Abercrombie & Fitch Co (ANF) Q2 2027 Earnings Call Transcript

Operating margin was roughly 990 basis points above the around 10% outlook we provided in May. About 790 basis points of that outperformance came from the IEPA tariff refund. The remaining approximately 200 basis points came primarily from favorable gross margin and operating leverage on stronger sales. While the refund was meaningful, the underlying business performed above our expectations. Year-over-year, operating margin increased 600 basis points from 13.9% in the second quarter of 2025. The tariff refund benefit was partially offset by higher year-over-year tariff expenses of 100 basis points, store occupancy and fulfillment costs and selling expense, as well as higher incentive compensation and general and administrative expense. We've included a table in the investor presentation with additional detail on the timing of tariff refunds and ongoing tariff expense. The tax rate for the quarter was 29%, better than our outlook due to higher earnings from the IEPA tariff refund and overall international outperformance. Net income per diluted share was $4.17, compared with adjusted diluted earnings per share of $2.32 last year. That was above our outlook of $1.80 to $2, even when taking into account the approximate $1.75 benefit from the IUPTA tariff refund. Inventory remains tightly managed, and both brands are chasing. Ending inventory at cost was approximately flat to last year, with units up low single digits and aligned with our expected unit sales growth. On the balance sheet, we ended the quarter with $628 million of cash and cash equivalents, approximately $1.1 billion of liquidity, and $10 million of marketable securities. We repurchased $177 million worth of shares during the quarter and $282 million year-to-date. Repurchases for the quarter and year-to-date periods represented approximately 4% and 7% respectively of shares outstanding at the beginning of the year, and we ended the quarter with 568 million dollars remaining on our current repurchase authorization turning to the outlook our first half execution and strong start to august support a higher full year sales expectation and an increase to our operating margin and eps outlook our underlying second half operating margin assumptions have also improved from our may expectations updating our tariff refund assumptions we now expect to recognize a total of approximately 120 million dollars of refunds related to IEFA tariffs, excluding accrued interest. We recognize $100 million in the second quarter and expect to recognize the remaining $20 million in the third quarter. The full-year outlook includes the entire $120 million refund. We estimate that the refund will contribute approximately 220 basis points to full-year operating margin and approximately $2.10 to full-year diluted earnings per share. The remaining expected $20 million refund is included in our third-quarter outlook. We estimate it will contribute approximately 160 basis points to third quarter operating margin and approximately $0.35 third quarter diluted earnings per share. Separate from the IEFA tariff refunds for 2026 tariff expense, our outlook for the second half reflects the current Section 301 tariff rates of 10% to 12.5% effective on global imports into the U.S. On that basis, our updated tariff assumptions provide approximately 10 basis points of full year gross margin favorability year over year. We expect that benefit to be largely offset by higher freight costs. We've included a schedule in today's release and our investor presentation to provide further detail on our tariff expense and refund history. For the full year, we now expect net sales growth around 5% from $5.27 billion in 2025, with growth across regions and brands. Our first half APAC performance reinforces the region's growth potential, and our strategic review remains focused on the best path to capture that opportunity. We continue to expect modest AUR improvement and approximately 30 basis points of benefit to net sales from foreign currency. We now expect full-year operating margin in the range of 14.5% to 15%, including approximately 220 basis points of benefit from the IEPA tariff refunds. We're forecasting a tax rate around 29%, diluted weighted average shares of around 44 million, and net income per diluted share in the range of $13.10 to $13.60. The EPS outlook includes an estimated $2.10 benefit from IEPA tariff refunds. For capital allocation, we now expect capital expenditures around $250 million. We plan to deliver approximately 130 net new store experiences, including 50 new stores and 80 remodels and right sizes, against approximately 20 closures. New stores are expected to be relatively balanced across brands and weighted towards the Americas. We now expect at least $500 million of share repurchases for 2026. For the third quarter of 2026, we expect net sales growth of 5% to 6% to the Q3 2025 level of $1.3 billion, with growth across regions and brands. We expect third quarter operating margin in the range of 13% to 14%, including the expected $20 million or approximately 160 basis point IEPA tariff refund benefit. We also expect modest AUR growth and slight year-over-year favorability from tariff expense to more than offset modest freight pressure on gross margin. We expect slight operating expense deleverage from incremental payroll and amortization related to the ERP implementation completed in the first quarter. We expect a third-quarter tax rate of around 29% and net income for a diluted share in the range of $2.90 to $3.20, including an estimated benefit of $0.35 from the IEPA tariff refund. Diluted weighted average shares are expected to be around $43 million, including the anticipated impact of at least $100 million of third-quarter share purchases. To close, the first half demonstrated the strength and balance of our business. We've continued to do what we said we would do. deliver profitable growth while investing for the future. We're strengthening our brands, expanding our capabilities, and building the infrastructure needed to support the next phase of growth. At the same time, we've maintained healthy double-digit operating margins, generated strong cash flow, and returned significant capital to shareholders through consistent share repurchases. Our updated outlook includes the benefit of IEPA tariff refunds.

