Alex Straton

Alex Straton asked if the current 60/40 performance-to-lifestyle product mix is optimal long-term, noting any geographical differences. She also sought clarification on why fatigue is observed in casual wear despite Lululemon's later entry into that category compared to its longer-dated performance franchises.

Answer

CEO Calvin McDonald affirmed the 60/40 split as a good benchmark, emphasizing continued innovation in performance activities like run, yoga, train, golf, and tennis globally. He explained that casual wear fatigue, particularly in lounge and social core franchises, stems from consumers seeking newness rather than updated seasonal colors, unlike the continuous innovation in performance apparel.

Asked about the current level of newness in the assortment, what other drivers are being explored if newness isn't lifting Americas comps, and if a positive comp in the Americas is possible this year.

Answer

Newness percentages are back to historical levels, and the company is increasing the mix of completely new silhouettes that guests are responding well to. The full-year revenue guidance for the Americas remains low to mid-single-digit growth, and while not guiding to comps specifically, the company feels positioned to capitalize on any improvement in the consumer environment.

Alexandra Straton of Morgan Stanley asked for clarification on the guidance for 'modest' U.S. revenue growth in 2025, inquiring about the specific definition, expected cadence throughout the year, and the rationale behind this forecast.

Answer

CEO Calvin McDonald noted that while guests are responding well to new products, a dynamic macro environment has led to a more cautious consumer and slower industry-wide traffic. CFO Meghan Frank specified that North America is expected to grow in the low-to-mid-single-digit range for the year, with the U.S. at the lower end of that range. She added that Q1 trends are not materially different from Q4.

Alexandra Straton asked for clarification on the 'modest U.S. revenue growth' guidance for 2025, seeking a specific definition and the expected cadence throughout the year.

Answer

CEO Calvin McDonald noted that while guests are responding well to new products, a cautious consumer is impacting industry-wide traffic. CFO Meghan Frank quantified the guidance, stating North America is expected to grow in the low- to mid-single-digit range, with the U.S. at the lower end of that. She added that Q1 trends are not materially different from Q4 and face a difficult comparison to the prior year's growth.

Alexandra Straton asked about the stabilization of U.S. sales, questioning if the third quarter represented a bottom for the region and what the outlook is for future improvement and long-term growth.

Answer

CEO Calvin McDonald stated that Q3 U.S. performance was in line with expectations and that newness is sequentially strengthening into Q4. He expressed confidence in future U.S. growth, citing strong guest retention, low unaided brand awareness (36%), and the opportunity to increase revenue per guest by returning to historical levels of product newness by Q1 2025. He affirmed that the company's 'Power of Three x2' growth targets for North America remain unchanged.

Asked for clarification on the revised full-year guidance, particularly the timing and reasons for the reduction, and the attribution of the Q2 revenue miss between internal issues and macro factors.

Answer

The second-half guidance aligns with Q2 trends, with Q4 adjusted for a shorter holiday season and macro uncertainty. The overall outlook was lowered, but the Q3/Q4 relationship is unchanged. The revenue shortcoming was attributed primarily to controllable, internal factors, specifically a lack of newness in the U.S. women's business, which impacted conversion despite positive traffic.

Alexandra Straton questioned if the revised full-year guidance reduction was primarily concentrated in the fourth quarter and asked management to weigh the Q2 revenue shortfall between internal missteps versus macroeconomic pressures.

Answer

CFO Meghan Frank clarified that while the overall second-half outlook was lowered, the relative performance expectation between Q3 and Q4 remains unchanged, with Q4 adjusted for a shorter holiday season and the U.S. election. CEO Calvin McDonald attributed the revenue miss primarily to controllable, internal factors, specifically a lack of product newness in the U.S. women's category that hurt conversion rates despite strong store and site traffic.

Alexandra Straton questioned the revised full-year guidance, asking if the reduction was concentrated in Q4 and seeking clarity on the drivers of the revenue shortfall, specifically between internal missteps and macro pressures.

Answer

CFO Meghan Frank clarified that the second-half guidance reflects Q2 trends, with Q4 adjusted for a shorter holiday season and macro uncertainty, but the relative outlook between Q3 and Q4 is unchanged. CEO Calvin McDonald attributed the revenue miss primarily to controllable, internal factors, namely a lack of product newness in the U.S. women's assortment which impacted conversion despite strong traffic.

Alex Straton asked about the drivers of SG&A improvement, both in the second quarter and for the back half of the year, and sought more details on the sequential acceleration observed in Bloomingdale's comparable sales.

Answer

Tom Edwards, COO and CFO, attributed SG&A savings to benefits from store closures, ongoing end-to-end initiatives, and continuous cost containment efforts, with larger reductions expected in Q4 due to timing. Tony Spring, Chairman and CEO, explained Bloomingdale's accelerating momentum through a strong strategy, leadership, new brand additions, digital growth, successful collaborations, and expansion of Bloomies small-format stores and outlet locations.

