ABERCROMBIE & FITCH CO /DE/ Q4 2026 earnings call

Thank you. Good morning and welcome to our fourth 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 fourth quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investor 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 mention today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission.

In addition, we'll be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations from 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, Mo. Good morning, and thanks for joining us today. Before we begin, I do want to acknowledge the situation in the Middle East with associates and stores in the region. Our focus continues to be on their safety and well-being. Returning to our results, I'm happy to report the fourth quarter finished on a higher end of the ranges provided in our early January update. Once again, we accomplished exactly what we set out to do. Holiday product acceptance drove record fourth quarter net sales with balanced growth across regions, brands, and channels, along with growth in earnings per share. As a company, our goal is to set clear commitments and then deliver on them, leveraging our strong foundation and operating model. We achieved another year of consistent results for 2025, with record sales, growth across regions and channels, and leading double-digit operating margins.

Substantial operating cash flows also enabled strong returns of cash to shareholders via share repurchases. Looking forward to 2026, we expect to continue on a path of global growth and add to our track record of consistent, strong profitability. For the fourth quarter, we delivered net sales growth of 5%, which was balanced across regions, brands, and channels. It was particularly great to see both brands deliver record fourth quarter net sales. At Abercrombie brands, we achieved our goal of returning the brand to growth with 4% net sales growth on top of a record last year. Hollister brand continues to deliver for the teen customer, producing an eleventh consecutive quarter of net sales growth at up 6%.

With balanced top line growth and continued financial discipline, we delivered an operating margin of 14.1%, including 360 basis points of tariff pressure. I have to recognize the team's incredible efforts here to meaningfully reduce the impact of these costs. On the bottom line, earnings per share of $3.68 improved 3% on last year's record quarterly results, demonstrating our ability to create value through a balanced combination of global growth, operational excellence, and disciplined capital allocation. Recapping the year, fiscal 2025 net sales were a record $5.3 billion, surpassing $5 billion for the first time in company history. We grew over 6%, exceeding our beginning of the year growth projections provided last March.

For the third consecutive year, our customers responded to the team's compelling product and engaging marketing, delivering net sales growth across regions, led by the Americas, up 7%. Sales also grew across channels for the third year in a row. We continue to see great traffic on digital and in-store. Importantly, we continue to see our highest value customers shopping across channels. We delivered an operating margin of 13.3% or 12.5%, adjusting for a one-time litigation benefit, a double-digit result for the third straight year, despite 170 basis points of tariff pressure. On the bottom line, we delivered full-year earnings per share of $10.46, our second consecutive year of EPS over $10, by far the strongest back-to-back performance in our 30-year history as a public company. We also remain committed to shareholder return.

With $619 million of operating cash flow after investing back into the business, we returned $450 million to shareholders via share repurchases, totaling 11% of shares outstanding at the beginning of 2025. The team worked hard all year, staying fully committed to our customer and our playbooks. I'm proud of the consistency of these results as a clear demonstration of our leading operating model and culture of financial discipline. From a regional perspective, 2025 was another year of progress. In the Americas, we grew net sales 7% on strong cross-channel traffic, driven by compelling marketing across brands and continued store expansion. In EMEA, net sales growth of 6% was driven by double-digit growth in the U.K., along with good growth in the Middle East. APAC grew 5% this year, led by solid performance across our digital platforms.

Moving on to brand performance. I'll start with Hollister brands, where we set records across the business. I am so proud of what the team has achieved with the global teen consumer. With two consecutive years of 15% growth driven by increases in unit selling and AUR. On product, we delivered growth across genders and key categories, showing improved balance on both. We saw great response from a variety of exciting marketing campaigns supporting key product drops like our collegiate collection, the grad shop, and engaging collaboration with Taco Bell. We added millions of new customers in 2025, and importantly, we also saw improved retention. Simply put, Hollister's growth and scale stand out in the teen space, and we are excited about what is ahead.

At Abercrombie Brands, after a challenging start to 2025, up against a near perfect 2024, the team rallied and committed to getting the brand back to growth for by the end of the year. We did just that, achieving a return to net sales growth for the fourth quarter. As we've shared throughout the year, we believe Abercrombie remains a leader for our target customer. We continue to see strong traffic along with growth in customer counts and good retention trends. Reflecting our confidence, we invested across stores, digital, and marketing to bring the brand to life in new ways throughout 2025. Most recently, the brand hosted several amazing activations leading up to the Super Bowl.

