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Abercrombie & Fitch Co (ANF) Q1 2019 Earnings Call Transcript

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Abercrombie & Fitch Co (NYSE: ANF)
Q1 2019 Earnings Call
May 29, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone. Welcome to the Abercrombie & Fitch first quarter fiscal year 2019 earnings call. Today's conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Pam Quintiliano. Please go ahead.

Pamela Quintiliano -- Investor Relations

Thank you. Good morning and welcome to our first quarter 2019 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 Investor 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 mentioned 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 the 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

Thanks, Pam. Good morning everyone, and thank you for joining us today to discuss our first quarter results. Throughout the quarter, we remained focused on our core customer and executing against our strategic initiatives. This resulted in a solid start to the second full year of our growing while transforming phase. In the first quarter, we grew the topline; we posted our seventh consecutive quarter of positive comparable sales.

Abercrombie rebounded from Q4 with a return to positive comp, while Hollister achieved its 10th consecutive quarter of positive comp. We held those profit rates flat to last year. We had operating expense leverage, and we delivered 130 basis points of adjusted operating loss margin improvement and a net loss reduction.

We continue to make progress on our transformation initiatives that outlined in our April 2018 Investor Day, optimizing our global store network, enhancing our digital omni-channel capabilities, increasing the speed and efficiency throughout our concept-to-customer product life cycle, and improving our customer engagement through our loyalty programs and marketing optimization. Importantly, we remain on track across all four initiatives and following my discussion on Q1 results, I had exciting developments to share on global store network optimization.

So let's discuss our first quarter. The brands are becoming increasingly differentiated in their product, voice and experience. We continue to interpret product trends for each prospective target audience. What's increasingly clear though is that the customer demand's newness and we deliver that, they respond. At Hollister, we had a plus 2% comp on top of a plus 6% last year.

On the guy side, bottoms remained strong especially jeans and pants, while fleet, top, wovens and outerwear were also solid. Guys achieved several records, including its highest ever first quarter sales in jeans, pants, outerwear and sweaters. Girls also experienced strength at outerwear and bottoms with pants, shorts and skirts resonating. We had record first quarter sales in pants and outerwear as well as two of our must-grow categories, swim and Gilly Hicks.

Our Hollister marketing campaign served the key complement to our product and brand positioning. We just wrapped up our High School Nation Tour where we had active in-person dialogue with over 100,000 teens. On the digital side, Hollister had its five most engaged Instagram posts of all-time in the first quarter, including two from our swim collective. The collective had a total reach of approximately 22 million people and total campaign likes, comments and shares up approximately 300% from last year.

At Abercrombie, comps returned to positive territory. We posted a plus 1% comp on top of the plus 3% last year. The story here is about the progress we made in women's. Last quarter, Abercrombie comps were negative on the men's and and women's tops and dresses. The team quickly identified the opportunities and took advantage of our agile supply chain to update spring deliveries wherever possible. During the first quarter, we provided newness in tops and dresses. Both categories registered a significant trend change with dresses recording its highest first quarter sales ever. In addition to tops and dresses, women's bottom was another highlight. Jeans, shorts and skirts, all performed well, and pants posted its best first quarter sales number in Company history.

I'm excited about the direction of our women's business is heading. We are listening and responding to our customer and look forward to building on recent successes. I spent a lot of time talking about women. But men's had several highlights as well with strength in knits, joggers and outerwear. Our Abercrombie marketing team has been rolling out updated digital campaigns, which speak directly to our target mid-20's customer and their lifestyle. We've been highlighting our most fashion forward product, and we are seeing results with year-over-year growth in traffic. Our recent Fierce relaunch is a great example of our new integrated approach to marketing. The campaign has garnered over 300 million media impressions since its February introduction. While Fierce has always been popular, after the relaunch, it had its best comp in over five years with about half of recent identified purchases coming from customers that we believe are new to the brand, which is very exciting.

Shifting gears to our transformation initiatives. In the first quarter, we built on the progress we made in 2018 and hit the ground running for the second full year of our growing while transforming phase. Thus far, a critical part of our transformation has been optimization of our global store network, opportunistic closures, right-sizes, remodels and select openings. Well, I've said before. It is worth repeating. Stores matter. As increasingly omni-channel world, the customer continues to value the ability to shop across channels and remains focus on providing the brand appropriate experiences whenever, wherever and however they choose to engage with us.

Local store optimization is a key component of our ongoing operating margin expansion story and critical to achieving our previously stated fiscal 2020 goals. We ended fiscal 2018 with 861 stores across brands, of which 19 were considered flagship. We have and continue to be focused on reducing our lines on large format stores and transitioning to smaller more omni-channel spaces in the best locations that cater to both local and tourist customers.

In line with that strategy, earlier today, we announced our plans to close three additional flagships: Hollister, SoHo in the second quarter of fiscal '19; Milan, A&F by the end of fiscal '19; and Fukuoka, A&F in the back half of fiscal '20. When including the recent A&F Copenhagen closure this March and the Pedder Street, Hong Kong A&F closure in 2017, this will bring our total recent flagship closure count to five and takes it over 140,000 square feet of real estate that had below Company average productivity. By excluding the recent and announced closures, there are 50 global flagships. Looking ahead, we do expect additional closures through a combination of natural lease expiration, the exercise of pickup clauses and negotiations with our landlord. These actions as well as ongoing repositioning of our fleet keep us on track for our long-term 2020 targets.

