Abercrombie & Fitch Co /De/ Q1 FY2025 Earnings Call

Good day, and welcome to the Abercrombie & Fitch Co. First Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Today's conference is being recorded. At this time, I would like to turn the conference over to Mohit Gupta. Please go ahead.

Thank you. Good morning, and welcome to our first quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, Scott Lipesky, Chief Operating Officer, and Robert Ball, Chief Financial Officer. Earlier this morning, we issued our first-quarter earnings release, which is available on our website. Also available on our website is an investor presentation. Please keep in mind that we will make certain forward-looking statements on the call, subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. Additional details are discussed in our reports and SEC filings. We'll also be referring to certain non-GAAP financial measures during the call. Additional details are included in the release and investor presentation issued earlier this morning. With that, I will turn the call over to Fran.

Thanks, Mohit, and thanks, everyone, for joining. I'm pleased to report first-quarter results came in ahead of expectations. I am proud of how the team is applying our playbook to execute for our customers and our business. As we've mentioned before, our playbook and read and react model are an important part of the strong foundation we've built over years of transformation. This foundation allows us to manage and adapt to the environment while maintaining focus on strengthening our brands and company for the long term. We are one quarter into 2025, and our team is doing an excellent job balancing both of these priorities. For the first quarter, we delivered record net sales of $1.1 billion, an 8% increase compared to last year, surpassing our expected range of 4% to 6%. Operating expense leverage partially offset lower gross margin and marketing, with earnings per share of $1.59 for the quarter, both exceeding the ranges we provided in March. We utilized our strong balance sheet to return $200 million to shareholders through share repurchases, totaling 5% of shares outstanding as of the beginning of the year. We saw net sales growth across all regions in the first quarter. The Americas grew 7% with good traffic levels in both stores and digital, building on a terrific first quarter in 2024 where we grew 23%. In EMEA, we grew 12%, following a remarkable 19% growth last year. We continued to see strength in the UK and Germany, with digital demand complementing the positive reception we've seen for the six stores we opened in the region last year. In APAC, we experienced a 5% growth on top of 10% growth last year, with excellent comparable sales performance in China. From a brand perspective, Hollister led the way, delivering record first-quarter results with 22% net sales growth from last year, on top of 12% growth in the first quarter of 2024. Comparable sales rose 23%. I am incredibly proud of the Hollister team for achieving the brand's eighth consecutive quarter of growth. Both AUR and units were up during the quarter, with growth balanced across genders and categories, particularly in fleece, jeans, and skirts. Cross-channel traffic was strong this quarter, and we continue to ramp up our marketing investment year over year to support growth. We are excited about the balance we are seeing in our assortment and look forward to the summer season kicking off officially. At Abercrombie Brands, results fell short of expectations. We recorded a 4% decline in net sales against last year's impressive 31% growth and record net sales achieved in Q1 2024. Comparable sales fell 10% versus a 29% comp growth last year. As anticipated entering the quarter, sales performance was primarily driven by AUR decline as we moved through winter carryover inventory. We also saw weaker results in some of the spring categories that showed outstanding growth in Q1 last year. We built our business to rapidly respond to customer feedback, and the team acted quickly, leveraging our agile operating model to shift inventory receipts based on summer product test reads. The brand continues to experience good traffic trends, and on the store side, we continue to see productivity and surrounding digital sales growth from new stores. We have 13 openings planned for the second quarter in some great locations, building on the successful opening in Williamsburg, Brooklyn, earlier in April. I have confidence in the team and our playbook, and our goal is to deliver sequential improvement on the top line in the second quarter, setting Abercrombie brands back on a path to growth later this year. From a total company perspective, we expect to deliver year-over-year second-quarter sales growth on top of a record 2024, with balanced growth across regions. As we navigate through the evolving trade environment, we remain flexible and agile with our inventory receipts and marketing expenditure to ensure alignment of our product investments with selling trends. Our playbook was built to effectively respond to circumstances like these, much like how our team successfully managed the freight and cotton price spikes a couple of years ago. Our global supply chain and sourcing teams are working hard to drive efficiency across the supply base by engaging with our sourcing partners and implementing strategic geographic changes to our purchases.

