Earnings Call Transcript - ANF Q1 2021

Operator, Operator

Good day, and welcome to the Abercrombie & Fitch First Quarter Fiscal Year 2021 Earnings Call. Today's call is being recorded. Please use the operator instructions. At this time, I would like to turn the conference over to Pam Quintiliano. Please go ahead.

Pamela Quintiliano, Investor Relations

Thank you. Good morning, and welcome to our First Quarter 2021 Earnings Call. Joining me today on the call are Fran Horowitz, Chief Executive Officer; and Scott Lipesky, Chief Financial Officer. Earlier this morning, we issued our first quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that any forward-looking statements made on the call are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today. A detailed discussion of these factors and uncertainties is contained in the company's 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 a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier this morning. With that, I will turn the call over to Fran.

Fran Horowitz-Bonadies, CEO

Good morning. It is hard to believe that over a year of earnings calls have passed since COVID first began impacting the world. During that time, we have become stronger, smarter, and more nimble, and we have discovered new ways of uniting our teams to foster innovative thinking and stay close to our customer. First quarter results are evidence of the progress we have made against our key transformation initiative, which enabled us to report our best operating income since 2008. We exceeded our pre-COVID results, delivering significant improvements across key financial metrics on both a 1- and 2-year basis. Sales rose 6% compared to Q1 2019 despite removing 1.3 million gross square feet or roughly 20% of our base over the last 2 years and experiencing temporary store closures in EMEA during our most recent quarter. In our largest market, the U.S., sales were up 18%, while our global digital revenues grew 81% from Q1 '19 levels. Our gross margin rate was 290 basis points higher compared to Q1 2019, and our operating margin rate rose 1,100 basis points. I am extremely proud of what we have accomplished. We proactively invested in the business, keeping an eye on our longer-term goals. While consumer spending benefited from some well-documented tailwinds, results reflected strong product acceptance driving a substantial reduction in promotions and markdowns. This is further confirmation that our target customer is responding to our unique product, voice, and experience across brands, all of which have been significantly refined over the last several years. For the quarter, total company revenues rose 61% year-over-year with similar growth in Hollister and Abercrombie. This was well above our plan for a 30% to 40% increase. And by region, the U.S., which is our largest market, was a standout, with revenues rising 72% on a beat across all brands. Digital, which has continued to carry 4-wall operating margins above the store channel, remained strong even as COVID restrictions eased and store traffic improved from Q4. For the quarter, digital revenues grew 45% compared to last year to 52% of total first quarter sales. We continue to add new customers in the channel as we lean into our digital marketing efforts. Importantly, customer retention is high and spend per customer increased. In addition to our strong digital results, we were pleased to realize improvement in our stores' performance both year-over-year and on a sequential basis. We ended the quarter with approximately 674 of our 731 stores open or 92% of our base, with the majority of closures in Western Europe. This compares to 88% of our base opened at the end of the fourth quarter. For the first quarter, global store sales rose 77% compared to last year. We continue to take a balanced approach to our omnichannel product and messaging. Our collections were wear now, trend right and hit the bull's eye for each of our brand's unique edit points. From jeans to dresses to fleece to tees, our kid, teen, and millennial customer responded to our latest product. Jeans, which is one of our top sales categories, continued to be a huge win, growing on a 1- and 2-year basis. We linked into the key women's trends, including higher rise and wider leg silhouettes in ways that were appropriate and differentiated for each of our brands, and we offered them in extended sizes. At Abercrombie, the majority of our new women's jeans styles are selling through at full price. And at Hollister, we've also stepped away significantly from promotional events. She loves the style, quality, and fit of our jeans across brands, which allowed us to achieve our best Q1 jeans gross margin rate since the first quarter of 2012. As our customer has been adopting the latest jean silhouettes, we've been experiencing great full-price top selling. We are now being viewed as an outfitting destination and recognized for our exceptional value creation across our balanced assortment. We remain disciplined with our inventory commitments while chasing into proven successes where appropriate. We ended the quarter with inventories down 9% to last year on our 61% revenue increase. We pulled back on omnichannel promotions and markdowns, including winter clearance, category-specific and entire site promotions. After many years of hard work, we have made great progress in transitioning our customers away from a wait-for-sale mentality to a buy-it-when-you-see-it one. We are firing on all cylinders and experienced our best Q1 gross margin in over a decade in A&F Women's, Hollister Girls, and Kids, Boys and Girls. As a result, our gross profit rate grew by 900 basis points to last year to the highest Q1 level since 2013. At the same time, we've continued to tightly manage expenses while making strategic investments across marketing, technology, and fulfillment to support future growth, and the formula is working. In Q1, we expanded our operating margin to over 7%, our best first quarter since 2008. Our results illustrate that we are executing better than ever. We've been on this path for several years and rather than slower progress, the global pandemic has accelerated change. Q1 speaks to our evolution into a digital-first global omnichannel retailer. We've enhanced our customer and brand experiences through a digital lens, which has helped our customers engage with us across social media, our apps, websites, and our stores. We've also refined our messaging to speak to our customers authentically on the topics that they care about the most. In February, Hollister introduced its first Black History Month collection with the Academy Group, a great organization that supports and helps unlock opportunities for teams from the most resilient communities. In March, we had our second Annual World Teen Mental Health Day campaign, where we partnered with TikTok stars and mental health podcasts, teenager therapy to host pop-up virtual mental wellness discussions for high school students across the country, including a surprise session from Dixie D'Amelio. At Abercrombie, adults kicked off the quarter with their Black History Month for Justice Collection, a capsule designed by our BIPOC associates that spoke about racial equity in their own words. This was launched with our partners at the Steve Fund, who do amazing work devoted to the mental health and emotional well-being of young people of color and was part of the Abercrombie equity project. For kids in April, we launched the second season of our successful social content series, The Kind Crew, which appears on Nickelodeon's YouTube channel. In line with last year, the purpose is to inspire others to lead with kindness and help to make the world a more kind, accepting, and