Abercrombie & Fitch Co (ANF) Q1 2022 Earnings Call Transcript

Abercrombie & Fitch Co (NYSE: ANF) Q1 2022 earnings call dated May. 24, 2022

Corporate Participants:

Pamela Quintiliano — Group Vice President, Investor Relations

Fran Horowitz — Chief Executive Officer

Scott Lipesky — Executive Vice President and Chief Financial Officer

Analysts:

Dana Telsey — Telsey Advisory Group — Analyst

Corey Tarlowe — Jefferies — Analyst

Paul Lejuez — Citigroup — Analyst

Janet Kloppenburg — JJK Research Associates — Analyst

Mauricio Serna — UBS — Analyst

Kimberly Greenberger — Morgan Stanley. — Analyst

Marni Shapiro — The Retail Tracker — Analyst

Presentation:

Operator

Ladies and gentlemen, please standby. Good day, and welcome to the Abercrombie & Fitch First Quarter Fiscal Year 2022 Earnings Call. This call is being recorded. [Operator Instructions].

At this time, I would like to turn the conference over to Pam Quintiliano. Please go ahead, ma’am.

Pamela Quintiliano — Group Vice President, Investor Relations

Thank you. Good morning, and welcome to our first quarter 2022 earnings call.

Joining me today on the call are Fran Horowitz, Chief Executive Officer and Scott Lipesky, 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 any forward-looking statements made on the call are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today. A detailed discussion of these factors and uncertainties is contained in the company’s filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier this morning.

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

Fran Horowitz — Chief Executive Officer

Good morning. Thank you for joining us today to discuss our first quarter results.

This earnings, we are going to approach things a little differently. Since 2018, we have dedicated a portion of our call to talking about the progress made in our key transformation initiatives, which were anchored to our goal of doubling our operating margin from 2017 levels. Last year, we not only achieved that goal, but we significantly surpassed it, more than tripling our operating margin. At our upcoming June 14th Investor Day, we will discuss the next phase of our corporate journey and how we will execute our Always Forward plan. From there, we will update you regularly on our progress.

In the first quarter, we navigated another period of global volatility. We remained focused on controlling what we can control and never lost sight of what’s important to drive our business: our customers, associates, communities and partners. We exceeded our sales plan, delivering our best Q1 revenues since 2014 despite several major headwinds, including the lapping of stimulus and a return to in-person learning from much of the U.S last March, global inflationary pressures, significant COVID restrictions in China and the conflict in Ukraine.

For the quarter, total company revenues rose 4% year-over-year, above our outlook for a low single-digit increase. Abercrombie continued to outperform, rising 13% on top of 60% gain last year. By region, our largest market, the U.S., registered a 6% increase while international was flat. EMEA accelerated from last quarter and last year, benefiting from the reopening of our largest country in that region, the U.K. In APAC, China remained challenged due to COVID-related lockdowns.

Our global revenues were healthy. Customers continue to respond favorably to our product, voice and experience, and we achieved our eighth consecutive quarter of AUR improvement as we benefited from higher tickets and slightly lower promotional activity. As a reminder, we implemented targeted ticket increase in the first quarter based on competitive pricing analysis.

We took advantage of colder weather conditions to push through the delayed Q4 receipts to ensure we were clean for spring. Scott will discuss these pressures in more detail, but we remain focused on navigating through these near-term challenges, while delivering the right product at the right time, at the right price. Looking ahead, we expect freight and raw material costs to remain elevated. We plan to tightly manage inventories and expenses and our action opportunities to offset a portion of these costs. We are carefully evaluating these opportunities and do not plan on trimming areas that support our longer-term growth strategies.

Now on to the brands. Q1 represented the continuation of the Abercrombie brands’ remarkable turnaround. Abercrombie adults delivered its best first quarter sales since 2014 and its highest Q1 AUR in brand history, benefiting from higher tickets and lower discounting. Results were led by ongoing strength in North America, which posted its highest sales since 2012, although we did also experienced a sequential improvement on international basis. And while we have heard that the consumer is spending more on experiences, our millennial Abercrombie customer is coming to us to refresh the wardrobe as they get back out there. And with unwavering dedication to listening to our customers about the new trending styles and fits they are looking for, we’ve been able to expand market share. And we’re not just winning in one or two areas. Strength was broad based with multiple categories registering growth.

In women’s, denim, dresses and knits were standouts, all delivering their highest Q1 sales and AUR in over a decade. In men’s, our target customers also take notice of the changes we have made. Tops, which is our largest men’s revenue driver, were strong with growth in graphics, sweaters and wovens. There is so much more market share opportunity at Abercrombie.

