Abercrombie & Fitch Co. Class A Stock

Good day, and welcome to the Abercrombie Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]

At this time, I would like to turn the conference over to Mohit Gupta. Please go ahead.

Thank you. Good morning, and welcome to our second 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 second quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors 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 Private Securities Litigation Reform Act of 1995 and are subject to the risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned 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 release and the investor presentation issued earlier this morning.

With that, I will turn the call over to Fran.

Thanks, Mo, and thanks, everyone, for joining. I'm excited to report we delivered our 15th consecutive quarter of top line growth on record second quarter net sales. Sales growth was above the expectation we set in May and was balanced across regions and brands with both Abercrombie and Hollister brands achieving record second quarter net sales. While we benefited from tariff refunds in the quarter we beat our outlook by more than the refund on both operating margin and earnings per share. Year-to-date, we've repurchased approximately 7% of shares outstanding at the beginning of the year.

With the first half complete and a strong start to August, we're updating our full year net sales outlook to the high end of our prior range and increasing our expectations on the bottom line, setting us up for another year of consistent profitable growth in 2026. Importantly, we're making meaningful progress across key strategic priorities, which we believe will further strengthen our foundation and set us up for long-term success. Diving into the results.

For the second quarter, we delivered record net sales of $1.27 billion, growing 5% from last year, a nice acceleration from the first quarter. While we benefited from $100 million in tariff refunds we beat our outlook by more than that on the bottom line, delivering an operating margin of 19.9% and net income per diluted share of $4.17 for the quarter. We continue to leverage our strong cash flow and balance sheet, returning $177 million to shareholders in the quarter through our tenth consecutive quarter of share repurchases.

We grew in the second quarter across our regions, -- the Americas grew 5% in the quarter, with growth across our direct channels, EMEA saw return to net sales growth of 2% and -- the U.K. remains a strong growth market for us, and we saw a good sequential improvement in Germany as well as in the Middle East as the team has managed inventory and receipts well across the region. Our APAC business remains strong, growing 19% on comparable sales growth of 13%. The -- both our brands achieved record second quarter net sales led by Abercrombie Brands growth of 8%, an acceleration from 3% in Q1.

And the brand also returned to comparable sales growth of 4% on improvements in conversion and AUR and full price selling, particularly in the Americas. Growth was balanced by gender in category with knits and wovens contributing along with a solid bottoms business across pants and shorts. Outside the strong financial results, it was an exciting quarter for the Abercrombie & Fitch brand, -- the brand is be in 130 years of New York City heritage, and we're so excited to bring that authenticity to life in our new SoHo store.

The new location represents the modern expression of the brand and has been very well received by customers. We're continuing to lean into our New York routes with the city serving as a backdrop for our recent fall denim campaign featuring the variety of styles and fits we're known for. We also continued to build on our connection to sport. We're entering our second year as the NFL's official fashion partner with an expanded collection across several categories, serving fans all 32 teams with styles for men, women, kids, babies and toddlers, -- we're bringing the partnership to life through both players and fans reflecting the personal style of the Centro Abercrombie today.

We featured Jackson Dart and Mileage neighbors in New York Giants and our recent dam campaign, along with several other players, we'll continue to highlight throughout the season. We're just getting started on factors for Abercrombie with more to come as we build toward holiday. Turning to the record second quarter for Hollister. The brand grew 2% on top of a 19% increase in the second quarter last year, and also sequentially accelerated from a flat first quarter. We grew across regions and genders led by strength in knits, shorts and non-denim bottoms.

Hollister's collaboration will target the brand's first meaningful wholesale and category expansion in the U.S. has performed very well against expectations and added nicely to top line growth this quarter. Having our products in over 1,500 target locations has also given us access to new house or customers across the country while providing our existing customers new categories available on our owned digital app and web experiences to outfit their dorms.

We're very encouraged by this partnership and underlies the potential for our brands to expand their reach through new distribution channels and categories. Holger's back-to-school season continued to build as we exited the second quarter, and we've seen growth accelerate off of Q2 levels so far in August. We started the season with our LaPaluzaFest launch, which included an exclusive collection with Y2K hystalgic styles expressed to a modern lens for the young adult customer as well as on the ground activations at the festival.

Additionally, we teamed up with rising star Free Sky and our fall denim launch featuring limited-edition product and a broad range of denim styles. We're excited by back-to-school, keeping Hollister on track to make 2026 the best ever sales result in the history of the brand. Halfway into 2026, we're diligently executing to the ambitious goals we set across the business.

As a reminder, our core priorities for the year are: First, to grow sales across brands with continued investment in owned and operated stores and digital businesses while adding growth in partnerships and new product categories; second, to stabilize gross margins by mitigating external cost pressures. Third, to continue to invest in tools and technologies, including AI to improve speed and efficiency across the product and customer journeys.

And finally, to maintain our strong profitability and feel excess cash return to shareholders. We've made meaningful progress across all 4 of these objectives in the first half in 2026. One area to highlight is the work we're doing to expand our reach through new distribution channels and product categories. We continue to be pleased with our Abercrombie Kids licensing performance as well as the target partnership I mentioned earlier. And we are very excited to build on a couple of areas this fall.

First, we've seen good initial reads in our footwear and accessories business across brands as we bring new categories to support head-to-toe dressing. And second, we look forward to expanding the distribution of our NFL product, which will now be sold at nflshop.com in NFL Stadium stores and an official team e-commerce sites in Synatics.com. I'm so proud of this team as we continue to set sales records, improve gross margin and control expenses while making important long-term investments. We remain on offense and our updated full year outlook reflects increasing confidence that we can deliver balanced growth across brands and regions.

We're also on the path to deliver industry-leading margins again this year, demonstrating the sustainability and overall quality of our business, powered by a culture of financial discipline. We see the quality in our cash flow as well. Coupled with a strong balance sheet, we now expect to return at least $500 million to shareholders through share repurchases for the year. While we've made meaningful progress so far in 2026, I'm most excited about how much opportunity is ahead, and the proof points we're seeing show how uniquely positioned we are to capitalize on it.

We remain on track to deliver strong results this year, while staying focused on what will be the next page chapter of our journey. Thank you to the entire team, the best in retail for making it all happen.

And with that, I'll hand it over to Robert.

Thanks, Fran, and good morning, everyone. We delivered record second quarter net sales of $1.27 billion, up 5% and above the 2% to 4% growth range we provided in May. Comparable sales were flat and AUR increased mid-single digits for the quarter. with lower promotions driving better-than-expected results to our outlook. By region, net sales increased 5% in the Americas, 19% in APAC and 2% in EMEA. Comparable sales increased 1% in the Americas, 13% in APAC and declined 4% in EMEA.

In EMEA, the U.K. remained strong and Germany returned to growth. By brand, Abercrombie Brands net sales increased 8% with comparable sales up 4%. And Hollister net sales increased 2% against last year's record with comparable sales down 3%. Both brands grew net sales in the Americas, Abercrombie led the growth in EMEA and Hollister led to growth in APAC. Across regions and brands, the spread between net sales growth and comparable sales was driven by net new store and third-party channel performance.

I'll cover the rest of our results on an adjusted non-GAAP basis, which excludes the $39 million net benefit from a favorable litigation settlement in the second quarter of 2025. Reconciliations are included in this morning's earnings release and investor presentation. Second quarter operating income was $253 million and operating margin was 19.9% of sales. That compares with adjusted operating income of $168 million and adjusted operating margin of 13.9% of sales last year.

Given the size and unique nature of the Patara refund, we believe it's important to walk through the individual components and impact on our results this quarter, and we've included a schedule at the bottom of the first page of today's press release with the details. We received and recognized approximately $100 million of refunds related to Aipu tariffs in the quarter. The full amount is included as a reduction of cost of sales and contributed approximately 790 basis points to second quarter operating margin and approximately $1.75 to diluted earnings per share.

Our operating margin was roughly 990 basis points above the around 10% outlook we provided in May. About 790 basis points of that outperformance came from the Aptara refund. The remaining approximately 200 basis points came primarily from favorable gross margin and operating leverage on stronger sales. While the refund was meaningful, the underlying business performed above our expectations. Year-over-year, operating margin increased 600 basis points from 13.9% in the second quarter of 2025.

The tariff refund benefit was partially offset by higher year-over-year tariff expenses of 100 basis points. store occupancy and fulfillment costs and selling expense as well as higher incentive compensation and general and administrative expense. We've included a table in the investor presentation with additional detail on the timing of tariff refunds and ongoing tariff expense. Tax rate for the quarter was 29%, better than our outlook due to higher earnings from the iatatararefund and overall international outperformance.

Net income per diluted share was $4.17 compared with adjusted diluted earnings per share of $2.32 last year. That was above our outlook of $1.80 to $2 and even when taking into account the approximate $1.75 benefit from the [indiscernible] tariff refund. Inventory remains tightly managed, and both brands are chasing. -- ending inventory at cost was approximately flat to last year. with units up low single digits and aligned with our expected unit sales growth. On the balance sheet, we ended the quarter with $628 million of cash and cash equivalents, approximately $1.1 billion of liquidity and $10 million of marketable securities.

We repurchased $177 million worth of shares during the quarter and $282 million year-to-date. Repurchases for the quarter and year-to-date periods represented approximately 4% and 7%, respectively, of shares outstanding at the beginning of the year, and we ended the quarter with $568 million remaining on our current repurchase authorization. Turning to the outlook. Our first half execution and strong start to August support a higher full year sales expectation and an increase to our operating margin and EPS outlook.

Our underlying second half operating margin assumptions have also improved from our May expectations. Updating our tariff refund assumptions, we now expect to recognize a total of approximately $120 million of refunds related to Aiba tariffs, excluding accrued -- we recognized $100 million in the second quarter and expect to recognize the remaining $20 million in the third quarter. The full year outlook includes the entire $120 million refund. We estimate that the refund will contribute approximately 220 basis points to full year operating margin and approximately $2.10 to full year diluted earnings per share. The remaining expected $20 million refund is included in our third quarter outlook.

We estimate it will contribute approximately 160 basis points to third quarter operating margin and approximately $0.35 third quarter diluted earnings per share. Separate from the APA tariff refunds for 2026 tariff expense, our outlook for the second half reflects the current Section 301 tariff rates of 10% to 12.5% effective on global imports into the U.S. On that basis, our updated tariff assumptions provide approximately 10 basis points of full year gross margin favorability year-over-year. We expect that benefit to be largely offset by higher freight costs.

We've included a schedule in today's release and our investor presentation to provide further detail on our trifarotene refund history -- for the full year, we now expect net sales growth around 5% from $5.27 billion in 2025. And with growth across regions and brands. Our first half APAC performance reinforces the region's growth potential and our strategic review remains focused on the best path to capture that opportunity. We continue to expect modest AUR improvement and approximately 30 basis points of benefit to net sales from foreign currency.

We now expect full year operating margin in the range of 14.5% to 15% and including approximately 220 basis points of benefit from the APA tariff refunds. We're forecasting a tax rate around 29% and diluted weighted average shares of around $44 million and net income per diluted share in the range of $13.10 to $13.60. The EPS outlook includes an estimated $2.10 benefit from IPA tariff refunds. For capital allocation, we now expect capital expenditures around $250 million. We plan to deliver approximately 130 net new store experiences, including 50 new stores and 80 remodels and rightsizes, against approximately 20 closures.

New stores are expected to be relatively balanced across brands and weighted towards the Americas -- we now expect at least $500 million of share repurchases for 2026. For the third quarter of 2026, we expect net sales growth of 5% to 6% to the Q3 2025 level of $1.3 billion with growth across regions and brands. We expect third quarter operating margin in the range of 13% to 14%, including the expected $20 million or approximately 160 basis point IEPAtariff refund benefit. We also expect modest AUR growth and slight year-over-year favorability from tariff expense to more than offset modest freight pressure on gross margin.

We expect slight operating expense deleverage from incremental payroll and amortization related to the ERP implementation completed in the first quarter. We expect the third quarter tax rate of around 29% and net income per diluted share in the range of $2.90 to $3.20 including an estimated benefit of $0.35 from the Aptara refund. Diluted weighted average shares are expected to be around $43 million, including the anticipated impact of at least $100 million of third quarter share repurchases.

To close, the first half demonstrated the strength and balance of our business. We've continued to do what we said we would do, deliver profitable growth while investing for the future. We're strengthening our brands, expanding our capabilities and building the infrastructure needed to support the next phase of growth -- at this time, we've maintained healthy double-digit operating margins, generated strong cash flow and returned significant capital to shareholders through consistent share repurchases. Our updated outlook includes the benefit of Aupa tariff refunds.

More importantly, it reflects the underlying strength of the business and our confidence in our ability to continue delivering sustainable profitable growth.

And with that, operator, you're ready for questions.

[Operator Instructions] Our first question coming from Delano Dana Telsey with Celsius Pfizer Group.

Congratulations, everyone. So nice to see the progress. Fran, as you think of the product acceptance and what you've been seeing in Hollister and Abercrombie when you think of new product trends or fashion versus core, what are you seeing in each? And how do you see the denim cycle -- and then, Robert, as you think about inventory, AUR versus units, how do you think of that progress as we go through the year?

Dana, yes, exciting quarter for us, exceeded expectations, 15th consecutive quarter of growth went across both Abercrombie and Hollister brands and regions. So super excited about what we reported this morning. Regarding fashion, we're seeing lots of different things in the brands. It's exciting to see the customer really showing up. We're seeing a balance between casual and dress up. Second quarter was really driven through some incredible key knit opportunities and items that we had in wovens Denim specifically is important to both brands. We're heading into the back.

Obviously, we're in the middle of that school for Hollister. It's part of the assortment. We learned years ago, we got to stay balanced and make sure it doesn't become too dominant in the assortment, but exciting. The Hollister team is absolutely loving low rise the Abercrombie consumer is loving actually the styles we have across brands because their really depends on their wearing occasion and what they're doing for the day. So lots of exciting things happening and thrilled to have momentum heading into the back half.

Dana, as it relates to AUR versus units, not assuming anything different than what we've been talking about all year here. outlook continues to expect modest AUR improvement in the back half. That's consistent with what we shared back in May. We're happy with this being a demand story. In Q2, AUR came in stronger than expected on reduced promotional activity. the consumers are responding really well to the assortments, and that came with unit sales growth. So it's balanced, which is what we like to see.

So as we think about like going forward, inventory is in good shape, up mid-single, up 3% across the company here with both brands positioned well to chase into the back half. And all of that gives us the best chance to grow our AURs here in the back half of the year.

Our next question in queue coming from the line of Cory Tama with Jefferies.

Great. I guess what I'm wondering is on the third quarter sales outlook, which is quite healthy. Curious how that breaks down by brand, if you could share any color and really would just be curious to understand kind of the sequential trends at Hollister as well and maybe the regional differentials, if there's been any impact based on exposures to various regions?

Yes, Cory. So on the outlook for sales for Q3, again, expecting 5% growth with growth across regions and brands. haven't given specific color on individual brand performance, but we've been happy with what we've seen on the A&S side, delivering plus 8% for Q2. Happy to see that trend, and we've had a nice start to the month of August, and we've got new things coming down the pipeline. -- with the NFL drop and different supplements to the assortment. On the Hollister side of the business, we're kind of in the middle of back-to-school here. It's been a nice acceleration here into August.

So happy with what we're seeing there. And -- and that's kind of where we are today. The EMEA business has been strong. It's been -- we saw a nice sequential improvement. The APAC business continues to be strong, and both brands are growing in the Americas. So nice balance business that gives us confidence here into going into the back half.

That's very helpful. And then just as a follow-up, I think Fran mentioned in our remarks, but Curious if you could unpack that for us a little bit on the margin commentary. Full year margin outlook raised and buy more than the amount of the tariff benefit. So seemingly, there's some embedded improvement in the margin profile based on where you were versus prior expectations. So could you kind of highlight what the main differentials are or the puts and takes, that would be really helpful.

Yes. I mean if you think about full year, it's a pretty straightforward story. Underlying tariff rates and freight rates are kind of going in different directions and those are largely offsetting 1 another. -- we've talked all year about modest AUR growth as we move through the year here. That's still in play. We still continue to expect that. We did have the outperformance in margins in Q2 that we are rolling us through.

So that all keeps us kind of in line when you do the add them up. We've got a modest AUR growth offsetting some investments that keeps us kind of in that 12.5-ish percent range around last year. And then on top of that, you've got this 220 basis point benefit from the tariff refunds and that gets us to our or 14.5% to 15% range for the full year. So we feel good about where we are. The business is executing. We've got some outperformance in Q2 that we're rolling through. Now we're just focused on executing for the back half.

Our next question coming from the line of Matthew Boss with JPMorgan.

So Fran, could you speak to structural drivers, which you think have been built that support the return to positive comps at the Abercrombie brand? And specifically, any key categories which you saw inflect this quarter and just drivers of opportunity that you see in the back half of that nameplate.

Thanks, Matt. So yes, we've been on quite a journey here and really have rebuilt this entire company from bottom to top and top to bottom. And the fundamentals that we've built to do that are rooted in our operating model and the in all the technology investments that we've been making. We paid back a lot of tech debt. We talked a lot about our ERP system that's just come to fruition in March. So lots of exciting things happening to your point, from a fundamental perspective. Star also strong business, strong bottoms business. So what I'd like to see in the business is a balance, and that's what we're seeing right now. So balance across categories that we're winning in lots of categories, we're winning across genders and brands and regions. So all around, super excited about the back half.

It's great. And then Robert, could you just help break down expectations for AUR freight and marketing as we think about the third quarter operating margin forecast, excluding the benefits from tax refund?

Yes. So. On the AUR side, no change to our thinking here. We're expecting modest AUR growth in the back half of the year. When you think about the tariff side of things and then the freight side of things, so freight Freight has been a bit of a headwind for us here. The rates have remained elevated. So that is largely offsetting the benefit that we would be seeing from outlook to outlook related to the 10% to 12.5% tariff rates that are in place today for the 301 versus that 15% that we had assumed back in our last guide.

So you can think about freight and tariffs largely offsetting 1 another and then getting that benefit in AUR kind of rolling through, excluding all of the tariff refund components, but obviously, you've got that $20 million on the Q3 side. and then we should be relatively clean here for Q4. And then on the marketing side, I really like where our marketing has been, it's been a deleverage point for us in the front half of the year, and we've talked quite a bit about that as we've lapped some of the investments that we made last year. We're lapping that in the back half. We kind of like this a little north of 5% range. So we wouldn't expect to see any sort of meaningful leverage or deleverage on the marketing side for the back half of the year.

