Abercrombie & Fitch Company

Good day, and thank you for standing by. Welcome to the Abercrombie & Fitch Third Quarter Fiscal Year 2024 Earnings 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. please be advised that today's conference is being recorded. I would now like to turn the conference over to Mo Gupta, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to our third quarter 2024 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, Scott Lopesky, Chief Operating Officer, and Robert Ball, our recently appointed Chief Financial Officer. Earlier this morning, we issued our third quarter earnings release which is available on our website at corporate.apocrami.com under the Investors section. Also available on our website is an investor presentation. Please 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'll 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 the investor presentation issued earlier this morning. Finally, references to Abercrombie brands include our Abercrombie & Fitch and Abercrombie Kids brands, and references to Hollister brands include our Hollister and Gilly Hicks brands. With that, I'll turn the call over to Fran.

Thanks, Mo, and thank you all for joining us during a busy holiday week. I am very proud to report that third quarter financial results exceeded the expectations we provided in August on both the top and bottom lines. We delivered record third quarter net sales of $1.2 billion, growing 14% over 2023 and strong comparable sales of 16%. Third quarter operating income grew 30% year over year to $179 million, with operating margin expanding 170 basis points to 14.8%. We continue to see customers responding to our product, voice, and experience across regions and brands. Importantly, our playbook is delivering for both new and existing customers. We have had a strong start to November, and we are ready to compete around the world this holiday season. For these reasons, we are raising our sales expectations for the full year and expect to be at the high end of our previous operating margin target, positioning us well for the achievement of sustainable, profitable growth for 2024. As an important indicator of business health and the quality of our playbook, in the third quarter, we continue to see broad-based sales growth across regions, brands, and vendors driven by strong traffic. We also saw nice growth in unit selling and AUR in the quarter as we were able to reduce promotions compared to last year. We continue to see balanced growth across categories, giving our customers a steady flow of newness and choice. This healthy top line performance, enabled by our closeness to the customer, also drove a growth profit rate of 65.1%, the best third quarter growth profit rate since 2010. Importantly, our culture of financial discipline delivered growth in the bottom line too, adding $41 million year-over-year in operating income or growth of 30% for the quarter. Staying true to our long-term ambitions, we produced these great financial results while also funding necessary investments to improve the customer and associate experience all over the world. Strong grant help can be seen across regions with the Americas, EMEA, and APAC all growing double digits in the third quarter. The Americas grew 14%, our sixth consecutive quarter of double digit sales growth in the region. In EMEA and APAC, we grew 15% and 32% respectively, which are exciting results from the teams based in London and Shanghai. Our London team delivered their fifth consecutive quarter of double-digit growth in EMEA, showing consistency in key markets with both new and returning customers. We have a number of new store openings planned in the greater London area over the coming quarter, and we're excited for local customers to see how the team has tailored the holiday experience for them. For APAC, while the region remains small, we saw similar strength in Q3, particularly on digital platforms. We're excited about the momentum our brands are seeing around the globe, with each region executing their localized playbooks at a high level. Looking at the business from the brand view, they each delivered in the third quarter. Abercrombie Brands grew 15% in the quarter, on top of 30% growth in the third quarter of 2023, achieving a third quarter record for brand net sales. Sweaters, dresses, jeans, and fleece were key categories for us and category balance continued across genders. Units and AOR both contributed to growth in the quarter, and we