In March, we launched YPB or Your Personal Best, after hearing from customers that they want us to deliver a performance active line with the same dedication to fit, comfort and confidence they experience in our regular assortment. YPB has received high praise from customers, influencers, affiliates and media for its fit, fashion and function. The launch has truly served as a reflection of our personal best, far exceeding expectations. We sold out over 25% of our SKUs within weeks of the launch and have been quickly working to replenish. The speed with which customers have embraced YPB gives us even more confidence in its future.

A big part of Abercrombie’s success can be attributed to our marketing team. Throughout the quarter, they continue to tap into human-powered brand buildings or influencer and affiliate network, which we view as a vital social commerce revenue stream. In Q1, Abercrombie was recipient of LTK’s Most Loved Product Awards in multiple categories, had its best social commerce quarter ever with significant double-digit year-over-year growth and achieved volumes that beat our previous record, which we just hit last quarter. And we are not satisfied. We intend to continue building on the rapid rise of this channel as the team innovates and invents new possibilities.

We’re excited for Q2. Stay tuned for the third Annual Abercrombie Pride Collection co-designed with our partners, The Trevor Project, an organization that provides essential services benefiting LGBTQ youth. In June, we’re set to launch a getaway-inspired collaboration with two influencer friends of the brand; Champagne & Chanel and Dress Up Buttercup. And soon to come, we’ll be bringing our popular Curve Love fits to both tops and bottoms in our YPB line.

Now onto Abercrombie kids. During the quarter, we experienced strong conversion and a record-setting basket size. Our comfy, dressy assortments for Easter and spring break drove results. In addition, we had our best Q1 swim season ever and our franchise collections, The Cool Stuff, Ready for Play Active and Made for Life Essentials were well received.

Turning to Hollister, which includes Gilly Hicks and Social Tourist. In North America, we delivered our second best sales results since 2012, behind only last year even as we lapped stimulus and the mini back-to-school season in March. Internationally, although trends improved dramatically from last year and last quarter, the business has not yet returned to pre-pandemic levels. Taken together, global sales were in line with our expectations, declining 3% for the quarter.

We continue to emphasize our top 30 items in must-win categories, which led the way in the first quarter and we experienced strength in women’s dresses and fleece and men’s wovens and swim. In denim, our customer embraced newer wide-leg fashion assortments, although skinny remains an important part of a wardrobe. Social commerce and affiliate growth continue to be key drivers of our success.

In February, we wrapped our Respect the Jeans campaign, which was done in partnership with Black-ish star and Gen Z favorite, Marsai Martin. The campaign outperformed benchmark goals, driving 11 million impressions and also won Gen Z over on TikTok with benchmark beating engagement and comments such as, now, this is how you do an ad. During the quarter, we also launched our monthly Facebook live shopping event, which drove social commerce sales up an average of 20%.

Now let’s talk about Gilly Hicks, where we continue to be excited about the global growth opportunity ahead. Customer responses or updated carveouts in side-by-side locations, which incorporate key elements of our standalone store has been very encouraging, with these locations outperforming the balance of the chain. We’re also bringing our updated store concept to our global customer. We recently opened our first Gilly Hicks standalone EMEA store a few weeks ago in Centro, Oberhausen, Germany, and plan to introduce more stores throughout the year, including Carnaby Street in London this summer.

Last but not least, Social Tourists. Our newest brand has an engaged fan base who is providing valuable insights into up-and-coming fashion trends and the shopping habits of social-first customers, which we’ve applied to the brand into our broader portfolio. Looking ahead, there is a lot of excitement in all three brands under the Hollister umbrella. In partnership with GLSEN, an organization that works to make K-12 schools safe and inclusive of LGBTQ plus students, we will be launching our 6th Annual Hollister Pride Collection.

At Gilly Hicks, we have plans to expand our active lifestyle collection, Gilly Go, which has consistently been our top performers since its launch. And at Social Tourist, we are set to open a pop-up shop on Melrose Avenue in Los Angeles which will be the brand’s first standalone experience. The pop-up will future always-on social content and programming, monthly activations including consumer influencer events and PR engagements and visits from Dixie and Charli to meet customers. So exciting.

Before turning it over to Scott, I want to take a moment to discuss our thoughts on the health of our global consumer. It is an interesting time, the weather has started to become more seasonal and collectively, it seems as though we are ready to return to some form of normalcy. In our largest market, the U.S, unemployment is currently low, wages are high and there is a hunger to participate in many of the social activities that were missed over the last two plus years. However, we are in an extremely inflationary period. Everything from food to gas is costing more and we expect this pressures to weigh on consumer confidence.

