Abercrombie & Fitch Company

Good day and welcome to the Abercrombie & Fitch second quarter fiscal year 2021 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 telephone. 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. And at this time, I would like to turn the conference over to Pam Quintaliano. Please go ahead, ma'am.

Thank you. Good morning and welcome to our second 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 second quarter earnings release, which is available on our website at corporatesouthabercrombie.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 with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures. Additional details and 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.

I am excited to be here today to share our recent results and provide insights into the start of our back-to-school season. We entered Q2 well positioned to realize ongoing benefits from the work that we had done heading into and during the pandemic. This included... growing our digital channel, which carries a higher four-wall operating margin than stores, right-sizing our store fleet, expanding our digital and technology teams, adding to our vendor and regional carrier networks, and investing in marketing with an emphasis on digital and social. Throughout the late spring and summer, our customers took advantage of the warm weather and an increase in social activities. We were there for all their outfitting needs. College acceptance was strong across brands, continuing momentum for the past several quarters. Once again, we reduced markdowns and promotions, tightly managed inventories, and made strategic investments across marketing, technology, and fulfillment to support near and long-term growth. Our proven playbook worked, and we achieved our best second quarter operating income and operating margin since 2008. Before I turn to results, just a quick PSA. As we continue to lap significant impacts from COVID, we will be providing comparisons to both second quarter 2020 and 2019 where applicable. And due to temporary COVID-driven store closures last year, we do not plan to disclose comparable sales. Second quarter total sales was 24% to last year, and we were up 3% compared to Q2 2019. Our largest market, the U.S., led with sales up 31% on a one-year and 11% on a two-year basis. Results speak to customer attention and spend and to new customers discovering our brands. By channel, total global store sales rose 55% from last year and were down 20% from 2019. I'm very proud of our store's performance, which was achieved despite permanent closures as well as ongoing restrictions in EMEA. As a reminder, during fiscal 2020, we proactively closed 137 locations, removing 1.1 million underproductive gross square feet from our store base. We continue to execute against our number one transformation initiative, global store network optimization, to further align with our customers' shifting shopping behaviors. Even with aggressive store sales growth, digital did not skip a beat and remained as solid as stores reopened. Digital sales held steady to 2020 levels and grew 52% from 2019. Results are further proof of our ongoing evolution into a digital-first global omnichannel retailer and should yield sustainable operating margin benefits. Our total sales growth has been healthy, as evidenced by our significant growth margin expansion. For the quarter, we achieved our best Q2 growth margin rate since 2009. Our total company gross margin rate increased 450 basis points on a one-year and 590 basis points on a two-year basis. We reduced the depth and breadth of promotions compared to last quarter and last year. While customer reaction to products has continued to be strong, we have not and will not step away from our inventory discipline. This is one of the key COVID learnings we will continue to apply going forward. Reflecting our strong top line and gross margin performance combined with ongoing tight expense controls, our operating margin rate rose over 1,100 basis points compared to last year and 1,800 basis points compared to Q2 2019. While we benefited from a good consumer environment, especially in the U.S., our results also reflect the body of work done by our global teams to dramatically improve our product, voice, and experience. Since I became CEO in 2017, our brands have evolved with our customers and we have focused on being there and supporting them for all their lifestyle needs. Speaking of those lifestyle needs, let's take a moment to talk about some major fashion wins that applied company-wide. Many have asked me about the current denim cycle. There's a ton of newness and interest in jeans and it's been great for our brands, especially as it is one of our top three categories on an annual basis and even more important in the back half of the year. Our teams have done an absolutely amazing job staying on top of current denim trends. We are viewed as a premier denim destination with newer styles representing over 40% of our jeans volume, up from 25% last year, and our customer is not waiting for sale to get what they want. In the second quarter, we reduced promotions within this category well below 2020 and 2019 levels. So what's working? We have high rise, wider legs including mom, dad, straight, and flare. Skinny is still there, although becoming a smaller part of the total. And there are new and upcoming trends, like 90s-inspired low rise. Something for everyone. And lengths are changing, too. Following years of ankle, we are starting to see interest in full. We're encouraged that these changes are not limited to one gender. Customers are also responding to the wider leg openings in men's, which represents another significant opportunity, as it has been a long time since he has updated his silhouette. Of course, our customer needs tops to go with their new jeans. In women's, we continue to see customers gravitate to slim and crop tops and to oversized and bodysuits, which further reinforces the proportion play in bottoms. Dresses, skirts, shorts, and swim were also popular. As product acceptance is built, our teams have been meeting our customers where they are in the digital landscape. We are firmly committed to our test and learn strategy and to new and emerging technology trends and engagement opportunities. It was certainly a busy and exciting quarter for both technology and engagement, and I want to take a moment to discuss some of the highlights. We introduced and evolved Gilly Hicks brand purpose and positioning. We launched our newest brand, Social Tourist. We accelerated investments and testing across influencer, paid media, and digital, reaching both core and new audiences. And we hired a chief digital and technology officer to further evolve and accelerate our digital first model. Starting with Gilly Hicks. On July 15th, we took a huge leap forward in our growth strategy by relaunching the brand globally with an evolved purpose and position to bring our customer to their happy place. Given our Gen Z customer is the most stressed generation, the updated purpose is very important. As part of the relaunch, we introduced gender inclusive product and new size inclusive materials so that everyone can feel welcome and comfortable, regardless of size or gender identity. In addition, we opened our first standalone store at Easton Town Center in Columbus, Ohio, and introduced updated side-by-side within Hollister store experiences. This included 20 refreshes to existing side-by-side formats and three new locations, all of which incorporate elements from the standalone store. Wow, what can