Good day, ladies and gentlemen, and welcome to the Abercrombie & Fitch Third Quarter Fiscal Year 2023 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would now like to turn the call over to Mo Gupta. Please go ahead.

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.

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…

Thanks, Fran. I'll start with adding my thanks and congrats to our global team for delivering a strong third quarter. We drove net sales, gross profit rate and operating margin above our expectations, while continuing to manage inventory tightly. For the quarter, total net sales of $1.056 billion were up 20% to last year with growth across brands and regions. Comparable sales for the quarter were up 16% with both stores and digital contributing. The 400 basis point spread between comps and total sales was primarily driven by net new store activity. As a whole, our new stores have exceeded our expectations and are expected to deliver productivity per square foot at a rate more than double the stores we closed last year and will close this year. On a regional basis, our growth was more balanced in the quarter compared to recent past. Better balance was driven by an acceleration outside the Americas. By region, net sales grew 22% in the Americas, 14% in EMEA and 13% in APAC. On a comp basis, sales grew 16% in the Americas, 15% in EMEA and 32% in APAC. In our EMEA and APAC regions, we have seen a good response to localization efforts made this year, including product and inventory distortions, pricing adjustments and timing of product drops. On a brand basis, Abercrombie brands delivered another great quarter of growth at 30%, while Hollister brands grew 11%. On a comp basis, Abercrombie grew 26% and Hollister grew 7%. Similar to the second quarter, Abercrombie brand's growth was consistent across genders, while the women's business drove the growth in Hollister brands. Moving on to gross profit. The gross profit rate for the quarter was 64.9%, up nicely compared to 59.2% in 2022. The 570 basis point rate improvement was driven by a…

[Operator Instructions] And our first question coming from the line of Dana Telsey with Telsey Advisory Group.

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?

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 our -- we saw it happen in Abercrombie, Women's led the way there, too, and girls is leading the way for Hollister. What specifically worked for us, non-denim bottoms that we've had an expansion in our bottoms category. They still love denim, but a lot of opportunities to 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 hinder 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.

Yes. Picking up the online versus stores, 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 good to see that store traffic coming back. And that's really on a global scale, which is very, very exciting.

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?

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 super exciting to be putting a number out there at 10% that we talked about last year in 2022, that 8% to 10% longer term. Excited to get here quickly.

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

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?

So, hi, Corey. So what's super exciting to have just finished our 11th consecutive quarter of growth for Abercrombie brands is just such a big win for the company. Super excited and proud of the team of what they've been able to accomplish. What's really terrific about that is it's balanced growth. We saw balance across actually brand, 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 product in there that the consumer is already loving. And lastly, as you know, we've really expanded the addressable market for Abercrombie. And 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.

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 well. 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?

Yes, great question. And this is something we've talked about a lot over the last couple of years really is the sustainability of the AUR. And 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 in Chase. So what you're seeing this year is another freight coming back in and normalizing, cotton getting kind of getting to the end of the tailwind and really strong AURs and a really great Abercrombie business that Fran just explained. So we want this margin to be sustainable. We're working hard at that. And the pieces that we can control will be the inventory levels and great product, and we feel confident in that.

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

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?

So a, it's really exciting. So as you watch the evolution with us of the brand, we've gone really from it, a jeans and t-shirt brand to a lifestyle brand. And that has afforded us the opportunity to expand both our age demographic as well as the categories that we are offering. The journey reaching our 11th consecutive quarter of growth is probably less based on reduced promotions for A&F because we've made a lot of progress over the years, and there's a lot of mix happening. And the consumer is responding to categories like outerwear and dresses. And we're seeing her respond based on obviously value and the fashion that we put out there for the price point. So as I'd like to say, products plus voice plus experience actually equals AUR and what the consumer is willing to play and pay for their goods. How do we apply that to Hollister? We work on playbooks here. So we had a playbook for A&F. We started with women's. We then went to men's, same thing in Hollister. We're seeing nice progress in girls. Now we're working on the guy's business. And then we'll continue to roll that playbook out now geographically, right? We're rolling into international and seeing success across all of our regions as well.

On the inventory side, our ability to chase, we've been doing it all year. We started the year with a sales outlook kind of low single digits, 1% to 3%, and now we're talking about 12% to 14% for the year, and we've been able to chase into that inventory as we've come throughout the year. Huge thanks to our teams, planning merchandising sourcing. It's hard to run the business this way and we put up a lot of process, and it takes a lot of hard work. But the teams have just chased into millions and millions of units this year. And so, if there's upside to be had here in Q4, we'll go get it. We'll turn our inventory faster. We'll bring in the next and so I'm confident in that ability.

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

And if I forget, best of luck this holiday weekend. Can you talk a little bit just about 2 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?

