Now at this time, I'll turn the call over to Pam Quintiliano. Please go ahead, ma'am.
Thank you. Good morning, welcome to our fourth 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 fourth 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, which include commentary on the estimated impact of the coronavirus on our operating results, are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and 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.
Good morning, everyone, and thank you for joining us. We ended 2019 on a strong note, growing top line while delivering a +1% comp for the quarter and a +1% comp for the year, which was our third consecutive year of positive comps. Importantly, we continue to make great progress against the transformation initiatives that we laid out at our 2018 Investor Day and expect to keep this momentum going. Over the past two years in real estate, we provided 157 new store experiences, reduced gross square footage by 6%, closed four large footprint underperforming selections, excuse me, and lowered store occupancy costs as a percent of sales by approximately 190 basis points. In digital and omni, we grew DTC revenues by double digits, implemented omni-channel capabilities across key global markets, and equipped our store associates with handheld devices to improve shopping and checkout.
In concept to customer product lifecycle, we reduced our product development calendar by four weeks, improved lead times in our must-win, must-grow categories, lowered China production exposure from 42% in 2017 to 22% in 2019, and added manufacturing capacity across Southeast Asia. In customer engagement, we opened regional offices in London and Shanghai, launched personalization, evolved our Hollister and Abercrombie loyalty programs in the U.S., and introduced our loyalty programs in China. Finally, outside of our stated transformation initiatives, we continue to advance our ESG efforts, most notably with our participation in the UN Global Compact. We are excited about all that we have accomplished while cognizant that there is still work ahead. Here on campus, everyone knows that one of my favorite sayings is always forward. We are focused on our long-term goals while tirelessly driving near-term results.
There will always be some challenges along the way, but our company has shown great resilience. Recently, the coronavirus has presented a new challenge. We would like to express our deepest sympathies to all of those who are affected. Our top priority is the health and safety of our associates, vendor partners, and customers. We are closely monitoring the situation, which seems to be changing daily, if not hourly. While this has created a near-term headwind, longer term, we continue to view Europe and Asia as important long-term growth drivers. Scott will provide further detail on the recent and estimated impact of the coronavirus. Now let me turn to our fourth quarter results. We anticipated a very competitive season given retail bankruptcies, six fewer shopping days between Thanksgiving and Christmas, and heightened inventory levels across the industry.
During the quarter, we were strategic with the cadence of our promotions and carefully managed our inventories. On a total company basis, we delivered a + 1% comp. We registered strong performance during Black Friday week, which we define as the Tuesday before Thanksgiving through Cyber Monday. We had the highest revenue for this period in the history of our company. In the U.S., Hollister achieved record sales over the week, and Abercrombie delivered its strongest top line in over five years. For the holiday season, we had a plan to manage the anticipated traffic peaks and valleys. We started our marketing campaigns earlier and introduced new product and messaging throughout the quarter. Our planning paid off with record fourth quarter revenues in bottoms, including jeans, as well as outerwear and intimates.
We also saw significant improvement in women's tops, driven by elevated fashion content and the increased adoption of our new bottom silhouettes. By region, the U.S. posted its 10th consecutive quarter of positive comps at +3%, and our international comp improved sequentially to a -3%. International improvements were broad-based across regions and channels and achieved despite the late quarter adverse impact to our APAC business from the coronavirus outbreak. By brand, Hollister delivered a -2% comp, and Abercrombie delivered a +8%. Turning to Hollister. Recent reported comp trends continue with the U.S. outperforming international, guys outperforming girls, and digital traffic and comps outperforming stores. We saw sequential improvements in conversion and improved average unit retail, with customers responding well to newness.
On our last call, we discussed a renewed focus on our proven playbook, particularly on the girls' side, with an emphasis on assortment architecture, SKU breadth, and investments in our top fashion items. For the fourth quarter, we were able to impact a portion of the girls' product. As we progress through the first half, we expect to see ongoing improvement in our assortment architecture and inventory investments. We are especially excited about the opportunity in girls' jeans. In the back half of 2019, we continued to see them respond to our fashion offerings. While we chased inventory for these updated styles, we could not keep up with demand. In the first quarter, we've continued to flow in more newness and further increase the mix of fashion to basics. While the composition is still not ideal, we are scaling the business, laying the groundwork for potential comp improvement ahead.
Looking beyond jeans, we've experienced better performance in tops as she has been buying our new must-have collections as a complement to our high rise and straight style fashion bottoms. On the guys side, we hit a new sales record in the fourth quarter, driven by jeans, outerwear, and pants, all of which had their highest fourth quarter revenues in brand history. Gilly Hicks, Hollister's intimate sub-brand, also had a record fourth quarter revenues and another quarter of double-digit comps. As a result of this impressive and sustained growth trajectory, we have invested in additional headcount as we prepare for the next stage of growth. For marketing, throughout the quarter, we focused on speaking to our core Gen Z customer across the platforms that are most meaningful to them, including YouTube, Instagram, TikTok, Spotify, and Twitch.