And Matt, you have to add 1 more piece to Yes. I add 1 more piece also. As we head forward, we've been talking quite a bit about this opportunity for us to diversify our operating model. So we had 2 really nice proof points this quarter, 1 from Crombie and 1 from Hollister and that is expanding into new channels and new categories for us. So the great example was this target partnership where we've introduced dorm. We got proof points now that Hollister can certainly expand way beyond apparel and there's significant opportunity there.

And we just recently mentioned the fact that we're expanding our NFL partnership, and we're going to be selling in the venues and nflshop.com and other channels as well. So that's been a big piece that we've been working on behind the scenes and we're excited about what that can bring for the future.

Our next question coming from the line of Marni Shapiro with The Retail Tracker.

Congratulations. The stores have looked incredible. So I have a quick question on Hollister. At times during the quarter, the inventory was very clean. And I'm curious if you had any delivery issues at Hollister or if it was just selling out at store in stores that quickly. And then I do have 1 quick follow-up just on [indiscernible].

Sorry. So one, I'll take that first one. So yes, we had an incredible demand for the brand, and it really all exceeded our inventory at many points during the quarter. team was absolutely a chasing, chasing, which is what our model can help us do. Now that our inventory has caught up. We're excited to see the acceleration and have nice momentum heading into the balance of back-to-school in the back half.

That's a great problem to have actually, the stores was very empty again yesterday. And then I'm curious on Abercrombie, other than social media have you got -- are you activating new customers? And are you planning any activations in the back half of the year? Is it going to be a balance of sort of activations and online? How are you thinking about that for Apple property brand?

Thank I'll take that one, too. So our goal, obviously, is always to bring new customers into the brand as well as to retain our active customers, which we're working on. We talked a bit about some new opportunities. So yes, as we head into the back half with Abercrombie, the NFL is a great example of that. Our second year is the official fashion partner, and now we're going into stadium nflshop.com we have an opportunity, again, for example, with Target reaching new customers to new categories exciting, exciting with the opening up of Soho. That has been really a terrific opportunity for Abercrombie that bringing our heritage to where the brand is today, the customer feedback has been terrific, and the businesses really exceeded our expectations.

Congrats. Best luck with the rest of the back-to-school.

Our next question coming from the line of Alex Stratton with Morgan Stanley.

This is Kate Delahan on for Alex. Maybe just you mentioned Hollister demand being constrained by inventory at some point during the second quarter. Can you maybe frame like how meaningful that was to the second quarter? And what kind of the acceleration that you're seeing as you kind of catch up on inventory quarter-to-date?

Yes. Katie, we had a great second quarter, Hollister sequential improvement, up to, and we're squarely focused on carrying that demand and that momentum here into the third quarter. What we can say is we've seen that Hollister growth accelerate from its Q2 level so far in August, and we feel good about the product across and the assortment across that brand. SP1 Our next question in queue coming from the line of Mauricio Serna with UBS?

Great. I wanted to ask about Abercrombie. I think you talked about better conversion. Could you elaborate on that? Is that across both online and stores. And what in your view has led to that improvement? And then on Hollister, maybe could you talk about what kind of comp sales cadence you've seen throughout Q2? And is it fair to assume like it's -- the comp is near an inflection like positive in Q3?

And yes, just on those 2 things to start that will be super helpful. Yes. I mean -- so we've been on this journey with ANF Mauricio with conversion. We've continued to see nice traction within the brands, and that speaks a lot to the quality of the traffic that we're bringing into the brands. When you see conversion improve on reduced discounts and still selling more units, that's a really nice sign. And it shows that the assortments are resonating with the customers and we're actually seeing that across both brands, which is great to see.

And that's really showing up in a nice back-to-school and a nice start to the month of August. So we're attracting the right consumer. We're bringing them into the stores. based on what we see in the first half, where the investments that we're making are great. And we're excited to see that continue into the back half. In terms of comp sales cadence again for Q2, again, not talking comps here. We're focused on driving the total here. We've got plus 2 sales in the Hollister side. We've got momentum headed into and threw back-to-school and that's carrying us into August and Q3.

And so we're excited to be positioned to drive another quarter here, 5% to 6% growth on the top line and double-digit operating margins. So that's what we're squarely focused on executing here in the back half. Got it. And then just a quick follow-up on like the guidance for the year. I think if you do the math, like for 5% total stroke full year, it implies an acceleration in Q4 to roughly 7%. So just wondering what in your view is driving that acceleration?

And then on the collaborations and partnerships that you're doing with Target, NFL. Could you elaborate maybe on what are like the gross margin and operating margin implications of those businesses as they continue to scale SP999 Yes. So on the fourth quarter, right, we've guided Q3, giving you the full year implications would be that we've got a nice healthy business here headed into the back half. We've just got to execute. We're going to keep inventories tight make sure that we're continuing to lean into the places that we're seeing the marketing be effective. So that's what we're focused on.

Obviously, a lot of business to do here as we get through the balance of Q3 and then head into the holiday season. As it relates to the gross margin impact on 3P, I'd say like sitting here today, the short answer is there's nothing meaningful to -- there's not a meaningful impact here today. we like these opportunities. We like the incrementality of what they give us. They allow us to reach new customers. It's a nice opportunity for us to participate in new categories and extend that brand reach without requiring a ton of capital deployment. So we're excited about where that looks like.

We're evaluating the right mix, obviously, of distribution channels for us. And -- but sitting here today, I don't see any sort of meaningful impact to gross margins?

It's very early innings, Mr. So we stay tuned, more to come, but excited to see the beginning of this happening.

Our next question coming from the line of John Keypour with Goldman Sachs.

Just a very quick 1 and then a follow-up. I noticed you raised buybacks $50 million for the year. and you've got $120 million incoming from the total tariff refunds. Just wondering what the $70million remaining will be used for?

Yes. So John, this is Robert. I think it's pretty straightforward here. The refunds don't change how we allocate capital in our business. Balance sheet has been strong for years now, and we've been able to invest in the brands, invest in future growth and at the same time, consistently return cash to shareholders. We got 10 consecutive quarters of share repurchases here now, and we continue -- and we expect to see that continue. So we'll work the refunds through that same framework as we go forward, but nothing to allow us to report today.

Got it. Okay. And then just in terms of the target partnership, I'm not sure if you guys are willing to give the size of the impact to the quarter, but just curious about if you guys have seen anything in terms of like a -- a positive feedback loop where it's growing the customer book on the apparel side of things at Hollister as well.

Yes. I mean it's early, John. And we're not sizing the opportunity today. we're seeing evidence that we're reaching new customers, which is great. That's 1 of the primary objectives of the partnership. So we're focused right now on making sure that we have that strong customer response, healthy sell-through of the product and ultimately, trying to evaluate the long-term opportunity that we have here.

I mean the reaction to the products has been absolutely terrific. I mean, the virality of it was incredible. I mean, from the pluses to the comforters. I mean we learned a lot, John. It was really exciting to be able to see the opportunity to sell holster outside of apparel. So again, we're at early stages, but we're learning and testing and more to come in the future.

Definitely. I like the less.

Our next question in queue coming from the line of Janine with BTIG.

I was hoping you could comment a little bit on the promotional environment. I think you said promotions were down better than your plan. Was that across all brands? And just curious what you're seeing broadly in the environment. And then for Robert, just as we think about long-term operating margins, we're sitting here this year, shipping out the tariff benefits kind of in the top to 13% range. Is there anything structurally changing that you would see from here to prevent that from being a sustainable operating margin?

Janine, yes. So I would say our results from Q2 are really proof that our model is working outperforming our outlook was primarily driven from lower discount levels and that was across both brands, delivering this 5% growth that we have -- this retract model is really working for us. The team was chasing and tightly managing the inventory. So exciting to see how that's working for us. we don't view our promotions on what's happening on a competitive basis. We sit down with the team literally week by week, see what's working in our business, what's working, what's not working and we take action. So again, focused on what we can control within our world.

Yes. And on the long term, Jennie, not providing any sort of specific guidance beyond 2026 today. as we've been talking about, we are excited about new growth levers that we're building that are available to these brands on a go-forward basis, category expansion, channel diversification, new partnerships all of those can work to complement what is effectively a very healthy and profitable owned and operatives over time, but nothing structural that I would say that would stop us from maintaining these healthy double-digit operating margins as we have for for a number of years now.

[Operator Instructions] Next question in queue coming from the line of Adrienne Yih-Tennant with Barclays.

This is Argus Kelliher on for Adrianne. I wanted to ask a question on category expansion. Footwear and accessories are getting good initial reads across both brands. How big can head to do be as a percent of the assortment -- what is the margin structure there? And then if you could just remind us if that isn't owned to build or a license category.

Yes. I mean we like the opportunities, Angus, because they expand our addressable market, and they diversify our growth drivers whether it's NFL target, footwear, accessories, home goods, licensing, wholesale, right, those all help us reach customers in different ways. It's early days. We're learning a ton. We're not sizing them today because quite honestly, they are still relatively small in the grand scheme, but we're exitabout the longer-term growth potential that we see across these buckets.

Great. And then just I have you, I'll ask a follow-up. On the stores, you're at 130 new experiences this year with 80 of those remodels and rightsizes, so I guess the mix has kind of shifted from doors towards modernizing the existing fleet. How much runway is left on new stores in the Americas? And then how much is left on modernizing the existing fleet?

Actually, that -- we have been very -- sorry, we've been very consistent in the balance between our new stores and our store experiences over the past several years, fifth year of being a net store opener continuing with this strategy as we move forward. And to answer the question on how many new stores are left there is no finish line in retailers, these new opportunities for us to explore just like we've been doing with these street locations for Abercrombie recently. This new SoHo experience has really been so well received by our consumer. We're so excited to continue to implement that in some stores going forward. So again, no finish line exciting strategy that we've had on retail estate.

Our next question coming from the line of Janet Joseph with JJK Research Associates.

Congratulations on a nice quarter. I wondered if you could talk a little bit more about the AUR improvement and the unit improvement on AUR, are you seeing that, that's coming from less promotions and you did speak to that and also price increases and what the outlook looks like for that going forward? And then on units, I was just wondering if that's a mix issue or just overall units are improving. And then lastly, when you think about EMEA, do you have confidence that, that Hollister will continue to accelerate as we go through the second half?

Janet, I'll take a couple of these. So on the AUR improvement, yes, we're seeing nice AUR improvement. The outperformance to our outlook in the second quarter was primarily driven through better-than-expected AURs, and that really came from reducing our overall promotional or overall discount levels from our expectations. So nice to see the progress there that shows that the product is resonating. We are selling more units coming along with that. That is not just a mix dynamic that is true sales units out the door.

So again, nice signs that the consumer is responding to what we're putting out there for them. We have taken any sort of additional price increases and none of that versus what we've been talking about, that is all baked into our outlook. So we continue to expect modest AUR growth in the back half of the year. On the EMEA side of the house.

I mean you may slide house, yes, we are confident. We certainly believe in the long-term potential of that region, Janet. The local team is really busy at work staying close to that customer. Our playbook that we've exported is working. It's exciting to see that the U.K. has continued to be positive and that Germany flipped positive -- all of that is obviously in our outlook for the back half, but yes, I believe in the long-term opportunity and have the confidence to see that business continue.

There are no further questions in the queue at this time. I will now turn the call back over to Fran for any closing remarks.

Yes, I just want to thank everyone for participating, and we look forward to updating you after the third quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Abercrombie & Fitch First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mo Gupta, VP of Investor Relations. Please go ahead.

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 Investors 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 mentioned 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, Mo, and 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, and 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, and 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 action 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 and the 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 3 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 Brands 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 going 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 transitioned to spring.

With graduation season well underway here in the U.S., Hollister was excited to showcase Gigi Perez in our updated version of the iconic Green Day song, Time of Your Life. We featured the song and highlighted our great assortment across our digital marketing channels celebrating this important milestone in our customers' lives.

And with the upcoming World Cup, teams are looking for authentic fits to represent their team. Hollister is partnered with Kappa, the Italian sportswear brand with a deep connection to international football on the 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 gross 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. And finally, to maintain our strong profitability by delivering double-digit operating margins and expansion in 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 a 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 & 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 multiyear 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 margin, expansion earnings per share and strong cash flow, enabling us to target returning $450 million to shareholders this year via share repurchases.

And with that, I'll hand it over to Robert.

Thanks, Fran, and 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% to 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 resume 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 3 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 time 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 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, and 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.

However, we expect that relief 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. However, 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% to 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% to 12.5%. We're forecasting a tax rate of 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 to $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 rightsizes.

We also expect to be net store openings 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 to $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.

And with that, operator, we are ready for questions.

[Operator Instructions] Our first question comes from Dana Telsey with Telsey Advisory Group.

And nice to see the progress. A couple of questions. First, Middle East, how much of an impact was that? How you're planning that go forward, whether in the second quarter, how you're incorporating it for the balance of the year? What percent of sales is it?

Second, on ERP, is that all complete now? And is that in the rearview? And then just lastly, Fran, how would you frame the consumer, both on Hollister and in Abercrombie, which certainly seems like the collaborations have done nicely. Anything to note on consumer sentiment and strength of product categories of what you're seeing?

I think we're actually going to start in reverse here. So I'm going to start with your third question regarding the consumer. So just really proud of another quarter of growth. Really, we did exactly what we said we were going to do again. We have a strong relationship, as you well know, with our customer. The team is hard at work every day, aligning that product, voice and experience. And when that customer is willing to spend and you get it right, they choose us. That's the magic in it, right?

Both brands are strong. We are expecting to see growth in both brands through the year. As far as customer sentiment goes, I can speak to our business, right? They keep -- they're showing up. We're positioned well with 2 healthy brands. We're not seeing any change in performance across cohorts. Abercrombie, again, second consecutive quarter of growth. Hollister, strong in Americas, which I think is an important point to notice significantly affected more by the EMEA, which Robert is going to go into next.

Yes. So Dana, it's Robert. So impact on the quarter was about 50 basis points to the total versus the outlook that we put out there in March. Really expecting more of the same as we move throughout the balance of the season. So no change in the trend expectations there. So continue to expect a bit of an impact here on the Q2 and full year.

In terms of how we're managing that, doing what we always do, we're adjusting inventory, we're aligning the promos. We'll stay close to the demand in that region and do what we can to mitigate as much as we can.

In terms of the ERP, really great to have that one in the rearview mirror here. Team did an amazing job with that cutover. Really excited about how that strengthens our foundation for this business and allows us to lean more into some of these new channels that we're developing, some of these new categories. So really excited to have that one cut over and be kind of back to normal operations here.

Our next question comes from Corey Tarlowe with Jefferies.

Great. So I guess maybe if we could just start to talk about kind of trends that you saw throughout the quarter, maybe by month. And then any color on what you're seeing quarter-to-date and kind of what the expectation is for go-forward comp performance as you think about Hollister specifically where -- you were lapping some pretty tough comps in the quarter and how we should think about kind of the shape of that performance throughout the remainder of the year within the current guide?

And then secondarily, could you talk a little bit about the promotional cadence as well and what you're seeing there?

So let's break down this lengthy question here. Okay. Starting with the fact that we just had a strong Q1 and our 14th consecutive quarter of growth. The Q1 trends have continued, and it's really built into our outlook of plus 2% to 4%. We were straight down the fairway for Q1, and we're excited to see some potential acceleration, expecting 2% to 4% for the quarter. The inventory is well controlled in a great place, as Robert has mentioned, we are excited about our assortments. The consumer is responding positively to them.

Regarding promotions and pricing, our strategy worked in the first quarter. There's no change to our strategy. We saw nice AUR growth in the first quarter, which obviously is a sign of product acceptance and the customers seeing value in what they're purchasing. Controlling that inventory and aligning promotions is how we run the business, and that's where we will continue to run it for the balance of the year.

What did we miss, Corey?

Just on the, I guess, on the promotions, I was curious if they've been elevated recently, the response to that and then how you think about that shape throughout the remainder of the year? And then on the -- just on the Hollister performance as well, like are you looking at it on a 2-year stack? How should we be thinking about that performance go forward?

Yes. So the expectation for Hollister is to grow for the year. And yes, I mean, it was a 22% 2-year stack for the first quarter. Good categories happening in there, Corey, like graphic tee, short swim, other warm weather categories, staying connected to that teen consumer. Those categories get more important as we head into the quarter. So expecting full year growth.

Okay. Great. And then just lastly -- go ahead, Robert, sorry.

No, no. So our approach to promos hasn't changed here, Corey. We're staying disciplined, obviously showing up in the quality of the results that we're putting out there. Q1 AUR was positive. Promotional levels were consistent with our plan coming into the quarter. And again, we're thrilled about the product that we're putting out there and the customer response to that product. So that's really the story here. You know how we think about promos on an ongoing basis. As long as we keep our inventory in tight control, put that great value out there for the consumer, it gives us the chance to continue to grow that AUR, and that's our expectation here with modest AUR growth here as we think about the full year.

Our next question comes from Marni Shapiro with The Retail Tracker.

Congratulations. I'm curious, Hollister, the inventory is moving very quickly through your stores. So I'm curious if you've been in chase mode. And is there any impact to being in chase mode these days given fuel costs and just the cost of doing business in general, is there any additional cost to being in chase mode versus in the past? And then if you could just give us a quick update on YPB. There's been a couple of sets that have looked very good. I'm curious what that looks like today and what you're thinking about it.

So yes, it's exciting. We run the business in chase mode and Hollister is definitely in chase mode. We've had some exciting things happening in that business, and the team is going after them. On a weekly basis, we meet with them, see what's working, and we have the opportunity set up with our supply chain, producing in 16 countries around the world that enables us to do that. The fuel costs, Robert mentioned earlier, really are affecting us more in the back half, but we will continue to chase. It's an important part of our business. And you know well, those are usually better purchases, right, than buying ahead and not having as much confidence in what you're doing. And as far as YPB goes, yes, we've seen nice business with YPB, nice acceleration this year so far.

