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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.
We will also be providing financial comparisons to the corresponding periods of fiscal 2020 and 2019 where applicable and due to temporary COVID driven store closures last year, we will not be disclosing comparable sales.
I am excited to share our third quarter results, which benefited from a strong back to school and discuss the fourth quarter which is off to a good start.
Together, we actively navigated factory closures and transportation delays, reduced our promotions and markdowns, manage expenses and made strategic investments across marketing, technology and fulfillment to drive our business forward.
Due to that hard work and our ongoing commitment to delivering against our key strategic pillars, including fleet optimization, digital and omnichannel enhancements, stature [Phonetic] concept to customer life cycle and improved customer engagement.
We delivered our best third quarter operating profit and margin in close to a decade.
Total sales rose 10% to last year and were up 5% to Q3 2019 and we achieved our highest Q3 sales since 2014 despite industry wide supply chain constraints and removal of 1.1 million gross square feet from our store base last year.
Our largest and most established market, the U.S. outperformed with sales up 17% on a one-year and 12% on a two-year basis.
It was wonderful to have more kids return to school and as social activities resume for our kid, teen and millennial customer.
We executed well against the back to school and fall calendar, providing seasonally appropriate newness and outfitting options.
With compelling interpretations of the latest fashion trends including water leg silhouettes, vegan leather and seamless bodysuits, all while maintaining the quality, fit and value that we have become known for.
Our customers were highly engaged as illustrated by our average basket size and lapsed customer rate of return, both of which improved in the double-digit percent range.
In addition, we also acquired roughly 2 million new customers globally, all very positive signs regarding the health of our brands.
By channel, store sales rose 11% from last year and declined 20% from 2019.
Digital, which for us, carries a significantly higher four-wall margin than stores grew 8% on a one-year and 55% on a two-year basis, representing 46% of total sales.
Results speak to higher AUR across brands and channels on reduced markdowns and promotions and improved full price sell-throughs.
Q3 marked the sixth consecutive quarter of AUR improvement as our customers continue to adopt a buy it when you see it attitude.
This represents a major shift in mindset that has been years in the making as we have evolved each brands conditioning, purpose, perception and execution.
Looking ahead, we will build on our solid foundation and believe there's ongoing AUR opportunity at all of our brands.
Third quarter AUR improvements were offset by higher supply chain related costs.
In spite those pressures, we grew our operating margin rate by 80 basis points on a one-year basis and 640 basis points on a two-year basis.
And while we don't talk about it often publicly, we could not have achieved these results without our corporate purpose of being there for you on the journey to being a becoming who you are, which serves as our North Star.
It ensures our associates and partners feel comfortable sharing their thoughts and evolving with us and that we listen and speak to our customers authentically, providing inclusive options for all of their lifestyle needs.
Part of that evolution was the recent hiring of a leader to drive our comprehensive ESG efforts forward.
Simply put, purpose is woven into all that we do, including our critical pillars of product, voice and experience.
Starting with product, during this third quarter we had strong new wins that is hard to name just a few.
Denim, which is one of our most important categories continue to be on fire, posting record breaking Q3 sales.
We received a tremendous amount of positive media headlines and publications that have billions of impressions and thousands organic social media tags across the platform, all devoted to the fit, quality and comfort of our assortment.
Momentum built-in non-skinny and water leg styles including the mom, dad, straight and flare for women, while slim, straight and tapered gained popularity for guys as we continue to refresh his wardrobe.
Importantly, promotions were once again down across brands with higher full price selling.
In addition to denim, other top-performing categories included dresses, shorts, pants and knit tops and bottoms.
We are thrilled with the progress we've made with our products, which goes hand in hand with amplifying our voice and experience.
Our marketing teams are leaders in a rapidly evolving digital space and are embracing new and emerging technology trends and engagement opportunities using voices and platforms that are authentic to each of our brands.
Across the company, we continue to lean into the power of social selling and refining strategies are tailor made for each of our brands and their target customer.
This includes live shopping events on TikTok and Instagram, exclusive social product launches, in-app storefronts across platforms, augmented reality campaign for Snapchat and robust affiliate influencer program and our customer is responding.
