Good afternoon and welcome to the first slot after lunch. I hope everyone's well fed. It's my pleasure to announce Abercrombie and Fitch this afternoon. I am joined by Fran Horowitz, who's going to introduce herself real quick. Sure.
Thanks, Alex. So thanks for joining us today. I'm excited to be here. I'm joined with Scott Lipinski, our CFO. I assume some of you in the room know our story and some of you may not.
So I'm looking forward to bringing everybody up to speed on where we are and all the exciting work that we're doing at Abercrombie and Fitch.
Fantastic. So perhaps let's start for those who are maybe a little bit less familiar with the business and the story. Can you tell us a little bit more about your iconic brands and
who they cater to? Sure. So great way to kick off. We have been on an incredible journey. I started as Brand President of Hollister back at the end of 2014.
And Scott was my Brand CFO at that point in time. And when I came to interview for the position and I went shopping at the mall, it was very clear to me that the brands were the same. So Abercrombie and Hollister were essentially the same product in different stores with different labels and different price points and that there was a tremendous opportunity to really set both brands on a path of their own. And that journey for me with Hollister started in 2015 and soon after that, that journey then started with Abercrombie in 2016. But what we were able to do was take Hollister and really establish it as an iconic global teen brand, So that the consumer whether they wake up in Tulsa, Ohio Tulsa, Oklahoma or Shanghai, the first brand that comes to mind as a teen consumer is Hollister.
That is the Gen Z consumer. We pinpoint the age of 17 as our real target consumer, but the Gen Z consumer today really goes from the age of 10 to 24, and that's the teen brand. Abercrombie is a little bit different. Abercrombie has had a little bit of a different history. Many, many years ago, people would refer to Abercrombie as a teen brand.
That is actually not the case today. 60% of our consumers in the U. S. Really start to shop with us at about the age of 18. And we're targeting the young millennials.
The millennials essentially start with Z Stops at age 24 and goes on beyond that. But we target what we call the younger millennials for Abercrombie. And that consumer is in their early 20s. They're just starting their career post college and that is who we're targeting for both brands. We also have 2 sub brands.
We also have Abercrombie Kids. That's Generation Alpha for us and that target consumer is 9 as well as Gilly Hicks, which is a sub brand that we run out of Hollister, which is an intimate apparel brand.
Fantastic. Now with that portfolio of brands, you have a strong insight across ages and the different ways that people shop. I think you mentioned on your Q2 call that Generation Z is visiting the store more often. Can you talk a little bit more about that and any other insights on the generational shift and what that means for retailers?
So we do a tremendous amount of customer insighting and learning about our insighting and learning about our consumer. And Gen Z today, which I mentioned, essentially goes from age 10 to 24, is our largest consumer today. And that consumer does behave differently than the millennial. The millennial prefers a much more digital experience shopping online. They are the biggest driver of our pop ins business, which is purchase online, pickup in store.
The Gen Z consumer starts on their phone, 80% of the transaction starts on their phone, but they actually enjoy coming to the mall. They enjoy talking about going to the mall. It's still a social experience for them. Once they get to the mall, they like to have a seamless transaction when they're there. But their shopping behavior is proving to be a bit different than the millennials, and we're excited about that because we firmly believe that stores matter and brands matter and it's exciting to have that opportunity with both of our brands.
You have several transformation activities underway at the company. Can you talk us through these and where we are in the journey? Sure.
Okay. Yes. So we started our transformation journey in 2 phases. The first phase when Scott and I were at Hollister was a transformation, which I will tell you was really people, product and process. And that happened with functions and more as a siloed opportunity.
When I arrived at Abercrombie again, the business was being run-in a very different way than I'd ever seen before. And I knew there was an opportunity to change all three of those components. So we worked very diligently together to change people, the product and the process. As time went on and we were able to make progress, we realized that the next opportunity was to transform across the entire business. So at the beginning of 2018, we created a TMO, which is an abbreviation for a transformation management office.