continue to see nice contribution from new and existing customers. For the upcoming holiday, our customers will see a lot of exciting newness and a variety of gift giving and gift yourself ideas across categories. Coupled with compelling marketing campaigns in digital and social, our goal is to give the customer reasons to buy all season long. From a channel perspective, we continue to invest in the Abercrombie digital experience where we generate a majority of the brand's business. Importantly, the holiday season is a key moment for our stores, and we are investing in both new and existing locations to support the great traffic and productivity trends we're seeing. We're planning to open around 40 new stores for Abercrombie brands this year, and we are so excited to engage customers however they choose to shop this holiday season. Hollister also delivered double-digit growth to last year, with 14% growth in the quarter on top of 11% growth in the third quarter last year. Across brands, we continue to build on strength, and Hollister is comping the comp. The Hollister team has been focused on expanding our reach within the teen market. I congratulate them for delivering outstanding results in a competitive back-to-school season and throughout the entire third quarter. Sweaters, Knit Bottoms, and Felice led the growth, including our new collegiate collection. and we are continuing to see more balance across categories as the brands build momentum. Strong traffic across channels enabled growth in both genders, and we saw both improved unit selling and AUR expansion from lower promotions. Our teams continue to deliver engaging moments for our Hollister customers through social, in-person events, and other authentic marketing content. We are investing in digital as well as stores. As a reminder, our Hollister customers tend to start their journey digitally. but they still finish a majority of their transactions in stores. For the year, we plan to refresh or right-size around 40 Hollister locations, evolving the store experience to match our updated brand aesthetic. We also plan to open around 20 new Hollister stores this year. Whether on digital or in-store, we'll have a great product across our core categories, as well as other seasonal items to bring holiday comfort and style to Hollister teen customers. Coming up strong third quarter results, we are ready and rolling right into peak holiday season starts this week. We have had a strong start to the quarter, seeing positive reads in our holiday assortments. Most of the fourth quarter sales are ahead of us, and we can't wait to engage with so many of our customers in the days and weeks to come. Our marketing and digital teams have amazing content and activations on the way, and our stores and distribution centers are well staffed to support our customers. Importantly, we have the right product in place to meet demand. I'd like to thank our product and supply chain teams for navigating what continues to be a dynamic shipping market, getting our inventory here in time for peak selling. We are prepared and ready to compete this holiday season, and I'm confident in our ability to deliver for our customers around the world. Our third quarter results again demonstrate our ability to deliver on our commitments. Incorporating our fourth quarter expectations, we are increasing our full year sales outlook and now expect growth in the range of 14% to 15% with an operating margin of around 15%. We believe achievement of these goals will further underline the strength and potential of our global operating model. Our brands are healthy, and we are making key investments across people, process, technology, and stores to support ongoing growth, setting us up for sustainable, profitable growth again in 2025. Before I hand it off to Scott, I just want to take a moment to recognize Robert Ball and his promotion to Chief Financial Officer. With more than two decades of experience at the company spinning retail finance, Robert has worked very closely with me and Scott for years to help build and drive the financial discipline mindset we all live by here at A&F Co. He is an integral to our recent success, and we look forward to partnering with him even more closely as we continue our growth journey. Congratulations, Robert. And thanks again to our global team for delivering such strong Q3 results. I'm so excited for everyone to see their hard work pay off over the next few weeks. And with that, I'll hand it over to Scott.