Alexandra Straton of Morgan Stanley inquired about the 'Reimagine 125' store group, asking about the path to achieving positive comps and whether more stores would be added to this cohort this year. She also asked for the drivers behind the widened SG&A guidance range for the full year.

Answer

Chairman & CEO Tony Spring expressed continued confidence in the 'Reimagine 125' locations, noting their outperformance versus the rest of the fleet and improving trends from February to May. He stated that while he feels good about the initiatives, he couldn't comment on when they would turn positive. COO & CFO Adrian Mitchell explained that the widened SG&A range provides flexibility to navigate various uncertain scenarios in the coming quarters, while reiterating the expectation for SG&A dollars to be down low single digits for the year.

Alexandra Straton of Morgan Stanley asked why the digital channel was a pressure point in Q3 and how that might change, and also inquired about the top strategic priorities for 2025 that differ from the current year.

Answer

COO & CFO Adrian Mitchell explained that the digital business has been a multi-year challenge, but recent investments in SEO, category pages, and site stability are now showing traction with improvements in conversion and traffic. CEO Antony Spring outlined that 2025 will be a year of 'scaling' rather than 'testing,' with key headwinds like the delivery expense issue and cost accounting conversion behind them. He also highlighted the opportunity to expand new brands and the 'First 50' initiative.

Alexandra Straton asked about the strategic approach for the fourth quarter holiday season, considering the election and a compressed shopping period. She also questioned the drivers behind the expected back-half comp acceleration against a more difficult comparison.

Answer

CEO Tony Spring expressed confidence in the holiday assortment, highlighting more newness, exclusive partnerships, and a broader range of gift ideas beyond just cold-weather items. COO and CFO Adrian Mitchell explained that the back-half improvement is expected from the ongoing execution of the 'Bold New Chapter' strategy. This includes in-store and digital changes, an adjusted media mix, a sharper value focus, better in-stocks, and faster delivery, all contributing to sequential top-line improvement.

Alexandra Straton of Morgan Stanley asked about the path for the 'Reimagine 125' group of stores to achieve positive comparable sales and whether more stores would be added to this initiative. She also inquired about the drivers behind the widened SG&A guidance range.

Answer

Chairman & CEO Tony Spring stated that while the 'Reimagine 125' stores are not immune to macro pressures, their performance trend is improving month-over-month and they continue to outperform the rest of the fleet. COO & CFO Adrian Mitchell explained the wider SG&A range provides flexibility to navigate uncertainty, while reiterating the plan for SG&A dollars to be down low-single-digits for the year.

Alex Straton questioned whether the company still aims for mid-to-high single-digit growth and a 20% EBIT margin over time, and asked about the building blocks for each target.

Answer

CEO Daniel Heaf affirmed the company is anchored to achieving mid-to-high single-digit growth by enhancing digital platforms to attract new customers and expanding distribution channels. Regarding the 20% EBIT margin, he stated the principle is unchanged, but the immediate focus is on reallocating capital to key growth drivers without diluting margins in the near term.

Alex Straton asked CFO Eva Boratto about the appropriate long-term growth rates for the Home Fragrance and Body Care categories and requested details on the plan for the upcoming semi-annual sale.

Answer

CFO Eva Boratto stated that the semi-annual sale will start later this year to better feature Father's Day and align with broader market timing, supported by amplified marketing. For category growth, she expects Body Care to grow with the market over time, implying a rate better than low-single-digits. She noted that Home Fragrance is growing and gaining modest share despite pressures in the overall candle market, and highlighted that gifting was a strong performer, up double-digits.

Alexandra Straton of Morgan Stanley inquired about the evolution of the average customer age due to younger customer acquisition and asked what the 2025 sales guidance assumes for volume versus AUR.

Answer

CEO Gina Boswell noted that while the average age isn't a key metric, the brand is increasingly seen as more youthful, driven by product lines like Everyday Luxuries and Lip, and targeted social media outreach. CFO Eva Boratto clarified that the sales guidance is expected to be volume-led, as they are not assuming a step-up in promotional activity.

Alexandra Straton asked if the company is achieving its desired back-half growth when adjusted for calendar shifts, what is preventing a return to mid-to-high single-digit growth, and about the margin profile of new adjacency categories.

Answer

CFO Eva Boratto confirmed that when normalized for calendar shifts, the company is driving growth consistent with its Q3 performance. She noted that adjacency margins are factored into the overall outlook and typically improve with scale. CEO Gina Boswell added that adjacencies grew above the company average in the quarter, and importantly, the core business also drove sequential improvement, indicating both are contributing to growth.