More importantly, it reflects the underlying strength of the business and our confidence in our ability to continue delivering sustainable, profitable growth. and with that operator you're ready for questions thank you ladies and gentlemen just question at this time you will need to press star 1 1 on your telephone and wait for your name to be announced to withdraw your question simply press star 1 1 again please stand by while we compile the Q&A roster now first question coming from the lineup Dana Telsey with Telsey Advisory Group your line is now open hi congratulations everyone so nice to see the progress Fran, as you think of the product acceptance and what you've been seeing in Hollister and Abercrombie,

when you think of new product trends or fashion versus core, what are you seeing in each and how do you see the denim cycle? And then, Robert, as you think about inventory, AUR versus units, how do you think of that progress as we go through the year? Thank you.

Hey, Dana, good morning. Yes, exciting quarter for us. Succeeded expectations, 15th consecutive quarter of growth, you know, went across both Abercrombie and Hollister brands and regions. So super excited about what we reported this morning. Regarding fashion, you know, we're seeing lots of different things in the brands. It's exciting to see the customer really showing up. We're seeing a balance between casual and dressed up. Second quarter was really driven through some incredible key knit opportunities and items that we had and woven. Denim specifically is important to both brands. We're heading into the back. Obviously, we're in the middle of the back school season for Hollister. It's part of the assortment. You know, we learned years ago we got to stay balanced and make sure it doesn't become too dominant in the assortment. But exciting. The Hollister team is absolutely loving low rise. The Abercrombie consumer is loving actually the styles we have across brands because theirs really depends on their wearing occasion and what they're doing for the day. So lots of exciting things happening and thrilled to have some momentum heading into the back half.

Hey, Dana, as it relates to AUR versus units, not assuming anything different than what we've been talking about all year here. Outlook continues to expect modest AUR improvement in the back half. That's consistent with what we shared back in May. We're happy with this being a demand story. In Q2, AUR came in stronger than expected on reduced promotional activity. The consumers are responding really well to the assortments, and that came with unit sales growth. So it's balanced, which is what we like to see. So as we think about going forward, inventory is in good shape, up 3% across the company here with both brands positioned well to chase into the back half. And all of that gives us the best chance to grow our AURs here in the back half of the year.

Thank you.

Thank you. Our next question in queue coming from the line of Coriutalo with Jeffrey. Fiel on his mouth.

Great. Great. Thanks, and good morning. I guess what I'm wondering is on the third quarter sales outlook, which is quite healthy, I'm curious how that breaks down by brand, if you could share any color, and really would just be curious to understand kind of the sequential trends at Hollister as well, and maybe the regional differentials, if there's been any impact based on exposures to various regions. Thanks so much.

Yeah, Corey. So on the outlook for sales for Q3, again, expecting five to six growth with growth across regions and brands. Haven't given specific color on individual brand performance, but we've been happy with what we've seen on the A&F side delivering plus eight for Q2. Happy to see that trend. And, you know, and we've had a nice start to the month of August and we've got new things coming down the pipeline with the NFL drop and different supplements to the assortment on the Hollister side of the business. We're kind of in the middle of back to school here. It's been a nice acceleration here into August. So happy with what we're seeing there. And and that's that's kind of that's kind of where we are today that the EMEA business has been strong. It's been, you know, we saw a nice sequential improvement. The APAC business continues to be strong and, you know, both brands are growing in the Americas. So, nice balanced business that gives us confidence here in it going into the back half.