All right, thanks, Fran. Good morning, everyone. I'd also like to add my congratulations to Robert on his appointment to CFO. We've done a lot of great work together over the years, and it is an exciting time for him to take on this new role. I look forward to many of you getting to know Robert even better in the months to come. Getting into the third quarter, I'm also very pleased with our performance. We again delivered strong, balanced growth across regions and brands. Total net sales of $1.2 billion, which set a record for the third quarter, were up 14% to last year, with each region and brand delivering double-digit growth. On a reported basis, we saw a 90 basis point adverse impact on sales growth from the calendar shift from the 53rd week in 2023, consistent with our expectation. Comparable sales grew 16% on top of comparable sales growth of 16% last year, reflecting the sixth consecutive quarter of double-digit comparable sales growth in both the stores channel and the digital direct selling channel. On a regional basis, net sales grew 14% in the Americas, 15% in EMEA, and 32% in APAC. Comparable sales grew 16% in the Americas, 13% in EMEA, and 16% in APAC. In the Americas, we saw balanced growth across markets. In EMEA, the UK and Germany continued to lead the way, and we've now delivered year-over-year growth for six consecutive quarters in the region. In APAC, growth was led by China. For the brands, each brand delivered record net sales for the third quarter. Abercrombie brands continued to deliver strong results, growing net sales by 15% over last year, while Hollister brands grew 14% as customers continued to respond to our product and marketing. Comparable sales grew 11% at Abercrombie and 21% at Hollister. The growth in both brands was driven by strong traffic in both the stores and digital channels. We delivered $787 million in gross profit, up approximately $100 million, or 15%, from Q3 2023. The gross profit rate was 65.1% this year, compared to 64.9% last year, with higher AURs from lower promotions, mostly offset by higher freight costs due to higher freight rates and air usage. We ended the quarter with inventory up 16% to last year, Around half the increase is due to the combination of mix and inventory unit growth to support expected Q4 sales growth. And the other half is primarily due to higher freight costs and inventory as we proactively increase the use of air shipments in Q3 to mitigate potential shipping delays from longer and more inconsistent ocean transit times and the East Coast port strike. Each brand continues to operate with clean inventory and is ready for peak selling. Moving on to expenses, operating expense, excluding other operating income, was $609 million for the quarter compared to operating expense of $546 million last year. We continue to drive operating expense leverage with operating expenses as a percentage of sales of 50.4% compared to 51.7% last year. Year-over-year expense growth drivers were consistent with the first half with higher variable expenses on sales growth and increased investments in marketing, digital and technology, and people. For marketing, third quarter expenses were around 5.5% of sales, up 100 basis points compared to Q2, and up 50 basis points from last year, as we ramped spending from back to school into the peak holiday season. Operating income was $179 million, or 14.8% of sales, compared to operating income of $138 million, or 13.1% of sales last year. Net income preluded share was $2.50, up 37% from $1.83 in Q3 last year. EBITDA totaled $219 million, or 18% of sales, compared to EBITDA of $171 million, or 16% of sales last year. On the balance sheet, we went to the quarter with cash and cash equivalents of $683 million and current investments of $56 million. We delivered operating cash flow of roughly $143 million and had $50 million of capital expenditures. We repurchased approximately $100 million worth of shares, an acceleration from the first half of the year after we executed the full redemption of our senior secured notes in Q2. We ended the quarter with $102 million remaining on our current share repurchase authorization. Year to date, we have repurchased 924,000 shares, or around 1.8% of shares outstanding at the beginning of the fiscal year. In the fourth quarter, we again expect to prioritize share repurchases as the primary way to use excess cash subject to business performance, share price, and market conditions. For the store fleet, we ended the quarter with 773 stores. Through the end of the third quarter, we have opened 39 new stores, remodeled or right-sized 38 stores, and closed 31 stores. For the full year, we continue to expect to deliver approximately 60 new stores, 60 remodels and right sizes, and 40 closures. Shifting to the fourth quarter outlook, We've seen a strong early response to our holiday assortments, and we are ready and excited for the peak selling period to kick into high gear this week. For the fourth quarter, we expect net sales to be up in the range of 5% to 7% compared to the fourth quarter 2023 level of $1.45 billion, inclusive of a year-over-year headwind of $80 million or 550 basis points from the calendar shift and loss of the extra week in 2023. We also expect a 100 basis point adverse impact from foreign currency. Adjusting for the last week in foreign currency, we see growth in the range of 11% to 13% to last year. We expect continued growth across regions and brands. We expect operating margin to be around 16% compared to 15.3% in 2023. We expect expense leverage will be the primary driver of operating margin expansion, while the gross profit rate is expected to be consistent with Q4 2023 as higher freight costs and foreign currency offset lower promotions. For tax, we expect an effective rate in the high 20s. For the full year, we now expect net sales growth in the range of 14% to 15% from the 2023 level of approximately $4.3 billion, an increase in the previous outlook of growth in the range of 12% to 13%. This outlook assumes a slight adverse impact from foreign currency and continues to include an adverse impact of around $50 million or 120 basis points from the loss of the 53rd week in 2023. We've included a table in the press release summarizing the expected sales and comparative growth impacts by quarter and for the full year. For operating margin, we now expect to be around 15%, the high end of our previous range of 14% to 15%. This compares to 11.3% last year. We continue to expect the year-over-year improvement to be driven by the combination of gross profit rate expansion and expense leverage. We expect an effective tax rate in the mid-20s and capital expenditures of around $170 million. To finish up, I'd like to thank our global teams for executing at a high level across the business. We have delivered record year-to-date results for both sales and operating income, showing the strength of our brands and operating model. We look forward to delivering for our customers this holiday season and to finish out another great year of growth for our company. With that, operator, we are ready for questions.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please lend yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. And our first question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Good morning, everyone, and congratulations on another successful quarter, and congratulations, Robert. Fran, if you look at the Hollister business, which saw such nice acceleration in comps not only from last year but from the second quarter, where are you in the arc of that business as it continues to move forward, and is there any difference in the men's and women's performance? And then Scott and Robert, incremental investments were a topic of conversation last quarter with marketing. How are you thinking of the components of investment going forward and what we should look for? Thank you.