For the year, we had over 30 million views of The Carpe Challenge, which is our YouTube Optimist TV series, and achieved double-digit lifts in brand affinity, purchase intent, and recommendations. In addition to being on the right platforms, we're also focused on authentically speaking to our teens. On March 2nd, we introduced the inaugural World Teen Mental Wellness Day, which was created in partnership with National Day Calendar and is dedicated to raising awareness of teen mental health issues. In conjunction with this event, we launched the Hollister Confidence Project, a global year-round initiative designed to promote teen confidence. At Abercrombie Brands, 2019 was quite the year, culminating in a +8% comp in the fourth quarter, its best comp since 2010.
Over the past two years, our teams have made great strides in refining adult and kids brand purpose and shifting product, voice, and experience to more closely align with the needs of its target customers through offering relevant fashion at a compelling value. Comps were positive for adults and kids, as well as domestic and international. Improvement was broad-based on a sequential basis, with higher traffic in stores and online and AUR growth. At adults, we provided our mid-20s target customers items that were perfect for a much-anticipated long weekend and all of the associated social events. We elevated fit, fabric, and design, helping to drive reduced promotions on comparable products. Women's continued to outperform men's, although both delivered positive comps. In women's, we had our best fourth quarter comp in over eight years, with knit tops, dresses, and outerwear leading the way.
Jeans was another highlight as momentum from our recent Curve Love launch continued with the introduction of new washes and the expansion of mom and ankle straight to the collection. On the men's side, pants, sweaters, jeans, and sleeves were all standouts. Our Fierce franchise had its fourth consecutive quarter of positive comps, building on momentum seen throughout the year. For the holiday, we offered customizable and larger size Fierce bottles as well as gift sets, which were both well-received. Fierce is a great example of our marketing team's focus on consistent storytelling that ties directly to our brand purpose. Over the year, we built on that with the introduction of our Curve Love, Soft AF, and Do 96 Hours In campaigns, which we believe benefited traffic and conversion.
Our marketing momentum has continued into the first quarter with the introduction of our 2020 Fierce campaign, which features 24 individuals who we believe embody facing your fears. The Fierce family, which includes professional athletes Megan Rapinoe and Kyle Kuzma, will share their personal experiences on self-empowerment, body positivity, and overcoming obstacles. At Abercrombie Kids, momentum continued, with our target customer and their parents responding to age-appropriate product that was fashionable, functional, and most importantly, soft and comfortable. Boys and girls both contributed to the positive comp results. Looking ahead, we continue to view kids as an important growth vehicle. We're excited about the future of our brands. As we move into spring, inventory is current, carryover is limited, and customers are responding well to product and messaging. Shifting gears to our transformation initiative. Global store network optimization is a critical component to our operating margin expansion plans.
The retail environment is incredibly dynamic, and the lines between shopping channels have blurred. Our goal is to be there for our customer whenever, wherever, and however they choose to engage. Our digital business grew in the double-digit range, exceeding $1 billion in annual revenue. However, roughly two-thirds of transactions still occur in-store, which is why stores matter. We're committed to providing our customers the best and most seamless omnichannel shopping experience. For stores, we do not take a one size fits all approach. They need to be the right size in the right locations and with the right economics. We've been updating our fleet through a combination of reductions in square footage, remodels of existing footprints, and store closures. We've been selective in opening new stores, with roughly one-third of our 2019 openings in under-penetrated international markets.
With every new experience, we strive to improve the health and productivity of our store fleet. Domestically, roughly half of our store base is up for renewal on a rolling two-year basis, with the majority of negotiations occurring in the fourth quarter. We view our landlords as key partners, and we continue to modernize, evolve, and invest in our stores. Our U.S. fleet is healthy, with roughly 90% of mall stores located in A and B centers, approximately 95% of the base profitable on a four-wall basis, and an average remaining lease life of about three years. This, coupled with our strong balance sheet, gives us flexibility to be nimble and to take advantage of previously unavailable opportunities. Our Abercrombie Fifth Avenue flagship is a great example of this.
On our third quarter call, we announced that we would be closing the store in fiscal 2020 due to a natural lease expiration and moving to our smaller footprint Hollister location a few blocks away. After the announcement, we remained engaged with the Abercrombie Fifth landlord, and we were able to agree on a mutually beneficial short-term lease extension. The economics now make sense to operate Abercrombie and Hollister Fifth Avenue in the near term, in addition to Hollister 34th Street, which remains one of our top-performing stores. This announcement does not change our long-term commitment to close the majority of our flagships and repositioning within markets to more intimate shopping experiences that cater to our local customers. We entered 2019 with 19 global flagships and exited with 15.
During the year, we closed A&F Copenhagen, A&F Milan, A&F London Kids on Savile Row, and Hollister SoHo in New York City, removing 107,000 gross square feet from our base. The remaining 15 flagships, which collectively account for an additional 415,000 gross square feet , had a - 50 points impact to comp and a - 60 basis points impact to operating margin in fiscal 2019. In fiscal 2020, three additional flagships will be available for closure, including the previously announced Abercrombie Fukuoka kick-out. Flagships are an important piece of our square footage rationalization story, and so is the right sizing of large format Abercrombie stores in favor of smaller, more productive omni-enabled spaces. For context, stores that were right-sized over the past two years have roughly 30%-40% lower gross sq ft than their older formats.
