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Text: abercrombie.com, under the Investors section.
A detailed discussion of these factors and uncertainties is contained in the Company's filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measures.
I'm excited to be here today to share our recent results and provide insights into the start of our back-to-school season.
We entered Q2 well positioned to realize ongoing benefits from the work that we had done heading into and during the pandemic.
This included: growing our digital channel, which carries a higher four-wall operating margin in stores; rightsizing our store fleet; expanding our digital and technology teams; adding to our vendor and regional carrier networks; and investing in marketing with an emphasis on digital and social.
Throughout the late spring and summer, our customers took advantage of the warm weather and an increase in social activities.
We were there for all their outfitting needs.
Product acceptance was strong across brands, continuing momentum from the past several quarters.
Once again, we reduced markdowns and promotions, tightly managed inventories, and made strategic investments across marketing, technology and fulfillment to support near- and long-term growth.
Our proven playbook worked and we achieved our best second quarter operating income and operating margin since 2008.
Before I turn to results, just a quick PSA.
As we continue to lap significant impacts from COVID, we will be providing comparisons to both second quarter 2020 and 2019 where applicable.
And due to temporary COVID-driven store closures last year, we do not plan to disclose comparable sales.
Second quarter total sales rose 24% to last year and we were up 3% compared to Q2 2019.
Our largest market, the US, led with sales up 31% on a one-year and 11% on a two-year basis.
Results speak to customer retention and spend and to new customers discovering our brands.
By channel, total global store sales rose 55% from last year and we're down 20% from 2019.
I'm very proud of our stores performance, which was achieved despite permanent closures as well as ongoing restrictions in EMEA.
As a reminder, during fiscal 2020, we proactively closed 137 locations, removing 1.1 million under productive gross square feet from our store base.
We continue to execute against our number one transformation initiative, Global Store Network Optimization, to further align with our customers' shifting shopping behaviors.
Even with aggressive store sales growth, digital did not skip a beat and remained a solid as stores reopened.
Digital sales held steady to 2020 levels and grew 52% from 2019.
Results are further proof of our ongoing evolution into a digital-first global omnichannel retailer and should yield sustainable operating margin benefits.
Our total sales growth has been healthy as evidenced by our significant gross margin expansion.
For the quarter, we achieved our best Q2 gross margin rate since 2009.
Our total Company gross margin rate increased 450 basis points on a one-year and 590 basis points on a two-year basis.
We reduced the depth and breadth of promotions compared to last quarter and last year.
While customer reaction to products has continued to be strong, we have not and will not step away from our inventory discipline.
This is one of the key COVID learnings we will continue to apply going forward.
Reflecting our strong top line and gross margin performance, combined with ongoing tight expense controls, our operating margin rate was over 1,100 basis points compared to last year and 1,800 basis points compared to Q2 2019.
Though we benefited from a good consumer environment, especially in the US, our results also reflect the body of work done by our global teams to dramatically improve our product, voice and experience.
Since I became CEO in 2017, our brands have evolved with our customers and we have focused on being there and supporting them for all their lifestyle needs.
Speaking of those lifestyle needs, let's take a moment to talk about some major fashion wins that applied companywide.
Many have asked me about the current denim cycle.
There is a ton of newness and interest in jeans and it has been great for our brands, especially as it is one of our top three categories on an annual basis and even more important in the back half of the year.
Our teams have done an absolutely amazing job staying on top of current denim trends.
We are viewed as a premier denim destination with newer styles representing over 40% of our jeans volume, up from 25% last year, and our customer is not waiting for sales to get what they want.
In the second quarter, we reduced promotions within this category well below 2020 and 2019 level.
We have [Phonetic] high-rise, wider legs, including mom, dad, straight and flare; skinny is still there, although becoming a smaller part of the total; and there are new and upcoming trends like '90s inspired low-rise; something for everyone.
And lengths are changing too.
Following years of angle, we are starting to see interest in full.