Alexandra Straton from Morgan Stanley asked for details on the sales cadence during the second quarter, the primary reasons for the performance shortfall, and the basis for management's confidence in an improving trend for the third quarter.

Answer

CFO Eva Boratto explained that a cautious consumer and traffic pressures persisted throughout Q2, with the Semi-Annual Sale (SAS) underperformance being a significant factor; excluding SAS, net sales were down only 1%. She noted that traffic improved late in the quarter and into early Q3, supported by recent launches like Everyday Luxuries and the Stranger Things collaboration, providing confidence for the upcoming quarter.

Alex Straton of Morgan Stanley asked for more color on the improvements made to in-store standards and the shopping experience. She also requested further detail on the inventory shortage favorability seen in Q2 and how that dynamic might evolve in the second half of the year.

Answer

CEO Michael O'Sullivan described the improvements in store standards as 'extraordinary,' citing all-time high customer service scores and improved operational metrics driven by strong leadership and new processes. CFO Kristin Wolff noted that while the external environment for theft remains challenging, a Q2 physical inventory showed better-than-planned shortage results. She stated the company remains focused on its mitigation investments and will conduct another physical inventory in Q4.

Alex Straton of Morgan Stanley requested details on Q1 comparable sales performance by geographic region and by merchandise category, as well as the impact of weather.

Answer

EVP & CFO Kristin Wolfe reported that the Southeast region outperformed the chain, while the Midwest trailed, likely due to unfavorable weather in February that negatively impacted the Northeast and Midwest. She noted that performance across merchandise categories was broad-based, with the only specific call-out being that the beauty business was the strongest performer during the quarter.

Alexandra Straton asked for a breakdown of the 15% year-over-year increase in total inventory, given that comparable store inventory was down. She also requested an update on the number of store leases Burlington has acquired through recent retail bankruptcy proceedings.

Answer

EVP & CFO Kristin Wolfe explained the 15% inventory increase was driven by the addition of 101 net new stores and a strategic increase in reserve inventory, which rose to 46% of total inventory from 39% the prior year. She noted that comp store inventory was down 3%, reflecting faster turns. CEO Michael O'Sullivan added that in addition to the 64 Bed Bath & Beyond leases acquired in 2023, Burlington secured another 39 store locations late last year from other bankrupt retailers, which are included in the 2025 new store opening plan.

Alexandra Straton asked which 'Burlington 2.0' initiatives are most exciting and how they will impact financials. She also requested color on the comp trend breakdown between regular-priced and clearance selling during the quarter.

Answer

CEO Michael O'Sullivan highlighted two key initiatives: a new in-season trending process for merchants and new machine-learning-based store allocation algorithms to customize assortments. CFO Kristin Wolfe stated that regular-priced selling was very strong, with a 3% comp increase in Q3, 200 basis points above the overall trend. She noted this validates their inventory control strategy but cautioned that Q4 clearance levels would be more similar to last year, providing less margin benefit.

Alexandra Straton inquired about Burlington's strategy for attracting younger shoppers and asked for clarification on what had changed in the back-half earnings outlook compared to three months prior.

Answer

CEO Michael O'Sullivan stated that Burlington has always over-indexed with younger shoppers and families, a core demographic they serve with a strong mix of relevant categories like Juniors and kids. CFO Kristin Wolfe clarified that the only material change to the back-half guidance from the prior quarter was the inclusion of a new $0.10 EPS headwind from higher ocean freight costs.

Alex Straton of Morgan Stanley asked for a breakdown of first-quarter comparable sales performance by geographic region and the impact of weather. She followed up with a question about comp performance by merchandise category.

Answer

EVP & CFO Kristin Wolfe detailed the regional performance, noting that the Southeast outperformed the chain while the Midwest trailed, which was likely due to unfavorable weather in that region. She confirmed weather was a significant negative factor in February but normalized in March and April. Regarding categories, Wolfe stated that performance was broad-based, with the only specific call-out being that the beauty business was the best-performing category during the quarter.

Alex Straton from Morgan Stanley inquired about the competitive impact of the end of the de minimis exemption and whether URBN utilizes it. She also asked if the gap between total sales growth and comp sales would narrow in the second half of the year and the reasons for it.

Answer

Frank Conforti, Co-President & COO, stated that the de minimis exemption has an immaterial impact on URBN's business. He explained that the narrowing spread between total sales and comp growth is primarily due to the wholesale segment anniversarying strong prior-year gains. CEO & Chairman Richard Hayne added that the change could competitively benefit the Urban Outfitters brand.

Alexandra Straton asked why the full-year gross margin guidance was maintained despite the Q1 outperformance and which product categories have the most potential for selective price increases to mitigate tariff impacts.