That's exciting. Congratulations. And then if you could just touch on one more thing. On the men's side or online, there are a few -- I'd say dressed-up items like that, pleated trouser that is amazing. Is there a shift happening in men's a little? I'm not seeing it quite in the stores yet as I am online, and I like what I'm seeing online.

Well, balance is my favorite word. Everybody knows that. So yes, the team is working on it, a balanced assortment that is an opportunity for our customer. Overall, casual as well as more dressed up consumer has been shopping with us.

Great. Congratulations. Best of luck for summer.

Our next question comes from Mauricio Serna with UBS.

Just curious on the shape of the guidance for the year. You -- since you're maintaining 3% to 5% and then second quarter implies a little bit below that coming after Q1, that's also below. So just trying to understand like what drives the acceleration to get to the full year guide. And then you mentioned for the EBIT margin outlook, which you maintained, you're getting a positive from lower tariffs, which I think is a 50 basis points benefit and that's offset by freight and marketing. Could you just break that down like how much incremental you expect from freight and marketing at the outset?

Yes. So thanks, Mauricio. So again, 14th consecutive quarter of growth here for the first quarter. So we're excited about that track record. We're adding to it every quarter here. And we've got the confidence here to keep that going. We've got the confidence in the underlying business here. So growth across the brands in Americas and APAC and within EMEA. We also saw growth in the U.K., which is great to see, and that's our largest market in that region.

So sitting here today, as we think about some of the headwinds that we were facing in Q1, we've got the 50 basis points of the Middle East. We've got that kind of continuing through in terms of the magnitude on the business. We had the 100 basis points of ERP impact that will come back to us. So we've got the building blocks to kind of keep us right in that range of that 3% to 5% on the full year.

And as long as we keep inventory in good shape, we're seeing that AUR growth, that's a great thing. When you think about the EBIT margin and some of the big boulders here, for the full year, it is a balanced story here. Tariffs and freight, by the time we get to year-end will be just slight headwinds year-over-year. So think like tens of basis points each.

We've got this modest AUR growth that is largely funding the investments that we're making in the brand. So that all keeps us in line with this 12% and 12.5% despite those headwinds that we're seeing in the Middle East and broader EMEA. We're continuing to invest in this business, all while returning a bunch of cash, $450 million to shareholders through share repurchases.

And I guess when it gets to some of the big boulders and pieces and parts, so tariffs, 180 basis points of headwind here in Q1. We talked about $20 million for Q2. So that's about 120 basis points at the midpoint of our guide. And that will -- when we move to that 15% tariff in the back half of the year, that will still flip to a tailwind as we're up against the full IEEPA tariffs from last year. So that all kind of washes out to a full year of like tens of basis points of headwind for us.

On the freight side of the house, nice to see in Q1 as expected. It was 180 basis points tailwind to gross margins. So that fully offset tariffs. That's expected. That's really what has us up against and lapping the higher freight rates that we saw in Q1 of 2025. That will start to normalize here as we get into Q2. So again, a handful of tens of basis points here of benefit in Q2.

And with rates up, fuel prices up, we are seeing some pressure on freight. So that will actually flip to a headwind for us in the back half of the year and kind of washes back out to just a slight headwind, again, tens of basis points on the full year. So that's kind of the cadence there.

From a marketing standpoint, we talked in March about front-loading a little bit of the marketing. So we're pulling some of that forward. So we did show some deleverage here in Q1. We're going to continue to invest in the marketing. We've got great brands. We've got a lot of great opportunities. So we're leaning in there for Q2. And then we'll kind of get back to kind of status quo or more normalized or flattish levels year-over-year in the back half of the year.

Got it. Very helpful. Just quick follow-ups on the comps. Q1, I saw Americas comps were up 1%. Could you talk about like both brands comped positive in the Americas? And then one other detail. You mentioned -- you touched upon AI investments that you've done. Could you maybe share any benefits that you've gotten so far from your AI investments in the business?

I'll take the second part of that one, Mauricio. So we're very excited about AI's potential for the business. The past couple of calls, we've mentioned a few things, right? We launched on Perplexity during Black Friday to learn a little bit more about Agentic commerce. Our customer care function is a good example of rapid improvement helping out our customers. The entire team is going through what we call basically an AI academy, and they all have access to Copilot Premium. We're excited about that. We're using it in our business models being embedded into things like forecasting and inventory. We're using it for our customers to create a more seamless experience. So it's really becoming integrated in the entire business, and we're very excited about the opportunity.

Yes. And just real quick on the Americas, again, proud to be delivering another quarter of growth here, both brands growing in the Americas. That's really the right place to start. We're seeing a healthy business there. We've got positive AURs and unit growth, both contributing in the quarter there, along with positive traffic, driving both a 1-year and on a multiyear basis growth, which is great to see. So still seeing stable conversion, good product acceptance, which is why we feel good about the trajectory of the brands in that core market.

Our next question comes from Jon Keypour with Goldman Sachs.

I just wanted to drill into the EMEA impact at Hollister. I just want to make sure I understand it. So it's 50 bps to the total company, that implies it was about 100 basis points drag to Hollister. So if that's correct, we can go off that. But then that seems -- if that's correct, that seems to imply that Hollister is still comped down 1. Just wondering what the -- like if we cancel out the Middle East stuff, what exactly drove the negative comp? I understand that the comp was very high last year. But I think a lot of us walked into the quarter expecting modest growth and to see that even an adjusted number is still down. Just wondering what drove that down 1 on an adjusted basis?

Yes. I would say, like generally, your thought process is right, but I would correct you on one specific thing. So on the EMEA side, that's primarily a Hollister business. So applying a 50 bps, assuming that it's about 50 bps of the business is probably a little low. You definitely have to increase that total impact on the Hollister business. So much of that EMEA impact is coming from the Hollister brands. So that's what I would say as you're thinking about modeling out the region.

Again, Middle East is -- was 50 bps in total. I'd skew that more towards the Hollister brands, obviously, actively managing this and still seeing strength in places like the U.K. So it is concentrated, it is focused. We've got very specific areas that we have to work on, and we're controlling what we can control. We're going to stay close to that consumer. We're going to adjust inventory and promos. We're going to use that playbook that's been effective to navigate a lot of different scenarios in the past and apply that to the EMEA region here and work to improve that trend as we move through the year.

Got it. And then I guess just on that last piece, you mentioned the promo cadence and things like that. I mean, we track promos like I'm sure everybody does. We've seen what looks like an elevated promotional cadence in Hollister, at least online. Can you just explain -- I mean, first of all, maybe I have that wrong, but if that is true that it is kind of elevated at least online, how does that wash out so that you're still getting the positive AUR? And like how should we think about what looks like elevated promotional cadence into this quarter through the rest of the year?

Yes. I mean it's a messy quarter. Q1 is a messy quarter with promo cadences as Easter shifts around on you. So I'd just say be cautious there. From our vantage point, we executed against our promo plans that were built into our outlook in March. We were thrilled to see the product acceptance that we saw. The customer continues to find value in the assortments that we're putting out there, and it's ultimately driving another positive AUR result for us. So that's all part of the model. It's not the only driver of the outlook that this continues to be this demand-led story. We're seeing unit growth and AUR growth, which is an awesome place to be. So far in '26, we're seeing that customer react really, really well and inventory is well controlled, and that gives us -- that puts us in the best position here to continue to deliver AUR growth as we move through the balance of the year.

Our next question comes from Rick Patel with Raymond James.

This is Suraj Malhotra on for Rick Patel. Can you just help us understand demand in the denim category? Is it holding up at full price? Are you seeing customers being drawn to promotions there? And what are your expectations for denim as the year moves ahead?

And just a follow-up on how to think about SG&A leverage from here. Given the slower demand in the Middle East, do you see an opportunity to cut back on spending in EMEA to preserve margins? Or will you lean into more spend to drive better demand elsewhere? Just some color on the puts and takes would be great.

So we'll start with the denim question. So we are not seeing any change in the demand for denim. We're actually excited about what we're seeing. There's some exciting trends happening within denim.

Promos. Yes. Pricing of promos, Suraj. When we look at pricing, this is one of those categories that we're protecting from a price point standpoint. So thrilled with the customer response there. We're seeing success in denim across the brands, which is a great place to be and the bottoms business has been good for us.

Yes. Sorry about that. Yes. So anyway, so that's actually true for both brands for both genders. So heading into back-to-school, obviously, usually a big time for denim. So we're well positioned for that as well. But we're excited about what we're seeing and continue to expect that for the balance of the year.

Yes. And Suraj, on the SG&A side and the expense side of the house, our model hasn't changed here. We expect balanced flow-through at the midpoint of our guide here, and we're choosing to invest in a growing business. Investments are focused on places like marketing, stores, expanding capabilities, ultimately, things that drive long-term growth. It's great to be in a position where on that 3% to 5% sales guide, we're holding margins year-over-year with that 12% to 12.5% guide.

So as you move above that range, that sales range, the model does what it's always done. You'll start to see some leverage kind of roll through the model. But sitting here today, whether EMEA or elsewhere, we're investing in 2 very strong brands for the long term, and that's what positions us to deliver consistent growth over time.

Next question comes from Tom Nikic with Needham.

I wanted to ask about the international business, specifically about the strategic review of Asia. Given how strong Asia growth was in the quarter and some of the issues that have popped up geopolitically in EMEA, does it change the calculus at all on the strategic review? Or is it kind of full steam ahead there?

Tom, yes, great quarter for the APAC region, both brands growing. Ultimately, what that tells us and it reinforces our belief in the long-term opportunity there. Focus right now is making sure that it scales in the right way. So to that end, we're being thoughtful. We're reviewing how we can optimize that go-to-market model, whether it's partnerships or other capital-light approaches. So no change there. Review is underway. We'll have more to share later this year.

And similar story on the EMEA side of the house, we're navigating some near-term choppiness here in the region. Happy to see growth in our biggest market there in the U.K. We'll obviously navigate the Middle East dynamic here as we move through in the near term, but nothing changing in terms of our long-term belief and opportunity in the region for our brands.

Understood. And if I could just follow up on Mauricio's question earlier about margins. I just kind of want to make sure I understand the puts and takes, I guess, for Q2 specifically. And the guidance implies that the EBIT margin is down close to 400 basis points, roughly speaking. I know tariffs are 120 basis points. It sounds like there's some marketing that's front-loaded to the first half of this year? Any other kind of key puts and takes for EBIT margin in Q2?

Yes. So really 3 big drivers here for Q2. Again, you called out the tariffs, and we talked about that $20 million. So that's 120 basis points that will come off the top. Again, freight it will be a slight tailwind, but again, tens of basis points instead of that 180 basis point benefit that we saw in Q1. We're continuing to invest in this business. So when you think about the marketing investments, when you think about continuing to invest in new stores and this overall store experience, you put that together and combine that with some modest AUR growth, and that's what ultimately walks you down to that 10% operating margin.

Understood. Best of luck for the rest of the year.

Our next question comes from Janine Stichter with BTIG.

I want to follow up on the operating margin this year, 12% to 12.5%. How do you think about that structurally being the right level? I think you mentioned that if sales were above the 3% to 5%, you would get some additional leverage. Would you let that flow through? Or would you reinvest? Just how you're thinking about it?

Yes. I mean our model has delivered really strong double-digit operating margins for multiple years now. It's great to be positioned to continue that this year. Flow-through is really strong, and this is all about balance. We're obviously staying on offense here and focused on building a sustainable, profitable long-term business here. We're not managing quarter-by-quarter. So we are navigating external headwinds like tariffs, like freight and these geopolitical conflicts. We're making deliberate investments at the same time in marketing, digital and new stores, and new channels of business.

And we're also going to have to make some investments on the supply chain to support the brands and set us up to drive growth. So ultimately, that's the plan, right? We're going to set our goals. We're going to deliver against those goals. This business generates a ton of cash, and we're going to make sure that we're supporting this business for the long term.

To your point around where we see leverage points above that kind of 3% to 5% range, you'll start to see some leverage flow through and you might get some margin expansion there. But again, we're going to be diligent about how we repurpose or flow those dollars either through or reinvest back into this business for the long term.

Great. And then just maybe on raw materials. I know you mentioned higher freight costs from the higher fuel costs. Anything that we should be aware of on raw materials and when we would start to see any impact from the higher fuel costs flow through there?

Yes. So on the fuel cost side, specifically, we talked about freight flipping to a headwind here in the back half of the year. So that's really a result of just the timing of selling through that product. So you'll start to see that kind of flow through the back half of the year.

Input costs, we've got a great sourcing team. They've navigated a lot of different dynamics over the years. So we've got confidence in that team on a go-forward basis. Sitting here today, raw material costs relatively stable. You got a little bit of an uptick on the synthetics here, but all of that's already reflected in how we're planning the business in that guide.

Great. And then last one for me. I know the footwear collaboration with Sperry went really well. How should we just think about that category as a whole? Is there an opportunity to expand that just given what you saw with that collaboration?

Janine Stichter, it's Fran. So yes, we have been talking a bit about footwear in the past couple of calls. We were excited about seeing the customers' acceptance on it. One of the biggest things that we hear from our customer when we show them outfits in any of the social media areas on our website is to complete the outfit. So we were curious to learn a bit more about it. We saw some nice success, and we're continuing to explore.

Our next question comes from Janet Joseph with JJK Research Associates.

I wanted to you review what happened in EMEA. I think you said the U.K. was okay, but the rest of the region was challenged. So can you account for that, like why the U.K. would be okay? And also, if there's any other fundamental issues going on in EMEA besides how challenged the region is. I would just love to understand that. And should we see -- sorry, promotional levels pick up in this region just because you had a pretty tough result.

And last question on EMEA. Do you think that as comparisons ease that EMEA could improve for Hollister as you go through the year?

Well, starting with the U.K. The U.K. is where we export our playbook to start. So we do have our strongest and our largest business in the region there. And with our base office based in London and the closeness to the customer, that has been a successful export of our playbook. So we're excited to continue to see the growth there.

Regarding promotional levels in EMEA, Janet, really -- we have a model where we can control our inventory. And so we're working very closely with that team to make sure that we keep things tight and in line and are reacting very quickly to the business. So we feel we have that under control.

And then what was the third part improvement we go through the...

Do you think that...

Just to finish though. As we mentioned, what -- our Q2 outlook and our full year outlook, which we held, Q2 at 2% to 4% sees a bit of an acceleration in the business. So that's all built into our outlook.

Okay. In EMEA, you see an acceleration for the Hollister brand in the second quarter?

Haven't given any sort of specifics around brands by regions. We're seeing our outlook for the second quarter is pretty consistent to how we saw things roll through coming out of Q1, continued strength in the Americas and APAC. We'll see some pockets of challenges here within the EMEA market that, to Fran's point, we're navigating. We're going to do everything we can to adjust our inventory levels and make sure that we're keeping things tight there and aligning things with demand. And that's ultimately what gives us the best opportunity to try and drive a trend improvement there.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Fran for any further remarks.

I just want to thank everyone this morning, and we look forward to updating you after the second quarter.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Good day, and welcome to the Abercrombie & Fitch Fourth Quarter Fiscal Year 2025 Earnings Call. Today's conference is being recorded. [Operator Instructions] I would like now to turn the conference over to Mo Gupta, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to our fourth quarter 2025 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 fourth quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors 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 mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we'll 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 will turn the call over to Fran.

Thanks, Mo. Good morning, and thanks for joining us today. Before we begin, I do want to acknowledge the situation in the Middle East with associates and stores in the region, our focus continues to be on their safety and well-being. Returning to our results. I'm happy to report the fourth quarter finished on the higher end of the ranges provided in our early January update. Once again, we accomplished exactly what we set out to do.

Holiday product acceptance drove record fourth quarter net sales with balanced growth across regions, brands and channels, along with growth in earnings per share. As a company, our goal is to set clear commitments and then deliver on them, leveraging our strong foundation and operating model. We achieved another year of consistent results for 2025 with record sales, growth across regions and channels and leading double-digit operating margins.

Substantial operating cash flows also enabled strong returns of cash to shareholders via share repurchases. Looking forward to 2026, we expect to continue on the path of global growth and add to our track record of consistent, strong profitability. For the fourth quarter, we delivered net sales growth of 5%, which was balanced across regions, brands and channels. It was particularly great to see both brands deliver record fourth quarter net sales.

At Abercrombie Brands, we achieved our goal of returning the brand to growth with 4% net sales growth on top of a record last year. Hollister brand continues to deliver for the teen customer, producing an 11th consecutive quarter of net sales growth at up 6%. With balanced top line growth and continued financial discipline, we delivered an operating margin of 14.1%, including 360 basis points of tariff pressure. I have to recognize the team's incredible efforts here to meaningfully reduce the impact of these costs.

On the bottom line, earnings per share of $3.68 improved 3% on last year's record quarterly results, demonstrating our ability to create value through a balanced combination of global growth, operational excellence and disciplined capital allocation.

Recapping the year, fiscal 2025 net sales were a record $5.3 billion, surpassing $5 billion for the first time in company history. We grew over 6%, exceeding our beginning of the year growth projections provided last March. For the third consecutive year, our customers responded to the team's compelling product and engaging marketing, delivering net sales growth across regions, led by the Americas, up 7%. Sales also grew across channels for the third year in a row. We continue to see great traffic on digital and in-store. And importantly, we continue to see our highest value customers shopping across channels.

We delivered an operating margin of 13.3% or 12.5% adjusting for a onetime litigation benefit, a double-digit result for the third straight year despite 170 basis points of tariff pressure. On the bottom line, we delivered full year earnings per share of $10.46, our second consecutive year of EPS over $10, by far the strongest back-to-back performance in our 30-year history as a public company. We also remain committed to shareholder return. With $619 million of operating cash flow after investing back into the business, we returned $450 million to shareholders via share repurchases totaling 11% of shares outstanding at the beginning of 2025. The team worked hard all year, staying fully committed to our customer and our playbooks, and I'm proud of the consistency of these results as a clear demonstration of our leading operating model and culture of financial discipline.

From a regional perspective, 2025 was another year of progress. In the Americas, we grew net sales of 7% on strong cross-channel traffic, driven by compelling marketing across brands and continued store expansion. In EMEA, net sales growth of 6% was driven by double-digit growth in the U.K., along with good growth in the Middle East. APAC grew 5% this year, led by solid performance across our digital platforms.

