Good day, and welcome to the Abercrombie & Fitch Fourth Quarter and Year-End Fiscal Year 2021 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Pam Quintiliano. Please go ahead.

Thank you. Good morning, and welcome to our Fourth 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 fourth 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 mentioned 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.

Good morning, everyone. I am excited to be here today to discuss our fiscal 2021 results and the initiatives that empowered us to achieve a 9.6% adjusted annual operating margin, our highest in over a decade and well above the 5.8% target outlined at our 2018 Investor Day. But first, I'd like to thank our global stores, distribution center and home office teams as well as our partners. Without you, we could not have realized such significant improvements. I'd also like to take a moment to send our thoughts and prayers to all of those impacted by the current situation in Ukraine. Now on to our results. First, I'm going to discuss the substantial foundational changes made from fiscal year-end 2018, which anchors to our 2018 Investor Day through 2021 before turning to fourth quarter and full year results and our thoughts on 2022. As a reminder, at our 2018 Investor Day, we discussed the initiatives necessary to stabilize, transform and ultimately accelerate growth. These included: optimizing our global store network, enhancing digital and omni capabilities, increasing the speed and efficiency of our concept to customer life cycle, and improving customer engagement through loyalty programs and marketing optimization. As COVID hit and others were in survival mode, our balance sheet enabled us to double down our initiatives. As a result, today, we are firmly in our growth phase. Let's take a moment to discuss. Starting with global store network optimization. Over the past 3 fiscal years, we have removed 1.5 million gross square feet or 23% out of our base through 228 closures, including 14 flagships. The vast majority of closures were oversized Abercrombies. This has resulted in a reduction in annual store occupancy costs of $197 million or 31% since fiscal 2018. A huge shout-out to our real estate…

Thanks, Fran, and good morning. With 2021 coming to a close, we wrapped up a critical multiyear period where we made significant progress in transforming our operating model and improving our profitability profile. Like Fran, I'm extremely proud of how our teams have accelerated our transformation, while navigating a tremendous amount of personal and professional challenges over the past 2 years. Turning to our results. I'll start by covering Q4 and full year 2021 with references to 2020 and 2019, where applicable. I'll finish with thoughts on 2022. For Q4, we delivered net sales of $1.16 billion, up 4% to 2020 and down 2% to 2019. As mentioned in our January business update, we experienced significant unforeseen inventory receipt delays for the peak holiday selling period, primarily impacting Hollister and Gilly Hicks. We are caught up on receipts and do not anticipate significant inventory supply issues for the first quarter. We continue to execute against multiple initiatives to mitigate go-forward inventory disruptions, including updating our product calendar and diversifying our ports, carriers and countries of origin. Compared to 2020, net sales were up 2% for Hollister, which includes Gilly Hicks and Social Tourist and 6% for Abercrombie, which includes kids. By region, net sales increased 7% in the U.S. and decreased 4% in our international regions. Compared to 2019, net sales were down 6% at Hollister, up 4% at Abercrombie, up 3% in the U.S. and down 14% internationally. We continue to see stronger trends in the U.S. as compared to EMEA and APAC, where we saw ongoing disruptions from COVID-related lockdowns and restrictions. Our largest market, the U.K., was impacted throughout much of the quarter, while the Netherlands and Austria experienced COVID-related closures. As stores and markets have reopened, sales have rebounded nicely. Moving on to gross profit. Our…

[Operator Instructions] Our first question today comes from Paul Lejuez of Citi.

Curious if you can give any more color on the sales guidance in terms of what you assume by geography or concept? Just trying to understand which pieces of the business are likely to outperform versus underperform that top line guidance for both quarter and full year. Any quantification there? And I'm curious if you've seen any recent impact in your European business. Just what everything that's going on over there. Curious how the European customer is responding. And then last, just also curious if you're seeing any change in the promotional cadence out there amongst the competition. Or any signs from your customer that they might be resisting the higher AURs?

Yes. Paul, good to hear from you. I'll start with the color on the sales guidance. So thinking about the year in total, so up 2% to 4% this year, thinking about that in 2 ways, there'll be a balance new stores. So that will be a net new store grower this year, which is a great thing for the company. We've been reducing our store count for years and years, and we're at a point now where we are turning that up the other way. So really exciting on that side. And then we'll have a balance of comps. When we think about growth, we expect growth from both of our brands, Abercrombie and Hollister. Likely Hollister will continue -- I'm sorry, Abercrombie will continue to outperform Hollister a bit, but we expect growth by both brands and really the same trends continuing across geos. Expect the U.S. to outperform the international regions. Again, we're cautiously optimistic that the international business will inflect here as we get through the worst of COVID, but time will tell, and we're not going to forecast that until it actually happens. So that's how we're thinking about the sales outlook. And I would say those themes, pretty consistent as you think about Q1.

