Abercrombie & Fitch Company

Welcome to the Abercrombie & Fitch Fourth Quarter Year-End 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 1 on your touchtone phone. We will open the call to take your questions at the end of the presentation. We ask that you limit yourself to one question during the questions and answer session. At this time, I'd like to turn the call over to Ms. Pam Quintiliano. Please go ahead, ma'am.

Thank you.

Good morning and welcome to our fourth quarter 2020 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lopesky, Chief Financial Officer. Earlier this morning, we issued our fourth quarter earnings release, which is available on our website at corporate.abercrombie.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 Allegation 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 with 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. Good morning, everyone, and welcome to our fourth quarter earnings call. I hope you, your families, and your loved ones are safe and healthy. Looking back on 2020, I am proud of our accomplishments and the positive change we drove. Despite the difficult operating environment, we grew digital penetration to 54% of revenues from 33% last year, removed 1.1 million gross square feet, or 17%, from our global base, expanded our gross profit rate by 110 basis points, and fortified our balance sheet to end the year with 1.3 billion of liquidity. Today, I can confidently say that we are closer to our customer and stronger, faster, and smarter than ever before. Importantly, our brand positioning, product execution, and financial strength has enabled us to enter 2021 on the offense. Before turning to fourth quarter results, I want to take a moment to thank our global store, distribution center, and home office associates, as well as our partners for their unprecedented level of creativity and resiliency. There is no other group I would rather be on with on this journey with. Now onto the fourth quarter, where results exceeded our internal expectations. Total company revenues declined 5%. This was at the high end of our upwardly revised plan provided in January for a 5% to 7% decline and reflected a solid finish to the quarter. Results were driven by digital, which grew 34% to $639 million, or 57% of sales. We continue to realize significant year-over-year improvements in traffic to our websites and apps and delivered our highest ever quarterly digital sales and best digital growth margin rate in eight years. Digital strength was offset by ongoing weakness in stores. We ended the quarter with 88% of our global base open as multiple countries across EMEA re-entered lockdown, including our largest international market, the UK. This compared to 97% open at the end of Q3. Among our open stores, we continue to experience reduced hours and capacity restrictions. Across channels, our customers responded to product newness and messaging. We realized higher year-over-year AUR for the third consecutive quarter, driven by on-trend products, lean inventories, and lower promotional intensity, including over the Black Friday period and into the Christmas peak. We continued to utilize our agile supply chain to buy as close to need as possible, ending the quarter with inventories down 7% on our 5% revenue decline. These factors all contributed to gross profit rate expansion of 230 basis points. Overall, we were very pleased with fourth quarter performance, especially in light of continued disruptions across stores, factories, and our transportation network. While the holiday season was uniquely challenging, I am proud how we navigated. Listening to our customer has been paramount to our success. Today, all four brands have clearly defined edit points and our product, voice, and experience are more aligned than ever before. Our new and existing customers have been responding with our average transaction value up year over year. Reflecting dramatic digital growth, we estimate that new-to-file customers in the channel grew over 35%. Turning to brand performance, we continue to be pleased with the results of Hollister, which achieved another quarter of double-digit digital expansion. This was offset by ongoing store challenges. But Hollister more impacted than our other brands, given its larger global store base, including over 110 locations in EMEA and its lower digital penetration. Despite these challenges, Hollister realized improvements in average transaction value. Our focus on assortment architecture, High-margin must-haves and our top 30 items continued to pay off, allowing us to pull back on promotions and expand our gross profit rate. For girls, fleece tops and knit bottoms were standouts. Our guys also responded well to soft and cozy offerings with strengths in sweatshirts and sweatpants. At Gilly Hicks, we had another impressive quarter of double-digit sales growth and more than 100% digital growth year over year. Customers responded well to updated assortments, including cozy tops, bottoms, and our lounge-let matchbacks. Our active collection, Gilly Go, also continued to resonate, and as we shared last quarter, we have dedicated additional resources to this important global growth vehicle. Throughout the fourth quarter, we continued our productive partnership with social media stars Charlie and Dixie D'Amelio. Integrating with sisters across our Hollister marketing campaigns, including their own gift guide, which drove incremental sales, We also launched two new co-created products and offered Charlie's new book online, which generated buzz and quickly sold out. During the Blitz quarter alone, Charlie and Dixie's 36 social posts for Hollister resulted in over 200 million impressions and views. Post-holiday, we had a third collaboration. We are thrilled with our ongoing relationship, which has yielded quantifiable positive results and is bringing a new audience to Hollister. Looking ahead, we are excited to find new ways to expand our relationships with Charlie and Dixie. At A&F Adult, which caters to a young millennial, we reduced our promotions, leading to growth. Results benefited from double-digit digital sales growth, where we achieved record volumes in over two-thirds of our categories. In addition, we also experienced sequential improvement in store sales. Women's continued to outperform as our team confidently pushed boundaries and set trends with each new delivery. While most categories registered sales improvements over last year, knits, sweaters, outerwear, and jeans led the way, with our customers responding well to elevated fashion content. Across genders, our Soft AF and 96 Hours collections continue to resonate and gain traction. As we look ahead, we see opportunity to build on both franchises. At Abercrombie Kids, we experienced continued double-digit digital growth and increased interest in soft and cozy fabrics like Sherpa, polar fleece, and faux fur. To capitalize on the trend, we introduced our Sew Soft collection for the holiday. We also introduced Abercrombie and Family Collection, featuring matching outfits for the whole family, including sweatshirts and band tees. Turning to marketing, adults and kids focused on expanding our Abercrombie family, establishing shirts, establishing ourselves as an industry leader with best-in-class social selling and continuing to lean into our purpose and values. At A&F, we successfully doubled down in social selling, which accelerated but was a positive contributor to the quarter. Our vast influencer and