Moving on to brand performance. I'll start with Hollister Brands, where we set records across the business. I am so proud of what the team has achieved with the global teen consumer with 2 consecutive years of 15% growth, driven by increases in unit selling and AUR. On product, we delivered growth across genders and key categories, showing improved balance on both. We saw great response from a variety of exciting marketing campaigns supporting key product drops like our collegiate collection, the Grad Shop and engaging collaboration with Taco Bell. We added millions of new customers in 2025, and importantly, we also saw improved retention. Simply put, Hollister's growth and scale stand out in the teen space, and we are excited about what is ahead.

At Abercrombie Brands, after a challenging start to 2025, up against a near perfect 2024, the team rallied and committed to getting back -- getting the brand back to growth by the end of the year. We did just that, achieving a return to net sales growth for the fourth quarter. As we have shared throughout the year, we believe Abercrombie remains a leader for our target customer. We continue to see strong traffic along with growth in customer counts and good retention trends. Reflecting our confidence, we invested across stores, digital and marketing to bring the brand to life in new ways throughout 2025.

Most recently, the brand hosted several amazing activations leading up to the Super Bowl. As an official fashion partner of the NFL, the first of its kind, we had players and their families, several celebrities and league figures as well as our target customers at a series of events. I was there, and it was incredible to see Abercrombie at the intersection of fashion, sports and culture, a great finish to our 2025 season and the perfect kickoff to 2026. Our ongoing investments across channels continue to pay off in 2025. We saw growth in the stores and digital direct channels for a third consecutive year and both remain nicely profitable. In digital, we continue to see strong performance, finishing the year with that channel delivering 44% of total sales.

We also surpassed 1 billion visits across our platforms for the first time, demonstrating the scale and direct reach we have with our customers. Stores matter to them, too, and we were net openers for a fourth consecutive year, leveraging our digital demand to help us determine where we can better serve Hollister and Abercrombie customers with a physical location. At the center of all these excellent brand, channel and regional accomplishments was our Read and React inventory model. For the third consecutive year, we chased millions of units to support product demand at healthy AURs, helping to drive top line growth. Inventories remain tightly controlled, and we finished the year with units up in the mid-single digits. I can't overemphasize how hard our team works at this, coordinating product across functions, geographies, channels and partners, all while tariffs were changing the global supply chain landscape week-to-week.

So looking forward, we are very excited for 2026. We entered the year with a strong foundation, which includes 2 globally relevant brands, a proven operating model and a strong balance sheet, all managed by a world-class team. For the year, our goals for the company are as follows: 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 like our recent launch of Baby and Toddler and Abercrombie Kids.

Second, to stabilize gross margins as we progress through the year by mitigating as much of the tariff impact as possible. Third, to continue to invest in tools and technologies to improve our speed and efficiency across the product and customer journeys. A good example of this is the go-live of our new merchandising ERP system this month. We're also moving quickly to leverage AI to benefit the customer, and we're modernizing systems to help us.

And finally, to maintain our strong profitability by delivering another year of double-digit operating margins and expansion in earnings per share. We also expect to continue our track record of returning excess cash to shareholders through share repurchases. After closing another record year in 2025, we are off and running on these growth objectives for 2026. We have the team, the experience and the track record of delivering for our customers and our shareholders. Many thanks to the entire organization that makes this happen every single day. The work continues and always forward.

And with that, I'll hand it over to Robert.

Thanks, Fran, and good morning, everyone. I'd like to add my thanks to our associates around the world for staying agile and executing consistently throughout 2025. We're really proud of what we've achieved, and we have so much further to go. Starting with Q4 results. We delivered net sales of $1.67 billion, up 5% to last year on a reported basis. Comparable sales for the quarter were up 1% with approximately 100 basis points of benefit from foreign currency. By region, fourth quarter net sales increased 5% in the Americas, 8% in EMEA and 9% in APAC. On a comparable sales basis, Americas was up 2%, EMEA was down 3% and APAC was approximately flat.

Within the brands, both Abercrombie and Hollister delivered record fourth quarter net sales. Abercrombie brands returned to net sales growth, up 4% over last year on a comparable sales decline of 1%. Hollister brands net sales grew 6% on comparable sales growth of 3%. Across the business, we saw mid-single-digit AUR growth and low single-digit unit growth on increased traffic. Across regions and brands, the spread from net sales to comparable sales was driven by net new store openings, third-party channel performance and favorable foreign currency.

Operating margin was 14.1% of sales, coming in at the high end of the outlook we provided in early January, delivering operating income of $236 million compared to $256 million last year. Adjusted EBITDA margin for the quarter was 16.6% of sales on adjusted EBITDA of $276 million compared to $293 million last year. The 210 basis point year-over-year decline in operating margin was driven primarily by 360 basis points of tariff expense, which was partially offset in gross margin by 140 basis points of freight cost favorability, both included in cost of sales. Total operating expenses were in line with last year as a percentage of sales with investments in stores offset by leverage in general and administrative expenses. Marketing was in line with last year as a percentage of sales.

The tax rate for the fourth quarter was 28%. Net income per diluted share was above our outlook at $3.68 compared to $3.57 last year. We ended the quarter with inventory at cost up 5%, with approximately 3 points related to tariffs. Inventory units were also up 5%, including approximately 3 points related to strategically building receipts ahead of our planned ERP implementation this month.

I'll cover the rest of our results on an adjusted non-GAAP basis. For the year, we delivered net sales growth of 6%, reaching a record $5.27 billion. Growth was balanced across regions and channels, supported by mid-single-digit unit growth and low single-digit AUR growth on increased traffic. On a regional basis, net sales were up 7% in the Americas, 6% in EMEA and 5% in APAC. Across the business, we saw 70 basis points of favorable impact from foreign currency. Comparable sales for the year were up 3%, led by the Americas at 4%, with EMEA approximately flat and a 3% decline in APAC.

For EMEA and APAC, the favorable spread between net sales and comparable sales was driven by net store openings and third-party channel performance. EMEA also benefited from favorable foreign currency. By brand, Hollister Brands delivered net sales growth of 15% and comparable sales growth of 13%. At Abercrombie Brands, net sales declined 1% on comparable sales decline of 7%, with the 6-point favorable spread between net sales and comparable sales driven primarily by store openings and third-party channel volume.

Operating income for the year was $661 million, an $80 million decline from 2024's record result, driven by approximately $90 million in tariff expense included in cost of sales. Operating margin was 12.5% of sales, a 250 basis point decline from 2024, also driven by tariff expense, totaling around 170 basis points of sales with additional cost of sales increase driven by product mix.

Operating expense as a percentage of sales leveraged slightly with investments in marketing and store occupancy more than offset by leverage on general and administrative expenses. Adjusted EBITDA margin for 2025 was 15.5% of sales on adjusted EBITDA of $816 million compared to $895 million last year. The effective tax rate for the year was 29%. Net income per diluted share was $9.86 compared to $10.69 in 2024.

Moving to the balance sheet. We exited the year with cash and cash equivalents of $760 million and liquidity of approximately $1.2 billion. We also ended the year with current investments of $25 million. For the year, we drove operating cash flow of $619 million and free cash flow of $378 million. For the year, we used $450 million of cash to repurchase a total of 5.4 million shares of stock or 11% of shares outstanding at the beginning of the year.

From a direct channel perspective, both stores and digital grew nicely for the third straight year. For the year, 44% of total sales were digital with Hollister around 31% and Abercrombie around 59%. On the store fleet, we delivered 120 new store experiences, including 62 new stores, 11 rightsizes and 47 remodels. We also closed 22 stores, finishing as a net store opener for the fourth consecutive year. We ended the year with 829 stores, 523 Hollister and 306 A&F across 5.3 million gross square feet, growing square footage by 4% to last year. Both the stores and the digital business remain highly profitable with 4-wall store operating margins around 30% in aggregate.

Shifting to our 2026 outlook. For the full year, we expect net sales growth in the range of 3% to 5% from $5.27 billion in 2025, with full year net sales growth expected across brands. We are investing for continued growth in the Americas and EMEA from both owned and operated stores and digital channels as well as from wholesale and licensing partnerships. In APAC, while our business has delivered sales growth in recent years, we do not believe returns have fully reflected the level of investment.

Consistent with our commitment to financial discipline, we are undertaking a review of potential strategic alternatives for the region, including the evaluation of options such as partnerships, franchising and licensing with the goal of enhanced profitability, optimized capital deployment and a maintained focus on shareholder value creation.

We currently anticipate 40 basis points of favorable impact to net sales from foreign currency. We have assumed modest AUR improvement for the full year as we've taken some revised ticket pricing across brands, largely focused on fashion elements of the assortment. We expect full year operating margin in the range of 12% to 12.5%. At the midpoint, the year-over-year change reflects approximately 70 basis points of incremental tariff expense or around $40 million incrementally from 2025, net of product mitigation.

Our outlook assumes the 15% global tariffs announced by the administration are effective beginning February 24 and are assumed to remain in effect throughout the end of the fiscal year. No tariff refunds or recoveries are assumed for fiscal 2026. We also expect the first half will be favorably impacted by lower year-over-year freight costs normalizing in the back half of the year. We're forecasting a tax rate of around 29%. For earnings per share, we expect diluted weighted average shares of around 45 million, which incorporates the impact of 2025 share repurchases as well as anticipated 2026 share repurchases.

Combined with the tax rate, we expect earnings per share in the range of $10.20 to $11. For capital allocation, we expect capital expenditures in the range of $200 million to $225 million. On stores, we expect to deliver around 125 new experiences, including 55 new stores and 70 rightsizes or remodels. We also expect to be net store openers with our 55 new stores outpacing around 25 anticipated closures. We do expect net store openings to be relatively balanced across brands, but tilted to the Americas. The company has a strong balance sheet and cash flows, and we continue to expect share repurchases will be the primary use of free cash flow. For 2026, we are targeting share repurchases of around $450 million.

Turning to the first quarter of 2026. We will go live with a new merchandising ERP this month, which will temporarily impact operations for approximately 2 weeks. During this time, we will limit inventory receipts and movement across the business, creating a temporary headwind of approximately 1 to 2 percentage points of growth for the quarter. We also have some incremental implementation costs in the quarter. So in aggregate, we expect the ERP project will have over 100 basis points of unfavorable operating margin impact, which is factored into our Q1 outlook. Including those impacts, we expect net sales growth in the range of 1% to 3% from the Q1 2025 level of $1.1 billion, with net sales growth expected across brands. We also expect slight AUR expansion for the quarter.

On the evolving Middle East conflict, we currently anticipate a slight sales headwind, and we'll continue to actively monitor the situation alongside our in-market franchise and joint venture partner with safety as our highest priority. We expect operating margin to be around 7%. In addition to over 100 basis points of impact from the ERP implementation, we expect tariffs will drive approximately 290 basis points of decline or $30 million net of product mitigation. This will be partially offset by an expected freight tailwind of approximately 160 basis points for the quarter.

Marketing investments will also be up around 50 basis points as a percentage of sales, with the remainder of expense in line with Q1 last year in total. We expect a Q1 tax rate around 26%. We expect earnings per share in the range of $1.20 to $1.30, with diluted weighted average shares expected to be around 46 million, including the anticipated impact of at least $100 million in share repurchases for the quarter.

In closing, 2026 is underway, and we're excited -- we're executing from a position of strength, supported by a proven model, strong cash flows and disciplined capital allocation. Our outlook is informed by a multiyear track record of delivering on our commitments and reflects our confidence in executing in 2026 and continuing to build towards the long-term opportunities ahead.

And with that, operator, we are ready for questions.

[Operator Instructions] The first question comes from Dana Telsey with Telsey Advisory Group.

Certainly nice to see the progress. Fran, after the building blocks that you put in place for '24, for '25, the collaborations that you did with the businesses and frankly, returning to growth in the Abercrombie brand and certainly saw what you saw with the Super Bowl and being the fashion partner, how do you think of the merchandising drivers of 2026 and what you're most excited about to drive growth? And then, Rob, as you think about the building blocks for margins in 2026, how do you think of AUR growth relative to price increases from tariffs and the impact of tariffs on margins going forward?

Dana, so excited about what we just delivered for both the fourth quarter as well as the year, most excited that, that was delivered with balance across regions, brands and channels. And what's driving our confidence as we head into 2026 is that it's the first time the company has ever done more than $5 billion in revenue. It's proof that our model is working. We delivered all of that, to your point, the last 3 years actually of double-digit margins, operating margins. So our playbook is working. Our model of chasing, we didn't start the year with an expectation of Hollister to drive 15%. But with that model, we were able to chase millions of units to hit another 15% for Hollister. So I'm excited about the opportunities ahead, and I'm really looking forward to 2026.

Yes, Dana, so on the tariff impact here, so our outlook does reflect that 15% being kind of held all the way throughout the balance of the year. Obviously, Section 122 here in the front half of the year, and then we're making the assumption of something pretty substantially similar to that carries us through the back half of the year.

How that kind of cadences out? So Q1, we talked about this 290 basis point of impact on operating margins. That will be fully incremental year-over-year. We'll start to lap small amounts of tariffs in Q2, really towards the back end of Q2. We talked about $5 million of tariff impact in Q2 of 2025. So we'll start to lap a little bit of that, but again, largely incremental in Q2 before kind of neutralizing in Q3 and then flipping to a bit of a tailwind for us for Q4. So that's kind of the cadence throughout the year.

Total impact, incremental impact of about $40 million here for tariffs on a year-over-year basis. So that's roughly 70 basis points. We feel good about the mitigation strategies that we put in place here as it relates to country of origin changes, supplier negotiations, product costing. And then to your last point around pricing, we did take that pricing on spring products starting kind of late Q4. That will ramp as we move through Q1. So really only expecting some slight AUR improvement here in Q1 and then kind of that will build throughout the balance of the year, so give us some modest AUR growth on the full year. So we feel good about the mitigation strategies we put in place. We're tracking to another year of double-digit profitability. So excited to take that into 2026.

And the next question is going to come from Corey Tarlowe with Jefferies.

I wanted to ask first on Hollister, how you think about the sort of the right growth algorithm, if you will, for that segment, areas of success from Q4 and then areas of opportunity in 2026? And then I have a follow-up.

Corey, so yes, super excited, a big shout out to the Hollister team. I mean, congrats to them on the best year ever, the 11th consecutive quarter of growth. And what's driving that is really being dialed into that team consumer for holiday specifically, we saw winners in categories like fleece and graphics and outerwear. We've invested nicely into that business. We opened lots of new stores this year, refurbished a bunch of stores, spent money on marketing. Our Taco Bell collaboration on Cyber Monday was a terrific success. So I'm excited about the team staying dialed into that customer, staying close to that customer. Spring, we're already seeing some nice response from the consumer. So we're excited to see another year of growth.

That's great. And then just more for Scott and Robert. There have been periods throughout, I guess, the last 5-plus years where Abercrombie has invested in ERP systems and you haven't called out impacts. What's different about this implementation specifically? What does it allow you to do going forward? And then how should we be thinking about, again, that impact? Is it acute? Or will it be -- will there be any longer-lasting impacts from it?

Yes, great question, Corey. As you noted, this has been a multiyear undertaking for us, and it's great to have go-live in sight here. So the system that we -- that we're replacing was originally built and released about 15 years ago, and it was really architected for a very different business than what we're running today. This new ERP system allows us to support both the owned and operated omni business that we have as well as the expectations of growth that we have across channels and categories in a more efficient way.

In terms of what you're seeing here in Q1 and the reason we haven't called out any sales impact in the past is really it's been building, right? This has been building the system, getting ready for this go-live. What you're seeing here in Q1, we've been running parallel with this nonproduction instance for quite a while now. We've completed all the testing, final development, and now we're ready to go live. And that's what's coming up here in the next days and weeks. We feel like we've done the right work to ensure that we've got the units in the stores to support the sales during this transition. But the risk that we're calling out here in the outlook is primarily related to some temporary interruptions in third party and some product interruptions in Chase over the next couple of weeks. In the end, it's all about making us faster as we think about new growth opportunities. So we're really excited to get this new system in place, and we feel like any sort of disruptions kind of contains to this couple of week period here middle of Q1, and we'll be in good shape as we head into Q2.

And our next question will come from Matthew Boss with JPMorgan.

So Fran, on your target for sales growth at both brands this year, how are you managing the intersection between Abercrombie's return to growth and the moderation at Hollister relative to last year? What do you see as normalized growth for the 2 concepts?

Matt, I mean our goal is obviously to grow both brands each year. Mid-single digits would be a definition of success for us. We're excited to see our model working. I mean, you come out of fourth quarter where we grew the business again on top of a record and actually having another record year on top of 2024 is certainly proof that our operating model is working. I'm excited that you're already seeing confidence in the consumer about some of our -- the increases in prices that Robert talked about a little while ago. Those are ramping up in our assortment, but the acceptance to spring has been good so far. So excited. I think Q4, what it defines, honestly, Matt, is a balanced performance, which is growth across brands, regions and channels, and that is definitely our objective in 2026.

Great. And then maybe a follow-up for Robert. Could you just break apart the drivers by brand that supports the embedded revenue improvement in the back half of the year?

In the back half of the year. In terms of sales, Matt, is that what you're looking at?

Yes. Yes, top line improvement [indiscernible] for the year.

Yes. So again, if you think about where we came out of Q4 around that plus 5 and again, to Fran's point, really balanced across brands, regions, channels, that's kind of what we're carrying into 2026. The big difference in what you're seeing in kind of that step down from Q4 into Q1 with that 1% to 3% guide is really just that ERP impact that we're talking about. It's a couple of points here. But otherwise, it's a pretty consistent build as we kind of think about the full year 2026, and that's how we're running this business.

We're setting these clear expectations. We're going to control what we can control, and we've got the operating model that allows us to chase into revenue as we see those trends develop. So feel like we're in a really good place, driving growth on growth and excited to continue that trend here into 2026 in Q1.

Yes, Matt, this is Scott. Just want to add towards the end there. As we think about store growth, as Robert noted, we're net store growers here for the fourth year in a row. We'll do that again in 2026. And that store growth really ramps up towards the [indiscernible]. So that's a nice fuel to the fire there as we get into the back half of the year.

And the next question will come from Paul Lejuez with Citi.

Robert, just a clarification on the ERP system impact. Is that something that we are going to see throughout the entire quarter? Or is that still in front of us? And maybe if you can talk about what you're running quarter-to-date versus what you expect the next 2 months to be? Just want to understand the cadence of that impact. That's just the first question.