compassionate place. Turning to brand-specific performance, we continue to be pleased with results at Hollister, which includes Gilly Hicks, where our global team customer remains highly engaged. We drove higher average transaction value on strong AUR growth. For Hollister girls, dresses, fleece tops, knit tops, and bottoms were standouts. Our guys continue to live in soft and cozy products, including sweatpants. For both guys and girls, we realized significant sales improvement in jeans. By channel, digital revenues grew roughly 35% over last year, while stores experienced sequential improvement as more restrictions were lifted. A key driver of Hollister's success has been its on-target marketing. In February, we kicked off a partnership with flighthouse to launch our Hollister TikTok channel and introduced a new group of jeans-focused influencers, which helps solidify our jean business even further. In April, we hosted our first Fortnite gaming challenge with Mission Control. At Gilly Hicks, momentum continued to build with total sales up approximately 9%, including roughly 100% digital growth from the prior year. Customers responded well to lounge-led match-backs, sleep, underwear and our active collection, Gilly Go. We're excited about Gilly's future, and we'll share more with you throughout the year on how we will continue to thoughtfully scale. Moving on to A&F adult, fashion newness resonated with our evolution to a more modernized version of the brand continuing to gain traction. As a result of phenomenal product acceptance across genders, we achieved strong full-priced sell-throughs. Women's, in particular, truly had a breakout moment, the kind I have rarely seen in my 30-plus years as a merchant, achieving its best Q1 revenue since 2008 and the third largest Q1 in brand history. Success was broad-based across categories, including jeans, dresses, intimates, and swim. And for men's, jeans, shorts, and swim were all well-received. By channel, digital sales grew approximately 60% over last year, and there was sequential improvement in store sales. At Abercrombie Kids, we experienced roughly 25% digital growth and a sequential improvement in store traffic. Our assortments stayed true to our Playas life motto and the customer responded. Popular categories included boys' and girls' shorts, girls' knits and swims, and boys' sweatpants. Turning to marketing, at adults, we focused on being there to outfit our customer for all their activities, including travel, going out and spring and summer celebrations. We have been nimble and anticipatory of their needs, and our campaigns have reflected that, successfully targeting our 20- to 30-year-old customer with first and new product-end messaging. We built on our social media momentum, leveling up our partnerships with creators on TikTok and Instagram to promote our denim, soft AF, men's essentials and spring fashion collections. We also completed our social media denim model casting call. The response was great, and the campaign will roll out later this year. The power of social selling is clearly a key theme for us and one that we are actively winning into across brands. It's helping us identify those new and first trends that are happening faster than ever, especially with the ubiquity of platforms like TikTok. It's also allowing us to stay super close to and communicate with our customers in real time. The recent launch of our latest brand, Social Tourist, is a great example of our commitment to being an innovator and at the forefront of this shift in consumer behavior. It also encapsulates how much we have evolved and how we are thinking about our brands and our consumer differently with an eye towards the future. As our customers continue to shift to digital shopping and exploration across social channels, it made sense to introduce a brand inspired by that world and by the experience of two of the biggest social media stars, Charlie and Dixie D'Amelio. Social Tourist has taken our already successful relationship with Charlie and Dixie, who, combined, have over 250 million followers across social media platforms, to the next level. It is a groundbreaking, multi-year exclusive apparel agreement that has the sisters working side-by-side with our design teams, creating aspirational top-of-the-fashion product that speaks directly to Charlie and Dixie's digitally-led lifestyle. Working with the D'Amelios has just been amazing. In departure from our other brands, the majority of the products will live online with select SKUs available in Hollister stores. There will be limited edition monthly drops that aim to create excitement and buzz and to sellout. With Social Tourist, we've tapped into the power of social selling in a new and unique way and are positioning ourselves as the leader in the space. We've been very pleased with the reception to the brand that was introduced on May 6. Thus far, Social Tourist has hit over 85 million estimated impressions, including over 25 million views of the brand video. The brand will also be featured in the D'Amelio family's new series, the D'Amelio Show, which is coming soon to Hulu. We're extremely excited about the long-term opportunity and view the brand as another growth vehicle. We also believe it will provide a halo for Hollister, offer insights into up-and-coming team-oriented trends, and help inform other social strategies. As we've nurtured our established brands and our growth vehicles, we remain laser-focused on our transformation initiative, which were first introduced at our 2018 Investor Day. Global store network optimization remains one of our top priorities. Aligning square footage with digital penetration is the single most lever for long-term operating margin expansion. Looking ahead, we will continue to transition away from larger format locations to smaller, more intimate omni-enabled ones. In London, we closed our Abercrombie flagship on Savile Row last year and are set to open a significantly smaller store on Regent Street, where more of our local customers shop. This location has better economics, is in our updated prototype and is a more accurate representation of the brand, and we cannot wait for customers to see it in August. In addition to global store network optimization, we also remain committed to our other transformation initiatives, including investing in digital omnichannel capabilities, increasing the speed and efficiency of our supply chain and evolving brand positioning while improving customer engagement, and we'll update you on each throughout the year. Before I turn it over to Scott, I want to take a moment to discuss our thoughts on the health of the consumer. In the first quarter, the U.S. benefited from government stimulus, a mini back-to-school season, and easing of COVID restrictions. Internationally, there was the reopening of certain markets, although many large countries remained closed. As we think about Q2, we expect to realize benefits from the further lifting of COVID restrictions and, hopefully, a reopening of key countries in Western Europe. Thus far, our momentum has continued quarter-to-date. As more countries and states begin to open, we look forward to further engaging with our global customer base and are cautiously optimistic that we will see a more normal back-to-school and back-to-ball period compared to last year. And while we hope it all goes smoothly, we are not walking away from this past year's key learnings and disciplines. We will continue to expect the unexpected and we'll quickly pivot no matter what may come our way. I'm excited about the future and more confident than ever in our ability to drive sustainable, long-term operating margin expansion. And with that, I will turn it over to Scott.