Answer

Co-President and COO Francis Conforti stated that price increases are a last resort and would be applied 'gently and sparingly,' primarily on items with more embellishment, while protecting opening price points. Regarding guidance, he explained that maintaining the full-year forecast is a conservative approach given broader economic uncertainty, as the Q1 beat was largely driven by top-line outperformance that they hope, but are not yet planning for, will continue at the same pace.

Alexandra Straton asked for the key drivers behind the guided 50 to 100 basis points of gross margin expansion and questioned the difference in profitability between Anthropologie and Free People, as well as their future potential.

Answer

Co-President and COO Francis Conforti explained that gross margin expansion is expected to be driven primarily by lower markdowns at Urban Outfitters, along with leverage in occupancy and delivery expenses. He noted there is no significant difference in the healthy mid-teens operating margins of Anthropologie and Free People, and their future profit contribution will be driven more by top-line growth than further margin expansion.

Alexandra Straton asked for clarification on the higher discounting activity and the slightly decelerating sales trend guided for the Free People brand.

Answer

Executive Sheila Harrington explained that the brand remains strong at regular price and is comping against a 'fantastic' margin year, necessitating quick action on fashion learnings. CEO Richard Hayne added that despite a slight increase, Free People's markdown rate remains the lowest of all URBN brands and was compared against an unsustainably low rate from the previous year.

Alexandra Straton asked about potential plans to reduce the fixed cost base or store footprint at Urban Outfitters due to sales deleverage, and whether the anticipated Q3 markdowns are concentrated at one brand or spread across the portfolio.

Answer

Francis Conforti, Co-President and COO, confirmed the higher markdown plan for Q3 is a precautionary measure across all brands due to the recent sales slowdown. CEO Richard Hayne addressed the UO footprint, noting that over 50% of North American leases are up for renewal in the next three years, and decisions to renew, downsize, or close will be made on a case-by-case basis, favoring smaller, profitable formats.

Alex Straton from Morgan Stanley questioned the strategy behind expanding the physical store footprint for the digitally-strong Abercrombie & Fitch brand and asked for targets on store count by year-end and over the long term.

Answer

SVP & CFO Robert Ball explained that stores are an 'essential part of our brand experience,' delivering high productivity and serving as a key customer acquisition channel in their omnichannel strategy. He stated that for 2025, the company plans a net increase of 40 stores, with approximately 37 of the 60 new openings slated for the A&F brand.

Alexandra Straton asked about any bright spots or outperforming categories within the Abercrombie brand, given the weakness in the wedding shop. She also requested a more detailed breakdown of the drivers behind the full-year EPS reduction beyond the stated tariff impact.

Answer

CEO Fran Horowitz identified several bright spots in the A&F brand, including activewear, strong bottoms, and swim, emphasizing the team's ability to react to these trends. CFO Robert Ball detailed the EPS reduction, attributing the majority to the net $50 million tariff impact (100 basis points on margin). The remainder, he explained, comes from the flow-through of the Q2 operating margin outlook, which is pressured by remaining carryover inventory, and a slightly higher tax rate.

Alexandra Straton followed up on the comment that the Abercrombie brand was 'a bit negative,' asking for more context, and requested a breakdown of the drivers behind the guided Q1 EBIT margin compression.

Answer

CEO Fran Horowitz-Bonadies clarified that Abercrombie's start to the year was a 'more normalized' spring transition compared to a 'flawless' one last year, and they are seeing positive signs in spring categories. CFO Robert Ball reiterated that the Q1 operating margin pressure is driven by three factors: higher freight costs, gross margin pressure from selling through seasonal carryover inventory, and deleverage from increased marketing investments.

Alexandra Straton from Morgan Stanley questioned why Abercrombie & Fitch is experiencing freight cost headwinds while many peers are reporting tailwinds. She also asked for details on the 9% inventory increase, its composition, and the outlook for inventory levels.

Answer

CFO & COO Scott Lipesky explained that freight has become a headwind due to well-documented spikes in both ocean and air rates, which is factored into the company's outlook. Regarding inventory, he stated the company feels great about the position, noting the 9% increase is driven by higher freight costs and a mix shift towards higher-cost Abercrombie products, while unit levels remain tightly controlled in a 'read and react' mode.

Alexandra Straton asked about any 'bright spots' or categories within the Abercrombie brand that were outperforming the banner's overall results. She also requested a more detailed walkthrough of the full-year EPS reduction beyond the stated impact of tariffs.

Answer

CEO Fran Horowitz identified activewear, bottoms, and swim as bright spots within Abercrombie. SVP & CFO Robert Ball broke down the EPS reduction, attributing it primarily to the ~$50 million net impact from tariffs (100 basis points on margin), with the remainder driven by the flow-through of a slightly lower Q2 operating margin outlook and a higher tax rate.

Alex Straton of Morgan Stanley questioned whether the higher branded mix is a permanent margin headwind or if it could eventually enhance profitability, and asked about the potential for the business to return to low-teens operating margins over time.

