Abercrombie & Fitch CEO Fran Horowitz sits down with Yahoo Finance's Brian Sozzi to discuss Abercrombie & Fitch's 2023 outlook, consumer trends, and opening stores.

Video Transcript

- Another big winner, Abercrombie & Fitch shares surging today, to the upside on today's trading session after reporting a surprise beat on earnings and raising its outlook. Our very own Brian Sozzi had the chance to speak with Abercrombie and Fitch CEO, Fran Horowitz, to dig deeper into these results. Let's listen.

FRAN HOROWITS: Yes, super exciting day here on campus, Brian/ it's great to see all of the smiling faces and all the energy that we have going here. Abercrombie particularly, up 14%, which was growth on top of last year's 13%. There's so many exciting things happening in that brand, I'm trying to figure out where should we even start.

BRIAN SOZZI: Go with cargo pants.

FRAN HOROWITS: Start with cargo pants? OK. Cargo pants are important. But what's really exciting about Abercrombie is that we've really changed the brand from what people used to reference as a t-shirt and jeans brand to a lifestyle brand. And the consumer is coming to us for so many more categories today, which is really what's driving the momentum in our business.

You know, the turn started a couple of years ago with the women's business, where we got that going first. Now our men's business is also very good. Our third consecutive quarter of growth for men's, 11th consecutive double digits for women's. But we can talk about all sorts of categories.

Dresses, dresses, dresses, all day long. She's coming to us for all sorts of occasion dressing. The men-- guys and girls are both coming to us for pants, that's a fun conversation because that's kind of a new trend to this consumer. Now that they're back at the office and they're trying to figure out what to wear to work, they're coming to us for that as well. So lots of exciting things happening.

BRIAN SOZZI: Fran, you must have read my notes. And as you know, we've known each other for a while, I'm an avid earnings call listener geek. I love earnings calls. And to that point, I love what you mentioned on the call about people going back to the office. And is Abercrombie & Fitch, that brand, is that the new wardrobe? And, I mean, what are people wearing to the office again?

FRAN HOROWITS: Isn't that exciting though, Brian? I mean, to your point, right, people never thought of us as an opportunity to go back to the office, and now they certainly are. They're probably not necessarily wearing suits to the office, but they're certainly wearing something more dressed up than they were doing during the pandemic when they were working from home. So our pant business, our non-denim business, is just off the charts.

We've got a franchise in the women's business called the Sloan pant, you see it all over TikTok. We keep producing it in all sorts of fabrics and colors, and she loves it time and time again. And the men's business as well, we're selling trousers and pants that they can wear to the office.

BRIAN SOZZI: This is a major fundamental shift in the economy and society. People going, humans back in some form of office setting. Look at me, I'm back in the office here at Yahoo Finance every single day, and my wardrobe is, in fact, changing beyond the suit that you're wearing now. I mean, as a merchant at heart Fran, does that change how you plan your assortment in the back half of this year? Should we see more wear to work apparel from Abercrombie & Fitch?

FRAN HOROWITS: Well, I think a couple of things. I think, first of all, to strike a balance in your assortment is the most important thing. Everybody on campus knows my favorite word is "balance," and just making sure you don't ever lean one way or the other. Because even with people going back to the office, Brian, they're probably not going back five days a week, they're probably going back two or three days a week. So there's an opportunity for us to service them on the more casual days as well as those days where they're back in the office.

BRIAN SOZZI: I thought the customer that shopped Abercrombie & Fitch, and we'll talk about Hollister too as well, I thought they were economically challenged.

FRAN HOROWITS: We have been seeing a very strong consumer on the Abercrombie brand all through last year and certainly through the first quarter, we're also very pleased with our kickoff to the second quarter, so we have not experienced that. But what I will tell you is, the customer has a choice on where to shop, and they're choosing us because what we're doing is working.

BRIAN SOZZI: What about the state of the Hollister business. I know you continue to try to round the corner for that brand, what may be holding it back, because sales were under pressure?

FRAN HOROWITS: Yes, so, it's interesting. I'd love to take you on that journey for Hollister. So last year, during the second quarter, we saw a step down, just like a lot of the other teen brands did as well. But what we did was we said, how much of this is us, and how much of this is macro? And we found some opportunities for us.