Scott Lipesky, CFO

Thanks, Fran, and good morning, everyone. As we lap the start of COVID, we will be providing comparisons to both last year and to Q1 2019 where applicable. Due to temporary COVID-driven store closures, we do not plan to disclose comparable sales this year. Now on to Q1 results. In the quarter, we delivered net sales of $781 million, up 61% to last year as we lap the onset of the pandemic and associated widespread temporary store closures beginning mid-March 2020. On a 2-year basis, sales were up 6% compared to Q1 2019. We continued to experience strong digital demand across brands with 45% digital sales growth to last year and 81% growth from Q1 2019. Global digital sales for the quarter were $403 million or 52% of total sales. By brand, net sales increased 62% for Hollister, which includes Gilly Hicks; and 60% for Abercrombie, which includes Kids. As compared to Q1 2019, net sales increased 3% for Hollister and 11% for Abercrombie. By region, net sales in the U.S. were up 72% and 18% on a 1- and 2-year basis, respectively. As a reminder, we ended 2020 with a significantly transformed business model and had roughly 130 fewer stores and over 20% less square footage in our U.S. store base this quarter as compared to Q1 2019. The reduction in square footage was purposeful and continued our multi-year efforts to optimize our global store square footage to align with growing digital penetration. In EMEA, sales rose 41% on a 1-year basis and were down 9% on a 2-year basis. Results continue to be adversely impacted by COVID-related restrictions and temporary store closures in Western Europe, with nearly 60% of our European store base closed for the majority of the quarter. As the U.K. has recently reopened, we've experienced an uptick in trend. In APAC, sales were up 42% to last year and down 30% to Q1 2019. Throughout the quarter, we saw COVID-related restrictions in Japan. In China, we continue to build out our local teams and reset the foundation to enable long-term growth. We are committed to the APAC region and are following the successful playbook we put in place in the U.S. and EMEA. In the U.S. and APAC, we saw sequential store traffic improvements over Q4, while EMEA levels were consistent with Q4 as lockdown and closures continued. Globally, we realized sequential improvements in conversion and average transaction value. As of yesterday, 95% of our stores were fully opened with 36 stores closed, 22 of which are located in Germany and are only open for shopping by appointment. Moving on to gross profit. Our rate of 63.4% was up 900 basis points to last year and 290 basis points to Q1 '19, driven by higher AUR across brands on reduced promotions and markdowns. As a reminder, last year's gross profit rate included approximately 300 basis points of inventory write-down charges, primarily as a result of COVID and the unexpected store closures. Inventories remain tightly controlled and are current, ending the quarter down 9% to last year. I'll now cover the rest of our Q1 results and on an adjusted non-GAAP basis. Excluded from our non-GAAP results are $3 million and $43 million of pretax asset impairment charges for this year and last year, respectively. Operating expenses, excluding other operating income, were up 2% as compared to last year, while operating expenses as a percent of sales decreased to 55.9% from 88.6%. We've made great progress in our cost base and are seeing the benefits. Stores and distribution expense decreased 2% compared to last year and 11% on a 2-year basis, reflecting significant savings in store occupancy related to square footage reductions, partially offset by increased shipping and fulfillment expenses on digital growth. This is the formula we have been discussing for the past couple of years, and we are pleased to see it play out. Marketing, general and administrative expenses rose 12%, primarily driven by increased performance-based compensation and digital media spend, partially offset by lower noncustomer-facing controllable expenses and in-store marketing costs. We delivered operating income of $60 million compared to an operating loss of $166 million last year. As Fran noted, this is our best first quarter operating income and operating margin since 2008. The effective tax rate was approximately 13%. Net income per diluted share on adjusted non-GAAP basis was $0.67 compared to a net loss of $3.29 last year, which reflected adverse impacts related to valuation allowances on deferred tax assets and other tax charges of $1.45 per diluted share. As a reminder, we exited fiscal 2020 in a strong financial position with cash and cash equivalents of $1.1 billion and total liquidity of approximately $1.3 billion. This enables us to make investments to fuel sustainable growth and to