Abercrombie & Fitch Company

Please stand by, we're about to begin. Good day and welcome to the Abercrombie & Fitch first quarter fiscal year 2020 earnings call. Today's conference is being recorded. If you have a question at any time during today's conference, you may signal us by pressing star one on your touchtone phone. We will open the call. To take your questions at the end of the presentation, we ask that you please limit yourself to one question during the question and answer session. Thank you. At this time, I'd like to turn the conference over to Pam Quintiliano. Please go ahead.

Thank you. Good morning and welcome to our first quarter 2020 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lipesky, Chief Financial Officer. Earlier this morning, we issued our first quarter earnings release, which is available on our website at corporate.abcrombie.com under the investor section. Also available on our website is an investor presentation. Please keep in mind that any forward-looking statements made on the call are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 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 mentioned today. A detailed discussion of these factors and uncertainties is contained in the company's filings within the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details in the 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, everyone, and thank you for joining us today. During this unprecedented time, I hope that you and your loved ones are healthy and safe. What a difference three months makes. A great deal has happened since we last spoke. At the time of our fourth quarter earnings call in early March, the majority of our China stores had just reopened and we were pleased with the start of our global spring selling season across brands. Since then, we have all been tested in ways that we could never have imagined, both personally and professionally. I always task every member of our company to team up and build up. This quarter, that proved more important than ever as our teams pushed boundaries, streamlined processes and found new ways to be effective. I've been impressed with the strength, perseverance, humility and creativity of our global teams and would like to thank you for your efforts and your resiliency with an extra thanks to our distribution center and store employees. I believe that we've been able to successfully navigate during this challenging period due to our solid foundation which has been fortified over the past several years through our transformation initiatives. These include optimizing our global store network and square footage, investing in our digital and omni-channel capabilities, increasing the speed and efficiency of our concept-to-customer lifecycle, and improving our customer engagement. These initiatives, along with our strong balance sheet, have empowered us to be strategic with our business decisions while keeping an eye on the long term to ensure that we emerge from this crisis stronger and better positioned. As a reminder, we began 2020 with $671 million in cash and cash equivalents on our balance sheet. Digital sales of over $1 billion in 2019, accounting for roughly a third of our annual revenue base and our 10th consecutive year of digital growth. 66% of our revenue base derives in the U.S. and 34% internationally. 850 stores globally with over 90% of our domestic locations in A&B centers and roughly 50% of our leases up for renewal on a rolling two-year basis. And another successful year of global store network optimization, reducing global square footage by 4%, including the closure of four underperforming flagships. Fast forwarding to mid-March, by the time we closed our North American and EMEA stores, we had already experienced the impact of COVID-19 on our consumer, employees, and partners in China. While China only represented about 5% of our global revenues in 2019, we were able to apply key COVID-related learnings from the region to make informed decisions regarding reduction in demand, store closures and openings, and work-from-home strategies, among others. As we transitioned to our new reality, we became hyper-focused on developing processes that pushed our previous comfort zones. We adjusted to the differing needs of our global customer base, pivoting our marketing message and tactics across channels to thoughtfully address their new normal while staying authentic, and continuing to be there for them whenever, wherever, and however they chose to engage with us. As stores closed, we leveraged our digital business. We quickly implemented necessary safety protocols at our global distribution centers and redirected products destined for stores to our DCs, all of which remained open and operational. Our team did a great job finding ways to optimize existing fulfillment capacity under the revised operating procedures. And with roughly 90% of our orders typically filled through our DCs, our actions enabled us to have the inventory and expertise to keep up with the increased customer demand. Ultimately, we achieved 25% year-over-year digital sales growth in the first quarter to roughly $275 million, with customers responding to our work-at-home, play-at-home, stay-at-home messaging end product. While digital growth was already in the double-digit range from February through mid-March, trends accelerated across brands following the store closures and has further accelerated in May. As we leaned into our robust digital channel, we simultaneously embarked on a