We partnered with an outside company and then we built our own infrastructure, so we can continue this transformation once they were done helping us get started. And we have seen tremendous, really exciting changes in our business. An example would be concept to consumer, the way that we actually conceive the line, how the merchants buy the line, how we go to market with the line is very, very different than anything we've done before. It's much faster. It's much more agile.
We are making strong investments in the business in order to help facilitate all of that. One perfect example of that is personalization. That's an opportunity we just invested in the suite of machine learning tools that will help us introduce personalization to our consumer as we move forward. So we're doing I can't I could go on and on all day over a transformation, but lots of really exciting things happening within the business. Anything you want to add?
Yes. One other big one to add is store network optimization, something we talk about a lot. We have a big opportunity as a company. We were over stored back in the 2010s, coming out of the 2007 time. And we got onto a path of closing a significant amount of stores.
More recently, once Fran came on board, we started opening stores and we started remodeling stores and really trying to modernize our brand. So we've been on a path. We've while we've closed over 475 stores, we've also delivered about 300 new store experiences, whether it's a remodel, a right size of a store or opening a new store. So it's a path that we've been on for a while and we're going to remain on for a while. This is a long burn and we have a lot of the fleet left to get through and I'm really excited about that path.
And you've been terrific about that. So Hollister, we started that journey. We're almost halfway through our U. S. Fleet in transforming our stores.
Abercrombie joined that party a little bit longer, so we haven't been on that journey as long. We're at about 10% on those stores, but we're seeing terrific reaction to our new stores. They're more productive. They're extremely more efficient. The Abercrombie stores are showing their opportunity to reduce our square footage sometimes by 30% and maintain the same top line business.
So lots of progress being made.
One of the things that you talked about in more detail on the Q2 call was the flagship rationalization program, which is part of this reconfiguring of the store base. Can you run us through the highlights of that? And then perhaps I wonder if you could share your thoughts stepping back, there are a number of companies who are moving away from these flagship locations. Why is that and why is that the right thing to do?
I think, well, I'll start with the second part of your question, then we'll head up to the first part. So for us specifically, flagships were bought in a very different time in retail. They were built they were big. They were an expensive build. They're expensive to operate.
And unfortunately for us, some of the real estate decisions were not made beyond the best streets and the best areas for us, and they're extremely tourist driven locations. We see an opportunity to transform those. We love the markets that we're in, but there's an opportunity to be much more efficient and much more localized in those markets. So for example, we announced earlier that we're closing our store in Milan. We now operate several Hollister stores in those malls.
We have relationships with those landlords and we can transition out of a big flagship and into 2 or 3 mall locations in Milan and run a much more productive business. I'll let Scott talk a little bit to the first part of that question.
Yes. These stores in total, they're a drag on our comps, they're a drag on our profitability. And as Fran mentioned, it's an amazing opportunity for us longer term to reposition within these markets. The store experience that you see in these flagships isn't our modern brand experience. And part of this is a financially motivated decision, but also part of it is just it's not the brand experience we want to deliver.
So a couple of really good benefits coming out of these opportunities for us to reposition within these markets and should benefit us both financially go forward, but also strengthening the brands.
What is it about those smaller stores that makes them more productive?
So the key to winning in those stores is omni. A lot of people talk about omni experience, but what the winning formula for Omni is the entire how do I explain it? So everybody can buy the suite of tools it takes to run Omni. You can have a pop in, you can have an order in store, ship from store, but it's the experience that the customer has from the minute that they decide to interact with your brand to the minute that they make their purchase to post purchase. So those smaller store experiences allow the consumer, for example, to purchase online, pick up in store, come in.
There's a segment of the store that allows them an efficiency that they can pick up their package and leave. That if they rather try it on, then we can help them into the fitting room or we can help them do an add on to their purchase. So it's a matter of segmenting those stores so that if they want an efficient experience, they can have 1. If they want a more of a shopping experience, they can have 1. But you can do that in considerably less square footage than those flags were built have many, many years ago.