We are keeping a close eye on each of our respective consumers and how they’re being impacted in responding. With five distinct brands, we will not take a one-size-fits-all approach. We will stay close to our customer and have the ability to quickly recalibrate, reflecting their unique stages in life, activities and pressure points. Internationally, while encouraged by recent improvements in EMEA, we are cognizant that our European customer is safe with similar inflationary pressures and is more directly impacted from the situation in Ukraine.

Across the globe, we know there are a lot of options on where to spend and as always, we will focus on offering a compelling and inclusive product voice and experience for each of our respective customer basis with a commitment to fashion, fit and quality. We remain focused on profitable growth through leveraging strategic plan promotions and we intend to tightly manage expenses with the goal of offsetting a portion of freight and raw material inflation.

In closing, I would like to reiterate my confidence in our future. We are staying close to our customer and executing to our proven playbooks. With our strong balance sheet, we are well equipped to navigate the current environment and its challenges. We’ve clearly defined positioning in each of our brands and remain focused on our long-term opportunities. Reflecting the successful execution of our key transformation initiatives, we believe that we are stronger, smarter and faster than ever before and have a foundation firmly in place for the next phase of our corporate journey and our Always Forward plan, which we look forward to sharing in more detail at our June 14 Investor Day.

And with that, I will turn it over to Scott.

Scott Lipesky — Executive Vice President and Chief Financial Officer

Thanks, Fran, and, good morning.

Over the past several years, we have been providing financial comparisons on a one and two-year basis. Starting this quarter, our discussions will only focus on the year-ago period.

Now on to Q1 results. In the first quarter, we delivered net sales of $813 million, our highest Q1 since 2014. Sales were up 4% to last year, ahead of our expectation coming into the quarter for a low single-digit increase despite an estimated combined 100 basis point adverse impact from foreign currency volatility and the COVID-driven lockdowns in China.

Net sales were above expectations at Abercrombie, which includes kids, rising 13% compared to 2021 and in line with our expectations at Hollister, which includes Gilly Hicks and Social Tourist declining 3%. This compares to prior year growth of 60% and 62% respectively. By region, net sales increased 6% in the U.S. and were flat internationally.

Parsing out international, EMEA sales increased year-over-year as COVID-related restrictions were mostly lifted in our larger markets. Our biggest country in EMEA, the U.K., led results, although we were pleased to see year-over-year improvements in Germany and France later in the quarter. In APAC, China remained a challenge with the prolonged COVID-related lockdown in Shanghai, which is one of our largest markets in the region.

Moving on to gross profit. Our rate was 55.3% versus 63.4% last year. We continue to increase AUR, registering our eighth consecutive quarter of AUR gains driven by reductions in the depth and breadth of promotional activity and selective ticket increases, which we took for the first time this quarter. AUR growth was more than offset by higher AUCs reflecting two factors.

First, a higher than expected freight cost. In total, freight costs were approximately $80 million above last year and roughly $15 million above our estimate. In the current highly volatile global supply chain environment, the estimated freight rates in our outlook proved to be lower than actual rates. Second, we made the decision to take advantage of the unseasonably cold temperatures to proactively accelerate the sell-through of late holiday goods in Hollister and Gilly Hicks, which as a reminder had the highest exposure to Vietnam-related receipt delays.

These clearance sales came with a lower gross margin than our spring goods, causing reduction in our Q1 rate. Ending the quarter, our inventory is in a good position in all brands. Looking forward, we expect the impact from both of these factors to moderate in Q2 and beyond as we lap rising freight rates from last year and carryover inventory inherently becomes a significantly smaller portion of our sales mix.

Moving on to the health of our inventories. We came into Q2 with our in-stock in a much better place as we have realized the benefits of the multiple adjustments made to our product and sourcing playbooks to ensure timely deliveries. These efforts include diversifying carriers and ports of entry, adjusting our product calendars and further diversifying our countries of origin. We expect these collective efforts to result in more predictable inventory flows pending additional unforeseen shocks to the supply chain.

We ended Q1 with units up 10% off a multi-year low last year and total inventory up 45%, with higher freight costs and in-transit inventory, each contributing around 17 percentage points to the increase. As we look to the rest of the year, we expect inventory levels to remain above last year as we flow product in early to guard against potential supply chain disruptions. This compares to last year where we saw inventory receipt delays increased throughout the year.

I’ll now cover the rest of our Q1 results on an adjusted non-GAAP basis. Excluded from our non-GAAP results this quarter are $3 million of pre-tax asset impairment charges, which adversely impacted results by approximately $0.05. Last year, we excluded $3 million of pre-tax asset impairment charges, which adversely impacted results by $0.03.

