A&F(ANF) - 2019 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net sales for Q2 2019 were $841 million, a decrease of 0.2% from the previous year, but up 1% on a constant-currency basis, reflecting a $10 million adverse impact from foreign currency changes [33] - Comparable sales (comps) were flat compared to a 3% increase last year, driven by positive cross-channel traffic but offset by lower conversion rates [33] - Gross profit rate was 59.3%, down 90 basis points from last year, reflecting higher average unit costs (AUC) driven by product mix and slightly lower average unit retail (AUR) [34] Business Line Data and Key Metrics Changes - Abercrombie brand posted flat comps, while Hollister also reported flat comps, compared to 4% and 2% increases respectively in Q2 2018 [33] - The U.S. market achieved a 2% comp, down from 7% last year, while international comps were down 3%, an improvement from a 4% decline last year [34] - Hollister's boys' segment achieved record performance, while girls' segment fell short of expectations, particularly in tops [12][68] Market Data and Key Metrics Changes - The U.S. market, representing approximately two-thirds of revenue, experienced its eighth consecutive quarter of positive comps despite challenges from tourist locations and a competitive environment [9] - In Europe, comp results were consistent with the previous quarter, with weaknesses in the U.K. and Ireland, but improvements in other European markets [9] - Asia saw improvements in China that helped offset weaknesses in Hong Kong [9] Company Strategy and Development Direction - The company is focused on transformation initiatives, including optimizing the global store network, enhancing digital and omni-channel capabilities, and improving customer engagement through loyalty programs [16][30] - The strategy includes closing underperforming flagship stores and opening smaller-format locations with flexible lease terms [23][24] - The company aims to achieve a fiscal 2020 target of doubling its fiscal 2017 adjusted non-GAAP operating margin [17] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the health of the core U.S. customer but acknowledged an uncertain global macro outlook [16] - The promotional environment was described as heightened, with expectations for continued promotional activity during Back-to-School and holiday seasons [16] - The company anticipates potential global volatility impacting results, particularly in Europe and Asia [42] Other Important Information - The company announced new leadership hires for Europe and Asia to enhance localized execution and customer engagement [31] - The company is committed to environmental, social, and governance (ESG) initiatives, including participation in the UN Global Compact [30] Q&A Session Summary Question: Clarification on flagship store closures and international performance - Management confirmed that most flagship leases are expected to expire naturally and that they are evaluating the financial and qualitative aspects of remaining stores [49] - Management noted slight sequential improvement in international performance and emphasized the importance of new regional teams to enhance local strategies [51] Question: Back-to-school performance and markdown expectations - Management reported a solid start to Back-to-School in the U.S. but acknowledged that international back-to-school timing differs [54] - Management indicated that gross profit rates are expected to decline due to foreign currency impacts and tariffs, with a stable promotional environment anticipated [56] Question: EBIT margin target for 2020 - Management remains focused on achieving the 5.8% EBIT margin target, leveraging store occupancy optimization and investments in key tools [60][62] Question: SG&A outlook and marketing balance - Management highlighted ongoing tight expense control and incremental savings, while also planning to invest in marketing to drive growth [63] Question: Hollister Girls business performance - Management acknowledged challenges in the girls' tops category but noted improvements and agility in the supply chain to address issues quickly [68]