Additionally, delivering goods to the store can be much more efficient. You can deliver much more timely and sort of in time inventory as opposed to having big back rooms filled with inventory that's really just sitting there and can be much more efficient.
How favorable is the store environment sorry, is the real estate environment at the moment as you seek out things like relocations on those smaller stores? Any color that you can give us on rents, leases that you're getting, the locations that you're getting looked at?
Yes. More recently, with some of the bankruptcies we've seen across the industry, more space has freed up in some of the malls we operate in and a lot of malls we're not in. So we've been able to be opportunistic in getting into some of these spaces, putting temp stores in place, and we'll continue to do that as we go throughout the fall and the spring of next year. In terms of the negotiations, we have great partnerships with our landlords. We're one of the few retailers out there that are investing within the mall.
We talked about remodels and rightsizing our stores, big opportunity for our brands as we modernize, but also a good opportunity for our landlords to partner with us so that when the time comes, we're making their malls look better and we hope that they're investing right alongside us in their malls. So it's over the last couple of years, it's been a nice relationship builder with us and our landlords and it's been a good environment for us.
And internationally as well, we have strong relationships with our landlords as well. Hollister was built originally as a mall based business internationally. So we know the malls, we know the landlords internationally that's going to help us really reposition our Abercrombie flags into those malls based on those relationships as well.
One question we're asking all conference participants this year is about the size of the U. S. Store base. So as you look out over the next couple of years, would you expect your total U. S.
Store base Hollister for Abercrombie to be bigger or smaller?
We look at our store base in square footage. We don't actually look at it just specifically in number of stores. What's important for us to our real estate and our data analytics team is understanding the size of a market, what the opportunity in that market is both from a store as well as a digital perspective, and then we build accordingly. Our goal is to have less square footage, but even potentially the same, if not more stores in the future. It's really about the market and the size of the store and the efficiency of that store within a market.
Correct me if I'm misrepresenting this, but I believe that you've had stronger traffic than other players in the mall, but perhaps some challenges more recently with conversion. Can you talk a little bit about the interplay there?
Yes. So our mall traffic domestically has been outpacing the competition. With that said, I think we're all struggling with less traffic than we would like to be seeing in the U. S. Malls.
But ridiculous expression I use is it's less worse than others. So that's good. Up until very recently, well actually, I'm going to back up before I say it, cross traffic channel is also very strong, which is exciting. And until recently, our conversion was also strong. We had a couple of missteps, I would say, from a fashion perspective, specifically in Hollister Girls Tops that we talked about on the call for Q2 that drove our conversion down a little bit for the Q2, but that's something a little bit newer for us.
I wonder if I could pick up on a point you made there on the environment. As you say traffic is a little challenged. Can you talk a little bit about the nature of the backdrop perhaps year to date in terms of how traffic has trended, how promotions have trended and how you expect that to develop in the second half of the year?
Well, what we saw in the Q2, which I think was true for most in our industry, is we saw a very tough May. We don't really like to talk about the weather, but when it is extreme in one direction or another, it certainly affected the business across the industry. We saw sequential improvement as June July proceeded and then we were pleased with our kickoff for back to school at the beginning of August as we talked about. There are competitors out there that seem to have higher levels of inventory. We have to be cognizant of that.
Everybody listens to the same calls and gets the same information. So we take that into consideration when we think about our outlook for the back half. With that said, back to school has been the same as last year. We didn't see any elevated motion specifically. Back half is the most competitive time of the year.
We are excited about our product. We have great reads already on some of the product that will be in for the back half of the year, and we're prepared to compete based on what we see happening out there.
If you try to isolate the consumer backdrop and you think about the second half of the year relative to the first half, are you planning for the environment to improve, to deteriorate or to stay roughly the same?
I would say roughly the same. The consumer appears strong in the U. S. Consumer confidence came out recently, still strong. Unemployment remains strong.