Operating expense, excluding other operating income, was $460 million compared to $436 million last year, with approximately half of the increase due to lapping COVID-related rent abatements and government assistance recognized in Q1 2021 and the other half related to investments in marketing and higher digital fulfillment expense. We had an operating loss of $6 million compared to an operating income of $60 million last year. The effective tax rate was 9.3%. Net loss per share was $0.27 compared to net income per diluted share of $0.67 last year.

Taking a look at the balance sheet. We ended Q1 with cash of $468 million and liquidity of $783 million. During the quarter, we made further progress in utilizing excess liquidity with continued returns to shareholders through share repurchases. In the first quarter, we repurchased approximately 3.3 million shares for $100 million.

At quarter end, we had 50.4 million shares outstanding, down 19% from the start of 2021 and approximately $258 million remaining under our previously authorized share repurchase program. We remain committed to putting excess cash to work and expect to continue to focus on share repurchases pending market conditions, share price and our ability to accelerate investments in the business.

On investments, we expect fiscal 2022 capex to be approximately $150 million, with about half related to digital and technology and the other half related to stores and maintenance. As a reminder, we expect to be a net store opener this year for the first time in over a decade and now expect to open approximately 60 new stores this year, up from our prior assumption of 50 new stores. These openings will be weighted towards the back half. This year, we have roughly 250 leases up for renewal, around 33% of our base, which is higher than the last few years when we were closer to 25%. In line with our prior projections, we expect to close around 30 stores this year, pending negotiations with our landlord partners.

I’ll finish up with our thoughts on the remainder of the year. As noted in our press release, we are updating how we provide guidance. Going forward, we will provide a sales and operating margin outlook. The reasoning is two-fold. First, this approach better aligns with our industry peers. Second, with the current and likely continued volatility in freight and raw material costs, we expect to flex operating expenses in response to unforeseen swings, whether positive or negative.

In our updated outlook, which replaces our previous full-year outlook, we are making an assumption for inflation-related pressure on consumer demand and also that freight rates will remain at peak levels for the remainder of the year. From a supply chain perspective, our outlook does not anticipate a similar magnitude of inventory delays as experienced last year due to the Vietnam shutdown, but we are closely monitoring the lockdowns in China.

For the full-year, we are planning as follows. Net sales to be flat to up 2% to 2021 level of approximately $3.7 billion. Embedded in this outlook is a combined estimated adverse impact of approximately 200 basis points from foreign currency and inflationary pressure on consumer demand, partially offset by outperformance in Q1. Operating margin in the range of 5% to 6%, down from our previous range of 7% to 8%, reflecting an estimated combined 200 basis point adverse impact from higher freight and raw material costs, foreign currency and lower sales and an effective tax rate in the mid-30s.

For the second quarter, we are planning as follows. Net sales to be down low-single digits to 2021 level of approximately $865 million. Embedded in this outlook is an estimated adverse impact of approximately 300 basis points from foreign currency and COVID-related lockdowns in China, and an approximately 300 basis point adverse impact due to an assumed inflationary pressure on consumer demand. Operating margin in the range of 3% to 4% with the year-over-year decline driven by higher freight and raw material costs and an effective tax rate in the mid-to-high 30s as the rate remain sensitive at lower levels of income.

As we look to the remainder of the year, we intend to balance near-term profitability with long-term strategic investments. While we do not expect to fully offset freight and commodity headwinds real time, we do expect to drive efforts to reduce the impact on profitability, including, but not limited to; managing inventory flows by region to ensure we maximize top line during our peak selling periods, strategically increasing tickets and reducing the depth and breadth of promotions to drive AUR growth and prioritizing customer facing spend and strategic long-term investments, while reducing non-customer facing expenses. We believe we must continue investing for the long term, specifically in our people, store experience and advancing our capabilities in digital data and technology.

To finish up, we believe our brands are positioned well for the summer season and beyond. We are confident in our evolved business model and our current expectation to deliver an operating margin above pre-pandemic levels despite significant inflation. We look forward to sharing more with you at our Investor Day in a few weeks.

With that, operator, we are ready for questions.

Questions and Answers:

Operator

[Operator Instructions] We will begin with Dana Telsey with Telsey Group.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning, everyone. As you think about the Hollister business, I think, down around 3%, what’s the game plan and how you are looking at Hollister and growth go forward? And then you talked about the inflationary impact on demand that you’re planning go forward in this challenging environment now, how you are breaking that out? How are you thinking about promotions or markdowns going forward, given the uncertainty of when inventory arrives? And does it differ by brand or region? Thank you.