Answer

COO Michael Hartshorn reiterated the company's view that while the branded strategy was an initial margin headwind, they believe they can build on it over time. He cited sharpening merchant expertise, building better vendor relationships, and gaining access to more branded closeouts as key factors that will eventually improve profitability.

Alexandra Straton requested an update on the branded content strategy, including its current merchandise mix, its impact on margins, and the performance of the women's apparel category.

Answer

Executive James Conroy reported that the company is hitting its branded strategy targets and has now fully anniversaried the associated margin headwinds. He was encouraged by the performance of the Ladies' apparel business, which was in line with and slightly better than the total chain average for the quarter, suggesting the strategy is yielding positive results in that key category.

Alexandra Straton from Morgan Stanley inquired about the current status of the branded merchandise strategy, its mix, and whether it remains a margin drag. She also asked specifically about the performance of the women's apparel category.

Answer

Executive James Conroy stated that the company has successfully repositioned its assortment with the branded strategy and has now fully anniversaried the margin impact, so it is no longer a headwind. He was encouraged that the Ladies' business performed in line with, and slightly better than, the chain average for the quarter.

Alex Straton asked about the guidance assumptions for freight costs and for more detail on the investments in 'supply chain and merchant processes' within the CapEx plan.

Answer

Group President and COO Michael Hartshorn expects domestic freight to be a headwind, while ocean freight is being monitored. EVP and CFO Adam Orvos clarified the CapEx increase to $855 million is mainly for supply chain, including a new distribution facility. Hartshorn added that merchant process investments involve new buying tools and enterprise-wide data analytics.

Alexandra Straton sought to confirm if the Q4 guidance was largely unchanged aside from a packaway timing shift and asked about the company's confidence in the embedded comp acceleration for the quarter.

Answer

Group President & COO Michael Hartshorn confirmed the only notable change to the Q4 outlook was the packaway-related expense shift. He expressed confidence in achieving the 2% to 3% comp guidance, citing the lapping of Q3's negative weather impact, the strength of important holiday categories, and well-planned gift-giving assortments.

Alexandra Straton asked for more specific examples of the expense and cost-saving initiatives and whether they were primarily benefiting Cost of Goods Sold (COGS) or SG&A.

Answer

Group President and COO Michael Hartshorn provided several examples impacting both COGS and SG&A, including DC automation (automated vehicles, robots), in-store self-checkout pilots, new handheld devices for inventory management, and flexible scheduling. CFO Adam Orvos added that domestic freight was a key area of efficiency, with favorable contracted rates and some help from fuel costs contributing to the improved outlook.

Alex Straton asked for more detail on category performance at Marmaxx, specifically the health of apparel versus home, and questioned why the implied Q4 gross margin guidance suggests more degradation compared to Q3.

Answer

CEO Ernie Herrman stated that both apparel and home categories were healthy at Marmaxx, and he believes the company is gaining market share in apparel. CFO John Klinger explained the Q3-to-Q4 margin variance is due to two main factors: inventory cap favorability is highest in Q3, and the timing of the shrink accrual provides a benefit in Q3 but reverses to a headwind in Q4.

Alexandra Straton of Morgan Stanley focused on HomeGoods, asking about its margin trajectory for the year and whether its historical low-teens margin is achievable. She also asked how TJX is managing home and toy categories, which are heavily sourced from China, given the tariff situation.

Answer

CEO Ernie Herrman expressed positivity about continued margin improvement at HomeGoods, supported by strong sales. CFO John Klinger added that top-line sales are a key lever for margin improvement. Regarding sourcing, Herrman explained that for most home products, they deal with third-party vendors who negotiate with factories, and he isn't concerned about availability. For toys, he acknowledged it's trickier but believes their strong vendor relationships will ensure they get their share of available goods.

Alexandra Straton inquired about the drivers behind HomeGoods' significant profitability improvement and the strategic thinking behind the recent series of international expansion announcements.

Answer

CEO Ernie Herrman explained that the international expansions are possible now because the company has the experienced talent available to lead these initiatives without risking core business execution. CFO John Klinger attributed HomeGoods' 200 basis point margin improvement primarily to lapping the costs of closing homegoods.com, along with other expense efficiencies and freight favorability.

Alex Straton sought clarification on the sales guidance reduction, asking if core business expectations had changed, and requested a big-picture update on the transformation plan, including areas of strong progress and any unexpected pain points.

Answer

CFO Annie Mitchell confirmed the revised guidance reflects two factors: the structural impact of incremental store closures and a more conservative view of the uncertain macro environment. She reiterated confidence that new initiatives will drive year-over-year sales growth in Q4. CEO Joe Vernachio stated he was 'delighted' with the transformation's progress, noting they are at a pivotal moment and even slightly ahead of schedule with the website relaunch. He highlighted that new products are already driving sales and said he could not identify any significant pain points, as all initiatives were on or ahead of plan.