deploy excess cash strategically. On the latter, during Q1, we finalized an agreement with our Soho New York Hollister flagship landlord to settle all remaining obligations related to the store, which we closed in Q2 2019. Prior to this agreement, we had roughly $80 million of payments remaining through fiscal 2028. With the agreement, we received a discount to accelerate payments, resulting in a cash outflow of approximately $64 million. The settlement served to reduce our operating lease liabilities by approximately $65 million, resulting in a $900,000 gain and eliminated all future cash obligations related to this location. As a result of the settlement, we will avoid incurring interest expense of a total of approximately $3 million for the rest of 2021. Looking ahead, we will continue to search for ways to deleverage the balance sheet where the economics work. During the quarter, we also resumed our share buyback program, repurchasing approximately 1.1 million shares for $35 million. As of the end of Q1, we had approximately 8.9 million shares remaining under our previously authorized share repurchase program. We are committed to putting excess cash to work and we'll continue to focus on buybacks, pending market conditions, share price, and our ability to accelerate investments in the business. We expect fiscal 2021 CapEx to be approximately $100 million, with about half of that related to digital and technology. Taking a moment to discuss our omnichannel philosophy. As we evolve our model, the line between stores and digital continues to blur. We believe that stores are a critical part of the omnichannel brand experience and remain committed to investing in smaller omni-enabled locations that better serve our local customers. This includes restarting our store remodel program and delivering more off-mall formats in the future as we continue to meet our customers where they shop. This year, we have roughly 250 leases up for renewal. We look forward to having thoughtful conversations with our landlord partners to find stores that are the right size, right location, and right economics. I'll finish up with how we are approaching the remainder of the year. We will put some of the cost savings realized in 2020 back to work in customer-facing areas to fuel growth opportunities. Reflecting ongoing global uncertainty, we will continue to conservatively manage inventories to position the business to chase, optimize our DC capacity for digital demand and tightly manage expenses. We are not providing an outlook for the full year. Consistent with our comments last quarter, we are planning to make progress recouping COVID-driven sales losses, and the year is off to a great start. For gross profit rate, we will continue to manage inventory tightly with the goal of maintaining and potentially building on 2020 progress, keeping in mind we are likely to see cost headwinds for the remainder of the year. For OpEx, we will manage tightly and focus on using a portion of our occupancy savings to fund increased fulfillment, marketing and digital investments. For the second quarter, we are planning as follows: net sales to be at or above 2019 level, which was approximately $841 million. We do not expect an increase in government-mandated store closures from today's levels and are awaiting full clarity on when remaining countries in EMEA will fully reopen. Our plan also reflects the expectation that we will continue to successfully manage through ongoing supply chain constraints and labor shortages. Gross profit rate is to be up at least 200 basis points from 60.7% last year. We remain cautiously optimistic in our ability to drive AUR improvements through lower promotion and clearance activity and to realize potential FX benefits. This should be partially offset by elevated product costs. Operating expense, excluding other operating income, to be up 15% to 20% to last year's adjusted non-GAAP level of $404 million, reflecting lower occupancy, offset by the reversal of certain 2020 COVID-related savings, higher fulfillment costs and increased marketing, payroll and digital project spend. With that, operator, we are ready for questions.

Operator, Operator

And we will begin with Dana Telsey from Telsey Advisory Group.

Dana Telsey, Analyst

Congratulations on your impressive progress. The product Social Tourist is generating a lot of excitement. I've had two 15-year-olds express their enthusiasm for it. What are the latest insights for that brand? Additionally, how are Hollister and Abercrombie performing in both men's and women's segments? Are we anticipating as significant a denim back-to-school season as expected? Scott, could you provide details on expenses, including port congestion and labor costs, and your plans for managing those expenses?

