Earnings Call Transcript - ANF Q3 2023

Operator, Operator

Good day, everyone, and welcome to the Abercrombie & Fitch Third Quarter Fiscal Year 2023 Earnings Call. Today's conference is being recorded. I would now like to turn the call over to Mo Gupta. Please proceed.

Mohit Gupta, Executive Vice President

Thank you. Good morning, and welcome to our third quarter 2023 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer; and Scott Lipesky, Chief Financial Officer and Chief Operating Officer. Earlier this morning, we issued our third quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures today during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and investor presentation issued earlier this morning. Finally, references to Abercrombie brands includes Abercrombie & Fitch and Abercrombie Kids and references to Hollister brands include Hollister, Gilly Hicks and Social Tourist. With that, I will turn the call over to Fran.

Fran Horowitz-Bonadies, CEO

Thanks, Mo. Good morning and thank you all for joining us. We are excited to report outstanding third quarter results, which is a testament to our global team delivering on our goal of aligning product, voice and experience to our customers' needs at each brand. We continue to build on the momentum from Q2, with sequential acceleration in both sales growth and profitability. On the top line, growth trends were strong throughout the third quarter, driving sales results above our expectations. For the quarter, net sales increased 20% with growth across all regions, brands and direct selling channels, including both stores and digital. We also exceeded expectations on the bottom line with a 13.1% operating margin, driven by 570 basis points of gross profit rate expansion and operating expense leverage on higher sales. The 13.1% operating margin was an expansion of over 1,100 basis points compared to third quarter 2022. For the year-to-date period, net sales were up 13% to last year with an operating margin of 9.3%, over 900 basis points better than 2022 through the third quarter. These results show the powerful response from our customers as we continue to execute on our playbook. I am so impressed with what our team has delivered, pushing boundaries and challenging ourselves to grow, while staying close to our customers and remaining agile. As we enter the fourth quarter, we are poised to continue this momentum with our brands and regions strategically positioned to win. As such, we are raising our sales and operating margin expectations for 2023, capping off a significant year of improved growth and profitability for the company. I'm proud to share it with a strong quarter across our brand portfolio, and the time we've spent reinvigorating Hollister brands is resonating with our customer. With a refreshed brand aesthetic and evolved assortment, Hollister brands achieved 11% growth for the third quarter, showing nice progress as we comp a disappointing 2022 back-to-school season and what remains a dynamic team apparel environment. Hollister delivered growth in all regions, showing balance as we further localize our assortment experience. We continue to prioritize driving a healthier business in Q3 by improving gross profit and lowering rates on lower freight costs and higher AUR from lower promotions, consistent with the first half of the year. As we enter the peak holiday season, our inventory is in a significantly better place compared to last year, giving us the opportunity to be strategic with promotions. Turning to product wins. The Hollister women's business continues to lead the way for the brand, growing nicely and showing balance as tops, bottoms and dresses all helped drive sales improvement compared to last year. As we discussed last quarter, we entered back-to-school with purposeful distortions to dresses, non-denim bottoms and select top categories, all of which did well for the balance of the quarter. Importantly, we have used these learnings to chase into winners for the holiday season. The overall men's trend was similar to the second quarter with solid performance in non-denim bottoms, fleece and sweaters, all of which were areas of focus for newness as we rebuilt the assortment. This holiday season, as team customers head to the mall, we'll be ready to meet them with an evolved assortment. We expect to complement the in-store business with increased digital marketing, particularly on social channels, where our teams are spending an abundance of their time. Although it's early, we're pleased with Hollister's brands throughout the fourth quarter. And we remain on the path to deliver growth for 2023, a key point for progress