Wage growth is not super strong, but there gasoline prices are down. So it feels like a pretty good backdrop for the back half. Like France said, our inventories are in control. So we're controlling what we can control and that's why we're optimistic about the back half.
I think you mentioned on the call that back to the early back to school trends had started well. What do you think is driving that? Is it better product?
When we get product voice and experience aligned, our customer really responds. And I would tell you a great example of that would be denim and that would be in both brands. We just recently launched curvy jean for both brands. It's been really well received by the consumer. But when we take that product, we take the voice, we take the experience and bring those three things together, he and she responds.
So denim has been bottoms have been really trending probably the last year, denim trending within that. And we put together, for example, a campaign in Abercrombie called 96 Hours that spoke to denim. It was accentuated by what we are calling Curve Love, which is our new curvy jeans. And it resonated with the consumer. 96 Hours is the designation for a 4 day long weekend.
What better feeling does anybody have than on the 1st day, right, of a 4 day weekend you think you've got so much time ahead of you to relax and enjoy with your friends. And we put together a campaign that spoke to that through social and they responded terrifically. So I guess my answer is the right product with the right voice and the right experience all coming together as well received by our consumer.
I'm absolutely a big fan of the 4 day weekend. I think there's 3 more of them. But you mentioned the curvy jeans there. You've had a nice acceleration in the denim business, I think, across the board. That category has been strong for a few people and a lot of people are expanding into it.
Why is that? What's the opportunity there?
Slimes in general have been trending for probably the past year. I think it's just a fashion cycle that there's news when there's something new and a reason and a purpose to buy, the consumer responds. There's so many things happening in denim today that's making he and she want to buy something new. That's both between the rise of the jean, the wash of the jeans, the destruction on the bottom of the jeans. There's very strong trends happening that the consumer doesn't have and they want, and that's driving a lot of the business.
In total though, it's an interesting bottom cycle. I mean Abercrombie men's, we have a sneaker pant that's been terrific. That's essentially an evolution from a jogger with a cleaner bottom that the guy can wear out on date night. He can wear it to work. He can wear it to college.
I mean, it's a multipurpose use to it. So there's new innovation happening and that's what drives the consumer to go shopping.
Bottoms are trending. Other bits of your business that seem to be doing well include kids, intimate, swim. Can you talk a little bit about each of those and the reasons for the strength that you're seeing?
Sure. I'll start with kids. So our kids business has been strong. We're excited. We have a new prototype.
Back to the real estate conversation, we launched a new prototype for our kids business that has been very well received. Scott particularly likes that one. It is very
Small and very productive. Very A bold dream.
A very efficient model. But we also focused in when we were when I was talking earlier about the brands and focusing in on the brands. The kid brand prior to me being here was essentially sounds like a takedown from adult. It wasn't really a kid's line. The design team got closer to the customer, really actually has focus groups.
These 9 year old kids come into campus. We talk to them what matters to them. What matters is being soft, being comfortable, and we make sure that the product is right in line with what they are looking for. So that business has been trending. It's a must grow category for us.
The other 2 must grow categories you mentioned are also working for us, which are intimates, which we run under the Gilly Hicks name. The consumer has responded very well and that's across product categories that's both bras, panties, lounge. It's a brand that we will not compete with Hollister because today you find it within the Hollister stores and we're going to make sure that the categories are specific to intimate apparel and don't duplicate what's going on in the Hollister brand. We're expanding real estate there as well. We've been opportunistic.
We've been able to open up some side by sides as well as some carve outs and some pop ups. And then lastly, WIM, which has also been very strong. Hollister just had another record quarter that's year over year both girls and guys hit a record for Q2. Excited how that business has grown tremendously over the past 3 years. Any other categories where you're under penetrated or seeing opportunity?
The other big category for us is the Abercrombie women's dresses. We came off of a very tough Q4 where it really cost us several comp points and the teams dug in, they figured out what they were missing as far as the trend went and we uncovered something called the 1 and done, which is how we refer to it. And that's essentially rompers and pantsuits and things that you can put on 1 piece and you're done and out the door you go. And that is now driven Q1 and Q2 record sales for Abercrombie women's in our dress area.