Hey, Dana, good morning. Yes, could not be more proud of that Hollister team, the incredible progress that they have made, and we are clearly a leader in the team space. Getting close to that customer, Seeing growth, to your point, of 14% on top of 11, and then comping that comp at 21% on top of last year's 7%. Just really, really terrific. We saw balanced growth across genders and categories. Excited to see growth across regions as well. We saw that in some of our key categories, like sweaters, knit bottoms, fleece. Our new collegiate collection is really doing very, very nicely. Again, saw strong traffic across channels, so really balanced performance across categories. genders, categories, regions, et cetera. So excited to see where we are and expect to continue to see growth.

Yeah, I'll grab the second part on the incremental investments. You know, we are very happy with the execution, you know, from our marketing teams. We did invest more year over year. We talked about 50 basis points more year over year. So we are putting money to work and we're really excited about that. You know, other investments that we've been talking about are stores and we're investing in new stores. We're investing in refreshes and remodels. and right sizes. And when you put that stores and marketing together, we just love what we're seeing. The traffic has been strong to both channels across brands. So we believe that is working. As we think about Q4 for marketing, we'll continue to invest probably more year over year because we just love where each brand sits. And then kind of zooming out, other investments in the business, digital technology is something we've been talking about and just love making this model faster and leaner. and so much quicker, and then everything on the front end for digital for that customer experience. This journey spans stores and digital, and we've been investing across that journey and really excited to keep doing that in the future.

Thank you.

Thank you. And our next question comes from Corey Tarlow with Jefferies. Your line is open.

Great, thanks and good morning everyone and congrats to Robert on the CFO appointment. I wanted to ask about the drivers of the Abercrombie growth. Could you maybe unpack for us what you felt were some of the largest drivers of the growth in the quarter and where you're seeing any momentum and then was curious if you could just also touch on anything you saw on YPB in the quarter. And then for Scott, as we think about the margin profile, as we look ahead, what in your view is likely to be sustainable versus transient as we think about the future for Abercrombie's margin structure? Thank you so much.

Hey, Corey. Good morning. So let's start with Abercrombie. I mean, just to step back for a minute, what an amazing journey that brand has been on, 15 consecutive quarters of growth, and to drive 15%, you know, on top of 30 last year and a comp on 11 on top of 26 is really terrific performance. To your question, you know, where do we see it? We saw balanced growth across genders. We saw across categories. I mean, it really comes down, as you well know, to product and marketing, both of which are really aligned for us and working really, really well. We continue to dress that customer for all different wearing occasions. We talk a lot about the long weekend. We saw nice, nice performance in sweaters and dresses and jeans and fleece. We are welcoming in lots of new customers, also continuing to please our existing customers. YPB specifically continues to grow. That is a category that is growing very nicely. We're just finishing up year two and continuing to see nice product acceptance across YPB.

Hey, Corey, on the margin profile, you look up and down the P&L, we believe the entire P&L is sustainable. Starting at the top line, we have built a great platform for growth. You've seen global growth now for multiple quarters. We love how our teams are localizing our playbook outside of the U S and we continue on our biggest part of the business here in the Americas, uh, to drive double digit growth, which is really exciting. So top line, we want to sustain that, uh, gross margin. You know, we've come a long way since pre pandemic, you know, we're running a very agile inventory model. Uh, we talked a little bit about freight here, you know, as we proactively brought our receipts in early to hit holiday, you know, I'll call that part of our transient nature of, uh, you know, something hitting the P and L. but we love where the gross margin sits today. And the flow through on this business with those two things and a clean store base and a strong digital business is very strong. You saw that we outperformed our sales here in Q3 a bit, and we really had a nice flow through to the bottom line. So that's our model going forward. We want to continue to build on strength from this year and into the future, and we love the platform we've built. Great. Thank you so much, and best of luck.

