Abercrombie & Fitch Co

NYSE:ANF

Earnings Call Transcript 2021-Q3

[Operator]

Good day and welcome to the Abercrombie & Fitch Third Quarter Fiscal Year 2021 Earnings Call. Today's conference is being recorded. [Operator Instructions]

And now at this time, I would like to turn the conference over to Pam Quintiliano. Please go ahead, ma'am.

[Pam Quintiliano, Vice President, Investor Relations]

Thank you. Good morning and welcome to our third quarter 2021 earnings call. Joining me today are Fran Horowitz, Chief Executive Officer, and Scott Lipesky, 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 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, additional details, and a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier this morning. We will also be providing financial comparisons for the corresponding periods of fiscal 2020 and 2019 were applicable. And due to temporary COVID driven store closures last year, we will not be disclosing comparable sales.

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

[Fran Horowitz, Chief Executive Officer]

Thanks, Pam. Good morning and thank you for joining us today. I’m excited to share our third quarter results, which benefited from a strong back to school and discuss the fourth quarter which is off to a good start.

But first I'd like to begin with a thank you to our global team and partners. Together, we actively navigated factory closures and transportation delays, reduced our promotions and markdowns, manage expenses and made strategic investments across marketing, technology and fulfillment to drive our business forward.

Due to that hard work and our ongoing commitment to delivering against our key strategic pillars, including fleet optimization, digital and omni-channel enhancements, a faster concept of customer lifecycle and improved customer engagement. We delivered our best third quarter operating profit and margin in close to a decade.

Total sales rose 10% to last year and were up 5% to Q3 2019 and we achieved our highest Q3 sales since 2014 despite industry-wide supply chain constraints and removal of 1.1 million gross square feet from our store base last year. Our largest and most established market, the U.S. outperformed with sales up 17% on a 1-year and 12% on a 2-year basis.

It was wonderful to have more kids return to school and as social activities resume for our kid, teen and millennial customer. We executed well against the back-to-school and fall calendar, providing seasonally appropriate newness and outfitting options. With compelling interpretations of the latest fashion trends including water leg silhouettes, vegan leather and seamless bodysuits, all while maintaining the quality, fit and value that we have become known for.

Our customers were highly engaged as illustrated by our average basket size and lapsed customer rate of return, both of which improved in the double-digit percent range. In addition, we also acquired roughly 2 million new customers globally, all very positive signs regarding the health of our brands.

By channel, store sales rose 11% from last year and declined 20% from 2019. Digital, which for us, carries a significantly higher four-wall margin than stores grew 8% on a 1-year and 55% on a 2-year basis, representing 46% of total sales. Results speak to higher AUR across brands and channels on reduced markdowns and promotions and improved full price sell-throughs.

Q3 marked the sixth consecutive quarter of AUR improvement as our customers continue to adopt a buy it when you see it attitude. This represents a major shift in mindset that has been years in the making as we have evolved each brands conditioning, purpose, perception and execution. Looking ahead, we will build on our solid foundation and believe there's ongoing AUR opportunity at all of our brands.

Third quarter AUR improvements were offset by higher supply chain related costs. In spite those pressures, we grew our operating margin rate by 80 basis points on a 1-year basis and 640 basis points on a 2-year basis.

And while we don't talk about it often publicly, we could not have achieved these results without our corporate purpose of being there for you on the journey to being a becoming who you are, which serves as our North Star. It ensures our associates and partners feel comfortable sharing their thoughts and evolving with us and that we listen and speak to our customers authentically, providing inclusive options for all of their lifestyle needs. Part of that evolution was the recent hiring of a leader to drive our comprehensive ESG efforts forward. Simply put, purpose is woven into all that we do, including our critical pillars of product, voice and experience.

Starting with product, during this third quarter we had strong new wins that is hard to name just a few. Denim, which is one of our most important categories continue to be on fire, posting record breaking Q3 sales. We received a tremendous amount of positive media headlines and publications that have billions of impressions and thousands organic social media tags across the platform, all devoted to the fit, quality and comfort of our assortment.

Momentum built-in non-skinny and water leg styles including the mom, dad, straight and flare for women, while slim, straight and tapered gained popularity for guys as we continue to refresh his wardrobe. Importantly, promotions were once again down across brands with higher full price selling. In addition to denim, other top-performing categories included dresses, shorts, pants and knit tops and bottoms.

