Abercrombie & Fitch Co. (ANF) Earnings Call Transcript & Summary

All right. Good morning, everyone, and thank you for joining us today. My name is Corey Tarlowe. I am Jefferies' Specialty Retail Analyst. And I'm joined here by Abercrombie & Fitch. We have Fran Horowitz, CEO; Scott Lipesky, COO; and Robert Ball, CFO.

Good day.

Good morning, everyone.

And with that, I'm going to toss it over to Scott for some opening remarks.

Yes, first off, thanks for being here. Excited to tell our story today, and we have a breakout after this, of course. And thanks, Corey, for being here also. So we put out a release this morning, just a quick high level. We had a record holiday, December. When you add up November and December, a record for us on a great quarter last year in Q4. So really excited about how the holiday played out. We increased our Q4 outlook. We are talking about sales in a 5% to 7% range previously. We've taken that up to a sales up 7% to 8%. When you pull back on that crazy 53rd week from last year, we're going to be around a 13% to 14% growth when you neutralize that. So really excited about Q4 and really ending an amazing year for the company. We're expecting around 15% sales growth for this year, and it's about 15% operating margins, both up strongly to last year. So really excited about the momentum coming through holiday and setting us up for 2025.

Thank you for that. So good morning, everybody. I'm very excited to be here as well. Thanks for coming to see us this morning. So just a year ago, we sat here and said, we had a pretty defining 2023, and that's what we called the year of 2023. And we promised and committed to coming back and doing it again, and that's exactly what we did and even better for 2024. So I am just incredibly pleased and confident about, a, where we've been, the work that we've done to rebuild and transform this company and where we're headed for 2025. With that said, I think Corey has a few questions for us, and we're happy to jump right into it.

Fantastic. So Fran, with that, can you talk a little bit about Black Friday and holiday? Where did you see any bright spots or some opportunity? And then I think some color by region and banner would also be great too.

So Scott just said, coming in here today with our release this morning, very pleased to have raised our guidance both for the fourth quarter as well as for the year, coming in on awesome year of double-digit increases for both brands. We've seen success across regions, across brands and regions as well. So from a product, which I love to talk about, we're seeing a lot of wins. We headed into the fourth quarter, knowing a lot about our products. We talk consistently about this Read & React process that we have at Abercrombie, which really does differentiate us from the competition. So what happened for Abercrombie Adult, we saw for Women's, we saw sweaters work. We saw fleece work. Our leading dress business continues to be good. Super excited about how that business has just flourished over the years and continues to grow. Our Abercrombie Mens business, also good. Fleece and sweaters, lots of good -- bottoms in Mens as well, and then Hollister. Really a sensational year for that brand. They are winning in denim, they're winning in fleece. They're winning in sweaters. Again, I could go on and on and on about the products, but lots of good categories, lots of good winning for us for the holiday season. Again, a record 2024.

Just adding on a little bit more of that quantitative. I mentioned it a second ago, about 15% sales growth for the year, 15% operating margins, up from around 11% last year. And importantly, our operating income is going to be up almost 50% year-over-year on that 15% growth in operating margin. So all those wins that Fran talked about across regions and brands really flowing through the P&L in a great way.

That's great. So looking back on '24, what do you think are some things from a high level that the company got right? And what do you think we can improve on as we look forward?

Well, I guess most of it we got right because I think we got a lot right. We talked often, Corey, about our playbook. That's something that we've created years ago, which is our -- getting our -- lining our product voice and experience, we've now started to export that playbook. So it started pretty much in Abercrombie domestically and now our regions are also executing against that and executing quite well. Our store base, we opened up 120 exciting new experiences last year, 60 of those being new stores and 60 of those being refreshes around the world. I think that was year three of being a net store opener. And our expectation as we head into '25 is continue to open up new stores around the world. So lots more of excitement coming from that. In fact, I'm headed to London in just a few weeks, we're opening up two more terrific stores right in London right on the corner of Bond and Oxford as well is in Covent Garden. What else did we do right? We have amazing brands, right? We've got global brands that are really resonating. Our marketing is industry-leading. We've done a couple of these experiential things this past year that have been just terrific. We just did a big event in Las Vegas for the Formula One event. We've been doing these feel good festivals for Hollister, which are surprise concerts in high schools around the country. In just a few weeks, we'll be showing up at the Super Bowl again, bigger and better than we did last year. So a lot's working for 2024, and our expectations heading -- taking all of those things into 2025 and just building on them.

Yes, we did have areas for improvement. There's no doubt about that. I mean in this industry you have to constantly get better every year and make sure you can comp that comp. And Fran mentioned some of those investments, investing in the store base. We've been opening new stores. Our stores are highly profitable, highly productive, very different from where they were five years ago. So we're investing in a big way in both new stores and refreshes. And then on the customer journey, and this is so important in this business. Our business is basically 50-50 now between digital and stores, so we need to grow both channels. And we've been investing heavily both in the store business because it's performing quite well, but also in the digital business, which has been growing and is nicely, nicely profitable. So really happy about those investments. And our goal every quarter, every month is to come into this business and make it stronger whenever you exit that following quarter. And we've been doing that for multiple years now. Q4 will be another quarter of that. The brands will come out stronger, the company will come out stronger. And that takes us into 2025, but we need to continue to improve, which we will.

Take it with a lot of momentum.