I want to end the conversation of real estate with one final thought. But I'm extremely proud of the over $1 billion in digital sales that we achieved in fiscal 2018. We are a modern omni-channel retailer. In this age where it seems like every headline references a retail apocalypse, we continue to invest in our global store base. We have solid partnerships with our landlords and that's because we are one of the few retailers that remain committed to opening and remodeling stores. That has not changed.

We remain on track to provide approximately 85 new experiences for our customer this year and are committed to finding additional opportunities that align with our strategy. Beyond global store optimization, we also made progress on our remaining three transformation initiatives. Our teams are highly focused on building our digital and omni-channel capabilities, increasing our efficiency and speed to market through our concept-to-customer product life cycle, and improving our customer engagements through our loyalty programs and marketing optimization.

Digital grew to 30% of revenues compared to 27% last year with broad-based strength across the Hollister and combined Abercrombie brands. As we continue to evolve with our customer, we saw ongoing double-digit growth in our purchase online pickup in store. Within our efficiency and speed to market initiative, we continue to fine-tune our lead times and find ways to expand our chase capabilities. While that focus has been unwavering, we've added more tools to our arsenal with the recent roll-out of markdown and size optimization.

Lastly, on improving customer engagement, the growth of our loyalty programs has enabled us to have a customer identification rate of approximately 80%, more than double from where we first -- when we first introduced loyalty in Q1 '16. A critical next phase of our customer engagement initiative is to leverage this data to better personalize experience for each of our customers. And we recently launched key investments into systems and tools to help bring this to life.

Before I turn over to Scott, I want to give an update on a couple of current events in our industry. The first is the potential tariffs on China stores to apparel. Over the past several years, we have been proactively reducing our dependence on China. We have long-standing partners in the region, and they too have been shifting production out of China. These relationships provide us with flexibility, if we continue to maintain an active and open dialogue with our vendor partners. As a reminder, roughly 25% of merchandise receipts were sourced in China and imported to the US in fiscal 2018, and we plan to be below 20% this year.

In addition to the China tariffs, we are also closely monitoring the retail landscape. In the US, post Easter traffic trends of the malls have been challenging. In Europe, the macro situation remains in flux. And in Asia, we have a looming trade war. So where does that leave us? We have not been immune to the mall traffic trends since post Easter. We believe that the US consumer, which makes up the majority of our sales, remains healthy. Our traffic has tracked above the mall average, but we do not operate in a bubble. We anticipate a competitive environment, and we have plans in place to read and react as necessary throughout the summer selling season. Whatever the environment, I'm confident in our ability to execute and I'm excited about our summer assortments, which build on the newness and silhouettes, fabric and details that our customers responded so favorably to in the first quarter.

In conclusion, our hard work is paying off. This is evidenced by our first quarter results, which build on recent momentum and provide additional support for our growing while transforming phase. With the strong US consumer backdrop, Kristin Scott and her team providing differentiated products that is resonating across brands and effective relevant marketing campaigns, I'm excited about the future. Our flagship update is getting another series of important steps that keep us on track to achieve our fiscal 2020 operating margin target.

And with that, I'm going to turn the call over to Scott.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Thanks, Fran. I'll kick it off with the discussion of our first quarter results. From there, I'll touch on the impact of our flagship and lease accounting updates before ending with our outlook.

Turning for the first quarter. Net sales of $734 million were up slightly to last year. Results reflected a $16 million adverse impact from changes in foreign currency. Comps came in at a plus 1% on top of the plus 5% last year, marking our seventh consecutive quarter of positive comparable sales. Consistent with the last several quarters, positive cross-channel traffic was the key driver of our comp growth, but the customer continuing to respond well to our product into our compelling branded marketing campaigns.

At Hollister, we posted a plus 2% comp on top of a plus 6% last year, while Abercrombie returned to positive territory with a plus 1% comp on top of the plus 3% last year. By geography, we had comp sales of plus 4% in the US with both Hollister and Abercrombie contributing to results. International comps were negative 4%. Europe experienced sequential comp improvement from the fourth quarter, while Asia weakened. We attribute a portion of our Asia weakness to internal missteps, including product acceptance of key categories as well as not taking advantage of certain selling events in the region. We continue to have an opportunity to get closer to our Asian and European customers, and we look forward to building out our playbooks in these regions in fiscal 2019 and beyond.

Our gross profit rate of 60.5% was flat to last year as we clear through the majority of underperforming women's tops and dresses at Abercrombie. The year-over-year change reflects lower AUR, which was offset by reduced AUC.

