ABERCROMBIE & FITCH CO /DE/ Q2 2026 earnings call

Thank you. Good morning and welcome to our second quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, Scott Lipesky, Chief Operating Officer, and Robert Ball, Chief Financial Officer. Earlier this morning, we issued our second 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 subjects 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 during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and the investor presentation issued earlier this morning. With that, I will turn the call over to Fran.

Thanks, Moh, and thanks, everyone, for joining this morning. We entered 2025 aiming to build on our track record of delivering consistent total company success. I'm excited to share that our second quarter results continued this trend, as we delivered our 11th consecutive quarter of growth while also exceeding our top and bottom line expectations. Our team continues to leverage our strong foundation to balance reading and reacting to the current environment while diligently investing to realize the long-term global potential for our business. Our strong first half and start to the third quarter gives us confidence to increase our full-year net sales forecast, building on a record 2024. In short, our team and brands are strong, and we are entering the back half of the year with momentum to deliver sales growth, top-tier profitability, and drive shareholder return.

Second quarter net sales reached a record $1.2 billion, growing 7% over last year and above our expectations from May. We also exceeded our outlook on both operating margin and earnings per share, even after excluding the benefit of a litigation settlement. In addition, we continue to put our balance sheet to work, repurchasing $50 million of stock this quarter for a total of $250 million in repurchases so far this year. Regionally, the Americas achieved its 12th consecutive quarter of growth, with net sales up 8% on continued traffic strength across direct channels. In EMEA, continued cross-channel growth in the U.K. was outweighed by softness in Germany and the remainder of European markets, with regional net sales lower by 1% against 16% growth in the second quarter of 2024. APAC continued to perform well, growing 12% on nice cross-channel demand, while comparable sales grew 1%.

Moving to the brands, let's begin with Hollister. Wow, it is amazing to see this team so dialed into the teen customer. Hollister Brands delivered record first-half sales, growing net sales 19% in the second quarter on strong cross-channel traffic. Comparable sales were also up 19% in the quarter, and we continued to see growth in both units and AUR. Both the men's and women's businesses contributed to the growth story in the quarter, with good balance across categories. On dialing into this customer, we saw a great response to our brand activations at Lollapalooza in Chicago. Leading into August, we released our updated Collegiate Collection, which included several exciting social and in-store campaigns, with more on the way. We continue to find fun, effective ways to engage with the team, fueling Hollister, Inc.'s impressive growth.

For Abercrombie, the quarter was slightly below our expectations and similar to the first quarter overall. Net sales were lower by 5% against the backdrop of strong 26% growth in the second quarter of 2024. For further context on how exceptional last year was, the first half of 2025 remains the second best in brand history. In the second quarter, the team executed on their goals, leveraging promotions to manage inventory levels and by testing into new product concepts. As we expected, AUR was lower year-over-year, driving the majority of top-line performance for the quarter. Importantly, with the team's hard work, we exited Q2 with inventory in good shape and were in position to continue reading and reacting.

Entering the fall season, we're excited about some of the trends and fits from Boho to Western, and we'll be chasing winners to give our customers more of what they're looking for, building into holiday. Abercrombie & Fitch continues to gather momentum as a powerful global brand, and we remain on offense. Traffic was nicely positive across both stores and digital direct channels in Q2, and we continue to engage with customers globally through social and in-store campaigns. We're also investing with conviction, supported by our digitally-led customer base. We opened 13 new stores in the second quarter, including strong centers in Chicago and Toronto, as well as a great location in Hoboken. We have an additional 14 store openings planned this quarter, just in time for peak season. Strong brand health also allows for meaningful collaboration to capitalize on Abercrombie significant addressable market.