Let's start with the first question on store growth. So we, as you know, 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. That is probably not something we could have done years ago, but where the plan is today. We're seeing nice growth in them, it was just actually in New York last week, walking our SoHo and our Flatiron store, and it's so on a exciting to see this local customer coming in. We're selling -- are coming in. They're continuing to come in. We have an opportunity, as I mentioned going on several of these patients throughout the U.S. and possibly internationally as time goes on. We haven't declared total stores for 24, but what I can tell you is that we've been a net store opener for the last couple of years with the expectation that, that will continue to be so. Now for Hollister, to be more open and excited about testing and trying new things. So she did turn first for us for Hollister just like she did in A&F and hope that she would bring -- on we are seeing nice improvement, though, in Hollister guys. I mean the non-tenant bottoms have been very strong. Our fleece business, our sweaters business. So we're seeing category improvements, and our expectation is to continue to push out it and continue to see that expect -- continue to see that growth.

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?

Yes. So IPB, your personal faster active line for Abercrombie, we're seeing really nice growth in it. We have opened up some, I guess I would call them expenditure -- for example, like in our Fifth Avenue store, we just opened one up down in Aventura. So again, you know us, Marni, we are a test and learn culture. We're going to understand what the appetite is for this product, and we're going to continue to push on it.

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

Great. So do you view this as a holster inflection? And what processes have you put in place or change to kind of keep the brand from devolving back to where it was before?

Yes, Straton. It's exciting to see 2 consecutive quarters of growth. We're seeing lots of opportunity within the brand. As you know, we've repositioned it, and we have certainly come out with a nice new marketing that the consumer is really responding to. We have a playbook that is working, where we focus on our assortment architecture, our product, our voice, our experience. And our expectation is to stay close to that customer and continue to see growth.

Yes. And also for Hollister, just like Abercrombie, we've been talking, the inventory is in a great place down nicely the last year that brand is chasing. So as we're trying new things and have been broadening that assortment globally, we're able to chase into those winners and that's been part of the driver of Hollister, having that plus 8, and then having that plus 11. And so we're excited about going forward with clean inventory.

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

Great. I guess just on the 4Q guidance. Should we assume kind of like 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 like which brand has like a higher decline or where we see like a 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.

Hi, Mauricio. Good to hear from you. All right. Let's start with the Q4 guidance. So yes, similar trends is what the expectation would be as we've seen throughout the year. A&F outperforming Hollister. We do expect growth across regions. Good to see a nice acceleration in the Europe and APAC regions in Q3 and optimistic we can see continued trends there in Q4. Inventory by brand is where we want it to be. Hollister is down much more than Abercrombie is down, obviously, with the Abercrombie growth trend, where it is. We've been adding inventory to that brand chasing throughout the year, and Hollister is down. We were stuck last year with some of that carryforward inventory and really through year-end last year on the Hollister side, but very clean now and excited about moving forward. On the '24 raw materials, you noted it, we're not going to talk in detail about '24. What we've said throughout the year is holding. We'll see a little bit of freight benefit there in Q1 rolling into next year and then raw materials become a tailwind as we get into '24. So we'll talk a lot more about that on the Q4 call. And then the last piece was growth opportunity by brand. Hollister International, yes, we feel like we have an opportunity. COVID was tough for us. We've talked a lot about having a slow recovery coming out of COVID and more recently, it's nice to see that business pick up. It started in Q2. Q3, we're seeing nice traffic back to our stores. We've done a lot of localization efforts this year, pricing, marketing, inventory, and we're seeing that play out. One example is we've been focusing on U.K. and Germany, 2 of our biggest countries in the region, localizing our content, putting more marketing dollars there and we've seen a really nice response on an omnichannel basis. So we have some optimism there outside of the U.S. for the Hollister business going forward.

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

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

Sure. Kelly, it's Scott. I'll take this one. Yes. So Q4 guidance, we're sitting here. We talked about 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 the tomorrow into 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, excited about pressing our bets and marketing as we go through the fourth quarter. Our profitability has afforded us the opportunity to do so. So really excited about the opportunity ahead of us. When we think about brands, we're not going to talk about brands for the last few weeks. But just on the last question, expect Hollister or Abercrombie to outperform Hollister in the quarter and growth across brands and regions.

Got it. And just 2 quick follow-ups. Just on the strength you're seeing in A&F. Just curious if you could maybe talk more about the new customers you bring to the fold and some of the new categories that the customer is giving you permission to offer. And just what gives you confidence that you can comp the comp at A&F next year? And then just on cash, any thoughts on share repos, given the significant cash you'll likely generate in the fourth quarter?