I'll cover the rest of our results for the quarter on an adjusted non-GAAP basis. Adjusted operating expense, excluding other operating income, was $472 million, down 2% from last year, which was better than our expectations coming into the quarter and resulted in 160 basis points of leverage over last year. The decrease in operating expense compared to last year was primarily due to the impact from changes in foreign currency rates, decreased compensation expense and a reduction in depreciation on store and IT assets. This was partially offset by volume-related expenses from higher digital net sales. There were no excluded items in Q1 this year. As a reminder, in our Q -- in our first quarter 2018 results, approximately $6 million of pre-tax charges related to certain legal matters were excluded.

Other operating income was down $2 million compared to last year, contributing 30 basis points of deleverage. Our adjusted operating loss was $27 million compared to a loss of $37 last year and included a $2 million adverse impact from changes in foreign currency. Adjusted operating loss margin improved 130 basis points compared to last year.

The adjusted effective tax rate for the quarter was 34, which on a pre-tax loss was slightly better than our mid-20s guidance, reflecting benefits related to stock-based compensation awards exercised in the quarter and changes in certain valuation allowances. Adjusted net loss per diluted share was $0.29 compared to a loss of $0.56 last year and included the adverse impact from changes in foreign currency of approximately $0.02.

We ended the quarter with total inventories, up approximately 7% to last year. Of the increase, approximately 5 percentage points was driven by higher in-transit inventory and lower inventory reserves. We plan to end the second quarter with inventory up mid-single-digits, reflecting an increase in forecasted in-transit inventory flows due to updates to our August and September floorset strategy compared to last year.

Before turning to our outlook, I want to take a few minutes to go through some new items. I'll start with today's flagship news and the resulting impact on our P&L. As Fran mentioned, we have identified three flagship locations that will be closing over fiscal 2019 and 2020. We also closed our Copenhagen Abercrombie flagship this past March. As a reference, these four locations combined represented under 1% of our fiscal 2018 revenues. So the impact on topline going forward is minimal.

In the second quarter, we expect to take net lease-related charges of approximately $45 million due to the SoHo and Fukuoka closures. We expect to have more flagship closure announcements in the future. Each store situation is unique and therefore, the topline and expense commentary provided today should not be extrapolated to our other flagships. Given the delicate nature of exit negotiations, we are not prepared to discuss details of potential future closures at this time.

Next up is lease accounting. At the beginning of this fiscal year, we adopted a new lease accounting standard. We're using a modified retrospective transition method and have chosen not to restate prior periods. Upon adoption of the new lease standard on February 3rd, our total assets and total liabilities each increased by approximately $1.2 billion. These increases primarily reflect the recognition of right-of-use assets and liabilities.

In addition, we also recognized a cumulative adjustment decreasing the opening balance of retained earnings of approximately $75 million. The majority of this adjustment was related to an initial impairment of right-of-use assets for stores where the carrying value of assets was not recoverable.

I'll finish up with the outlook for the full year and the second quarter. Regarding fiscal 2019, we expect net sales growth of 2% to 4%, driven by comparable sales and net new store contribution, partially offset by an adverse impact of changes in foreign currency exchange rates. We now expect the adverse impact of FX to be $30 million, up from our prior expectations of $15 million; comparable sales to be up in the low-single-digit range; gross profit rate to be up slightly to the 2018 rate of 60.2% with higher average unit retail, net of adverse foreign currency impacts to be partially offset by higher average unit costs; operating expense, excluding other operating income, to be up 4% to 5% from fiscal 2018 adjusted non-GAAP operating expense versus our prior outlook for a 2% rise, this change reflects approximately $45 million or 220 basis points in net lease-related charges due to the SoHo and Fukuoka flagship closures; and finally a full year tax rate to be in the mid-20s versus our prior mid-to-upper 20s expectations. We are closely monitoring China trade talks and our outlook at this time assumes only current tariffs in place.

Regarding our second quarter, our outlook assumes net sales to be flat to up 2% from last year, reflecting a $10 million adverse impact from FX. Comp sales to be approximately flat. Gross profit rate to be down approximately 100 basis points from last year's 60.2% rate on expectations for continued FX pressure in a heightened promotional environment. Operating expense, excluding other operating income, to be up approximately 10% from 2018 adjusted operating expense of $498 million, including net lease-related charges of approximately $45 million. If not for the $45 million, we would have expected operating expense to be flat to up 1% and an effective tax rate in the mid-20s.

With that, let me turn the call back over to Fran.

Fran Horowitz -- Chief Executive Officer

Thank you, Scott. I'd like to thank our global team of associates for their contribution. In Q1, we continue to make progress toward our fiscal 2020 financial goals and this could not have been done without all of you. I'd also like to thank Joanne Crevoiserat. Joanne joined us about five years ago as a CFO and promoted to COO in early 2017. She has been a great partner as we stabilized the business and moved into our growing, while transforming phase. During her time here, she has built a strong team and I'm confident that we had a right talent in place to build on her important work. We wish her the best of luck on her future endeavors.

Pamela Quintiliano -- Investor Relations

Thanks, Fran. That concludes our prepared comments. We would now be happy to take your questions. (Operator Instructions) Thank you.

Questions and Answers:

Operator

(Operator Instructions). We'll take our first caller, Omar Saad from Evercore ISI. Please go ahead sir.