On the other hand, I think an area that's been a little bit weaker is the tops business. And again, it's not just you, that's something that we've seen elsewhere as well. Do you can you share some insights on why that is and perhaps some things that you're doing within your business to try to address that?
It's funny. Normally, in a bottom cycle, the tops do come along with it. It's been a little disappointing to us, but it's been a little bit more difficult than we would have anticipated. Specifically, for the Q2, last year in Hollister Growth, we had a record quarter. We had a trend called off the shoulder, which was off the charts and really, really strong.
And everything that we did this year for the Q2, we just could not comp the strength of that trend. But what we did do is identify what we believe were the problems a little bit off in the fashion, a little bit away from our real core DNA. And we of course corrected those tops and we've seen sequential improvement since that point in time and we continue to see improvement. So we're cautiously optimistic that we are on a better track, but it's a good point. It has been industry wide for some reason that the female tops business has been a bit tough.
We've talked a bit about products. I wonder if we could move for a moment to marketing and brand. I think as part of the strategies in recent year, you've made some changes to the brand messages. Can you talk a little bit about how those new messages are resonating and perhaps any broader comments on how you've rethought the approach to marketing in the business?
Well, so we never used to market. We actually didn't even have a It's
a big change.
It's a big change. We didn't even have a marketing muscle. We essentially used our stores and our photographs in our stores to market. So we have learned so much. I'm incredibly proud of what the teams have accomplished and how much they've actually learned in marketing over the past several years.
Hollister is a fantastic example. It is literally from my perspective industry leading. It is a fully integrated 360 degree marketing campaign from product voice to experience. Anywhere that you interface with the Hollister brand, whether you go on to our show that's on YouTube, whether you're on Snap, whether you're on Instagram, whether you're on email, whether you're in a store, you will see the same seamless experience and the consumer continues to resonate with that. This back to school, we just we use Emma Chamberlain.
She's probably the hottest teen influencer that's out there. She's got millions of followers. She did a video for us, a denim video for us. Now these kids watch a video for 6 seconds, right? You have to even take a 9 second video and make it 6 seconds to get their attention span.
This is a 6 minute video on denim and we've had over a 1000000 views. So it just shows the engagement that when you create the right brand DNA, the right purpose for the brand and the right influence and you get them together, you get an incredible reaction. So super excited to see what's happened with Hollister marketing.
Lots of stuff going on, on digital marketing, but I'd love to just get your thoughts from a moment on digital commerce. Dollars 1,000,000,000 business today, how big can that get? You've talked a little bit about some of those omni initiatives. How important are those to driving the business?
Yes, currently over $1,000,000,000 last year in 2018, continued growth in the future. I mean, the customer is going there. That's part of the growth, but also the new tools that you mentioned, buy online, pick up in store, it's just another option for the customer that will help accelerate that digital growth. We've been investing here for years and we will continue to invest here between mobile web and our apps. Those are our 2 biggest sources of traffic to our digital brand.
So our customers, they live on the phone, it's the age of our customer and that's the number one way to our brand. So big investment area and we see continued growth ahead. The great thing about our digital business is it's profitable, which is good. We have a large business that leverages a few DCs around the world. So it's a good profitable business for us.
Great. One of the things that having a complex digital and omnichannel business does is it raises the stakes for the supply chain and response capabilities. Can you talk a little bit about what you're doing what you're doing there and how you make sure you're getting product onto the shelves quickly enough?
I'll kick off. I'll hand it over to Ted. So we have, as everybody knows, it's a global business and we do have 60 Cs around the world in order to do exactly that. We have to make sure that we can get to the consumer as fast as possible and through the variety of our DCs, one of the ways that we do that. There's also a lot of upstream work being done by the supply chain team in order to make sure that they route each of the orders appropriately.