Scott Lipesky — Executive Vice President and Chief Financial Officer

All right, Dana. Hey, it’s Scott. I’ll kick this one off. All right. Let’s start with the inflationary impact on demand. See, as we think about coming through Q1, happy with our results in Q1 plus four to last year, solid growth. We did see some of that — some of those impacts that we talked about sneaking in late in the quarter. One is foreign currency, which we’ve all seen the U.S. dollar strengthened pretty materially recently. So that started to get us towards the end of the quarter and knocked around a point off of that Q1 growth. As we think about Q2, we have some of those same impacts carrying over. We have the foreign currency impact and China will hit us for about 300 basis points in Q2 versus last year. And then, we’re adding about 300 basis points based on this inflationary impact on the consumer. And what that does is it backs us into kind of where we’re operating quarter-to-date here, where with all those factors embedded in, we’re just slightly negative here coming into the quarter for the first three weeks.

So, we’re going to make the assumption that things are going to stay the same, not getting any better, not getting any worse because that’s the data that we have today. Obviously, the consumer is up against pretty dramatic inflation here and we’ll see how that plays through. We’ll be doing everything we can, delivering great products, great marketing and great experience to offset that, but we’ll see how that plays out. And then before I kick it over to Fran, just on Hollister, the minus 3 in Q1 was expected. Hollister did have a tough comp as we think about last year up against that mini back-to-school in March — that March time period, so that was the start and I’ll kick it over to Fran.

Fran Horowitz — Chief Executive Officer

Thanks, Scott. So Dana, on Hollister, just to kind of guess, sort of echo a little bit what Scott said. So, we continue to be pleased with our U.S. performance in Hollister. It was up 6%, and we are seeing strong acceptance from the consumer on product. So as Scott said, you have to parse the brand apart a little bit. We have our U.S. business which has been strong, was good through’21, a much higher penetration for Hollister from an international perspective. So APAC clearly, a tough go there with the shutdowns from COVID and EMEA coming back and we’re starting to see some nice opportunities happening there as well. So, we’re focused on the consumer. We’re focused on our top 30 and more to come. We’re looking forward to back-to-school.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

Now moving to a question from Corey Tarlowe with Jefferies.

Corey Tarlowe — Jefferies — Analyst

Hi. Good morning, and thank you for taking my questions. Firstly, can you discuss some cost savings initiatives that you have in place to help mitigate margin pressures that you’re witnessing? And then secondarily, how should be thinking about the EBIT margin cadence throughout the rest of the year? It would seem that you’re embedding an improvement in the outlook given the 1Q performance, the 2Q guide of 3% to 4% and the full-year guide of 5% to 6% EBIT margins? Thanks.

Scott Lipesky — Executive Vice President and Chief Financial Officer

Yeah. Hey, Corey. I’ll grab this one. So, I think I’ll start with EBIT margin, really. I’ll tie this together. So Q2, yes, so 3% to 4% down from last year, really driven by those year-over-year freight cost. As we think about the full-year being at 5% to 6% based on the seasonality of our business, we tend to have more sales in the back half and we can get much better leverage on the expense base back half specifically in Q4.

So what we are focused on is, number one, looking at expenses, anything that is non-customer facing, those discretionary expenses and pausing some of those, but we are not going to step back from some of the key expenses we need to drive the top line as that is marketing. And then also, some of these strategic investments that we’re making for the long-term in digital and technology and people, we’re going to continue on the path with making those investments because they are key to the long term in the midst of short-term inflationary issues.

We’re also going to look up and down the P&L. We’re going to continue to drive AUR growth. We just had our eighth consecutive quarter of AUR growth. The costs are coming in faster than we can take up the AUR, but very pleased with the AUR growth that we have seen this year so far on top of strong double-digit AUR growth back in 2021. So, we’re going to continue on that path, but it really comes down to, number one, great product, great marketing and let’s keep our inventory balance in check and we feel comfortable with our inventory levels at this point.

Corey Tarlowe — Jefferies — Analyst

Understood. Thank you very much.

Operator

Now moving to a question from Paul Lejuez with Citi.

Paul Lejuez — Citigroup — Analyst

Hey. Thanks, guys. I’m curious, how you would characterize the pricing environment in each of your regions and your ability to pass through higher prices compared to how you’re thinking about that opportunity just three months ago? And then, just curious on the inventory. Can you just give a little bit more details, Scott, just where do you expect that number to shake out at the end of 2Q and what we should expect for the balance of the year? Thanks.