We're encouraged that these changes are not limited to one gender.
Customers are also responding to the wider leg openings in men, which represents another significant opportunity as it's been a long time since we've updated his silhouette.
Of course, our customer needs tops to go with their new jeans.
In Women's, we continue to see customers gravitate to swim and crop tops and oversize and bodysuits, which further reinforces the proportion play in bottoms.
Dresses, skirts, shorts and swim were also popular.
As product acceptance is built, our teams have been meeting our customers where they are in the digital landscape.
We are firmly committed to our test and learn strategy and to new and emerging technology trends and engage in opportunities.
It was certainly a busy and exciting quarter for both technology and engagement and I want to take a moment to discuss some of the highlights.
We introduced an evolved Gilly Hicks brand purpose and positioning; we launched our newest brand Social Tourist; we accelerated investments in testing across influencer, paid media and digital, reaching both core and new audiences; and we hired a Chief Digital and Technology Officer to further evolve and accelerate our digital-first model.
Starting with Gilly Hicks.
On July 15th, we took a huge leap forward in our growth strategy by relaunching the brand globally with an evolved purpose and position to bring our customer to their happy place.
Given our Gen-Z customer is most stress generation, the updated purpose is very important.
In addition, we opened our first stand-alone store Easton Town Center in Columbus, Ohio, and introduced updated side-by-side with an Hollister store experiences.
This included 20 refreshes to existing side-by-side formats in three new locations, all of which incorporate elements from the stand-alone store.
Well, what can I say, what an absolutely phenomenal moment for the Gilly team, we are truly feeling the love.
Customer feedback has been overwhelmingly positive and the brand is resonating with our Gen Z customer and their mindset.
Early results from the brand relaunch and the new store concept have been very encouraging.
Taking a step back, our customers already responding well to the product and the brand, which gave us confidence to make the necessary investments to accelerate this exciting growth vehicle.
In the second quarter, sales rose approximately 30% year-over-year, with growth across digital and store channels.
This is the fifth consecutive quarter of double-digit total sales gains.
Loungelette match backs, sleep, underwear and our active collection Gilly Go continue to resonate with our customer.
Post-launch, our guys [Phonetic] product and matching collections also been well received.
Turning to Social Tourist.
It's hard to believe it's only been three months since we've taken Hollister's successful partnership with TikTok superstars Dixie and Charli D'Amelio, who combined have over 270 million followers across social platforms to the next level with the launch of our fifth brand.
Social Tourist is a great example of how we are approaching our business differently.
Meeting our customer where they are and pushing boundaries of social commerce in new and exciting ways.
Since the launch, the brand has had over 700 million impressions and views, and we continue to build awareness.
For the first collection, we had several Instagram exclusive pieces.
And for the second, we hosted a live TikTok fashion show, featuring the D'Amelios and other social stars, which would be TikTok benchmarks.
With Social Tourist, we have learned so much in a short period of time that up and coming fashion trends, social commerce and the growth of the TikTock platform.
We are optimistic about Social Tourist and its future and have several more exciting events happening throughout the remainder of the year.
Now onto our remaining brands.
Starting with our largest brand, Hollister, which includes Gilly Hicks and Social Tourist, sales rose 20% in the quarter and we achieved our highest Q2 sales in Company history, congrats to the entire Hollister team.
Our focus on voice and experience clearly complements our product, helping to drive higher average transaction values on strong average unit retail growth.
From a marketing perspective, we launched the Hollister Creator Collective, a year long influencer program.
In July, we sponsored the Lago Vista Snapchat series, featuring 21 non-skippable Hollister commercials.
We rounded out our efforts to the new monthly Instagram Live Shopping series with influencers.
Hollister site and app also got a refresh during the quarter, further improving the customer experience.
Gilly Hicks and Social Tourist now have dedicated tab, allowing users to shop between all three brands with a shared checkout.