Omar Saad -- Evercore ISI -- Analyst

Hi, thanks for taking my question. I wanted to understand the higher OpEx plan in the closing of the flagship. Could you give us more detail around that? How many you're closing? What the decision process looks like? How big of a factor is that? Is that the key factor driving the higher SG&A line and the lack of margin upside from that side? Thanks.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Yeah, Omar. It's Scott. Yes, that is the key driver. The flagships, the $45 million charge that we talk about for Q2 is the driver of the change in the OpEx outlook for the full year. That added about 220 basis points to our -- up approximately 2%. So just putting us in that range of 4% to 5% that we laid out. We are closing three stores, and we've announced the closure of three stores. They'll close within the 2019 and 2020 period. This is a really nice step-forward for the Company. We've been on this path for a while now. And so, it's nice to come to you with some nice progress in this area, and we look forward to looking to reposition within some of these markets and really move to these smaller more intimate omni-channel spaces as we move forward. So we also mentioned that there will be additional closures coming in the future, and we look forward to bringing news in the future.

Omar Saad -- Evercore ISI -- Analyst

Have these flagships been net drags and should we expect a lift as you work through them on their P&L?

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Yeah. In total, flagship business -- the global flagship business is a drag on the topline and a drag on the bottom line. So, well, each one in itself is small -- in the future, over the many years, it's going to take us to get out of these things. They'll add up. We mentioned that the four that we're closing were less than 1% of our sales in 2018. So like I said, incremental improvement is what we're expecting over the years. There's not a silver bullet whenever it comes to these flagships by closing one or two or three that's going to save the day. But it's just going to be a methodical approach to get through these things over the years.

Omar Saad -- Evercore ISI -- Analyst

Thanks, Scott.

Operator

Next, we'll go to Paul Lejuez with Citi.

Paul Lejuez -- Citigroup -- Analyst

Hi. Thanks for taking my question. Just given the flat comp guidance in the second quarter and some commentary on the promotional environment. Could you just elaborate how much of that is driven by the competitive set and how much is that related to inventory levels coming out of the first quarter? Thank you.

Fran Horowitz -- Chief Executive Officer

So I'll take the first half of that question. So we're excited about our business for the first quarter. We comped the comp. We had our seventh consecutive quarter of positive comps for the Company, 10th for Hollister and exciting that we took Abercrombie from negative to positive from Q4 to Q1. The consumer voted on our assortments. We had some exciting record this quarter as well. We went from a best quarter in swim for Hollister growth to a best quarter in Hollister guys for outwear. So balanced assortments that our consumer is voting on. We believe that what we learned from this quarter will help us drive our business for the second quarter. With that said, we have seen a little bit of weakness as we headed into the quarter with mall traffic -- our mall traffic actually continued to trend above the total mall traffic. So we are still very competent in our assortments for the second quarter.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

From an inventory perspective, we're comfortable with the inventory coming in. The print looks a little high at plus 7%, but there's a couple big items driving that. So we have about 5 percentage points that are coming from in-transit and some lower reserves year-over-year. So we are comfortable with the inventory position. As Fran mentioned, we're acknowledging what's happening around us. It's been a slow start in the mall in the US in -- at the start of May. And so, our gross margin guidance for Q2 of down 100 basis points, it gives us that flexibility to be competitive, if the promotional environment heats up in the quarter.

Paul Lejuez -- Citigroup -- Analyst

Great. Thank you.

Operator

Next, we'll go to Kate Fitzsimons with RBC Capital Markets.

Kate Fitzsimons -- RBC Capital Markets -- Analyst

Yes. Hi, good morning. I guess just expanding -- excuse me, on the gross margin commentary, it sounds like you're still planning for AURs to be up into the back half to reach that slightly up gross margin guidance. Can you just speak what gives you the confidence there on that back half improvement?

And then, secondly, the international business was down 4% from down 2% last quarter? You called out some issues maybe in Asia, but can you just elaborate on some more regional commentary, that would be helpful as well. Thank you.

Fran Horowitz -- Chief Executive Officer

Okay. I'll take it off, Kate. So, our business is and always has been back-half weighted. Obviously, back to school and holiday are very important times for us. And from a product perspective, we are staying very close to our customer. We're learning every day, I think that's quite evident in the change we saw from Q4 to Q1 in our Abercrombie women's dress business, which went from negative to record setting in the quarter. So as we continue to focus on the consumer, continue to focus on the product that in conjunction with our marketing campaigns that continue to show that these integrated campaigns are resonating with our consumer, it really gives us the confidence as we head into the back half.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

I'll pick up the international side. So a little bit of a mixed bag here internationally. In Europe, we did see sequential improvement off of Q4. The Hollister trend was very consistent with Q4 and then, the ANF business, which is primarily a flagship business, picked up a little bit versus Q4, really tracking what happened in the US when we see that, that women's product turnaround within the quarter. We continue to focus on transitioning away from those flagships based on our announcement today as well as a couple of stores that we opened in Q4. And we continue to keep an eye on the macro environment in Europe. It is certainly dynamic and tracking Brexits and European elections and everything else that's happening through the key countries in Western Europe, so definitely keeping an eye there.