series of precautionary actions to further fortify our strong liquidity position. In March, we borrowed $210 million under our senior secured asset-based revolving credit facility, withdrew the majority of excess funds from our rabbi trust, providing an additional $50 million of cash, and suspended our share repurchase program. In April, We furloughed all of our U.S. and a portion of our EMEA store associates and funded 100% of those eligible employees' health insurance premiums, enacted a temporary base reduction for VPs and above, and a temporary reduction in the board's cash retainer, and temporarily reduced the work schedule for approximately 15% of our corporate associates. Beyond those publicly stated actions, We were and continue to be focused on managing inventories, extending payment terms, and reducing our operating and capital expense structure. The positive impact of these actions will extend beyond Q1 to the remainder of the year. For inventories, when we closed our US and EMEA stores, we were fully bought through Q1 and a portion of Q2. Having ended the fourth quarter with inventories current, in-store product was predominantly beginning-of-life spring assortments that could be sold through summer. We subsequently reduced certain orders that were not already in production, delayed and recadenced deliveries, reduced SKU counts, and implemented pack-and-hold strategies. Towards the end of Q1, we also restarted ship-from-store and select locations to unlock in-store inventory. Regarding payment terms, I would like to start by thanking our vendors for their partnership and support. Since March, our cross-functional teams have tirelessly worked with our merchandise and non-merchandise vendors to find term extensions that are acceptable for all parties involved while remaining cognizant that these are challenging times for everyone. And finally, on expenses, rest assured that we are leaving no stone unturned. We have mobilized our entire organization, challenging every leader to take their budgeting process to the lowest level. We've evaluated thousands of operating spend line items Constantly questioning the definition of fixed versus variable costs. Through this process, we have removed roughly $200 million from the expense structure that we originally built for 2020, a portion of which will likely be permanent going forward. On capital expenditures, while we had carryover from last year and some spend in flight already, we immediately paused on the majority of our real estate projects while protecting certain key technology investments. As a result, we now expect capital expenditures to be down roughly 50% from last year to approximately $100 million for the year. The sum of this work helped to dramatically reduce our cash burn, despite the widespread store closures and a constrained global consumer landscape. While total sales were down 34%, we were able to maintain a solid liquidity position, ending the quarter with $763 million of liquidity, including $704 million of cash and cash equivalents and $59 million available under our ABL credit facility. Now turning to brand specific performance. At Hollister, girls slightly outperformed guys. Our girl responds well to loungewear including fleece and knit bottoms. Knit tops were also well received. We believe this speaks to our renewed focus on our proven playbooks with an emphasis on assortment architecture, few breaths, Top 30 distortion with increased newness year-over-year and a critical eye on AUC investments. On the guy's side, fleece tops, sweaters, sweatpants, and active shorts were top performers. Our Intimates growth vehicle, Gilly Hicks, also experienced very strong digital growth. Soft and cozy loungewear proved especially popular, as did our seamless collection. The highlight of the quarter was the amazing launch of Gilly Active in the second week of April. We sold out of key styles within a few days and had to pull forward future deliveries to keep up with demand. Both Hollister and Gilley benefited from our marketing, which is laser-focused on the global high school student. As the world changed in March, we leaned into our connection with our customer. We immediately launched a country-wide team panel to better understand their mindset as the impact of the virus unfolded. We also rolled out a series of customer-centric strategies to ensure that our broader community continues to feel connected and engaged during the pandemic. This included virtual prom, our first virtual-only event where over 70,000 teens around the country, including our ultimate prom contest winner, Eagle Rock High School, celebrated together from home. In addition, we also ramped up our TikTok content with foreign trends and lighthearted posts to make our teens smile. and further tapped into our brand agent program, documenting their outfitting and how they had been spending their time. Tune-ins for the prom were above expectations and performance across social continues to grow each week, exceeding goals and benchmarks. At Abercrombie, similar to Hollister and Gilly, soft and cozy products such as fleece and knits resonated. In adults, Women's continued to outperform men's, with both responding well to the soft AF collection, which is in the sweet spot of the comfortable dressing trend. While quarantined, she shopped as an activity, updating her work-from-home wardrobe with bodysuits and curved-love denim, while also buying dresses in anticipation of the quarantine lift. It is worth noting that despite the