Our unrelenting focus on digital is intertwined with providing the best omnichannel experience for our global customers by meeting them whenever, wherever and however they choose to interact with us.
This focus is what inspired us to open our New West Coast DC and introduced same-day delivery.
It is all what drove one of our major internal initiatives to know them better and squall them everywhere, which is about transforming our ways of working to ensure that everything we do is data driven and aligns the moments that are most important to our customer and a world of endless ideas and rapid innovation.
Now, moving onto the brands.
Hollister sales, which includes Gilly Hicks and Social Tourist rose 10% to last year and 1% to 2019.
In the U.S., sales rose 17% on a one-year and 7% on a two-year basis.
I am proud that Hollister global Q3 sales were the strongest since 2013 and that U.S. sales were the strongest since 2012, especially given that Hollister and Gilly saw an outsized impact on inventory receipts due to higher exposure to Vietnam production, importantly sales were healthy with nice AUR growth.
During the quarter, we continue to authentically speak to our Gen Z customer about the topics they care about the most, including our diverse backgrounds and identities, mental wellness and one of their most passionate -- biggest passions gaming.
In September, Hollister formally announced the launch of the Hollister good deeper perspective, a long-term program dedicated to supporting rising Latinx creators from the fashion, music and comedy verticals of TikTok and Instagram and authentically amplifying their voices.
This first of its kind collective is meaningful given Hollister's large Latinx customer base and is a testament to the fundamental shift in how we engage our customers.
The launch, which generated over 20 million PR impressions included the bilingual made for TikTok album produced by the collective music creators.
The following month Hollister named Fortnite World Cup Champion, Bugha, its first chief gaming scout.
The announcement made waves across the gaming new cycles garnering over 125 million PR impressions.
The partnership included a collection with Hollister's highly successful all day gameplay assortment featuring a match including and sweat pants that he co-created with the fans via social.
The collaboration boosted sentiment across our social channels and saw strong sell-throughs.
Looking ahead, Bugha worked with Hollister to scout rising gamers for team Hollister, our new up incoming gamer program.
We are looking forward to a charity livestreaming during GivingTuesday with proceeds going back to the Hollister confidence project, an initiative dedicated to promoting confidence and mental wellness in teams worldwide.
At Gilly Hicks, our updated brand purpose of bringing our customer to their happy place is resonating.
Our recently introduced men's products have been well received, which is exciting giving us a completely new and untapped customer for us.
At the same time, our existing customers continue to come to us for her must haves including Go Active, which grew to over 20% of sales.
Response to our stand-alone in '23 updated side-by-side locations have been encouraging.
We see runway to open additional stand-alone and side-by-sides globally and to refresh the Gilly Hicks experience that lived within Hollister as we embark on our next phase of growth.
In addition to Gilly Hicks, we've also please with results at our newest brand Social Tourist, which we view as another one of our growth vehicles.
As a reminder, Social Tourist was launched in May.
It's a multi-year exclusive apparel partnership with social media super stars Charli and Dixie D'Amelio.
In the third quarter, the D'Amelio series aired on Hulu.
In this show Charli, Dixie and their family wore Social Tourists into their daily lives.
The highly viewed series, which Hollister sponsored, drove meaningful social impressions and engagement, spikes in search demand and major PR buzz.
Hollister also partnered with Hulu on an ad by which drove roughly 90 million ad impressions.
We've also continued to apply learnings in Social Tourists, particularly as it relates to TikTok and social selling to other areas of the company making us even smarter, faster and more creative.
Turning to Abercrombie, which includes kids, Q3 sales rose 12% compared to last year and 10% to 2019, representing our highest sales volume since 2015 and best gross margin since 2013.
In the U.S., sales rose percent on a one-year and 18% on a two-year basis.
It has been absolutely amazing to experience a turnaround of this brand, which is in a remarkably different place than it was just a few short years ago.
At kids, we had a great back-to-school season.
We combined insight driven marketing and paid media, entered the stress and guesswork out of shopping for parents by providing product that shine from both the fashion and a quality perspective.
We also found power and leveraging affiliate parents voices with its first ever many collection, spanning both the adult and kids brands that contain stylish, cool and A&F essentials for fall and was an immediate hit.
At adults, we launched our highly successful denim your way campaign in early August.