Fran Horowitz — Chief Executive Officer

Hey, Paul. Good morning. I will start with the first question on pricing. So it’s exciting, we just finished our eighth quarter of consecutive AUR growth and in fact, that was on top of last year’s double-digit growth. So that really tells us that our consumer is responding to our price — our product, our voice and our experience. So, we have been able to see that push through. We’ve also seen an opportunity to be less promotional than pre-pandemic, which is also an exciting opportunity for us. We believe that we have continued opportunity to see AUR growth through the balance of the year.

Scott Lipesky — Executive Vice President and Chief Financial Officer

All right. Let’s move on to inventory. So thinking about inventory, I just want to pause real quick and reiterate Q1 level. So, up 45% to last year. We have units up around 10%. That is absolutely purposeful. We are bringing in units faster, earlier than we wanted to in the past because of the supply chain delays. So happy with where our inventory is today, our best-in-stocks that we’ve seen since back in 2019. As we think about going forward, that trend will continue.

We will continue to bring in inventory early to make sure we can hit the peak selling period, specifically in back-to-school and holiday. So, I expect inventory levels to be up in Q2 and Q3 and then start to right-size more towards Q4 whenever we lap, really, catching up those significant delays that we saw in the back half of last year. So comfortable with the receipt plan that we have in place. In the end, whenever you take a zoom out, that’s really what matters and we’re going to bring that inventory in a little earlier than we would have in the past based on what’s happening in the supply chain.

Paul Lejuez — Citigroup — Analyst

Got it. And Scott, just as a follow-up on, when you look at your full-year guidance for sales, how much of that is AUR driven versus units?

Scott Lipesky — Executive Vice President and Chief Financial Officer

Yeah, there is a piece of AUR and it’s a bit of units. I’d say it’s a little more tilted towards AUR and units will kind of bounce around. With the inflationary demands on the consumer here, we’re going to be prudent and how we forecast both the top line and the ability to pass through AUR and look at those items as upside to our plans as we’ve laid out.

Paul Lejuez — Citigroup — Analyst

Thanks, guys. Good luck.

Operator

[Operator Instructions] We’ll now move to our next question, which will come from Janet Kloppenburg with JJK Research.

Janet Kloppenburg — JJK Research Associates — Analyst

Good morning, everyone. Thank you for the detail this morning. A couple of questions. Fran, are you seeing AUR gains at Hollister, as well as A&F? And we’re seeing a trend towards slightly dressier product sales being stronger than casual, like shorts and tees maybe. I was wondering what you saw in your business and if you think that better positions A&F versus Hollister?

And for Scott, I was wondering, if you expected any AUR pressure coming from the competitive environment? I know you said, you expect AUR to be up for the rest of the year, but it does feel like promotions in your sectors are starting to tick-up around you. And I’m wondering, given what I see in the inflationary pressure that you referred to, whether or not you think that may impact the AUR opportunity. And just lastly on freight, do you expect it to remain as elevated in the second, third and fourth quarter as it was in the first quarter or what’s the trend outlook there? Thank you.

Fran Horowitz — Chief Executive Officer

Okay, Janet. Let’s see where we want to get started. Let’s start on the dressier product versus casual. So, what’s exciting about our brands is that we have various categories in both of our brands and opportunities to really balance those categories, right, depending upon what we’re hearing from our consumers and close to our customer. So if you start with Abercrombie, to your point, we’re selling lots of different categories that point to that customer wanting to get back out there and spend that 96-hour weekend that we always reference for that consumer and really dressing them for all of those occasions, as well as getting back to work.

So, we have an opportunity in dresses, in our woven pants, in our woven tops, all resonating really nicely. The Hollister customer as well, so he and she may be more casual shorts and T-shirts, but you know they have events to go to also. They have graduation. They have prom weekends. So, we’re seeing a nice dress business in there as another good support to both businesses having opportunity.

Scott Lipesky — Executive Vice President and Chief Financial Officer

Okay, Janet. I will take through the other. So AUR gains at Hollister, so AUR was down in Q1 at Hollister. And really getting back to that point around taking advantage of the cool weather and really pushing through some of that carryover inventory quicker than we expected to in our outlook. So that’s a good thing. We finished the quarter, inventories in a good place at Hollister, and Gilly got through a big chunk of that later arriving inventory.

As we think about freight, I’ll go to that one [Phonetic] next. We’re assuming it’s going to remain where it is for the rest of the year. I think a lot of us are optimistic that we’ll start to see a little bit of relief in the back half, but who knows, we’ve all been thinking that for the last couple of years. So, we’re just going to assume it stays where it is. The one benefit we will see on freight is that we will start to lap the heavy air usage that we were, call it, forced into with the Vietnam closures last year. So, that will be a tailwind as we get into Q4 and beyond as we saw a lot of that air freight hit in Q4 and then actually, a lot of that air freight from an accounting perspective hit us here in Q1 as you flow it through the inventory balance.