store closures, Women's had several positive comping categories for the quarter, including knit tops, jeans, and skirts. On the men's side, we had a very strong jogger business, which aligned with our customers' comfy mindset. For kids, product successes were in categories that support their new stay-at-home lifestyle, including cozy and lounge-access categories such as fleece tops, sweatpants, and sleepwear, as well as summer essentials including shorts and swim. As our AMF adults' and kids' lives quickly shifted, our marketing team shifted with them. Thank you for joining us. We've worked with our powerful influencer network to create and amplify updated content and are continuing to apply learnings from our employee sounding board which provides real-time insights into what a post-COVID life resume may look like. At Kids, we are talking to both our kid and their parent and have created content and storytelling to help navigate the unique challenges of homeschooling in a positive and optimistic light that aligns with our Play is Life motto. Throughout the quarter, we also continued our important ESG work through ongoing care, support, and empathy for our global employees and partners. In April, we announced our partnership with ThredUp, the world's largest fashion reseller. This partnership allows customers to send in clothing from any retailer for e-gift cards to be redeemed across our brands. It also reduces waste and supports our commitment to the UN Global Compact. We've continued our ESG efforts by further diversifying our board with two new members. So that gives you an idea of where we have been and what we've been up to in the first quarter. Let's move on to where we are going. As stores have opened, our customers have begun to reengage in person. As of yesterday, we had 409 locations in operation globally where the customer can cross the threshold and shop, representing 48% of our base. By region in the U.S., we have 285 stores open or 45% of the base. In the EMEA region we have 79 stores or 56% of the base and in APAC we have 40 stores open or 82% of the base. We continue to follow government mandates regarding the timing of openings and necessary in-store precautions. With the health and safety of our customers, store associates and the broader communities remaining a top priority. We hope to have the large majority of our store base open by the end of June. Similar to what we experienced in China in the first quarter, we are seeing steady improvements as our U.S. and EMA customers become more comfortable shopping in stores. Although we are earlier in the opening cycle in both regions and stores are largely operating under limited hours, we are encouraged by recent results, with the customer returning to stores at an even quicker pace than in China. Store traffic has been steadily building week over week. We're experiencing a broad range of results in stores that are open, with some experiencing sales trends that are above last year's levels and others below. As of Monday, since reopening stores in the U.S. and the EMEA regions, which are two of our largest markets, sales productivity is at 80% and 60% of last year's levels, respectfully. For reopened stores, with Hollister outpassing the higher digitally penetrated Abercrombie. As our store business continues to register daily improvements, our quarter-to-date digital business has further accelerated from April levels, with the U.S. and EMEA regions experiencing similar growth trends. Across stores and digital, our customers are responding well to our warm weather assortments, particularly girls' shorts and bear tops at Hollister, and women's curved love shorts at A&F and shorts for guys across brands. Looking ahead, as we have done since COVID-19 first emerged, we will continue to obsessively gather information to ensure we are making well-informed decisions. We feel great about the positioning of each of our brands as we enter this next phase. However, we are mindful of the unpredictable nature of the current situation and have taken a cautious approach to managing our business and conserving our cash position. We will continue to tightly manage inventory while maximizing our ability to chase as we learn more about the trend each day. We will stay flexible on promotions, balancing brand health, inventory sell-through, and the competitive environment. And we will continue to drive expense savings and flexibility so our business can thrive at different levels of sales. Before I turn it over to Scott, I would like to end my view with my view on the consumer landscape. I spent my entire career focused on apparel retail. I've been through many cycles, and what we are experiencing now is truly unprecedented. While there is no roadmap, there is one thing I know for sure. Crisis has a way of accelerating change. The retail landscape will look dramatically different by the end of this year with significant rationalization as players exit the market. Our recent strategic and process-driven pivots have accelerated new ways of approaching our business, both inside our four walls and with our customer, driving near-term results and long-term benefits. Through it all, our customer remains highly social and highly engaged, which is a testament to our brand positioning and to our collective efforts. As I reflect on this and how quickly our team has pulled together and adapted, I am confident that we are well positioned to not only survive, but to thrive. And with that, I will turn it over to Scott.