for the brand. Moving to Abercrombie brands. Wow, the team delivered their 11th consecutive quarter of sales growth with an impressive 30% sales increase year-over-year. We continue to find new ways to win with our target audience, resulting in great balance and consistency in addition to growth acceleration. Similar to Q2, we saw growth in units, AUR, genders, regions in both stores and digital direct channels. On the assortment, both men's and women's posted double-digit sales growth in the quarter. Looking at women's Q3 marks the 13th consecutive quarter of double-digit sales growth. I've been impressed with how our teams have continued to build on strong franchises across tops, bottoms and dresses. For men's, Q3 marked our fifth consecutive quarter of growth, an important milestone we strongly come at the beginning of our growth path in Q3 2022. Following our successful playbook for women's, we are building into franchises in the central lease and its while driving newness across jeans and pants. I'm excited about our cold weather assortments in both genders across sweaters, fleece and outerwear as we approach holiday. Abercrombie continues to find compelling ways to connect with customers through unique collaborations and brand experiences. For example, our recent collections with Influencer Kathleen Post and Harlem's Fashion Row Designer Nicole Benefield have driven engagement with new and current customers, particularly on social media and our digital shopping platforms. On an in-person experience, we continue to see traction in our neighborhood stores, and we were thrilled to open 4 additional locations in the quarter, including SoHo in New York, Brickell Street in Miami, King Street in Charleston and Harvard East in Baltimore. We have and will continue to use our digital in-store experiences in concert to drive a seamless customer experience. Looking forward to the fourth quarter, Abercrombie brands has had a great start to November, continuing at historic 2023, and we're confident our customers will love what we have for them this holiday season. Moving to regional performance. As we discussed last quarter, we are seeing positive results from our evolved regional operating model, which provides better support for our local teams and a greatly improved customer experience. Each region delivered growth in the quarter, building on second quarter sales increases. On a comparable sales basis, the Americas grew 16% in Q3. EMEA grew 15% and APAC grew 32%. The localization efforts our EMEA and APAC teams have made key updates to our assortments, pricing and force cadence as we have moved through 2023, contributing to our sales performance in those regions. In EMEA, our teams also localized marketing content and prioritized spend in our 2 largest markets, the U.K. and Germany, where we are seeing outsized positive results compared to the rest of Europe. We've seen similar progress from our APAC team as well. As you know, Singles Day is an important retail holiday for us in the region, and the team tailored promotions and product positioning, leading to a nice increase in sales this year. There is more work ahead, but our improved trends give me the confidence that we are focused on the right aspects of the customer experience and that we can continue to recoup lost volume over the past few years following the COVID pandemic. Before I turn it over to Scott, I want to share a few additional thoughts on the upcoming holiday period. The fourth quarter is off to an encouraging start, and we're ready and focused to compete with the large volumes still ahead of us. Our teams have worked hard to align our product and promotional messaging to set us up for a successful holiday across brands. With strong brand positioning and highly product strategies in place for each brand, we are accelerating our marketing investment in the fourth quarter to capitalize on heavier traffic and drive customer acquisition and retention. While the macro environment remains challenging and uncertain, we have proven that we can deliver growth across brands and regions, if we stay focused on our customer and execute our playbook. I'm so proud of what our teams have achieved so far, and we expect to finish 2023 showing the strength of our customer relationships in addition to sales growth and profitability. I'd like to thank all global associates for making this happen through their unrelenting customer focus and unwavering commitment to our always forward plan. We all look forward to continuing momentum in the important holiday period and sharing our full year accomplishments with you soon. With that, I'll hand it over to Scott.