Not to get too tactical, but when you have a purchase online pickup in store and it's coming from many different locations, you can end up sensing yourself into a bad place. So you have to make sure that your system, the way that you're reading the orders that you're most efficient in how you decide to deliver that order.
Yes. It's one of our key transformation initiatives we refer to as concept of customer. And this is really getting to the customer side of that, delivering to the customer. So while we've taken out many weeks of our supply chain upfront and getting our product from our vendors quicker, it's also about getting it to the customer quicker. There's hardware investments you make, but there's a lot of process investments that we can just be smarter, how we waive orders through our distribution center.
We've made some good investments over the past couple of years. Amazon has reset the expectations of the customer. Many of us are living through that, and we've all changed our expectations on delivery. So we're trying to catch up quickly.
Now what I've strategically done here is move to the discussion of supply chain, so I can seamlessly move to a tariff question. You imported, I believe, around 25% merchandise receipts from China of your U. S. Business in 2018. Can you talk about how you're thinking about the impact of tariffs for the balance of the year and into next year?
So we have been on a journey to reduce our reliance on China significantly before the entire tariff conversation came up. We have really strong relationships with our supply chain, with our sourcing base, and we've been with many of them for many, many years. They also started to move offshore years ago and have brought us along with them. So to your point, if you asked us the question a few years ago, we probably had 40% of our dependence. We've reduced that to it will be less than 20% this year and next year our expectation is for it to be in the low teens.
So staying with our vendor base, moving offshore, we today produce in 17 countries around the world. So we have a lot of agility in our manufacturing. We do not expect to pass on the tariffs at this point in time in the back half of the year. We also announced that during our call last year. Our ticket prices will remain the same.
And at this point, it's too early to comment on 'twenty. There's a lot of unknowns that are out there, but we will continue to reduce our dependence. We will continue to be as agile as we have been in our approach to the entire tariff situation.
Very clear. Now you mentioned not taking price this year. How do you think about the ability of your brands in the categories that you operate and the ability to take price maybe longer term?
Our goal is to give the best quality and the best value to our customer. Our expectation is to not raise our prices, but it is to mitigate what our challenges are coming from the tariffs. And once we know more about that, then we will certainly evaluate the situation.
So as you think today, one of the questions that we're answering all of the participants at the conference and you've partially answered this is, you look across the following options for tariff mitigation, which would you see as the biggest one. First is moving production or supply chain reconfiguration. 2nd is negotiations with vendors or other players in the supply chain. And third is taking price, which would you say is the biggest one?
I mean, for us right now, 12 are the way that we're going, and that's where we intend to stay for the near term till we have more information.
Right. I agree. I think it's that order. The customer always votes with their dollars. So while people can say they're going to take price, you never really know until you put the price out there and the customer actually transacts.
So we're controlling what we can control, which is really 1 and 2 at this
point. Very clear. Now I think you exited the last quarter with inventory a little bit ahead of inventory growth a little bit ahead of sales growth. Was one of the drivers of that the desire to bring product in from China sooner to offset potential tariffs? Or was that not a piece of the
picture? No. We're actually comfortable with where our inventory is. It was a little bit elevated because of in transit and a few changes in our floor set cadence, but that was really the driver. Our inventories are very healthy.
We don't have challenges that we're concerned about.
Yes. And we have not forward loaded inventory due to the tariffs.
Right. And as if you look to the end of the year, would you expect inventory growth to exceed sales growth in the second half or?
Our goal is always to keep it within a point or 2 on either side of sales. So that's what we manage to and we have a very tight process that helps us get there.
Marvelous. Now I want to make sure that I open it up to the floor. So if anyone has any questions, please do pop your hand up. There's one upfront here. So a roving mic will weave its way around these densely packed tables and make its way to you.
Anyway, Fran, you were mentioning at the outset how customer base at Abercrombie has evolved over the last some years, teens up maybe 21 to 22 and then 22 to 29 or whatever now. Given that first part, I call kids in school and the other part of people that are all working should be working. Could you explain how your consumer value proposition has changed over that time?