Okay. I'll take that one. So as I mentioned just a couple of minutes ago, so we have really expanded Abercrombie to be a lifestyle brand, and that has afforded us the opportunity to add many new categories, things that we never were able to sell in the past. Non-denim bottoms is one particular one. I mean our pant business is very strong, both in men's and women's. There's a lot of fashion happening today in that category. And he and she continued to choose that category. They can wear that for many different wearing occasions, and that's also a big win for us. So expanding the addressable market as far as who's buying from us, late teens early 20s all the way up to 40 plus. We're seeing a very varied customer in our stores, which is super exciting. As far as franchises go, we just talked a little bit about YPB, our Best Dressed Guest business is also very good. Our fleece and licensing business has been very strong. So we continue to learn lots about what the customer is looking for and continue to offer that to them.

On the cash piece, yes, so great to see the cash flow generation this year, $350 million of operating cash flow through the first 9 months. As the business and profitability has improved inventory is obviously nice and lean. We're seeing that cash flow come in. We did put $50 million to work. We bought in some of those high-yield bonds this quarter, $50 million there. So exciting to put that cash to work. Going forward, it's really the same story we've talked about over the past couple of years. We're going to look at debt and share repurchases, our main ways to put excess cash to work.

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

Congratulations on really exciting results and trends. It's just thrilling to see this come back. 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 time frame, but given what you see in the merchandising execution going forward and the opportunities that you appreciate. And then for 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 about how we should think about that. And for Scott as well, when the freight benefits might start to win.

Thanks, Dan. We'll start with Hollister guys. So it's exciting to see the progress in the entire brand, right? The second quarter of total growth and as you know, led by the girls business, which is exactly the same pattern that we saw, when we turned the A&F business. But what's good today though is that our supply chain and our ability to chase is back in the business, and that is really the win for us. So for Hollister guys, we're going category by category. We're testing. We're learning. We're chasing after those opportunities. So we saw progress in non-denim bottoms in fleece and sweaters. Those categories we expect to continue into the fourth quarter, and we're going to go category by category as we head into '24 and continue to put test out there turn and drive that business.

Yes. On the AUC piece, Jane, so as we think about -- we'll continue to see freight benefits here in Q4. And like I said, cotton and raw materials, just a little bit of a hurt here and then turning into a tailwind next year. I'm not going to break apart Q or 2024 in a big way, but we talked about freight being kind of a first half Q1 benefit tailwind coming into 2024. And then on the cotton side, we'll talk more about that on the Q4 call.

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

I just have 2. The first is just kind of trying to get a sense of particularly on the A&F brand, how many remodels repositionings you feel you have left in the timeframe one might expect that to rollout?

Yes. On that one, Dylan. We have some opportunities left. And we've actually made a lot of progress on the A&F fleet, and it was really through the closures that we did back in 2020. We closed a bunch of those legacy oversized Abercrombie stores, and we've just come back to those markets with newer, leaner, more modernized stores. So we've made good progress there. So we have some more remodels, yes, left. Yes, we do, but not in a huge way. The path to the future for Abercrombie is really about opening new stores in markets, where we don't have a presence. We've talked about these neighborhood stores and street stores that are a new thing for Abercrombie and we're probably about 8 or 10 in at this point, and there's a nice opportunity heading forward in that regard.

Will those add to the total fleet size and those are incremental accounts like as opposed to [indiscernible]?

Those would be incremental. When you think about this year, we're talking about 35 opens and 35 closes. So we'll be kind of net flat. And then we're also doing 20 remodels and rightsizes. So the way I like to look at it is we have 55 new experiences coming to the customer this year, and that's really exciting.

Got it. And Scott, I know you're not going to talk much about this, but to the extent that we're trying to sort of underwrite earnings power of the model, kind of come a long way with as it relates to operating margin. I mean, trying to count the question and kind of getting [indiscernible] speak to 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 kind of attribute perhaps to outperformance comp relative to the cost environment? And what do you feel like you're left with sort of more volume growth? I mean anything to kind of help us, asset think about some of the earnings power for...

I'll go back to '22, whenever we had our Investor Day, we talked about getting some growth on the top line, a little bit of leverage and then getting some of that cost back in on the gross margin line. And what we've seen is both of those things happen in a bigger way and then we expected back in 2022 this quickly. Really solid sales growth this year, talking in that range of 12% to 14%. And we're going to see great leverage fall through to the bottom line there. And then on the gross margin side, just seeing that freight costs come in pretty quickly and then getting to the end of the tail here in cotton. So it's just the same formula as we go forward. you've seen a really strong flow-through in the business on growth this year. So our goal is going to be the same for next year. We want to grow. We want to see some of that cost come back in -- and that's what we're thinking about for 2024. We're in the middle of our budget process right now, and we want to set this business up for long-term growth, sustainable growth.

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.

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

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