From an Asia perspective, we did see sequential weakness in Q4. We expected some of this quarter-over-quarter as the Chinese New Year shifted between the month of January and February. But we did have some self-inflicted issues here. We didn't maximize the Tmall event in February and as I mentioned that we saw some products acceptance issues in summer products. So that was really the key drivers that we saw in Asia. We're keeping our eyes there on the looming trade war. Everyone's keeping an eye on that. It's in the headlines every day. So again tracking that and how that's impacting our potential -- our future customer -- our current and future customer.

If we take a step back from the international business, we still feel that we have a great long-term opportunity here. We are underpenetrated in our key markets across Europe and in China. And so, we're continuing to what we call export our playbooks. We have a great team in place here in the US. That's digging into the customer. It's aligning that product, voice and experience of that customer. And we're building out those teams in Europe and in Asia. And we're optimistic that as we get those teams and those processes in place that we're going to be able to attack that growth long term.

Kate Fitzsimons -- RBC Capital Markets -- Analyst

Great. Best of luck for the second quarter.

Fran Horowitz -- Chief Executive Officer

Thank you.

Operator

We'll go next to Matthew Boss with JPMorgan. Great.

Steve Zaccone -- JPMorgan -- Analyst

Great, thanks. This is a Steve Zaccone for Matt today. Thanks for taking our question. Within the second quarter guidance, can you just elaborate a little bit more on comp expectations by brand -- as one brand seeing more softness than the other quarter-to-date and then as we look to the second half of the year, can you just speak to the drivers of expected comp improvement? Do you still see comps up low-single-digits for the full year?

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Yeah, I'll grab the first part. For Q2, we don't go into a brand basis. Our goal is to manage the total. I would say that we've all seen the traffic reports that have come out over the last three weeks and both of our brands exist primarily in malls, so neither brand would be immune to that traffic that's coming into the mall, but we're optimistic that as we get into the peak summer selling period that all the learnings we have from the spring season in the peak selling periods of Easter and spring break will translate into the summer and that's what's baked into our flat for Q2.

Fran Horowitz -- Chief Executive Officer

Hey, Steve. It's Fran. I'll get to the second half of that question. So, as we head into the back half, just to reiterate, we do expect continued sales growth. The Hollister momentum has continued. We're pleased with our results in the first quarter. Particularly our North America business is and continues to be strong. We have stabilized Abercrombie. We saw a nice shift from Q4 to Q1 by identifying the product opportunities. We believe, if we stay closer to the customer, we will continue to make sure that our products resonate. We talked a bit about our supply chain and the agility in our supply chain that was clearly demonstrated by the Q1 change in tops and dresses for our brands. And again we've also made some transformation initiative investments. We talked about that a little bit earlier today. So for example, marketing investments. We're working through personalization. We'll start to see that kick off in the back half. Markdown in size optimization also tools that we've embedded. So we have a lot of momentum heading into the back half of the year.

Steve Zaccone -- JPMorgan -- Analyst

Great. Thanks for that detail. Then just one question on the flagships. With the 15 flagships remaining, is there any way to contextualize how much these stores account for in terms of revenue or maybe how much they are an overall drag to the overall operating margin for the Company?

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Steve. We're not going to provide that detail at this point. I would say in total, they are a drag to comps and profitability. It's going to take us a while to get out of these things. We've been clear on that. And so, year-by-year we're looking to pick these things off one by one. And long term, we will have some of these flagships longer term because they're in the right place on the right shopping areas within the cities that we're in. But each store has its own story, and we're going to work through them month-after-month, year-after-year.

Steve Zaccone -- JPMorgan -- Analyst

Yeah, understood. Thanks very much.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Okay.

Operator

Next question comes from the line of Mark Altschwager with Baird.

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Hey, good morning. Thanks for taking my question. Exciting to see the return to positive comps at Abercrombie. Great to hear the return in women's. I'm wondering do you feel that you've hit a turning point there given the easier comparisons through the year, how confident are you that ANF can maintain positive comps from here?

Fran Horowitz -- Chief Executive Officer

Hey, Mark, it's Fran. The comps for both brands are built into our outlook. I'm pleased obviously and we have confidence in the assortments and what the team has been able to do in the short term. Kristin and her impact on the ANF team is clearly resonating. Our playbook is working. We talk a lot about product, voice and experience coming together. So as long as we stay on that path, it's all reflected in our outlook.

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Got it. And if I could quickly follow up on SG&A, I think the outlook is unchanged excluding the lease charges, but presumably there would be some benefit on the occupancy costs savings given the flagship closures. So, I'm wondering if you could discuss any other changes to your SG&A plans that are maybe offsetting lower occupancy costs. Any color on the marketing or distribution front, or just any changes there? Thank you.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

No change on the OpEx outlook for the year. We would pick up a little bit of occupancy on the SoHo store that will close at the end of Q2. The Milan closure is pretty much at year-end, so there's not a pickup there. And then, the Fukuoka closure is out in 2020. So it's really coming down to the SoHo where we pick up a little bit of OpEx and we lose a little bit at the topline. So, not a material impact to the OpEx for the back half.