affiliate network proved to be extremely powerful. With our A&F Women's High-Rise Super Skinny Name the number one keen in 2020 across the Like to Know app, which is one of the most popular social shopping apps in the world, In fact, I'm pleased to announce that later this month, A&F will be receiving the first ever Influencer Marketers of the Year Award by RewardStyle and Like to Know It. Congrats to the team. Q4 also proved to be an opportunity to expand Abercrombie's purpose and values. Following the recent launch of the Abercrombie Equity Project, the brand's social and racial justice initiative, we announced our partnership with the Steve Fund. the nation's leading nonprofit organization specifically devoted to the mental health and emotional well-being of young people of color. Recently, Hollister and A&F offered their first-ever Black History Month collections, which were co-designed with our associates and affiliates and modeled by members of our BIPOC and Allies Associate Resource Group, with inept proceeds donated to our philanthropic partners at the Academy Group, the Steve Fund, and the Conscious Kids. Today, we are celebrating the second annual World Teen Mental Wellness Day, a global event that Hollister created in partnership with the National Day Calendar to disrupt the stigma surrounding teen mental health. In support, Charlie and Dixie will be surprising high schoolers with virtual pop-up mental health discussions. This is a great example of the community that we are fostering and how we are listening closely to our customer while living by our values. We also remain committed to our environmental and social sustainability efforts and have made many advances this year as we work towards our longer-term goals. We provided training to our third-party factory workers in Cambodia, India, Vietnam, and Bangladesh on a variety of topics, including life skills, anti-human trafficking, and health and safety management, and confirmed 100% commitment of our third-party Tier 1 Cambodia factories into the PACE program. Recently, we also executed a 100% renewable electricity contract for our Ohio corporate office and DCs to begin in 2023 that will support our goal of reducing total Scope 1 and 2 greenhouse gas emissions by 2030. As it relates to our product, we adopted EcoWash for the majority of our genes and continue to partner with the Better Cotton Initiative. We are excited by our progress, but recognize that there is much work left to do. We will continue to support the communities we serve as we work to create a future we can all be confident about. In addition to our focus on corporate and social responsibility, we've also been hard at work on our transformation initiatives. Global store network optimization has and continues to be a top priority. Since I joined the company in 2015, we've introduced new productive prototypes across brands while proactively removing 2 million underproductive growth square feet or roughly 28% of our total company store footage. As we remain on our path to strategically refine our global footprint, we have increased our digital penetration from 24% in 2015 to 54% of net sales in fiscal 2020. The majority of store closures have been in A&F where the customer over-indexes to digital, and our legacy flagship and law fleet is older, larger, and more expensive than that of Hollister. In fiscal 2020, we took out 1.1 million gross square feet, or 17% of the base, reflecting the closure of 137 locations. We closed 129 non-flagship stores, removing roughly 850,000 gross square feet. This included 73 A&F stores, or approximately 25% of its base, and 56 college stores, or 10% of its base. Closed ANF locations averaged 8,300 gross square feet, or close to double our preferred prototype of 4,500 gross square feet. We also closed eight ANF flagships, including the seven discussed on our Q3 call and one additional, Dublin, Ireland, ahead of its natural lease expiration this month. As we move into 2021, our principles have not changed. Aligning square footage with digital penetration is the most important lever to maintain and improve profitability as we continue to transform from a store-led to a digitally-led business model. And while the role of the store continues to evolve, our commitment to our customer is resolute. They've made it very clear they want us to have a physical presence, but that experience needs to be seamless with our digital platform, user-friendly, and efficient. Reflecting on our ongoing journey, as well as the broader evolution of the retail landscape, we purposely keep our lease terms flexible, with 50% of our lease up for renewal on a rolling two-year basis. This gives us the ongoing ability to refine our base by exiting, relocating, or right-sizing legacy larger format flagship and mall-based locations, while continuing to find the right spaces to provide our customers with exciting and authentically on-brand new omni-channel experiences. With our financial strength and digital penetration, we remain disciplined with our approach and look forward to working with our global landlord partners to find spaces that are the right size, right location, and right economics. Hand-in-hand with our store optimization strategy is our digital and omni-transformation initiative. We have thoughtful plans in place to continue to invest in digital and omni-capabilities and enhancements to create best-in-class customer experiences while growing profitability across channels. Turning to our supply chain initiatives. As COVID reshaped customer behaviors, we flexed our model to fulfill elevated digital demand and utilize data and analytics to offer the right product at the right time and the right price. In 2021, we will continue on that path as we reposition our West Coast Distribution Center to a larger, more automated facility that will increase capacity and improve speed to customers. Last but certainly not least, regarding grant positioning and customer engagement, We are leveraging data, including our loyalty programs, to engage with customers across channels and drive more efficient and effective marketing spend. We also have made key investments in senior talent, including building our user experience and data and analytics teams. Before I turn it over to Scott, I'll summarize our mindset as we head into 2021. Building on momentum from recent results, we are pleased with our start to the first quarter and are optimistic about the long-term global growth opportunity we see across all four brands. including significant runway domestically and in EMEA and APAC, where we are realizing an increasing impact from our growing regional team. We are on the offense. As we work towards recapturing sales lost due to COVID-19, while we continue to operate in an uncertain environment, we will focus on what we can control. Specifically, we are planning to accelerate digital data and technology investments to increase agility and improve the customer experience, strategically invest in marketing to build momentum across brands and geographies, continue to focus resources on Gilly Hicks growth, optimize global square footage and be opportunistic in domestic and international store expansion, and build on our important CSR work with our associates, partners, and other thought leaders. Following a surreal 2020, I am excited for our future and more confident than ever that we are on the right path to deliver profitable growth in 2021 and beyond. And with that, I will turn it over to Scott.