Abercrombie & Fitch Company

Good day and welcome to the Abercrombie & Finch third quarter of fiscal year 2022 earnings call. This conference is being recorded. At this time, I'd like to hand the call over to Kate Wagner. Please go ahead, ma'am.

Thank you. Good morning and welcome to our third 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 third 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 reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and investor presentation issued earlier this morning. With that, I will turn the call over to Fran.

Good morning, and thank you for joining us today. Before we dive in, I'd like to thank our global teams, their ongoing resiliency and focus on executing toward long-term goals as we navigate a dynamic global macroeconomic environment. Against the challenging backdrop, our Q3 results beat our expectations on the top and bottom line with Abercrombie sales up 10% and Hollister showing sequential sales improvement and adjusted operating margin coming in 200 basis points higher than our expectations. We're excited about our position in going into the holiday season, continued momentum in apricot honey, and inventory is healthy with the year-over-year change cut in half from our peak last quarter. I'm encouraged by the trajectory of our business and am confident the steps we've taken throughout the year will put us in a position to win in Q4 and beyond. On to our Q3 results. While our global consumer continues to see significant inflation across their day-to-day lives, we were pleased to see our business improve off the second quarter. delivering flat sales in 2021 on a constant currency basis. Throughout the quarter, we continue to execute against the key pillars outlined in our investor day. Focused brand growth, an enterprise-wide digital revolution, and operating with financial discipline. These pillars give us confidence in our approach to the holiday season, which we will enter with healthy inventory levels, momentum in our key merchandising initiatives, and a consumer that is engaging with us across channels. Starting with focused brand growth, we saw sales trends improve across brands compared to Q2. However, Abercrombie continued to significantly outperform Hollister as the bifurcation of sales and gross margin performance continued in the third quarter. For the third quarter, total company net sales declined 3% to 2021, and as I mentioned, we were flat on a constant currency basis. For Abercrombie Brands, which includes kids, We saw third quarter net sales go 10% or 13% on a constant currency basis, led by ongoing strength in Abercrombie adults. Importantly, third quarter sales for Abercrombie brands were up over 20% compared to the pre-pandemic level in 2019, even as we have reduced store square footage by around 40%. During the third quarter, we saw momentum continue in Abercrombie adults as our customer transitioned to fall. Our assortments continue to evolve as we aspire to outfit our customer from the gym to the office to happy hour and beyond. We saw strong traffic across channels in AUR growth versus 2021, leading adults to achieve its best Q3 sales since 2014 and its highest Q3 AUR since 2004. I am so proud to see this team continue to push boundaries on product and marketing and deliver some of the strongest sales results in our industry. On product, performance for our women's assortment remains very strong. delivering the highest Q3 sales level since 2007. The strength was driven by our best ever Q3 sales in jeans, dresses, and pants, as we continued to build our best dressed guest franchise and chase into key trends across bottoms categories. And after seeing some green shoots in men's in Q2, we saw growth in Q3 with strength across key top categories as well as outerwear. While the overall size of men's lags out of women's, we are optimistic about the growth opportunity ahead. Across men's and women's, we are well positioned for holiday and are energized about emerging spring trends we will deliver in early 2023. On the marketing front, our team continues to deliver. We were thrilled to be recognized with Performance Marketing Strategy of the Year Award by LTK, which is the world's largest and creator commerce platform. The Avocami brand was also named to the Brands That Matter list by SaaS Company for effectively leading with purpose, inspiring conversation, and communicating our values through all of our work with the Trevor Project, the Steve Fund, and with our own communities. Kudos to our team for their passion around these projects and for all their hard work in ensuring successful partnerships. Moving on to Abercrombie kids. As discussed last quarter, kids had a soft start to the back-to-school season, but we saw sequential improvement as we moved through the quarter. We saw the best performance in our super soft sweatshirts and sweatpants. Turning to Hollister, which includes Gilly Hicks and Social Tourist, we saw selling trends improve slightly compared to Q2. Third quarter sales declined 12% or 9% on a constant currency basis. Consistent with Q2, we tracked closely to apparel store traffic in the U.S., but we saw lower conversion basket size compared to 2021 as we lapped the lingering effects of stimulus last year and our customer deals with significant inflation this year. As we work through the remaining back to school period into September and October, We continue to see our customers shift spend towards tops and out of bottoms as compared to 2021. We are pleased to see stronger performance in higher fashion and special occasion items like women's dresses and men's woven shirts. We're looking at these categories as leading indicators of our ability to improve conversion and have chased into related categories the past few months. We are seeing nice performance in our women's tops business and will work to spread the success to other categories. Zooming out on Hollister, while the teen apparel space has seen softness in the back to school season, we continue to look inward at opportunities to improve the business. From an organizational perspective, towards