Yes. I'll jump in on promotional cadence, Paul. So we look back on '21, what an exciting year for us. To reduce the promotions that we were able to take out of the business in '21 were quite an exciting accomplishment for all of us. So we did see the consumer, to your point, 7 quarters of AUR growth and 4 recent quarters of double-digit AUR growth. So he and she have shown some elasticity that is clearly based on the fact that our product voice and experience are resonating and we are keeping tight control on inventory. We will keep both of those things as part of our strategy as we head into '22, and we'll continue to monitor this customer on a weekly basis, like Scott and I do with the teams.

Just to close the loop on the EMEA current climate, Paul. A lot going on, obviously, in the European region. It's a horrible situation, what's happening in the Ukraine. We do not have a large exposure to that part of the world in Eastern Europe. And on the Western European side, we're kind of comping the reopening this year versus a pretty shutdown economy last year. So a lot of moving parts there, and our hearts go out to what's happening in that region.

And we can now move on to Susan Anderson of B. Riley.

I was wondering if maybe you can talk a little bit more about Gilly Hicks on maybe give some color on the size of the brand now, if it's material, and then the growth you're expecting over the next few years in number of stand-alone stores. And potentially other new product categories you can expand into such as like the Gilly Go as we look forward.

Hey, Susan. Love to talk about Gilly. So as you know, we launched Gilly back in July and established a nice new platform for it, which is finding your happy place, which is really resonating with our consumer, and we introduce guys into the brand as well. So starting with that, we carry guys now in our side-by-side, in our freestanding store in Easton and that is resonating nicely and selling nicely. Gilly Go, we added during the pandemic, and that has also been a nice growth vehicle for us. So Gilly had a strong year, excited about the product acceptance that we're seeing, as you mentioned. So we did open up to Easton and have seen a nice response to that store. We are a test-and-learn culture here. So what we're learning from that store is enabling us to open up 2 that we named this morning. So we're opening up a store in the U.K. and Germany as well. And we have a few more on the docket. When we get to our Investor Day in June, we're going to give more specificity about Gilly.

Okay. Great. And then maybe you could talk about -- have you seen, I guess, it sounds like denim is still very strong, maybe dresses are coming back. But have you seen I guess is everything selling very well, including fashion now? Or have you kind of seen that pendulum swing towards more fashion? And is that what you're expecting for this year for maybe dresses to kind of take the strength and denim is still strong but maybe not as strong as they had been?

This is actually -- our denim business and our dress business has been strong for quite a few years now. We even talked back during the real height of the pandemic that we were selling fashion in both denim and dresses. I couldn't tell you exactly where everybody was wearing it too, but we certainly talked about the fact that, that they were both resonating. Today, that continues to be so. We had a strong year in both those categories, in both of our brands for '21. We're still seeing strength in both of them. I mentioned during my script that we are looking at what could be a record year in weddings, and so dresses are resonating in both brands. There's so much fashion and exciting new things happening, particularly in the denim area that the more newness and the more fashion sending out to our consumer, the hungrier and excited they are about the product. So again, just to sum it up, both are strong and expect to continue to see that.

We can move on to Dana Telsey of Telsey Group.

As you think about the digital business, which I believe is around 48% of sales or so, where do you see that going? And now that you're shifting to being a net store opener, how do you see the percentage in the U.S. business malls versus off-mall? And going forward, is your rent expense going forward lower than what it had been in 2019? Or how are you thinking about occupancy cost?

Dana, good morning. I'll kick this one off. So exciting. Digital business has grown tremendously for us from 1/3, as you said, close to half of our business. As we think about the future of our business, both are important. Digital will grow and stores will grow. That is clearly the magic that makes our omni business. As the stores have reopened, we're actually seeing the channels rebalance a bit. So we haven't declared exactly where we think that's going. But today, at about 50% for both and growth for both is how we see it.