We are thrilled with the progress we've made with our products, which goes hand in hand with amplifying our voice and experience. Our marketing teams are leaders in a rapidly evolving digital space and are embracing new and emerging technology trends and engagement opportunities using voices and platforms that are authentic to each of our brands.

Across the company, we continue to lean into the power of social selling and refining strategies are tailor made for each of our brands and their target customer. This includes live shopping events on TikTok and Instagram, exclusive social product launches, in-app storefronts across platforms, augmented reality campaign for Snapchat and robust affiliate influencer program and our customer is responding.

Our unrelenting focus on digital is intertwined with providing the best omni-channel experience for our global customers by meeting them whenever, wherever and however they choose to interact with us. This focus is what inspired us to open our New West Coast DC and introduced same-day delivery.

It is all what drove one of our major internal initiatives to know them better and squall them everywhere, which is about transforming our ways of working to ensure that everything we do is data driven and aligns the moments that are most important to our customer and a world of endless ideas and rapid innovation.

Now, moving onto the brands. Hollister sales, which includes Gilly Hicks and Social Tourist rose 10% to last year and 1% to 2019. In the U.S., sales rose 17% on a 1-year and 7% on a 2-year basis. I am proud that Hollister global Q3 sales were the strongest since 2013 and that U.S. sales were the strongest since 2012, especially given that Hollister and Gilly saw an outsized impact on inventory receipts due to higher exposure to Vietnam production, importantly sales were healthy with nice AUR growth.

During the quarter, we continue to authentically speak to our Gen Z customer about the topics they care about the most, including our diverse backgrounds and identities, mental wellness and one of their most passionate -- biggest passions gaming. In September, Hollister formally announced the launch of the Hollister good deeper perspective, a long-term program dedicated to supporting rising Latinx creators from the fashion, music and comedy verticals of TikTok and Instagram and authentically amplifying their voices. This first of its kind collective is meaningful given Hollister's large Latinx customer base and is a testament to the fundamental shift in how we engage our customers.

The launch, which generated over 20 million PR impressions included the bilingual made for TikTok album produced by the collective music creators. The following month Hollister named Fortnite World Cup Champion, Bugha, its first chief gaming scout. The announcement made waves across the gaming new cycles garnering over 125 million PR impressions.

The partnership included a collection with Hollister's highly successful all day gameplay assortment featuring a match including and sweat pants that he co-created with the fans via social. The collaboration boosted sentiment across our social channels and saw strong sell-throughs.

Looking ahead, Bugha worked with Hollister to scout rising gamers for team Hollister, our new up incoming gamer program. We are looking forward to a charity live streaming during GivingTuesday with proceeds going back to the Hollister confidence project, an initiative dedicated to promoting confidence and mental wellness in teams worldwide.

At Gilly Hicks, our updated brand purpose of bringing our customer to their happy place is resonating. Our recently introduced men's products have been well received, which is exciting giving us a completely new and untapped customer for us.

At the same time, our existing customers continue to come to us for her must haves including Go Active, which grew to over 20% of sales. Response to our stand-alone in '23 updated side-by-side locations have been encouraging. We see runway to open additional stand-alone and side-by-sides globally and to refresh the Gilly Hicks experience that lived within Hollister as we embark on our next phase of growth.

In addition to Gilly Hicks, we've also please with results at our newest brand Social Tourist, which we view as another one of our growth vehicles. As a reminder, Social Tourist was launched in May. It's a multi-year exclusive apparel partnership with social media super stars Charli and Dixie D'Amelio.

In the third quarter, the D'Amelio series aired on Hulu. In this show Charli, Dixie and their family wore Social Tourists into their daily lives. The highly viewed series, which Hollister sponsored, drove meaningful social impressions and engagement, spikes in search demand and major PR buzz.

Hollister also partnered with Hulu on an ad by which drove roughly 90 million ad impressions. We've also continued to apply learnings in Social Tourists, particularly as it relates to TikTok and social selling to other areas of the company making us even smarter, faster and more creative.

