Good day, and welcome to the Abercrombie & Fitch's Fourth Quarter Year-End Fiscal Year 2022 Earnings Call. Today's conference is being recorded. [Operator Instructions] 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 Lipesky, 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 have 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 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 purposely 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,…

Thanks, Fran, and good morning. I'm also proud of how our teams wrapped up 2022, delivering improved results in both the third and fourth quarters. I'll start by covering Q4 results on both year-on-year and sequential comparisons, along with the rundown of our full year 2022 performance. I'll then provide some color on our 2023 outlook. For Q4, we delivered net sales of $1.2 billion, up 3% 2021 on a reported basis and up 5% on a constant currency basis. This was above the range we provided in early January due to a better-than-expected finish to the month. As Fran mentioned, we saw trends improve sequentially about Abercrombie and Hollister. Net sales at Abercrombie, which includes kids, rose 14% compared to 2021 on a reported basis and 16% on a constant currency basis. This compares to Abercrombie's Q3 reported and constant currency growth of 10% and 13%, respectively. Hollister, which includes Gilly Hicks and social tourist, declined 4% or 2% on a constant currency basis. This compares to Hollister's Q3 reported and constant currency declines of 12% and 9%, respectively. By region, net sales increased 9% in the U.S. Internationally, we saw a decline of 13% or 6% on a constant currency basis. By region, EMEA was down 14% on a reported basis and 7% on a constant currency basis, and APAC was down 21% on a reported basis and 13% on a constant currency basis. In EMEA, our strongest markets continue to be the Middle East and the U.K., but the region largely remains soft. In APAC, while sales were down to last year in the fourth quarter, we are excited to see the region reopen with the lifting of the Zero COVID policy in China. Gross profit rate was 55.7% versus 58.3% last year. Key drivers of the…

[Operator Instructions] And our first question comes from Dana Telsey from Telsey Advisor Group.

As you think about the Hollister business and the improvements that you're seeing, how do you frame it for 2023, whether stores, whether digital and how you're thinking about it. And then also, Scott, can you talk to at all the breakdown of the margin opportunity for 2023 in terms of freight and how you're balancing that given your clean inventories with pricing in the environment.

Dana. So let's talk about Hollister for a few minutes. We were very pleased to see the improvement with Hollister and the sequential improvement that we saw from the third to the fourth quarter. As you know, we were on a journey with Hollister last year. Around back-to-school, the whole teen market took a little bit of a step back at that time. And what we did was, we really dove to see how much of that was driven by macro and how much of that did we own. We assessed our situation, and we made some changes, as I mentioned earlier, people, product, we made sure our receipts are back in line for our trend in the back half, and we chased into product that was working like cargoes and dresses. So the inventories are clean as we now head into '23. We're pleased with the inventory levels are. And what's most exciting is that we have [ Chase ] back in our business, that is a very exciting work, particularly for that teen market. Because in '22, with all the constraints on the supply chain, it was much harder for us to chase and really be able to react to what's going on. So we are cautiously optimistic as we head into '23, as we've discussed and our expectation is to return to growth in the back half of the year.

All right. Let me pick up the margin piece. So as we look to 2023, our expectation is operating margin of 4% to 5%. That's up from 2.9% in 2022. Our path there is we do expect to see about 200 basis points from gross margin expansion, which would come from -- mainly from the net pickup in freight. We still see cotton as a headwind for next year, but do see a good amount of that freight coming back in 2023. From there, we do expect a little bit of deleverage on the expense base. Just due to inflation as well as some of the longer-term investments we're making in digital and technology. So for the year, again, 4% to 5% on the operating margin line. As we think about balancing that with inventory, Fran hit it for the Hollister brand, but in total, all of our brand positioned to chase right now. That gives us an opportunity on the AUR front as we go into 2023. We're not assuming anything big there. Obviously, the dynamics out there with [ indiscernible ] and inflation are in flux every day, but we have the opportunity with lower inventories across all of our brands to hopefully raise AUR this year.

And our next question comes from Corey Tarlowe from Jefferies & Company.