Scott Lipesky, CFO & COO

Thanks, Fran. I want to express my gratitude and congratulations to our global team for a strong third quarter. We exceeded our expectations in net sales, gross profit rate, and operating margin while maintaining tight inventory management. Total net sales reached $1.056 billion, marking a 20% increase from last year, with growth across various brands and regions. Comparable sales rose 16%, fueled by contributions from both stores and digital channels. The 400 basis point difference between comparable and total sales was largely due to new store openings. Our new stores have surpassed expectations and are projected to yield productivity per square foot that is more than double that of the stores we closed last year and will close this year. Regionally, our growth was more evenly distributed compared to previous quarters, with significant acceleration outside the Americas. Specifically, net sales increased by 22% in the Americas, 14% in EMEA, and 13% in APAC. On a comparable sales basis, growth was 16% in the Americas, 15% in EMEA, and a remarkable 32% in APAC. We've observed a positive response to our localization initiatives this year in EMEA and APAC, which included adjustments in product, inventory, pricing, and timing of product launches. On a brand level, Abercrombie saw a strong growth rate of 30%, while Hollister grew by 11%. On a comparable sales basis, Abercrombie increased by 26% and Hollister by 7%. Growth in the Abercrombie brand was consistent across genders, while the women's sector significantly drove the increase in Hollister. Now turning to gross profit. The gross profit rate for the quarter was 64.9%, improving from 59.2% in 2022. This 570 basis point increase was due to several key factors. We attributed approximately 250 basis points to increased average unit retail, driven by a higher mix of Abercrombie sales and reduced promotional activities resulting from lower inventory levels compared to last year. Additionally, we realized a freight benefit of around 200 basis points and a similar benefit from fewer inventory write-downs. These gains were offset slightly by higher raw material costs of about 80 basis points. We anticipate minor raw material cost pressure in the fourth quarter of 2023, shifting to a benefit starting in 2024. Regarding the supply chain, we continue to experience positive performance in freight costs and shipping times. We reduced inventory by 20% compared to last year by the end of the quarter and are still pursuing efficiencies across our brands. By year-end, we expect inventories to be down from last year. Our teams have excelled in making agile inventory decisions, and we look forward to customer reactions to our holiday assortments. Looking at expenses, total operating expenses, excluding other operating income, were $546 million compared to an adjusted $501 million last year. This year, there were no exclusions, while last year included a $4 million pretax asset impairment charge. The year-over-year increase resulted from inflation, digital and technology investments, higher incentive-based compensation, and increased marketing expenses. While marketing spending rose compared to last year, it remained steady as a percentage of sales. Due to strong sales growth, we achieved expense leverage this quarter, with operating expenses constituting 51.7% of sales, down from 57.3% last year. Operating income reached $138 million, or 13.1% of sales, compared to an adjusted operating income of $21 million last year. This operating income surpassed our expectations, largely due to better-than-expected sales performance. Net income per diluted share stood at $1.83 compared to an adjusted net income per share of $0.01 last year. With robust earnings and effective inventory management this quarter, we have strengthened our balance sheet, ending with $649 million in cash and approximately $1 billion in liquidity. We generated $134 million in operating cash flow during the quarter and repurchased $50 million worth of senior secured notes at par value, resulting in $250 million of such notes remaining outstanding. As in previous years, we will focus on debt repayment and share repurchases as our primary strategies for using excess cash while we monitor business performance, share price, and investment opportunities. For the first nine months of 2023, we achieved about $350 million in operating cash flow and approximately $129 million in capital expenditures. By the end of the third quarter, we had 765 stores. Looking ahead to the remainder of 2023, we've had a positive start to the quarter, and we are optimistic about the upcoming opportunities, as most of the sales volume is still ahead of us. For the fourth quarter of 2023, we project net sales to increase in the low double digits compared to the fiscal fourth quarter of 2022, which recorded $1.2 billion. Notably, we have the 53rd reporting week this year, expected to contribute around $45 million, or 375 basis points, to sales growth. We anticipate growth across all regions and brands and foresee minimal foreign currency impact. For operating margin, we project it to be between 12% and 14% compared to last year's adjusted operating margin of 7.7%, with improvements primarily from a higher gross profit rate due to lower freight costs and better average unit retail. In terms of operating expenses, we expect similar trends to what we observed in Q3, including increased technology and incentive compensation expenses as well as elevated marketing spending. We anticipate an effective tax rate of around 30%. Incorporating the fourth quarter outlook into the full year, our updated guidance for full-year net sales growth is 12% to 14% from the 2022 level of approximately $3.7 billion, up from a previous estimate of around 10% due to our third-quarter performance and expectations for the fourth quarter. We now anticipate about 35 new stores, a combination of 20 remodels and right sizes, and 35 closures. For the annual operating margin, we're adjusting our expectation to around 10%, up from our previous range of 8% to 9%. We still see a net benefit from freight and raw materials of about 250 basis points for the full year. We expect the effective tax rate to be in the low 30s, a revision from our previous expectation of the low to mid-30s, thanks to higher anticipated profitability. We still anticipate capital expenditures of approximately $160 million. In conclusion, we are encouraged by our ongoing progress across regions and brands, which reinforces our confidence in the effectiveness of our strategy. While we remain focused on a successful holiday season, we are also committed to advancing our long-term strategic investments to enhance speed, agility, and a seamless omnichannel customer experience as part of our always forward plan. We're now ready for questions.

Operator, Operator

And our first question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey, Analyst

Congratulations on the very nice results. Nice to see the improvement in Hollister. And when you unpack the comps, men's, women's, what did you see in terms of performing any categories to note. How is the difference between online and physical stores and how you're thinking about promotions? How were they in the third quarter and plans for the fourth?