This was a combination of work that's first again in January when we put out a call on social media to catch our customers in the campaign.
After receiving thousands of submissions, which was 10 customers and brand fans to help drive fit and design decision and to be predominantly featured in our denim your way marketing.
The campaign and the company assortment receiving glowing reviews as a perfect example of how we are listening to our customer to create product for their lifestyle needs.
Throughout the quarter, we also continue to leverage our relationship with TikTok, a highlight was our women's fall outfitting campaign, flashes of fall, which generated over 140 million impressions.
In addition our Abercrombie influencer team double down their efforts to maintain their leadership in the world at social selling.
Now looking to the fourth quarter.
Our customer is responding well to our assortments, especially our cold weather offerings including cozy and outerwear, as well as occasion dressing and denim.
We have seen some early holiday shopping and also a fair amount of self purchasing, as the weather has become more seasonal and our customer gears up for a turn to holiday activities and events.
With the delays in the supply chain, we expect to deliver newness leading up to the holiday peak, which will be a great learning around future flows and strategies.
On the delays, I'm proud of our season supply chain team for helping us navigate these challenges.
On top of our great products, I'm also excited about the social strategies we have in place.
Our stores and DCs are well staffed and ready to go and I'm confident that our store network and expanded suite of omni capabilities, including same day shipping, will enable our customers to do their shopping whenever, wherever and however they choose.
We are ready to compete and win for holiday and I'm confident in our ability to deliver an operating margin between 9% and 10% this fiscal year, which will be our best annual operating margin since 2008.
Looking beyond holiday, we continue to see significant growth opportunities across our portfolio brands and we look forward to sharing more on our strategic vision of how we will scale our business at our next Investor Day, which we are planning for the first half of fiscal 2022.
Stay tuned as we finalize the details.
In the third quarter, we delivered strong results across brands and across the P&L.
Our profitability continued to benefit from the transformative moves we made in our operating model and expense structure last year as the shift to digital accelerated.
For Q3, total net sales were $905 million, up 10% to last year and up 5% to pre-pandemic levels.
While transportation delays increased during the quarter, our teams were able to maximize the inventory on hand to deliver sales above our expectations.
Store sales rose 11% on a one-year basis and were down 20% on a two-year basis.
At the same time, total digital sales increased 8% compared to last year and grew 55% from 2019, representing 46% of total sales this quarter, compared to 31% in 2019.
By brand, net sales increased 10% for Hollister, which includes Gilly Hicks and Social Tourist and 12% for Abercrombie, which includes Kids.
As compared to Q3 2019, net sales increased 1% for Hollister and 10% for Abercrombie.
By region, we continue to see strong results in the U.S. with net sales up 17% and 12% on a one and two-year basis respectively.
Despite having roughly 140 fewer stores and over 20% less square footage in our U.S. store base as compared to Q3 2019.
In the U.S., Hollister was up 17% to 2020 and up 7% to 2019, while Abercrombie was up 19% and 18% respectively.
Outside of the U.S., we continue to see a slower recovery with EMEA down 6% to last year and 7% to Q3 2019.
Our business was strongest in our largest European market, the U.K., where we experienced sequential sales improvements.
The UK customer has responded well to product and has embraced our latest A&F location on Regent Street, which opened in September and is a fraction of the size and cost of our recently closed flagship.
This was offset by continued COVID driven restrictions and impacts across key Western European countries, including two of our largest markets, Germany and France.
In APAC, sales were down 12% to last year and down 32% to 2019 as we face traffic headwinds due to ongoing COVID cases inside China and Hong Kong and slow vaccination progress in Japan.
Additionally, we believe the China was impacted further by overall geopolitical climate.
We continue to view international as a long-term growth opportunity and are encouraged by the customer response to regional marketing and product distortions in both the EMEA and APAC markets.
Moving on to gross profit.
Our rate of 63.7% was down 30 basis points to last year and up 360 basis points to 2019.
The result exceeded our expectations and included approximately 300 basis points of impacts from higher freight costs and air utilization, which was at the low end of our 300 to 400 basis point expectation.
We continue to see AUR growth across brands compared to 2020 and 2019 on reduced promotions and markdowns, while maintaining initial tickets.