As we think about on-mall, off-mall, the Southport, the Chicago example we gave is a good one. We're going to continue to evolve our toolkit as it comes to stores and how we approach each market. So more to come there. I think we'll start to see a little bit more off-mall than we've had in our past. Going to the occupancy question, which was the last question. We've been on quite a journey here on occupancy. You've been on that journey with us. Our occupancy dollars are down close to $200 million when you look back a couple of years to that 2019 level. At this point, we're baking that into our outlook for next year. It's a great starting point. Our occupancy dollars will tick up a little bit as we become net openers of stores. But we're not going to lose that discipline that we've had here for the past couple of years. It's got to be the right size at the right location and the right economics. And if we get that, we will sign the deal. And so we don't expect large oversized expensive stores like we've had in the past, but we are going to maintain that discipline going forward.

And the next question comes from Matthew Boss of JPMorgan.

Great. So Fran, you cited top line acceleration in February relative to the fourth quarter. Could you elaborate on trends that you're seeing across your brands? Any early reception that you're seeing to spring assortments? And then, Scott, what is embedded this year for AUC or freight as we think about shaping the margin structure this year?

Hey, Matt. So yes, we are excited to see where we are for February. That's coming off of 2 specific things. We talked a lot during ICR about the delayed receipt. Those continue to sell through from our consumers. So excited to see that. And the reception to our early spring receipts have been strong, and that's across brands and genders.

Yes. On the AUC, as we think about the full year, we're looking at about 300 to 400 basis points impact on margin from AUC. And I'd say that the front half is going to be weighted more towards freight as we lap lower freight last year. The freight really started to spike up in Q3 and Q4 last year. So -- we'll lap that with higher freight this spring. And in the back half, we'll start to see some of that cotton inflation flow through. So in total, we're saying about 300 to 400 basis points from cost increases into AUC. We do expect gross margins to be down approximately 200 basis points. So our expectation is that we will offset a portion of that 300 to 400 basis points freight, and raw material cost headwind with higher AURs.

And our next question comes from Janet Kloppenburg of JJK Research Associates.

I'm just wondering about the freight assumptions for the year. I think you said, Scott, that there's $65 million impact in the first quarter. How do you see -- in your 7% to 8% EBIT margin assumptions for this year, how do you see freight for the rest of the year? Is there some opportunity for moderation later in the year? And Fran, it sounds like Abercrombie is -- has really got some strong momentum. And it feels like it's a little bit better than Hollister's. I was just wondering, is that just because productivity levels of being recaptured at A&F? Or do you think that there are some other issues confronting Hollister, perhaps the impact of your having more restrictions than the U.S.? I'd just love to see -- understand your view on the sales momentum of Hollister versus A&F and how we should think about that going forward.

Okay. So let's start. We'll go backwards, Janet. So starting with A&F, yes, the brand is on fire, and it is so awesome that the brand is back. I'm sure you've been with us for quite a time.

Right. It looks amazing. I mean it's just -- it's really quite well done. Yes.

Thank you. So it's obviously, Hollister got to start much earlier in this journey. And I will tell you that we are actually really excited about our Hollister business. Our U.S. business, specifically, let's focus on that for a minute. Yes, we were 6% ahead of 2019 in the U.S., and Hollister has a different composition to it. So to your point, it's more store-based, it's more international-based. And we can see the receipt delays that we incurred in December and January, a higher penetration on Hollister and on Gilly. So both brands are resonating. A&F trend is a bit stronger than Hollister, but Hollister is still strong, and we're excited. They got their assortment architecture right. Their denim business is terrific. So lots of good things happening in both brands.

Right, Janet, on the freight, the $65 million that we called out for freight is related to Q1, so year-over-year growth in freight in Q1. Assuming out to the year, getting back to that 300 to 400 basis points is our estimate right now for freight and raw material impact for the year. I think we as well as pretty much everyone that ships product across the ocean, we're all hopeful for some kind of moderation in the back half, but who knows when that might come. We're not planning for it. I think we're all hoping for it. When we think about the operating margins for the year, our sales were up 2% to 4%, expenses will track against that. So call it expense leverage, deleverage, essentially 0. And then we look at that gross margin in the middle. We're expecting around 200 basis points decrease from 2021. So that's really what's driving the expected operating margins down from this year into next year. And we'll see, we're putting a realistic AUR out there. We've had a really strong run on AUR, 7 straight quarters, double-digit for last year. We're expecting more on top of that. But at this point, we're not expecting we would overcome all of that inflation.