Thanks.

Thank you. Our next question comes from Matthew Boss with JP Morgan. Your line is open.

Great, thanks, and congrats on a nice quarter, especially despite all the weather. So, Fran, could you speak to global brand awareness and new customer acquisition that you're seeing overseas? And if you could elaborate on the strong early holiday response and current business momentum that you're seeing in November across brands, I think that would be great. And then maybe Scott, if you could just break down four Q gross margin expectations, maybe relative to the 20 basis points of expansion in the third quarter and just your comfort with inventory.

Hey, Mac, good morning. Yeah. So to start the first part of your question, so global brand awareness, you know, we could not be, I could not be more excited about the performance that we put up for the third quarter where we're just seeing very balanced performance across brands and as well as regions. You've been on this journey with us. We've been building talent locally. We have an office in London and Shanghai, and those teams really are localizing their assortments, they're localizing their marketing, and we're seeing a nice response to that. So excited to see that continue to grow. As far as holiday goes, we are off to a strong start. Last week, we always get ready. We walked the team through the stores. Our product is here. It looks great. We have a lot of product that's already tested that we know about. We are well-staffed in our stores. We're well-staffed in our DC. We're ready to go. Excited for the holiday season.

All right, Matt. On the gross margin expectations, really approaching Q4 just like we did Q3. Coming into the quarter, believed we could pull off some promotions and lighten some of those percentage offs, maybe shorten the time period that we're running a promotion. And we believe we can do the same here in Q4. We will have an offset with freight. We'll have a little bit of hurt here from foreign currency in Q4. So Again, very similar setup to what we saw in Q3. I'm thinking we'll be around flat to last year. We ended up about 20 basis points higher than last year in Q3, and again, a lot of water is coming under the bridge here in Q4, so we'll see where we end up, but we're thinking about it relatively consistent to last year. Moving on to inventory, we feel great about where the inventory sits. I mentioned a minute ago we were proactive in bringing our receipts in. The shipping environment has been pretty dynamic here in the back half. You know, we've seen some variability in ocean transit, so we're taking the chance out of our inventory deliveries, and we brought that in early. We have a little extra freight there with that air usage here in Q3. We saw that, and we expect that again here in Q4. But when you break apart that inventory, we're up 16%. You know, about half of that is just mixing into a little higher ticket product there in Abercrombie and some unit growth to drive the growth, and the other half is due to freight. So we feel really good about the inventory clean across brands and really set up well for holiday.

great color. Best of luck.

Thank you. Our next question comes from Paul Lejouet with Citi. Your line is open.

Thanks, guys. Fran, after the multi-year turnaround and the Abercrombie and Fitch and the continued momentum, I'm curious what you see as the next act and opportunity for ANF and how you might think about that different in the U.S. versus Europe versus Asia as you answer that. And then, Scott, if you hit numbers in 4Q, what is your expected level of cash that you expect to have at year end? And just how are we thinking about the pace of repo for not just fourth quarter, but as we look out to 2025 and beyond?

Hey, Paul. Good morning. Yeah, we'll start with the first part of your question. Abercrombie & Fitch, again, I just have to take a moment to say, you know, what an amazing journey and 15 consecutive quarters of growth, just incredible what's happened here at Abercrombie. With that said, you know, a lot of what's driven that, to answer your question, is that we really changed our addressable market. You know, we are no longer a jeans and T-shirt company. We're really truly a lifestyle brand. The consumer comes to us now, you know, in their early 20s. They stay well into their 40s. Our marketing is working very, very well. The team is just so close to the customer and really just staying aligned with what's important to those life moments for the customer. We've gotten into some new categories, you know, like our licensing, YPB, our best-dressed guest. Lots of those are continuing, certainly into the fourth quarter and into the future. So we are delivering what we said we would do this year, sustainable, profitable growth, and expecting that to go into the future.

