A&F(ANF) - 2019 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net sales for Q1 2019 were $734 million, slightly up from the previous year, with a $16 million adverse impact from foreign currency changes [21][22] - Comparable sales (comps) increased by 1% on top of a 5% increase last year, marking the seventh consecutive quarter of positive comps [21][22] - Adjusted operating loss improved to $27 million from a loss of $37 million last year, with an adjusted operating loss margin improvement of 130 basis points [25][26] Business Line Data and Key Metrics Changes - Hollister posted a 2% comp on top of a 6% increase last year, while Abercrombie returned to positive comps with a 1% increase on top of a 3% increase last year [22][10] - Hollister achieved record first-quarter sales in jeans, pants, outerwear, and sweaters, while Abercrombie saw significant sales growth in women's tops and dresses, with dresses recording the highest first-quarter sales ever [9][10] Market Data and Key Metrics Changes - U.S. comps were up 4%, while international comps were down 4%, with Europe showing sequential improvement and Asia experiencing weakness due to internal missteps [22][23] - The company plans to reduce its reliance on China for sourcing, aiming to decrease merchandise sourced from China to below 20% this year [18] Company Strategy and Development Direction - The company is focused on optimizing its global store network, with plans to close three flagship locations and transition to smaller, more omnichannel spaces [14][15] - Digital sales grew to 30% of revenues, up from 27% last year, with ongoing double-digit growth in online purchase pickup in-store [16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the U.S. consumer's health, despite challenges in mall traffic and a competitive environment [19] - The company anticipates continued sales growth and is optimistic about its summer assortments, which build on successful product trends from Q1 [20][19] Other Important Information - The company adopted a new lease accounting standard, resulting in an increase of approximately $1.2 billion in total assets and liabilities [28] - The company expects net sales growth of 2% to 4% for fiscal 2019, with comparable sales projected to be up in the low-single-digit range [29] Q&A Session All Questions and Answers Question: Can you provide more detail on the higher OpEx planned in the closing of the flagship stores? - The $45 million charge for flagship closures is the key driver of the change in the OpEx outlook for the full year, adding about 220 basis points to the operating expense outlook [36] Question: How much of the flat comp guidance in Q2 is driven by the competitive set versus inventory levels? - Management noted that while there has been some weakness in mall traffic, they remain confident in their assortments for Q2, with inventory levels being comfortable [40][41] Question: Can you elaborate on the gross margin outlook and the international business performance? - Management indicated that the international business was mixed, with Europe improving and Asia facing challenges due to internal issues and external factors like trade tensions [46][47] Question: What is the expected impact of flagship closures on revenue and operating margin? - The flagship business is a drag on both top and bottom lines, but the closures are expected to lead to incremental improvements over time [38][53] Question: How does the company plan to achieve its 2020 targets? - The path to 2020 involves topline growth, modest gross margin expansion, and operating expense leverage, with ongoing transformation initiatives being critical to achieving these goals [60][61]