Turning to Abercrombie, which includes kids, Q3 sales rose 12% compared to last year and 10% to 2019, representing our highest sales volume since 2015 and best gross margin since 2013. In the U.S., sales rose 19% on a 1-year and 18% on a 2-year basis. It has been absolutely amazing to experience a turnaround of this brand, which is in a remarkably different place than it was just a few short years ago.

At kids, we had a great back-to-school season. We combined insight driven marketing and paid media, entered the stress and guesswork out of shopping for parents by providing product that shine from both the fashion and a quality perspective.

We also found power and leveraging affiliate parents voices with its first ever many collection, spanning both the adult and kids brands that contain stylish, cool and A&F essentials for fall and was an immediate hit. At adults, we launched our highly successful denim your way campaign in early August. This was a combination of work that's first again in January when we put out a call on social media to catch our customers in the campaign.

After receiving thousands of submissions, which was 10 customers and brand fans to help drive fit and design decision and to be predominantly featured in our denim your way marketing. The campaign and the company assortment receiving glowing reviews as a perfect example of how we are listening to our customer to create product for their lifestyle needs.

Throughout the quarter, we also continue to leverage our relationship with TikTok, a highlight was our women's fall outfitting campaign, flashes of fall, which generated over 140 million impressions. In addition, our Abercrombie influencer team double down their efforts to maintain their leadership in the world at social selling.

Now looking to the fourth quarter. Our customer is responding well to our assortments, especially our cold weather offerings including cozy and outerwear, as well as occasion dressing and denim. We have seen some early holiday shopping and also a fair amount of self purchasing, as the weather has become more seasonal and our customer gears up for a turn to holiday activities and events.

With the delays in the supply chain, we expect to deliver newness leading up to the holiday peak, which will be a great learning around future flows and strategies. On the delays, I'm proud of our season supply chain team for helping us navigate these challenges. On top of our great products, I'm also excited about the social strategies we have in place.

Our stores and DCs are well staffed and ready to go and I'm confident that our store network and expanded suite of omni capabilities, including same day shipping, will enable our customers to do their shopping whenever, wherever and however they choose. We are ready to compete and win for holiday and I'm confident in our ability to deliver an operating margin between 9% and 10% this fiscal year, which will be our best annual operating margin since 2008.

Looking beyond holiday, we continue to see significant growth opportunities across our portfolio brands and we look forward to sharing more on our strategic vision of how we will scale our business at our next Investor Day, which we are planning for the first half of fiscal 2022. Stay tuned as we finalize the details.

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

[Scott Lipesky, Chief Financial Officer]

Thanks, Fran, and good morning. In the third quarter, we delivered strong results across brands and across the P&L. Our profitability continued to benefit from the transformative moves we made in our operating model and expense structure last year as the shift to digital accelerated.

For Q3, total net sales were $905 million, up 10% to last year and up 5% to pre-pandemic levels. While transportation delays increased during the quarter, our teams were able to maximize the inventory on hand to deliver sales above our expectations.

Store sales rose 11% on a 1-year basis and were down 20% on a 2-year basis. At the same time, total digital sales increased 8% compared to last year and grew 55% from 2019, representing 46% of total sales this quarter compared to 31% in 2019.

By brand, net sales increased 10% for Hollister, which includes Gilly Hicks and Social Tourist and 12% for Abercrombie, which includes Kids. As compared to Q3 2019, net sales increased 1% for Hollister and 10% for Abercrombie.

By region, we continue to see strong results in the U.S. with net sales up 17% and 12% on a 1 and 2-year basis, respectively. Despite having roughly 140 fewer stores and over 20% less square footage in our U.S. store base as compared to Q3 2019. In the U.S., Hollister was up 17% to 2020 and up 7% to 2019, while Abercrombie was up 19% and 18%, respectively. Outside of the U.S., we continue to see a slower recovery with EMEA down 6% to last year and 7% to Q3 2019.

Our business was strongest in our largest European market, the U.K., where we experienced sequential sales improvements. The U.K customer has responded well to product and has embraced our latest A&F location on Regent Street, which opened in September and is a fraction of the size and cost of our recently closed flagship. This was offset by continued COVID driven restrictions and impacts across key Western European countries, including two of our largest markets, Germany and France.

