Abercrombie & Fitch Company

Good day and welcome to the Abercrombie & Fitch fourth quarter and near-end 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 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 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 fourth 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 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 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 filing 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. I am excited to be here today to discuss our fiscal 2021 results and the initiatives that empowered us to achieve a 9.6% adjusted annual operating margin, our highest in over a decade and well above the 5.8% target outlined at our 2018 Investor Day. But first, I'd like to thank our global stores, distribution center, and home office teams, as well as our partners. Without you, we could not have realized such significant improvements. I'd also like to take a moment to send our thoughts and prayers to all of those impacted by the current situation in Ukraine. Now on to our results. First, I'm going to discuss the substantial foundational changes made from fiscal year end 2018 which anchors to our 2018 Investor Day through 2021 before turning to fourth quarter and full year results and our thoughts on 2022. As a reminder, at our 2018 Investor Day, we discussed the initiatives necessary to stabilize, transform, and ultimately accelerate growth. These included optimizing our global store network, enhancing digital and omni capabilities, increasing the speed and efficiency of our concept of customer lifecycle, and improving customer engagement through loyalty programs and marketing optimization. As COVID hit and others were in survival mode, our balance sheet enabled us to double down on our initiatives. As a result, today we are firmly in our growth phase. Let's take a moment to discuss. Starting with global store network optimization, Over the past three fiscal years, we have removed 1.5 million gross square feet, or 23%, out of our base through 228 closures, including 14 flagships. The vast majority of closures were oversized Abercrombies. This has resulted in a reduction in annual store occupancy costs of $197 million, or 31%, since fiscal 2018. A huge shout out to our real estate team who has rigorously evaluated every store in our portfolio and the role it plays. But it's important to note that optimizing our footprint has not been solely focused on closures. We continue to reposition each brand while evolving the experience to enhance our suite of Omni tools, including purchase online, pickup in store, curbside pickup, order in store, ship from store, and same day delivery. At Abercrombie, which has a significantly higher digital penetration than Hollister, reflecting the shopping preferences of its millennial customer base, we have added 65 new experiences over the past three fiscal years. On average, these are roughly 30 to 50 percent smaller than our heritage stores and better reflect the modern Abercrombie & Fitch through clean and open sight lines and improved functionality that supports the digital nature of our customer. Roughly 40% of Abercrombie stores are in updated format. At Gen Z Brandt Hollister, the team views going to the mall as a social activity. With a newer and more updated store base, the number and size of stores has remained relatively stable over the past three years, and our primary focus has been to open up and brighten the storefront and interior. Currently, around 60% of Hollister's are in the updated format. We also have a dedicated Gilly Hicks space in each Hollister globally, including 28 side-by-side locations. Simply put, there has been a fundamental shift in how we think about the purpose of a store. We no longer take a one-size-fits-all approach. With tens of millions of customers in our database, we have quantitative and qualitative data to inform our approach to each market. A great example is our recently opened Abercrombie Southport Chicago store. At roughly 2,300 selling square feet, it's one of our smallest footprints yet, offering only women's product, reflecting known demand in the area, and thus far we are beating internal expectations. We are excited to have added another highly productive, customer-centric store format, and will continue to explore different opportunities that reflect market-specific nuances. Needless to say, I am thrilled with our progress. We have shuttered underproductive locations and found new ways to meet our customers to enhance shopping experiences, both in stores and online. And while closing stores took a meaningful chunk of sales out of our base, it was absolutely the right decision for the longer-term health of our company and our brands. We are ready to move forward, unencumbered by a dated and expensive store base that does not accurately reflect who we are today. While there is no finish line, we have reached a pivotal moment for our company and our brands. We have exited our stabilization phase and are now on a path of growth with a continued