Yes, it does. Corey, you've been on this journey with us for quite some time, and many of you in the audience who's been on this journey with us. And the transformation that we've undergone just from a finance framework standpoint has been massive over the last handful of years. Coming into the year, sitting here saying 15% top line growth is amazing. But what we're really excited about is what Scott hit on earlier is the construct that we've got in this operating model is mid 60s gross margin for the year, 15% around operating margins for the year. What that allows is a massive flow through that top line beat. So incremental sales flowing through the bottom line to Scott's point earlier, we'll see 15% growth on the top line. We'll see operating margin dollars or operating profit dollars more than triple that, close to 50% for the year. So that framework is what kind of sets us up and what gives us a lot of excitement. It throws off a ton of cash. We've got a really strong balance sheet. It allows us to invest into the areas that Scott and Fran touched on. So we're really excited about the framework and how that launches us into 2025.

It's amazing. Fran, I wanted to go back to a comment that you made where -- because you're so focused on products, you talked about sweaters and fleece and denim. How important was products to your success in '24?

You are pulling my heart strings obviously. And it does not start with the products and it starts with the consumer, and that's just where the team has been incredibly focused. A lot of people say it, but we actually do it. We are so close to our customer. Everything is focused on them. We are out with our customers. That's the most important thing. We are spending time with that consumer, whether that's through teen events, whether that's through the 20-somethings and what they're doing for the weekends. We go away on weekends with them, and we make sure they're truly understanding who they are and what's important to them. That led us to a lot of wins. To your point, Corey, so let's just take Collegiate, for example. That was a new business for us this year. What we heard and listened to is that this teen is very aspirational whether they're going to college, whether they're thinking about going or not. They love wearing different universities around the even regardless of geography. So we listened, we heard, we said we're going to go after this business, and it has been absolutely terrific. Now with the whole new calendar of the football that's even gone on even longer. And there's been lots of success that helps drive that through the fourth quarter. So again, product is the center of everything that we do and staying close to the customer and then making sure our marketing team and our product teams are just aligned and getting that product voice and experience together is just driving this winning formula for us.

Yes, it's important over the 10 years in your analysis, we built an amazing process around product. We call it our Chase model, Read & React, pick your term just in time, we sometimes and it's all about understanding this consumer and then building a process where you can trigger that product as close to the time they need it as possible, and that's a very different way that we're running the business today than we were five years ago, 10 years ago. And so as that business has gone up, we started this year in 2024, thinking about a business up mid-single digits, and it's going to be close to up 15%. We were able to chase into that. And we have a team that is in rhythm across the organization. And we often get the question of why doesn't everybody chase? Some people do, but it's really hard. It's very, very difficult. Not only your product teams and your marketing teams, your sourcing teams, your supply chain teams, they need to be running as fast as they can, locking in arms and our team has done a great job doing that.

What we love about this Read & React model is not only does it allow us to chase into the upside that Scott's talking about, but also allows us to do is protect the downside. So we love our operating margin structures. This Read & React allows us to lean into the things that are working and lean into things that we get great reads on and actually step back on the things that don't check out from a testing sampling. So we love the model. We think it allows us to protect our margins. And again, it's a great place for us to be as an organization.

That's great. So Scott and Robert, you talked a lot about the financial successes of '24. I'm curious about -- and Fran about '25 and how you're thinking about '25 and keeping that growth that you saw in '24 going into this year?

Yes. I'll kick off, and I'm going to reiterate a little bit of the things I've already said. We have built a very strong global operating model. It's very different than the company that we used to be. And if you really can understand that we took this company bottom to top and have really changed the whole way that we do business. We built something that is very sustainable, and we're incredibly, incredibly proud of it. I'll let Robert and Scott get into a little bit more of the detail. But I think the biggest takeaway today is understanding the omnichannel, which is magic for us, right? We are winning in stores and we're winning in digital and putting those two things together. We're investing very heavily in both of those things, and that's going to continue into 2025. The brands are resonating around the world, making us stronger. We are getting approached by partners all around the world wanting to do business with us. We did talk about two things this year, one licensing deal that we did with Haddad Brothers and one with Myntra starting to do business in India. But we are getting approached consistently because we have such strong brands and more opportunities that we have to maybe diversify our model a little bit. So we're thinking about those things and we're investigating those, so to speak. I can keep going on. Do you guys want to jump in?

Yes, I'll jump in. Just on that last point. This is something new for Abercrombie. We've always kind of owned it in the past, and we've been talking for years together about strengthening these brands. And if you do strengthen these brands, people start to give you a call and we're starting to see that as a company, and we -- like Fran said, we've talked about a couple of deals, and it's really how do we get more exposure to customers around the world and -- but still focus on the core of our business. So getting great partners like we just signed up in India, obviously, is a fast-growing market, have our friends, our partners do that for us. So there'll be more of those coming in the future. And it's really a nice diversification of the P&L and the way we approach customers across the company. So we're loving that. Taking that construct a little bit more as we go into '25, just this concept of the flywheel effect. We have this amazing model of a lot of 15s, which is a very good thing in this business. So growing 15% this year, but with a 15% operating margin, if we can get that sales, when we get those sales coming on the top line like we did this year, like we did last year, bring more in the flow through is just amazing. And we can see that profitability. So for us, it's about growing the top line and seeing that expansion on the bottom line. More operating income dollars, more EPS, grow that at a rate faster than sales. And all of these things that Fran talked about, our brands today, way we're going to approach the market in the future will all help that.

And that drives all the money that we're investing. I mean, it's one of the most important things to walk away today is understanding how much we are investing in the business, whether that's in stores, whether that's in digital, whether that's in our culture, whether that's in our talent. All of that is helping us drive, to your point, 2025, '26 and '27 into the future.