Earlier this week, we were excited to announce Abercrombie & Fitch as an official NFL fashion partner, a first for a league sponsor. We look forward to collaborating with the NFL to bring A&F fashion to fans and players alike. Beyond the powerful NFL partnership, we've seen a great response to our August denim campaign, which focused on consistent fit across a variety of styles, from baggy to boot cut. As part of the campaign, we hosted in-store denim events in key markets, successfully highlighting our strength in this category while driving great engagement across channels. For YPB, we were excited to announce a collaboration with T.J. and Dani Watt, the Pittsburgh Steelers linebacker and former professional soccer player, as we continue to build our presence in the active category.

Finally, through the licensing partnership we announced in 2024, Abercrombie Kids has now launched globally with department store retailers like Nordstrom and Macy's, amongst others. Overall, Abercrombie Brands made good progress in the quarter. The brand remains strong globally, and we continue to target getting back to net sales growth by the end of the year. Looking to the second half of the year, we are increasing our full-year 2025 net sales growth expectations based on our year-to-date results, supported by strong brand positioning, clean inventory, cross-channel traffic growth, and our balance sheet. On the bottom line, we've adjusted our operating margin and earnings per share outlooks to reflect the second quarter performance and revised estimated impact from tariffs, net of planned mitigation.

On tariffs, we intend to bring our proven playbook, built on years of experience, to mitigate as much of the increased cost as possible over time as rates become more certain. As our teams have demonstrated before, we have a variety of options in our playbook, including shifting global production, enhancing supplier contracts and relationships, managing operating expenses, and determining ways to increase AUR through lower promotions and lower clearance selling. As we said last quarter, we don't expect broad-based ticket increases in the back half and will concentrate on the fit, style, and emotional connection our customers come to us for every day. Importantly, we are operating in this new tariff landscape from a position of strength in terms of our brand health, our balance sheet, and cash flow profile. For the year, our objectives remain clear.

We expect to deliver record net sales, top-tier operating margins, and significant free cash flow. As our recent results show, we intend to deploy this cash flow to further strengthen the business through long-term investments while enhancing shareholder returns via share repurchase. With each quarter, we're adding to a growing record of consistency that will keep us moving toward a significant global market opportunity for our brands. Now, I'll hand it over to Robert to expand more on our results and key outlook drivers.

Thanks, Fran, and good morning, everyone. Recapping Q2, we delivered record net sales of $1.21 billion, up 7% to last year on a reported basis, above the range we provided in May. We saw a 100 basis point benefit from foreign currency. Comparable sales for the quarter were up 3%. By region, net sales increased 8% in the Americas, 12% in APAC, partially offset by a 1% decline in EMEA. On a comparable sales basis, Americas was up 5%, EMEA was down 5%, and APAC was up 1%. Outside of the Americas, the spread between net sales and comparable sales benefited from new store openings in foreign currency, with EMEA additionally impacted by third-party channel headwinds. On the brands, Abercrombie Brands' net sales declined 5%, with comparable sales down 11%.

Consistent with our second quarter outlook, the sales decline was primarily due to lower AUR as we cleared through carryover inventory. Hollister Brands' net sales and comparable sales grew 19%, with both AUR increases and unit growth on lower promotions. The comp to net sales spread for Abercrombie Brands in the quarter was driven by net store openings and foreign currency, partially offset by third-party channel headwinds. I'll cover the rest of the results on an adjusted non-GAAP basis, which excludes a $39 million net benefit related to the favorable resolution of a payment card interchange fee litigation in which we were a plaintiff. On the second quarter income statement, the net benefit is comprised of a $43 million settlement benefit in selling expense, partially offset by $4 million in settlement-related expense within general and administrative expense.

Operating margin of 13.9% of sales was above the outlook range we provided in May, delivering operating income of $168 million compared to $176 million last year. Adjusted EBITDA margin for the quarter was 17% of sales, on an adjusted EBITDA of $206 million compared to $215 million last year. As expected, we did see around $5 million of adverse impact in Q2 from tariffs, mainly recognized in cost of sales. Lower gross margin was partially offset by around 60 basis points of operating expense leverage, where general and administrative expenses levered 150 basis points on lower payroll and incentive compensation. Selling expense as a percentage of sales increased by 90 basis points, primarily driven by incremental store occupancy from new stores. Marketing was consistent to the prior year at around 5% of sales.