Yes. I'd say cadence is relatively consistent. Again, great end to fiscal '25 with Q4, carrying that into Q1. The ERP timing is really kind of a 2-week period. We're kind of right in the middle -- right at the start of it here with the go-live. So it's really contained to that couple of weeks. We've gotten the inventory to our stores to support the Easter peak and the spring break time line. So we feel good about providing and supporting our stores through there. It's really just a function of this third-party impact here over the course of the next 2 weeks.

So is the right way to think about it that you're running up, let's say, 3% to 5% outside of that 2-week period and that 2-week period has got to be down significantly to have a 100 to 200 basis point impact on the whole quarter. Is that the right way to think about it?

Yes. I don't know that it's down significantly. It's really -- it actually is more of a -- because of the way the third-party flows through, it's really more of a comp to noncomp compression that you'll see here over the course of the next couple of weeks.

Got it. And then can you just give us an update on your sourcing base, how you've made changes, where you sit as we look out to F '26, just so we can monitor if there are any changes in tariffs by country that we might be able to keep tabs on that.

Yes. So obviously, we've talked a lot about our sourcing footprint over the course of the last year or so. Really proud of that diversified network that we have in place, and it's taken us years to build. We currently source from over 16 different countries. That's been obviously a core enabler for us in our Read and React model here. Approach isn't changing, Paul. We're always evolving this network to make sure that we can service our brands, help with speed, optimize costs.

To your point, the tariffs have clearly introduced some complexity to the supply chain, but our position here has been pretty consistent and changes here take time, and you obviously want to get them right and maintain quality levels. So we're focused on building the right partnerships for the longer term. I think as it relates to some of the more near-term news in the Middle East, we do have some sourcing operations there in the region, haven't experienced any disruptions that would have any sort of meaningful impact to the receipt plans here that underpin our outlook. And so we'll keep monitoring that. We'll keep agile with our sourcing base in total.

Got it. And then last one, just on the APAC strategic review. What's -- just what prompted that? And when should we expect to hear something from you on the outcome of that review?

I'll jump in on this one. So we have just finished our third year of growth in that region, and we really do believe in the long-term opportunity there. I'll tell you, it's just a matter of assessing our go-to-market strategy within that region. We currently go to market several different ways there. And it's our responsibility to make sure that we are doing that in the most profitable way for our shareholders. And so that's what the announcement was about.

Any timing on that, Fran?

Early days, I would say. The process is just getting started. So we'll provide updates as we can go forward here as appropriate.

And the next question will come from Marni Shapiro with The Retail Tracker.

I'm curious if you can give us a little bit of an update on some of your licensing efforts, particularly in kids and what that looks like. And then also just -- also on international, you've had some wholesale efforts. I know I think you're on ASOS, for example. I'm curious if your go-to-market in -- maybe in EMEA and APAC would include more wholesale opportunities like that to sort of build your brand regionally alongside your own efforts?

Marni, I'll kick that one off. So yes, to your point, we launched a global licensing opportunity this year with our kids brand, and we are very pleased with the results. In fact, we think it's actually created a halo for many people who didn't even know, many consumers that didn't know, we carry a kids brand. So we saw some nice growth in both our owned and operated as well as for our licensed partner.

We recently launched Baby and Toddler, which is also very exciting, so we can now capture that customer from age 0 and carry them all the way through there -- for lifetime value. Regarding your second question, I would say we are entertaining all concepts, licensing, wholesaling, franchising. It's what we're doing as we keep talking about diversifying our operating model. So all of those are opportunities.

Yes, Marni, as you know, the Europe business is -- Europe retail business, very different than here in the United States. So all of those different opportunities are available to us. We have done a few of them in the past, mainly the digital players that you called out. But there are opportunities in the future in each country to be in department stores, run wholesale businesses, potential concessions way down the line. So we're looking at all of that as we think about how we go to market in Europe.

Yes. If you think about it, it's actually a very exciting time for us. We're getting lots of reach outs, the health and strength of both of our brands. There's a lot of interest out there. So more to come.

Fantastic. And can I just ask you one follow-up on the tariffs. Once we get to sort of the back half of the year and we anniversary all the noise from '25, and I guess we're more in a steady state as you think forward into, say, '27, even after '28, should you be able to rebuild March product margins? Or is this kind of the new normal for you guys and for the world?

Yes. I mean, I think we'll see. We have a fantastic sourcing network. We've got a great sourcing team. We've been able to maintain these double-digit operating margins despite all of these different headwinds that we have -- we faced, whether that be supply chain disruptions, input cost inflation, inflation across all of operating expenses and now tariffs. So we're working hard. We feel like as long we put great product out there, connect with our customers, continue to give them a great experience, we've got an opportunity to grow AURs and continue to grow this business and provide a really healthy operating margin. So the goal would be, obviously, to try and offset as much of it as possible longer term, but that's a process, and that's what we're kind of working towards here in 2026 with some modest AUR growth, and we'll see how all that goes.

And the next question will come from Mauricio Serna with UBS.

First, I just wanted to ask, I mean, what have you seen so far in terms of consumers' reaction to your ticket increases? And I just wanted also to make sure I understood like I guess by quarter-to-date, it sounds that the growth has continued to be consistent versus what you were seeing in Q4. I just wanted to get that clarification.

Mauricio, so first on the ticket prices. So we mentioned during our last call that our strategy was to start to see some of these ticket increases for our spring product. So as a reminder, we deliver spring around December week 4, January, week 1, and it was going to be very judicious in things in categories like fashion, for example, and we're holding our commitment to our consumer. We did not raise prices in key categories like Denim and opening price point T-shirts. So we are ramping up. It's a portion of our inventory today. The initial response has been good, and we're going to continue with the strategy, and we're going to continue to test and learn as we head through 2026.

Yes. And on your quarter-to-date trends here, Mauricio, so obviously, very encouraged here coming off of a record fourth quarter with balanced performance across brands and regions, off to a good start here across both brands and regions for the first quarter. End of January, the start of February was a little bit choppy with the winter storms that we saw in the U.S. but as we've seen things pick up here once we've kind of gotten out of that disruption period.

Most of the volume for the quarter is still ahead of us, and we're expecting growth in Q1 across brands. And again, the only other piece of disruption would be this ERP implementation that we've got going live here in the next couple of weeks. So that will provide a little bit of a onetime headwind for us. But by and large, happy with where we are and excited about how the quarter started.

Got it. And just a couple of follow-ups on the Q1 guide. On the freight, you called out the tailwind for the quarter. Is that based on contracted rates? And does that remain a tailwind for the year? Or is that like Q1 peak? And then the other point on SG&A, excluding the marketing deleverage, should it be in line with last year in terms of like dollars or percentage of sales? Just trying to get that point of clarification.

Yes. So I'll give you some of the building blocks here for Q1. So, you called it out. So we've got this 290 basis points of tariff headwind. That's all incremental to last year. We do have offsetting tailwinds here. So we've got freight. That's about 160 basis points of tailwind. That has to do with how we've shipped product and our contract rates are in place.

So that's a yes on that answer. We do have some slight AUR improvements as well that will help offset some of that tariff headwind. And then we've got this 100 basis points of headwind from the ERP go-live this month on the expense -- really kind of flowing through on the expense side.

You called out marketing. It's about a 50 basis point headwind for us in Q1. That's really just timing on the year, marketing will be around flattish to last year as a percentage of sales. And then the rest of the expense base should be largely in line with last year's Q1 as a percentage of sales.

And the next question comes from Jon Keypour with Goldman Sachs.

Just one more thing on the Q1 gross margin. Last year, you guys were lapping carryover inventory drag. It sounds like you won't be -- there won't be any benefit from lapping that. Just wondering how that factors in. And then as a follow-on, what does that sort of imply about your promotional levels going into 1Q? And I guess if you could give a forward-looking statement about where you think promo may or may not be going for the rest of the year?

Yes, Jon. So you're right, we've talked about this lapping of carryover. So that's really a 2024 Q1 dynamic. Q1 of 2025, it was kind of normal. That's the more normal base. So as you think about where we are coming into 2026, nothing that's like a major mover up or down related to carryover levels or anything like that.

In terms of promos for Q1, we feel great about where our inventory sits coming into the quarter. Again, once you pull out the kind of front-loading of the inventory that we had to execute here for the ERP, we're up 2% on units. That's a great place to be for us. Both brands are really in chase position now, and that obviously gives us the best opportunity to kind of grow the AURs here.

So from a promo standpoint, we feel good about it, all baked into that slight AUR improvement that we're expecting here for the first quarter. And we're in a good position to kind of eat that up and get units flowing and inch that AUR up as we move through the quarter.

Great. And then just one more follow-up, if I can. Can you guys bracket out what the -- I guess, the difference in your expectations between -- for the full year between the low end and the high end of the guide? So what has to happen to hit the low end? What are you guys baking in to hit the high end?

I mean at the end of the day, John, it's all going to be about product execution, right? We got to put the right product out there, which we're off to a great start. We feel good about our assortments here in the first quarter. We got to keep doing it and keep executing as we move throughout the balance of the year. We've got to make sure that our marketing is resonating.

We've consistently driven positive traffic to these brands. We've got millions of customers coming into these brands, and we got to keep that going here, and we'll do that with consistent marketing spend here. And then we've got to provide a great experience in our stores. And all of those things kind of that 3% to 5% range, it's all just ranges of outcomes in terms of how we're executing here as we move throughout the year.

The exciting thing, though, Jon, is the operating model that we've created and our ability to chase and stay very agile is key to winning for us. And the example with Hollister last year, we certainly didn't set out expecting to pick up 15%, but our ability to chase millions of units and respond to the customer in real time has enabled us to do that. So we're approaching this year the same way with the expectation for both brands, obviously, to grow in 2026.

And the next question comes from Rick Patel with Raymond James.

Looking for more color on the building blocks of growth at A&F. Nice to see the expectation for growth. Do you anticipate growth in every quarter? And how do we think about the time line for a return to positive comps?

Rick, so yes, excited. The team was hard at work last year. Excited to see that the commitment that we made to returning to growth for the fourth quarter came to be. As a reminder, being down on the full year top line was up against our best year ever in 2024. It's just proof that the brand is healthy. We're going to continue to invest in stores and in marketing. Some of the strength that we saw in the fourth quarter were key categories, fleece, outerwear, YPD, and we're seeing nice acceptance already for spring. So our expectation is to continue to grow throughout 2026.

And just a follow-up on inventory. I appreciate that you're in chase mode, but how do we think about how you're planning units as we think about the price changes that are happening and the potential for demand elasticity?

Yes. So thanks, Rick. Units in control, nice, clean, up 5% on the print, again, up 2% once you exclude that ERP. You know how we operate here. We'll keep units tight and aligned with our forward growth expectations for the brands. We're in good shape here leaving 2025 and heading into 2026. We'll continue to flex that muscle and make sure that we're ready to chase across both of the brands.

And the next question will come from Janine Stichter with BTIG.

So on the product execution, can you speak to what you've been seeing on conversion, particularly at the Abercrombie brand? I think it was down a bit in '25, but you did see some improvement as the year went on. What did you see in Q4 into Q1? And then maybe some comments on Hollister conversion as well.

Yes. I would say it's more of the same, Janine. We were making progress. The teams leaned in on the A&F side, stayed focused on that consumer, executed against key learnings all the way throughout the year. And at the same time, again, going back to kind of Rick's point here, we kept units in control all the way through, and that allowed us to kind of chase through. That drove improvements in conversion as we move throughout the year, and we kind of saw more of the same headed into Q4.

And similar story there with Hollister, conversion has been a nice -- it's been something that's kind of built as we move throughout the year. So reflects the confidence that we have in the assortments that we're putting out there for our consumers, and we're kind of looking to do more of the same here as we move into '26.

Okay. Great. And maybe just a follow-up to Marni's question. It's been a while since you issued a long-range margin target. A lot's changed, 12% to 12.5% this year. Is that kind of the right level for the business? And if we were to see upside to that, excluding changes to tariffs, where would that come from?

Yes. Great question. Not going to provide guidance beyond '26 today, but I think we can talk through some of the underpinnings of the margin constructs that we're talking about, which I think addresses both yours and Marni's questions. I think it's important for us to anchor ourselves that over the past few years, this operating model has delivered double-digit operating margins across all different kinds of environments.

The last 3 years, we've gone through freight changes. We've had inflation, input costs from a product standpoint have fluctuated all over the board and obviously, tariffs here for the last bit. And as you think about what underpins this business, it's highly cash generative. We've got highly profitable stores and digital businesses, and we're building capabilities in third party to really accelerate that growth in more of a capital-light way.

Our balance sheet is in great shape and it allows us to kind of fund into all of these things and invest in these brands and still return hundreds of million dollars to our shareholders through share repurchases, which I think is kind of in our track record. We've delivered over $1.2 billion back to shareholders through cash since 2021 here through share repurchases, and we're looking to do more of the same here.

So all of that really gives us a lot of confidence as it relates to the durability of this model. So while I'm not going to sit here and extend any sort of guidance beyond '26 today, we do think that the fundamentals of this business are incredibly strong, and they position us well to maintain these healthy earnings growth as we continue to build here into the long term.

I show no further questions in the queue at this time. I would now like to turn the call back over to Fran for closing remarks.

I want to thank everyone for joining the call today, and we look forward to updating you all on our progress soon.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good day, and welcome to the Abercrombie & Fitch Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions]. Today's conference is being recorded. At this time, I would like to turn the conference over to Mohit Gupta. Please go ahead.

Thank you. Good morning, and welcome to our third quarter 2025 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 third quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors 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 mentioned 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 in the investor presentation issued earlier this morning.

With that, I will turn the call over to Fran.

Thanks, Mo, and thanks, everyone, for joining as we head into the important holiday season. I am happy to report our 12th consecutive quarter of growth, with sales up 7% to a record of $1.3 billion, we again delivered on the goals we outlined for the quarter, with net sales and operating margin, both at the high end of our outlook, earnings per share above our expectations and inventory levels aligned with trend.

Along with these strong financial results, we repurchased $100 million worth of shares in the quarter, bringing our total to $350 million or 9% of shares outstanding as of the beginning of the year. Our team continues to stay close to our customers while Read & React to the current environment. In the quarter, we made further progress on key brand, regional and foundational investments.

Based on our third quarter momentum and our fourth quarter outlook, we are narrowing our full year sales outlook towards the top end of the range we provided in August, targeting a strong finish to 2025 on top of a record 2024. Financially, in addition to record net sales, we delivered a gross margin of 62.5% and a 12% operating margin for the quarter, both of which include an adverse tariff impact of around 210 basis points. We exceeded our outlook range on earnings per share, delivering $2.36 for the third quarter. On the regions, we saw continued growth in the Americas with net sales up 7% on balanced traffic gains across channels.

In EMEA, total sales increased 7% with comparable sales higher by 2%. Similar to last quarter, strong sales performance in the U.K., our largest country in the region, continued to be fueled by localized marketing, inventory distortions and strategic partnerships. Strength in the U.K. was partially offset by softness in Germany and the remainder of European markets.

In APAC, net sales were down 6% with comparable sales down 12. cross regions, we remain excited about the significant long-term global growth opportunity for our brands through a blend of go-to-market strategies, including owned and operated, franchised, wholesale and licensing.

Turning to the brands. In line with our expectations, we made sequential improvement in Abercrombie brands that sales were down 2% and comparable sales down 7%. We continue to see positive cross-channel traffic to the brand. We manage inventory tightly, enabling improved AUR trends compared to the first half. The sequential improvement was led by women's, where we had a good seasonal transition to cold weather categories across top, bottoms and outerwear. In Abercrombie, we continue to remain active in marketing, building on early fall denim and NFL campaigns with our recently announced collaboration with luxury retailer, Chemo Sade. Putting these 2 brands together with a great way to connect with new and existing customers offering authentically crafted leather apparel and accessories, highlighting the Western trend. Avoca Grant as inventory in the right place and a strong marketing plan heading into holiday. We've opened 30 new stores to the third quarter, aiming for a total of 36 this year.

We remain focused on bringing the brand back to growth by diligently executing the playbook that has delivered a double-digit CAGR on sales from 2019 on strong double-digit AUR improvement over that time. This holiday, you'll see a lot of Abercrombie is known for, fashion, comfort and authenticity, and you'll continue to see it expressed through newness across categories. With this combination of investment across product, voice and experience, we are aiming for Abercrombie brands to be approximately flat in the fourth quarter on net sales against a record in Q4 last year. We're excited to see that milestone within reach.

In Hollister, we saw exceptional growth trends continue with 16% net sales growth in the third quarter. Comparable sales were up 15% on continued strong cross-channel traffic. Both men's and women's contributed to growth in the quarter, and we saw balance across categories. Consistent with our Read & React model, we've been keeping inventory tight while continuing to flow in newness allowing for AUR improvement on lower promotions.

Coming up a very strong back-to-school season. I was proud of the team transition to fall and into holiday. Speaking of holidays, Hollister has some exciting campaigns and collaborations planned that will highlight some must-have for the season. We kicked off a couple of weeks ago with [indiscernible] athletes co-designing special items in our collegian collection for football rivalry week. And you might have seen yesterday's announced with Taco Bell with the brands collaborated on 90s and Y2K styles across graphics and fleece. We are just getting started. And importantly, our team has been reading and reacting and has the right product to support sales throughout the season.

We're also enhancing the Hollister brand with investments in physical retail. We are on track to open 25 new stores this year while refreshing more than 35. The theme across our brand portfolio and company is consistent. We remain on offense. From both a brand and regional perspective, we are investing in marketing, stores and talent to support sustainable long-term growth. We also continue to make opportunistic investments in digital, technology and our infrastructure to improve the agility and speed needed to support our growing global business. These tech investments have the power to enhance the entire customer journey, especially when paired with AI. We recently deployed AI agents and customer service to improve the experience while driving scale and efficiency. And we're very excited about a new partnership we're kicking off this week with PayPal and Symbio, 1 of our technology partners and marketplace sales, that will enable agent e-commerce and AI answer engines like perplexity, where customers can seamlessly complete transactions directly within their AI conversation without even leaving the chat.