In APAC, sales were down 12% to last year and down 32% to 2019 as we face traffic headwinds due to ongoing COVID cases inside China and Hong Kong and slow vaccination progress in Japan. Additionally, we believe the China was impacted further by overall geopolitical climate. We continue to view international as a long-term growth opportunity and are encouraged by the customer response to regional marketing and product distortions in both the EMEA and APAC markets.

Moving on to gross profit. Our rate of 63.7% was down 30 basis points to last year and up 360 basis points to 2019. The result exceeded our expectations and included approximately 300 basis points of impacts from higher freight costs and air utilization, which was at the low end of our 300 to 400 basis point expectation. We continue to see AUR growth across brands compared to 2020 and 2019 on reduced promotions and markdowns, while maintaining initial tickets. We ended the quarter with inventory approximately flat to last year.

Inventory on hand was lower than plans coming out of Q3 and was offset by higher in-transit due to the extended Vietnam closures and increasing transit times. Related to Vietnam, all factories are open and operating. We are using air to catch up on these receipts and are encouraged by recent improvements moving product through the U.S. ports.

I'll cover the rest of our Q3 results on an adjusted non-GAAP basis. Excluded from our non-GAAP results are approximately $6.7 million and $6.3 million of pre-tax asset impairment charges for this year and last year respectively.

Operating expense excluding other operating income was up 8% compared to last year and up 1% to 2019, coming in at the low end of our expectation of up low-single digits. As we saw better-than-expected store and distribution expense and shifted a portion of our marketing spend to Q4 to better align with inventory flows.

In Q3, we saw an increase in store and distribution expense of 2% compared to 2020 and a reduction of 7% compared to 2019. Compared to 2019, store occupancy was down approximately $43 million related to square footage reductions and renegotiated leases. These savings were partially offset by increased shipping and fulfillment expenses on higher digital sales.

Marketing, general and administrative expenses rose 21% from last year and 28% to Q3 2019, primarily driven by increased marketing investments. As Fran mentioned, we continue to drive strong customer engagements across our brands and we expect to continue reinvesting a portion of our occupancy savings into digital media in Q4.

We delivered operating income of $79 million compared to operating income of $65 million last year and $27 million in 2019. This is our best third quarter operating income and operating margin since 2012. The effective tax rate was approximately 25%.

Net income per diluted share on an adjusted non-GAAP basis was $0.86 compared to $0.76 last year. As we continue to benefit from the evolved operating model and the resulting higher profitability level, we are in a strong position to both invest in the business and return excess cash to shareholders.

We ended the quarter with cash and cash equivalents of $866 million and funded debt of $308 million. During the quarter, we repurchased approximately 2.7 million shares for $100 million, bringing year-to-date total share repurchases to about 6.1 million shares and $235 million.

Recently, our Board of Directors approved a new share repurchase authorization of $500 million, replacing the February 2021 share repurchase program. In the fourth quarter, we expect to repurchase at least $100 million worth of shares pending market conditions and share price. We continue to expect fiscal 2021 CapEx to be approximately $100 million, with about half of that related to digital and technology and the other half related to real estate and maintenance items.

During the quarter, we opened 5 new stores, bringing the total to 23 for the year-to-date period and closed 3 stores for a total of 23 year-to-date. For the full year, we expect the store count to remain roughly flat to last year, pending ongoing negotiations with landlords.

I'll finish up with our thoughts on Q4, which we are planning as follows using 2019 as our comparison period: net sales to be up 3% to 5% from 2019 level of approximately $1.185 billion. We expect the U.S. to continue to outperform EMEA and APAC.

On inventory, we are optimizing AURs on current inventory and our distribution center teams are quickly replenishing as inventory flows in. While the inventory receipt pattern will be different than the past, we have and we will continue to work diligently to minimize the impact on sales for the quarter.

Gross profit rate to be around flat to the 2019 level of 58.2%, including an expected negative impact of approximately $75 million of freight cost pressure due to rising ocean and air rates as well as higher air deliveries necessary to catch up on the Vietnam factory closures. Based on early customer response to holiday, we are optimistic in our ability to continue to reduce markdowns and promotions to drive AUR improvements to offset this headwind.