Yes. So our purpose and brand DNA of Abercrombie is resonating with this early to mid-twenty consumer because they to your point they have either chosen to go to college or not, but they're in their first job. They're maybe they're in a new city. They're making new friends. And our product, what we put out there for the value of what we put it out there for is very, very strong and that is resonating with our consumer.
Also on the experience side, what we've noticed too is how the Gen Z shops versus the millennial customer. So we've actually changed our stores a little bit to evolve closer to that customer. So our Abercrombie stores, the new store you'll see a totally different fitting room experience than you see in the Hollister stores and as well as all the digital capabilities, a little more seamless and quick in Abercrombie because this customer is pressed for time because they are trying to juggle so many things with their first job as well as on the digital end, much more digitally focused customer. So we're seeing the customer spread apart versus where it was when Fran first came in here and we're adapting how we deliver that experience in that way.
A great customer insight example is we've said what's important to you in a store experience. And what they came back to us to say was the fitting room. There's not a good fitting room experience in the mall. We said, why is that important to you? Well, it's because it's when I have my private time, I have my bank account, I can figure out whether or not I can afford my purchase, I can send a picture to my friend and see whether or not they think I look good or not.
So we focused on the fitting rooms and we created a fitting room experience that enables them to do that. It has lighting in it, different lighting in it, it has music, it has a call button for the associate. So that's an example where customer insight and really understanding that consumer helped us to evolve our stores.
Thanks.
Thank you, Fred and Scott for sharing the insights about the company. You mentioned the company is using data machine learning to drive personalization. That's on the customer experience side. I wonder what you guys are doing using data to drive the trends and getting the trends right, getting the styles right?
Well, from a fashion trend perspective, is that what you mean? From a trend perspective, I have to say the best for us is retail 101, which is getting close to the customer. We spent a tremendous amount of time getting close to our customer in visiting our stores and visiting events that our customers are at Hollister, I'll use as an example. We have a first ever high school ambassador program. We have kids around the country that are ambassadors that are helping us understand what's happening in their high schools and what's important to them, what's happening in fashion.
We have a high school nation program where we go into these schools and we do, for example, we do things from lunchtime concerts to counseling to anti bullying. And we are really close to this consumer and understanding what they're looking for from a trend perspective. We go to BeautyCon, we go to SneakerCon, like we are out the teams are out there really understanding and researching this customer and finding the trends. And that's the best way I can tell you from our perspective to stay close to the customer and get the trends right.
Now we've spent a lot of time talking about the U. S, but a third of your business is outside the U. S. So I wonder if we could spend a few minutes, unfortunately not quite a third of the allocated time speaking about that. Perhaps starting in Europe, can you talk about some of the trends that you're seeing there?
You also have some new management coming into that business. What are the opportunities there?
So what's pretty exciting is that we have been able to build a very profitable and productive business outside the United States over the past several years. A third of our business is outside the U. S. And with that, it was done mostly from Columbus, Ohio. It was done very centrally.
Now that we have a goal of essentially doubling that business in next several years, we realized that in order to export our playbooks and get close to the customer, we needed to build teams in regions outside. So we just named to your point last week ahead of Europe and ahead of China based in London and Shanghai. They will build out teams underneath them and those associates will focus on things like product assortments, pricing and promotion, calendarization, marketing and really helping us get much closer to the consumer and understanding how different things are, particularly from a calendar perspective. Back to school is a great example. Back to school in the U.
S. Starts July week 2 or week 3. It peaks the week after Labor Day in the Northeast. And it hasn't even started internationally yet. It starts to build as we head into September.
And so those are important things that we need to know and understand when we do our assortments and we set our product around the world.
Can you talk a little bit about the any nuances in the challenges that you've perhaps seen in the Asia business and what the fixes there might be?
Yes, I'll kick that one off. Yes, for Asia, we've been very focused on the digital business to this point, not as much of a real estate play as we've seen in the U. S. And in Europe. The real estate environment in China specifically is pretty dynamic.