In addition, Gilly Hicks and Social Tourist launched their own unique app and we also update our membership loyalty program.
So, the customers can earn points, redeem rewards across all three brands.
As we look to the remainder of the back-to-school season, we are focused on continuing to win in jeans.
We have sterling pop-ups in key markets where we have been engaging with local teams and ceding product and thus far has been highly successful.
We will also have influencers and affiliates in the US and EMEA, amplify denim across Instagram and TikTok.
At Abercrombie Adults, our influencer, affiliate and editorial programs remain one of our top priorities.
In the second quarter, we grew associated sales by over 70% year-over-year and increased our already sizable network of digital brand advocates.
We also launched a Capital series with top affiliate creators and took part in Facebook's Live Shopping alpha test, which had fantastic engagement and insights.
During the quarter, we continued to leverage TikTok content.
On a year-over-year basis, we doubled our new-to-file visits, grew new-to-file orders and sales by over 80%, and continued to break TikTok's benchmarks for paid media.
I can't wait to see what the future holds on this important platform.
After all, according to POPSUGAR, Abercrombie is TikTok's favorite fashion brand, and we are proud to hold that title.
All the hard work connecting to our customers certainly paid-off.
On our last earnings call, I said Abercrombie Women's had a breakout moment.
During the second quarter, that momentum built with women's achieving its best Q2 sales since 2012.
In total, Abercrombie, which includes kids, grew sales 30% in the quarter.
Similar to Hollister, Abercrombie registered higher average transaction values and strong average unit retail growth.
Heading into fall, our team is energized.
We recently launched our Denim Your Way campaign, which features Abercrombie customers from Instagram casting call.
We also collaborated with wedding and events experts, The Knot, on a best dress guest collection.
In addition, we teamed up with Zappos as our exclusive domestic third party e-commerce provider for a limited selection of jeans and tops and a footwear collaboration.
At Abercrombie kids, if report cards were given out during summer, I would say, they received an A. We were highly focused on driving customer acquisition through expansion to new platforms and releasing new products and content franchises.
The Ultimate Summer Outfit campaign contributed to sales growth in shorts and swim, which are two important seasonal categories, while the release of the Cool Stuff collection and the launch of our active assortment both had over 70% new-to-file shop rates and average order values that were over 70% above our goal.
A common theme across the Company has been our focus on digital, which is critical for future growth.
As we continue our transformation into a digitally led operating model, we have made investments in technology and talent.
In the second quarter, the US benefited from government stimulus and reopening, as customers resumed many of their activities.
Internationally, the reopening in many countries, including our largest market the UK, lagged the US, reflecting ongoing COVID-related restrictions.
As we think about Q3, while global uncertainties remain, we are cautiously optimistic.
We've been pleased with the US back-to-school season to date, and believe our customers highly engaged and actively looking to refresh their wardrobe.
We are expecting to see an elongated season as many of our larger markets have yet to return.
In EMEA, the environment is improving and we have yet to start the back-to-school season.
Looking ahead, we will continue to execute our proven playbooks.
We will focus on controlling what we can control and remain on offense.
We are proactively managing through industrywide issues around inflation, production and transportation delays.
With our solid foundation and strong balance sheet, as well as our long-standing relationships with our global vendor and supply chain partners, we are well positioned to be winners in the back half and expect to surpass our previously stated 5.8% operating margin goal this year.
As Fran mentioned, we will be providing comparisons to both second quarter 2020 and 2019 where applicable, and will not be disclosing comparable sales.
Turning to our results, in the second quarter, we delivered total net sales of $865 million, up 24% to last year.
On a two-year basis, sales were up 3%.
We ended the quarter with all of our 733 stores open.
This compares to 92% of our base open at the end of the first quarter.
As of yesterday, all stores remain open.
Store sales rose 55% on a one-year basis and were down 20% on a two-year basis.
We recouped a significant amount of lost sales due to COVID-driven store closures last year.