At year-end, 20% of the combined Abercrombie and Kids fleet were an updated format. In addition to Abercrombie, Hollister has also been active. At year-end, roughly 53% of its fleet was in the newer format. These remodels have consistently delivered a high single-digit lift in sales versus control stores. In total, we provided our customers with 90 new experiences during 2019, ending the year with 41% of our base in updated formats as compared to roughly 30% in the previous year. For 2020, we are planning for another 75 new experiences, including 30 Abercrombie & Kids and 45 Hollisters, some of which will include Gilly Hicks carve-outs and side-by-sides. Since early 2018, we have taken about 6% of our gross square footage out of the base and reduced store occupancy as a percent of sales by roughly 190 basis points.
Our plan is to continue to lower store occupancy by reducing gross square footage in the low single-digit range annually, primarily through Abercrombie right sizes and flagship closures. We are pleased with the progress we've made against our Global Store Network Optimization Initiative, bringing us closer to achieving the long-term targets introduced at our April 2018 Investor Day. At that time, we laid out the goal of doubling our adjusted non-GAAP operating margin from 2017 levels to 5.8%. The path relies on the successful execution of our Transformation Initiative. Over the past two years, we have made great progress, but have also been impacted by some unanticipated external factors, including a strong dollar, China tariffs, and protests in key markets across Europe and Asia. FX has had the greatest impact on operating margin at 80 basis points.
On a constant currency basis, this brings our 5.8% target to 5.0%, before factoring in the estimated impact of the coronavirus. We are managing through these challenges and remain focused on meeting and ultimately surpassing our 5.8% operating margin target, albeit on a slightly different timeline than initially expected. The foundation for future growth is in place. Based on our fourth quarter and full-year results, customers are responding to our updated product, voice, and omni-channel brand experience. Looking ahead, we are confident that we have a clear path to achieve our goals, including total sales growth through ongoing U.S. comp growth and increased market penetration in Europe and Asia, benefiting from our local teams in these markets, Gross margin expansion on lower AUC, reflecting strategic sourcing efforts and improved assortment architecture, and slightly higher AUR from data analytics and data analytics tools, including markdown and size optimization.
Operating expense leverage through ongoing reductions in square footage, which coupled with expected sales growth, will further improve store occupancy and fund ongoing investments in customer-facing efforts. As always, we remain focused on controlling what we can control and mitigating what we cannot. With that, I'm going to turn the call over to Scott to discuss our recent results in more detail, as well as our outlook for 2020.
Thanks, Fran. Starting with the fourth quarter, total net sales of $1.2 billion rose 3% from last year on a reported and constant currency basis. We had adverse impacts of approximately $3 million related to changes in FX and $4 million primarily from store closures in mainland China due to the coronavirus. Comp sales came in at +1 versus +3 last year. Our marketing and loyalty investments continue to drive positive cross-channel traffic and support ongoing digital growth. Hollister posted a -2 comp versus +6 last year, and Abercrombie was +8 versus -2 last year. Overall, our digital performance served to offset store traffic, which remained negative. By geography, the U.S. achieved its 10th consecutive quarter of positive comp sales with a +3 on top of a +5 last year.
International comps, while still negative, registered significant sequential improvement in both Europe and Asia, coming in at -3 versus -8 in Q3 and -2 last year. Gross profit rate declined 90 basis points to 58.2% from 59.1% last year, with higher AUR offset by higher AUC. This included the adverse impact from changes in FX of 50 basis points and from China tariffs of 30 basis points. I'll now recap the rest of our results for the quarter and the year compared to last year on an adjusted non-GAAP basis. Excluded from our fourth quarter operating results this year were approximately $2 million of pre-tax charges related to flagship store asset impairments. Operating expense, excluding other operating income, was up 2% as compared to last year, primarily due to volume-related costs from higher digital net sales and increased marketing.
This was partially offset by a reduction in store payroll and consulting expenses. Operating expense as a percent of sales leveraged 30 basis points as compared to last year. Operating income was $125 million compared to $130 million last year, reflecting year-over-year adverse impacts from FX of $7 million and China tariffs of $4 million. The adjusted effective tax rate for the quarter was 29%. Net income per diluted share was $1.31 compared to $1.35 last year, with FX adversely impacting year-over-year results by approximately $0.07. For the full year, excluded from our 2019 operating results were approximately $13 million of pre-tax charges related to flagship store asset impairments. This compares to approximately $11 million of excluded charges last year related to certain legal matters and flagship store asset impairment.
Net sales were $3.6 billion, up 1% on a reported basis and up 2% on a constant currency basis compared to last year. Comp sales were +1 versus +3 last year. Gross profit rate was 59.4%, down 80 basis points from last year with flat AUR offset by higher AUC. Results include adverse impact from changes in FX of 30 basis points and from China tariffs of 10 basis points. Operating expense, excluding other operating income, rose 2% from last year, primarily due to $47 million of flagship exit charges, mostly related to our Hollister Soho flagship, as well as increased volume-related expenses from higher digital net sales and investments in marketing. These increases were partially offset by benefits from changes in FX, decreased compensation and consulting costs, and reduced store occupancy expense. This resulted in an operating expense deleverage of 60 basis points.
Other operating income contributed 20 basis points of deleverage. Operating income was $83 million, down from $139 million last year, reflecting the $47 million of flagship store exit charges this year and a $19 million adverse year-over-year impact from FX. The effective tax rate for the year was 28%. Net income per diluted share was $0.73 compared to $1.15 last year. The year-over-year decline was primarily driven by $0.53 of flagship store exit charges this year and $0.20 from changes in FX. Turning to cash flow and the balance sheet. Our fourth quarter performance was a key driver of our full-year operating cash flow of approximately $301 million compared to $353 million last year, which helped fund $203 million of capital expenditures, $115 million of returns to stockholders through share repurchases and dividends, and $20 million of debt repayments.
