Abercrombie & Fitch Company

Good day, and thank you for standing by. Welcome to the Abercrombie and Fitch fourth quarter and year-end fiscal year 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. 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 remove yourself from the queue, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mo Gupta, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to our first quarter 2023 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, and Scott Lopesky, Chief Financial Officer and Chief Operating Officer. Earlier this morning, we issued our first 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. Keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our 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. Finally, references to Abercrombie brands includes our Abercrombie & Fitch and Abercrombie Kids brands, and references to Hollister brands include our Hollister, Gilly Hicks, and Social Tourist brands. With that, I will turn the call over to Franz.

Good morning and thank you for joining us today to walk through our first quarter results. I'm excited to share that we surpassed expectations on both the top and bottom lines despite a challenging macro environment. Total company sales grew 3% led by historic performance in Abercrombie Brands where we were up 14% to last year. As we've discussed, Top line growth is one of our top priorities, and I'm proud of how our teams continue to deliver incredible product and brand experiences for our customers. Additionally, our work over the last year to reduce freight costs paid off this quarter, with 570 basis points of growth profit rate improvement year over year, driving a 4.1% operating margin compared to a loss last year. Looking forward, we are increasing our outlook for the full year based on a combination of our first quarter results and second quarter expectations. We're also showing our product flexibility with inventory down 20% to last year with high confidence that we can support demand through the return of Chase capabilities. And although it's early in the year, 2023 is off to a great start. We remain focused on managing the business prudently to deliver the balance of the year while appropriately investing to position ourselves for long-term profitable growth. Sharing more on Abercrombie Brand's successful first quarter, total brand sales were 436 million, accounting for 52% of total company sales, up 14% on top of 13% growth in the first quarter last year. This is truly the most powerful brand transformation that I've seen in my career. By listening to our customers and putting them at the center of everything we do, we are delivering product, voice, and experience that are tightly aligned and continue to resonate. Being able to deliver consistent growth quarter after quarter underlines the enormous potential we have within Abercrombie Brands. It's even more special to see how we're growing Abercrombie, showing strength of our customer connection. Sales improvement in the quarter was balanced across genders, channels, and geographies. As we've discussed previously, The women's business led our turnaround and continues its strong trend with its 11th consecutive quarter of double-digit increases. More recently, we've seen the men's business turn on, delivering its third consecutive quarter of growth. Across genders, AUR was up nicely, representing the highest level since 2005 and meaningfully contributing to our overall growth profit rate improvement. AUR is now up significantly from pre-pandemic levels, which is a clear measure of the inherent value and relevance customers see in our assortment. At this point in the journey, Abercrombie has established rhythm. We're finding, winning, and retaining customers digitally through a genuine brand voice, supported by a seamless experience in our stores, our app, and the web. On digital engagement, our team has leveraged social media platforms to showcase our lifestyle offering, where we are able to highlight key must-win products for us in an authentic way. Social has proven to be a great channel for our target millennial customer. Further, we're extending the assortment with new styles and collections, like best-dressed guests and YPB, to outfit them for professional, active, or casual environments, keeping them coming back to find something new. We are energized about the results in Abercrombie, and we are aiming to reach new heights this year. We feel great about how the brand is positioned, and we are chasing inventory to support growth. Moving on to Hollister brands. Later in Q2, we'll hit the one-year mark since we saw teen apparel demand shift significantly downward. While first quarter sales were not where we need them to be, the Hollister assortment evolution is on track, heading towards back to school with a fresh, more balanced perspective. As we've talked about the last couple quarters, these changes are informed by the comprehensive work the team has undertaken to know our team. We're testing and collecting feedback as we evolve the product piece by piece, and we'll have fully addressed the assortment as we enter the second half of the year. Hollister's first quarter sales decline of 7% was consistent with internal expectations. We focused on managing the overall health of the business in terms of gross profit rate and inventory, and we surpassed internal expectations on both fronts. Hollister was able to expand growth profit rate nicely compared to last year on a combination of lower freight and higher AUR as tightly managed inventory allowed us to be more selective with promotions. In fact, Hollister inventory was down more than the total company level of 20%, which puts the brand in an excellent position to leverage Chase and invest in winning categories as we move through the summer and back to school seasons. Our Q1 results in Hollister show our focus on running a healthy business in a challenging teen market as we lay the foundation for growth. I'm excited to see what this team can produce in the second quarter and look forward to sharing Hollister's progress through the year. We'll share our consolidated financial outlook for the business in a few minutes, but I'd like to offer some context on how we are thinking about the remainder of 2023, as well as how we'll deliver on our long-term aspirations. As you may recall, One of the three pillars of our 2025 Always Forward plan, which we introduced last year at our investor day, is focused brand growth. We remain committed to delivering on this ambition despite macroeconomic uncertainty by leveraging our playbook and a transformed operating model. Our other two strategic pillars help support the growth ambition. The digital revolution ensures we stay closer to our customer as digital touches every aspect of their lives, including how they shop. The third pillar, financial discipline, keeps us on a profitable path as we invest for the long term. With our playbook and our Always Forward plan, we believe we have the tools in place, including the ability to chase inventory, to show up for our customers whenever, wherever, and however they want to engage with us. To be clear, our focus at this phase of our journey is to grow the business as a whole by building and maintaining strong, long-lasting customer relationships. With Abercrombie Brands, We are further along and expect to use the momentum we're seeing to push both customer acquisition and retention. In Hollister, we're applying customer insights and continue to focus on evolving the assortment and brand positioning. While it's early in 2023, our team's strong first quarter execution against a challenging macro backdrop gives us cautious optimism as we look to the second quarter and beyond. We will navigate this dynamic environment as we have in the past to drive progress towards our long-term vision. Before we turn to our financial review, I would like to recognize Scott for his incredible efforts helping A&F Co. transform and set our sights on growth. Congratulations, Scott, on becoming our Chief Operating Officer in addition to your role as CFO. I'm excited to have Scott take a broader leadership position overseeing key operational areas like supply chain and store operations to help drive connectivity and key investments to support our broader growth ambition. I'll turn it over to him now to provide some more color on the border, all things financial discipline.