ABERCROMBIE & FITCH CO /DE/ Q1 2027 earnings call

Thank you. Good morning and welcome to our first quarter 2026 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 first 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 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'll hand it over to Fran.

Thanks, Mohit. Thanks everyone for joining. I'm happy to report that once again, we delivered against our commitments, growing net sales for the 14th consecutive quarter, setting a record Q1 despite headwinds in the Middle East and other select countries in EMEA. On the bottom line, our first quarter results exceeded expectations on both operating income and earnings per share. We're seeing good progress against our company priorities so far in 2026, led by net sales growth across brands in the Americas and other key markets like the U.K. We successfully launched our upgraded merchandising ERP, which will enable long-term channel and category expansion, and we continue to make strategic investments in marketing, digital, and stores to drive profitable growth.

One quarter in, the team continues to stay agile in a dynamic global environment. 2026 is shaping up to be another year of consistent progress as we maintain our full-year outlook on net sales, operating margin, and earnings per share. Recapping the first quarter, we delivered record net sales of $1.1 billion on growth of 2% to last year, in line with our expectations. Operating margin of 8% exceeded our plan, reflecting slightly lower tariff rates. Earnings per share of $1.47 was above our expected range. We used our strong balance sheet to return $105 million to shareholders through share repurchases totaling 3% of shares outstanding as of the beginning of the year. Regionally, the Americas grew 3% with growth across brands and good traffic levels in both stores and digital.

In EMEA, continued growth in the U.K. was more than offset by declines in the Middle East and other European markets as the regional conflict ramped up, driving EMEA sales down 10% for the quarter. The team has taken acts by controlling receipts and dialing in promotions to align to the trend. In APAC, we grew 24% on top of 5% growth last year, and our strategic evaluation of the region is underway to ensure we fully capitalize on the large addressable market there. From a brand perspective, Abercrombie brands delivered net sales growth of 3% for the quarter on flat comparable sales. We delivered positive AURs in the quarter on solid customer response to our spring assortment, along with consistent traffic and conversion levels to last year. In the Americas and the U.K., we saw balanced growth across genders with fleece, denim, and wovens performing well.

We continue to find excellent collaboration partners to highlight Abercrombie's elevated lifestyle brand positioning. Most recently, we teamed up with Sperry to renew a relationship that was first established in the 1930s on a collection of footwear and apparel across both men's and women's product. The initial launch, which reflected the rich heritage of our brand that continues to connect with today's customers. It exceeded internal expectations, and we're seeing higher than average conversion. We're in our fifth year of net store expansion for Abercrombie, and we're developing our local experiences directly on scaled customer feedback. A great example is our new expanded Abercrombie & Fitch store opening in SoHo next week. We've operated a smaller format location on Broadway for the past three years, and it was clear from our traffic and sales data that our customer was looking for a broader assortment.

This new store will be our best expression of the Abercrombie brand to date, and we're continuing to invest in other new stores across key markets to support long-term growth. At Hollister brands, we continue to find opportunities to further our connection with teen customers growing nicely in the Americas and APAC. This was offset by the Middle East and European demand trend, resulting in flat net sales to last year's first quarter record and growth of 22%. In the Americas and APAC, we saw positive traffic across both stores and digital direct channels, along with slight AUR improvement. Graphic tees, shorts, swim, and other warm weather categories grew nicely as we transition to spring.

With graduation season well underway here in the U.S., Hollister was excited to showcase Gigi Perez and her updated version of the iconic Green Day song, "Time of Your Life." We featured the song and highlighted our grad assortment across our digital marketing channels, celebrating this important milestone in our customers' lives. With the upcoming World Cup, teams are looking for authentic fits to represent their team. Hollister has partnered with Kappa, the Italian sportswear brand, with a deep connection to international football on a collection of men's and women's pieces. We believe we have exactly what the Hollister customer needs for match days and watch parties, in addition to the casual wear we're known for. Now turning to our 2026 priorities. In March, we outlined our focus areas for the year.