At the same time, total digital sales dollars remained steady compared to last year and grew 52% to Q2 2019, representing 44% of total sales this quarter.
By brand, net sales increased 20% for Hollister, which includes Gilly Hicks and Social Tourist, and 30% for Abercrombie, which includes kids.
As compared to Q2 2019, net sales increased 2% for Hollister and 4% for Abercrombie.
By region, net sales in the US were up 31% and 11% on a one- and two-year basis, respectively, despite having roughly 129 fewer stores and over 22% less square footage in our US store base as compared to Q2 2019.
In EMEA, sales rose 11% on a one-year basis, but were down 5% on a two-year basis.
Customers responded well to localized product, voice and experience, which allowed us to reduce promotions in region.
We were pleased with results in light of permanent store closures and ongoing COVID-related restrictions.
Since Q2 2019, we have closed 17 stores, including eight flagships, as we continue to reposition to a smaller and wider store network focused on local customers.
During the quarter, the region as a whole remained influx as we experienced intermittent temporary closures and reduced operating hours.
As a reminder, in region, our penetration is highest in the UK, while Germany and France are also meaningful.
In APAC, sales were down 1% to last year and down 39% to Q2 2019.
We experienced continued traffic challenges in the region.
In our largest market, China, we are encouraged by customer response to new products, including APAC exclusive collections.
On Tmall, we saw stabilized sales trend and improved profitability, as we continued to reduce promotional activity.
Globally, we continue to see lower store traffic levels relative to Q2 2019, but sequential improvements of Q1.
From an omnichannel perspective, we were pleased with year-over-year improvements in conversion and average transaction values.
Moving on to gross profits.
Our rate of 65.2% was up 450 basis points to last year and 590 basis points to Q2 2019, driven by higher AUR across brands on reduced promotions and markdowns, partially offset by higher AUC, reflecting increased transportation costs.
Inventories control and current ending the quarter down 8% to last year.
Reflecting well documented industry-related challenges, we did see delivery delays increase over the quarter as global shipping congestion continued, and there were renewed COVID restrictions across several of our production countries.
We are managing through delays of one to three weeks on average, by pulling forward deliveries, employing fabric platforming and leveraging air deliveries as necessary.
Also we are working through an extended closure of factories in Southern Vietnam, which have been further delayed, and are now expected to open in the first week of September at the earliest.
We have and will continue to leverage our strong vendor partnerships in a similar playbook already used in other countries to ensure we get product as quickly as possible upon reopening.
I'll cover the rest of our Q2 results in an adjusted non-GAAP basis.
Excluded from our non-GAAP results are approximately $800,000 and $8 million of pre-tax asset impairment charges for this year and last year, respectively.
Operating expense excluding other operating income was up 11% compared to last year, while operating expense as a percentage of sales decreased to 52% from 57.8%.
In Q2, we saw an increase in stores distribution expense of 5% compared to 2020, and a reduction of 13% compared to 2019.
Compared to 2019, store occupancy was down approximately $50 million related to square footage reductions and renegotiated leases and included approximately $9 million of benefits associated with rent abatements and a flagship lease-related item.
These savings were partially offset by increased shipping and fulfillment expenses.
Marketing, general and administrative expense rose 27% from last year and 7% compared to 2019, primarily driven by increased marketing spend and higher performance-based compensation expense.
We delivered operating income of $116 million compared to operating income of $22 million last year.
As Fran noted, this was our best second quarter operating income and operating margin since 2008.
The effective tax rate was approximately negative 6%.
In the quarter, we released approximately $30 million of previously established valuation allowances on certain deferred tax assets, primarily in the United States, Germany and the Netherlands.
Additionally, the quarter reflected a discrete benefit of approximately $4 million for UK rate change enacted in the quarter, which increased the value of deferred taxes in the UK.
Net income per diluted share on adjusted non-GAAP basis was $1.70 compared to $0.23 last year.