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Great. Best of luck.

Operator

Now we'll go to Susan Anderson with B. Riley FBR.

Susan Anderson -- B. Riley FBR -- Analyst

Hi. Good morning. Thanks for taking my question. I was wondering if you could maybe just give some thoughts, you talked about, I think, still feeling confident about achieving the 2020 targets. Maybe if you could just kind of talk about the path from here to there, particularly I guess in terms of the EBIT margin from '17 levels and I think you had laid out $1.5 billion opportunity in Europe and China. I'm just curious if maybe that's changed at all given the macro events out there? Thanks.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

The path for 2020 hasn't changed and we've been pretty consistent since the 2018 Investor Day. It's about topline growth, some modest gross margin expansion and then OpEx leverage to get us there. 2018 was a good first step. We picked up 100 basis points of the 290 or so basis points that we need and that's really the path that we're on. Q1 was another step forward. We saw leverage. We saw expansion on the operating margin line at the bottom.

As we think about the path from here to the remaining 2020, we remain confident that we're on that track. It's about growing the topline, it's about leveraging the expenses and getting some gross margin in the middle. The transformation initiatives that we've talked about are so important to get us there. Each one of the four that we talk about each quarter are all about driving one of those levers to get us to that formula.

On the $1.5 billion opportunity in Europe and Asia, that's truly a longer-term aspiration. It wasn't baked in that we needed that $1.5 billion to get to our 2020 target. So while we expand our store count slowly in our digital business in the European and Asia markets, it's not the $1.5 billion that we need for 2020. But again, a very optimistic long term that we can further penetrate those markets.

Susan Anderson -- B. Riley FBR -- Analyst

Great. That's really helpful. And maybe if you could touch a little bit more on inventory. It sounds like the higher inventory is mainly just in-transit. I guess, are there any pockets of higher inventory globally though that you're seeing or is it really just the higher in-transit of it? Thanks.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Yes. It's really just those two pieces that we called out, remain comfortable with the inventory levels. The gross margin outlook that we have for Q2 is really about the competitive landscape and the FX and not an inventory-forced gross margin outlook.

Susan Anderson -- B. Riley FBR -- Analyst

Great. Thanks so much. Good luck next quarter.

Fran Horowitz -- Chief Executive Officer

Thanks.

Operator

We will next go to Janet Kloppenburg with JJK Research.

Janet Kloppenburg -- JJK Research -- Analyst

Good morning, everybody. Just a couple of questions, Fran. First of all, if you could give us a little bit more clarity on current transit. It sounds like from one of your prior answers that maybe Hollister is OK, but there's been a slowdown at ANF. And we've heard more about the weather being the culprit as opposed to the competitive environment. So maybe you could just talk a little bit about that and what's embedded in your guidance? In other words, do you think that as weather improves that the comp will get -- will improve as we go through the quarter? Just a little bit more clarity on this slowdown and the outlook for the gross margins to be more pressured than we had expected.

And also on the tariff outlook, if tariff -- higher tariffs do become a reality, then should we expect some adjustment on the current gross margin outlook? And just for Scott. On the $45 million real estate charge, I assume that it sounds like it's a GAAP charge? So do you want us to be modeling on a GAAP basis or a non-GAAP basis for the second quarter? Thank you.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

I'll grab the last part of that multi-part question first. The $45 million is a GAAP charge. I would say it's GAAP and non-GAAP. It's not going to be excluded from our results. So you should model that into the results for the year and the quarter.

Janet Kloppenburg -- JJK Research -- Analyst

So it's going to be in a non-GAAP P&L.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

That is correct. Yeah, because it's a lease-related cash charge, it will be on our results. It's very similar if you look back to 2016 for us the way we treated Pedder Street, so it's something that -- we'll continue to call out that it will be in our results.

Janet Kloppenburg -- JJK Research -- Analyst

Okay. Thank you.

Fran Horowitz -- Chief Executive Officer

So going back up to the top. We do not give specific brand trend. So I'm not sure you have heard Janet. What I can tell you is that again to reiterate, very pleased with our first quarter performance. Both brands were positive. Both brands comped to comp. I'm definitely pleased with the turn that we saw in ANF from negative to positive. The specificity on whether -- it's an interesting question everybody asks. We had two records in the first quarter. One was guys outerwear and the other was girls swimwear. It is very important for the team to keep balance in their assortments. Balance is the word I used them all the time. It's actually my favorite word and staying closer to customer and keeping those balance assortments give us the confidence in our outlook we've already expressed earlier today. I think there's one more question.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Yeah, on tariffs, nothing baked into our outlook. We're still dealing in the world of hypothetical here. We remain very engaged with our sourcing partners. We actually just had a vendor conference in Vietnam recently where we set out with 100 of our closest friends from a vendor perspective. And obviously, this was a topic of consideration and we have a playbook in place. If the hypothetical becomes reality, we continue to engage with those landlords or those vendors and we'll have more to say to then.

Janet Kloppenburg -- JJK Research -- Analyst

Thank you.

Operator

All right. We will next go to Dylan Carden with William Blair.

Dylan Carden -- William Blair & Co. -- Analyst

Thank you very much. Just curious if you could unpack some of the operational efficiencies and where we are that you've kind of built into the model here over the last couple of years, dynamic pricing, European merchandise team independence, collective bargaining on fulfillment, anything to add there as far as sort of how much more? And how quickly that sort of impacted the Abercrombie recovery and sort of the stability that lends to the overall model would be appreciated, lead times, things like that would be great.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

I'll kick it off with some of the more expense side of it. The path we've been on around store occupancy, I'd say the biggest call-outs, this is a multi-year journey. So we've been trying to grow sales and by taking out square -- while taking out square footage, we've been successful with that over the past couple of years. And that's really the path that we're going to stay on. We have a couple of tools in our toolbox here. One is store closures and that's the path we've been on. But another one is right-sizing of our store base, a great stat that we'd like to talk about internally is over the last couple of years, we've right-sized or downsized over 30 stores. And we've taken out over 30% of the square footage of those stores and held the topline. So these are just little nuances of productivity that are going to add up to our longer-term targets. And unfortunately, it takes us a while to get there, but it's a path we've been on and a path we're going to stay on.

Rolling out new prototypes is also something that helps our business. These are smaller stores, more efficient stores, more omni-channel-based stores and they've been more productive than our baseline store. So that's kind of the store occupancy in a nutshell. That's been a big structural change for us over the last couple of years.

Fran Horowitz -- Chief Executive Officer

On the lead times, Dylan. We have a very seasoned sourcing team and we have very strong relationships with our vendor community. In fact, we just held a vendor conference in Vietnam a few weeks ago talking about strategy and opportunities for us to go forward. We have taken out several weeks. And our concept-to-customer lead times over the past few years, we continue to stay focused on that. The teams hold opened by each week and they respond to the business. Just as one example, our fastest category today is cut and sew knits. We can turn knits domestically in four to six weeks in that particular category. But it does differ by category and by region. But we've made a lot of progress on lead times. We're excited about what's happening with our sourcing team.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

I'll just circle back. You did mention dynamic pricing in the Investor Day in 2018. We laid out that we have a big opportunity to be smarter with data and analytics and how we embed that into our business. The couple of tools that we talked about then were rolling out size and markdown optimization. It took us 2018 to get these programs in place. We've rolled them out at the start of Q2. So the models will continue to live and learn as we go through Q2 and Q3. So we expect some benefits as we get into the back half of '19, into '20. The other one that we talked about today was investing in some personalization tools. So this is the next phase of how we're going to leverage that data from a loyalty perspective to better personal -- personalized, sorry, the customer experience on more of a one-on-one basis. So these are key investments. They take a little bit of time. They take some organizational change. We are on track and those are going to be drivers of our topline we believe.

Dylan Carden -- William Blair & Co. -- Analyst

Sorry Scott, second quarter of '19 you rolled out the, sort of, data analytics tool or...

Scott Lipesky -- Senior Vice President & Chief Financial Officer

That is correct. Yeah, we were in implementation mode through 2018 and then we went live at the beginning of Q2 here with markdown and size optimization.

Dylan Carden -- William Blair & Co. -- Analyst

Thanks. And if I could just sneak a quick one and just trying to square the omni-channel, sort of, capabilities being added to the smaller Abercrombie footprint, how does that work and sort of what efficiencies are being built into sort of make those more omni-family?

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Within the store, so we -- for Abercrombie specifically, we've been shrinking this box from -- in the past, call it, 8,000 to 10,000 square feet into more of a 5,000 to 6,000 square feet. Within the store itself, we've put handheld devices in. We've updated the fitting room experience. We've put pop-ins, closets, so purchase online, pickup in store closets to make that a more efficient experience for the customer. We're still in the early innings of rolling out that omni-channel experience and that's a key focus of all of our brand teams and our store design teams to make sure that experience gets better and better as we go forward.

Operator

Your next question comes from the line of David Buckley with Bank of America.

David Buckley -- Bank of America -- Analyst

Hi, thanks for taking my question. I can share inventory positioning by brand and during the second quarter and then, any commentary on foreign tourism trends you're seeing? Thank you.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

From a brand perspective, we're comfortable across brands. We don't usually get that level of detail. On the tourism basis, we've talked about this for the last couple of quarters and it's been a consistent story. The US tourism has been soft. We expect it to remain soft based on where the currency levels are both within Europe and within South America. So we see this concentrated on the coasts mainly East Coast from Europe and then down into Florida from South America and Europe. So those trends have continued. In light of that, we continue to have a very strong US business with a plus 4% comp in Q1 on top of a plus 8% last year. So, in light of that tourism softness, we're driving a nice solid US business.

Operator

And next, we'll go to Tiffany Kanaga with Deutsche Bank.