The analyst inquired about the company's conviction in its back-half revenue growth forecast, especially in light of new tariffs, and asked for details on the holiday season inventory planning and order placement timeline.

Answer

Joe Vernachio expressed strong conviction in the back-half plan, stating it's been over a year in the making and is executing well. He highlighted that over 50% of the product from July onward will be new, which has historically driven consumer response. He acknowledged macro uncertainty but emphasized the team's experience and the strength of their plan. For the holiday season, he confirmed that purchasing is mostly complete, with minor trims to some purchase orders (e.g., reducing colorways), but the core product expression remains intact. He believes the company's clear proposition will resonate with consumers, allowing them to achieve their growth targets.

Alex Straton of Morgan Stanley asked about the company's view on a normalized, medium-term growth rate and for the drivers behind the expected decline in SG&A growth in the second half of the year compared to the first half.

Answer

EVP & CFO Harmit Singh stated that the executive team is focused on delivering consistent mid-single-digit growth to reach its $10 billion revenue goal over time. Regarding SG&A, he explained that the company has already leveraged SG&A year-to-date and expects the full-year rate to be around 50%. The key focus is ensuring gross profit dollar growth significantly outpaces SG&A dollar increases, leading to EBIT margin expansion.

Alex Straton from Morgan Stanley asked if there is any structural reason the business should not return to double-digit operating margins after the current transition period and what may have changed in the long-term margin profile.

Answer

CFO Matt Friend affirmed that returning to a double-digit margin is a worthy goal, consistent with Nike's history. He explained that the 'WinNow' actions are designed to reposition Nike as a full-price brand, and the long-term goal is to achieve operating leverage through sustainable growth and disciplined expense management. CEO Elliot Hill added that leadership is ambitious about returning to double-digit operating margins over time.

Alexandra Straton asked for key learnings from re-engaging the wholesale channel and whether historical wholesale margins are still achievable given current discount headwinds.

Answer

CEO Elliott Hill's biggest learning was that the direct and wholesale channels had become too siloed, and the focus is now on creating an integrated marketplace with closer partnerships. CFO Matt Friend clarified that they are not structurally lowering margins; rather, they are returning wholesale discount rates to historical levels to ensure mutual profitability and enable investment in retail presentation, which he called 'ultimately what wins'.

Alexandra Straton asked about Elliott Hill's key learnings upon re-engaging with the wholesale channel and whether historical wholesale margins are still achievable or have become structurally lower.

Answer

President and CEO Elliott Hill identified a key learning was that NIKE had been operating its direct and wholesale channels in silos and is now moving to a more integrated marketplace approach. He also noted a need to get back 'in rhythm' with wholesale partners. CFO Matt Friend clarified that while the wholesale profit pool has been volatile, NIKE is restoring commercial terms and discount rates to historical levels, not structurally lowering them, to ensure mutual profitability and enable investment in retail presentation.

Alexandra Straton asked for the primary reasons behind the unexpected unit sales disappointment in the quarter and which key metrics NIKE is tracking to measure the progress of its business comeback.

Answer

EVP & CFO Matthew Friend attributed the unit miss to underperformance in Greater China and broad macro softness. He noted the 20% decline in NIKE Digital was largely driven by a planned, nearly 50% reduction in three classic franchises to rebalance the portfolio. For tracking the comeback, he pointed to encouraging signs like double-digit growth in new products and positive momentum in the Running category.

Alex Straton from Morgan Stanley asked for an update on the progress of the brand's evolution since the new CEO started and requested a quantitative breakdown of the first quarter's gross margin decline.

Answer

CEO Hillary Super highlighted significant progress in PINK apparel and the Beauty division, noting they are now working to inject more 'joyful expression' into the core Victoria's Secret brand. CFO Scott Sekella detailed that the 170 basis point gross margin decline was primarily driven by higher inbound freight costs, tariff-related raw material write-offs, and increased GWP activity, which he expects to moderate in the back half of the year.

Alexandra Straton asked for the rationale behind the intense focus on the PINK brand over others and requested details on the primary category pain points at both Victoria's Secret and PINK, along with the 2025 improvement plans.

Answer

CEO Hillary Super clarified the focus reflects the different stages of each brand, not a preference. She sees an enormous, faster-to-capture opportunity in PINK apparel, which requires a brand repositioning. For Victoria's Secret, which is further along its path, the focus is on supercharging lifestyle categories and refining brand voice. She identified lifestyle categories (sport, swim, apparel) as current growth drivers, while the key challenge in bras is ensuring new launches lift the entire category.

Alexandra Straton asked for the key drivers behind the standout momentum in the digital business and whether the recent overall business momentum is being driven by new or existing customers.