We ended this year with $671 million in cash compared to $723 million last year. Gross borrowings outstanding were $233 million compared to $253 million in 2018. Total inventories ended the quarter down one compared to last year. This was better than our expectation discussed on the third quarter call of up low to mid-single digits. Our overall inventory position entering the quarter was well-balanced across brands with strategic investments in our must-win and must-grow categories. We expect to end the first quarter with inventory up low single digits excluding potential supply chain disruptions resulting from the coronavirus. Moving on to our fiscal 2020 outlook. As we look to the full year, there is significant uncertainty across our industry as we attempt to assess the potential impact of the coronavirus on the global consumer and the global supply chain.
We are providing a full-year outlook that takes into account the estimated impact on our operations in the first half of the year based on the information available today. Given the fluid nature of the situation, this is subject to change. When evaluating our outlook, we considered several factors, including store closures, consumer travel and demands, production delays, raw material availability, and freight congestion. Regarding store closures and consumer travel and demands, we know that roughly 10% of our revenues were derived from the APAC region in fiscal 2019, and about half of that from mainland China and the Hong Kong Special Administrative Region. Outside of APAC, we have begun to see temporary store closures and reduced store hours in other regions. We have also experienced weakening trends in our tourist-heavy locations, even when stores have not closed.
On the supply chain side, in 2019, approximately 22% of our total merchandise receipts were sourced from China, and 15% of the total receipts were sourced from China and imported into the U.S. We expect to reduce these percentages in 2020 to the low teens and roughly 10%, respectively. In addition to these factories, most of our fabric mills are in China. To date, we have not seen meaningful delivery disruptions. All factories and mills are now operational, although running with delays, which may cause increased short-term freight costs. We continue to be in close contact with our partners and are evaluating all options to try to ensure that we do not disappoint our customers.
For the year, including our estimated first half impact of the coronavirus, we expect net sales to be flat to up 2%, including an approximate $60 million - $80 million adverse impact related to the coronavirus and a $10 million adverse impact from FX. Comp sales will be down low single digits, reflecting a 200 basis point impact from the coronavirus. Gross profit rate for the year to be down 50 - 70 basis points from the 2019 rate of 59.4%, including a 50 - 70 basis point adverse impact from the coronavirus and the adverse impact from changes in FX of approximately 30 basis points. Operating expense excluding other operating income to be approximately flat to the fiscal 2019 adjusted operating expense of $2.07 billion. An effective tax rate in the mid I'm sorry, in the upper 20s to low 30s, and capital expenditures of approximately $175 million.
For the first quarter, we expect net sales to be down in the mid-single digits compared to last year, including an approximate $40 million - $50 million adverse impact related to the coronavirus and a $5 million adverse impact from FX. Comp sales to be down in the mid-single digits, reflecting a 600 basis point impact from the coronavirus. Gross profit rate to be down 100 - 150 basis points from last year's 50.5% rate, including 100 basis point adverse impact from the coronavirus and the combined adverse impact from changes in FX and anticipated China tariffs of approximately 50 basis points. Operating expense, excluding other operating income, to be flat to up 2% from 2019 adjusted operating expense of $472 million and an effective tax rate in the upper 20s.
A detailed walk of our pre- and post-coronavirus earnings expectations is available on pages 32 and 33 of our investor presentation. With that, I will turn the call back over to Fran.
Before Q&A, I just would like to take a moment to thank our global store team for all of your hard work this year and to our global partners for your help and support during this period of uncertainty. Operator, we are ready for questions.
Thank you. If you'd like to ask a question, once again, that is star one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We'll take our first question from Paul Lejuez with Citi.
Hey, thanks, guys. Curious, just a high level within the U.S. market, what you're seeing around the competitive landscape as far as competitor store closings whether that has had any sort of a near-term impact on some of your stores. Do you think store closings provide a market share opportunity in FY 2020 any more so than FY 2019? Then, Scott, maybe if you could talk a little bit about some of the puts and takes on SG&A. Maybe run through just what are the big SG&A buckets which are moving in the right direction, which are moving in the wrong direction if you could give a little color there. Thanks.
Sure. I'll kick it off, and then Fran can chime in. As we think about the competitive landscape in the fourth quarter, it was competitive. It always is. We were very happy with how we performed through the quarter, delivering a positive comp with Abercrombie at +8 , a nice mark compared to last year. We had a plan. Fran mentioned that we had a plan coming into the quarter. We knew that the peaks were going to get higher and the troughs would get lower, and that's how it played out. Specifically on store closures, it's not something that we looked at and said that was a driver of our business. One of the good things about store closures in the industry is it gives us more opportunities from a real estate perspective to maybe get into a mall that didn't have space available before.
Maybe gives us an opportunity to remodel or right-size a store. We like seeing some of that inventory come on from a real estate perspective. On the puts and takes in the SG&A outlook, as we think about next year, full year, it's kind of a similar theme. We'll see some inflation as we look at store payroll and we look at some freight and transportation. We'll also see a little bit of inflation come at us on the digital side, one from a mix shift into digital, but also from some of that freight. We're going to continue to invest in marketing. We're going to continue to invest in our people, and really the funding is going to come from occupancy reductions. It's something that we've been working on significantly over the past few years. We're seeing the benefits of that year after year.