Fran Horowitz-Bonadies, CEO

Thanks, Dana. Good morning. So specifically the Hollister. I mean it was really exciting to see our second quarter of consecutive growth, up 11% led by women's again. So just like we saw happen in Abercrombie, Women's led the way there, too, and girls are leading the way for Hollister. What specifically worked for us was non-denim bottoms that we've had an expansion in our bottoms category. They still love denim, but there are many opportunities with a lot of other non-denim bottoms, which are happening actually in both the guys and the girls' business. Categories to note, lots of exciting things, a very balanced assortment. Our inventories are very clean. I'm excited that we can enter the fourth quarter with really fresh inventories and promotions. As you know, the fourth quarter is certainly always the most promotional quarter of the year. We're prepared to compete, but it is based on our own internal selling. What's working, what's not working. We work with the teams very closely during the fourth quarter to make sure that we're agile and focusing those promotions specifically.

Scott Lipesky, CFO & COO

Yes. Picking up the online versus stores, there was good balance across the total company for the quarter. We think about Hollister, a little tilted towards the store business in the quarter, which is great to see. We've opened some new stores throughout the year, have done some remodels and rightsizes, and it's good to see that store traffic coming back. And that's really on a global scale, which is very, very exciting.

Dana Telsey, Analyst

Just one last item. Given that you're hitting a 10% operating margin this year, is the 13% to 15% in the purview in the future? Or how do you think of the framework?

Scott Lipesky, CFO & COO

Thanks, Dana. Yes. Very, very exciting to put a 10% outlook out there for the year. We started the year at 4% to 5%, and as the business has improved throughout the year, we're looking out there at 10% now. We're not going to talk about 2024 today. We are very focused on delivering an amazing holiday, but it's super exciting to be putting a number out there at 10% that we discussed in 2022, that 8% to 10% longer term. Excited to get here quickly.

Operator, Operator

And our next question coming from the line of Corey Tarlowe with Jefferies.

Corey Tarlowe, Analyst

Great. So Fran, as it relates to the really impressive growth that you've seen at Abercrombie in the quarter. What are some things that surprised you as you think about the upside that was driven versus your original plan? And what were some items that really resonated with customers this quarter across products and geographies that really worked for you and that you see working into the fourth quarter and the upcoming holiday season?

Fran Horowitz-Bonadies, CEO

So, hi, Corey. What's super exciting is to have just finished our 11th consecutive quarter of growth for Abercrombie brands, which is just such a big win for the company. I am super excited and proud of the team for what they've been able to accomplish. What's really terrific about that is it's balanced growth. We saw balance across the brand, the genders, the regions, the channels, I could keep going. So to have accomplished that was really, really terrific. We have a playbook that we are focused on delivering that product, voice and experience. It's aligning really well for our consumer. And most excitingly, we built this business to run with speed and agility, and that's what the team is doing this year, and they've really been able to test and react and learn about our assortment. I'm excited for the fourth quarter. We've got a lot of known products in there that the consumer is already loving. Lastly, as you know, we've really expanded the addressable market for Abercrombie. So we're seeing the opportunity to have that customer from 20 to 40 shop with us as well as these expanded categories. So lots of exciting things happening.

Corey Tarlowe, Analyst

Great. And then, Scott, on the gross margin that you saw in the quarter, close to 65%. That's the highest we've seen in quite a while. So quite impressive. As you think about the drivers of that and as we look ahead, just qualitatively, is there any way to think about within that construct, what is perhaps sustainable going forward and what may come out just to get a sense for the puts and takes of the gross margin as we look ahead?

Scott Lipesky, CFO & COO

Yes, great question. This is something we've talked about a lot over the last couple of years, really about the sustainability of the AUR. What we always say is if we have great products and lean inventory, you have a great chance of delivering strong AURs. And that's really what we've done. Last year, we had a little step back with the Hollister inventory as that business fell off pretty abruptly in Q2. But we've gotten through that, and each of the brands is chasing. What you're seeing this year is another freight coming back in and normalizing, cotton getting to the end of the tailwind and really strong AURs and a really great Abercrombie business that Fran just explained. We want this margin to be sustainable. We're working hard at that. The pieces that we can control will be the inventory levels and great product, and we feel confident in that.

Operator, Operator

And our next question coming from the line of Matthew Boss with JPMorgan.

Matthew Boss, Analyst

And congrats on another nice quarter. So Fran, at the Abercrombie brand, if we take a step back, could you speak to product versus pricing? Meaning, how have you repositioned the assortment and maintain competitive pricing? And then what elements of this turnaround are you applying to the Hollister brand today? And then, Scott, with inventories down 20% exiting the quarter, could you just speak to the ability to chase into continued demand momentum in holiday?