Fran Horowitz-Bonadies, CEO

Good morning, Dana. So we are also incredibly excited about Social Tourist. I mean it truly is a groundbreaking opportunity for us and for the industry, frankly. To partner with Charlie and Dixie D'Amelio, two of the largest influencers out there in social media today with over 250 million followers is an incredible partnership. I think you know that partnership with them started back in 2020 for back-to-school. And the work that we've done with them has been successful from that point forward. So we thought, what better time than now, coming out of COVID, coming out of 2020, a stronger, faster, smarter company to kick off a new brand? What we've seen so far, 25 million views just on their brand video, 85 million impressions. So as you know, it just launched. We will update everybody throughout the year on the excitement, but so far, lots of excitement around the brand. Regarding denim, we are in an exciting denim trend. It started about a year ago when we saw this shift both from a rise perspective as well as from a leg perspective, and the consumer is responding quickly. It's funny today with TikTok, one of the leading influencers of fashion out there, as soon as the kids and the young millennials saw this shift, they were excited to get out there and buy these new denim choices. So we believe across both brands, back-to-school at Hollister, and we call it back-to-fall for the millennial customer for Abercrombie, we see denim as an opportunity. And with that, I'll give it to Scott to go through the...

Scott Lipesky, CFO

Okay. I will unpack some expenses here. So on the first one, port congestion and transportation cost, yes, there is definitely inflation here, pretty much in every mode and channel and also some delays on top of that getting product in. We have an amazing supply chain team, and they are doing everything they can to use pretty much every tool in the toolkit to enable us to get our product here at the best cost. But we do expect to see inflation there in the product cost on the transportation side but also on the commodity side as we've seen cotton prices tick up. It's just going to put more importance on the AUR side of the business. It's going to force us to deliver amazing products, which is what we try to do every day and also keep our inventories in line so that we can deliver a great AUR to offset some of these costs. On the labor side, we are seeing some labor inflation. There's always inflation with labor as rates go up each year. We are seeing some shortages in certain markets around the country. Our store teams are managing that on a case-by-case basis, a city-by-city basis as well as the ongoing inflation we've seen in the distribution center. So more inflation. It's booked into our outlook, and it's something that we feel we can lap. And the great thing is with all the progress we've made around store occupancy, we can absorb some of these shocks to the system in the near term.

Operator, Operator

We'll now move to our next question that will come from Paul Hughes with Citi.

Kelly Crago, Analyst

This is Kelly Crago on for Paul. Just curious if you could provide any color on 2Q trends and whether you're seeing acceleration in trends versus the first quarter. And any chance you could provide more color on how the brands did in the U.S. versus international? Obviously, performance for both brands is impressive. Just curious if Hollister's underperformance versus A&F has something to do with their store closure in Europe where there were store closings.

Scott Lipesky, CFO

Kelly, it's Scott, I'll kick this one off. So thinking about the acceleration in Q1, so a great business in Q1, have seen that momentum continue here into Q2. I won't give numbers per se on Q2, but I just would say that it's given us the confidence, even though May is the smallest month of the quarter, to put a target out there for Q2 that is at or above 2019 levels, which is a good thing because coming into this year, we were all wondering in this company, I’m sure in others, when we're going to get back to those 2019 levels, so good progress here. The brands in the U.S., both brands performed quite well in the U.S., really outperformed 18% up versus Q1 2019. That's just stellar. And really all the work that we've done around the product and the marketing really came through as the customer started coming back out here in Q1. Thinking about Europe, continues to be very lumpy. In Europe, I would say, some countries have reopened. As those countries were closed, we really shifted to digital, kept that inventory moving, and saw some nice results on the digital side. Have seen nice acceleration as countries reopened. There's definitely some pent-up demand out there but still lacks some clarity. Germany is a big country for us, and we still have a chunk of stores that are shopped by appointment only. So it will be nice to see those stores get open and stay open. Hopefully, that will happen here in Q2, but in the meantime, we'll just read and react.

Kelly Crago, Analyst

Got it. And just curious with the strength in margins you're seeing this year. How are you thinking about the long-term margin opportunities since it seems that you could exceed your sort of 6% EBIT margin target this year?

Scott Lipesky, CFO

Yes, regarding our 6% margin target, we are still dedicated to achieving that goal. We took a brief pause last year due to COVID, but we are eager to get back on track. Despite losing a significant amount from our top line, we made substantial progress in managing expenses and inventory. This inventory helped us improve gross margins last year and into the first quarter. The expense management set us up for a favorable flow-through that you witnessed in Q1. We are confident that as we advance, we can bring the top line back to 2019 levels while maintaining our gross margin. Average unit retail is increasing, helping to balance out the rising costs we face. We believe we have the appropriate cost structure for positive flow-through and aim to achieve that. While we are not providing a full-year outlook at this time, we remain on track for Q2.

Operator, Operator

Susan Anderson with B. Riley has the next question.

Susan Anderson, Analyst

Nice job on the quarter. Nice to see the strong sales there. I'm curious how you're thinking about back-to-school this year. As kids get back to school and then the cycling of virtually no back-to-school last year, are you planning for that to start off in July this year? And also, are you expecting to see a benefit as the child tax credit rolls out?