That's going to be a funding impact. We're also continuing to look at our transformation initiatives. We had a good ramp in the last couple of years. That will stabilize a little bit in here in 2020. That's what takes us to some of those SG&A investments and some of the funding that we have internally.
Just to wrap that up, just to echo what Scott said, just extremely proud of the team. We did go in anticipating a competitive quarter. We were ready to compete. They aligned their product, their voice, and their experience, and the customer responded, and we are very proud of our results.
Thanks. Just to follow up, curious if over the last several weeks, your inventory planning or expense planning has changed at all as a result of the coronavirus. You guys are one of the ones, one of the first to really try to estimate the impact from this whole thing. We appreciate that. I'm curious if you've actually made changes already to inventory buys, expense planning as a result of it. Thanks.
Our process hasn't changed. We actually look at inventory and expense planning on a weekly basis for every year that we've existed here. That hasn't changed with COVID, a little more focus on the inventory. A huge thanks to our global supply chain partners and our sourcing team here. It's been a 24/7 conversation with our suppliers to understand where they are in ramping up post-CNY and what that means to our inventory flows as we go through the quarter. We always have a piece of our expense base that is variable. We trigger into that during the year, and that's a process that will continue week after week.
Then in 2019 probably was a complicated year, and lots of credit to the team globally that helped us manage through that very effectively, and we expect to do the same this year.
Great. Thank you. Good luck, guys.
Thank you.
All right. Your next question comes from Dana Telsey with Telsey Advisory Group.
Good morning, everyone. As you think about the international and the U.S. business, obviously, you saw a bit of improvement, certainly in the international business compared to the third quarter, what were the puts and takes with Abercrombie and Hollister? What did you see domestically from Abercrombie and Hollister that might have been the same or different from last quarter? Thank you.
Hey, Dana, good morning, it's Fran. What we saw domestically, we also saw internationally. The results were very similar. Let's start with A&F. We had a strong U.S. fourth quarter. We had a strong quarter overall. From a product perspective, exciting wins in that brand. Outerwear, which was a big topic, I think we discussed at ICR. Very proud of the assortments. We drove through fashion as well as core for men's and for women's, very strong. We had nice denim business. Set quite a few records for that brand. In Hollister, again, same thing. Domestically and internationally, very similar wins. Guys Hollister had another record year. We had some opportunities in the girls business, which we discussed on the call last time. We're addressing those product opportunities.
I would say the two key ones were in denim and in tops, where we're seeing progress in both of those. Let's start with denim. We saw a really significant shift from our girls denim customer out of core and into fashion. We're catching up as quickly as we can on those inventories. The tops business, which across the industry has been top. We're seeing nice sequential improvement in Abercrombie women's and in girls. We've got some big winners in girls that we're gonna really work on for the second quarter and chase as quickly as we can because we're seeing some good wins, particularly in the new must-haves that we just landed. Go ahead, Scott.
I'll add in a little bit on the international. We did see nice improvement in our key markets in Europe, pre-coronavirus, and in APAC also. What we did see is some of that macro disruption that we've been talking about throughout the year, like Brexit and some of the protests, settle down a little bit in the fourth quarter, and our comps got back onto that trend, that low single-digit negative trend after the drop in Q3. A little more stable environment in Europe, again, pre-coronavirus.
Thank you.
Next question comes from the line of Matthew Boss with JPMorgan.
Great, thanks for taking my question. This is Steve Zaccone on for Matt today. Maybe to start, wanted to better understand the comps outlook. We think about trends outside the coronavirus impact. What's driving the change in comp growth outlook to approximately flat versus the prior commentary of positive comps that you talked about at your Analyst Day plan? Along those same lines, how should we think about the performance of the two concepts within the guidance?
Be able to kick this one off, Steve. As we think about 2020, the put out there of the approximately flat comps, it's where we ended up in 2019. We were +1 for the year, which I'm going to call right around flat as we think about a full year outlook. It's a little bit hard to really break coronavirus out of our results as we're thinking about it. We've given you the table to do that, but it's part of our business. We're living it today. We are a global business. We operate in 20 countries around the world, and each of them is seeing some level of impact. What we've tried to do with our outlook is to give you a baseline of what we think that impact is going to be globally, and that's APAC, that's Europe, and U.S. as we see lower global travel.
That's how we've set up the outlook into the year, and what we're trying to do right now is control the controllables as we go through the quarter.
Yeah, understood. Thanks for that. One on gross margin. Can you just talk a bit more about expectations for AUR and AUC as we progress through the year? Excluding the adverse impact of coronavirus and FX, seems like your gross margin guidance for the full year is like a 30 basis point increase. Just what's the expectation for AUR and AUC within that guide?
For 2020, we are optimistic on the AUR and AUC fronts. We came through 2019 and saw increasingly strong performance on AUR, a nice performance in Q4 on the upside. Going into 2020, we feel like we have opportunities on AUC on the cost side, so we can keep that stable AUR and pick up a little bit on the cost side as we get back to some of those fundamentals that we've been talking about through the year on SKU breadth and assortment architecture. We feel like that's gonna give us some benefits in AUC. Again, putting the coronavirus and the FX aside with some of the uncontrollables. Optimistic coming into the year for gross margin expansion outside of those factors.