I say? What an absolutely phenomenal moment for the Gili team. We are truly feeling the love. Customer feedback has been overwhelmingly positive, and the brand is resonating with our Gen Z customer and their mindset. Early results from the brand relaunch and the new store concept have been very encouraging. Taking a step back, our customer is already responding well to the product and the brand, which gave us confidence to make the necessary investments to accelerate this exciting growth vehicle. In the second quarter, sales rose approximately 30% year-over-year, with growth across digital and store channels. This is the fifth consecutive quarter of double-digit total sales gains. Lounge let matchbacks, sleep, underwear, and our active collection, Gilly Go, continue to resonate with our customer. Post-launch, our guys' product and matching collections have also been well-received. Turning to Social Tourist, it's hard to believe it's only been three months since we've taken Hollister's successful partnership with TikTok superstars Dixie and Charlie D'Amelio, who combined have over 270 million followers across social platforms, to the next level with the launch of our fifth brand. Social Tours is a great example of how we are approaching our business differently, meeting our customer where they are and pushing boundaries of social commerce in new and exciting ways. Since the launch, the brand has had over 700 million impressions and views, and we continue to build awareness. For the first collection, we had several Instagram exclusive pieces, and for the second, we hosted a live TikTok fashion show featuring the D'Amelios and other social stars which beat TikTok's benchmarks. With Social Tourist, we have learned so much in a short period of time about up-and-coming fashion trends, social commerce, and the growth of the TikTok platform. We are optimistic about Social Tourist and its future and have several more exciting events happening throughout the remainder of the year. Now on to our remaining brands, starting with our largest brand, Hollister, which includes Gilly Hicks and Social Tourist, Sales rose 20% in the quarter, and we achieved our highest Q2 sales in company history. Congrats to the entire Hollister team. Our focus on voice and experience clearly complemented our product, helping to drive higher average transaction values on strong average unit retail growth. From a marketing perspective, we launched the Hollister Creator Collective, a year-long influencer program. In July, we sponsored the Lago Vista Snapchat series, featuring 21 non-skippable Hollister commercials. We rounded out our efforts with a new monthly Instagram live shopping series with influencers. Hollister's site and app also got a refresh during the quarter, further improving the customer experience. Gilly Hicks and Social Tours now have dedicated tabs, allowing users to shop between all three brands with a shared checkout. In addition, Gilly Hicks and Social Tourists launched their own unique app, and we also updated our membership loyalty program so that customers can earn points and redeem rewards across all three brands. As we look to the remainder of the back-to-school season, we are focused on continuing to win in jeans. We have styling pop-ups in key markets where we have been engaging with local teens and seeding product, and thus far has been highly successful. We will also have influencers and affiliates in the U.S. and EMEA amplify denim across Instagram and TikTok. At Abercrombie Adults, our influencer, affiliate, and editorial programs remain one of our top priorities. In the second quarter, we grew associated sales by over 70% year-over-year and increased our already sizable network of digital brand advocates. We also launched a capsule series with top affiliate creators and took part in Facebook's live shopping alpha test, which had fantastic engagement and insights. During the quarter, we continued to leverage TikTok content, On a year-over-year basis, we doubled our new-to-file visits, grew new-to-file orders and sales by over 80%, and continued to break TikTok's benchmarks for paid media. I can't wait to see what the future holds on this important platform. After all, according to PopSugar, Abercrombie is TikTok's favorite fashion brand, and we are proud to hold that title. All the hard work connecting to our customers certainly paid off. On our last earnings call, I said Abercrombie women had a breakout moment. During the second quarter, that momentum built, with women's achieving its best Q2 sales since 2012. In total, Abercrombie, which includes kids, grew sales 30% in the quarter. Similar to Hollister, Abercrombie registered higher average transaction values on strong average unit retail growth. Heading into fall, our team is energized. We recently launched our Denim Your Way campaign, which features Abercrombie customers from our Instagram casting call. We also collaborated with wedding and events experts The Knot on a best-dressed guest collection. In addition, we teamed up with Zappos as our exclusive domestic third-party e-commerce provider for a limited selection of jeans and tops and a footwear collaboration. At Abercrombie Kids, if report cards were given out during summer, I would say they received an A. We were highly focused on driving customer acquisition through expansion to new platforms and releasing new product and content franchises. The ultimate summer outfit campaign contributed to sales growth in shorts and swim, which are two important seasonal categories, while the release of the Cool Stuff collection and the launch of our active assortment both had over 70% new-to-file shopper rates and average order values that were over 70% above our goals. A common theme across the company has been our focus on digital, which is critical for future growth. As we continue our transformation into a digitally-led operating model, we have made investments in technology and talent. Over the past year, we've expanded our data and analytics, user experience, and technology teams, and we recently welcomed Samir Desai to the ANF family in the newly created role of Chief Digital and Technology Officer. Before I turn it over to Scott, I want to take a moment to discuss our thoughts on the health of the consumer and how we are approaching the fall season. In the second quarter, the U.S. benefited from government stimulus and a reopening as customers resumed many of their activities. Internationally, the reopening in many countries, including our largest market, the UK, lagged the US, reflecting ongoing COVID-related restrictions. As we think about Q3, while global uncertainties remain, we are cautiously optimistic. We've been pleased with the US back to school season to date and believe our customers highly engaged and actively looking to refresh their wardrobe. We are expecting to see an elongated season as many of our larger markets have yet to return. In EMEA, the environment is improving and we have yet to start the back-to-school season. Looking ahead, we will continue to execute our proven playbooks. We will focus on controlling what we can control and will remain on offense. We are proactively managing through industry-wide issues around inflation, production, and transportation delays. With our solid foundation and strong balance sheet, as well as our long-standing relationships with our global vendor and supply chain partners, We are well positioned to be winners in the back half and expect to surpass our previously stated 5.8% operating margin goal this year. And with that, I will turn it over to Scott.