Throughout our business, we are pursuing expense efficiencies while remaining proactive in key investment areas. All of this work will have a clear impact, and based on our current assumptions on tariffs, we are not planning broad-based ticket increases. As we've done season after season, our goal is to deliver high-quality products and align inventory and promotions with our customers' value perceptions. This will provide us the best opportunity to achieve healthy sell-throughs, AURs, and gross margins that support our track record of net sales, earnings, and cash flow growth. Our playbook and model both work, and we will continue to leverage them moving forward. Reflecting on what we've built over the years, we have a solid history of capitalizing on moments like these to further strengthen the business. We remain focused on the long-term opportunity ahead. We strongly believe in the global power of our brands and continue to extend their reach by investing in marketing, technology, new channel partnerships, and company-owned stores. On the store side, we expect to add around 100 new physical experiences this year, including localized products and advertising to build a lasting market presence and growth. The first quarter was another demonstration of where we set a goal and accomplished that goal. As we move through the second quarter, we expect to build on our track record of controlling what we can manage and fulfilling our promises. Global growth remains our highest priority for 2025, and we reflect on our first-quarter progress while investing for the long term. With that, I'll hand it back to Fran to elaborate further on our results and key outlook drivers. Thanks, Fran, and good morning, everyone. Recapping the quarter, we delivered record net sales of $1.1 billion, up 8% from last year on a reported basis, exceeding the range we provided in early March. Comparable sales for the quarter were up 4%, and we did not see meaningful impact from foreign currency. By region, net sales increased 7% in the Americas, 12% in EMEA, and 5% in APAC. On a comparable sales basis, the Americas was up 4%, and EMEA was up 6%. The spread between reported and comp sales for EMEA and APAC was due to net store openings and third-party channels, with EMEA also benefiting from foreign currency. Regarding the brands, Abercrombie brands net sales declined 4%, with comparable sales down 10%. As expected, the sales decline was primarily due to lower AUR as we worked to clear seasonal carryover inventory. Hollister Brands net sales grew 22% with comparable sales of 23%, reflecting both unit increases and AUR growth on lower promotions. Operating margin was 9.3% of sales, above the outlook range we provided in early March, delivering operating income of $102 million compared to $130 million or 12.7% of sales last year. Lower gross margin was partially offset by around 140 basis points of operating expense leverage, led by general and administrative expenses on lower payroll and incentive compensation. Marketing, fully included in selling expenses, accounted for 5.3% of sales for the quarter and was the primary driver of the 110 basis points of deleverage in selling expense. We ended the first quarter with inventory at cost up 21%. Within that, inventory units increased by 6%, positioning us to support future growth, along with a four percentage point increase due to freight and inventory actions related to tariffs, with year-over-year changes in product category mix driving the remaining cost increase. The tax rate for the quarter was in line with our outlook at 25%, and net income per diluted share surpassed our outlook at $1.59 compared to $2.14 last year. Moving to the balance sheet, we exited the quarter with cash and cash equivalents of $511 million and liquidity of approximately $940 million. We finished the quarter with marketable securities of $97 million. For the quarter, we repurchased $200 million worth of shares, consistent with our commentary from early March, ending the quarter with $1.1 billion remaining on our current share repurchase authorization. Shifting to the outlook, global growth remains our highest priority. Our 2025 outlook assumes a 10% tariff on all global imports into the US, as well as a 30% tariff on imports from China. We have worked for some time to relocate suppliers, and this year's sourcing volume from China will be in the low single digits. Globally, we are diversified across 16 countries. We have been leveraging our agile playbook to build mitigation strategies, focusing primarily on changing our supply chain footprint, vendor negotiations, and achieving operating expense efficiencies. Concerning AUR specifically, we currently expect no AUR mitigation in our outlook as we do not anticipate broad-based ticket price increases. We will pursue higher AURs through lean inventory and strong product acceptance. Excluding expected mitigation efforts, assumed tariffs will result in a cost impact of around $50 million for 2025, affecting our full-year operating margin outlook by 100 basis points. For the full year, we now expect net sales growth in the range of 3% to 6% from $4.95 billion in 2024, with full-year growth expected across regions. We increased the high end of our prior outlook based on our first-quarter outperformance, while the second half of the year remains largely unchanged for net sales. We now expect full-year operating margin between 12.5% and 13.5%. This reduction from our previous outlook is primarily due to the estimated 100 basis point impact from tariffs net of mitigation efforts, with the remainder driven by the flow-through of the Q2 operating margin outlook. We forecast a tax rate around 27%. For earnings per share, we expect diluted weighted average shares of around 49 million, incorporating the anticipated impact of 2025 share repurchases. Combined with the tax rate, we anticipate net income per diluted share in the range of $9.50 to $10.50. For capital allocations, we expect capital expenditures of approximately $200 million. In terms of new stores, we expect to deliver around 100 new experiences this year, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers, with our 60 new stores exceeding around 20 anticipated closures. At the current sales and operating margin outlook, we continue to target around $400 million in share repurchases for the year, depending on business performance, share price, and market conditions. For the second quarter of 2025, we expect net sales to rise by 3% to 5% from the Q2 2024 level of $1.13 billion. We project an operating margin in the range of 12% to 13%. We still expect slightly higher costs from freight and around $5 million of tariff impact, net of mitigation efforts. At the midpoint of our outlook, we anticipate no leverage or deleverage on expenses. We expect the Q2 tax rate to be around 28%. We project net income per diluted share in the range of $2.10 to $2.30, with anticipated diluted weighted average shares around 49 million, including around $50 million in share repurchases for the quarter. To conclude, our agile operating model has supported transformative growth and continues to be a catalyst for driving consistent gains across sales, earnings, and cash flow. One quarter into 2025, we are executing with discipline to deliver against our near-term goals while maintaining a focus on the significant long-term opportunities ahead. With that operator, we are ready for questions.