Great. Thanks very much.
Next, we'll go to Kate Fitzsimons with RBC Capital Markets.
Yes, hi, good morning. Thank you for taking my question. Scott, I guess building upon Steve's question there, when we are looking at the full year revenue outlook, certainly appreciate there are a lot of moving pieces with the coronavirus, but you are looking for some pretty nice improvements into the back half as per the guide. Can you just speak to optimism on driving those gains, whether it be by brand, category, region, or channel just
What initiatives should we think of as on deck in 2020 that you think can drive those sequential gains? I guess, assuming these headwinds are more so confined to the first half here. Thank you.
Correct. As we set up the outlook for the year, we're thinking about this on a first half basis today with the information we have at hand. Looking at the full year, we do think we can grow sales. Our outlook, including the $60 million-$80 million adverse impact from coronavirus, is flat to up 2%. We're starting to see some of that benefit of a spread between comp sales and net sales. As we get through more remodels, we get through some right sizes of our stores, we continue to open stores on a global basis. Opened 40 stores last year. Going to open 40 more this year is our expectation. We're optimistic that we'll see a positive spread there on the net sales versus comp.
When we think about brands, we don't give an outlook by brands, but our goal is to challenge both of our brands to be positive throughout the year. We go into every quarter thinking that way and every year. From a geo perspective, we assume that the same trends will continue with the U.S. outperforming international. That's kind of been our trend here for the last couple of years. From a channel basis, we would assume that digital would outperform stores. A lot of the same of what has been happening over the last couple of years and looking forward to seeing some of the benefit from comp and net sales spread.
Yeah, just to underscore, we've done a lot of transformation in the business. We've built good fundamentals, and we have good building blocks in place as we move through the year.
Great. That's helpful.
All right. Your next question comes from the line of Mark Altschwager with Baird.
Good morning. Thanks for taking my question. I wanted to touch on the real estate side. You talked about taking advantage of some opportunities. It sounds like the leasing environment has turned more favorable based on your comments and some from your competitors. With that in mind, could you just update us on how you're thinking about the potential for the pace of the A&F right sizes over the next one to two years? I know availability has been a constraint there. I think the slide in your outlook looks like you're planning on actually fewer in 2020 versus 2019. If you could just touch on that and potential for acceleration.
Hey, Mark, I'll kick off and then I'll let Scott get into a little bit more of the details. Yes, we just came through with our negotiating with our landlords. As you know, we are one of the few global retailers that's investing in stores, and we were able to have very constructive conversations with them, and we were pleased with the outcome. I also mentioned, more specifically in my former comments, even on A&F Fifth Avenue, that we're going to keep that open for another year because we were able to come up with a mutually agreeable opportunity for ourselves. I'll let Scott get into a little bit more of the detail about the pace ahead.
Thinking about the new experiences that we'll deliver, we had 90 in 2019. Our expectation is for around 75 in 2020. The total new stores, around 40 each year there, so very consistent. The availability of remodels and right sizes is really what's swinging it a little bit year-over-year. We're excited to have 20 more rightsizing opportunities this year. As we've talked in the past, these are hard to come by because we need more partnership from our landlords in order to move out of our space or to carve up our large store into a smaller space. On the remodel side, the pace at Hollister is slowing a little bit. We've gotten through a pretty good chunk of the fleet, so we expect that to slow down a little bit as we go through year after year.
Really excited about delivering another 75 this year.
Thank you. Scott, just a quick modeling follow-up. A lot of moving pieces. Could you just speak specifically on how you're thinking about free cash flow for 2020 and just any detail on how you're planning inventory through the year?
I'll start with inventory. On that, we try to keep it right around sales. Coming into this quarter, we were down 1% in sales, and Q4 we're up a bit on a constant currency basis, or up 3% on a total basis, up 2% for the year on a constant currency basis. Feel good about our inventory planning. On our free cash flow, it goes down our normal capital allocation walk, investing in the business. From there, it's share buybacks or debt repurchases. We did a little bit of both in 2019. We returned $115 million to shareholders through buybacks and the dividends, and we also bought down about $20 million of our debt. Excited to use the liquidity and the strong balance sheet that we have to continue to return cash to shareholders and de-leverage the organization.
Thanks for all the detail.
All right. Your next question comes from the line of Susan Anderson with B. Riley FBR.
Hi, good morning. Thanks for taking my question. I was curious maybe to get your thoughts looking out the next few years just on your longer term operating margin goal. I know it's taking a step back this year due to the coronavirus, how are you thinking about that as we look out over the next three years and the opportunities there? Thanks.
I'll kick off. The three key levers that we talk about are still the three key levers that we're focused on. Clearly, driving our top line is opportunity number one. We see that from a comp perspective domestically and from a net sales opportunity internationally as we continue to build our market share outside of the U.S. Growth margin expansion would be lever number two, and three would be operating expense leverage driven primarily through these opportunities that we have with our global real estate optimization strategy.