Fran Horowitz-Bonadies, CEO

Good morning, Susan. So we are looking forward to a more normalized back-to-school this year, but we're still waiting to hear, obviously, from a lot of states, on whether or not that is actually going to happen. So we're continuing to be cautiously optimistic about the back half. We're continuing to really take those disciplines that we learned from last year on managing our inventory tightly. We can react very well to our business. We're working still weekly with the team to read and react to what's happening and be able to chase the business, which is an amazing place for us to be.

Scott Lipesky, CFO

Yes, I'll address the rollout of the child tax credit. We hope to see some positive effects on our business, especially since our customer base skews younger. Reflecting on the first quarter, we believe we experienced a beneficial impact from the stimulus. It's challenging to quantify that precisely, but if this trend continues and the child tax credit is implemented, we anticipate that it will coincide with the back-to-school season.

Susan Anderson, Analyst

Great. And then just to follow up on inventory. It sounds like you're still planning very conservatively. Should we expect that to be down also for the rest of the year? And then just if you could talk about your expectations around the promotional environment as we kind of go throughout the year if you're expecting that to remain very lean and rational.

Fran Horowitz-Bonadies, CEO

Yes. I mean as far as inventory goes, as I had mentioned, we are going to plan lean inventory. We have learned that there's a real pivot happening in our industry, and it's very exciting. That's the supply and demand is proving out that we can grow our margins and get higher AUR for our products. So we will continue to be lean. The best news is that we can chase the business. We've got a very agile supply chain. We produce in 17 countries around the world, and the team is very agile in being able to respond.

Scott Lipesky, CFO

I'll grab the promotion part. The promotion environment has been good. You can see that across the industry, which is exciting, but you still have to have great products, and keeping the inventory in line is very necessary to make that happen in the future. We'll see what happens in the future. We're going to play our hands, that's for sure. We're going to deliver great products, have awesome marketing campaigns and keep our inventory in line, and that puts us in control of our promotional cadence, and that's how we're going to plan it. To your first question there around inventory, it's really all connected.

Fran Horowitz-Bonadies, CEO

Sorry about that. Before our next question, operator, I guess there's been some incoming questions about Gilly Hicks. Gilly Hicks was up 90%. There was some confusion that they thought I said 9% but it was up 90%.

Operator, Operator

We'll now move to the next question from Jay Sole with UBS.

Jay Sole, Analyst

Great. My question is about the margins. I'm interested in understanding the sustainability of the EBIT margin in Q1. The guidance for Q2 indicates that the EBIT margin will approach the level achieved in Q1. Typically, the second half of the year has higher EBIT margins compared to Q1. So, how should we consider the EBIT margin in the latter half of the year based on your performance in the first half? Additionally, Scott, regarding the SoHo Hollister store, what was the profitability of that store? Was it operating at a loss? Any information on that would be appreciated.

Scott Lipesky, CFO

I'll kick off SoHo. So that store was a drag. We closed that store. We went dark in that store back in Q2 2019 but we still had a rent stream going forward. And so it was nice to put some cash to work. We had the excess cash on our balance sheet to be able to pay off that lease liability in full at a discount. So it's good to get that out of the cash flow base and off the liability side of the ledger. As we think about EBIT margins for the second half, we're not talking about the second half at this point. We're only going to focus on Q2 and our outlook. But to your point around sustainability, that's really what we've been trying to do as a company for the last 3 years, reduce occupancy expense, reduce the fixed side of that expense as our customer continues to shift over to the digital side, which brings along much more variable. And so with last year's store closures and rent negotiations, we've taken out $100-plus million of store occupancy versus 2019 levels, which should enable us to have more consistent operating margins going forward if, and it's a big if, if you can keep getting that top line and keep good stable gross margins. So that's the formula that we're working with and good progress on Q1. The outlook that we've laid out there for Q2 puts us in that same range. So that's what it's all about for us, closing the gap to some of our peers, which we've owned our investors for a long time.

Operator, Operator

Matthew Boss with JPMorgan has the next question.

Matthew Boss, Analyst

Great, and congratulations on the improvements across both brands. Fran, could you discuss the balanced strength you're observing in both of your brands, especially regarding the merchandising and marketing initiatives you've implemented over the past few years to differentiate the concept? Looking ahead, how can we approach the market share opportunities that you see, and what are the next steps for us?

Fran Horowitz-Bonadies, CEO

Okay. So let's take that back to the start. So it is pretty exciting to see that we have strengthened in all of our brands today and across genders. The balance that we're seeing in our business is super exciting. And it is a result, to your point, Matt, of a lot of years of hard work and really setting each of the brands on their own path. So where we have Abercrombie resonating, it's a really modern new version of the brand, and it's resonating with that young millennial and appealing to their lifestyle. That, coupled with the voice and the experience, as we like to say, when those things come together, we see a true win. The women's business, particularly, is just a complete industry standout. It's fantastic what's happening in that business. She is responding to everything from our 96 Hour Collection, which is more about cozy stay-at-home to dresses, which are just terrific. So she's getting ready to also go out. So we're providing her, candidly, with a balanced assortment, and it's appealing to each part of her lifestyle. In Hollister, again, product voice and experience coming together. Both girls and boys are resonating. The girls business as well has a nice dress business happening. So she's obviously getting ready to go out and see the world again. And denim, denim across both brands and across all genders has been strong. Lots of exciting things that are happening within denim.