Operating expense excluding other operating income to be up low to mid single digits to 2019 adjusted non-GAAP level of $565 million. We expect to continue to see lower store expenses, partially offset by higher fulfillment costs. Similar to Q3, we plan to increase marketing spend compared to 2019 as we look to maximize holiday sales and build momentum heading into 2022. Finally, we expect the tax rate in the low 20s. Assuming we deliver against these expectations, we expect the full-year operating margin to be in the 9% to 10% range, our highest since 2008.

In closing, we are excited to have delivered another quarter of profitable growth in Q3 and are laser focused on executing our strategies for holiday and beyond. We will provide additional detail on our 2022 assumptions in our year-end earnings call.

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

[Operator]

[Operator Instructions] We will take our first question from Paul Lejuez with Citigroup.

[Paul Lejuez, Citigroup]

Hey, thanks guys. Curious within that gross margin guidance for the fourth quarter, what are your AUR assumptions and how does that compare to AURs in the third quarter and maybe if you can also kind of run through the freight pressure that you're expecting in 4Q versus 3Q? Thanks.

[Scott Lipesky, Chief Financial Officer]

Sure, Paul. I will grab that one. So, yes, the gross margin for Q4, we will see a little bit accelerated pressure versus what we saw in Q3. Number one, it's just a larger quarter, so we have more units flowing through and we will also see more of that Vietnam reopening pressure where we are putting a lot of that product on air to get it here by the holiday peak. So in the outlook for Q4, we are calling it flat to 2019. Q3 was up about 360 basis points to 2019. And getting back to the AUR question, we believe that we can get the AUR on lower markdowns and promotions to offset that $75 million headwind in Q4. Products has resonated well coming into the quarter from October and we are seeing that here in the November time period. So feel confident that we can offset that headwind here in Q4.

[Paul Lejuez, Citigroup]

Got it. Thanks, Scott. And I think you mentioned the shift in marketing. Can you just maybe run through kind of what shifted out of 3Q and into 4Q?

[Scott Lipesky, Chief Financial Officer]

Yes, as we learned more about the inventory flows in Q3, we made a decision to move some of that marketing into Q4. So, we shifted a small chunk of our marketing out of Q3 into Q4 to better align with those flows. So, as Fran mentioned, we are loving what our teams are doing on social and we're going to continue to fuel those efforts. We love the response that we are getting in each of our brands. We called out Abercrombie and we will see some great things on Snap and TikTok this week. So we're going to continue to fuel those efforts. That should help us here in Q4, but it's also going to give us a nice set up heading into 2022.

[Fran Horowitz, Chief Executive Officer]

Yes, I mean, important things, just to add one last thing there, Paul, as we are seeing a different flow of our inventory this quarter, which is kind of exciting and lots of things to learn from it. That marketing will help -- noticed by the customer that we are going to surprise and delight them all the way from Black Friday through Christmas with new deliveries and fresh new product.

[Paul Lejuez, Citigroup]

Great. Thank you, guys. Good luck.

[Fran Horowitz, Chief Executive Officer]

Thank you.

[Operator]

Next we will go to Jay Sole with UBS.

[Jay Sole, UBS]

Great. Thank you so much. I’m just wondering if you can give us an update on denim, you mentioned some -- denim was really strong, you mentioned some styles that were non-skinny denim that really we're working. But I mean, where do you think we are in this denim resurgence? I mean is there sort of like the peak of it? I mean, do you think you can last another quarter to last another year or two? How do you think about it?

[Fran Horowitz, Chief Executive Officer]

Jay, I would love to talk about denim. It is on fire. We just reported our highest denim quarter in history, which is across all brands and genders, I mean, it's super exciting. There are so many things happening in denim, it's hard even pin them down, but between -- to your point between the wider legs, the lighter washes, he is adopting them, she is adopting them. This kind of a trend in denim has legs, no pun intended, but it is going to last quite some time. I mean, if you look at what happened with the skinny jean that trend went on for a decade and we are just at the beginning of this trend. We’ve been seeing such positive response to consumer and he and she both need newness in their wardrobe. So we expect it to continue for quite some time.

[Jay Sole, UBS]

Got it. Okay. If I can just ask one more about the buyback. With the authorization that's out there, where the stock price is, I mean, do you feel like now is a good time with the margins have really bounced back so far. It's a good time to buy back a stock or do you feel may be a little bit cautious ahead of next year with tough comparison lapping stimulus and all that then maybe it's better to hold on to that cash return?

