Abercrombie & Fitch Company

Good day, and welcome to the Abercrombie & Fitch fourth quarter year and fiscal year 2022 earnings call. Today's conference is being recorded. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. At this time, I would like to turn the conference over to Mo Gupta. Please go ahead.

Thank you. Good morning. and welcome to our fourth 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 fourth 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, and a warm welcome to Mo on his return to A&F, leading our investor relations efforts. I'm excited to share our fourth quarter and full year results. We finished the quarter with sales surpassing the outlook range we provided in our early January business update for a strong close to the year. 2022 was another year of twists and turns, and I'd like to thank our global associates as well as our partners for once again stepping up to deliver solid financial results while making progress against our long-term strategic priorities. As geopolitical disruption and inflationary impacts accelerated early in the year, we laid out plans to pivot our investments to optimize sales growth, operating margin, and inventory. Our teams rally to deliver on each of those dimensions, leveraging the agility we've gained from our transformation efforts these past few years. At the start of every year, my goal is to make this organization stronger, and we have done that once again in 2022, allowing us to start 2023 from a position of strength with so much opportunity in front of us. Today, I'll cover our fourth quarter and our full year 2022 results, reflecting on our progress in the past year. Then I'll conclude with our objectives and priorities for 2023. For the fourth quarter, we grew sales 3% year-over-year on a reported basis and 5% on a constant currency basis. This growth was enabled by having inventory on hand to meet demand during the peak holiday period. We purposefully built inventory in the second and third quarters with the target to be around flat to last year by year end. We delivered on that goal. with inventory finishing down 4% to year-end 2021. While sales trends improved sequentially across brands, performance was once again led by continued strength in the Abercrombie & Fitch brand. I am incredibly proud to report that Abercrombie brands, which includes Abercrombie & Fitch and Abercrombie Kids, grew 14% from Q4 2021, or 16% on a constant currency basis. All the work we have done to bring this brand back it was incredibly special to see the Abercrombie & Fitch women's business achieve its highest quarterly sales in brand history, an impressive follow-up to a similar record in the third quarter. I was also thrilled to see growth in the men's business accelerate sequentially from Q3. At Hollister, we saw sequential trend improvement, delivering sales down 4% to 2021 on a reported basis and down 2% on a constant currency basis. While we still have progress to make, we are beginning to see trend improvement on product and organizational actions taken in late summer, something we will carry forward into 2023, which I'll talk more about in a moment. Taking a step back from the quarter and reflecting on the full year, one word comes to mind, complex. With the conflict in Ukraine, rising inflation, and continued COVID-related measures impacting the consumer, a back to normal did not happen in retail. With all this uncertainty, our focus was simple, control what we could control. While that meant making short-term strategic decisions, we also kept an eye on the long-term. In June, we held our first Investor Day since 2018 and presented our 2025 Always Forward Plan, transitioning our mindset from transformation to growth. The Always Forward Plan is underpinned by three key pillars, delivering focused brand growth, executing an enterprise-wide digital revolution, and operating with financial discipline. Starting with the first pillar, focused brand growth. In June, we discussed Abercrombie & Fitch brand as our number one growth opportunity for the company. Having completed one of the most impressive brand turnarounds you will see in this industry, our team has continued to build momentum with this brand. Abercrombie Brands finished 2022 at $1.7 billion in total sales, a growth rate of 11% year-over-year, or 13% on a constant currency basis. For the Abercrombie & Fitch brand, our assortment, marketing, and values continue to align with our customer as we look to outfit them from their in-office workdays to their long weekend adventures. A few other highlights for the year in Abercrombie. Our women's bottoms business had the highest full-year sales in the history of the brand, The Best Dressed Guest franchise helped us deliver the best year ever for women's dresses. And we launched our newest franchise, YPB, your personal best in Q1 to an amazing customer response. YPB Leggings and Square Neck Tank were both named to the Best Leggings and Best Tops list in the Self Magazine Activewear Awards, along with multiple A&F brand items featured in Men's Health, Esquire, Refinery29, People Magazine, and more. As we set new records across key product categories, we continue to leverage our marketing efforts to drive customer engagement and conversion. Our authentic and innovative initiatives across the platform resulted in two amazing awards this year. We received the Performance Marketing Strategy of the Year Award by LTK, the world's largest influencer and creator commerce platform, and the brand was named to the Brands That Matter list by Fast Company. With the brand firing at all cylinders, we opened 21 stores and right-sized another four across Abercrombie & Fitch and Abercrombie Kids brands. We continue to focus on smaller, more productive stores, which is a key enabler of improved four-wall operating margin. We believe store expansion and marketing execution nicely positions Abercrombie brands for the growth expectations in the Always Forward plan. Turning to Hollister, 2022 was certainly a challenge. Hollister, including Gilly Hicks and Social Tourist, finished the year with $1.96 billion in sales, down 9% to 2021, or down 6% on a constant currency basis. The teen apparel space took a step back early this summer as global inflationary pressures mounted. While macro factors certainly impacted the business, we had opportunities within our own operations to realign