Yeah, and one add there on the A&F brand, as we think about the European business, we've seen great growth there now, six consecutive quarters of growth. Bringing that new Abercrombie & Fitch brand to that local market has been really exciting. We've started our efforts in UK, specifically in London, pushing our marketing there and really reintroducing that brand to the consumer. And next up is Germany, our second biggest country in Western Europe. So really excited about the early days of driving that brand awareness and growth outside of the U.S. Jumping to the second half, so cash, we haven't given an outlook there for cash for Q4, but what I would say is if all goes to plan, it will be more than today, and that's exciting. The balance sheet remains super strong. We bought back $100 million of shares in Q3, really put a lot of good cash to work this year, paying down the debt, a couple hundred million dollars there, and then year-to-date $130 million of share repurchases. We do have $102 million left on that authorization period. As we think about going forward, we've set up a really clean model here where hit our targets, have nice flow through, generate cash. We've generated $400 million of operating cash flow year to date, and we can put cash to work, whether it's investing in the business or buying back shares. So really excited the position we're in. We have nice flexibility to make the business stronger every day.

Thank you. Good luck.

Thank you. Our next question comes from Marnie Shapiro with the Retail Tracker. Your line is open.

Hey, guys. Congratulations. The stores are just stunning, absolutely stunning. I just have one quick housekeeping question. If you could just remind us at the end of this quarter, I was looking through all the releases. What was the actual store count of Hollister and Abercrombie, and do you break out an international store count? And then just, Fran, I'm curious. Abercrombie has had an exceptional playbook with social media and influencers and the Hollister customer is definitely a younger customer. So I'm curious if you're able to use a similar playbook, even though it's a younger customer and, you know, maybe their parents aren't as thrilled with them being on and they still have a little bit of control. I'm just kind of curious what that looks like for you guys.

Hey, Marnie, I'll kick us off. So store count, 773 at the end of the third quarter. For Abercrombie Plus Kids, we had 247 stores globally. And then for Hollister, we had 518 stores globally. When you think about the U.S., call it Americas versus international, call it about 550, 225 round numbers. Fran, I'll kick it to you for the second one. Perfect.

Yes, so thanks Marty. It has been pretty exceptional what's happened at A&F, and there's certainly lots to learn. We talk a lot about our playbook, aligning our product, voice, and experience, and all of that is certainly applicable to Hollister. It's also applicable globally as we've exported our playbook. Specifically for Hollister, you know, we do augment it with things like in real life events. We're doing festivals at high schools that have been very successful. So it's a combination of both being on digital platforms as well as doing things in real life and striking a good balance for the consumer and for their parents. Great. Thanks, guys.

Best of luck for the holidays.

Thank you.

Thank you. Our next question comes from Alex Stratton with Morgan Stanley. Your line is open.

Hi. This is Katie Delahunt on for Alex Stratton. Your full year guidance raise implies that you're more optimistic on four key sales and profitability than you were three months ago. Where have your assumptions changed most positively, either by geography, banner, or on gross margin SG&A? Thank you.

Hi, Katie. I'll grab this one. Yeah, we are more bullish today than three months ago. Obviously, three months have gone by. We've seen a strong performance in the back-to-school period specifically for Hollister and kids, and then throughout the quarter for Abercrombie & Fitch as we got into that kind of fall selling season and the weather started to cool a bit. And really, when you think about where we are today, we've had a strong start to the fourth quarter. We feel great about our assortments, much of which has been tested earlier in this year. We're seeing the customer continue to respond to marketing and product across brands, across regions. And that gives us the confidence to talk about taking up that Q4 number versus what was implied previously. Breaking apart Q4 a little bit, we talk about a reported number of around 5% to 7% growth last year. We had that 53rd week last year. So when you take that out of the play and some foreign currency, we're talking about growth in the low double digits still, this 11% to 13%. So continuing to see growth across regions and brands, that's our expectation here for Q4. And we think we're set up for success sitting here today.

