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 one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one. Again, please be advised that today's conference is being recorded. I would now like to turn the conference over to Mohit 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 Lipesky, 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.abercrombie.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 mention 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 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, Mohit, 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 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 continued to see broad-based sales growth across regions, brands, and vendors, driven by strong traffic. We also saw nice growth in unit selling at 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 gross profit rate of 65.1%, the best third quarter gross 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%. Staying true to our long-term ambitions, we produced these great…

Alright. 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%…

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, we 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 components of investment going forward and what we should look for? Thank you.

Hey, Dana. Good morning. Yes, I could not be more proud of that Hollister team and the incredible progress that they have made. We are clearly a leader in the teen 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, and fleece. Our new collegiate collection is really doing very, very nicely. Again, we saw strong traffic across channels, so really balanced performance across genders, categories, regions, etc. 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. We are very happy with the execution 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. 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 rightsizes. 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. Our next question comes from Corey Tarlowe 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 YPD 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. Consecutive quarters of growth, and to drive 15% on top of 30% last year and a comp on 11% on top of 26%. It's really terrific performance. To your question, where do we see it? We saw balanced growth across genders. We saw across categories. And 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 performance in sweaters and dresses and jeans and fleece. We are welcoming in lots of new customers, also continuing to please our existing customers. YPD specifically continues to grow. You know, that is a category that is growing very nicely. We're just finishing up year two and continuing to see nice product acceptance across YPD.

Hey, Corey. On the margin profile, you know, when you look up and down the P&L, we believe the entire P&L is sustainable. You know, 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 US, and we continue on our biggest part of the business here in the Americas to drive double-digit growth, which is really exciting. So top line, we want to sustain that. Gross margin, you know, we've come a long way since pre-pandemic. You know, we're running a very agile inventory model. We talk a little bit about freights here, you know, as we proactively manage holiday. I'll call that part of our transient nature of, you know, something hitting the P&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. So that's our model going forward. You know, 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.

Thank you. Our next question comes from Matthew Boss with JPMorgan. 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 Q4 gross margin expectations relative to the 20 basis points of expansion in the third quarter and just your comfort with inventory?

Hey, Matt. Good morning. So to start with the first part of your question, global brand awareness, you know, we could not be more excited about the performance we put up for the third quarter. We're just seeing very balanced performance across brands and as well as regions. You've been on this journey with us. You know, 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 nice response to that. So excited to see continued growth. As far as holiday goes, we are off to a strong start. Last week, you know, we always get ready. We walked the team through the stores. Our product is here. It looks great. We have a lot of products that's already tested that we know about. We are well-staffed in our stores. We're well-staffed in our DC. We are ready to go. Excited for the holiday season.

Alright, Matt. On the gross margin expectations, really approaching Q4 just like we did Q3. You know, coming into the quarter, we believed we could pull off some promotions, you know, 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'll have an offset with freights. 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 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. You know, the shipping environment has been pretty dynamic here in the back half. You know, we've seen some variability in ocean transit, so we are 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 Lejuez with Citi. Your line is open.

Thanks, guys. So then after the multiyear turnaround and that Abercrombie surge and the continued momentum, I'm curious what you see as the next act and opportunity for A&F, and how you might think about that differently in the US versus Europe versus Asia. As you answer that. And then Scott, if you hit numbers in Q4, what is your expected level of cash that you expect to have at year-end? And how are we thinking about the pace of repo for, you know, just not just fourth quarter, but as we look out to 2025 and beyond?

Hey, Paul. Good morning. We'll start with the first part of your question. So 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, a lot of what's driven that, to answer your question, is that we really changed our addressable market. 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 twenties. They stay well into their forties. 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, YPD, our best-dressed guest. Lots of those are continuing. Certainly, into the fourth quarter into the future. So we are delivering what we said we would do this year, profitable growth, and expecting that to go into the future.