Congrats on the continued strong results. So could you talk a little bit, Fran, about the success that you drove in the fourth quarter at Abercrombie & Fitch, I know that -- you've seen some really great momentum in women's and dresses as well. But maybe could you talk a little bit more about why you think that, that momentum is sustainable and should help to continue to drive results throughout the next year? And then Scott, just on stores. I know that yet again, I think you're going to be a net opener of stores, but it sounds like you're actually going to be opening fewer than you were last year. But all that said, it's only going to be, I think, a modest change you said in gross square footage and occupancy dollars. So could you talk a little bit about how you're going to be really thoughtful around opening stores and still keeping costs in control?

Corey, I'd love to talk about continuing our momentum at A&F. Coming off another strong year for the brand, which is super exciting, what we've been able to accomplish in this turnaround and there are so many exciting things happening and certainly to come. So a great example of that is women's bottoms. Our best year ever and women's bottoms and that goes way beyond just denim. So there's a whole trend happening in pants which women are now wearing back to work. They're going back to the office. They're able to use as a transitional outfits to wear them to go out because we know how social, our Abercrombie customer tends to be. We also launched a new franchise called YPB, which is our activewear. We launched that because our customers said to us, "We know you can do this well, we'd love to see some activewear from you", and they really responded nicely. So there's just lots of opportunity, our Best Dressed Guest franchise. We talked a lot about all the weddings in 2022. There's even more to come for 2023, and they're coming to us for all those special occasions. And to your point, men's is also a second quarter of positive comps for men, and we're excited to see that starting to roll as well. So there's just lots of opportunity in heading into the year with nice momentum.

Okay. On the store side, yes, net opener in 2022 first time, I think, in over 10 years or around there. We opened 59, closed 26. We will slow down the 59 as we go into 2023. As we look at 2022, there were tons of great malls that we wanted to get back into. And we were able to find the right deals with our landlord partners and they were successful. Looking at those stores, the productivity on a square footage basis, the new stores versus the old almost double as we continue to have that opportunity to close some of these bigger legacy stores and open these smaller new format stores. So we like what it does for the brand and we like what it does financially. So we're going to keep that going here in 2023 and beyond [indiscernible] we'll moderate a bit, but we still have great opportunities around the country and really around the world.

And our next question comes from Paul Lejuez from Citi.

Scott, this is Kelly on for Paul. Any change you can talk about brand performance, specifically in the U.S. And then how our trends performing core rate overall, but also by region, we've heard from others that maybe [indiscernible] is starting to take a toll in Europe in 1Q. And then just bigger picture, how are you thinking about the Europe region. Is it possible you could maybe look to close some stores in Europe, just given the difficulties you've seen there over the last couple of years?

Okay. We're going to start a little bit backwards. So you heard at our Investor Day with us back in June, and we talked about the fact that we still believe that we have an opportunity -- a nice long-term opportunity in our international business. That's part of our Always Forward plan. Coming out of COVID, we've had a little bit of a starter -- starting back up in some of those countries. But we believe long term in both regions, EMEA and APAC, we're excited to see in APAC, particularly removing of the zero-COVID policy. We've got a team there in place ready to go and chase goods at this point. And in EMEA, we still have seen a strong business in the U.K. and the Middle East. We have work to do admittedly, but we still believe we have a long-term opportunity.

On the U.S. piece of it, Abercrombie continues to do extremely well here in the U.S. The growth is strong double digits for the Abercrombie & Fitch brand, so really excited about that. And back to the previous question, hopefully, more momentum coming in the future. As we think about Hollister, also made a really good comeback. We had a second quarter low here in the U.S. where it stepped back as that inflation started to range, and we saw that teen space come in, in Q2. And that group has really built up in Q3 and into Q4, and a lot of that has been driven here in the U.S. So nice to see it come back in Hollister. As Fran mentioned, we have some work to do in the future, and we're very focused on that brand, but happy with the progress we've made to date.

Got it. And then just a follow-up on the A&F brand. You sound very excited about the opportunity in '23, but I'm just wondering if you could talk more specifically about what's driving the growth? Is it coming from AUR? Is it coming from more units? And then beyond YPB, which you've talked a lot about is just any other categories to call out for '23.