I'll just add onto the international piece. We are super excited long term. We believe in that business. We're investing in our teams. It's something we talked about through 2019. We will continue to invest in our teams. We have high aspirations for the international business. There's clearly a lot of noise out there in key markets in Europe and with the coronavirus in Asia moving west. We are optimistic long term, that's going to be a key driver for us long term. Fran mentioned the U.S. piece of this. We had our 10th consecutive quarter of positive comps. The brands are getting stronger year after year. The foundation of the company is getting stronger year after year. We believe that we can keep that going in the U.S. We have a ton of white space to fill in international markets.
Optimistic long term, and we're going to lean on our teams in these local markets to help us build.
Great. That's helpful. If I could just add a follow-up on just the fashion or product side of things. Maybe if you could talk a little bit about how you see 2020. Do you still see significant opportunity on the denim side, maybe with new fits or washes? Do you see any other opportunity within pants going forward? Thanks. Or bottoms.
Sure. The answer to both of those questions is yes. We're excited about what's continuing to happen in denim in both brands and all genders, and there's so many exciting new things happening. The high rise just continues to get more and more important. The customer's responding now to a straight jean as well, which is something a little bit newer for her. Our Curve Love continues to grow, in both brands and in men's as well. Men's denim business has been strong, so super excited. As far as bottoms go, there's lots of things happening in bottoms as we head throughout the year, not just in denim, but in shorts and in skirts. We're seeing some newness happening as well. We're capitalizing on all the signs that we're seeing today.
Great. That's helpful. Good luck this year.
Thank you.
Next, we'll go to Tiffany Kanaga with Deutsche Bank.
Hi. Thanks for taking our questions. Thank you for all the very helpful detail around the coronavirus impact. Would you help us understand a little better what level of disruption from today is folded into your full year projections in terms of coronavirus, whether you assume any incremental worsening conditions in particular regions, or if we're past the deepest impacts in your view? What is the incorporated timeline for moving beyond sales and supply chain disruption in areas that are already affected, and especially what you factored in with respect to potential challenges in Europe?
Okay. Let me get after this one. All right. Thinking about how we set up the year, the $60 million-$80 million is based on a first half impact. We have looked at this as more of a six-month phenomenon at this point. Again, no one knows. There's a ton of uncertainty out there. The way we've broken out that 60 - 80 is we're living what's happening in the APAC region right now. Seeing store closures from day one of the quarter in mainland China and seeing some significant impact on the Hong Kong business also. That's a big piece of this, is what's happening in the APAC region.
As we think about what's happening versus what's going to happen, we've given ourselves a provision, I guess I would say, on the European tourism business to continue to suffer a little bit as the travel restrictions get more and more intense. I think we've seen that more and more out of China and into Europe, but also global travel from corporations. I think the travel is continuing to slow, so we have a provision in there for that. Same impact would happen in the U.S. as we think about our stores up and down the coast on the east and west side, that we're seeing an impact to those stores already from the reduced travel, and we would expect that to continue. Lots of moving pieces, as you said. I'll move on to the supply chain. With the supply chain, it's getting back up and running.
I think we're optimistic that we can get past any significant amount of delays. We are seeing some delays right now. I think they're pretty consistent with what others have said in that two, three, four-week period. We're going to look for different options on transportation in order to accelerate the travel back here to the U.S. or our European DCs. Optimistic that we can work through that.
All right. Your next question comes from the line of Janine Stichter with Jefferies.
Hi, good morning. Thanks for taking my questions. Wanted to ask a little bit about Gilly Hicks, another strong quarter, and sounds like you're investing a little bit more in that business there. Can you give us an update on how many side-by-sides and carve-outs you currently have, what the mix looks like next year? Just any more color you can give on, kind of where you see the opportunity and where you've been seeing the recent trends. Thank you.
I'll let Scott get into the detail of the side-by-sides and carve-outs. Just real quick, on a high level, Janine, we are seeing really nice product acceptance for Gilly. We were able to open up several side-by-sides and carve-outs this year and have several planned as we head into 2020. The consumer globally is responding nicely to both the intimates piece of that business as well as the sleep piece of that business. We do have some exciting new product launches coming up later in the year that I can't share yet, but some exciting new things happening. We've also separated the team, which was some news that we talked about earlier today, because the Hollister team and the Gilly team, in order for both of them to grow, we've separated the teams and named a new lead for Gilly, which we're excited about.
Scott is just quickly looking up the numbers.
Yeah. In 2019, we opened additional 15 side-by-sides for Gilly, an additional seven. It's something that we will continue to do. This year, we have more slated. We love what's happening in that box for the side-by-side. It is improving the productivity of the box and really having that special entrance for Gilly or that special room in a carve-out for Gilly really helps it kind of isolate as a separate brand. We're excited about the response from the customer, and it's something we're going to remain on that track as we go through 2020.
Yeah. If you get a chance to go out to Garden State Plaza, it's a great example of a new side-by-side that we opened in the fourth quarter of 2019.
Great. I'll check it out. Thank you very much.
Thanks.
Next, we'll go to Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much. Fran, I wanted to follow up on your earlier comments with regard to women's denim selling out. I'm wondering if you feel like your base level in stocks in some of your evergreen denim styles might be on the light side if you're planning on making some investments there, and when we would see that flow in 2020. It sounded like you were reflecting back on that 5.8% long-term operating margin target and saying that the like-for-like comparison is 5%, if you look at it on a constant currency basis. Should we take that as 5% is your new long-term operating margin target, and do you feel like that is realistic and achievable in the timeframe originally presented? Thanks so much.