Fran Horowitz-Bonadies, CEO

It's really exciting to see the evolution of the brand. We've transitioned from a jeans and t-shirt brand to a lifestyle brand. That has afforded us the opportunity to expand both our age demographic and the categories that we are offering. The journey to reach our 11th consecutive quarter of growth is less about reduced promotions for A&F, as we've made significant progress over the years, and there's a lot of mix happening. The consumer is responding to categories like outerwear and dresses based on value and the fashion that we put out there for their price point. Products, voice, and experience equals AUR and what consumers are willing to pay for their goods. How do we apply that to Hollister? We work on playbooks here. We had a playbook for A&F. We started with women's, then moved to men's. We've seen nice progress in girls, and now we're working on the guys' business. We'll continue to roll that playbook out geographically as well, right? We're rolling into international and seeing success across all of our regions.

Scott Lipesky, CFO & COO

On the inventory side, our ability to chase has been ongoing all year. We started with a sales outlook in the low single digits, and now we're talking about 12% to 14% for the year. We've been able to chase inventory as we've progressed through the year. Huge thanks to our teams in planning, merchandising, sourcing. It's challenging to run the business this way, and it requires a lot of process and hard work. But the teams have chased into millions of units this year. If there's upside in Q4, we'll go get it. We'll turn our inventory faster. We'll bring in the next and I'm confident in that ability.

Operator, Operator

Our next question coming from the line of Marni Shapiro with DeSalTracker.

Marni Shapiro, Analyst

And if I forget, best of luck this holiday weekend. Can you talk a little bit just about two quick things: How are you thinking about store growth for next year with the success of these smaller neighborhood stores for Abercrombie? And then could you also just talk a little bit about dipping back into Hollister, really great improvement in the assortment there. I guess, what are the thoughts on the guys' side? Has it not been as strong? Or is it just a harder customer to sell to because they're so picky and difficult, and so trying to figure out what they want?

Fran Horowitz-Bonadies, CEO

Let's start with the first question on store growth. We have been on a journey with our stores for many years now, and it's exciting that we've actually been able to open up these neighborhood stores, something we couldn't have done years ago. We're seeing nice growth in these and just last week in New York, we walked through SoHo and our Flatiron store, and it’s thrilling to see local customers coming in. We've got opportunities as I mentioned, going on several of these locations throughout the U.S. and possibly internationally as time goes on. We haven't declared total stores for 24, but I can tell you we've been a net store opener for the last couple of years, and we expect that to continue. Now for Hollister, we are more open and excited about testing and trying new things. The girls' business has performed really well for us, just like it did in A&F, and we hope she will bring that success on the guys' side. We're seeing nice improvement, though, in Hollister guys. The non-denim bottoms have been very strong. Our fleece and sweaters business are seeing category improvements, and we expect to continue to push out and see that growth.

Marni Shapiro, Analyst

Great. And would you consider like your personal best store or side-by-side? Or is Gilly Hicks really the vehicle, which you would grow that part of the business?

Fran Horowitz-Bonadies, CEO

Yes. Our best-performing store has demonstrated significant growth. We have opened some new locations, such as our Fifth Avenue store and a new one in Aventura. We are focused on testing and learning, and we need to gauge the demand for this product, and we will keep advancing in this area.

Operator, Operator

And our next question coming from the line of Alex Straton from Morgan Stanley.

Alexandra Straton, Analyst

Great. Do you view this as a Hollister inflection? And what processes have you put in place or changed to keep the brand from devolving back to where it was before?

Fran Horowitz-Bonadies, CEO

Yes, Straton. It's exciting to see two consecutive quarters of growth. We're observing lots of opportunities within the brand. As you know, we've repositioned it, and we have come out with nice new marketing that the consumer is truly responding to. We have a playbook that is working, concentrating on our assortment architecture, product, voice, and experience. Our expectation is to stay close to that customer and continue to see growth.

Scott Lipesky, CFO & COO

Yes. And also for Hollister, just like Abercrombie, our inventory is in a great place, down significantly from last year, and that brand is chasing. As we're trying new things and broadening that assortment internationally, we can chase into those winners. That's been part of the driver for Hollister having that plus 8 and then that plus 11. We're excited about moving forward with clean inventory.

Operator, Operator

And our next question coming from the line of Mauricio Serna with UBS.