And the last piece is AUR pressure from the competitive set. What I would say is, we’re looking at it. It’s not something that drives our decision making. We have been promotional throughout this entire cycle and have still been able to take up our AURs on a double-digit basis. We will remain promotional going forward. That is part of the business that we’re in. It’s just being smarter with the promotions, reducing some depth, reducing some breadth and being able to tick up AUR to offset some of this inflationary pressure.

Fran Horowitz — Chief Executive Officer

So, I think, Scott, we’ve said it many times. We’ve said it many times, our AUR pressure are promotional and based on our consumer, right, our supply, our demand what we’re seeing with our customer and not really based on what’s happening with the competition, right? Staying close to our customer is what’s most important and keeping that inventory in line are the two real key pieces.

Janet Kloppenburg — JJK Research Associates — Analyst

Fran, if I could just sneak one more in. You talked about sort of late deliveries impacting the assortments at Hollister and you took care of that. You liquidated that product. Do you feel now that the assortments at Hollister are structured right that the architecture of that assortment is where you want it to be?

Fran Horowitz — Chief Executive Officer

Yeah. I mean the short answer to that is yes. We feel very comfortable with where we are heading into summer with where swim shorts and tees are and as well as I mentioned just a few minutes ago, but the dress business also, really pleased with that business as well. So yes.

Janet Kloppenburg — JJK Research Associates — Analyst

Great. Thanks so much. Talk to you guys later.

Operator

And next, we have Mauricio Serna with UBS.

Mauricio Serna — UBS — Analyst

Great. Good morning, and thanks for taking my questions. I wanted to ask if you could provide some details on how sales performed in stores versus digital and also, if you could talk maybe about how the quarter progressed from month-to-month?

And lastly, if you could just repeat that portion from your remarks at the beginning when you were talking about the two drivers for the AUC? I know you mentioned the freight, but I kind of missed the second part, so just want to make sure I get that part correctly. Thank you.

Scott Lipesky — Executive Vice President and Chief Financial Officer

Sure. Let’s start with the last question. So the two drivers for AUC, so we saw some incremental freight versus what we assumed coming into Q1, that hit us for about $15 million more than we thought. The other piece was accelerating the sell through as we just talked about the Hollister and Gilly Hicks late receipt. So, we pushed those through. Those fall goods come with a higher AUC than the spring goods that we’re selling, little heavier apparel, so that comes with a higher AUC. So that hit us from a margin rate perspective in Q1.

Backing up into the quarter on a monthly basis, I’d say, our trends were consistent with what we’ve heard in the market. February was a good month and then March was a tough month for a couple of reasons. We had the mini back-to-school here in the U.S. and kind of that reopening, and a lot of people going back to school in person last year and we also had the Easter shift out of March. So whenever you add that in, and it all came back there in April and then thinking, we’ve already talked about how we’re trending here in the beginning of May.

The last piece is performed — stores versus digital. Yes, stores have continued to claw their way back. We did see the benefit in Q1 of reopening in Europe and a lot of those stores getting back up to kind of full hours or at least were moving some of those restrictions and we continue to see the traffic here to stores in the U.S. continue to climb. So nice to see the balance coming back between digital and stores, and we continue to see kind of that 50-50 balance and we’ll continue to track to that.

Mauricio Serna — UBS — Analyst

Thank you. And if I could just in sneak one last one, just in EMEA. It seemed a sequential recovery was still like below the U.S. I was just wondering, from a market perspective, you talked about U.K. and Germany and France. I mean, how much do — roughly how much does each represent of your sales? And given with the reopening, I would have expected maybe a higher growth rate. So I just want to understand, like what could drag down the performance in EMEA?

Scott Lipesky — Executive Vice President and Chief Financial Officer

Sure. We haven’t provided the percent of sales for each, but those are the kind of the one, two, three biggest countries for us in EMEA. So good to see the U.K. perform well in Q1 and then Germany and France really turned on later. They had some pretty heavy restrictions. It’s really started to kind of pull off as we went throughout the quarter. Thinking about the results in total, the EMEA customer is dealing with even more inflation unlikely than the U.S. I mean because of what’s happening with the situation in Ukraine, there is pretty significant inflation that local consumer is seeing, whether it comes to heating bills or gasoline, it’s just multiples of things of what we’re paying here in the U.S.

So part of the reason for our outlook that we’ve set up like looking at that inflationary demand on the consumer is we’re seeing in the U.S. We’re all seeing that real time, but also in the EMEA region that is happening in a big way. So feel good about the big three countries. We are laser focused on these countries on the reopening and looking forward to them getting even closer to normalcy and kind of catching up here to the U.S.