The current quarter includes the benefit of approximately $0.53 related to the tax items mentioned.
Our strong financial position continues to enable us to both invest in the business and return excess cash to shareholders.
We ended the quarter with cash and cash equivalents of $922 million and total liquidity of approximately $1.2 billion.
During the quarter, we repurchased approximately $2.4 million shares for $100 million, bringing the year-to-date total share repurchases to about 3.5 million shares and $135 million.
At the end of Q2, we had approximately 6.5 million shares remaining under our previously authorized share repurchase program.
In addition, we spent $47 million to purchase $42 million at par value of our senior secured notes on the open market, as a way to deleverage the balance sheet and deploy excess cash.
Looking ahead, we will continue to focus on returning excess cash to shareholders, primarily through share repurchases, pending market conditions, share price and our ability to accelerate investments.
Looking ahead, we continue to expect fiscal 2021 capex to be approximately $100 million, with about half of that related to digital and technology and the other half related to real estate and maintenance items.
During the quarter, we opened 14 new stores, bringing the total to 18 for the year-to-date period and closed 12 for a total of 20 year-to-date.
In the back half, we expect to open roughly 20 stores, bringing the total for the year to approximately 40.
This year, we have about 240 leases up for renewal.
We look forward to having thoughtful conversations with our landlord partners to find stores that are the right size in the right location at the right economics.
I'll finish up with how we are planning the remainder of the year.
We will stay on offense and leverage a portion of our structural cost savings to support top-line growth, including investments in marketing across brands, the digital experience and growing Gilly Hicks and Social Tourist.
Reflecting ongoing global uncertainty, we will continue to maintain inventory discipline as we managed through supply chain disruptions and the cost and delays associated with it, as well as read reenact the operating environment in each market around the world.
Recently, we have been encouraged by back-to-school results in the US, where we expect to see an extended back-to-school season.
We are excited for some of our largest school districts, including New York to return in the weeks to come.
For the third quarter, we are planning as follows, using 2019 as our comparison period.
Net sales to be up 2% to 4% from 2019 level of approximately $863 million.
We expect the US to continue to outperform EMEA and APAC.
At this point, our plan assumes a modest impact on sales due to supply chain constraints, with the larger impact coming from cost inflation, which I'll cover momentarily.
We will work to manage through disruption using all available tools in our toolkit, including airing inventory and shifting production as necessary, and if possible.
Gross profit rate to be up at least 300 basis points to 2019 level of 60.1%, including an expected negative impact of approximately 300 basis points to 400 basis points of freight cost pressure.
We remain cautiously optimistic in our ability to drive AUR improvements through lower promotions and clearance activity to offset this headwind.
Operating expense excluding other operating income to be up low-single digits to 2019 adjusted non-GAAP level of $494 million.
Lower store expenses will be partially offset by higher fulfillment costs.
We also plan to increase marketing spend compared to 2019 as we look to further drive momentum in social and digital media across brands.
We expect to see benefits from this marketing throughout the back half and into 2022.
And the tax rate to be in the low-20%.
Net sales to be up low to mid single digits to 2019 level of $3.6 billion.
Gross profit rate to be up around 300 basis points to 2019 level of 59.4%.
Operating expense excluding other operating income to be down 3% to 4% to 2019 adjusted non-GAAP level of $2.07 billion.
Assuming we deliver against these expectations, we would expect operating margin at or above 9% for the full year, which is well above our 2018 Investor Day target of 5.8%.
We are excited about the significant progress we have made on our operating model and cost structure.
While plenty of hard work remains, we are optimistic about our future and will provide additional detail on our 2022 assumptions on our year end earnings call.

user
q2 sales $865 million versus refinitiv ibes estimate of $879.2 million.
qtrly adjusted earnings per share $1.70.
qtrly digital net sales of $376 million decreased 3% as compared to last year.
have had a strong start to u.s. back-to-school season.

assistant