Yeah, and one add there on the A&F brand. You know, as we think about the European business, we've seen great growth there now, six consecutive quarters of growth. You know, bringing that new Abercrombie & Fitch brand to that local market has been really exciting. We've started our efforts in the UK, you know, specifically in London, pushing our marketing there and really reintroducing that brand to the consumer. And, like, next up is Germany, you know, our second biggest country in Western Europe. So really excited about the early days of driving that brand awareness and growth outside of the US. 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'll be more than today. And that's exciting. The balance sheet remains super strong. We bought back $100 million of shares in Q3. You know, 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. You know, as we think about going forward, you know, we've set up a really clean model here where, you know, hit our targets, have nice flow-through, generate cash. We generated $400 million of operating cash flow to date, and we can put cash to work whether it's investing in the business or buying back shares. So really excited about the position we're in. We have nice flexibility to make the business stronger every day.

Thank you. Goodbye.

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. Thank you. I just have one quick housekeeping. 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 hall calls to customers 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 kinda 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 US, call it Americas versus international. So call it about 550 in the Americas and 225 internationally, round numbers. Fran, I'll kick it to you for the second one.

Perfect. Yeah. So thanks, Marnie. It has been pretty exceptional what has 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 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. 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 Q4 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. You know, we've seen strong performance in the back-to-school period specifically for Hollister and kids and then, you know, 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, you know, 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, you know, taking up that Q4 number versus what was implied previously. Breaking apart Q4 a little bit, you know, 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. That's 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 on? By region across each brand? And then just thinking about the Hollister comp sales growth acceleration, could you talk about what drove that acceleration Q over Q either, you know, on a regional basis and units or last time, inventories, I understand, you know, the explanation on why they look high at the end of this quarter. Maybe could you share your thoughts on where you think inventories should be at the end of the year and kind of growth that you should see relative to sales going forward?

Hey, Mauricio. This is Scott. I'll kick this one off. Let's start with new stores. So this year, our new store growth has a little bit tilted towards Abercrombie & Fitch, and then a little bit tilted towards the US. 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 and 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 for the Hollister comp sales acceleration.

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 the 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 customer. So again, strong traffic across channels. It's a very balanced performance across the board.

Alright, Mauricio. Let me finish up on the inventory side. So we still think about year-end. 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 2024 into Q1 of 2025. The other swing in there will be how much freight is left over, you know, from the air usage 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 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 AURs, 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 promotion, you know, 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 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. You know, 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 when we beat that top line.

Thank you very much.

Thank you. Our next question comes from Janet Kloppenburg 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 the top line there and maybe, you know, the brand has more room to go in terms of improving margins there. And Scott, just one question. When we think about the inventory, and I understand what's going on with freight, etc. Should we think that you'll go down to single-digit levels next year or, you know, is there a possibility you'll remain at the double-digit level as we look forward?

Hey, Janet. Good morning. To start with the Hollister question, we are very pleased with our Hollister margins. They are very strong. We are also seeing really terrific increased productivity. I mean, our stores 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 that second part, inventory. So our goal is to 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. 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 gonna 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. Yeah, you too.

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

Thanks. Someone mentioned it. You know, there was not a significant amount of weather disruption out there. Is it that you didn't see as much, or is it more instructive as some of the flexibility that you kind of embedded into the business at this point? And I was curious, you know, 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 kinda 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 several year low double-digit growth rate on the business at this point?

Hey, Dylan. Let's take off with some weather questions. So, you know, we generally do not look to weather to be 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. I'm looking at the margin discussion yet. Thinking about that long-term algorithm, you mentioned that a little early, but, you know, our brands are healthy. Our operating model is more agile and flexible. We took out over a million square feet in the business, over a million. And we've stayed there. You know, we've been at around five 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. You know, we continue to talk about quick paybacks, you know, four-wall operating margin, or EBIT margins for the stores above 20%. These are strong returning stores. So if we're opening stores, you know, trust us that they are adding to the total. And then you think about the rest of it, you know, global growth opportunity. We have stores. We have digital growth outside of the US. 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 tariff question, I guess? I mean, you guys did a really good job in 2018, 2019 taking that down to, like, 12% China that is in production. Then you ramped it up in years. Can you kinda move pretty quickly still in sort of any comments or what the plan might be, you shouldn't see.

Yeah. Great question. And, yeah, our China, we talk 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 US, we import about 5% to 6% of our receipts from China into the United States. So a very small piece of our business. You know, half of that 12% that you called 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 was immaterial, you know, on the grand scheme for us coming into the US. So right now, you know, 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 into play at some point in the future. We source out of 17 countries, diversified, agile supply chain, we're excited to continue to flex that muscle in the future.

Got it. Thanks.

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.