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. Second, to stabilize growth margins by mitigating external cost pressures, including tariffs. Third, to continue to invest in tools and technologies, including AI, to improve our speed and efficiency across the product and customer journeys. Finally, to maintain our strong profitability by delivering double-digit operating margins and expansion earnings per share, which will fuel excess cash return to shareholders through share repurchases. We made solid progress on each of these in the first quarter. We're using our playbook in growth markets like the U.S. and the U.K., and we're there for our customers every day in all the places they want to shop. With investments in marketing, new stores, and digital, we're seeing the customer respond, leading to our record first quarter.

As we shared on our March call, the team is closely monitoring developments in the Middle East using our playbook and global operating model to remain agile. Sticking with our playbook, we're focused on what we can control, including our inventory levels and marketing investments, ensuring we can respond to what's happening in real time. Despite these EMEA headwinds, we expect total sales growth for second quarter along with full year 2026, which would be our fourth consecutive year of net sales growth. Beyond net sales, we delivered modest year-over-year gross margin expansion in the first quarter as lower tariff rates and our mitigation efforts took hold. Our customers have responded positively to spring assortments, continuing to look to both Abercrombie and Hollister as leaders in the intersection of fashion and value for their respective demographics.

We expect the team's extensive efforts to maintain our customer relationships while balancing costs will support gross margin stability. Our 2026 priorities are also about evolving our model. We're finding new ways to grow, adding new chapters to our playbook and strengthening our foundation. We're excited to find new categories to serve our customers, like we are with Abercrombie baby and toddler. We're also looking beyond our owned and operated channels, developing new franchise, wholesale, and licensing relationships that will allow us to reach even more customers. I have to commend our team on a successful ERP implementation in March. Sitting here on the other side of this incredible multi-year effort, we're all excited to see how our new technology will accelerate our abilities to onboard and support new global partners, channels, and geographies.

Of course, we're also looking at how the buying process is evolving, particularly as AI advances, and we're testing new ways to bring our brands to those new chats, apps, and devices. Supported by our upgraded ERP, we have a modern digital foundation that will give us an advantage in leveraging data and insights with greater speed and impact. We're focused on continuing to develop these new capabilities to increase both quantity and quality of our customer relationships around the world. In summary, we started the year from a position of strength, delivering progress on both top and bottom lines. We remain confident in our plans and the growth opportunities ahead as we continue executing through 2026. We're tracking to another year of top-line growth, double-digit operating margins, expansion earnings per share, and strong cash flow, enabling us to target returning $450 million to shareholders this year via share repurchases.

With that, I'll hand it over to Robert.

Thanks, Fran. Good morning, everyone. Recapping the quarter, we delivered record Q1 net sales of $1.1 billion, up 2% to last year on a reported basis, within the range of up 1%-3% we provided in March. Comparable sales for the quarter were down 1%. By region, first quarter net sales increased 3% in the Americas, 24% in APAC, and declined 10% in EMEA. On a comparable sales basis, Americas was up 1%, APAC was up 15%, and EMEA declined 11%. Demand in EMEA was directly impacted as the conflict in the Middle East ramped up, reducing first quarter total company net sales growth by more than 50 basis points relative to our outlook. As discussed in March, we proactively limited certain third-party orders during the implementation of our merchandising ERP, negatively impacting top-line growth by approximately 100 basis points.

With the implementation complete, we resumed normal operations in April and moving forward. On the brands, Abercrombie brands posted a second consecutive quarter of net sales growth, up 3% over last year on flat comparable sales. Hollister brands net sales were flat to last year's record on comparable sales decline of 2%. As expected, across brands, we saw low single-digit AUR growth and low single-digit unit growth. Our brands both grew in the Americas and APAC, offset by softer demand trends that emerged in the Middle East and select European markets, with particular impact to the Hollister brands business. Across regions and brands, the three percentage point spread from net sales to comparable sales was driven by net new store openings and favorable foreign currency, partially offset by third-party channel performance, including the temporary pause for the ERP upgrade.