product, voice, and experience to better match the changing customer mindset. We quickly addressed these opportunities. making multiple changes this summer spanning people, process, and inventory investments to get back on track and allow us to more quickly respond to changes in the marketplace. Our teams have made shifts across the assortment to provide better balance. As an example, we're leaning into more cargoes and dresses. On top of these product shifts, we are reviewing every aspect of the Hollister brand voice and customer journey. Our team customer continues to favor the in-store experience with more than two-thirds of Hollister sales happening in-store in 2022. During the year, we opened 38 stores, finishing 2022 with 529 stores globally. Towards the end of the year, we introduced our evolved store design in a few locations, which continues to open up and brighten the shopping experience while offering improved product placement flexibility. You will continue to see the store play an integral role with Hollister as we move forward, And combined with the assortment evolution, our team will have all the pieces in place to stabilize the brand and return to growth later this year. For Gilly Hicks in 2022, we evolved the brand positioning and assortment, readying for the move into our freestanding stores, a majority of which opened in the fourth quarter. In 2023, we are focused on delivering our active lifestyle assortment to the customer across physical and digital touchpoints. The shift into activewear is a key part of the evolution for Gilly Hicks. Up until recently, Gilly has been weighted to intimates and sleepwear as it started as a complement to the Hollister brand. We are now broadening categories to get to our target assortment mix between active, lounge, and intimates. Something we'll continue learning more about as we go through the year. Lastly, a quick update on social tours. We've continued to use the brand to push fashion content in Hollister and leverage learnings around social engagement across all brands. In summary, our ambition of focused brand growth will be apparent in 2023. For Abercrombie Brands, we expect to distort resources to digital marketing and store expansion to capitalize on the momentum. For Hollister, the work is underway to optimize the product and brand voice, positioning us for growth in the second half of the year. And for Gilly Hicks, we'll continue to read results from the evolved assortment mix with a trigger strategy in place to allocate additional resources to drive customer acquisition later in the year. Moving on to our second pillar, executing an enterprise-wide digital revolution. For context, at 1.6 billion in sales, our digital business is approximately 44% of our total sales in 2022. Across brands, our customer journeys are different and ever-evolving, necessitating a robust set of tools and technologies. Our team has been hard at work modernizing our technology foundation. A focus area in 2022 was evolving our data infrastructure to enable faster, more predictive insights, which will largely conclude in 2023. We also kicked off a multi-year upgrade of our retail merchandising ERP, touching several key systems to provide a platform with more flexibility. These modernization efforts are integral to enabling future organic growth and incremental go-to-market opportunities like wholesale, franchise, and or partnerships. These projects will take time, but we've designed our deployment schedule to realize value as quickly as possible. On the customer experience side of our digital revolution, we are improving the experience across the web, mobile apps, and stores. We've set up continuous feedback and delivery loops to ensure we are finding and focusing on the highest impact opportunities. One example we've talked about is Share to Pay, a feature that enables our customers to easily share their digital shopping bag with a family member or friend to complete the purchase. Share2Pay is an example of how our new digital teams are applying customer analytics and agile development to uncover and quickly deliver against customer opportunities. For 2023, we will continue modernizing our foundation to support our digital revolution. We expect to be largely complete with our foundational data infrastructure efforts and to continue progressing on our ERP transformation while maintaining a relentless pace of digital experience improvements to win and retain customers. And for our last pillar, operating with financial discipline, it was another year where we needed to flex this muscle. With over $250 million of inflation hitting us in 2022 compared to 2021, we needed to balance playing offense and defense. On offense, we opened 59 new stores and accelerated key digital and technology investments. On defense, we managed expenses and inventory tightly. For inventory, our objective was to be approximately flat to 2021 at the end of 2022, and we achieved that goal with inventory down 4% at year end. We are optimistic we have gotten through the worst of freight costs and supply chain disruptions. Importantly, each of our brands entered 2023 in a position to chase inventory, and we will continue demonstrating agility in managing the cost side of business while balancing the long-term investments that enable growth. As we wrap up, Just one more thought on our industry-leading team and culture. While the past three years have been the most challenging I've seen in my 35 years in retail, the learnings and collaboration we've achieved has made both our company and our associates stronger. I was so proud of our company to be recognized yet again as a best workplace in retail by Great Place to Work and Fortune. Additionally, we received a perfect score on the Human Rights Campaign's 2022 Corporate Equality Index for the 16th year in a row, with designation as one of the best places to work for LGBTQ plus equality. As we say regularly, change is the only constant in retail, and our team will continue to balance being reactive to shifts in the market while staying focused on our long-term strategic priorities to drive sustainable, profitable growth in 2023 and beyond. We enter the year well-prepared, focused, and ready to execute across the three pillars of our Always Forward plan. With that, I'll hand it off to Scott to provide more color on our results and additional details for our 2023 outlook.