Abercrombie & Fitch Company

Good day and welcome to the Abercrombie and Fitch first quarter fiscal year 2021 earnings call. Today's call 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 touch tone 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 question and answer session. At this time, I would like to turn the conference over to Pam Quintiliano. Please go ahead.

Thank you. Good morning, and welcome to our first quarter 2021 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 first quarter earnings release, which is available on our website at corporate.abercrombie.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 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 calls. 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. Good morning.

It is hard to believe that over a year of earnings calls have passed since COVID first began impacting the world. During that time, we have become stronger, smarter, and more nimble, and have discovered new ways of uniting our teams to foster innovative thinking and stay close to our customer. First quarter results are evidence of the progress we've made against our key transformation initiatives, which enabled us to report our best operating income since 2008. We exceeded our pre-COVID results, delivering significant improvements across key financial metrics on both a one and two year basis. Sales rose 6% compared to Q1 2019, despite removing 1.3 million gross square feet or roughly 20% of our base over the last two years and experiencing temporary store closures in EMEA during our most recent quarter. In our largest market, the U.S., sales were up 18%, while our global digital revenues grew 81% from Q1 2019 levels. Our growth margin rate was 290 basis points higher compared to Q1 2019, and our operating margin rate rose 1,100 basis points, I am extremely proud of what we have accomplished. We proactively invested in the business, keeping an eye on our longer-term goals. While consumer spending benefited from some well-documented tailwinds, results reflected strong product acceptance, driving a substantial reduction in promotions and markdowns. This is further confirmation that our target customer is responding to our unique product, voice, and experience across brands, all of which have been significantly refined over the last several years. For the quarter, total company revenues rose 61% year over year, with similar growth in Hollister and Abercrombie. This was well above our plan for a 30% to 40% increase. And by region, the US, which is our largest market, was a standout, with revenues rising 72% on a beat across all brands. Digital, which has and continues to carry four-wall operating margins above the store channel, remained strong even as COVID restrictions eased and store traffic improved from Q4. For the quarter, digital revenues grew 45% compared to last year to 52% of total first quarter sales. We continued to add new customers in the channel as we leaned into our digital marketing efforts. Importantly, customer retention is high and spend per customer increased. In addition to our strong digital results, we were pleased to realize improvement in our stores' performance both year over year and on a sequential basis. We ended the quarter with approximately 674 of our 731 stores open, or 92% of our base, with the majority of closures in Western Europe. This compares to 88% of our base open at the end of the fourth quarter. For the first quarter, global store sales rose 77% compared to last year. We continued to take a balanced approach to our omnichannel product and messaging. Our collections were wear now, trend right, and hit the bullseye for each of our brand's unique edit points. From jeans to dresses to fleas to tees, our kid, teen, and millennial customer responded to our latest product. Jeans, which is one of our top sales categories, continued to be a huge win, growing on a one- and two-year basis. We leaned into key women's trends, including higher-rise and wider-leg silhouettes, in ways that were appropriate and differentiated for each of our brands, and we offered them in extended sizes. At Abercrombie, the majority of our new women's jeans styles are selling through at full price, and at Hollister, we've also stepped away significantly from promotional events. She loved the style, quality, and fit of our jeans across brands, which allowed us to achieve our best Q1 jeans growth margin rate since the first quarter of 2012. As our customer has been adopting the latest jean silhouettes, we've been experiencing great full-price top selling. We are now being viewed as an outfitting destination and recognized for our exceptional value equation across our balanced assortment. We've remained disciplined with our inventory commitments while chasing into proven successes where appropriate. We ended the quarter with inventories down 9% to last year on our 61% revenue increase. We pulled back on omnichannel promotions and markdowns, including winter clearance, category-specific, and entire site promotions. After many years of hard work, we have made great progress in transitioning our customers away from a wait-for-sale mentality to a buy-it-when-you-see-it one. We are firing on all cylinders and experienced our best Q1 growth margin in over a decade in A&F women, Hollister girls, and kids, boys, and girls. As a result, our growth profit rate grew by 900 basis points from last year to the highest Q1 level since 2013. At the same time, we've continued to tightly manage expenses while making strategic investments across marketing, technology, and fulfillment to support future growth, and the formula is working. In Q1, we expanded our operating margin to over 7%, our best first quarter since 2008. Our results illustrate that we are executing better than ever. We've been on this path for several years, and rather than slower progress, the global pandemic has accelerated change. Q1 speaks to our evolution into a digital-first, global, omnichannel retailer. We've enhanced our customer and brand experiences through a digital lens, which is how our customers engage with us across social media, our apps, websites, and our stores. We've also refined our messaging to speak to our customers authentically on the topics that they care about the most. In February, Hollister introduced its first Black History Month collection with Academy Group, a great organization that supports and helps unlock opportunities for teens from the most resilient communities. In March, we had our second annual World Teen Mental Health Day campaign, where we partnered with TikTok stars and mental health podcast Teenager Therapy to host pop-up virtual mental wellness discussions for high school students across the country, including a surprise session from Dixie D'Amelio. At Abercrombie, adults kicked off the quarter with their Black History Month for Justice collection, a capsule designed by our BIPOC associates that spoke about racial equity in their own words. This was launched with our partners at the Steve Fund, who do amazing work devoted to the mental health and emotional well-being of young people of color and was part of the Abercrombie Equity Project. For kids in April, we launched the second season of our successful social content series, The Kind Crew, which appears on Nickelodeon's YouTube channel. In line with last year, the purpose is to inspire others to lead with kindness and help to make the world a more kind, accepting, and compassionate place. Turning to brand-specific performance, we continue to be pleased with the results at Hollister, which includes Gilly