Answer

CFO Tim Johnson attributed digital success to strong product, technology investments improving conversion and basket size, and more efficient media buying. Regarding customers, he noted the loyalty program shows existing customers are shopping more, while October market data indicated new customer growth for the first time in months. CEO Hillary Super added that she is anecdotally seeing younger customers and that November brand equity data showed a clear uptick with Gen-Z.

Alexandra Straton from Morgan Stanley asked for more detail on the drivers behind the raised full-year sales guidance and questioned whether the company's current promotional levels are considered appropriate for the long term or are still too elevated.

Answer

CFO and Interim CEO, Timothy Johnson, clarified that the annual sales guidance was raised primarily due to outperformance in the spring season, with back-half expectations remaining largely unchanged. He expressed optimism about strong early customer acceptance of new products in both the Victoria's Secret and PINK brands. On promotions, Johnson acknowledged the discount rate is up year-over-year, reflecting the competitive environment and the strategy to drive trial for new merchandise. While he believes the company can be less promotional in the future, current data indicates that promotions are accretive to both sales and margin dollars.

Alex Stratton of Morgan Stanley sought clarification on the second-quarter guidance, which implies a sales deceleration, and asked about quarter-to-date business trends.

Answer

CFO Paula Dempsey attributed the Q2 sales outlook to the strategic decision to pause the lower-margin shoe business, which is heavily sourced from China. CEO Lisa Harper quantified this annual impact at $40-$45 million. Regarding current trends, Harper described consumer behavior as 'choppy' with customers buying closer to need, but noted continued strength in the digital channel.

Alexandra Straton sought clarification on whether the 2025 growth outlook applies to comparable sales, total sales, or both, and the assumed quarterly cadence. She also asked to confirm when the company laps its strategic shift on clearance sales and for a reflection on that strategy's effectiveness.

Answer

CEO Lisa Harper confirmed the 2025 growth expectation is for both comparable and total sales, and they anticipate positive results for the entire year, by quarter. She stated the company will lap the clearance headwind in Q1 2025. Harper defended the strategy, acknowledging it was aggressive but is glad the company is now in a healthy inventory position, which provides a foundation for growth.

Alexandra Straton of Morgan Stanley questioned the rationale for trimming the high end of the full-year sales guidance despite management's confidence in a back-half comp improvement. She also asked about the strategy concerning the observed increase in the average customer age.

Answer

CFO Paula Dempsey clarified that the guidance was narrowed to reflect six months of actual performance and to account for the 53rd week in the prior year, which was worth about $22 million. CEO Lisa Harper addressed the customer age, stating the goal is to rebalance it slightly younger by introducing new capsule collections and ensuring product relevance, like the updated denim assortment, without alienating the loyal core customer.

Alex Straton from Morgan Stanley inquired about the potential for Gap Inc. to mitigate more than half of the anticipated tariff impact, both in the current year and over the long term.

Answer

CEO Richard Dickson stated that the company is navigating the tariff complexity without compromising its long-term strategy or customer value, highlighting ongoing sourcing diversification away from China. CFO Katrina O'Connell added that the provided outlook transparently separates the underlying business health from the dynamic tariff situation, detailing a gross impact of $250M-$300M and a net impact of $100M-$150M after initial mitigation efforts.

Alex Straton from Morgan Stanley inquired about the potential for Gap Inc. to mitigate more than the stated 50% of the anticipated tariff impact, both in the current year and over the long term.

Answer

CEO Richard Dickson affirmed the company's commitment to navigating complexity without compromising long-term strategy or customer value, highlighting ongoing sourcing diversification away from China. CFO Katrina O'Connell added that the provided outlook transparently separates the underlying business health from the dynamic tariff situation, detailing a gross impact of $250-300M and a net impact of $100-150M after current mitigation plans.

Alex Straton of Morgan Stanley asked what factors would give management the confidence to reinstate full-year guidance. She also inquired about the key performance indicators (KPIs) being watched in the second quarter to ensure progress is being made after the first quarter's missteps.

Answer

Executive VP & CFO Mike Mathias explained that reinstating full-year guidance depends on gaining better visibility, particularly on the impact of tariffs, and that a decision would likely be made by the Q2 call. He identified AUR (Average Unit Retail) and conversion as the key metrics being watched closely, as they were the primary drivers of the negative comp in Q1, while traffic and customer counts remained relatively healthy.

Alexandra Straton of Morgan Stanley asked for a breakdown of the key top-line initiatives expected to drive sales improvement after the first quarter and sought clarification on where sourcing production is being shifted away from China.

Answer

President Jen Foyle outlined several initiatives, including chasing inventory in high-demand categories like denim and sleepwear, maintaining inventory flexibility for the back half, and balancing the promotional cadence. CFO Mike Mathias responded to the sourcing question by emphasizing flexibility, stating that the company has redundancy across 15 countries and will shift production as needed, without specifying destinations.