The next question comes from Kimberly Greenberger of Morgan Stanley.

I wanted to ask about the outlook for gross margin here in 2022. Are you contemplating any return of some promotions either across the industry or in your store? Or do you think you'll be able to hold all of those AUR gains that you got last year and build upon those with the additional price actions in 2022?

Our expectation is that we will be able to hold those gains. Our expectation for the year, I just mentioned, the AUR to be up off of 2021 levels. We are increasing tickets in select places, and we also think we have an opportunity to pull back on some additional promotions. You know better than anyone. I read your tracker. It's very nice. We were promotional all year last year. We are in a promotional business. So what we are trying to do as a company is pull down our promotions. What used to be 40 to 50 are now a 30 and a 20, and we've had great success with that. So what we're going to do, stepping back, looking at the full year, we're going to deliver great products. We're going to keep our inventory in control and that's going to put us in the best control of our promotional calendar. So the short answer is yes. We think we can hold those gains and build on them in 2022.

Okay. Great, Scott and that is a great segue to my second question, which is just on inventory. How should we think about inventory levels throughout the year 2021? Do you expect a similar kind of increase to what we're seeing here at the end of Q4 to be relatively durable over the next 3 quarters?

Yes. Coming into this year, just breaking apart of that inventory, so we were up 30%, which have seen a lot of that across the industry. There's some interesting things happening out there. In transit, we all know the transportation lag now versus the past. So we're seeing higher in transit this year. And then we're also seeing some of those higher freight costs baked into that inventory level. As we think about the units on hand, our units on hand starting the year were flat to last year. So we're in a really good place, continue to be clean. As we look towards the rest of the year, as we've gone through last year, specifically back-to-school and more into holiday, we lessen business on the table due to some of those late receipts. So we're going to make sure that some of those receipts are here at a better time line than last year. All of the efforts that our supply chain and sourcing team have been making to ensure our receipts are properly timed and placed and received. So we're optimistic that we'll have better on-hand inventories as we start some of these peak quarters and the peak holiday selling period.

Our next question comes from Corey Tarlowe of Jefferies.

You had mentioned that, I believe 40% of Abercrombie stores are in updated format. Can you talk about the comp performance of these updated stores versus some of the older stores?

Hey, Corey. Scott, I'll grab this one. Yes. The performance in these stores has been good, and it's been interesting to read. I'd say it's hard to read during COVID here because of the wild nature of the stores in each region. So going back to 2019 when we were talking about this, the store performance was really strong in these stores. And regardless of the performance, this is a significant step for the brand to modernize the experience in the stores to match what's happening on social and to match what's happening on our sites and our apps, whenever we're marketing. So we will continue to remodel these Abercrombie stores. We'll continue to close some of the legacy stores and reposition the new stores. So excited about raising that 40% rates of the modern store experiences because we just love where this brand is and where this brand is going.

Great. And then just a follow-up on stores. How should we be thinking about the idea that you're going to be a net store opener this year after years of closing stores with some flagships still, I believe, remaining to be closed and the continued evolution of digital and the continued expansion of your store fleet? Just any color as it relates to expectations for store growth this year in the context of kind of continued flagship closures and expansion of digital, that would be very helpful.

Corey, the way to think about this thing a net store opener is that it is an exciting new chapter for us. We have not been a net store opener since 2008. Omni for us equals stores plus digital, and we believe that we have an opportunity to grow both. Our capital is invested in both. As Scott just talked about, I mean, these new smaller, more efficient stores for us, which are omni hubs, right, the consumer comes to bring their pop in or do their DTC return or shop for new product is a winning formula for us. So we need to have stores in order to be omni-capable. So the way I would think about it, just to sum it up, is that being a net store opener for us is an exciting new chapter. It talks about the fact that our balance sheet is strong and that we have growth ahead of us.

[Operator Instructions] Our next question today comes from Mauricio Serna of UBS.

Great. I wanted to ask about the store -- the new stores. You mentioned you plan to open 50 new stores then close 30. Does that store closure include any flagships? And then you also mentioned about the sales growth expectations being a mix of higher comp store sales and expansion. Could you provide a little bit more details on that breakdown? And lastly, regarding marketing. I mean how much should we think marketing as a percentage of sales should increase this year? I mean is the intention to continue investing at a higher pace than sales growth?