focus on the omni-channel brand experience, which includes both stores and digital. In 2022, for the first time since 2008, we expect to see net store openings with a minimum of 50 new omni-enabled experiences offset by an estimated 30 closures and square footage to be up in the low single-digit range for the year. We will continue to maintain our discipline surrounding size, location, and economics. Ultimately, we believe that stores and digital are complementary brand experiences and that there is the opportunity to further increase digital sales even as we introduce more store locations. Turning to digital. When COVID accelerated the shift to this channel, the consistent investments we had made over the last several years enabled us to fulfill that demand. Financially, we executed against our long-term plan of reducing occupancy to fund increased digital fulfillment. In fiscal 2021, even as stores reopened, roughly half of our sales were digital versus about a third in 2018. Now onto our third area of transformation, speed. In order to be nimble and stand top of current and upcoming trends, we refined our design calendar, rebalanced our vendors, and expanded countries of origin. This has enabled us to move quicker and further improve the quality of our product. Looking ahead, we will continue to evolve our sourcing and transportation strategies to mitigate inventory risk by further diversifying production, adjusting our product calendar, and adding ports and carriers. Last but certainly not least, let's discuss customer engagement. where the most critical step thus far has been clearly defining the purpose and competitive positioning of each brand. With this lens, our teams have evolved how we stay close to our customer and their ever-changing needs. While there are so many great examples, let's start with Abercrombie's Best Dressed Guest franchise. For those of you who haven't heard, 2022 is predicted to be a record year for weddings. With our best-dressed guest collection, we provide outfitting options for all their wedding, shower, bachelor, and bachelorette party needs. For our Gen Z customer who's not preparing for wedding season just yet, we collaborated with world Fortnite champion Booga on gamer training events and associated product. These programs, Abercrombie and Hollister, have been highly successful and speak to the innovative ways we are gathering customer insights and executing to them. With the DNA and positioning solidified for each of our brands, our marketing teams are authentically engaging with their respective customers on the channels that are most relevant to them. We continue to unlock and realize the power of social selling to influencers, affiliates, and platforms such as TikTok, Instagram, and Like to Know It, or LTK. LTK, one of the top global influencer platforms, recently recognized Abercrombie by including two pieces on its 2021 Most Popular Items list, the seamless tank bodysuit and the asymmetrical snap-up fleece. We also launched a highly successful mini-me collaboration for kids with one of LTK's top performers, Sister Studio. Additionally, we have tapped into social selling that is relevant to our teen, with social tourists hosting TikTok's first-ever live fashion show, Made by Gen Z for Gen Z. As our product voice and experience have clicked, our target customer has noticed. At fiscal year end 2021, we had roughly 34 million combined gross global followers across brands and social media platforms and approximately 18 million loyalty accounts. And just recently, Abercrombie and Hollister were voted America's best loyalty programs for 2022 by Newsweek and Statista. And here's the punchline. These initiatives have enabled us to increase sales, shift investments from occupancy into marketing and digital while growing our adjusted operating margin by 570 basis points from fiscal year end 2018. As we've evolved our brands and operating model, we've also been working on our corporate culture. We recently launched our corporate purpose, being here for you on the journey to being and becoming who you are. And we were named one of Fortune's 2021 Best Places to Work in Retail and designated a best place to work for LGBTQ equality by the Human Rights Campaign Corporate Equality Index for the 16th year in a row. I know, I have spoken for quite a while on our transformation initiative, but it is a critical part of our story and the foundation for how we are going to thrive in the future. Since our 2018 Investor Day, we have become stronger, smarter, faster, and more agile. with five clearly defined and differentiated brands, all of which have global growth opportunity. So focusing on 2021, we achieved the following. 