As our business continues to evolve, we're making future focused investments to deliver for customers and strengthen our operating model. And for us, that's really the story of 2025. More than 3 quarters in, I am proud of how the team has worked through this year, responding to the dynamic tariff environment and evolving with our customers. We are fully prepared for the holiday season having used these past months and quarters to test and learn and build confidence in our assortment and brand positioning. We've also continued to keep inventory tight with the goal of reducing promotions and clearance selling to mitigate some portion of the tariff cost. With our holiday plans in place, we expect to deliver top-tier profitability and earnings per share, reflecting the consistency of our model.

And with that, I'll hand it over to Robert.

Thanks, Fran, and good morning, everyone. Recapping Q3, we delivered record net sales of $1.3 billion, up 7% to last year on a reported basis at the high end of the range we provided in August. Comparable sales for the quarter were up 3%, and we see a benefit of approximately 50 basis points from foreign currency.

By region, net sales increased 7% in the Americas, 7% in EMEA, partially offset by a 6% decline in APAC. On a comparable sales basis, Americas was up 4%, EMEA was up 2% and APAC was down 12%. Across regions, the spread from net sales to comparable sales was driven by net new store openings and third-party channel performance. EMEA also benefited from favorable foreign currency.

On the brands, Abercrombie Brands net sales declined 2% with comparable sales down 7%. Consistent with our third quarter outlook, the sales decline was primarily due to lower AUR, but the AUR decline was less than the first half of the year. Hollister Brands net sales grew 16% on comparable sales growth of 15% with both unit growth and AUR improvement from lower promotions. The comp to net sales spread for Abercrombie brands in the quarter was driven by third-party channel performance, along with net store openings. I'll cover the rest of our results on an adjusted non-GAAP basis.

Operating margin of 12% of sales was at the top end of the outlook range we provided in August, delivering operating income of $155 million, compared to $175 million last year. Adjusted EBITDA margin for the quarter was 15% of sales on adjusted EBITDA of $194 million compared to $219 million last year. The 280 basis point decline in operating margin from Q3 2024 was driven primarily by 210 basis points of tariff expense included in cost of sales.

In addition, as we forecasted in August, Third quarter marketing was up 100 basis points from the prior year. This was partially offset by leverage in general and administrative expense on lower payroll and incentive compensation. The tax rate for the quarter was below our outlook at 29% driven by outperformance to expectations in EMEA. Net income per diluted share was above our outlook at $2.36, compared to $2.50 last year.

Moving to the balance sheet. We exited the quarter with cash and cash equivalents of $606 million and liquidity of approximately $1.06 billion. We also ended the quarter with marketable securities of approximately $25 million. For the quarter, we repurchased $100 million worth of shares, ending the quarter with $950 million remaining on our current share repurchase authorization.

Year-to-date, we repurchased $350 million in shares totaling 9% of shares outstanding at the beginning of the year. We ended the third quarter in a clean current inventory position with costs up 5% and units up around 1% and have seen freight and other unit cost mix normalize.

Shifting to the outlook. We entered the fourth quarter with momentum, and we are narrowing to the upper end of the full year sales expectations we provided in August. We continue to reflect tariffs and mitigation consistent with our second quarter call commentary and the team continues to find cost efficiencies through vendor discussions as we plan 2026. For the full year, we now expect net sales growth to be in the range of 6% to 7% from $4.95 billion in 2024. We've narrowed the range to reflect third quarter performance and for expected fourth quarter sales. We currently anticipate 60 basis points of favorable foreign currency in the outlook. We continue to expect full year GAAP operating margin in the range of 13% to 13.5%. As a reminder, this range includes the impact of the $38.6 million benefit from litigation settlement or around 70 basis points of sales. Also, the assumed tariffs included in the operating margin carry a cost impact of around $90 million for 2025, or 170 basis points of sales.

We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around $48 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10.20 to $10.50. For clarity, the $38.6 million benefit included in our outlook carries a favorable impact of $0.59 per share. For capital allocation, we continue to expect capital expenditures of approximately $225 million. On stores, we continue to expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we are targeting around $450 million in share repurchases for the year, subject to business performance, share price and market conditions.

For the fourth quarter of 2025, we expect net sales to be up 4% to 6% to Q4 2024 level of $1.6 billion. We expect operating margin to be around 14 . We continue to expect lower cost of goods sold from freight at around 150 basis points of sales for the quarter. We also continue to expect $60 million of tariff impact net of mitigation efforts or around 360 basis points. Operating expense will be around last year as a percentage of sales. We see opportunities to incrementally invest in marketing, but this will be largely offset by leverage in other areas. We expect the Q4 tax rate around 30%.

We expect net income per diluted share in the range of $3.40 to $3.70 with diluted weighted average shares expected to be around $47 million, including the anticipated impact of around $100 million in share repurchases for the quarter. To close things out, we entered the fourth quarter ready to compete with inventory aligned with trend and the right composition. We have great momentum having delivered against expectations these past 3 quarters on both top and bottom lines. Our brands are in great shape with Abercrombie brands making sequential improvement and Hollister brands taking share with impressive growth. We remain on the offense, investing in marketing through key brand collaborations and partnerships and with store expansion and digital enhancements that enable us to win in the long term. We look forward to a great holiday selling season. And we thank our teams around the globe for putting us in reach of record sales for [indiscernible] and with that, operator, we are ready for questions.

[Operator Instructions] First question comes from Dana Telsey with Telsey Advisory Group.

So nice to see the sequential progress. Congratulations. Fran, if you think about the Abercrombie brand and the plan it's tracking to, what did you see by category, men's and women's? Does it differ by channel? How you're seeing the progress of the brand? And then just overall, international, any puts and takes on the different regions and countries.

Dan, so super excited about the results we just put up for the third quarter. I mean total company 12th consecutive quarter of growth, top line is 7%, comps at 3% the Abercrombie brand specifically continues to be strong. This is evidenced by a few things. Our traffic is positive. Our customer file continues to grow. We're seeing nice engagement in our digital or stores channels excited about where we're headed for the fourth quarter. The team has been busy at work all year testing and learning and really reacting to what's happening, heading into the fourth quarter, well inventoried and denim, fleece and sweaters very strong categories for us. As I mentioned, also 30 new stores to date, 6 more opening up this quarter. So we're fully prepared to compete for the fourth quarter.

Yes. Dan, I'll jump in here on the international side. So obviously, we continue to be really excited about the opportunities that we see for EMEA. We have invested in this region. We've got the infrastructure in place to take our brands to the market. This quarter, when you think about puts and takes, U.K. results were really strong. That's where we've been investing most to improve awareness and service our customers there. We're still in pretty early innings here in Germany and more broadly in the other European countries. We don't really have much of a presence or awareness. So we would anticipate seeing some shorter-term fluctuations here as we ramp those brands.

But obviously, we see that as opportunity to go after. On the APAC side of the house, very similar dynamics here. The market is huge. Our business is relatively small. We're focused on building our brand awareness there and building a stronger presence. So again, not surprising for us to see some shorter-term fluctuations. But overall, really confident in the global opportunities that we see for our brands. Obviously committed to getting closer to those customers, deploying our playbook and ultimately taking these brands to market and growing this business longer term.

Our next question comes from Corey Tarlowe with Jefferies.

Great. Fran, the Hollister momentum has been really impressive and it seemed like the back-to-school momentum is continuing into holiday based on what we're seeing in stores. So just curious on how you expect to continue to build on that momentum as we look ahead into 2026.

Corey, yes, wow, what a year we're having with Hollister, congrats to that entire team, super excited to grow the business another 16% on last year's 14%, the tenth consecutive quarter of growth. We are seeing balanced growth Corey, across genders, across categories. We're seeing our AUR growing on lower discounts. The customer file is growing. Our traffic is strong. Most importantly, we're holding our inventory tight, so we can really Read & React to the business. We've got great momentum heading into holiday seasons. Honestly, there's almost every category is working, which is super, super excited. I'm sure you saw the announcement yesterday, this Taco Bell partnership for Cyber Monday, we're excited about. So lots of good things happening as we head into the fourth quarter.

That's great. And then just a follow-up for Robert. How best to think about traffic versus ticket as we head into holiday? And then any comments on what that could mean for next year as well.

Yes. I mean, Corey, so across our brands, when we think about sort of tickets, I guess touching on tickets real quick, haven't taken any sort of meaningful tickets. We've been talking about this for a couple of quarters now through the holiday season. It's a nice interplay as you think about this holiday season, the best way to drive traffic and to engage with that consumer is going to be through promotions and pricing. So our tickets are pretty stable. We have started to think through and take tickets here post holiday. So you'll start to see some ticket increases across the assortment here with spring deliveries.

But the good news is the AURs are growing. We made sequential improvement from spring into fall across actually both brands, Hollister and A&F and we're seeing nice positive traffic. So traffic is growing across both Hollister A&F and across channels, which is great to see, and AURs are headed in the right direction. So customer files are growing, customers are engaged. Our teams are locked in with those customer bases. We've got the right inventory here in our stores to compete for the holiday. So we're excited to push through into Q4.

Our next question comes from Matthew Boss with JPMorgan.

So Fran, at the Abercrombie brand, could you speak to the cadence of trends that you saw over the course of the third quarter and elaborate on trends that you're seeing so far in November? And then Robert, could you speak to the composition of inventory across both brands and gross margin puts and takes to consider for the fourth quarter?

Yes. So I'll jump in here. So we obviously had a really strong third quarter, delivering our 12th consecutive quarter of growth, reaching the top end of our guide. Abercrombie, obviously, sequential improvement here. Hollister continues to grab share with that customer. We're excited about the momentum that we're carrying into Q4.

In terms of the outlook, I think we're being reasonable, responsible here. We're happy with how the quarter has started. But as you know, Matt, all the volumes ahead of us here, and we're ready to compete. As it relates to the inventory side of the house, inventory is in good shape, up 5% year-over-year at cost with tariffs being about 3% of that. Units are pretty clean here and in control at up 1, you know how we operate. We're going to keep units tight here and aligned with our forward growth expectations by brand. We didn't provide a brand breakout, but as you'd expect, Hollister units are up more than the A&F units. And again, both brands are positioned to chase to close out the year. So we feel good about where we sit from an inventory standpoint.

On the margin front, gross margin puts and takes here, down about 260 basis points year-over-year in Q3. 210 basis points of that is tariffs. We did see a benefit from freight. It was a smallish benefit from freight and AUR. And then we had a couple of offsets from third-party channels and some inventory reserves to keep ourselves clean headed into holiday. So that's Q3. And then Q4, we'll see some of those themes continue, Matt. You'll see about 200 -- or about 360 basis points of impact from tariffs from that roughly $60 million. And then the freight tailwind, as we've been talking about for the past couple of quarters will continue here, and you'll see about 150 basis points of tailwind here for Q4.

And then you know how we operate from an AUR standpoint. We've been on this great multiyear journey of AUR growth here. We had a great holiday last season, so we're going to come into the fourth quarter assuming AURs hold. So assuming AUR is flat here as we think about the go forward.

Our next question comes from Marni Shapiro with the Retail Tracker.

Congratulations on another great quarter, best of luck for the holidays in case I forget. Can you talk a little bit about the collaborations you've been doing, the NFL, the NCAA, but you also have [indiscernible]. I'm curious, are these all global collaborations or are these specific to the U.S.? And if they're not global, will you do global? And as we think about the brands going forward into '26 I think these pops of excitement are fun. Are they bringing new customers into your store? And should we see an increase or similar cadence into '26?

Marni, the clubs are interesting. Our goal with our collaborations, honestly, is a real authentic branding moment. You know we talked about this a lot. We stay close to our customer and we listen to them and what's important to them, what's happening in their life moments. That's how we make these decisions to do these collaborations, so they are planned accordingly. The NFL has been very exciting. Yes, it's definitely bringing in new customers. Our goal with that with the partnership was about brand awareness and customer acquisition. There's a big crossover with their fandom and our customer base, and we listened to the customer. They told us several years ago how important football fandom was to them, and we took that and tested our way into it and have seen a nice success with it. [indiscernible] is another great example. Western was happening.

Our consumer was responding to it. We went to an authority in the business and made a terrific collaboration. The Taco Bell we're super excited about for Cyber Monday. So as far as 2026 goes, we will continue to listen to our customer. We'll look for authentic moments to make sure that we stay close to them, and we'll continue on this journey. .

Martin, it's Scott. Just to add on here. It really speaks to where the brands are today. Each brand is in such a strong position, which is enabling us to partner with other strong and great brands. So like Fran said, it's a great way to authentically connect to our customers and lots more ahead and it's been fun for the brands. .

Our next question comes from Alex Stratton with Morgan Stanley.

This is Katie Delahunt on for Alex. Just thinking about the Abercrombie banner, I know you've all talked about sales growth being about flat for the fourth quarter. But what is the time line you're thinking about for return to sales growth and then even comp as well?

Yes. So Katy, it's Robert. So obviously, delivering sequential improvement here in Q3, that's important for us. The team has been focused on that customer. We're seeing improved product execution inventory is clean. And as Fran mentioned, we're placing our bets here for the holiday here in sweaters, fleece, denim. So we're happy about where the brand that's heading into holiday.

Marketing is resonating new collaborations that we just talked about with Marini here. earlier. Those are great brand moments. They're driving traffic. Our customer file is growing. We've got strong engagement across both stores and DTC platforms here. So we're excited about this holiday season. We're aiming to continue to progress here, hold that brand flat against last year's record, which sets us up well for next year.

Our next question comes from Mauricio Serna with UBS.

Great. First, on the marketing front, could you elaborate a little bit more about what you're doing across each brand, the plans for marketing this quarter, as you mentioned in the guidance for Q4 that assumes that there's more investment happening. And then maybe on the Abercrombie brand performance in Q3, could you break down like how the comps reflected AUR versus units or total sales? That would be very helpful.

Yes, Mauricio, let me jump in here real quick. Obviously, I'm not going to share a ton in terms of our specific marketing plans. We've got some exciting collaborations that we either have announced in terms of like Taco Bell and you'll see the campaigns kind of continue as we move through the holiday time period. It's been effective. Our traffic is up, as we've mentioned a couple of times. We're pretty intentional with our marketing here. We're obviously focused on brand building, driving customer engagement and ultimately supporting both near term and long term. So it's not all just what are we going to see this quarter, but we're really building these brands for the long-term growth. Obviously, looking at performance as we work to optimize that spend and where we see value, we're going to lean in.

And we have 2 strong healthy brands, both exactly where we want them to be, and so we're going to keep our foot on the gas here. As it relates to A&F Q3 performance, you heard us talk about comps there, the down 7%. AUR was sequentially improved. So we did see improvement there. So if you think about the KPIs and the puts and takes, we've seen traffic on the positive side. AUR was still down, but sequentially improved here from the first half into the third quarter. And then we had a little bit of pressure here on conversion as well, but conversion also headed in the right direction. So nice to see improvements in conversion, improvements in AUR and continued engagement from our customers with positive traffic.

Our next question comes from Rick Patel with Raymond James. .

Congrats on the progress. I was hoping you could double-click on the expectations around SG&A. I know marketing is going to increase, but you touched on being able to mitigate some of that pressure through other areas. So if you can expand on that, that would be great. And then second, just on comps, wondering if there's any variability in performance to flag in the U.S. due to the weather or any regional differences.

Yes. So quick on the SG&A side of things, yes, we'll see a little bit of increased marketing investment year-over-year. We've obviously been leaning into this throughout the first 3 quarters of the year. That will continue, but at a slightly slower clip here in Q4. Q4, obviously, with the sales growth, you're going to see some expense leverage on the G&A side of the house. We've been delivering that throughout the entire year. And given the midpoint of our guide, we wouldn't expect a ton of leverage or deleverage in total at the midpoint of that 4 to 6. We'll see as we have the rest of the -- as we have all year, as we outperform on the top line, you might see some leverage roll through.

But again, we're going to be balanced in our investment approach and where we see opportunities to continue to invest in this business for the longer term, we will. Nothing really to call out from a regional standpoint. We've got a really broad store fleet. So weather in one area, it kind of offsets across the board. Might there be a day or a week here in there that you start to see little blips based on weather events, when you think about the broader quarter, it kind of all works itself out, and it's been pretty consistent for us across the regions.

Our next question comes from Janine Stitcher with BTIG.

One more question about Abercrombie. It sounds like a lot of the improvement sequentially was led by women. Can you just elaborate on what's going on in the men's side. If I recall, the comparisons there maybe weren't as challenging as what you had in the first half with Abercrombie. But just help us understand what's going on with that side of the business?

Janine, it's Fran. Yes, led by women's but also seeing nice sequential improvement in men's as well. Again, inventories are clean, super excited about where we are for the fourth quarter. Team has been busy at work testing and learning all season. So all your pardon me, heading into the fourth quarter to make sure our inventories are where we want them to be, focused on categories like denim place and sweaters. So we feel good about the fourth quarter, heading into a big week, right, excited for seeing all the excitement out there for Black Friday and ready to compete. .

And then maybe one for Robert, just on the tariffs, I think you said $60 million in Q4 net of mitigation. Any initial thoughts on just how to think about that in the first half of next year as you proceed with more mitigation efforts?

Yes. So we've talked quite a while, Janine, around our sourcing footprint. We've been obviously at work at this for quite a long time, starting way back in tariffs, 1.0. We've got a really well diversified sourcing footprint here. We source from over a dozen countries, which obviously gives us a benefit both from a cost negotiation standpoint as well as speed to market, which is obviously core to our model here. I think it's important for us to take a step back real quick and think about how we're entering this next chapter of tariffs.

We're coming at this from a position of strength. We're coming off of 15% operating margins last year to go along with record net sales. The teams have obviously been active. We've got a proven playbook here. So they're leveraging the playbook. They're looking at country of origin footprint as well as finding expense efficiencies. And we've touched on this earlier. But while we haven't moved tickets broadly, through the holiday we are taking targeted price increases here for the spring. So that inventory will start delivering here post holiday. We've done all of that as we've kind of been navigating 2025, and we've delivered record sales for the first 3 quarters of the year. We're positioned to do the same for the fourth quarter. And we've continued to invest in this business and return cash to shareholders.