Great, thank you.

Thank you. Our next question comes from Mauricio Serna with UBS. Your line is open.

Great, good morning. Thanks for taking my question. I just wanted to ask about the new stores that you're opening this year. Where are these store openings concentrated by region across each brand? And then just thinking about the Hollister Comp Sales growth acceleration, Could you talk about, like, what drove that acceleration, Q over Q, either, you know, on a regional basis and units or APU? And last, inventories, I understand, you know, the explanation on why they look high on, you know, at the end of this quarter. Maybe could you share your thoughts on what do you think inventories should be ending, you know, should be at the end of the year and the kind of growth that you should see relative to sales going forward? Thank you.

Hey, Maurice. Scott, I'll kick this one off. So let's start with new stores. So this year, our new store growth is a little bit tilted towards Abercrombie & Fitch and then a little bit tilted towards the U.S. We mentioned about 40 remodels, right sizes, refreshes for Hollister. So really getting into that fleet. We rolled out that new prototype around last year at this time, and we started to really press some of those remodels in Hollister. So really excited about what we're seeing in all of our new stores. The performance across brands, whether it's a new store or remodel, refresh, right size, have really been strong in beating our expectations, which is exciting and putting us in place, again, to be a net store opener this year. Fran, I'll kick it to you.

Sure, I'll take this one. So Hollister Comp Sales Acceleration, I'm just super excited about the back-to-school that we delivered. It was a result of really staying close to the customer. What's driving that acceleration is a balance amongst the genders as well as the categories, and we're seeing just broad-based growth. You know, a couple of the key categories like sweaters and knit bottoms and fleece are driving it. We launched our collegiate collection for back-to-school this year, which had a really terrific acceptance by the customers. So, again, strong traffic across channels, just a very balanced – very, very balanced cross-channel.

All right, Mason, let me finish up on the inventory side. So we think about year end, you know, no number to provide at this point. It will be up to last year. You know, we continue to expect to grow our brands as we move from 24 into Q1 of 2025. You know, the swing in there will be how much freight is left over, you know, from the air usage that we had here in Q3 to get to our holiday receipt plan. So we'll see what the sell through looks like. We'll talk a lot more at year end. But we again, we would expect it to be up to support growth as we go into Q1.

Understood. Thanks so much and congratulations.

Thank you. Our next question comes from Rick Patel with Raymond James. Your line is open.

Thank you. Good morning and congrats to Robert on the new role. Can you talk about the outlook for AUR going forward? How do you view the opportunity to reduce promotions further given the strong demand you're seeing? And then how do we also think about Any impact on AUR from changes in the sales mix across regions and brands?

Hey, Rick, I'll grab this one. So as we think about AUR, you know, as we came into Q3, we felt like we had the opportunity to continue to pull off some promotions. We were able to do that. We feel the same as we walk into Q4 here. Nothing to talk about in Q5 or for 2025 at this point, but feel good where the gross margin sits across brands. In terms of reducing promotions, it comes down to two things. It's inventory levels and product acceptance. We're happy with both of those things right now in the business. Like I said before, we have seen nice product acceptance here early in the quarter, those holiday floor sets. A lot of that product has been tested and proven, so that gives us the confidence here in Q4 we can take off some of those promotions. When you think about AUR impact from sales mix across brands and regions, it's not that much. It's not something that's material enough that we'll even call out bits and pieces here and there, but really zooming out, talking about a gross margin here in Q3 of 65%, just super strong, enabling great flow through. We beat that top line.

Thank you very much.

Thank you. Our next question comes from Janet Kloppenberg with JJK Research Associates. Your line is open.

Hi, everybody. Congratulations on the good performance. Fran, I wondered if you could talk about the Hollister margins, the contribution margin, given the real acceleration that you're seeing in top line there and maybe the brand has more room to go in terms of improving margins there. Scott, just one question. When we think on inventory, when we think about the inventory, and I understand what's going on with freight, et cetera, should we think that you'll go down to single-digit levels next year, or is there a possibility you'll remain at the double-digit level as we look forward?