the end of the second quarter, we made several key personnel moves at the senior levels of our Hollister merchandising team. We have also shifted ownership of Hollister marketing to Carrie Krug, who has been our head of advertising marketing for the past four years, where she has built a great team and is instrumental in driving the amazing A&F turnaround. Carrie has moved into a new role as Chief Marketing Officer and is now responsible for marketing strategy and creative across all brands. We look forward to seeing Carrie building the work our Hollister team has done over the past few years. From an operational perspective, we are continuing with the inventory actions discussed, which includes adjusting forward receipt plans in terms of total level and by category. With these adjustments, we are determined to improve Hollister performance in the quarters to come. At Gilly Hicks, as we continue to build awareness around its active lifestyle brand, we took a big step forward in opening additional freestanding stores. As of today, we have 14 freestanding Gilly stores with 11 in the US and three in EMEA. The team and I are excited to bring our updated positioning and product offering to our global customer as we continue to test and learn. Outside of Gilly, we continue to support our brand growth principle with new store openings across our brands. We opened 19 stores in the quarter and continue to track towards opening around 60 for the full year which will make us a net store opener for the first time in more than a decade. It's been great to see our brands deliver an updated experience in new centers, as well as reenter key locations we exited over the past few years. For the year, we expect to open 18 Abercrombie Adults, 24 Hollister's, 15 Gilly Hicks, and three kids' stores. For Abercrombie Adults, our customer has responded well to the new store concept we premiered last quarter that features elevated fixtures and furnishings. Dialed space is dedicated to key merchandising categories and updated fitting rooms with customizable lighting. Financially, our new Abercrombie stores are delivering 60% higher sales per square foot compared to the average Abercrombie adult store. For Hollister, we're excited to start rolling out our Evolve store concept this quarter. The new format creates an optimistic and welcoming environment that is omni-focused and complements our digital shopping experience. The open concept interior is designed to be agile and adaptable, allowing for merchandising flexibility. Across all brands, we remain disciplined in our real estate approach, with the new stores checking each required box, the right size, the right location, and the right economics. Shifting to inventory. The year-over-year inventory trend is playing out as planned, with inventory growth moderating in Q3 after a peak in Q2. We ended the quarter with inventory up 36% to 2021 as we made good progress selling through summer and back to school inventory at Hollister. Consistent with last quarter, 92% of our inventory was current, defined as fall and holiday product, new goods that haven't been set, or longer life items. As we move through Q4, we expect year over year inventory growth to moderate further and we are planning to be relatively flat to 2021 by year end as we fully anniversary the late receipts we experienced last year. Turning to our second strategic principle, enterprise-wide digital revolution. During the quarter, we delivered Share to Pay, a new way for Hollister customers to pay on the mobile app. Share to Pay was completely developed in-house, and I'm so proud of our internal teams, many of whom we've hired over the past 18 months as we add talent to accelerate our digital revolution. This first-of-its-kind payment solution is based on a need we saw among our team customer to eliminate a key barrier to conversion. The feature allows our Hollister customer to easily share their digital shopping bag with their parent. For example, to complete the purchase as many don't have access to credit cards to transact digitally. The early response has been positive with share to pay transactions showing higher conversion and basket size than the average. We'll continue to get feedback and evolve this technology with the goal of finding more use cases beyond Hollister. This feature is one example of the work our teams are doing to support our digital revolution which is necessary to grow our digital business off the 2021 base of roughly $1.7 billion. In addition to rolling out customer-facing technology, we also made progress on multi-year technology modernization efforts in areas like merchandising and data, which will enable us to be smarter and faster in the future. A huge thanks to our team, and I can't wait to see what's next. For our third strategic principle, operating with financial discipline, we were focused on managing controllable expenses in the third quarter. We tightly managed headcount and adjusted marketing to better match demand patterns. As discussed last quarter, we reduced inventory buys for holiday and go forward to better align with sales trends and to ensure all brands are in a position to chase receipts in strong performing categories. Despite the challenging macro backdrop, we remain cautiously optimistic as the holiday season ramps up in a big way this weekend. For order to date, sales are running consistent with Q3 levels. Across brands, I am pleased. with our assortments and we've seen good early reads in cold weather categories. Also, much different than last year, we have the inventory on hand for our customer this year due to our efforts to deliver inventory earlier than normal to mitigate potential supply chain delays. While our teams are working to deliver a great holiday, we also remain laser focused on the long term. As we move through Q4, it is 2023, we expect to continue to leverage our strong balance sheet to fund the multi-year strategic investments necessary to execute our Always Forward plan. And with that, I'm going to turn it over to Scott to provide more details on the quarter and our updated outlook.