Tiffany Kanaga -- Deutsche Bank -- Analyst

Hi. Thanks for taking the questions. You touched on it, but would you dig a little more into the drivers behind your second quarter expectation for gross margin down 100 bps breaking it down with some color around currency impact? Additionally, would you discuss what kind of currency impact is folded into your gross margin full-year plan, since we saw that 60 basis points depression in 2016, when there was also about $30 million in currency headwind considering the greater FX sales headwinds, but reiterated margin guidance. Perhaps you could also elaborate a bit more around what might have bolstered your confidence in second half offsetting benefits? Thanks.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Okay. I will try to unpack that. So FX, I'll start with the topline here. So for the year, we've taken it from a $15 million adverse impact of $30 million. From a margin perspective, that'll be a little bit of a hurt. We still see the majority of that coming in the front half. We had that in Q1, where it was about $16 million hurt on the topline and $10 million that were our outlook covers for Q2. So those are going to be a bit of a margin drag here in Q1 to Q2. For the back half, the currency year-over-year will be a little bit more stable. Those key European currency is where we have the majority of our business, weakened pretty significantly in the back half of last year, so we'll start to comp that. That's part of the reason why we have more confidence in the back half as we will lap some of that issue.

From our Q2 specifically, two ways to unpack that 100 basis point down gross margin outlook. We will have some of that FX hurt. I don't call that 20 basis points, 30 basis points. The remaining is giving us the ability to operate in a competitive environment. So while the -- we see the soft start here in the US, if inventory start to pile up across the industry, we expect people to get more promotional and more aggressive and we're going to be playing in that environment. So that's why we have the outlook of down 100 basis points for Q2.

Fran Horowitz -- Chief Executive Officer

But from a competent perspective, Tiffany, our consumer continues to react to newness. We saw a lot of newness in Q1. A great example of that is a category that I call one-and-done for the Tmall consumer, that's rompers and jumpsuits. We had a very strong response to that. We are able to react to things like that and get back into them as we head into the back half of the year.

Another opportunity is weight details and tie details. So our consumer is responding to fashion. She and he are responding to newness, with the agility of our supply chain that we just talked about a few minutes ago. We can respond to those in real time. And so, we continue to be focused on our assortment going forward in our consumer.

Operator

All right. And we'll take our last question from Marni Shapiro with Retail Tracker.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey, guys. Actually congratulations and what's been a very choppy environment. The stores do look really great. Two quick ones. Since we're in the public forum, would you guys give any insights around a pick up, if there was any around the Memorial Day weekend? And then Fran, if you could just talk about marketing expenses for the second quarter and particularly the back half of the year, you've had very high social media engagement. You have 30% direct to consumer; that's where your customers gravitating. So how should we think about your marketing spend to the back half of the year?

Fran Horowitz -- Chief Executive Officer

The first part of question on Memorial Day, you're right. We can't comment on inter-quarter. And what I can tell you though is that the first few weeks of May are the smallest part of the quarter for us. We are prepared to see the majority of our -- the quarter ahead of us and based on what we're seeing from our consumer response to key categories that gain importance in the second quarter. That's where we felt confident in our assortments.

I'll let Scott talked specifically about the expense piece of it, but yes, we have had a very strong social engagement with our consumer. We intend to continue on that, excited about the plans that the team has in place for some of our campaigns in the back half. Building on things like our Fierce campaign, which we just came off -- which was very successful to your point. So lots of excitement there. Let Scott speak to the specific numbers.

Scott Lipesky -- Senior Vice President & Chief Financial Officer

The marketing will be a key area of investment for the back half. In 2018, we took a nice step-up for the year in terms of our marketing investments. We will continue to build on that for this year. It'll be a slightly lesser rate with that nice step we took last year. Within the marketing spend though, one of our key transformation initiatives has been optimizing that spend. So our teams have done an amazing job, putting tools in place and putting processes in place to make sure that we're investing the dollars we are spending in the right channels. So what that has resulted in as you mentioned, some strong social media engagements because we're putting the money in the right place. So even within a flat environment from a marketing spend perspective, we would expect our performance to be better because our teams are getting smarter and putting the money in right place.

Marni Shapiro -- The Retail Tracker -- Analyst

Fantastic. Best of luck guys.

Fran Horowitz -- Chief Executive Officer

Thank you.

Operator

And it looks like there are no further questions at this time. So I'd like to turn the call back over to Fran for any additional or closing remarks.

Fran Horowitz -- Chief Executive Officer

Thank you. So we are pleased with our first quarter performance and the progress in our transformation initiatives. I look forward to updating you further as the year progresses. And thank you for your continued interest and support.

Duration: 50 minutes

Call participants:

Pamela Quintiliano -- Investor Relations

Fran Horowitz -- Chief Executive Officer

Scott Lipesky -- Senior Vice President & Chief Financial Officer

Omar Saad -- Evercore ISI -- Analyst

Paul Lejuez -- Citigroup -- Analyst

Kate Fitzsimons -- RBC Capital Markets -- Analyst

Steve Zaccone -- JPMorgan -- Analyst

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Dylan Carden -- William Blair & Co. -- Analyst

David Buckley -- Bank of America -- Analyst

Tiffany Kanaga -- Deutsche Bank -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

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