Hey, Janet. So starting with the policy, Good morning. To start the Hollister question, we are very pleased, actually, with our Hollister margins. They are very strong. We are also seeing really terrific increased productivity. I mean, our store business has been very strong. That consumer, as you know, starts their journey digitally and really does most of it in-store. So we're seeing lots of strong traffic being driven to both channels, so pleased.

Yep, Janet, on the second part, inventory. So our goal, we want inventory to be up next year. That'll signal more growth in the business. So too early to tell. Again, you mentioned the freight that's in inventory today. You know, we'll see how much we sell through as we get to year end. But, you know, assuming we see more growth next year, you know, we're going to have the inventory to have it. And we'll talk a lot more about that at year end.

Okay. And congratulations to Robert and also to you, Scott. Thank you. And happy Thanksgiving.

Thanks, Janet. You too.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. Again, that is star 1-1 to ask a question. Our next question comes from Dylan Cardin with William Blair. Your line is open.

Thanks. Someone mentioned it. You know, there was a not insignificant amount of weather disruption. out there is it that you didn't see as much or is it more instructive as to some of the flexibility it'd be kind of embedded into the business at this point and and i was curious you know the the commentary around sort of structural margin seems to be entirely predicated on maintaining low double digit growth and that's fine but at your level of square footage growth you know i'm kind of just curious looking past these current quarters or even sort of the more medium-term quarters You know, that would imply a certain amount of sort of incremental business that you're capturing relative to sort of your core. What does sustain maybe a several-year low double-digit growth rate on the business at this point? Thanks.

Okay, John, we'll kick off with some weather questions. So, you know, we generally, you know, do not look to weather to being a reason for our business. We are a global business. We've got stores around the world. We're very, you know, very diversified weather at any given time. The most important thing that I tell the team is to make sure that the assortments are balanced. Balance will continue to drive your business, you know, dependent upon things that we can't control, like weather.

Yeah, and looking at the margin discussion, yeah, thinking about that long-term algorithm, we mentioned that a little earlier, but, you know, our brands are healthy. Our operating model is more agile and flexible. You think about that store base that you mentioned. Back in 2020, we took out over a million square feet in the business, over a million. And we've stayed there. We've been at around 5 million square feet across our store base for a few years now. And we've been able to add stores by taking out some bigger ones, adding some smaller ones. So we have a much more broad store base in the right places, in the right malls than we've had in a long, long time. So I'm really excited about that. And the performance of these new stores is very strong. We continue to talk about quick paybacks, four-wall operating margins or EBIT margins for the stores above 20%. These are strong returning stores. So if we're opening stores, trust us that they are adding to the total. And then you think about the rest of it, global growth opportunity. We have stores, we have digital growth outside of the U.S. You've seen that more recently. We continue to localize those playbooks. So that gets us excited. And behind that, you have a strong balance sheet. So we can continue to invest across regions, across channels that drive the growth into the future. And that's why we're so excited sitting here today.

Got it. And can I just ask the Tara question, I guess? I mean, you guys did a really good job in 2018-19 taking that down to like 12% China that is a production. Then you ramped it up in recent years. Can you kind of move pretty quickly still and sort of any comments as to what the plan might be? Thanks.

Yeah, great question. And yeah, our China, we talked about taking it down to 12. We actually never ramped it back up. So I know there were some reports out there that had it ramping. It hasn't ramped. So Right now, today, into the U.S., we import about 5% to 6% of our receipts from China into the United States, so a very small piece of our business, half of that 12% that you call out. I know there were some discussions last night about tariffs also around Mexico and Canada. Just for us, we don't have anything coming in from Canada, and Mexico is immaterial in the grand scheme for us coming into the U.S. Right now, we'll see what happens. We're following the news just like everybody else. We have an awesome sourcing team. We have great partners globally, and we'll have a playbook if and when new tariffs come in play at some point in the future. We source out of 17 countries, diversified Agile supply chain, and we're excited to continue to flex that muscle in the future.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Fran Horowitz for closing remarks.

Thank you, everyone, for joining the call today. I just want to wish you all a happy holiday season, and we look forward to providing more updates to all of you soon. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.