Q3 Operating Margin Guidance Q: Could you unpack the operating margin guide for the third quarter? A: Scott explained that for Q3, they expect some freight pressure but may see a bit of AUR (Average Unit Retail) growth, keeping the gross profit rate stable. Operating expenses will increase due to investments in the business, which may moderate operating expense leverage compared to previous quarters. They are excited about the guidance for Q3 and have expanded the full-year operating margin outlook to 14% to 15%.

Future Margin Expansion Opportunities Q: How should we think about incremental margin expansion opportunities multi-year? A: Scott noted opportunities across the P&L. On the top line, there's significant growth potential across brands and regions, especially in the Americas, with real estate opportunities and customer growth. They are underpenetrated in Europe and APAC and focused on expanding there. Gross margin improvements can come from higher AUR, strong product acceptance, and inventory management. Wise investments should lead to future operating leverage.

Freight Costs Impact on Gross Margin Q: Freight costs are higher; what's happening there, and your outlook? A: Scott mentioned that freight has become a headwind in the back half, with ocean and air rates spiking. They are managing through these challenges, which are factored into their outlook. They assume elevated freight rates will continue into and through the fourth quarter.

Inventory Levels and Management Q: Inventory is up 9%; how do you feel about levels and composition? A: Scott feels great about current inventory levels. Units are up less than the 9% due to higher freight costs and a shift towards Abercrombie, which has higher-cost products. They are tightly controlling units and maintaining a "read and react" approach, setting up well for the holiday season.

Sales Progression and Promotional Strategy Q: Could you talk about sales progression and promotions throughout the quarter? A: Scott reported double-digit sales growth in each month of the quarter and is excited about the start of Q3. On promotions, Fran said they base promotions on their business, adjusting weekly. Promotions have decreased considerably over the years, and they aren't seeing anything extraordinary at this point.

International Growth in U.K. and Germany Q: What growth did you see in U.K. and Germany? A: Scott said the U.K. and Germany are their largest and fastest-growing countries in Europe. They have increased marketing spend and product focus there, and these efforts are working, significantly contributing to EMEA growth.

Abercrombie Brand Growth Drivers Q: How do you think about growth vectors for the Abercrombie brand? A: Fran is excited about Abercrombie's performance, with 26% growth on top of 26%. Growth is driven by staying close to the customer, expanding initiatives like The Wedding Shop, the NFL partnership now including all 32 teams, and the YPB brand entering its third year of growth.

Loyalty Programs Engagement Q: Are your loyalty programs meaningful and growing? A: Scott said the loyalty programs continue to grow and are a great way to engage consumers. They are always looking to evolve them and consider the next level for loyalty.

Abercrombie Customer Demographics Shift Q: What customer mix shift are you seeing for Abercrombie? A: Scott noted that the Abercrombie customer has aged up compared to prepandemic. They aimed to separate Abercrombie and Hollister, focusing Abercrombie on post-collegiate, early to mid-20s customers, and have seen great results. They are driving both new customer acquisition and retention through effective marketing and new categories.

Capital Allocation and Share Repurchases Q: Any sense of year-end cash balance and capital allocation plans? A: Scott stated they have a strong cash balance of $700 million and liquidity of $1.2 billion after paying off the 8.75% notes in full in Q2. They plan to focus more on share repurchases with excess cash and continue investing in the business for long-term sustainable growth.