As an official fashion partner of the NFL, the first of its kind, we had players and their families, several celebrities and league figures, as well as our target customers at a series of events. It was incredible to see Abercrombie at the intersection of fashion, sports, and culture. A great finish to our 2025 season and the perfect kickoff to 2026. Our ongoing investments across channels continued to pay off in 2025. We saw growth in the stores and digital direct channels for a third consecutive year, and both remain nicely profitable. In digital, we continue to see strong performance, finishing the year with that channel delivering 44% of total sales. We also surpassed 1 billion visits across our platforms for the first time, demonstrating the scale and direct reach we have with our customers.

Stores matter to them too. We were net openers for a fourth consecutive year, leveraging our digital demand to help us determine where we can better serve Hollister and Abercrombie customers with a physical location. At the center of all these excellent brand, channel, and regional accomplishments was our read and react inventory model. For the third consecutive year, we chased millions of units to support product demand at healthy AURs, helping to drive top-line growth. Inventories remain tightly controlled and we finished the year with units up in the mid-single digits. I can't overemphasize how hard our team works at this, coordinating product across functions, geographies, channels, and partners, all while tariffs were changing the global supply chain landscape week to week. Looking forward, we are very excited for 2026.

We entered the year with a strong foundation, which includes two globally relevant brands, a proven operating model, and a strong balance sheet, all managed by a world-class team. For the year, our goals for the company are as follows. First, to grow sales across brands with continued investments in owned and operated stores and digital businesses, while adding growth from partnerships and new product categories, like our recent launch of baby and toddler in abercrombie kids. Second, to stabilize growth margins as we progress through the year by mitigating as much of the tariff impact as possible. Third, to continue to invest in tools and technologies to improve our speed and efficiency across the product and customer journeys. A good example of this is the go-live of our new merchandising ERP system this month.

We're also moving quickly to leverage AI to benefit the customer, and we're modernizing systems to help us. Finally, to maintain our strong profitability by delivering another year of double-digit operating margins and expansion earnings per share. We also expect to continue our track record of returning excess cash to shareholders through share repurchases. After closing another record year in 2025, we are off and running on these growth objectives for 2026. We have the team, the experience, and the track record of delivering for our customers and our shareholders. Many thanks to the entire organization that makes this happen every single day. The work continues and always forward. With that, I'll hand it over to Robert.

Thanks, Fran. Good morning, everyone. I'd like to add my thanks to our associates around the world for staying agile and executing consistently throughout 2025. We're really proud of what we've achieved, and we have so much further to go. Starting with Q4 results, we delivered net sales of $1.67 billion, up 5% to last year on a reported basis. Comparable sales for the quarter were up 1%, with approximately 100 basis points of benefit from foreign currency. By region, fourth quarter net sales increased 5% in the Americas, 8% in EMEA, and 9% in APAC. On a comparable sales basis, Americas was up 2%, EMEA was down 3%, and APAC was approximately flat. Within the brands, both Abercrombie and Hollister delivered record fourth quarter net sales.

Abercrombie Brands returned to net sales growth up 4% over last year on a comparable sales decline of 1%. Hollister brands net sales grew 6% on comparable sales growth of 3%. Across the business, we saw mid-single-digit AUR growth and low single-digit unit growth on increased traffic. Across regions and brands, the spread from net sales to comparable sales was driven by net new store openings, third-party channel performance, and favorable foreign currency. Operating margin was 14.1% of sales, coming in at the high end of the outlook we provided in early January, delivering operating income of $236 million compared to $256 million last year.

Adjusted EBITDA margin for the quarter was 16.6% of sales on Adjusted EBITDA of $276 million compared to $293 million last year. The 210 basis point year-over-year decline in operating margin was driven primarily by 360 basis points of tariff expense, which was partially offset in gross margin by 140 basis points of freight cost favorability, both included in cost of sales. Total operating expenses were in line with last year as a percentage of sales, with investments in stores offset by leverage in general and administrative expenses. Marketing was in line with last year as a percentage of sales. The tax rate for the fourth quarter was 28%.

Net income per diluted share was above our outlook at $3.68 compared to $3.57 last year. We ended the quarter with inventory at cost up 5% with approximately 3 points related to tariffs. Inventory units were also up 5%, including approximately 3 points related to strategically building receipts ahead of our planned ERP implementation this month. I'll cover the rest of our results on an adjusted non-GAAP basis. For the year, we delivered net sales growth of 6%, reaching a record $5.27 billion. Growth was balanced across regions and channels, supported by mid-single-digit unit growth and low single-digit AUR growth on increased traffic. On a regional basis, net sales were up 7% in the Americas, 6% in EMEA, and 5% in APAC.