Mauricio Serna — UBS — Analyst

Got it. Thank you very much, and good luck.

Operator

Our next question will come from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger — Morgan Stanley. — Analyst

Great. Thank you so much. I wanted to dig in a little bit more on freight cost, if I could. Scott, have you renegotiated contracts for this year and are you seeing any sort of relief in or still some inflation in those contract negotiations? And I just wanted to check if you are largely in contract for your freight needs, or are you also availing yourself of the spot market?

And then, you mentioned that you might experience some relief from the very high use of air freight as we get later in the year, particularly, I think to the fourth quarter. Assuming that does happen, would you expect to begin to see some benefits of lower freight — a lower airfreight usage in the fourth quarter gross margin? Or would we not see those benefits flow through the P&L until we get into the first half of 2023? Thanks so much.

Scott Lipesky — Executive Vice President and Chief Financial Officer

Okay. I’ll start with the freight cost. So, we are actually in the midst of finishing up some contracts. Our cycle is happening real time, so I’m not going to provide too much there. What we are trying to do is lock in more than we have in the past in contracted rates to try to avoid some of the fluctuations that we’ve seen in the spot market. We’ve added some new carriers, which is exciting. So, our goal is to have optionality and flexibility and hopefully, that will result in lower rates as we go forward, but this market remains pretty tough out there.

On the air freights, yes, we do expect to see some benefits flow through in Q4 and Q1 of next year. Now on the other side of that fence is the commodity costs. So when you think about what’s happening in the cotton markets, that’s starting to flow through the P&L. So, there’ll be a little bit of an offset to some of the savings we see there in air freights, with some of those commodity costs starting to flow through because it does take a pretty healthy time to have them lag through the P&L since you buy so forward into the future. So, that’s what we’re thinking about for air freight. We’re optimistic that we’re not going to see big disruptions like last year. And assuming that happens, we should see a really nice benefit from air freight in the back half.

Kimberly Greenberger — Morgan Stanley. — Analyst

Okay. Great. Thanks so much.

Operator

[Operator Instructions] Now moving to Marni Shapiro with Retail Tracker.

Marni Shapiro — The Retail Tracker — Analyst

Hey, guys. Just two quick ones. Can you maybe just talk a little bit about was the traffic — I guess, what were the traffic patterns like in the first quarter? Are you seeing a more traditional traffic pattern driven by weather or when you run a promotion in the store, she’s coming into buy for promotions specifically at Hollister as well? And then you’ve had some good results from this active business, and I’m curious if you could just talk a little bit about it, is it bringing a new customer into the store, is that helping to drive traffic to the site and to the store?

Scott Lipesky — Executive Vice President and Chief Financial Officer

Hey, Marni. I’ll start with the first one. So traffic patterns in Q1. So you are right, we’re starting to get back to more normalized traffic. Clustered around Easter in Q1, there were some spring breaks happening. So, I’d say it’s more normal. Last year was very abnormal with what we call our mini back-to-school. So, we are definitely getting closer to normalized traffic patterns and we’re expecting that as we go forward for the rest of the year.

Fran Horowitz — Chief Executive Officer

And regarding YPB, yeah, we’re very excited about the initial response to YPB, which was created by a request by our customers as I was talking about how close we are to our consumer. And it is actually bringing in new consumers, which is even more exciting about it, so driving traffic and bringing in new customers. So excited to see where that’s going. We’re busy chasing goods. We sold out of almost a quarter of the SKUs very quickly. So, we’ll talk about more of it at our Investor Day on June 14.

Marni Shapiro — The Retail Tracker — Analyst

Well, that’s exciting, nice highlights. And did you guys break out what percentage of sales are online versus in-store? I was looking for the number. I wasn’t sure if you broke that out.

Scott Lipesky — Executive Vice President and Chief Financial Officer

No, we have not. We’re going to — we’re not going to give that on a quarter-by-quarter basis as we start to normalize in, but we’ll keep you posted if there is any large swings.

Marni Shapiro — The Retail Tracker — Analyst

Fantastic. Thanks so much.

Scott Lipesky — Executive Vice President and Chief Financial Officer

Great.

Fran Horowitz — Chief Executive Officer

Thank you.

Operator

And ladies and gentlemen, that’s all the time we have for questions today. I will turn the call back over to Fran for any additional or closing remarks.

Fran Horowitz — Chief Executive Officer

Thank you for participating in our call today. I hope you all enjoy Memorial Day weekend. And I look forward to seeing many of you in New York City at our June 14th Investor Day.

Operator

[Operator Closing Remarks]