Scott Lipesky, CFO

Yes. Let me grab the second part here on market share. We do feel like we have a market share opportunity across our brands. When you think back to where we peaked in sales back in 2012, we've exceeded margin within the industry to other apparel retailers, but we've also exceeded it outside the industry to technology and experiences and things like that. So we do have an opportunity to go grab share. The grab share is about delivering amazing product and an awesome marketing message. We have built that marketing muscle over the past couple of years, and we feel great about how each of our brands, all of our brands, are positioned from a marketing perspective. The things we're doing on social media are very innovative. Social Tourist is just a more recent example of that. So we think that the combination of that product, voice, and experience, is the right formula. If we can deliver it, we can go get share.

Operator, Operator

Janine Stichter with Jefferies has the next question.

Janine Stichter, Analyst

Congrats on the progress. I wanted to ask a bit about marketing. It seems like you're definitely earning a return on the spend there. I'm wondering if there's any way to quantify the higher spend this year, and maybe talk a little bit about the plans. It sounds like a lot of it is going towards digital but maybe any more color by brand or channel? And then also want to ask about pricing. AUR is obviously very strong. Wondering if you've taken price up at all on like-for-like product. And if not, if that's something you would consider just as we start to get the hit from some of these raw materials costs coming in.

Fran Horowitz-Bonadies, CEO

Yes, we're going to start with pricing. We are actually very comfortable with our product pricing across all of our brands. What's exciting is that we have been able to reduce our discount to ticket and be less promotional, which is really what we're seeing out there. So, we are pleased with our ticket pricing and very happy to see that we've been able to reduce many of the promotions.

Scott Lipesky, CFO

Back to the marketing, this is an area of investment for the company. We will exceed last year's levels and also 2019's. As mentioned previously, we have established strong marketing teams, and each brand is effectively focusing on how to engage with their direct customers. Looking ahead at our spending plans, we maintain a test-and-learn culture. We continue to explore various opportunities across the marketing landscape, utilizing different digital channels and platforms. We are excited about the positive returns we've observed and will keep driving top-line growth through increased marketing efforts.

Operator, Operator

We will now take a question from Mark Altschwager with Baird.

Sarah Goldberg, Analyst

This is Sarah Goldberg on for Mark. It's been great to see the high level of engagement behind the Social Tourist launch. Two questions there. How are you thinking about the incrementality of this brand versus the current offering at Hollister? And then are there any differences in terms of gross margins or overall profitability we should be mindful of, given the new collaboration structure?

Fran Horowitz-Bonadies, CEO

Yes, we see Social Tourist as a significant enhancement for the Hollister brand. Partnering with Charlie and Dixie early last year introduced a fresh customer base. They tend to appeal to a more trend-savvy audience, which aligns with the upper tier of our trend pyramid. Their influence allows us to showcase new trends sooner. We can use these insights to enrich our Hollister offerings. Collaborating with Social Tourist opens many exciting opportunities, and these influencers have a strong connection with Gen Z consumers, just as we do. We’ve gained valuable knowledge from each other, and we'll continue to explore this collaboration moving forward.

Scott Lipesky, CFO

On the financial side of it, the gross margin is relatively consistent with the other brands. And when we think about the operating margins, there'll be a bit of a startup cost here as we continue to ramp that up from zero this year. So there'll be less of an operating margin generator than the other brands. But like Fran just mentioned, the halo that we expect to see around the Hollister brand should be a good benefit.

Operator, Operator

And Janet Kloppenberg with JJK Research Associates has the next question.

Janet Kloppenburg, Analyst

Congratulations on the strong improvement. I got on a little bit late, Scott, so forgive me. But can you talk about, Scott, traffic levels? What you're seeing there month-by-month and how that may change your view on digital gains as we go forward, and some of the puts and takes on margin associated with that mix change? And also, I was wondering about the strong full-price selling, Fran, and if you thought that maybe some price increases could take place given how much your product is resonating. And just lastly on Gilly, what do the margins look like there? And could that be a spinoff concept?

Scott Lipesky, CFO

So start with the beginning, yes. All right. So store traffic levels by month, not going to get into the details by month. But what I would say is that store traffic remains negative as we look back to 2019 and obviously positive versus 2020 since they were barely open. But it is, kind of is what it is. The economy is reopening slowly, faster in some places. You see a pretty much of a very scattered response across the U.S. and Europe, and that's fine. Does not change our view at all on digital gains. Our customer is a digital-first mindset. They're on the younger side of the age group. So everything starts on digital and sometimes it ends in the stores and sometimes it ends online. So no change there. As we think about margins, for us, the formula has been, as the customer continues to shift online, we need to pay less rent and have less store expense if they're not there. So that's a lot of the work that we had done last year. We saw that play out here in Q1. So longer term, no change in our thinking about that balance.