[Scott Lipesky, Chief Financial Officer]

Yes, Jay. We have fundamentally changed this business, started back with COVID last year in the middle of the year and the expense we were able to take out of the business and then the store occupancy that we removed in the back half. So our goal has been for years to reset the profitability of this company and we have done that. So, we are bullish on the stock as you can imagine on the company. So, we have repurchased about $235 million so far this year. We expect to continue that here in Q4. And as we mentioned, our Board put a new authorization for $500 million out there. We're in a great position to have the balance sheet to be able to do it. With higher profitability levels, we're generating more cash and we continue to put that cash to work in the business and for shareholders.

[Jay Sole, UBS]

Got it. Thanks so much.

[Operator]

All right. Next we will go to Susan Anderson with B. Riley.

[Susan Anderson, B. Riley]

Hi, good morning. Nice job on the quarter. I was wondering if maybe you could talk about your thoughts on your longer-term EBIT margin goals as much as you can. I know you're doing your Analyst Day next year, but just wondering how much of the margin gains seen this year is sustainable longer term and is there a still more opportunity to drive that EBIT margin over the next couple of years?

[Scott Lipesky, Chief Financial Officer]

Sure, Susan. I will kick this one off and then Fran can chime in. But our goal back in 2017 with the take our 2017 margin of 3% and double that to 6%, we are going to about triple that and more this year if we deliver on our Q4 outlook. So, it feels good here at Abercrombie to be talking about operating margins in the 9% to 10% range and we are not going to talk too much about the long-term, but we believe that a lot of these gains are sustainable. But getting back to what I just mentioned, it's about this fundamental shift in our operating model.

This acceleration of digital has been good. We have done a great job cleaning up our store fleet, a lot of those stores that were too big, whether it's a chain store in a mall or a store in a flagship. So pulling down that occupancy has given us better profitability and also the ability to invest in marketing efforts as we become more of a digital business. So, we like where the business is set up from a expense perspective and we believe that these gains are sustainable.

[Fran Horowitz, Chief Executive Officer]

Yes, Susan, the one thing I would add to that is the sustainability is driven by the transformation of this company and this company is a very different company than it was just a few years ago and the fact that our brands are firing in all cylinders and that their brands are just resonating, getting that product voice and experience right, really is proof point to delivery that we're going to do for third quarter and the future that Scott just discussed.

[Susan Anderson, B. Riley]

Great. Thanks for the details. And then if I could add one follow-up. Just curious what you're expecting out of the international business for fourth quarter? Are you expecting similar trends as we saw in the third quarter? It sounds like U.K. things are resonating there, it seems opened up by now parts of -- other parts of Europe we are starting to see that shut down and then Asia obviously still having some issues? Thanks.

[Scott Lipesky, Chief Financial Officer]

Yes. You nailed it. We do expect the trends to continue heading into fourth quarter. We expect the strong performance in the U.S. to continue. First three quarters of the year, we had double-digit growth off of 2019 in the U.S. and that's with less -- 140 less stores than we had in 2019, so great progress there. And the U.K. is our strongest country, which is good because it's our largest country outside of the U.S. and I would say the environment in the U.K. has been most similar to what’s happening here in the U.S. So, we are excited to see some of those other countries in Western Europe open up. We -- you saw Austria in the news recently, we have a handful of stores in Austria. So those stores will be closed for about 20 days here, but in the meantime, as we are looking at that European and APAC business, we're going to continue to leverage that strength in the U.S.

[Fran Horowitz, Chief Executive Officer]

And we believe in the long-term growth of both the APAC and the EMEA regions. In fact, we just recently opened up a new store on Regent Street for Abercrombie, which we are already seeing nice response to and that store is very much the prototypes of our go forward. It's a smaller location, much less expensive build out and yet the customer experience is really resonating. So we're excited about the opportunities in both EMEA and APAC.

[Susan Anderson, B. Riley]

Great. That’s good to hear. Good luck this holiday.

[Fran Horowitz, Chief Executive Officer]

Thank you.

[Operator]

Next question comes from Dana Telsey with Telsey Advisory Group.