So, Kelly, just to reiterate a little bit what we talked about. So we've been focusing on franchises. So we focus on -- our curve love franchise for denim, which has been very successful, which has helped us reach our best ever year in denim for A&F women's, we launched this YPB franchise, Best Dressed Guest, lots of exciting things happening. Our Sloan pants is something that is now caught on incredibly well. We named the pants -- named and claimed it as we like to say in retail. And now everyone is referring to what is one of our best-selling items that we have out there for women. So growth is going to continue through product innovation, getting that product voice and experience on target as we've been doing. There is potential, we've grown the AUR extremely well since pre-pandemic, up over double digits. And there's a focus to continue to believe we have opportunity there as well.

And our next question comes from Marni Shapiro from Retail Tracker.

Congratulations. The stores look beautiful. I'd love to just talk about two quick things, if I can. Can you -- on the real estate, are you finding that the market is a little tighter? And are you able to still get the deals you want to be in those models? And if not, are you are you holding back and willing to wait? And then could you just give us a quick update on your loyalty programs? I'm curious what the engagement looks like and are people signing up? And are they engaged in using the Perks?

Marni. I think you've heard me say many times, right? As far as the store matter, absolutely. Got [indiscernible] in the right or right location and right economics. And as we've shown over the past several years, yes. We'll hold if we are not getting the deals that we need to make this economically viable for us. That said, we opened some really terrific stores in 2022. [Thrilled to be] back in some of the best malls. We walked away from and now we have all of our new product types in them and doing nicely. So it is a -- there's no finish line to real estate for us. We're always out there exploring and understanding what the opportunities are. But yes, just a quick answer is yes, we will hold unless we have the right deals.

On the loyalty programs, we continue to drive these -- our identifiable customer rate has gone up dramatically over the past few years. So it's great to see customers signing up for this. We can share information back and forth and really leverage this group to kind of help us with product and also on the top line. So we are still signing people up. We refresh these programs each brand over the past 12 months, and excited about what that brings to us really from an identifiable customer perspective.

And our next question comes from Janet Joseph Kloppenburg from JJK Research.

Congratulations on the progress. I got on a little bit late, but are you able to talk about Hollister U.S. trends in the fourth quarter. Did you say if they were directionally positive or negative? I think they were better in the European trends in the third quarter, but still negative, maybe mid-single digits. And another question is, you're looking for the sales rates to decelerate from the fourth quarter to the first quarter of fiscal '23. And I'm just wondering, what's involved in that, or if you're seeing some resistance from the consumer or if you're not as optimistic about Hollister, maybe you could give us an indication of what led to that top line guidance? And just lastly, I think, Fran, you said that Hollister was really clean. But I wondered how the markdown levels were and if the seasonal product clearance was in good shape and had been cleared.

Right, [indiscernible] It's good to roll in. So on Hollister U.S. trends for Q4, the Hollister U.S. business was around flat for Q4, and that's a really nice improvement off of where we were kind of negative. Yes, versus where we were in Q2 and even in Q3. So really nice progress there. As we think about the Q1 outlook kind of the sales rates Q4 into Q1, as we're sitting here today, Q1 is our toughest comp on a 1-year basis and a multiyear basis. There's obviously a lot of inflation that's still happening out there, and we haven't really gone full circle on inflation whenever it really started to spike last year kind of in the early Q2 period. So we're really factoring all of that into our outlook. The volumes -- February is a low month, and the volume is really going to start to ramp up here with spring break and the Easter holidays. So getting kind of to that next question on inventory, we like where the inventory sits on a spring basis for each of the brands. So we're ready for that volume. And again, sitting here cautiously optimistic. And on the Hollister piece around how clean we are, we've made a lot of progress. It was a kind of a grind there in 2022, whenever that business fell off in Q2 through Q4, we were pressing the gas on getting through that clearance. A lot of that was from that back-to-school period in early fall. We've made great progress on that. You saw a little bit of that margin take there in Q4 to make that happen. But very happy to say that the Hollister brand is in a nice chase position now for spring and beyond just like Abercrombie & Fitch has been.

Did you see any improvement in Europe [indiscernible] Hollister in the fourth quarter? Or how did that shake out?

Yes, some. That business has been obviously lagging the U.S. That's been a multiyear trend for us coming out of COVID, something that we're very focused on as we're going through the spring season. And we do feel that all the changes that we're making that are going to help here in the U.S. will eventually help us in EMEA as well as APAC. So again, cautious optimism as we look to the global business for Hollister.