Just for clarity on the women's denim, let's break down women's and girls. Starting with Hollister, what we have seen is an outsized move from our customers from what we call our core to our fashion, which I imagine is what you're referencing too on the evergreen style. The core piece of the business, we've been transitioning into more fashion inventory. We've been doing that since the third quarter and into the fourth quarter. The demand for the fashion just continues to outpace the amount that we keep bringing in, but we are currently working on catching those inventories up. Women's denim, specifically for A&F, has also been a nice transition into the fashion business, but they did not have as much core to transition through. I'll let Scott answer the second part of your question.
On the long term, the 5.8%, that is still a target for us long term, and based on how our peers have been operating, we feel like we should be beyond that. It's something we've talked about since our April 2018 investor day. We have a lot of work to do from our transformation and our store optimization work specifically to get to that 5.8% as the first point, but we believe long term, we can be above that. The 5.0% is meant to give a little clarity around how impactful the effects have been over the past 18, 24 months. Just a level set there.
Okay. That's helpful. Thank you.
All right. Next question comes from Janet Kloppenburg with JJK Research.
Good morning, everyone. Fran, I wondered if you could touch on the progress at Hollister, maybe focus on both Europe and the U.S. I know you talked about some categories improving, can you confirm that Hollister comps were positive in North America in the fourth quarter? I think you said that, I may be mistaken. Also, the European performance was better than expected in the fourth quarter, I wondered if you could talk about the new merchandising teams and the progress being made there. Lastly, excluding the coronavirus, I was wondering if you could give us an idea of how U.S. trends are here in the early spring. The stores look quite good. Thank you.
Okay. Let's start with the progress on Hollister. Number one, the guys business was a record for the quarter again. Strong guys business domestically and internationally. The girls business did make progress, and it made progress in certain categories both internationally and domestically. Those are the two gens that I highlighted, which was making progress in tops and making progress in denim, we're seeing progress in both of those across both channels.
On the comp, we didn't give regional by brands comps.
Okay. Thank you. Yeah. Okay, go ahead with the progress in Europe, Fran.
I'll just reiterate what I said a bit earlier. Progress in Europe specifically was across brands. We talked a little bit, I'll start with the macro, and Fran can chime in on some products. Seeing some of the macro stabilization, Brexit is something that we talked about as being an impact in Q3 as it was really ramping up. Having a little bit of clarity there has seemed to help us in the U.K. business. Hollister is a little more impacted by that with the bigger store counts across the U.K. I think that was a bit of a helper. Just seeing some of the stabilization as you think about France and Italy and Spain as we got through the quarter. As the weather got a little more seasonal in Europe in Q4, our products were aligned with what the customer's looking for.
Again, across the business and across brands, saw some of that product improvement quarter-over-quarter also.
All right. Your next question comes from the line of Marni Shapiro with Retail Tracker.
Hey, guys. Congratulations. The stores look really fantastic.
Thank you.
You've invested behind marketing, and I think you've talked about the numbers were up, spending was up a little bit in 2019. Are the numbers going to be up, the investments in marketing up in 2020 on top of what was up in 2019? Are you investing both in the U.S. the same rate as international, or is it more weighted in one area?
Marketing will be up in 2020 off of an increase in 2019. We made a really nice step up back in 2018 with marketing, continued in 2019, and will continue in 2020. We are investing some of this incremental spend in both the U.S. and international markets. We've been building our teams in Europe and Asia on the marketing side, and we're excited to feed them a little bit of marketing dollars in 2020 to get our localization efforts rolling.
That's what I was just going to ask. You have a team on the ground because the marketing in Asia is very different than it is here, and you've built a team there to tackle it. It's not being done out of the U.S. necessarily?
Well, that's the transition that we're in right at the moment because we talked this year, Marni, about how we launched the regional offices in EMEA and APAC, London and Shanghai, respectfully. We're currently building those teams. They'll be working with the global team here in the U.S., they will be responsible for their own individual local campaigns.
Fantastic. Can you just remind me as far as Tmall and those businesses, where you guys stand and how that looks?
Tmall is the biggest piece of our digital business in China. The business has been good. More recently, it's been impacted by the coronavirus. We're really excited about some merchandising and marketing talent that we've put into the Shanghai office and really building an assortment for Tmall and building a better strategy for Tmall versus what we had in the past. We think it's a huge long-term opportunity for the company. We've had nice growth to this point, but looking forward to accelerating that in the future.
Fantastic. Thanks, guys.
Thank you.
Right. We have one more question. We'll take that from David Buckley with Bank of America.
Hi, guys. Good morning. Thanks for taking my question. I had a question on the kids business. Sounded like it was another strong quarter for you there. How large is the category now, and what have been the key drivers of the momentum there?
We did have a nice quarter for Kids. The product reception to Kids has really been very strong. Our whole mantra on life is play and letting kids be kids is really resonating from a marketing perspective. We don't break the category out. We report on the Abercrombie brand in total.
Okay, thank you.
All right, it looks like we have no further questions at this time. I'd like to turn it back over to Fran for any additional or closing remarks.
Just want to say thank you very much, everybody, for this morning, and we look forward to updating you all on our continued progress on our next call.
That does conclude today's conference. We thank everyone again for their participation.