So bought back 350 million shares year-to-date, on track to do another $100 million here in the fourth quarter. So we're doing all this, all while delivering 13% to 13.5% operating margins despite this 170 basis points of tariff impact. So the company is strong. We feel like we're operating and executing at a high level. We'll detail a lot of the components out and the magnitude of some of the stuff for 2026 when we get into our next call. But Suffice it to say that we're confident in our ability to navigate this environment. And obviously, our goal is to meaningfully offset these tariff headwinds longer term.

[Operator Instructions] Our next question comes from Janet Kloppenburg with JJK Research Associates.

Congratulations on the upside. I wanted to ask a few questions. I'll give them to you right now. The tariff impact will be greater in the first quarter than the fourth quarter, Robert, I'm not sure on that. And the price increases, when do you expect those to be complete, like what we see a big bump in the first quarter and then you'll be done. Maybe you could talk to that cadence.

And on cadence plan, I thought that the assortments of Abercrombie started to get better in mid-October and continued. And I'm wondering if you saw some response from the consumer on that and less I'm wrong. And then the fourth question is just on promo levels. What you saw in the third quarter year-over-year, what you experienced in the third quarter? And what's your thinking about for the fourth quarter?

Where do you want to start, Robert, do you want to start to take the tariff on.

Yes, let's just keep the tariff conversation going here a little bit. So haven't quantified anything related to 2026. But as you think about how this is going to cadence out Janet, we would expect that a lot of our mitigation tactics, which we've been working at for the last 9 months here. Those will start to take hold heading into 2026. So the hope here and our confidence level and obviously, the pricing adjustments that we've made, which I guess is your second question. Those will start to show up here with spring deliveries. So think late December and into January, you'll start to see those tickets go up.

And that will just kind of work through as the assortments and the newness flows through into the quarter. As you think about vendor negotiations and all those pieces and parts, that will also start to impact the first quarter here in 2026. So expectation would be that we would see some relief off of that Q4 tariff headwind of 360 basis points .

Yes, promos...

Go ahead, finish the promos.

Yes. So from a promo standpoint, we feel good about the cadence that we've been operating under. We've obviously got a track record here of pulling back on promotions and improving AURs here wherever we can. AURs did see sequential improvements from front half into back half across the brands, Hollister is continuing to grow units on lower discounting with higher AURs. So headed into the fourth quarter, we're confident in our promotional plans. We've got the flexibility, and we've got the reactivity to adjust to demand as we see it come through. We're looking to hold those AURs flat for Q4.

And like we do always, we'll come in every day. We'll see if we can pull back on a day of promos here, go a little bit shallower there. But it's been a nice formula for us with this multiyear AUR growth, and we're just going to keep -- we're going to keep executing that playbook.

And then just real quick on the last piece of that question. So I'm very excited to have announced that we made the progress that we committed to at the beginning of the year that we're seeing sequential improvement in Abercrombie, and that's really across the board in categories. So we're heading into the fourth quarter. We've committed to having clean inventories, and that's where we are. We feel really well positioned, Janet, for the fourth quarter. We are expecting to be -- our goal is to be approximately flat for the fourth quarter. That's on top of a record fourth quarter for last year. So we're happy with the start. The customer is resilient. Our file is growing, as I've said before, our traffic is positive, and we're ready to compete for the fourth quarter.

You're talking about A&F fund .

Not less, I'm talking total company, but yes, the A&F not specifically, we committed to sequential improvement, and that's what we have delivered with a goal of approximately being flat for the fourth quarter.

Do you feel like the challenges that you faced in merchandising in the first half at A&F are now behind you?

Yes. We committed to getting clean. The opportunities in the first half, which we talked about on both of those calls are really the opportunity that the inventory was much more balanced between sale clearance and regular price. That was something that we didn't really have in 2024. And that's what drove the reduced AUR. As Robert mentioned, we've made sequential improvement in the AUR as we continue to see the customer responding to the newer product .

There are no further questions at this time. I'd like to turn the call back over to Fran for any closing remarks.

All right. Thanks, everyone. Just wishing you all a happy holiday season, and we look forward to updating you soon.

Thank you for your participation. You may now disconnect. Everyone, have a great day. .

Good day, and thank you for standing by. Welcome to the Abercrombie & Fitch Second Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Mo Gupta. You may begin.

Thank you. Good morning, and welcome to our second quarter 2025 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 second quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors 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 subjects 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 mentioned 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 will turn the call over to Fran.

Thanks, Mo, and thanks, everyone, for joining this morning. We entered 2025 aiming to build on our track record of delivering consistent total company success. I'm excited to share that our second quarter results continued this trend as we delivered our 11th consecutive quarter of growth while also exceeding our top and bottom line expectations. Our team continues to leverage our strong foundation to balance reading and reacting to the current environment while diligently investing to realize the long-term global potential for our business. Our strong first half and start to the third quarter gives us confidence to increase our full year net sales forecast building on a record 2024.

In short, our team and brands are strong, and we are entering the back half of the year with momentum to deliver sales growth, top-tier profitability and drive shareholder return. Second quarter net sales reached a record $1.2 billion, growing 7% over last year and above our expectations from May. We also exceeded our outlook on both operating margin and earnings per share, even after excluding the benefit of a legal settlement. In addition, we continue to put our balance sheet to work, repurchasing $50 million of stock this quarter for a total of $250 million in repurchases so far this year. Regionally, the Americas achieved its 12th consecutive quarter of growth with net sales up 8% and on continued traffic strength across direct channels.

In EMEA, continued cross channel growth in the U.K. was outweighed by softness in Germany and the remainder of European markets, with regional net sales lower by 1% against 16% growth in the second quarter of 2024. APAC continued to perform well, growing 12%, a nice cross-channel demand, while comparable sales grew 1%. Moving to the brands. Let's begin with Hollister. Wow, it is amazing to see this team so dialed into the team customer. Hollister Brands delivered record first half sales growing net sales 19% in the second quarter on strong cross-channel traffic. Comparable sales were also up 19% in the quarter, and we continue to see growth in both units and AUR. Both the men's and women's businesses contributed to the growth story in the quarter with good balance across categories. And dialing into this customer, we saw a great response to our brand activations at Lalapalooza in Chicago. Leading into August, we released our updated Collegiate collection, which included several exciting social and in-store campaigns with more on the way.

We continue to find fun effective ways to engage with the team, fueling Hollister brands impressive growth. For Abercrombie, the quarter was slightly below our expectations and similar to the first quarter overall. Net sales were lower by 5% against the backdrop of strong 26% growth in the second quarter of 2024. For further context on how exceptional last year was, the first half of 2025 remains the second best in brand history. In the second quarter, the team executed on their goals leveraging promotions to manage inventory levels and by testing into new product concepts. As we expected, AUR was lower year-over-year, driving the majority of top line performance for the quarter Importantly, with the team's hard work, we exited Q2 with inventory in good shape, and we're in a position to continue reading and reacting.

Entering the fall season, we're excited about some of the trends and fits from Boho to Western and we'll be chasing winners to give our customers more of what they're looking for, building into holiday. Abercrombie & Fitch continues to gather momentum as a powerful global brand, and we remain on offense Traffic was nicely positive across both stores and digital direct channels in Q2, and we continue to engage with customers globally through social and in-store campaigns. We're also investing with conviction, supported by our digitally led customer base. We opened 13 new stores in the second quarter, including strong centers in Chicago and Toronto as well as a great location in Hoboken. We have an additional 14 store openings planned this quarter just in time for peak season.

Strong brand health also allows for meaningful collaboration to capitalize on Abercrombie significant addressable market. Earlier this week, we were excited to announce Abercrombie & Fitch as an official NFL fashion partner, a first for a league sponsor. We look forward to collaborating with the NFL to bring ANS fashion to fans and players alike. Beyond the powerful NFL partnership, we've seen a great response to our August denim campaign, which focused on consistent fit across a variety of styles from bagging to boot cut. As part of the campaign, we hosted in-store demo events in key markets, successfully highlighting our strength in this category while driving great engagement across channels. For YPB, we were excited to announce the collaboration with T.J. and Danny Watt, the Pittsburgh dealers Linebacker and former professional soccer player as we continue to build our presence in the active category.

Finally, through the licensing partnership we announced in 2024, Abercrombie Kids has now launched globally with department stores like department store retailers like Nordstrom and Macy's amongst others. Overall, Abercrombie brands made good progress in the quarter. The brand remains strong globally, and we continue to target getting back to net sales growth by the end of the year. Looking to the second half of the year, we are increasing our full year 2025 net sales growth expectations based on our year-to-date results, supported by strong brand positioning clean inventory, cross-channel traffic growth and our balance sheet. On the bottom line, we've adjusted our operating margin and earnings per share outlook to reflect the second quarter performance and revised estimated impact from tariffs, net of plant mitigation.

On tariffs, we intend to bring our proven playbook built on years of experience to mitigate as much of the increased cost as possible over time as rates become more certain. As our teams have demonstrated before, we have a variety of options in our playbook, including shifting global production, enhancing supplier contracts and relationships managing operating expenses and determining ways to increase AUR through lower promotions and lower clearance selling. As we said last quarter, we don't expect broad-based ticket increases in the back half and will concentrate on the fit style and emotional connection our customers come to us for every day. Importantly, we are operating in this new tariff landscape make a position of strength in terms of our brand health, our balance sheet and cash flow profile. For the year, our objectives remain clear. We expect to deliver record net sales, top-tier operating margins and significant free cash flow.

As our recent results show, we intend to deploy this cash flow to strengthen the business through long-term investments while enhancing shareholder returns via share repurchase. With each quarter, we're adding to a growing record of consistency that will keep us moving towards a significant global market opportunity for our brands. And now I'll hand it over to Robert to expand more on our results and key outlook drivers.

Thanks, Fran, and good morning, everyone. Recapping Q2, we delivered record net sales of $1.21 billion, up 7% to last year on a reported basis, above the range wided in May. We saw a 100 basis point benefit from foreign currency Comparable sales for the quarter were up 3%. By region, net sales increased 8% in the Americas, 12% in APAC, partially offset by a 1% decline in EMEA. On a comparable sales basis, Americas was up 5%. EMEA was down 5%, and APAC was up 1%. Outside of the Americas, the spread between net sales and comparable sales benefited from new store openings and foreign currency with EMEA additionally impacted by the headwinds -- on the brands, Abercrombie Brands net sales declined 5% with comparable sales down 11%. Consistent with our second quarter outlook, the sales decline was primarily due to lower AUR as we cleared through carryover inventory.

Hollister Brands net sales annual sales grew 19%, with both AUR increases and unit growth on lower promotions. The comp to net sales spread for Abercrombie brands in the quarter was driven by net store openings and foreign currency, partially offset by third-party channel headwinds. I'll cover the rest of the results on an adjusted non-GAAP basis, which excludes a $39 million net benefit related to the favorable resolution of a payment card interchange fee litigation in which we were appointed. On the second quarter income statement, the net benefit is comprised of a $43 million settlement benefit in selling expense, partially offset by $4 million in settlement-related expense within general and administrative expense. Operating margin of 13.9% of sales was above the outlook range we provided in May, delivering operating income of $168 million compared to $176 million last year. Adjusted EBITDA margin for the quarter was 17% of sales on adjusted EBITDA of $206 million compared to $215 million last year. As expected, we did see around $5 million of adverse impact in Q2 from tariffs, mainly recognized in cost of sales.

Lower gross margin was partially offset by around 60 basis points of operating expense leverage where general and administrative expenses levered 150 basis points on lower payroll and incentive compensation. Selling expense as a percentage of sales increased by 90 basis points, primarily driven by incremental store occupancy from new stores. Marketing was consistent to the prior year at around 5% of sales. We ended the second quarter with inventory in a clean current position with inventory at cost up 10% and units up 7%. In anticipation of tariffs, we did selectively clear third quarter receipts early within our bonded warehouses, driving around 1 point of the cost increase. As we alluded to last quarter, we saw a normalization of freight costs and unit mix that drove sequential improvement in year-over-year inventory comparisons. The tax rate for the quarter was above our outlook at 33% and driven by a valuation allowance of a deferred tax asset. Adjusted net income per diluted share was above our outlook at $2.32 compared to $2.50 last year.

Moving to the balance sheet. We exited the quarter with cash and cash equivalents of $573 million and liquidity of approximately $1.02 billion. We also ended the quarter with marketable securities of $31 million. For the quarter, we repurchased $50 million worth of shares, consistent with our commentary from May, ending the quarter with $1.05 billion remaining on our current share repurchase authorization. Shifting to the outlook. As Fran mentioned, we entered the second half with good momentum from second quarter, and we are raising full year sales expectations. On the cost side, our 2025 outlook issued today reflects the tariffs announced through August '25. Our approach and underlying principles for tariff mitigation remain unchanged, supported by a deep playbook and experience. We continue to expect China sourcing share in the U.S. will be in the low single digits for the year, and we have minimal exposure to the de minimis exemption that is no longer in place. So it's not a factor of impact.

Globally, we remain nicely diversified across 16 countries, and the team is continuing to evaluate supply chain footprint changes, vendor negotiations and operating expense efficiencies that will largely take shape in fiscal 2026. As discussed in May, we do not anticipate broad-based ticket price increases this year and have not assumed meaningful AUR mitigation in our outlook. Net of planned actions, the assumed tariffs carry a cost impact of around $90 million for 2025, impacting our full year operating margin outlook by 170 basis points at the midpoint of our sales outlook. For the full year, we now expect net sales growth in the range of 5% to 7% from $4.95 billion in 2024 with full year growth expected across regions. We've increased the full year outlook to reflect second quarter outperformance and for expected third quarter sales, and we're in a position to chase for the fourth quarter.

We currently anticipate around 50 basis points of favorable foreign currency in the outlook. We now expect full year GAAP operating margin in the range of 13% to 13.5%. The increase from our prior outlook range is primarily due to the inclusion of the $39 million net benefit from the litigation settlement in the second quarter results, offset by the revised second half impact from tariffs, net of mitigation efforts. We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around $49 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10 to $10.50. For capital allocation, we now expect capital expenditures of approximately $225 million increased primarily due to the timing of projects.

On stores, we expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we continue to target around $400 million in share repurchases for the year, subject to business performance, share price and market conditions. For the third quarter of 2025, we expect net sales to be up 5% to 7% to the Q3 2024 level of $1.2 billion. We expect operating margin to be in the range of 11% to 12%. We continue to expect slightly lower costs from freight as well as around $25 million of tariff impact net of mitigation efforts. We are also increasing marketing investments year-over-year by over 100 basis points to support key partnerships and fall campaigns. We expect the Q3 tax rate around 31%. We expect net income per diluted share in the range of $2.05 to $2.25 with diluted weighted average shares expected to be around $48 million, including the anticipated impact of at least $50 million in share repurchases for the quarter.

To wrap up, we're proud of our first half results, and we're excited to keep the momentum going through the rest of the year. We're in a great position with a strong balance sheet, and we'll continue investing across regions and brands to tap into global growth opportunities. At the same time, we're staying focused on what we can control, using our proven playbook to navigate the environment and drive long-term value. And with that, operator, we're ready for questions.

[Operator Instructions]. And our first question will be coming from Dana Telsey of Telsey Advisory Group.

As you think about the Abercrombie brand Fran, and the markers going forward given last year's success of the wedding shop and other things, what are you seeing now? What are the markers that are giving you confidence for acceleration as we go through the year and into next year? And then Rob and Scott, on the credit card settlement inclusion, exclusion. Can you clarify exactly how you're thinking about it as we go through the balance of the year and why 1 versus the other, given others we've seen?

Dana, what we are very proud of the strong results for a total company that we put up in the first half. As you look back to your point, on the stellar season that Abercrombie had last year, we did take a little bit of a step back. But we are very confident in where we're headed. The brand is in great shape. Our traffic is strong. We are signing exciting partners. I mean who would have dreamed a few years ago to partner with an iconic global brand like the -- we're investing. We opened up 17 new stores this first half. We've got 20 more in the second half. The team has worked through very diligently the carryover inventory that we've talked about for the last 2 quarters that we're starting clean. We've got some good reads on Boho and Western that the team is chasing. We had a really strong denim event to kick off the third quarter. So we are confident we're on a path to improvement, and we expect to see us return to growth by the end of the year.

Yes. And Dana, on the credit card exclusion for the year. So as we guide, we guide from a GAAP standpoint. So we did include that $39 million net benefit here in that 13% to 13.5% guide. When you think about where the guide moved from last quarter to this quarter, we were at 12.5% to 13.5% last quarter, two big moving pieces here. We obviously had the interchange benefit of $39 million around $40 million and that's offset by the incremental tariffs as the rates have become a little bit more clear here in the back half. That's about 40 -- it's net about $40 million. We talked $50 last quarter for the year. We're talking 90 now.

So those two pieces offset, and you got a little bit of benefit from, obviously, the Q2 outperformance rolling through. So those are the big pieces. Our guidance is just on a GAAP basis, and you've got the pieces and parts to back us as needed.

Great. Just one quick follow-up on the entry into department stores with Abercrombie Kids, how is it going through any of the other brands ever go in department stores? And what are you seeing?

So, Dana, as you know, last year, we talked a bit about diversifying our operating model. And one of the first things that we did was signed this global licensing deal for kids. It was very exciting to see the launch. I was actually up at Macy's going through our shop up there with Tony just a couple of weeks ago. So reaching new customers, hearing lots of positive things from these -- from the new partner and from these department stores that we're in. Today, that's the one that we've announced, but expanding our operating model is something that we've talked about and we're excited to bring some new things in the future.

Dana, it's Scott. I'll just jump in here, too. When you think about the kids brands, we don't have a lot of stores out there. So this is a great opportunity to get more eyes on that brand and have people find us in different places. And then hopefully come to our brands either through digital or the handful of stores that we have out there. For Hollister and Abercrombie, we have great scale, specifically here in the U.S. So we'll see what happens in the future. But this right now is a great opportunity for the kids brand.

And our next question will be coming from are Corey Tarlowe of Jefferies. Your line is open, Corey.

Great. Fran, I wanted to ask about the momentum in Hollister up 19%. Hollister is probably one of the busiest stores in the mall, and it sounds like you've made some inroads early into back-to-school here. I'm curious if there's anything in particular that stood out to you in the second quarter with regards to some of the momentum that you're seeing anything so far in the third quarter that you've seen some nice momentum in? And then what maybe in terms of developments ahead for the brand that might help to continue the momentum into the back half.