And I think Fran said that maybe she expects Hollister to inflect this year, maybe you said second half, I'm not -- I can't remember, Fran. But I was just wondering if you thought it may inflect in the U.S. in the first half.

Yes, we've seen some inflection here, obviously, in the fourth quarter. But I think what we're all waiting for is how we lap that Q2 period. Obviously, the whole team space fell off Q2 of last year as we kind of ramped in the back-to-school. There were a lot of things happening from a macro perspective in the economy with inflation ranging, et cetera. So I think all of us in the teen space are excited to lap that. And we're all especially are setting up our businesses to do that in a good way. But time will tell, and we'll see what happens as we get to that point.

And our next question comes from Alex Straton from Morgan Stanley.

Just a couple from me. I think I just wanted to zero in on your cautiously optimistic commentary on consumer demand. Can you just talk about kind of what data points are informing that? And then secondly, this ability to have Chase back in the business, that's great to hear. Is there any way you can kind of quantify where you're at now versus what's normal or what was going on in 2022, just so I had a reference point?

Absolutely. On the consumer demand side, we're always looking at employment levels as well as wage levels. Those both -- both of those things remain very strong, and that's very helpful for our customer on the discretionary side. When you think about some of this cautious optimism [ that ] we don't know what the Fed is going to do here in the U.S. and how that's going to kind of ripple through the economy as we go throughout the rest of the year. And as you watch TV or read the news every day, depending on how the winds blow, it's good or bad. So we'll see. But the real point gets to your number two, is the things we can control and the best thing we can do is remain in a [ chase ] position in inventory. We got caught up a little bit with Hollister there as the business fell off in Q2 of last year. We've been able to get through that, get all the brands in Chase and the environment out there for Chase, you've heard a lot of others talk about it already, is very good. The supply chain isn't back to where it was in 2019, but it's getting closer. And we're able to do things. We're able to test in stores like we haven't been able to in a couple of years, and we're able to chase inventory in a quicker way than we have been in 2022. So the amount that we're leaving open for Chase, and we're not going to give you a percentage, they're much higher than they were in '21 and '22, and that's great for our business.

[Operator Instructions] And our next question comes from Mauricio Serna Vega from UBS.

Just a couple from my end. Just -- I was wondering -- I don't know if you mentioned on your sales outlook and you -- where you talked about Abercrombie outperforming Hollister. Does that imply Hollister sales are flat, return to positive? Or just trying to understand like how much of an outperformance should we be thinking about? And then maybe if you could talk about AUR trends across each of the brands. And then lastly, on the tax rate, I know you guided for a high tax rate for this year. But any thoughts on where that could actually converge or converge [indiscernible] in the long term? That would be very helpful.

Okay, Mauricio. Good to chat. Let me grab a couple of these. So I'll start with the tax rate. So yes, the tax rate remains elevated to where it was kind of in that 2019 before COVID period. Something we're laser-focused on. We're not getting the ability as the European and APAC business that step back coming through COVID, not getting the ability to realize some of those tax losses that we're seeing there. So very focused on that and bringing back the international business, and that will obviously help the tax rate. On the sales outlook, I mean there's many paths as we all know, there's many scenarios as we go through 2023. We would just expect that Abercrombie would outperform Hollister and likely see the U.S. business outperform the international business. But Again, we've been talking about this for the last couple of years. Those are the trends we've been seeing, and we're just going to assume we're going to keep seeing them until we don't. And that's really how we're setting up 2023.

Yes. And regarding AUR trends, it's interesting. If you take a step back and you think about the last several years of disruption, one of the positive outcomes that has come out of that are AUR growth. If we look at pre-pandemic levels today, we actually have double-digit AUR growth in both brands. And our goal is to hold on to those AUR growth as well as hopefully maybe even grow a little bit into the future. The opportunity really comes in the AUC, like we've talked about a couple of times this morning and the reduction of the freight cost as well as the cotton in the back half.

And I am showing no further questions. I would now like to turn the call back over to Fran for closing remarks.

Just want to say thank you all for joining us today, and we look forward to speaking to many of you soon.

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