Hicks, where our global team customer remains highly engaged. We drove higher average transaction value on strong AUR growth. For Hollister girls, dresses, fleece tops, knit tops, and bottoms were standouts. Our guys continue to live in soft and cozy products, including sweatpants. For both guys and girls, we realized significant sales improvements in jeans. By channel, digital revenues grew roughly 35% over last year, while stores experienced sequential improvement as more restrictions were lifted. A key driver of Hollister's success has been its on-target marketing. In February, we kicked off a partnership with Flight House to launch our Hollister TikTok channel and introduced a new group of gene-focused influencers, which helped solidify our gene business even further. And in April, we hosted our first Fortnite gaming challenge with Mission Control. At Gilly Hicks, momentum continued to build, with total sales up approximately 9%, including roughly 100% digital growth from the prior year. Customers responded well to lounge-let matchbacks, sleep, underwear, and our active collection, Gilly Go. We're excited about Gilly's future and we'll share more with you throughout the year on how we will continue to thoughtfully scale. Moving on to A&F Adult, fashion newness resonated with our evolution to a more modernized version of the brand continuing to gain traction. As a result of phenomenal product acceptance across genders, we achieved strong full-price sell-throughs. Women's in particular truly had a breakout moment. the kind I have rarely seen in my 30-plus years as a merchant, achieving its best Q1 revenue since 2008 and the third largest Q1 in brand history. Success was broad-based across categories, including jeans, dresses, intimates, and swim. And for men's, jeans, shorts, and swim were all well-received. By channel, digital sales grew approximately 60% over last year, and there was sequential improvement in store sales. At Abercrombie Kids, we experienced roughly 25% digital growth and a sequential improvement in store traffic. Our assortments stayed true to our Play is Life motto, and a customer responded. Popular categories included boys and girls shorts, girls' knits and swim, and boys' sweatpants. Turning to marketing. At Adults, we focused on being there to outfit our customer for all their activities, including travel, going out, and spring and summer celebrations. We have been nimble and anticipatory of their needs, and our campaigns have reflected that, successfully targeting our 20- to 30-year-old customer with first and new product and messaging. We built on our social media momentum, leveling up our partnerships with creators on TikTok and Instagram to promote our denim, soft AF, men's essentials, and spring fashion collections. We also completed our social media denim model casting call. Response was great, and the campaign will roll out later this year. The power of social selling is clearly a key theme for us and one that we are actively leaning into across brands. It's helping us identify those new and first trends that are happening faster than ever, especially with ubiquity of platforms like TikTok. It's also allowing us to stay super close to and communicate with our customers in real time. The recent launch of our latest brand, Social Tourist, is a great example of our commitment to being an innovator and at the forefront of this shift in consumer behavior. It also encapsulates how much we've evolved and how we are thinking about our brands and our consumer differently with an eye towards the future. As our customers continue to shift to digital shopping and exploration across social channels, it made sense to introduce a brand inspired by that world and by the experience of two of the biggest social media stars, Charlie and Dixie D'Amelio. Social Taurus has taken our already successful relationship with Charlie and Dixie, who combined have over 250 million followers across social media platforms, to the next level. It is a groundbreaking, multi-year, exclusive apparel agreement that has the sisters working side-by-side with our design teams, creating aspirational, top-of-the-fashion pyramid product that speaks directly to Charlie and Dixie's digitally-led lifestyle. Working with the D'Amelios has just been amazing. In a departure from our other brands, The majority of the products will live online with select SKUs available in Hollister stores. There will be limited edition monthly drops that are brought to create excitement and buzz and to sell out. With Social Tourist, we've tapped into the power of social selling in a new and unique way and are positioning ourselves as a leader in the space. We've been very pleased with receptions to brands as it was introduced on May 6th. Thus far, Social Tourist has had over 85 million estimated impressions, including over 25 million views of the brand video. The brand will also be featured in D'Amelio Family's new series, The D'Amelio Show, which is coming soon to Hulu. We're extremely excited about the long-term opportunity and view the brand as another growth vehicle. We also believe it will provide a halo for Hollister, offer insights into up-and-coming teen-oriented trends, and help inform other social strategies. As we've nurtured our established brands and our growth vehicles, we've remained laser-focused on our transformation initiative, which was first introduced at our 2018 Investor Day. Global store network optimization remains one of our top priorities. Aligning square footage with digital penetration is the single most lever to long-term operating margin expansion. Looking ahead, we will continue to transition away from larger format locations to smaller, more intimate Omni-enabled ones. In London, we closed our Abercrombie flagship on Savile Row last year and are set to open a significantly smaller store on Regent Street where more of our local customers shop. This location has better economics, is in our updated prototype, and is a more accurate representation of the brand, and we cannot wait for customers to see it in August. In addition to global store network optimization, we also remain committed to our other transformation initiatives, including investing in digital omni-channel capabilities, increasing the speed and efficiency of our supply chain, and evolving brand positioning while improving customer engagement, and we'll update you on each throughout the year. Before I turn it over to Scott, I want to take a moment to discuss our thoughts on the health of the consumer. In the first quarter, the U.S. benefited from government stimulus, a mini back-to-school season, and easing of COVID restrictions. Internationally, there was the reopening of certain markets, although many large countries remained closed. As we think about Q2, we expect to realize benefits from the further lifting of COVID restrictions and hopefully a reopening of key countries in Western Europe. Thus far, our momentum has continued quarter to date. As more countries and states begin to open, we look forward to further engaging with our global customer base and are cautiously optimistic that we will see a more normal back-to-school and back-to-fall period compared to last year. And while we hope it all goes smoothly, we're not walking away from this past year's key learnings and disciplines. We will continue to expect the unexpected and will quickly pivot no matter what may come our way. I am excited about the future and more confident than ever in our ability to drive sustainable, long-term operating margin expansion. And with that, I will turn it over to Scott.