[Dana Telsey, Telsey Advisory Group]

Good morning, everyone. As you think about the occupancy expense leverage from the reset where are you in that? How do you see that progressing through 2022? And are there any stores that you thought you would close that maybe whether sales pick up or more favorable lease negotiations is helping you keep that? Thank you.

[Scott Lipesky, Chief Financial Officer]

Hi, Dana. We made great progress last year. We got through a significant amount of those oversized Abercrombie's within the mall, as well as a big chunk of those flagships. Looking at this year, we're going to be around flat on store count. A lot of that progress was made last year that will be around flat this year and when we do expect as we go into next year and beyond will likely be net store openers. But the good thing is we're going to continue to reposition our fleet globally, whether it's the U.S. or international and make sure that we're getting rid of some of those larger size stores and replacing those with smaller stores, more of those omni-channel stores that we've been talking about. So as we do that, even as net openers of stores, our goal is to keep our square footage relatively flat or just increasing slightly in the years to come to keep that occupancy where it is today.

[Dana Telsey, Telsey Advisory Group]

Thank you. And just one quick follow-up on price. Where are you in terms of raising prices? Is it across categories? How much is it and how do you see the promotional environment, how you're planning it for 2022? Thanks.

[Fran Horowitz, Chief Executive Officer]

So, I’m very proud, Dana, to tell you that we actually have not raised our prices this year nor do we plan to for the fourth quarter. What we've been able to do is really reduce our promotions and what we referenced as you know discounted ticket has been, we've made considerable progress in that. We have been working on that for a long time to see six consecutive quarters of AUR growth, is really a testament to all that work and how it's coming together. I think the second part of your question was Q4 2022?

[Dana Telsey, Telsey Advisory Group]

How you see 2022? Yes.

[Fran Horowitz, Chief Executive Officer]

2022, we will discuss in our fourth quarter call. Obviously, we are looking at things like inflation and the opportunities that are out there. We haven't made any commitments to that yet. So we will get back to you on the fourth quarter call for that one.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Operator]

All right. [Operator Instructions] We will next go to Janet Kloppenburg with JJK Research Associates.

[Janet Kloppenburg, JJK Research Associates, Inc.]

Good morning, everyone, and congrats on a good quarter. Scott, I got a little late. I think you said that it was $75 million in freight pressure in the fourth quarter. Did you say was that compared to versus the third quarter? And I was wondering if you -- I know your guidance was flat gross margin on a 2-year basis. I was wondering if you expected AUR trends to continue to improve the 3Qs rate or if you thought that maybe that would moderate because of that being a holiday and promotions perhaps picking up? And as you look into next year, I was wondering how you felt in the first quarter and the second quarter about freight headwinds? Some of the companies I'm talking to think that there will be higher -- that they will be higher than the fourth quarter sequentially, others like Urban last night felt that there would be some relief. If you could help there, it would be great. Thanks.

[Scott Lipesky, Chief Financial Officer]

Okay. Nice to hear from you, Janet. All right. Let's start with the first question. The freight pressure in Q3 was around 300 basis points. So if you do the math there, call it $25 million, $75 million you did catch that in Q4. So as you said, we expect to be flat on gross margin for the Q4 period. So, yes, we assume that the AUR trends that we've seen throughout the first few quarters of the year here will continue into Q4, so that we can absorb that margin pressure here in Q4. Not a lot to say about 2022. There's still a lot to figure out here in Q4 as we finalize some of the air as we get to the inventory in from Vietnam. So, we will see how much flows through here in Q4 and then we'll talk about the spring period. I do see -- I forget which companies you've mentioned, but I do think that freight will moderate at some point. I think we've seen some of the ocean rates coming down more recently in some of the indices that we look at. So more to come, lot of variables and lot of moving parts here heading into the spring.

[Janet Kloppenburg, JJK Research Associates, Inc.]

Okay. And just one for Fran, if that's okay. It looks like this marketing investment is really paying off, Fran, and I'm wondering if you feel like you're at a level now that's appropriate or if you think continued investments would be -- give you a nice return like we've been seeing?