They build a mall on top of a mall on top of another mall. So we've really been focused on the digital business, mainly Tmall being the marketplace that is the biggest in China. So focus there. I've been happy with our growth at this point. Putting someone on the ground with Ogawu on the ground in China really gives us the chance to accelerate going forward.
So optimistic about China long term.
You have a Chinese consumer who's spending in China, but also outside. Can you talk a little bit about the trends, how that's shifting and maybe a comment on the overall health of that group?
I'll kick it off. The China customer traveling for us has never been a significant part of our business. By having a presence in China for years, they haven't needed to leave that area to discover our brand. So we haven't seen as big of an impact across Europe, which I've read from others on the Chinese customer traveling around. We have seen a soft tourist business globally, especially in the U.
S. We've seen that on the coast. Currencies have been very weak outside of the U. S, which I think is slowing down tourism a little bit. So we're not immune to that.
And then our flagship business in Europe, we've talked quarter after quarter has been a little tougher and that's mainly a tourist customer. But our goal as a leadership team is to build a local customer. We're building very large loyalty programs have a lot of runway to head there.
Good segue. Thank you. Loyalty programs, a big opportunity. Can you talk us through what you're doing there? How much of your customer base is on it today?
Where can I get to?
Well, we are very proud of our loyalty program. We kicked off the Hollister 1 a couple of years ago and more recently the Abercrombie 1. They've continued to grow double digit year after year and quarter after quarter. We have close to 30,000,000 members with accounts in our loyalty programs. And that's resonating with them back to the initial conversation of product voice and experience.
But when we can communicate with them and help them understand and help have them help us understand what they're looking for, it's a good mix.
Any changes to how you approach loyalty? I suppose what I'm thinking of here is that should a loyalty program be more focused on giving discounts or more focused on building relationships and experiences?
Number 1 would be relationships and experiences. We've found things as a great example like a gift with purchase works very well with our loyalty program. This past weekend, we had a nice loyalty program with Hollister on a back to school blanket that really resonated with our consumer. So yes, you're right, sometimes it's a very transactional and that is part of what loyalty is, but building experiences, gift with purchases, those are the things that ideally long term we will build into the program.
How does it affect the P and L from a profitability perspective or is it more about driving the top line?
It's more about driving the top line. It's a very, very minimal drag on the total. And when we think about the lifetime value of a customer, it's a great investment to be making. Fran also mentioned personalization earlier. And this gives us an amazing data set to use with our customers to better personalize their journey with us.
So we think longer term, having this connection with the customer, they've raised their hands to be part of our brands and we can leverage that to better personalize their experience, which should hopefully raise their lifetime value long term.
One more question on the margin, key cost buckets, wages, freight in particular, they've been the key talking points over the last year or so. How are they trending?
I'd say freight has stabilized a bit. There was some shocks to the market last year with tariffs, people moving around a lot of freight. I think that has stabilized. On the wages side, we're mainly a part time hirer in our stores. It's our biggest headcount.
And we continue to see part time and minimum wage inflation. That's been baked into our model for years and will continue to be go forward and we're just finding productivity opportunities to offset.
Marvelous. Now we're coming up against the end of the time here. So perhaps final question from me. I think that there is always going to be an element of promotionality in the business and clearly that will ebb and flow and it's important in different levels at different times of the year. Is there anything structurally that needs to change about the level of promotionality in the business or the way that that's tackled?
So it's a reality, right? And I mean, it's definitely a reality of our business today. I mean, both brands are promotional. We understand that. I think that when you get your product, your voice and your experience right and you get your brand purpose and your brand DNA really appreciated by the customer, that's when you can see an opportunity to raise your AUR and reduce your promotion.
So that to me is the winning formula and how that works.
Marvelous. Well, thank you so much for joining us today. We really appreciate you sharing all your insights. And thanks everyone for joining us with your questions.