Fran Horowitz-Bonadies, CEO

Regarding full-price selling and price increases, we are very enthusiastic about the product acceptance from our consumers. This highlights two important factors: having the right product and the opportunity to manage our inventory much more efficiently than before. We are not currently planning to raise our prices. Instead, we have managed to reduce our promotions and discount rates, which has been a significant focus for us. It's been thrilling to see this progress.

Scott Lipesky, CFO

And on Gilly Hicks, the last piece, margins have been improving, which is great. We've built a great team within Gilly Hicks. They're expanding the assortment. And with that assortment expansion, we've seen margins come up, which is good. A spin-off concept, and we're not thinking about it that way at this point. We think it's a nice growth vehicle, and we're putting the resources behind that from people and from a marketing side as well as the assortment in inventory like we just talked about. So we look at that as a growth vehicle for the company, and we'll focus on it that way.

Operator, Operator

We'll now hear from Marni Shapiro with Retail Tracker.

Marni Shapiro, Analyst

Congratulations, everybody. The stores have looked absolutely fantastic. I have a couple of product questions, if you wouldn't mind. They're quick short ones. Since restrictions have been eased across the country and in parts of Europe, have you seen a shift in the type of products that are selling? Or has that been pretty consistent through the first quarter? And could you talk a little bit also about your product quality? You guys have always had good product quality. There was a period of time where maybe it got a little bit less at some point, I think even before your time maybe, a while ago. But it's really improved across some of the categories in the stores, especially at Abercrombie, if you could touch a little bit on that. And then just a follow-up on all the Social Tourist commentary, which I'm obsessed with. Is there an opportunity to partner with an influencer or somebody like Charlie and Dixie at the Abercrombie brand? And would you consider that? Sorry for so many.

Fran Horowitz-Bonadies, CEO

Let me address the first question regarding the product shift. We have observed a significant growth in our dress business across both brands. While Marni showed strong dress sales in 2020, even during the shutdowns, we are still seeing a shift now. Our team is committed to staying close to our consumers to understand their lifestyles and needs, which still include a mix of work-from-home and outings. The major change is that dresses, which were already popular, have gained even more traction now for both brands. I appreciate your comments on quality. When I joined, my first priority was to recommit to our focus on quality, which had slipped for both Hollister and Abercrombie. We are fully dedicated to improving the quality of our offerings, and we're receiving positive feedback from consumers on social media about the value we provide. Regarding partnerships, we have multiple collaborations across all our brands. For instance, in Abercrombie women's, we are working with several affiliates who promote our products on social media, helping to attract new customers to our brands. This aligns with our focus on leading in social commerce, which we discuss frequently.

Marni Shapiro, Analyst

Would you consider doing a product launch with any of them? Or is it more just the affiliate marketing and things like that?

Fran Horowitz-Bonadies, CEO

Yes, at this point, what's working for us is working with them as affiliates, and that's kind of our focus at the moment.

Operator, Operator

We will now hear from Dylan Carden with William Blair.

Dylan Carden, Analyst

Awesome. I was just curious. I appreciate you acknowledging that it might be a little bit early for this question. But just on the retail footprint, you guys have been ahead of the curve there, and you're kind of highlighting some of the combination of those efforts here on this print. Just any commentary about how you're feeling about closures going forward, give and take, between the two channels now that you've made a lot of efforts to kind of link them up would just be appreciated. Just sort of appreciate any sort of comments you can provide there.

Fran Horowitz-Bonadies, CEO

I think, Dylan, it is early. We are excited about the progress we were able to make in 2020, as you noted, closing an additional 130-plus stores and really taking that very unproductive square footage out of our store base. We still have an opportunity. We keep 50% of our leases up for renewal over the next couple of years. We keep a very fluid lease stack. Those negotiations candidly haven't started yet for this year. So as we head into the back half of the year and we start those negotiations with our landlord, we'll have more to report at that point.

Scott Lipesky, CFO

Yes, just to add on a little bit. As we think about more broadly how the store network plays with digital, it's really about supporting the omnichannel experience in a certain market. And that's really how we look at it, how many stores you need in a particular city or a catchment to drive the total omnichannel business and what size should those stores be. We've been shrinking our stores. You've been on this journey with us for years. We need to continue to do that. We still have some stores that are oversized. So we still have an opportunity to thin out that square footage. But really, when you take a step back, it's about supporting that omnichannel brand experience within each market.

Operator, Operator

And with that, ladies and gentlemen, this will conclude your question-and-answer session for today. I will turn the call back over to Fran Horowitz for any additional or closing remarks.

Fran Horowitz-Bonadies, CEO

Thanks. So thank you, everyone, for participating in our call today. I hope you all enjoy your summer, and I look forward to speaking with you in August when we report our second quarter results.

Operator, Operator

With that, we will conclude today's conference. Thank you for your participation, and you may now disconnect.