19% sales growth from fiscal 2020 and 2% growth from fiscal 2019. A gross profit rate of 62.3%, 180 basis points above fiscal 2020, and 290 basis points above fiscal 2019. with double-digit AUR growth offsetting 370 basis points of freight cost headwinds compared to fiscal 2019. A 9.6 percent adjusted operating margin, our best since 2008, and adjusted earnings per share of $4.35, our highest since 2007. And this year, we also became more aggressive with shareholder returns, repurchasing 10.2 million shares for $377 million and reducing total shares outstanding by 15%. We were faced with many unexpected challenges throughout the year, but especially in the fourth quarter with the rise of a new COVID variant, elevated freight costs, and major inventory receipt delays, to name just a few. For the quarter, total sales were up 4% from 2020 and down 2% from 2019, with U.S. sales up 7% and 3% respectfully. We had significant unexpected inventory receipt delays from late November into December, leaving us unable to fulfill peak holiday demand. Following the delays in the mid-January Omicron peak, we ended the quarter strong as remaining receipts arrived and case counts declined. The fourth quarter marked our seventh consecutive quarter of AUR growth with all brands, regions, and channels contributing to improvements on reduced promotions, markdown, and clearance activity. Turning to brand-specific performance. Hollister was the most heavily impacted by inventory receipt delays, store closures, and EMEA exposure. Our teams navigated the challenge as well and are in a good position for the spring season. While there were many fourth quarter products standouts at Hollister, jeans remained one of the best performing categories as girls and guys embraced newer silhouettes. Even though jeans are already a top three sales driver on an annual basis, we believe there's opportunity for more growth and look forward to sharing additional detail on our plans as the year progresses. At Gilly Hicks, our customers responded well to underwear and sleep, two categories where we added newness following the brand relaunch, and continue to love our active collection, Gilly Go. Reaction to recently introduced men's product remains strong, and our first Gilly Hicks standalone store is exceeding internal expectations with additional locations, including in the UK and Germany, scheduled to open this spring. At our newest brand, Social Tourist, we are learning something new with every collection. It's been an amazing ride curating this social first brand with the D'Amelio family. We are leaning into Social Tourist's unique positioning, which has helped us find creative ways to engage and attract customers and have applied these learnings to our other brands. At A&F Adults, the young millennial customer continues to rediscover the brand. Elevated fashion content and size inclusivity have been key drivers of success. In the fourth quarter, women's remained on the path to accelerated growth driven by must-win categories, including jeans, where sales are more than doubled, and we see additional opportunity, as well as dresses, sweaters, and knits. Abercrombie brand love is strong, with customers and press continuing to support the theme that Abercrombie is back, and we could not agree more. Just last week, we had a soft launch of our active sub-brand, Your Personal Best, and response has been amazing. This is another great example of taking and actioning on customer feedback. At Abercrombie Kids, our play-as-life mindset continued to drive our product, and our comfy dress assortment for holiday proved to be a standout. Now on to marketing. Over the last few calls, we've discussed increased investments, and I want to take a moment to highlight some of our successes. At Hollister, we owned Black Friday on TikTok, with 185 million impressions and a whopping 75% of Gen Z on TikTok seeing an ad for Hollister or Gilly Hicks. We also hosted Hollister's first virtual store on Snapchat, which launched on Black Friday, and they had a total of 30 million impressions and had eight weeks of storytelling with influencers and affiliates across TikTok and Instagram, including weekly Instagram live shops for holiday. At Abercrombie Adults, Abercrombie & Fitch search volume grew 250% over the last year and 150% in Q4 alone. We had our best social selling quarter ever with triple-digit year-over-year growth, including a record cyber week for digital. We are at such an exciting point in our journey and have the foundations firmly in place to accelerate growth. Quarter to date, we've had a nice build in sales trend from Q4 levels and have seen a strong early response to our spring assortments. While we faced several near-term headwinds, including ongoing COVID unknowns, the lapping of stimulus, supply chain and input cost pressure, and the potential impact of geopolitical uncertainty, We believe that our target customer is currently healthy, engaged, and hungry for the new fashion content we are offering across brands. Operationally, we are thoughtfully executing to growth. We have the balance sheet to support our long-term strategic view and are committed to profitable global expansion. We look forward to sharing more detail on our three-year plan at our investor day this June. With that, I'm going to turn it over to Scott to discuss our recent results in more detail and our outlook for 2022. Thanks, Rand, and good morning.