Across the business, we saw 70 basis points of favorable impact from foreign currency. Comparable sales for the year were up 3%, led by the Americas at 4%, with EMEA approximately flat and a 3% decline in APAC. For EMEA and APAC, the favorable spread between net sales and comparable sales was driven by net store openings and third-party channel performance. EMEA also benefited from favorable foreign currency. By brand, Hollister Brands delivered net sales growth of 15% and comparable sales growth of 13%. At Abercrombie Brands, net sales declined 1% on comparable sales decline of 7%, with the 6-point favorable spread between net sales and comparable sales driven primarily by store openings and third-party channel volume.

Operating income for the year was $661 million, an $80 million decline from 2024's record result, driven by approximately $90 million in tariff expense included in cost of sales. Operating margin was 12.5% of sales, a 250 basis point decline from 2024, also driven by tariff expense, totaling around 170 basis points of sales, with additional cost of sales increase driven by product mix. Operating expense as a percentage of sales leveraged slightly, with investments in marketing and store occupancy more than offset by leverage on general and administrative expenses. Adjusted EBITDA margin for 2025 was 15.5% of sales on Adjusted EBITDA of $816 million compared to $895 million last year.

The effective tax rate for the year was 29%. Net income per diluted share was $9.86 compared to $10.69 in 2024. Moving to the balance sheet, we exited the year with cash and cash equivalents of $760 million and liquidity of approximately $1.2 billion. We also ended the year with current investments of $25 million. For the year, we drove operating cash flow of $619 million and free cash flow of $378 million. For the year, we used $450 million of cash to repurchase a total of 5.4 million shares of stock or 11% of shares outstanding at the beginning of the year.

From a direct channel perspective, both stores and digital grew nicely for the third straight year. For the year, 44% of total sales were digital, with Hollister around 31% and Abercrombie around 59%. On the store fleet, we delivered 120 new store experiences, including 62 new stores, 11 right sizes, and 47 remodels. We also closed 22 stores, finishing as a net store opener for the fourth consecutive year. We ended the year with 829 stores, 523 Hollister, and 306 A&F across 5.3 million gross sq ft, growing square footage by 4% to last year. Both the stores and the digital business remain highly profitable, with four wall store operating margins around 30% in aggregate. Shifting to our 2026 outlook.

For the full year, we expect net sales growth in the range of 3%-5% from $5.27 billion in 2025, with full-year net sales growth expected across brands. We are investing for continued growth in the Americas and EMEA from both owned and operated stores and digital channels, as well as from wholesale and licensing partnerships. In APAC, while our business has delivered sales growth in recent years, we do not believe returns have fully reflected the level of investment. Consistent with our commitment to financial discipline, we are undertaking a review of potential strategic alternatives for the region, including the evaluation of options such as partnerships, franchising, and licensing with a goal of enhanced profitability, optimized capital deployment, and a maintained focus on shareholder value creation. We currently anticipate 40 basis points of favorable impact to net sales from foreign currency.

We have assumed modest AUR improvement for the full year as we've taken some revised ticket pricing across brands, largely focused on fashion elements of the assortment. We expect full year operating margin in the range of 12%-12.5%. At the midpoint, the year-over-year change reflects approximately 70 basis points of incremental tariff expense or around $40 million incrementally from 2025, net of product mitigation. Our outlook assumes the 15% global tariffs announced by the administration are effective beginning February 24th, and are assumed to remain in effect throughout the end of the fiscal year. No tariff refunds or recoveries are assumed for fiscal 2026. We also expect the first half will be favorably impacted by lower year-over-year freight costs normalizing in the back half of the year. We're forecasting a tax rate of around 29%.

For earnings per share, we expect diluted weighted average shares of around 45 million, which incorporates the impact of 2025 share repurchases as well as anticipated 2026 share repurchases. Combined with the tax rate, we expect earnings per share in the range of $10.20-$11. For capital allocation, we expect capital expenditures in the range of $200 million-$225 million. On stores, we expect to deliver around 125 new experiences, including 55 new stores and 70 right sizes or remodels. We also expect to be net store openers with our 55 new stores outpacing around 25 anticipated closures. We do expect net store openings to be relatively balanced across brands, but tilted to the Americas.

The company has a strong balance sheet and cash flows, we continue to expect share repurchases will be the primary use of free cash flow. For 2026, we are targeting share repurchases of around $450 million. Turning to the first quarter of 2026, we will go live with a new merchandising ERP this month, which will temporarily impact operations for approximately two weeks. During this time, we will limit inventory receipts and movement across the business, creating a temporary headwind of approximately 1 to 2 percentage points of growth for the quarter. We also have some incremental implementation costs in the quarter. In aggregate, we expect the ERP project will have over 100 basis points of unfavorable operating margin impact, which is factored into our Q1 outlook.