Mauricio Serna Vega, Analyst

Great. I guess just on the 4Q guidance. Should we assume the similar growth trend in terms of Abercrombie outperforming Hollister? And then maybe could you elaborate on the inventory decline by brand? Like I just want to understand which brand has a higher decline or where we see more moderate inventory levels on a brand perspective? And then when thinking about fiscal year '24, I know you're not giving guidance yet, but just thinking about our raw material cost recapture tailwind that you expect or that you have for 2024, maybe you could quantify that. And then just very lastly, could you talk about maybe about growth opportunities across each brand? I mean, I'm particularly interested in Hollister because I remember you had talked about the international business still being well below prepandemic levels. I just want to understand where we stand on that front.

Scott Lipesky, CFO & COO

Hi, Mauricio. Good to hear from you. All right. Let's start with the Q4 guidance. Yes, similar trends would be the expectation as we've seen throughout the year: A&F outperforming Hollister. We do expect growth across regions. Good to see a nice acceleration in Europe and APAC in Q3, and we are optimistic that we can see continued trends there in Q4. Inventory by brand is where we want it to be. Hollister is down significantly more than Abercrombie, obviously, with the Abercrombie growth trend. We have been adding inventory to that brand, chasing throughout the year; Hollister is down. We were stuck last year with some of that carryforward inventory, but it is very clean now, and we're excited about moving forward. Regarding 2024 raw materials, we're not going to talk in detail about '24. What we've said throughout the year is that we will see a little bit of freight benefit there in Q1 rolling into next year. Then raw materials become a tailwind as we get into '24. We'll talk a lot more about that on the Q4 call. Lastly, for growth opportunities by brand, yes, Hollister International, we feel that we have an opportunity. COVID was tough for us, and we have talked about a slow recovery coming out of COVID. More recently, we're seeing that business pick up. Starting in Q2 and going into Q3, we have seen positive traffic back to our stores. We've done localization efforts this year that include pricing, marketing, inventory, and we're seeing that play out. One example is focusing on the U.K. and Germany, localizing our content, putting more marketing dollars there, and seeing a nice omnichannel response.

Operator, Operator

And our next question coming from the line of Paul Lejuez from Citi.

Kelly Crago, Analyst

This is Kelly on for Paul. Just curious, your 4Q guidance assumes a pretty meaningful deceleration in sales relative to the strengthening in 3Q. So just curious what's driving that. And if you could provide any more color on the 4Q quarterly comp trends? Any color by brand would be helpful. And then I have a follow-up.

Scott Lipesky, CFO & COO

Sure. Kelly, it's Scott. I'll take this one. Yes, for Q4 guidance, we are sitting here discussing an encouraging start to the quarter. I wouldn't say these 3 weeks don't matter, but they're very small in the grand scheme. The game really starts today and tomorrow for the next 40 days through Christmas. So that's how we're sitting here today. We think this is a reasonable outlook. Happy to be putting up another low double-digit outlook coming into the quarter. Inventory is in a great place; we’re excited about pressing our bets and marketing as we go through the fourth quarter. Our profitability has allowed us to do so. When we think about the brands, we're not going to provide specifics for the last few weeks, but just to reiterate, expect Hollister or Abercrombie to outperform Hollister in the quarter, along with growth across brands and regions.

Kelly Crago, Analyst

Got it. And just two quick follow-ups. Just on the strength you're seeing in A&F, could you talk more about the new customers you're bringing in and some of the new categories that the customer is giving you permission to offer? And what gives you confidence that you can comp the comp at A&F next year? And then just on cash, any thoughts on share repurchases, given the significant cash you'll likely generate in the fourth quarter?

Fran Horowitz-Bonadies, CEO

I'll take that one. We've expanded Abercrombie to be a lifestyle brand, and that has allowed us to add many new categories, things we could never sell in the past. Non-denim bottoms are a strong category for us in both men's and women's. There's a lot of fashion happening in that sphere today, and our consumers can wear that for many different occasions. That's also a big win for us. We're expanding the addressable market, with consumers now ranging from late teens to early 40s. We're witnessing a diverse customer base in our stores. For franchises, our Best Dressed Guest business is also performing well. Our fleece and licensing business has shown strength. We are continuously learning about what the customer is looking for and providing them with options.