That's very helpful. And then just as a follow-up, I think Fran mentioned it in our full year in our remarks, but I'm curious if you could unpack that for us a little bit on the margin commentary. rate, full-year margin outlook raised, and by more than the amount of the tariff benefits. So, seemingly, there's some embedded improvement in the margin profile based on where you were versus prior expectations. So, could you kind of highlight what the main differentials are or the puts and takes? That'd be really helpful. Thank you.

Yeah. I mean, if you think about full year. It's a pretty straightforward story. Underlying tariff rates and freight rates are kind of going in different directions, and those are largely offsetting one another. We've talked all year about modest AUR growth as we move through the year here. That's still in play. We still continue to expect that. We did have the outperformance and margins in Q2 that we are rolling us through. So that all keeps us kind of in line when you do the add them up. We've got modest AUR growth offsetting some investments. That keeps us kind of in that 12.5-ish percent range around last year. And then on top of that, you've got this 220 basis point benefit from the tariff refunds, and that gets us to our 14.5 to 15 percent range for the full year. So, we feel good about where we are. You know, the business is executing. We've got some outperformance in Q2 that we're rolling through. Now we're just focused on executing for the back have.

Great. Thanks so much and best of luck. Thank you.

Thank you. Our next question coming from the line of Matthew Boss with J.P. Morgan. Yellen is now open.

Great. Thanks. So, Fran, could you speak to structural drivers which you think have been built that support the return to positive comps at the Abercrombie brand and specifically any key categories which you saw inflect this quarter, and just drivers of opportunity that you see in the back half at that nameplate?

Thanks, Matt. So yes, we've been on quite a journey here and really have rebuilt this entire company from bottom to top and top to bottom. And the fundamentals that we've built to do that are rooted in our operating model and they're rooted in all the technology and investments that we've been making. We paid back a lot of tech debt. We talked a lot about our ERP system that's just come to fruition in March. So lots of exciting things happening, to your point, from a fundamental perspective. What we see in the business is the opportunity to get really close to that customer. Both the teams in Abercrombie and Hollister are excellent at doing that, and that's shown our results for the second quarter and momentum that we have heading into the third quarter. Abercrombie specifically, knits, wovens really strong throughout the second quarter, swim. Hollister also strong knit business, strong bottoms business. So what I like to see in the business is a balance, and that's what we're seeing right now. So balanced across categories that we're winning in lots of categories. We're winning across genders and brands and regions. So all around, super excited about the back half.

That's great. And then, Robert, could you just help break down expectations for AUR freight and marketing as we think about the third quarter operating margin forecast, excluding the benefits from tax refunds?

Yeah. So on the AUR side, no change to our thinking here. You know, we're expecting modest AUR growth in the back half of the year. When you think about the tariff side of things and then the freight side of things, so freight has been a bit of a headwind for us here. The rates have remained elevated, so that is largely offsetting the benefit that we would be seeing from outlook to outlook related to the 10 to 12.5 percent tariff rates that are in place today for the 301s versus that 15 percent that we had assumed back in our last in our last guide. So you can think about freight and tariffs largely offsetting one another and then getting that benefit in AUR kind of rolling through. I'm excluding all of the the tariff refund components, but obviously you've got that 20 million dollars on the Q3 side and then we should be relatively clean here for Q4. And then on the marketing side of the house, you know, really like where our marketing has been. It's been a deleverage point for us in the front half of the year and we've talked quite a bit about that as we've lapped some of the investments that we made last year. We're lapping that in the back half. We kind of like this, you know, a little north of 5% range. So we wouldn't expect to see any sort of meaningful leverage or deleverage on the marketing side for the back half of the year.

And, hey, Matt, you want me to add one more piece to – yeah, I mean, I have one more piece also. You know, as we head forward, we've been talking quite a bit about this opportunity for us to diversify our operating model. So we had two really nice proof points this quarter, you know, one from Abercrombie and one from Hollister, and that is expanding into new channels and new categories for us. So the great example was this Target partnership where we've introduced DORM. We got proof points now that Hollister can certainly expand way beyond apparel, and there's significant opportunity there. And we just recently mentioned the fact that we're expanding our NFL partnership, and we're going to be selling in the venues and NFLshop.com and other channels as well.