All right. Let me click down through these. So let's start with the closures. We will have a couple of flagships run off this year, more than likely pending any kind of short-term extensions. But the estimate on the rest of the closures of around 30 will be across brands. We'll continue to target those malls where landlords not investing and our customers moving away from those centers as well as oversized stores and legacy stores. So part of the great thing about closing stores and then opening more stores is repositioning that fleet. And to the question we just discussed, being able to close legacy stores and open more modernized experience is a great thing for all of our brands. I'll hop to the marketing question. So as a percent of sales, we did increase marketing nicely this year versus 2019. That was funded by those reductions in occupancy, that almost $200 million that we talked about. So really nice to be able to position from a fixed cost to a variable cost, number one, but also give us the best chance to grow and win with our brands. So our marketing as a percent of sales. We feel good where we were in 2021. So we'll probably keep that pretty level as we go forward. On the sales comp, as we -- I missed that middle question. Can you repeat that again?

Yes. The sales growth for guidance for the year, I recall you mentioned there's some contribution from comp store sales, but also the store expansion. If we could -- could you give us an idea of how is that balance?

Yes, sure. I'd say it's a balance, probably down the middle. We'll get some comp growth, half of it and some of it will new store expansion. We did close 38 stores last year, 44 stores last year. So we'll see -- we'll lose those sales, and we'll offset that with new store openings this year, so call it about half and half.

And just very quickly, the stores that you're closing, are they bigger than the ones that you're opening like on an individual store basis?

More than likely, we have an estimate for the year, not exactly a targeted store list, but we still have a portion of the fleet that is oversized, and we will continue to work through that as quickly as we can.

And the next question comes from Marni Shapiro of Retail Tracker.

Stores really look fantastic. And congrats on the new launch in activewear. Looks great. Fran, can you talk a little bit about what -- you've talked a little bit about this omni-enabled. But I'm curious from your perspective, what that means to the company. It sounds a little bit like using those stores as a hub. What does that mean for the shopper? Are there also things happening in the stores, the cash rep is still there, for example. Can she scan items? Or what's the long-term thought about the omni? And then I have one follow-up question just on inventory.

Sure. So kicking off with omni. I mean what is omni to us, Marni? It's our future, right? Having a great omnichannel brand experience for the consumer, so every touch point that he or she comes to the brand on, that they have a seamless consistent experience is our end goal, and that's what we're working to. Scott brought up a little bit about this store we just opened up in Chicago, the Southport store. That speaks to a couple of things. First, it speaks to data and analytics, right, telling us that this consumer, we had a big digital consumer in that market and she needed a place to pop in, right, pop in and [indiscernible] online or return our DTC purchases or just come in and shop. So as we continue to build out our data analytics and our omni. Those 2 things come hand in hand, will help us continue to grow the business.

Yes. But just to add on, when you think about a store, I'd call it maybe 80% of the functionality is going to be similar. But then it's really on the build-out. That other 20%, how do we tailor that market to the local consumer? Depending on the store or the market, we see pop-ins at a much higher rate in some places, and a lot of places, it's smaller. And there's not a lot of digital returns, and it's purely a shopping experience. So what we do is we tweak the store format to match that market. We have all the same functionality in those stores, but it depends on how much space we give to those. That functionality, where we put the cash rep, how many fitting rooms we have. So that's and the technology we put in the fitting room. So that's all the work that we're doing and really tailoring that experience for each market.

Would it allow you -- I know this is kind of a silly question given how lean inventories are right now. But would it allow you to, longer term, carry less inventory in those stores as well?

Yes, some cases and in some cases, more.

Right, exactly.

Okay. And then just a follow-up on the inventory. I know Hollister was more severely impacted than Abercrombie. As the inventory start to flow into the stores, was it highly seasonal? Is this something you had to pack away? Or is it something you were able to flow through when the customer responded to the full price anyway?

The latter. So what's exciting, Marni, for our business, we don't do a lot of deals -- true seasonal product. We do some mostly probably in our sleepwear category. And so we made those decisions before we bought the product, and we did have to pack away a little bit nothing, nothing significant. But the exciting thing was that we knew [ the receipts ] that were coming in. We had some testing on them, and the consumer responded accordingly. So we are selling through those nicely as well as our new spring receipts. So both are working.

As there are no further questions at this time, I would like to turn the call back to Fran Horowitz for any additional or closing remarks.

Just want to thank everyone for joining us today.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.