Release Date: May 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Abercrombie & Fitch Co (ANF, Financial) reported record first quarter results with net sales of $1 billion and operating income of $130 million.
- First quarter sales grew 22% year-over-year with broad-based growth across regions, brands, and direct channels.
- Both women's and men's divisions saw growth across brand families, contributing to a 12.7% operating margin for the quarter.
- The company maintained a clean inventory position, allowing for fewer promotions and improved gross profit rates.
- Abercrombie Brands achieved a double-digit net sales growth CAGR from 2019, and Hollister Brands returned to growth in 2023.
Negative Points
- Despite strong performance, there is still uncertainty in the back half of the year, particularly regarding the global economic environment.
- Higher freight costs are expected to impact gross profit rates in the latter part of the year.
- The company faces challenges in maintaining the same level of growth in the international markets, particularly in APAC and EMEA.
- Operating expenses increased due to inflation and higher investments in marketing, digital, technology, and personnel.
- The implied outlook suggests minimal SG&A leverage in the back half of the year, indicating potential cost pressures.
Q & A Highlights
Q: Congratulations on the terrific results. Fran, as you think about the merchandise assortment for each of the brands, key drivers for men and women, did you see men improve? What are you seeing from women? How is the denim impact? And then, Scott, as you think about the drivers of gross margin, what was the AUR uptick in the first quarter? How are you thinking of it going forward in addition to the benefit from any lower freight and raw material costs?
A: Fran Horowitz (CEO): It was a pretty incredible quarter with balanced growth across both brands, genders, channels, and regions. Abercrombie women's dresses, particularly the Wedding Shop, exceeded expectations. Men's Abercrombie business also performed strongly. In denim, new trends like low-rise baggy and wide-leg jeans are emerging. Scott Lipesky (CFO): Gross margin performance was strong, up 540 basis points year-over-year, driven by lower cotton costs and reduced promotions. We expect cotton to continue benefiting in Q2, with freight costs slightly increasing in the latter half of the year.
Q: Fran, could you elaborate on drivers of the same-store sales acceleration that you're seeing at Hollister across men's as well as women's? And any change in current business momentum across the organization? And then, Scott, just maybe relative to 2024 operating margin guide of 14%. What do you see as the right long-term margin target for the business?
A: Fran Horowitz (CEO): Hollister's men's business turned around faster than anticipated, with significant growth in tops and bottoms. The brand saw balanced growth across genders and categories. Scott Lipesky (CFO): The 14% operating margin guide for 2024 is a significant improvement from the original 12% outlook. While not discussing long-term targets yet, the focus remains on sustainable, profitable growth.
Q: Could you talk a little bit about the marketing side? You've done an exceptional job on the Abercrombie side as the brand is coming back to strength and continues to put growth on top of growth. Now that Hollister is on solid ground, will you follow that same kind of path, even though it's a younger customer? Could you talk a little bit about what that could look like and what the spend will look like over the next couple of months?
A: Fran Horowitz (CEO): We are investing in marketing across the funnel for both Abercrombie and Hollister. For Hollister, we are focusing on top-of-funnel activities to drive brand awareness among teens. Scott Lipesky (CFO): We aim to maintain marketing spend at around 5% of sales, which translates to more dollars as the top line grows. This balanced investment in marketing is crucial for customer acquisition and long-term growth.
Q: Just a couple here. One, just on the full year sales guidance raise, it looks like you guys have a pretty big back half slowdown built in. Is that just a function of compares? Or can you talk to us about the rationale there? And then secondly, just on Asia Pac, can you just elaborate on what you're seeing there for the brand in that geography as well as your view on the consumer there?
A: Scott Lipesky (CFO): The full-year sales guidance raise reflects a strong start to Q1 and a good start to Q2. The back half outlook remains cautious due to uncertainties and learnings from Q2. Fran Horowitz (CEO): In APAC, we saw 10% net sales growth, driven by localized assortments and promotions. Although it's a small part of our business, we see significant potential and will continue to invest in the region.
Q: Could you talk about in Q1, what you're seeing in terms of customer acquisition in Abercrombie, are you seeing like any new customers coming into the brand specifically age cohort or anything like that? And maybe also, could you talk about the playbook implemented in international markets? How are you seeing that in -- like what are you doing in U.K. and Germany to drive that strong growth? And then just finally, just I was wondering like for Q2 -- sorry, for the second half of the year, are you baking any expectation of OpEx leverage considering that there's an implied slowdown in the sales guidance?
A: Fran Horowitz (CEO): Abercrombie is seeing new customer acquisition through initiatives like the Wedding Shop and increased top-of-funnel marketing. In international markets, particularly the U.K. and Germany, we are localizing assortments and marketing efforts. Scott Lipesky (CFO): For the second half, we expect minimal OpEx leverage, with most leverage occurring in the first half due to higher growth rates.
Q: Just to follow up on the AURs. Did you say what AURs were up in the quarter? I think your plan was for flat. So just curious how AUR has performed? And any color by brand and how -- and what your assumption is for AURs for the year now? And then secondly, for Fran, I'm just curious on new customer growth at Hollister. I know previously you said Hollister was somewhat more limited by just the age range of the Hollister customer relative to ANS. Just curious if any of your thoughts have changed about what the ultimate customer acquisition opportunity is there.
A: Scott Lipesky (CFO): AURs saw growth across brands, driven by mix benefits and reduced promotions. We expect AUR growth to continue in Q2 and moderate in the back half. Fran Horowitz (CEO): Hollister's addressable market is smaller due to its teen-specific focus, but we are investing in marketing to attract new customers. The brand's customer acquisition strategy includes a balanced investment in store locations and digital marketing.
Q: I wondered about the -- you're comparing here still, against high promotions and clearance last year at Hollister. And I'm wondering if you expect that to be a benefit for the year. And also, when you think about the international business, I think that you're in early innings there in terms of recovery trend. So I wondered if you thought that comps could be maintained at the kind of level we saw in the first quarter. And just lastly, on brand extensions with The Wedding Dress Shop do you see opportunities for additional brand extensions at both brands as we look forward?
A: Scott Lipesky (CFO): The benefit from reduced promotions at Hollister will moderate as the year progresses. Fran Horowitz (CEO): We are excited about the progress in international markets and believe the growth trends can be maintained. Regarding brand extensions, we will continue to explore new opportunities based on customer feedback, similar to the success of The Wedding Dress Shop.
Q: Is there an outlook given -- the sales acceleration for the back half,
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