So that's been a big piece that we've been working on behind the scenes, and we're excited about what that can bring for the future best of luck thanks thank you our next question coming from the line of marnie shapiro with the retail tracker yolanis nelson hey guys congratulations uh the stores have looked incredible so i have a quick question on hollister at times during the quarter the inventory was very clean and i'm curious if you had any delivery issues at Hollister or if it was just selling out at store in stores that quickly. And then I do have one quick follow up just on Abercrombie.

Sure. So I'll take that first one. So yes, we had incredible demand for the brand. It really honestly exceeded our inventory at many points during the quarter. The team was absolutely chasing, chasing, chasing, which is what our model can help us do. You know, now that our inventory has caught up, we're excited to see the acceleration and have nice momentum heading into the balance of back to school and the back half.

Well, that's a great problem to have. Actually, the stores were very empty again yesterday. And then I'm curious on Abercrombie, you know, other than social media, you know, have you got, are you activating new customers and are you planning any activations in the back half of the year? Is it going to be a balance of sort of activations and online? How are you thinking about that for Abercrombie brand?

Thanks, I'm going to take that one too. So our goal obviously is always to bring new customers into the brand as well as to retain our active customers, which we're working on. We talked a bit about some new opportunities. So yes, as we head into the back half of Abercrombie, the NFL is a great example of that. Our second year is the official fashion partner, and now we're going into stadium, nflshop.com. We have an opportunity, you know, again, for example, with Target, reaching new customers through new categories. Exciting, exciting, you know, with the opening up of Soho, that has been really a terrific opportunity for Abercrombie, that bringing our heritage to where the brand is today, the customer feedback has been terrific, and the business has really exceeded our expectations.

Well, congrats. Best of luck with the rest of the back to school. Thanks, guys.

Thank you. Thank you.

Our next question coming from the line of Alex Stratton. with morgan stanley yolanis melvin hi thank you this is uh katie delahunt on for alex um maybe just you know you mentioned uh hollister demand being constrained by inventory at some point during the second quarter can you maybe frame like how meaningful that was to the second quarter and in uh uh you know what uh kind of acceleration that you're seeing as uh you kind of catch up on inventory quarter to date? Thank you.

Yeah, Katie, we had a great second quarter, you know, Hollister sequential improvement up to, and, you know, we're squarely focused on carrying that demand and that momentum here into the third quarter. What we can say is, you know, we've seen that Hollister growth accelerate from its Q2 level so far in August, and we feel good about the product across across and the assortment across that brand.

Great. Thank you.

Thank you. Our next question in queue coming from the lineup. Mauricio Serna with UBS. Your line is now open.

Great. Good morning. Thanks for taking my question. I wanted to ask about Abercrombie. I think you talked about better conversion. Could you elaborate on that? Is that across both online and stores? and, you know, what in your view has led to that improvement? And then on Hollister, maybe could you talk about, you know, what kind of comp sales cadence you've seen, you know, throughout Q2? Is it fair to assume, like, it's, you know, the comp is near an inflection, like, too positive in Q3? And, yeah, just on those two things to start, that would be super helpful. Thank you.

Yeah, I mean, so we've been on this journey with A&F Mauricio with conversion. We've continued to see nice traction within the brands. And that speaks a lot to the quality of the traffic that we're bringing into the brands. When you see conversion improve on reduced discounts and still selling more units, that's a really nice sign. And it shows that the assortments are resonating with the customers. And we're actually seeing that across both brands, which is great to see. And that's really showing up in a nice back to school and a nice start to the month of August. So, you know, we're attracting the right consumer. We're bringing them into the stores, you know, based on what we see in the first half. You know, the investments that we're making are great, and, you know, we're excited to see that continue into the back half. In terms of comp sales cadence, again, for Q2, again, not talking comps here. You know, we're focused on driving the total here. We've got plus two sales on the Hollister side. We've got momentum headed into and through back to school, and that's carrying us into August in Q3. And so we're excited to be positioned to drive another quarter here, 5% to 6% growth on the top line and double-digit operating margins. So that's what we're squarely focused on executing here in the back half.