[Fran Horowitz, Chief Executive Officer]

Janet, you're absolutely spot on. We are just thrilled with the results of our marketing. I think you remember when I first got here, we barely had a marketing department and now we are industry-leading in both Abercrombie and Hollister, and the results and the innovation that we continue to see is just incredibly exciting. As we continue to see returns, we will continue to invest. Stay tuned for today. We are going to have a TikTok takeover. It's the most important social media platform that’s out there and we're going to own it for the most important week of the year. So, we are thrilled with what the teams have been doing and we will continue to monitor the investment relative to return.

[Janet Kloppenburg, JJK Research Associates, Inc.]

Great. Happy Thanksgiving.

[Fran Horowitz, Chief Executive Officer]

Thank you, you too.

[Operator]

Next we will go to Mark Altschwager with Baird.

[Sarah Goldberg, Robert W. Baird]

Hi, good morning. This is Sarah Goldberg on for Mark. Thanks for taking our question. I wanted to ask further on the recently launched same-day delivery across the U.S. stores. What have been the early learnings there? And then how should we think about that longer-term impact of digital sales and margins versus other digital options such as buy online, pickup in store ship from the start?

[Fran Horowitz, Chief Executive Officer]

So, look, Sarah, we are a leading omni-channel retailer and the most important thing that we do is listen to our customer and they told us that same-day delivery was a very important option for them. Just like last year when they told us that curbside was important for them. So, we are continuing to evolve all of our optionality for our consumer. We’ve seen week-over-week gains in same-day delivery and a really nice early response to it.

[Scott Lipesky, Chief Financial Officer]

And the impact on margins longer term, this specific offering will not have a material impact on those margins really like Fran just mentioned. It's just another option for our consumer to engage with us. If they need something quick, they have that option. So really excited about that rollout this year.

[Sarah Goldberg, Robert W. Baird]

Great. Thanks for the clarity.

[Operator]

It looks like we have one more question. We will take that from Marni Shapiro with Retail Tracker.

[Marni Shapiro, The Retail Tracker]

Hey, guys, congratulations. Two questions, first one is very important. When does the TikTok takeover start because you know I’m going to be on?

[Fran Horowitz, Chief Executive Officer]

It starts today for both brands.

[Marni Shapiro, The Retail Tracker]

Excellent. And then could you talk a little bit about -- you've done some really interesting things on product drops very aligned to this generation, yet you've had to deal with all of these product delays. Just -- were any of the drops or new products and marketing that were supposed to hit for the fourth quarter, will they not hit in the fourth quarter were you -- are you able to repurpose some of this stuff into the first quarter? Were there product cancellations? Can you just talk a little bit about like I guess what kind of business you may have left on the table because of the product delays in Vietnam?

[Fran Horowitz, Chief Executive Officer]

It's exciting, Marni, is that the team can pivot honestly on a moment and that’s the beauty of having obviously a digitally driven business. So, we do not believe -- we have not had any specific delays on special product drops. I’m possibly referring to one of the most exciting ones that we did for Q3, which was Bugha.

[Marni Shapiro, The Retail Tracker]

Yes.

[Fran Horowitz, Chief Executive Officer]

Partnering with the Fortnite World Champ and having a product that's sold out within just very, very shortened period of time was super exciting. But to the point being, we've not had to delay any of the jobs because of these deliveries to channel this.

[Marni Shapiro, The Retail Tracker]

That's fantastic. And then just one follow-up. Are you seeing both at Abercrombie, specifically, lapsed shoppers and new shoppers come back to the brand?

[Fran Horowitz, Chief Executive Officer]

Yes, we are. So, it's very exciting. I am sure -- I know you're on social media all the time, but hearing all the customers talk and all the social chatter about how excited Abercrombie being back and all of the positive response that the brand has been just incredibly exciting.

[Marni Shapiro, The Retail Tracker]

Yes. It's been a very warm welcome. Best of luck for the holidays you guys.

[Fran Horowitz, Chief Executive Officer]

Thanks. I appreciate it, Marni.

[Operator]

And that's all the time we have for questions today. So I'd like to turn the call back over to Fran for any additional or closing remarks.

[Fran Horowitz, Chief Executive Officer]

I just want to thank everybody for joining us today. I hope you all have a great holiday season and we look forward to catching up in the New Year.

[Operator]

And that does conclude today’s conference. We thank everyone again for their participation.