Cory, yes, simply, I mean, an outstanding performance for Hollister. I am incredibly proud of the team and how dialed in they are, honestly, to the team consumer. I must have to ask that question of reverse what's not working. Everything is working. It's actually kind of an exciting time. That's true across categories. That's true for both genders. I mean the team is just so dialed into what is happening. We launched, I'll give you a good example. We did a little bit of a heritage launch our Y2K A couple of weeks ago, it just absolutely flowed the stores. The customers were asking for it. We stayed very close to our customer. They were telling us, could you do some reissue. We did it. They loved it. We did a homecoming shop recently that also got tremendous sell-through. So stay dialed into this customer staying close to them. The Collegiate Collection is off to a good start. So again, we've got momentum heading into the back half, and we're excited about what's happening at Hollister.

Great. And then just a follow-up for Rob and Scott. I think you guys had mentioned that your inventory is now in good shape. Is there any update on the state of the carryover inventory that you have? And then maybe what the shape of that inventory is going to look like throughout the remainder of the year? And then what of that is inflation and tariff-related versus units? And how are you thinking about units in the back half as well?

Yes. Corey, I'll grab this one. So yes, to your point, made a ton of progress here on inventory in the quarter. ended up in a very clean and current position. Supply chain is stable. Both brands are now positioned to chase into the back half, which is awesome. We end the quarter inventory up 10% at cost. Within that, units were up 7%. And so we're happy about where that sits kind of sitting here against our third quarter sales guide here. Tariffs did have a small impact on us ending inventory costs for Q2, call it about 1 point, and that will have an impact on ending inventory values as we move through the back half. Not quantifying that sitting here today. But as you know, we like where our units sit, and we'll continue to manage units tightly to support those growth plans for the back half of the year.

And our next question will be coming from Matthew Boss of JPMorgan.

So Fran, could you speak to the cadence of traffic that you saw during the second quarter, what you've seen for early back-to-school at both brands and at the Abercrombie brand, I guess what specifically missed your plan in the second quarter? How do you see the progression of comparable sales in the third versus fourth quarter relative to the second quarter down 11.

Yes, let me jump in on the traffic side, Matt. So traffic has been awesome. I mean we've got 2 really strong healthy brands here. both really where we want them to be. We're seeing traffic grow -- have seen traffic grow across the globe, across brands. across channels. It has been a really nice, consistent theme for us here. We're not getting into the month-by-month cadence here for Q2. But been a really nice, consistent theme here. We're seeing traffic grow. We're seeing our customer files grow and that momentum has kind of carried us into the early back-to-school. So really thrilled with what we're seeing the marketing front and what that -- and what kind of traffic that's driving to our brands.

Thanks. So to answer the second part of the question, Matt, so the miss in Q2 for Abercrombie was really the AUR that we talked about. The carryover inventory drove the AUR down a bit, and that was really the significant miss. So we are excited about what we're seeing. Our model helps us chase the product. We've gotten some nice reads, particularly on Boho and Western, as I mentioned earlier, a nice kick off to the third quarter with denim, which is an important category for us. So the brand is in a great place. We've opened up stores. We're continuing to open up stores. We're continuing to invest. So a lot of exciting things coming up for the back half.

Great. And then maybe, Robert, just as a follow-up. How best to think about gross margin in the third quarter relative to your operating margin forecast for the over 300 basis points of decline.

Yes, sure. So you think about Q3 here, you will see some margin pressure year-over-year. We talked about $25 million worth of of tariff impact that we're expecting here in the quarter. So call that about a couple of hundred basis points on the quarter. Freight rates are largely holding, and we've been pretty tightly managing the mode mix here. So we should see a slight tailwind as we've been talking about here for the quarter on freight. It's just not going to be enough to make a meaningful dent in that tariff headwind. And then just on the rest of the pieces and parts here, for -- no change to our forward mindset.

As you know, we're going -- we go into every quarter, assuming that we're going to hold our AURs roughly flat. We'll work to pull back promo days here and there as we see that consumer respond, and we'll see how that plays out. here in the back half. In terms of how it kind of marries with the balance of the operating margin forecast, if you think about the big boulders here, so we were about 14.8% last year in Q3. You got a couple of hundred basis points of tariff impact there that will hit us. And then we talked about the marketing investments that we're making, some really exciting things happening with partnerships and some fall campaigns. So we're leaning in there. We're on the offense. We're going to keep our foot on the gas to continue to drive that traffic and gather those customers. And so that's a little over 100 basis points, and that kind of walks you down to that 11% to 12% guide for the quarter.

[Operator Instructions]. coming from Paul Lejuez of Citi.

Can you talk a little bit more about the tariff impact? I know is that $90 million net. Can you talk about what the growth is? And just how you are able to offset the big pieces in your mitigation efforts? And then second, maybe a little bit more about the Europe business and anything sort of that you could share by country you saw during the second quarter? And any changes throughout the quarter? Maybe how you started versus where you finished the exit rate? And what's the outlook for the second half in Europe?

Yes. So I'll take the tariff piece, Paul. So obviously, it's evolving constantly. We're getting some clarity on rates, but it is still pretty fluid. We don't even have the ink is not even dry in a lot of these agreements that are out there. So we're not making any sort of knee-jerk reactions as it relates to those rates as we move forward here, and they continue to move around. What we are doing is we're staying on offense. We've got great teams. We've got proven playbooks to address disruptions like this just like we have in the past. But changes particularly in this space are complicated. They take a lot of time. So our actions, we've got to be well informed. We've got to be strategic, and we got to get them right.

So sitting here today, the tactics haven't really changed from the conversation that we had in May. As you know, we're well diversified. We source out of 16 countries, but we're always looking for ways to optimize that country of origin footprint. We have great partnerships with our vendors, and we're always having active conversations in terms of negotiations as it relates to cost. And from an operating model standpoint, we're obviously looking to uncover efficiencies in the cost base. Fran mentioned this, but on the pricing, it's a lever for us. But sitting here today, we're not expecting broad-based ticket increases for the year. We're focused on the value that we're providing to the customer, not just the price that approach has really served us well throughout a lot of these disruptions, and that's what we're going to stay true to go forward.

We aren't providing a specific dollar impact in terms of those mitigation efforts Again, most of the things that we would do would start to take shape in 2026 because they do take time. So just know that we're taking a measured approach, and we're confident that we can navigate this environment. while we both protect the consumer experience as well as our margins.

All right. And on your -- the second part of your question, Paul, for EMEA. So as we have invested very heavily in the U.K., we continue to see success in that particular market, opening new stores, investing in marketing, very focused on the product -- that playbook is getting exported throughout Europe. Germany is next up. We took a little bit of a step back in Germany this quarter, but we have all the confidence that our global opportunity still exists and our EMEA opportunity certainly still exist. So investing, believe in the region and excited about what we're seeing in the U.K. I'm confident that we can export that.

And our next question will be coming from Marni Shapiro of the Retail Tracker.

Congratulations, and thanks for making back to school, a lot of fun because the stores have been so much fun to walk through. Just give me a quick update on the marketing. I think you said 100 basis points of marketing in the third quarter increase. I'm curious, is that primarily around the NFL launch as football season kicks off in the NCA? And then what should we expect for holiday? Will you repeat that as you go into sort of the I think that's when the playoff seems not to be a lame about football. I think that's when the playoff season starts in all of that?

Yes. So Marni, so yes, we are sitting here today. We're thrilled with what our marketing team has been able to do and the investments that we've been able to make, obviously, driving healthy traffic and growing those customer files, which is what we're trying to do here. to grow the top line. We are funding full funnel marketing strategies across all 3 regions to build these brands for the long term. That's been our approach that will be our approach going forward. As we think about the back half, obviously, we've got some great opportunities in the back half, to your point, we'll continue to engage with those consumers, but we do need to support these new partnerships like the NFL and lock into some other great fall campaigns that we've got on the docket.

So keep your eyes out for those things. We are anticipating some increases there, obviously. So you will see, to your point, and our call out here a little over 100 basis points of deleverage here year-over-year and will likely be a little bit north of 5% here for the back half of the year as well to continue to support holiday.

And then is it equally balanced between like social media content and that as well as you guys have been very effective on events? Or is it still more heavily leaning into social media content versus events?

It's a pretty balanced approach for us, right? And it really comes down to the strategies that the marketing teams are putting in place. So I don't want to get into too many details. Obviously, I don't want to give some things away here. But happy with that balance that we're seeing. The Lalapalooza event is a great example of of some of these events that we're leaning into for our brands. And you'll see us kind of sprinkle those in as we go along, and we'll continue to push on the social selling to your point.

And our next question will be coming from Alex Stratton of Morgan Stanley.

Congrats on a nice quarter. Maybe for Fran, can you talk about why store growth is the right path for the A&F banner? And maybe bigger picture, how many stores do you envision moving to by the end of the year and over time? Maybe any color on Hollister 2 from that store growth perspective would be helpful as well.

Yes. So let me jump in here real quick. So Alex, stores, we've said this a lot in the past year. Stores are an absolutely essential part of our brand experience. The new stores that we're opening up as well as the remodel programs that we've been putting out there. they're both performing really well. We're seeing higher productivity. We're seeing nice paybacks in those spaces. And when we marry that stores and the digital component, which continues obviously to be a critical growth channel, it's a nice experience for that consumer. We don't see it as an either or, yes, A&F is a little bit more distorted to digital today, but really what it is, it's about omnichannel.

So the stores help us to acquire consumers, and create that physical brand experience for us. And while the digital allows us to scale, reach more customers, provide personalization and engage more frequently with our consumers. So we need both to make this thing work. And we see opportunities in the A&F brand to continue to build out that fleet.

Perfect. And then just on the number of stores that you guys envisioned by the end of the year and then maybe over time for both banners.

Yes. So we've talked about 60 stores opening in total this year, about 20 closures, so call it a net 40. Fran mentioned it, but we've opened 17 A&F stores so far this year. We've got about 20 on the docket. So you can do the math there. It's around 37 of the 60 are tilted to the A&F side. The balance will be in the Hollister side.

And our next question will be coming from Mauricio Serna Vega of UBS.

I wanted to ask about Abercrombie's results. You talked about some third-party channel headwinds. Could you just elaborate on what that when you meant with that? And then on the quarter-to-date, like anything that you can tell us about the Abercrombie brand's performance that maybe gives you confidence that you would return to sales growth by the end of the year? And then just on the gross margin for Q2, it was down 230 basis points, it seems like 40 basis points was related to tariffs. The rest of it, the $190 million, could you elaborate how much of that is like the carryover situation versus freight?

So let's break that down. We're going to start with the middle question. What gives us confidence for Abercrombie, just to repeat myself. Yes, we'll start off with the fact that the first half of this year was still the second best spring in the history of the brand. So we took a little bit of a step back, still incredible business out there. The brand is in great shape. As we mentioned, the traffic is strong. We are signing some very exciting partners. We've got some great fall campaigns coming up. We're continuing to invest in the brand. We did say earlier, we are off to a strong start, total company for third quarter, and we are very pleased with our start for Abercrombie for the third quarter. We had successful denim event. Really exciting to see the customer respond to all sort of fits that are happening right now in denim, Boho and Western are also happening. So there's -- we're confident there's a path to improvement, and we do expect to see growth by the end of the year.

Yes, Mauricio, I'll jump in on a couple of these other ones. So on the A&F third-party headwinds, there's not a lot to talk about here. It was a component of that gap between comp sales and net sales really just comes down to the timing of orders with partners. We would expect that to normalize as we get here into the back half of the year. So not a lot of news there. In terms of Q2, also no major surprises from what we had talked about in May. We did expect margin compression as we were selling through that -- those higher levels of carryover year-over-year. That's exactly how it played out. That puts some pressure on AUR. So AUR was down for the quarter.

Within that, Hollister was up against A&F down. And then as you think about the cost of sales, those were also up as we sold through that higher cost inventory that we had on the balance sheet. Heading into the quarter. So -- and then on top of that, about $5 million of tariff impact for the quarter. So that's kind of our -- the big moving pieces on gross margin. And I think we talked gross margin outlook a little bit earlier on the call.

Great. And I guess just wanted to make sure, like on Q2, there was not really like anything on freight that affect the gross margin. And then the other thing on Abercrombie results in Q2, like were units up and like essentially like those AUR pressure for units were actually up for the brand.

Yes. So just on Q2, nothing new on the freight side. Freight normalized as expected. We talked about it in May. We had -- I think we called out about $10 million of excess freight on the balance sheet there. that we worked through in Q2. We're exiting the quarter in a nice clean place. And then I haven't given any color specifically on branded units. So we'll just work to drive those businesses as we go forward and nicely sitting here today from an inventory perspective, having units aligned with our outlook. So we'll continue to tightly manage that go forward.

And our next question is coming from Adrienne Yih of Barclays.

Great. Congratulations on the progress for back-to-school. I guess my question is on tariff timing. And I'm sorry to be a dead horse here. But it would -- I would imagine that kind of the tariff wave of 8, 7, August 7 and then certainly the India kind of new information today. I imagine they don't have a lot of impact on certainly the third quarter and probably the fourth quarter. So how should we think about any potential kind of price increases or any further mitigation that you might use in the spring season to offset kind of the rolling impact of all these different decisions that are being made?

Yes. So I think you're generally right. Our outlook and our guidance was it was information that we knew of as of a couple of days ago on August '25. So yes, there's some new information here on India. But again, we're going to want to see that solidified and kind of the ink dry here before we make any we make any reactions Sitting here today, we've got that $90 million of net sitting in our outlook, again, broken out $5 million in Q2 '25 in Q3 and then the balance there, that $60 million would sit in Q4, not really providing any sort of kind of roll forward or annualized numbers here in 2026.

Sitting here today, our goal is to drive and finish 2025 strong. Mitigation tactics wise, again, we've got those 4 different levers that we're obviously looking at in terms of country of origin footprint. Vendor negotiations, OpEx efficiencies or expense efficiencies and then pricing. And from a pricing standpoint, it's -- our customer doesn't come to us for price. We're not we're not necessarily going to chase traffic and conversion through price. We're going to try and protect that value proposition that we've seen from a customer standpoint. And quite honestly, good or bad. Our team has a ton of experience navigating uncertainties like this. We've seen tariffs 1.0. We've seen the pandemic. We've seen inflation, cotton spikes, freight rate spikes, you name it, and those are just a couple of examples.

We've got an amazing team, and we've got a battle-tested playbook. And we've dealt with a lot of these moments in the past, and we've done that while growing the business and improving the financial strength of this company. So that's what we're focused on doing. And these things take time. And we just don't -- we just want to make sure that we're informed, we're strategic. We're doing the right things for this business long term. And so more to come on 2026 and go forward as we move throughout the balance of the year.

Great. And then, Fran, for you, let's move to the demand side on the denim category specifically. I have not seen sort of breadth of pricing from entry-level $40 to well north triple-digit numbers with so much variety and so much quality and content. Clearly, I'm seeing it in the Abercrombie assortment. I'm just wondering, could you give us some perspective on the assortment this year, the spread of initial price points a variety. And are we in kind of a get-incycle that is a little bit more premium than I'd say, like classics of last year?

Thanks. So yes, obviously, we're very excited about our Abercrombie denim business, as you have mentioned. So when I think about the architecture of our business, what's kind of exciting that's happening in denim today is it's really not just one fit. A lot of times, we talk about like what the key it is that the consumer needs to buy. And we're in an interesting cycle because now it's really about their wearing occasion. So if they want this new boot cut that's really starting to rise in importance, they're also still wearing a low-rise bag year or wide like jeans, all depending upon where they're going and what they're doing. The pricing of all of that is driven by the customer demand. So we have been seeing tremendous demand when we get the product device product, voice experience aligned and the consumer continues to respond.

So it's exciting to see what's happening. Our Hollister Denim business is also very strong. That one harkens back a little bit to our heritage. It was exciting to reissue like our rainbow pockets in the back that the customer is really responding to -- so there's a lot of exciting things happening. And when there is a denim cycle, it also drives different tops to go with it. The called Boho and Western thing that's starting to happen for us. It's exciting and more to come on that for the fall.

And our last question will be coming from Janet Kloppenburg of JJK Research.

Congrats on a good quarter plan. When I look at the achievements of Hollister and BN plan last fall, holes comps get a lot tougher in A&F somewhat easier. So I'm just wondering, should we think that your comp performance and should start to gain some momentum? And I know Hollister is going to continue to do well, but should we expect a cool down there? And then I have another question.

Yes, I'll kick off. So as I started my script I own the total and driving the right, is really what matters. And so if you look at the outlook of what we're putting out there, our expectation takes the momentum that we've had from the first half into the back half. We had nice record year 2024, and our expectation is to have another one right on top of that. So I'm excited about what we're seeing. We are seeing continued incredible excitement about the Hollister brand and some nice improvement in the Abercrombie brand.

So with that, I don't know if you want to add anything else, Robert.

Yes. I mean -- so Janet, we think that our outlook sitting here today is reasonable. We think it's appropriate. Excited to be able to put that 5% to 7% growth on top of a plus 14% for Q3 of last year. not providing specific brand-level guidance here, but we're obviously happy with the record first half that we just delivered. We would expect, as we move into Q3, and we would expect Hollister to continue to outperform A&F here. We're super excited to try to continue driving Hollister's growth. And we are encouraged by all of the actions that we're seeing and the things that are underway at the Abercrombie brand. So we're happy with the guidance we'll chase into the business and which as we've done in the past, and we'll continue to try and drive these record sales into the back half.

Great. And on AUR that was down for A&F and up for Hollister. Do we think that there'll be improvement for A&F as some of the lockdown or, I guess, you call it excess inventory levels have moderated.

Yes. Again, not no brand level guidance provided, but that's obviously our goal every time that we come into a quarter is to hold the gains that we've seen on these brands. We've got up nice double digits on a multiyear basis across both of these brands, and we'd like to hold on to that. And so that's the work of the work. That's -- we've got to put a great product out there. We've got to control our inventory. And again, if we can step away from a promotional day here or there, that's great for the operating model, and it's a great flow-through. So that's what we're doing. We've got great teams in place, and we're working on that on a day-by-day basis.

And I would now like to hand the call back to Fran for closing remarks.

Thank you, and thank you, everyone, for joining us this morning, and we look forward to updating you after the third quarter.

And this concludes today's conference call. Thank you for participating. You may now disconnect.