Thank you. One moment for questions. Our first question comes from Dana Telsey with Telsey Advisory Group. Your line is open. Dana, if your telephone is muted, please unmute.

Hi. Good morning, everyone. Sorry about that. Great to see the updated guidance. And I would love to get some more color both on Hollister, Fran, and on Abercrombie. How do you see the outlook going forward on the different men's and women's for Abercrombie? Cycling the comparisons and the newness that you're looking for. And also, what other initiatives do you see at Hollister that continue to drive this growth? And then just on the real estate side, I noticed that the closures are being reduced this year in the guide to twenty from forty. What's changing? What's new there?

Thanks, Dana. Good morning. Yeah. I’m super excited about the record results that we just achieved company-wide. Let's break down your question. We will start with Abercrombie. So, you know, we entered the quarter with some carryover from last year against the spectacular Q1 of last year where we were essentially devoid of carryover which put pressure on the AUR as we had expected. However, our model enables the team to be flexible and responsive to trends. A great example of this was when we had a terrific response to our swim line. We had a vacation set for the second quarter, and we were able to ramp up our assets and marketing in response to this strong reaction. So it's exciting to see progress, and we do expect to see an inflection in Abercrombie in the back half. As for Hollister, what a quarter it was, up 22%, and I’m incredibly proud of that team. One of the exciting new initiatives is The Grad Shop. Our aim is to stay culturally relevant and meet our customers during critical life moments with initiatives like this. The first quarter was driven by fleece, jeans, and skirts. We expect Hollister to continue growing throughout the year. With that, I will turn it over to Robert for your real estate questions.

Yeah. Hey, Dana. I'll address the real estate question. Again, we're thrilled to talk about being net store openers again for another year. The adjustments are quite consistent with our strategy. We are excited to be on target for around 100 new store experiences this year, including sixty new store openings and forty refreshes. As for store closures, we closed forty stores last year, and we are planning to close twenty stores this year. Our teams have been actively working through landlord negotiations and packages, and we see opportunities to keep these locations in operation. We're eager to be out there connecting with consumers and growing this fleet, which we believe significantly contributes to our performance. So as long as we continue to see strong productivity from these stores, we will keep them running.