We ended the second quarter with inventory in a clean, current position, with inventory at cost up 10% and units up 7%. In anticipation of tariffs, we did selectively clear third-quarter receipts early within our bonded warehouses, driving around one point of the cost increase. As we alluded to last quarter, we saw a normalization of freight costs and unit mix that drove sequential improvement in year-over-year inventory comparisons. The tax rate for the quarter was above our outlook at 33%, driven by a valuation allowance of a deferred tax asset. Adjusted net income per diluted share was above our outlook at $2.32 compared to $2.50 last year. Moving to the balance sheet, we exited the quarter with cash and cash equivalents of $573 million and liquidity of approximately $1.02 billion. We also ended the quarter with marketable securities of $31 million.

For the quarter, we repurchased $50 million worth of shares, consistent with our commentary from May, ending the quarter with $1.05 billion remaining on our current share repurchase authorization. Shifting to the outlook, as Fran mentioned, we entered the second half with good momentum from the second quarter, and we are raising full-year sales expectations. On the cost side, our 2025 outlook issued today reflects the tariffs announced through August 25. Our approach and underlying principles for tariff mitigation remain unchanged, supported by a deep playbook and experience. We continue to expect China's sourcing share of the U.S. will be in the low single digits for the year, and we have minimal exposure to the de minimis exemption that is no longer in place, so it's not a factor of impact.

Globally, we remain nicely diversified across 16 countries, and the team is continuing to evaluate supply chain footprint changes, vendor negotiations, and operating expense efficiencies that will largely take shape in fiscal 2026. As discussed in May, we do not anticipate broad-based ticket price increases this year and have not assumed meaningful AUR mitigation in our outlook. Out of planned actions, the assumed tariffs carry a cost impact of around $90 million for 2025, impacting our full-year operating margin outlook by 170 basis points at the midpoint of our sales outlook. For the full year, we now expect net sales growth in the range of 5% - 7% from $4.95 billion in 2024, with full-year growth expected across regions. We've increased the full-year outlook to reflect second-quarter outperformance and for expected third-quarter sales, and we're in a position to chase for the fourth quarter.

We currently anticipate around 50 basis points of favorable foreign currency in the outlook. We now expect full-year GAAP operating margin in the range of 13% - 13.5%. The increase from our prior outlook range is primarily due to the inclusion of the $39 million net benefit from a litigation settlement in the second quarter results, offset by the revised second-half impact from tariffs net of mitigation efforts. We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around 49 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10 - $10.50. For capital allocation, we now expect capital expenditures of approximately $225 million, increased primarily due to the timing of projects.

On stores, we expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers, with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we continue to target around $400 million in share repurchases for the year, subject to business performance, share price, and market conditions. For the third quarter of 2025, we expect net sales to be up 5% - 7% to the Q3 2024 level of $1.2 billion. We expect operating margin to be in the range of 11% - 12%. We continue to expect slightly lower costs from freight, as well as around $25 million of tariff impact net of mitigation efforts. We are also increasing marketing investments year-over-year by over 100 basis points to support key partnerships and fall campaigns.

We expect a Q3 tax rate around 31%. We expect net income per diluted share in the range of $2.05 - $2.25, with diluted weighted average shares expected to be around 48 million, including the anticipated impact of at least $50 million in share repurchases for the quarter. To wrap up, we're proud of our first half results, and we're excited to keep the momentum going through the rest of the year. We're in a great position with a strong balance sheet, and we'll continue investing across regions and brands to tap into global growth opportunities. At the same time, we're staying focused on what we can control, using our proven playbooks to navigate the environment and drive long-term value. With that, operator, we're ready for questions.