We ended the quarter with inventory approximately flat to last year.
Inventory on hand was lower than plans coming out of Q3 and was offset by higher in-transit due to the extended Vietnam closures and increasing transit times.
Related to Vietnam, all factories are open and operating.
We are using air to catch up on these receipts and are encouraged by recent improvements moving product through the U.S. ports.
I'll cover the rest of our Q3 results on an adjusted non-GAAP basis.
Excluded from our non-GAAP results are approximately $6.7 million and $6.3 million of pre-tax asset impairment charges for this year and last year respectively.
Operating expense excluding other operating income was up 8% compared to last year and up 1% to 2019, coming in at the low end of our expectation of up low-single digits.
As we saw better-than-expected store and distribution expense and shifted a portion of our marketing spend to Q4 to better align with inventory flows.
In Q3, we saw an increase in store and distribution expense of 2% compared to 2020 and a reduction of 7% compared to 2019.
Compared to 2019, store occupancy was down approximately $43 million related to square footage reductions and renegotiated leases.
These savings were partially offset by increased shipping and fulfillment expenses on higher digital sales.
Marketing, general and administrative expenses rose 21% from last year and 28% to Q3 2019, primarily driven by increased marketing investments.
As Fran mentioned, we continue to drive strong customer engagements across our brands and we expect to continue reinvesting a portion of our occupancy savings into digital media in Q4.
We delivered operating income of $79 million compared to operating income of $65 million last year and $27 million in 2019.
This is our best third quarter operating income and operating margin since 2012.
The effective tax rate was approximately 25%.
Net income per diluted share on an adjusted non-GAAP basis was $0.86 compared to $0.76 last year.
As we continue to benefit from the evolved operating model and the resulting higher profitability level, we are in a strong position to both invest in the business and return excess cash to shareholders.
We ended the quarter with cash and cash equivalents of $866 million and funded debt of $308 million.
During the quarter, we repurchased approximately 2.7 million shares for $100 million, bringing year-to-date total share repurchases to about 6.1 million shares and $235 million.
Recently, our Board of Directors approved a new share repurchase authorization of $500 million, replacing the February 2021 share repurchase program.
In the fourth quarter, we expect to repurchase at least $100 million worth of shares pending market conditions and share price.
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 five new stores, bringing the total to 23 for the year-to-date period and closed three stores for a total of 23 year-to-date.
For the full year, we expect the store count to remain roughly flat to last year, pending ongoing negotiations with landlords.
I'll finish up with our thoughts on Q4, which we are planning as follows using 2019 as our comparison period: net sales to be up 3% to 5% from 2019 level of approximately $1.185 billion.
We expect the U.S. to continue to outperform EMEA and APAC.
On inventory, we are optimizing AURs on current inventory and our distribution center teams are quickly replenishing as inventory flows in.
While the inventory receipt pattern will be different than the past, we have and we will continue to work diligently to minimize the impact on sales for the quarter.
Gross profit rate to be around flat to the 2019 level of 58.2%, including an expected negative impact of approximately $75 million of freight cost pressure due to rising ocean and air rates as well as higher air deliveries necessary to catch up on the Vietnam factory closures.
Based on early customer response to holiday, we are optimistic in our ability to continue to reduce markdowns and promotions to drive AUR improvements to offset this headwind.
Operating expense excluding other operating income to be up low to mid single digits to 2019 adjusted non-GAAP level of $565 million.
We expect to continue to see lower store expenses, partially offset by higher fulfillment costs.
Similar to Q3, we plan to increase marketing spend compared to 2019 as we look to maximize holiday sales and build momentum heading into 2022.
Finally, we expect the tax rate in the low 20s.
Assuming we deliver against these expectations, we expect the full-year operating margin to be in the 9% to 10% range, our highest since 2008.
In closing, we are excited to have delivered another quarter of profitable growth in Q3 and are laser focused on executing our strategies for holiday and beyond.
We will provide additional detail on our 2022 assumptions in our year-end earnings call.

user
q3 sales rose 10 percent to $905 million.
qtrly adjusted earnings per share $0.86.
qtrly digital net sales of $413 million increased 8%.
compname announces board of director's approval of $500 million share repurchase program.

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