Thank you.

Thank you. Our next question comes from Corey Tarlowe with Jefferies. Your line is open.

Great. Thank you for taking my question. I guess, Robert and Scott, on the outlook for the full year, you obviously took down profit mainly as a result of tariffs. But on the sales outlook, the high end of the guide was actually revised up. So I'm just curious how you think about that and what's your confidence in sort of that the higher end of that range as we look to the remainder of the year, and what informs that?

Yeah. I'll take this, Corey. For the full year, we are expecting growth across the regions in a top line guide of 3% to 6%. We're rolling through the Q1 beat on the top end of our guide while holding the bottom, which we consider reasonable given that we just have one quarter in the books. On the margin front, you're exactly right; we are factoring in the $50 million impact from tariffs. We expect margin pressure from Q2 will bring us from our prior guidance of 14% to 15% down to our updated range of 12.5% to 13.5%.

Yeah. Just to add on to that, Corey. The confidence we have comes from being proactive. We have a strong balance sheet, which provides flexibility. As Robert mentioned, we are planning to open a hundred new experiences this year. Coupled with marketing and technology investments, that builds our confidence in achieving our targets. Additionally, the brands are agile and ready to respond to market trends. We're well positioned with inventory, which further supports our outlook.

That's great. And then just on Abercrombie, is the expectation that we return to growth later in the year? That's presumably both sales and comp. Is there any expectation as to when or what the drivers might be for that as we consider the strong comparisons we will be cycling?

Yes, and I believe Scott just mentioned it. The team is hard at work, Corey. Our model allows them to drive open-to-buy and remain flexible with receipts moving forward to react to business developments. We anticipate seeing an inflection in the back half of the year, though we won't specify an exact date for that. The drivers will be the categories that we are seeing positive reactions toward—activity that the team is already engaged in.

Great. Thank you very much, and best of luck.

Thanks.

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

Great. Thanks. Fran, could you speak to the progression of traffic during the first quarter and into May at Abercrombie relative to Hollister? Just where Abercrombie stands also with end of season carryover inventory today.

Yes. We saw nice traffic actually throughout the quarter for Abercrombie. That’s why I previously mentioned that the opportunity lay mainly in the carryover and the compression of AUR connected to that product. Our expectation is that we are successfully selling through that and gradually improving our position. Traffic was strong as well for Hollister, both digitally and in stores.

Yes, Matt, I’ll just add that on the Abercrombie inventory side. We eliminated a significant amount of that carryover inventory in Q1. We still have some leftover, but we’re not concerned about it. For some context, last year we encountered abnormally low carryover inventory levels throughout the spring season, and we are now coming up against last year’s low levels. Currently, we are below our carryover levels from this time in 2023, representing a more normalized inventory position.

And then maybe, Robert, just as a follow-up, is there a way to break apart second-quarter gross margin for thinking about promotions relative to tariffs and freight? How should we view gross margin progression in the back half of the year? And higher level, as we consider operating margins multiyear, is there any adjustments in the model or how best to assess operating margins on a long-term basis?

On the gross margin guide, we expected to face challenges from freight and carryover costs, which drove the gross margin declines in Q1. We processed much of that inventory through Q1, but we will still experience some pressure in Q2 as we handle remaining freight. Regarding carryover inventory, we anticipate some AUR pressure as we manage through that remaining inventory and adjust our mix. Our plan for the year is to remain aligned with our sales growth going forward. We ended the quarter up six units, and we are pleased with this position, intending to manage unit growth tightly throughout the year.

Understood. And just a quick follow-up on inventory. You spoke about the success with the Grad Shop and noted positive customer response. How are you preparing for growth in the second half as we will be comparing against a tougher base?

Let me provide some context regarding the brand. We saw record performance, balanced growth across regions and genders. We are gaining market share in the teen segment, which is incredibly exciting. The team's efforts have shifted our focus from simply being a teen outfitter to being culturally relevant. This has been displayed through our initiatives like collegiate activity and the launch of the Grad Shop. We are dedicated to meeting our customers at their most significant life moments. There are exciting new initiatives on the horizon. Though I won’t detail everything, we have engaging products ready for launch this summer and further exciting developments for fall.