So we've been on a journey to really evolve our assortments and get back to being close to that customer. We've worked on our assortment architecture, we've worked on our assortments. And what we're seeing is, as we've pivoted out of being predominantly denim, as an example, non-denim bottoms, again, are working, dresses are working.

So the top line was disappointing, to your point, but the bottom line wasn't. So we're back to profitability. We actually were able to raise our AUR, which is a good sign that the brand is healthy. And most excitingly is our inventory is under control. So we're down 20% as a total company, and even more with Hollister. That has brought back one of my other favorite words, which is "chase." And the fact that the team can now chase goods and react to the business is a big win for us.

BRIAN SOZZI: Well, OK, maybe some green shoots in Hollister. Abercrombie & Fitch brand firing on all cylinders. If you had to place a guess, how do you think the key back-to-school shopping season will go for your company?

FRAN HOROWITS: I'm looking forward to back to school, especially since we've evolved all the assortments. So we'll start to see the end of Q2 and the third quarter, we'll see. But I'm looking forward to it. And I'm excited about what we have for the consumer.

BRIAN SOZZI: We've heard a lot of retailers call out this earnings season, consumers are trading down. Are you seeing that in your business?

FRAN HOROWITS: We are not seeing in it. We've seen AUR increases, interestingly enough. We came out of the pandemic, we have had double digit AUR increases through 2020 from pre-pandemic. That is something we tried to do pre-pandemic for many years and couldn't accomplish.

Our goal coming into 2023 was to hold on to those AURs. And in fact, we beat them for Q1, and in both brands.

BRIAN SOZZI: I know we have talked many times through the years on how you continue just to close underperforming stores-- you're opening new stores but given all the concerns in commercial real estate with interest rates, are you getting any higher rents? Are some of these mall players trying to raise rents on you because of challenges they are, in fact, seeing?

FRAN HOROWITS: We have two very strong global brands, so we are very desirable in the malls. To your point that we've been on a storage journey for a very long time, it started with a lot of closures. And now we're being back to a net store opener. So in 2022, we were net store opener, we plan to be one again for '23.

But the most important thing for the team is to make sure that we find stores that are the right size, the right location, and the right economics, and we don't budge on that. So if the deal doesn't work for us, we pass and we patiently wait until we can get the deal that does work for us.

BRIAN SOZZI: How do some of these newer stores you're opening compare to the stores that are already in the ground? Whether it be Hollister or Abercrombie & Fitch?

FRAN HOROWITS: So both are much smaller. What we have found is that these smaller, more efficient formats are definitely working for us. Some exciting new things that we're doing in Abercrombie is that we're opening up street locations.

We opened up a couple in Chicago last year that have been absolutely terrific. We just opened one up on Newbury Street in Boston. We have a few more planned for the balance of the year in some key cities. So again, listening to the customer and understanding where our consumer is, we're always testing and learning and trying to find new opportunities.

BRIAN SOZZI: One thing we have been tracking here-- closely here at Yahoo Finance, Fran, in retail is inventory shrinkage or theft. Does this apply to your business? And then what are your contacts saying in the industry? I talked to the folks at Target, they're calling out a $500 million profit hit this year because of theft. I mean, do you see that in your stores, and have you had to put extra security in your locations?

FRAN HOROWITS: No, we've been very fortunate. At this point, our PNL, we always have to reflect some shrink because it's all part of what we do, but we have not seen a spike in, it at this point.

BRIAN SOZZI: That is certainly a good thing to hear. And last question for me here, Fran, what is the biggest challenge you're up against this year as a leader? We have concerns about a debt ceiling, we have inflation that seems to be benefiting you a little bit, that's starting to come down. That's a good thing but how do you think, as you try to formulate your plan for the back half of the year, what are some of the things you're up against?

FRAN HOROWITS: Yeah, I guess when I step back, Brian, I think about the last three years as a CEO. Anybody that has sat in this seat is honestly ready for anything and everything that comes at us. It's taught us how to be incredibly agile, and really ready to pivot on any opportunity.

So there is a lot out there, to your point, a lot of macro things that we're not sure about. But we're ready to compete, we've got our inventories under control, and we're controlling what we can.

- Abercrombie CEO, Fran Horowitz, speaking to our Brian Sozzi there.