Got it. And then just a quick follow-up on the guidance for the year. I think if you do the math, like for 5% total sales growth full year, it implies an acceleration in Q4 to roughly 7%. So just wondering what in your views is driving that acceleration. And then on the, you know, collaborations and partnerships that you're doing with Target, NFL, could you elaborate maybe on what are like the gross margin and operating margin implications of those businesses as they continue to scale? Thank you.

Yeah, so on the fourth quarter, right, we've got a Q3 giving you the full year. Implications would be that, you know, we've got a nice healthy business here headed into the back app. You know, we've just got to execute. We're going to keep inventories tight, you know, make sure that we're continuing to lean into the places that we're seeing the marketing be effective. So, you know, that's what we're focused on. Obviously, a lot of business to do here as we get through the balance of Q3 and then head into the holiday season. As it relates to the gross margin impact on 3P, I'd say, like, sitting here today, the short answer is there's nothing meaningful to – there's not a meaningful impact here today. You know, we like these opportunities. We like the incrementality of what they give us. They allow us to reach new customers. You know, it's a nice opportunity for us to participate in new categories and extend that brand reach without requiring, you know, a ton of capital deployment. So, you know, we're excited about what that looks like. You know, we're evaluating the right mix, obviously, of distribution channels for us. But sitting here today, don't see any sort of meaningful impact to gross margins.

It's very early innings, Mauricio. So stay tuned. More to come, but excited to see the beginning of this happening.

Thanks for that. best of luck thanks maricia thank you our next question coming from the line of john keyboard with goldman sachs elena snalvin hi thank you guys very much for the question um just a very quick one and then a follow-up um i noticed you raised buybacks 50 million uh for the year um and you've got 120 incoming from the total tariff refunds just wondering what the 70 remaining uh will be used for?

Yeah. So, hey, John, this is Robert. I think it's pretty straightforward here. You know, the refunds don't change how we allocate capital in our business. Balance sheet has been strong for years now, and we've been able to invest in the brands, invest in future growth, and, you know, at the same time, consistently return cash to shareholders. You know, we've got 10 consecutive quarters of share repurchases here now, and we expect to see that continue. So, you know, We'll work the refunds through that same framework as we go forward, but nothing else to report today.

And then just in terms of the target partnership, I'm not sure if you guys are willing to give the size of the impact to the quarter, but just curious about if you guys have seen anything in terms of like a positive feedback loop where it's growing the customer book on the apparel side of things at Hollister as well.

Yeah, I mean, it's early, John, and we're not sizing the opportunity today. We're seeing evidence that we're reaching new customers, which is great. That's one of the primary objectives of the partnership. So we're focused right now on making sure that we have that strong customer response, healthy sell-through of the product, and ultimately trying to evaluate the long-term opportunity that we have here.

I mean, the reaction to the product has been absolutely terrific. I mean, the virality of it was incredible. I mean, from the plushies to the comforters, I mean, we learned a lot, John. It was really exciting to be able to see the opportunity to sell Hollister outside of apparel. So, again, we're at early stages, but we're learning and testing, and more to come in the future.

Definitely. I like the plushies. Thank you.

Thank you. Our next question in queue coming from the line of Chin Instincter with BTIG, Yolanda Smelfen. Hi, good morning.

I was hoping you could comment a little bit on the promotional environment. I think you said promotions were down better than your plan. Was that across all brands? And just curious what you're seeing broadly in the environment. And then for Robert, just as we think about long-term operating margins, we're sitting here this year stripping out the tariff benefits kind of in the 12% to 13% range. Is there anything structurally changing that you would see from here to prevent that from being a sustainable operating margin? Thank you.

Hey, Janine. So I would say our results from Q2 are really proof that our model is working. You know, outperforming our outlook was primarily driven from lower discount levels, and that was across both brands, delivering this 5% growth that we have. This read and react model is really working for us. The team was chasing and tightly managing the inventory, so exciting to see how that's working for us. We don't, you know, we don't view our promotions on what's happening on a competitive basis. We sit down with the team literally, you know, week by week, see what's working in our business, what's working, what's not working, and we take action. So, again, focused on what we can control within our world.

