools that we've been investing in throughout this year through personalization optimization as well as the great product investments our teams have been making two to drive growth next year. So thats, our path really hasn't changed as Fran mentioned loved the word a couple of curve balls came at US here more recently, but it's our job to take some swings and get there.
So you don't you don't think that you have to change that goal in light of the tower pressure that's emerged no changes at this time.
Okay. Thank you so much.
Got it thanks.
So first question.
On.
We'll now go to David Buckley with Bank of America.
Hi, good morning, Thanks for taking my question.
Sure performance by brand in both Europe , and Asia in the quarter and then can you shared Jude multi compares.
As third quarter progresses. Thank you.
And we don't talk about the inter quarter monthly progression from last year, David looking at the international performance by brand.
Ill break I'll start at the total so internationally, we were slightly better than last quarter. So it down three versus the down four last quarter Europe was relatively consistent quarter over quarter and we saw some improvements in Asia, something we called out in Q1 about the hit that we took in Q1 for Asia with some Hollister performance some things that we own and we were able to rectify some of those things, which helped our China business, specifically get a little bit better in Hollister. So generally pleased with where we are internationally very excited as Fran mentioned earlier about the hiring of our two folks to run our regions over in Europe and Asia. This is going to give us a great opportunity to improve our international business as we go forward.
Thanks Scott.
Well go to Marni Shapiro with retail tracker.
Hey, guys.
I guess, if you could talk a little bit about two things you talked a little bit about the international business I think you touched on tourist visits.
If you could talk about the U.S. business ex tours was that stronger than the core US business and then was the denim business strong girls and guys you touched on Herbie, but did you see that business accelerate through the second quarter with denim shorts, and then into long denim.
I'll start with the U.S. tourist business. This has been a consistent theme I'd say quarter after quarter after quarter.
We continue to see a drag on the coast across our brands.
With the currency levels, where they are you will travel a little more difficult little more expensive to the U.S. So I think this is more of an industry wide phenomenon here.
Taking that out we still delivered a plus two comp in the us on a plus seven last year and there was definitely a drag from these tourist stores. The great thing is that the U.S. business and these tourist stores as we track our credit card spend continues to be stronger. So our goal is to continue to drive a more localized customer even in the U.S., we talk a lot about that for flagships, but even in the US we want to drive that more local customer and some of these key tourist cities on the coast. So continues to be a drag or expectations will be that it remains a drag for the foreseeable future until we potentially see some changes in currency.
Mhm.
Regarding denim Marty our we did have a record quarter in denim for Q2 across the company.
Super excited about what's happening across genders and across brands shorts were strong in the second quarter as well lots of newness happening in shorts actually the second quarter between waste detail at new fabrications, adding things to take us into next year.
And we have seen momentum continue in our denim business. It's definitely the Kirby has been an exciting New addition to our assortment, but there's other things happening as well.
Our mom gene is also doing extremely well the customer continues to respond to.
The higher higher waste of genes that trend continues to build momentum. So there is lot of exciting things happening in denim across genders and across brands.
Right.
Thank you.
And it looks like we have no further questions.
I'd like to turn it back over to Brian .
Great. Thanks, I look forward to updating you further as the year progresses.
Thank you everyone for your continued interest and support.
Okay. Thank everyone again for their patients.
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