Scott Lipesky, CFO & COO

On the cash aspect, it's great to see the cash flow generation this year, with $350 million of operating cash flow through the first 9 months. As the business and profitability improve, our inventory is lean. We're witnessing cash flow come in. We did allocate $50 million this quarter to repurchase some of those high-yield bonds. So it’s exciting to deploy that cash. Moving forward, it’s the same strategy we've discussed over past years: debt and share repurchases will be our primary means to utilize excess cash.

Operator, Operator

And our next question coming from the line of Janet Kloppenburg with JJK Research Associates, Inc.

Janet Kloppenburg, Analyst

Congratulations on really exciting results and trends. It's just thrilling to see this comeback. A couple of questions, Fran. On Hollister Men, do you look for that momentum to pick up just as we look out? I'm not talking about any particular timeframe, but given what you see in merchandising execution going forward and the opportunities that you perceive. And then, on Scott, when we think about the AUC opportunity, should we think about that building starting in the fourth quarter and then going through fiscal '24, like each quarter consecutively better as you sell through higher cost goods? I just want to understand how we should consider that. And for Scott as well, when might we see freight benefits start to show?

Fran Horowitz-Bonadies, CEO

To start with Hollister guys, it's exciting to see the progress in the entire brand, right? We're witnessing a second quarter of total growth. As you know, it's led by the girls' business, which mirrors what we saw when we turned around the A&F business. However, what’s beneficial today is our supply chain and ability to chase is back, and that's a win for us. For Hollister guys, we’re focused on category testing, learning, and chasing those opportunities. We saw progress in non-denim bottoms, fleece, and sweaters. We expect this to continue into the fourth quarter and will approach 2024 with a category-focused mindset.

Scott Lipesky, CFO & COO

Yes. Regarding the AUC opportunity, as we consider it, we will continue to see freight benefits in Q4. As I mentioned earlier, cotton and raw materials will experience a minor setback, transitioning to a tailwind next year. I won’t delve into specifics about quarters for 2024 now, but we discussed freight as a first half Q1 benefit rolling into next year. Regarding cotton, we will provide further details on that at the Q4 call.

Operator, Operator

And our next question coming from the line of Dylan Carden with William Blair.

Dylan Carden, Analyst

I just have two. The first is just trying to get a sense of particularly on the A&F brand, how many remodels and repositionings you feel you have left in the timeframe one might expect that to rollout?

Scott Lipesky, CFO & COO

We have some opportunities left. We've made significant progress on the A&F fleet, particularly due to the closures from 2020. We closed many legacy oversized Abercrombie stores, and we've returned to those markets with newer, leaner, modernized stores. We've made substantial advancements. So we have some remodels left, yes, but not in a huge volume. The path forward for Abercrombie is focusing on opening new stores in unrepresented markets. We've talked about these neighborhood and street stores being a fresh approach and have already opened around 8 to 10. There is a wonderful opportunity ahead with it.

Dylan Carden, Analyst

Will those contribute to the overall fleet size, or are they additional accounts instead?

Scott Lipesky, CFO & COO

Those would be incremental. For this year, we're discussing 35 openings and 35 closures. We're kind of net flat. We’re also doing 20 remodels and rightsizes. The perspective is that we have 55 new experiences coming to customers this year, and that’s quite exciting.

Dylan Carden, Analyst

Got it. And Scott, I know you're not going to discuss much about this, but essentially, given the nature of underwriting earnings power, kind of come a long way with respect to operating margin. I mean, trying to understand sort of, I guess, in relation to the 8% longer-term target, how much of this kind of the low double-digit margin that you're seeing now? Can you attribute perhaps to outperformance comp relative to the cost environment? And what do you feel like you're left with regarding more volume growth?

Scott Lipesky, CFO & COO

I’ll reference back to '22, whenever we had our Investor Day, we discussed the potential for growth on the top line, some leverage, and regaining some of that cost on the gross margin line. We have experienced both happening at a greater level than we anticipated back in 2022. We are seeing robust sales growth this year, anticipating in the range of 12% to 14%. We experience great leverage flowing through to the bottom line. Regarding the gross margin, seeing freight costs normalize quickly and arriving at the end of the tail regarding cotton is part of the formula moving forward. We want this growth and stability to continue in the upcoming years.

Operator, Operator

Thank you. And I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Fran Horowitz for any closing remarks.

Fran Horowitz-Bonadies, CEO

Yes, I just want to thank everyone for joining the call today, and we look forward to providing some more updates to you soon.

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.