We have a clear focus on growing the overall company. We possess two profitable and strong brands, a network of productive stores combined with a highly profitable digital business. Additionally, we are recording positive comps across three regions, which is an encouraging sign for further growth ahead. We appreciate having this diversified portfolio and channels, as it allows us to pursue growth objectives in Q2.

Got it. And if I may just one quick follow-up. On gross margin, you mentioned a decrease of 440 basis points in Q1. Should we expect a similar decline in Q2?

While we haven’t provided an explicit guide for Q2, you can generally expect sequential improvement from the 440 decline in Q1. Freight shouldn't be as significant an obstacle for Q2, and we won’t see as much impact from carryover inventory. That said, we are still forecasting flat AUR, so incremental improvements should be expected.

Thank you so much, and congratulations.

Thanks, Mauricio.

Thank you. As a reminder, to ask a question, please press star one one. Our next question comes from Rick Patel with Raymond James. Your line is open.

Thanks. Good morning. I wanted to clarify your expectations for promotions going forward. It seems that there is some work to do regarding carryover for Abercrombie soon, but that back half will be cleaner. Does this improvement forecast reflect fewer planned units or more confidence in the assortment? Subsequently, regarding Hollister, given the momentum, do you foresee opportunities to reduce promotions?

For the A&F brand, we expect some AUR pressure as we manage carryover inventory. We expect less impact in Q2 compared to Q1, which means we should see sequential improvement. Promotions will always be aligned to our inventory levels and customer needs. Our goal is to optimize our promotional strategy based on real-time data. For Hollister, similar principles apply and we will review promotional opportunities regularly to sustain our performance.

Can you also elaborate on your expectations for growth in Europe and Asia for the rest of the year? You have presented nice results in Q1, adding in positive global growth expectations for the year. Further insights on that would be helpful.

Our perspective remains unchanged. It was great seeing all three regions generate growth with positive comps in Q1. We expect all these regions to report growth for the full year. Our commitment to this growth goal every year never waivers, and we see opportunities for growth across the Americas, EMEA, and APAC. Overall, there’s healthy growth present with substantial opportunities ahead.

To further expand on the international aspect, we’re particularly focused on the UK and Germany markets. Our team has established a solid foothold in Europe, executing strategies effectively from London. In the quarter, we witnessed strong growth in the UK and Germany, which are our largest countries within EMEA. It’s encouraging to see this growth continuing.

Thanks very much.

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

Hi, everybody. Great job on the quarter. I had a couple of questions. When you talk about the improvement for Abercrombie in the second half, does that stem from moving on from any voids experienced in spring last year? More importantly, how confident are you in that forecast?

Concerning carryover products, the response alludes to our experience from 2024's Q1 when we were recording around 66% gross margins and faced essentially no carryover throughout spring season. Understandably, we are now facing last year's low levels, but we do not expect the carryover margin impact to be significant as we move forward.

To answer your first question, there were no major voids in the product line. Instead, we encountered new trends overseeing sales, allowing the team to respond proactively. For example, we've noted emerging trends in boho and western styles which have been positively received by customers. Our operational model allows us to respond quickly to these shifts and we’re excited about what’s coming up for second quarter and beyond. On the competitive front, while it is flattering to be the focus of others, our priority is on staying ahead with innovation and responding quickly to customer preferences; we have exciting initiatives in the works.

Do you have time to complete that with the lead times involved?

Absolutely! That's central to our model; we have built in flexibility that allows us to be responsive.

Are you feeling any competitive pressure from other brands? This often comes about after consistent strong performance leading others to try to obtain a part of that market share.

It's encouraging that our successful playbook attracts attention and admiration, but ultimately it is our responsibility to stay ahead and respond swiftly to maintain that distinction. We're confident that our team is developing exciting strategies to continue driving growth.

Okay. Congratulations and good luck.

Thanks, Janet.

Thanks, Janet.

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Fran for closing remarks.

Thanks, everyone. We look forward to updating you after the second quarter.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.