Operating margin was 8% of sales, coming in above our outlook of around 7%. We delivered operating income of $89 million compared to $102 million last year. Adjusted EBITDA margin for the quarter was 12% of sales on adjusted EBITDA of $131 million, compared to $140 million last year. The 130 basis point year-over-year decline in operating margin was primarily driven by 90 basis points of increased marketing investment and around 90 basis points of ERP implementation costs. Year-over-year expense investment was partially offset by AUR and foreign currency gross margin favorability, as 180 basis points of year-over-year tariff pressure was fully offset by favorable freight costs. Tariff expense was lower than anticipated given the timing and level of tariff rates in the quarter. The tax rate for the quarter was 28%, higher than our outlook, primarily due to the jurisdictional mix of income.

Net income per diluted share was above our outlook at $1.47 compared to $1.59 last year. We're managing inventory tightly, ending Q1 with inventory at cost down 2%. Within that, inventory units are up low single digits, reflecting planned investments to support growth, while remaining disciplined in adjusting receipts in regions where trends are softer, particularly in the Middle East. Product cost favorability was primarily driven by lower freight costs. Moving to the balance sheet, we exited the quarter with cash and cash equivalents of $594 million and liquidity of approximately $1 billion. We also ended the quarter with marketable securities of $25 million. For the quarter, we repurchased $105 million worth of shares, or 3% of shares outstanding at the beginning of the year. We ended with the quarter with $745 million remaining on our current share repurchase authorization.

Shifting to the outlook, we remain on our path to a fourth consecutive year of total company growth, we've incorporated both the Q1 outperformance and the current environment into our full-year outlook. On tariffs, our 2026 outlook assumes a 15% tariff on all global imports into the U.S., effective for the second half of the year. Combined with a 10% effective tariff rate for the second quarter, the updated tariff rate assumptions drive around 20 basis points of gross margin pressure for the full year, an improvement from 70 basis points in our March outlook. We expect that release to be offset by elevated freight costs and continued investments in marketing and stores. As a result, our full-year outlook for sales and operating margin remains unchanged. We've applied for around $100 million in IEEPA tariff refunds. We have not assumed any benefit from these in our outlook.

Consistent with our prior 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 anticipate growth in the Americas, with EMEA currently expected to be slightly behind 2025 sales, given the current trend in the Middle East and parts of Europe. In APAC, work continues on our review of strategic alternatives for the region. Our focus continues to be on how to best scale the region with strong returns, and we're encouraged by the first quarter performance as it underlines the region's potential. We continue to assume modest AUR improvement for the full year, as well as an anticipated 40 basis points of favorable impact to net sales from foreign currency. We continue to expect full-year operating margin in the range of 12%-12.5%.

We're forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around 44 million. We expect earnings per diluted share in the range of $10.20-$11. For capital allocation, we expect capital expenditures around $225 million. On stores, we expect to deliver around 130 new experiences, including 50 new stores and 80 remodels and right-sizes. We also expect to be net store openers, with our 50 new stores outpacing around 20 anticipated closures. We expect net store openings to be relatively balanced across brands, but tilted to the Americas. We continue to expect share repurchases of around $450 million for 2026.

For the second quarter of 2026, we expect net sales to be up 2% to 4% to the Q2 2025 level of $1.2 billion, consistent with how we exited the first quarter, with continued strength in the Americas and APAC and ongoing pressure in parts of EMEA. We expect operating margin to be around 10%, including around $20 million or around 120 basis points of unfavorable tariff impact, net of mitigation efforts. We also anticipate a slightly favorable impact from freight on gross margin and modest AUR growth. The remaining operating expense deleverage coming from incremental marketing, stores, and incentive compensation. We expect a Q2 tax rate around 32%. We expect net income per diluted share in the range of $1.80-$2, with diluted weighted average shares expected to be around 45 million, including the anticipated impact of at least $150 million in share repurchases for the quarter.

To close things out, we're entering the middle of 2026 with clear priorities, healthy brands, and a strong playbook. We're operating with discipline and flexibility in a mixed environment, and we're monitoring our markets, particularly the Middle East, and we're remaining nimble and tight with inventory. This is the same model we've consistently used to successfully manage through a wide range of environments, and we're confident in our ability to deliver another year of growth and profitability. With that operator, we are ready for questions.