Abercrombie & Fitch Company

Ladies and gentlemen, please stand by. Good day and welcome to the Abercrombie & Fitch first quarter fiscal year 2022 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 1 on your touchtone phone. We will open the call up 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, ma'am.

Thank you. Good morning and welcome to our first quarter 2022 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 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. Thank you for joining us today to discuss our first quarter results. This earnings, we are going to approach things a little differently. Since 2018, we have dedicated a portion of our call to talking about the progress made in our key transformation initiative, which were anchored to our goal of doubling our operating margin from 2017 levels. Last year, we not only achieved that goal, but we significantly surpassed it, more than tripling our operating margin. At our upcoming June 14th Investor Day, we will discuss the next phase of our corporate journey and how we will execute our Always Forward plan. From there, we will update you regularly on our progress. In the first quarter, we navigated yet another period of global volatility. We remained focused on controlling what we can control and never lost sight of what's important to drive our business. our customers, associates, communities, and partners. We exceeded our sales plan, delivering our best Q1 revenue since 2014 despite several major headwinds, including the lapping of stimulus and a return to in-person learning for much of the U.S. last March, global inflationary pressures, significant COVID restrictions in China, and the conflict in Ukraine. For the quarter, total company revenues rose 4% year-over-year, above our outlook for a low single-digit increase. Abercrombie continued to outperform, rising 13% on top of a 60% gain last year. By region, our largest market, the U.S., registered a 6% increase, while international was flat. EMEA accelerated from last quarter and last year, benefiting from the reopening of our largest country in that region, the U.K. In APAC, China remained challenged due to COVID-related lockdowns. Our global revenues were healthy. Customers continued to respond favorably to our product, voice, and experience, and we achieved our eighth consecutive quarter of AUR improvement as we benefited from higher tickets and slightly lower promotional activity. As a reminder, we implemented targeted ticket increases in the first quarter based on competitive pricing analysis. We took advantage of colder weather conditions to push through the delayed Q4 receipts to ensure we were clean for spring. Scott will discuss those pressures in more detail, but we remain focused on navigating through these near-term challenges while delivering the right product at the right time at the right price. Looking ahead, we expect freight and raw material costs to remain elevated. We plan to tightly manage inventories and expenses and are actioning opportunities to offset a portion of these costs. We are carefully evaluating these opportunities and do not plan on trimming areas that support our longer-term growth strategies. Now on to the brands. Q1 represented the continuation of the Abercrombie brand's remarkable turnaround. Abercrombie Adults delivered its best first quarter sales since 2014 and its highest Q1 AUR in brand history, benefiting from higher tickets and lower discounting. Results were led by ongoing strength in North America, which posted its highest sales since 2012, although we did also experience a sequential improvement on an international basis. And while we have heard that the consumer is spending more on experiences, Our millennial Abercrombie customer is coming to us to refresh their wardrobe as they get back out there. And with an unwavering dedication to listening to our customers about the new trending styles and fits they're looking for, we've been able to expand market share. And we're not just winning in one or two areas. Strength was broad-based, with multiple categories registering growth in women's, denim, dresses, and knits for standouts, all delivering their highest Q1 sales in AUR in over a decade. In men's, our target customers also take notice of the changes we have made. Tops, which is our largest men's revenue driver, were strong, with growth in graphics, sweaters, and wovens. There is so much more market share opportunity at Abercrombie. In March, we launched YPB, or Your Personal Best. After hearing from customers, they wanted us to deliver a performance active line with the same dedication to fit comfort and confidence they experience in our regular assortment. YPB has received high praise from customers, influencers, affiliates, and media for its fit, fashion, and function. The launch has truly served as a reflection of our personal best, far exceeding expectations. We sold out of over 25% of our SKUs within weeks of the launch and have been quickly working to replenish. The speed with which customers have embraced YPB gives us even more confidence in its future. A big part of Abercrombie's success can be attributed to our marketing team. Throughout the quarter, they continued to tap into human-powered brand building through our influencer and affiliate network, which we view as a vital social commerce revenue stream. In Q1, Abercrombie was the recipient of LTK's most loved product awards in multiple categories, had best social commerce quarter ever with significant double-digit year-over-year growth, and achieved volumes that beat our previous record, which we just hit last quarter. And we are not satisfied. We intend to continue building on the rapid rise of this channel as the team innovates and invents new possibilities. We're excited for Q2. Stay tuned for the third annual Abercrombie Pride Collection co-designed with our partners at the Trevor Project, an organization that provides essential services benefiting LGBTQ youth. In June, we're set to launch a getaway-inspired collaboration with two influencer friends of the brand, Champagne & Chanel and Dress Up Buttercup. And soon to come, we'll be bringing our popular Curve Love fits to both tops and bottoms in our YPB line. Now on to Abercrombie Kids. During the quarter, we experienced strong conversion and a record-setting basket size. Our comfy, dressy assortments for Easter and spring break drove results. In addition, we had our best Q1 swim season ever, and our franchise collections, the Cool Stuff, Ready for Play Active, and Made for Life Essentials were well-received. Turning to Hollister, which includes Gilly Hicks and Social Tourist. In North America, we delivered our second best sales results since 2012, behind only last year, even as we lapped stimulus and the mini back-to-school season in March. Internationally, although trends improved dramatically from last year and last quarter, the business has not yet returned to pre-pandemic levels. Taken together, global sales were in line with our expectations, declining 3% for the quarter. We continued to emphasize our top 30 items in must-win categories, which led the way in the first quarter, and we experienced strength in women's dresses and fleece and men's wovens and swim. In denim, our customer embraced newer, wider-leg fashion assortments, although skinny remains an important part of her wardrobe. Social commerce and affiliate growth continued to be key drivers of our success. In February, we wrapped our Respect the Jeans campaign, which was done in partnership with Black-ish star and Gen Z favorite, Marsai Martins. The campaign outperformed benchmark goals, driving 11 million impressions and also won Gen Z over on TikTok, with benchmark-beating engagement and comments such as, now this is how you do an ad. During the quarter, we also launched our monthly Facebook Live shopping event, which drove social commerce sales up an average of 20%. Now let's talk about Gilly Hicks, where we continue to be excited about the global growth opportunity ahead. Customer response to our updated carve-out and side-by-side locations, which incorporate key elements of our standalone store, has been very encouraging, with these locations outperforming the balance of the chain. We're also bringing our updated store concept to our global customer. We recently opened our first Gilly Hicks standalone EMEA store a few weeks ago in central Oberhausen, Germany, and plan to introduce more stores throughout the year, including Carnaby Street in London this summer. Last but not least, Social Tourist. Our newest brand has an engaged fan base who is providing valuable insights into up and coming fashion trends and the shopping habits of social first customers, which we've applied to the brand and to our broader portfolio. Looking ahead, there's a lot of excitement at all three brands under the Hollister umbrella. In partnership with GLSEN, an organization that works to make K through 12 schools safe and inclusive for LGBTQ plus students, we will be launching our sixth annual Hollister Pride collection. At Gilly Hicks, we have plans to expand our active lifestyle collection, Gilly Go, which has consistently been our top performer since its launch. And at Social Tourist, we are set to open a pop-up shop on Melrose Avenue in Los Angeles, which will be the brand's first standalone experience. The pop-up will feature always-on social content and programming, monthly activations including consumer influencer events and PR engagements, and visits from Dixie and Charlie to meet customers. So exciting. Before turning it over to Scott, I want to take a moment to discuss our thoughts on the health of our global consumer. It is an interesting time. The weather has started to become more seasonal and collectively it seems as though we are ready to return to some form of normalcy. In our largest market, the U.S., unemployment is currently low, wages are high, and there's a hunger to participate in many of the social activities that were missed over the last two plus years. However, We are in an extremely inflationary period. Everything from food to gas is costing more, and we expect those pressures to weigh on consumer confidence. We are keeping a close eye on each of our respective consumers and how they are being impacted and responding. With five distinct brands, we will not take a one-size-fits-all approach. We will stay close to our customer and have the ability to quickly recalibrate, reflecting their unique stages in life, activities, and pressure points. Internationally, while encouraged by recent improvements in EMEA, we are cognizant that our European customer is faced with similar inflationary pressures and is more directly impacted from the situation in Ukraine. Across the globe, we know there are a lot of options on where to spend, and as always, we will focus on offering a compelling and inclusive product, voice, and experience for each of our respective customer bases with a commitment to fashion, fit, and quality. We remain focused on profitable growth through leveraging strategic plan promotions, and we intend to tightly manage expenses with the goal of offsetting a portion of freight and raw material inflation. In closing, I would like to reiterate my confidence in our future. We are staying close to our customer and executing to our proven playbooks. With our strong balance sheet, we are well equipped to navigate the current environment and its challenges. We have clearly defined positioning at each of our brands and remain focused on our long-term opportunities. Reflecting the successful execution of our key transformation initiatives, we believe that we are stronger, smarter, and faster than ever before and have the foundation firmly in place for the next phase of our corporate journey and our Always Forward plan, which we look forward to sharing in more detail at our June 14th Investor Day. And with that, I will turn it over to Scott.