Alexandra Straton sought further clarification on the lowered full-year revenue guidance and the drivers behind the expected operating income cadence, which implies a step-down in Q3 followed by a significant improvement in Q4.

Answer

Mike Mathias, CFO, reiterated that the revenue guidance adjustment is due to non-core revenue components, not the AE or Aerie brands. He explained the operating income cadence is a function of the retail calendar shift: Q3 will have a similar operating rate to last year due to flat revenue, while Q4 will see significant operating rate improvement from SG&A leverage, leading to a full-year rate expansion of approximately 140 basis points.

A representative for Alex Straton asked about the Ball & Racquet segment's store growth, specifically its concentration in China and future sustainability, and the path to improving the segment's profitability.

Answer

CFO Andrew Page confirmed that the store growth is almost entirely in Asia and Greater China, where the mono-brand retail format is highly effective. He explained that profitability is currently impacted by strategic investments in the 'Tennis 360' concept and is expected to improve as that initiative reaches scale.

An associate for Alex Straton asked about the Ball & Racquet segment, specifically the geographic breakdown of its recent store growth, the sustainability of new openings, and the path to improved profitability for the segment.

Answer

CFO Andrew Page explained that the store growth for the Ball & Racquet segment was almost entirely concentrated in Asia and Greater China, where the mono-brand retail format is highly effective. He stated that profitability is expected to improve as the company's strategic investments in the 'Tennis 360' concept begin to scale.

Alex Straton of Bank of America asked about the discovery origins of the discontinued CCM, NF2, and C. diff programs and how the refined pipeline strategy better reflects the platform's current capabilities.

Answer

Co-Founder and CEO Christopher Gibson explained that CCM and NF2 originated from the Recursion 0.1 platform (repurposing), while C. diff came from the 1.0 platform (new chemical entities). Chief R&D Officer Najat Khan added that the go-forward strategy emphasizes in-house molecule design and development strategies with clearer endpoints, a shift from the in-licensed nature of the older programs.

Alexandra Straton focused on the apparel category, asking about the growth outlook for 2025, potential geographic variations, and the long-term vision for apparel's revenue share and market differentiation.

Answer

Co-CEO Marc Maurer stated that while the company surpassed CHF 100 million in apparel sales, the long-term goal is 10% of total revenue. He explained that growth is strongly correlated with the company's own retail footprint, where apparel share often exceeds 20%. Future plans include enhancing the e-commerce presentation and streamlining the collection to improve sell-through. Executive Co-Chairman David Allemann added that marketing will increasingly link apparel to key partnerships, such as an upcoming co-created collection with Zendaya.

Alexandra Straton of Morgan Stanley inquired about the timeline for resolving supply chain constraints, the channel strategy for 2025, and the current inventory position.

Answer

CFO and Co-CEO Martin Hoffmann stated that while short-term measures have improved product flow, the long-term solution is warehouse automation, with the Atlanta facility going live in Spring 2025. Co-CEO Marc Maurer outlined the 2025 strategy, which includes growing D2C share by opening 20-25 new stores, slowing wholesale door expansion to focus on sell-through, and prioritizing apparel growth, supported by a strong S/S '25 preorder book.

Alexandra Straton from Morgan Stanley questioned the deceleration in international revenue, the outlook for 2025, and whether the new higher tax rate is a permanent change.

Answer

John Vandemore (executive) attributed the international deceleration primarily to an 11% decline in China, stating that the business was robust elsewhere. He noted the 2025 international outlook is heavily impacted by a ~$200 million FX headwind. Regarding the tax rate, Vandemore explained it is driven by new global minimum tax regulations, which will likely establish a new base rate going forward for Skechers and other companies, though it is subject to regulatory changes.

Alexandra Straton asked about the long-term trajectory for SG&A as a percentage of sales and whether the success of comfort technology is opening doors to new types of wholesale partners.

Answer

CFO John Vandemore explained that higher selling expenses were due to a front-loaded marketing investment and expects some leverage in Q4. He anticipates the overall OpEx base will not see significant leverage or deleverage going forward. Executive David Weinberg added that while it's still early, the brand's expansion into technical athletics is creating positive momentum that could eventually lead to opportunities with new wholesale partners.

Alexandra Straton asked about the expected growth trajectory for international wholesale in the second half, considering the temporary issues and a less positive near-term view on China, and also inquired about the outlook for selling expenses.

Answer

Executive David Weinberg clarified that Q2's international wholesale results were distinctly impacted by issues in Europe and India. He reiterated a net positive view on China, noting that constant currency growth was solid and that bumps in its recovery are expected. Regarding selling expenses, he stated that while investment will continue, the level of year-over-year increase seen in Q2 was a focal point and is not expected to be similar in the back half, leading to less deleverage.