Yeah, and on the long term, Janine, you know, not providing any sort of specific guidance beyond 2026 today. You know, as we've been talking about, we are excited about new growth levers that we're building that are available to these brands on a go-forward basis, category expansion, channel diversification, new partnerships. All of those can work to complement, you know, what is effectively a very healthy and profitable owned and operated business over time but nothing structural that i would say that would would stop us from um you know maintaining these healthy double digit operating margins as we have for for a number of years now okay thanks very much thank you and as i wanted to ask a question please press star one one and please limit yourself to one question and one follow-up our next question in queue coming from the line of Adrian Yee with Barclays.

Yolen is now open.

Hi, this is Angus Kelleher on for Adrian Yee. I wanted to ask a question on category expansion. Footwear and accessories are getting good initial reads across both brands. How big can head to toe be as a percent of the assortment? What is the margin structure there? And then if you could just remind us if that is an owned build or a license category? Thank you.

Yeah, I mean, we like these opportunities, Angus, because, you know, they expand our addressable market. They diversify our growth drivers, whether it's NFL, Target, footwear, accessories, home goods, licensing, wholesale, right? Those all help us reach customers in different ways. You know, it's early days. We're learning a ton. We're not sizing them today because, you know, quite honestly, they are still relatively small in the grand scheme, but we're excited about the longer-term growth potential that we see across these buckets.

Great. Thank you, Robert. And then just while I have you, I'll ask a follow-up. On the stores, you're at 130 new experiences this year with 80 of those remodels and right sizes. So I guess the mix has kind of shifted from new doors towards modernizing the existing fleet. How much runway is left on new stores in the Americas, and then how much is left on modernizing the existing fleet.

Actually, we have been very consistent in the balance between our new stores and our store experiences over the past several years. Fifth year of being a net store opener, continuing with the strategy as we move forward. And to answer the question on how many new stores are left, there's no finish line. In retail, there's always new opportunities for us to explore, just like we've been doing with these street locations for Abercrombie recently. this new Soho experience has really been so well-received by our consumer. We're so excited to continue to implement that in some stores going forward. So, again, no finish line, but exciting strategy that we've had on retail, you know, state. Great.

Thank you.

Thank you. Our next question, coming from the lineup, Janet Joseph with JJK Research Associates, Yolanda Snellman.

Hi everybody, congratulations on a nice quarter. I wondered if you could talk a little bit more about the AUR improvement and the unit improvement. On AUR, are you seeing that that's coming from less promotions, and you did speak to that, and also price increases and what the outlook looks like for that going forward. And then on units, I was just wondering if that's a mixed issue or just overall units are improving. And then lastly, when you think about EMEA, do you have confidence that that full hollow still will continue to accelerate as we go through the second half? Thank you.

Janet, I'll take a couple of these. So on the AUR improvement, yes, we are seeing nice AUR improvement. The outperformance to our outlook in the second quarter was primarily driven through better than expected AURs, and that really came from reducing our overall promotional or overall discount levels from our expectations. So, you know, nice to see the progress there. That shows that the product is resonating. We are selling more units coming along with that. That is not just a mixed dynamic. That is true sales units out the door. So, again, nice signs that the consumer is responding to what we're putting out there for them. You know, we haven't taken any sort of additional price increases, and none of that versus what we've been talking about. That is all baked into our outlook, so we continue to expect modest AUR growth in the back half of the year. On the EMEA side of the house, you know, I – I'm sorry.

On the EMEA side of the house, yes, we are confident. We certainly believe in the long-term potential of that region, Janet. it. You know, the local team is really busy at work staying close to that customer. Our playbook that we've exported is working. It's exciting to see, you know, that UK has continued to be positive and that Germany flipped positive. All of that is obviously in our outlook for the back half. But yeah, believe in the long-term opportunity and have the confidence to see that business continue.

Okay. Lots of luck. Thank you.

Thank you.

Thank you. And there are no further questions in the queue at this time. I will now turn the call back over to for any closing remarks.

I just want to thank everyone for participating and we look forward to updating you after the third quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.