At this time, I'd like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.
Thank you. Good morning, welcome to our first quarter 2018 earnings call. Joining me today are Fran Horowitz, Chief Executive Officer, Joanne Crevoiserat, Chief Operating Officer, and Scott Lipesky, Chief Financial Officer. Earlier this morning, we issued our first quarter earnings release, which is available on our website at corporate.abercrombie.com under the investor section. Also available on our website is an investor presentation, which we will be referring to in our comments during this call. Before we begin, I remind you that any forward-looking statements we make today are subject to our safe harbor statement found in our SEC filings. In addition, we'll be referring to certain adjusted non-GAAP financial measures during the call. Additional details and a reconciliation of GAAP to non-GAAP financial measures are included in the release issued earlier this morning.
Due to the calendar shift resulting from the 53rd week in fiscal 2017, first quarter comp sales are compared to the 13-week period ended May 6, 2017. With that, I will turn it over to Fran.
Thanks, Brian. Good morning, everyone, thank you for joining us today. We are off to a strong start in 2018 with our first quarter's performance supported by our brand's improving health, effective marketing, and growing consumer confidence. We are pleased with our performance across all brands. The consistent execution of our playbooks delivered a solid quarter of sales growth and bottom-line improvement with a 5% increase in comp sales, gross margin expansion, and significant expense leverage, all while continuing to make progress transforming our business. We were pleased with the gross margin improvement, which exceeded our expectations for the quarter and remains a focus as we improve the health of our brands, work to reduce our promotional intensity, and tightly manage inventory. Hollister continued to drive sales growth across all channels and geographies, Abercrombie built momentum with another quarter of positive comp sales.
Direct-to-consumer net sales increased 14% compared to last year, with another quarter of growth across both brands and geographies. More than two-thirds of our digital traffic is from mobile, with 17% of that coming from our highly rated app, which is our fastest-growing digital platform. Digital sales are an important driver of our business as customers increasingly start their shopping journey online. We are well positioned to capitalize on this trend and continue to invest to enhance our omni capabilities and roll them out globally. We are very happy with our marketing execution this quarter. Our marketing is increasingly integrated and driving engagement with our customers. We are fueling these efforts with higher spend. We are moving the needle on engagement, consideration, and traffic, with traffic to our stores in North America across brands ahead of industry trends.
In addition to stronger traffic, we've seen further improvement in brand health-related metrics for both brands, including external metrics such as YouGov BrandIndex and our own internal Voice of the Customer and customer satisfaction scores. We continue to make progress with our loyalty programs, growing member accounts to approximately 17 million across brands. Our loyalty club members continue to spend more and more often. These programs are providing valuable data and insights that enable us to direct special attention to our most valuable customers and explore how to harness their engagement through exclusive products and experiences. Turning to the brand's performance. We continue to focus our execution on aligning product, voice, and experience, which we believe drives traffic and conversion. Customer centricity remains core to our success.
Our teams continue to spend countless hours with our customers in our stores and events to listen and learn about their preferences. At Hollister, we had another quarter of strong growth with comp sales up 6%, driven by continued strength in North America and Asia. We saw strength across genders with record first quarter sales for guys. From an assortment architecture perspective, we've said previously, we devote our attention to our must-win and must-grow categories. This is a strategic focus, as must-win are the core categories that drive our business and that we're known for, such as graphic tees, outerwear, and jeans. Must-grow are those categories adjacent and complementary to must-win, such as swim, underwear, and Gilly Hicks, where we believe we're able to drive significant growth and take share.
These categories accounted for more than two-thirds of Hollister sales, with growth driven by record first quarter sales in denim and swim. Another strong quarter in graphic tees and outerwear. We saw a strong response to newness and positioned ourselves to chase effectively during the quarter with the triggering of more than 20% of second quarter receipts based on first quarter learnings. We've also seen a continued enthusiastic response to Gilly Hicks. We've invested behind our Gilly Hicks brand, dedicating more space to it. We are pleased with the results. We see it drawing in new customers and adding incremental sales to the Hollister brand. We continue to explore Gilly's potential and see further opportunity for growth. We believe Hollister's marketing is industry-leading. Our marketing campaign execution this year is the best it has ever been. We are seeing high levels of engagement across platforms and programs.
Carpe Now is our most successful campaign to date, with more than 1.5 billion impressions across all platforms and more than 78 million engagements with our content in the first quarter. At Abercrombie, we saw our second consecutive quarter of positive comps, with comp sales up 3%, including strength in our stabilizing North America base, driven by traffic and conversion across channels. From an international sales perspective, we had strong performance in Asia, while Europe experienced a tougher quarter, due in part to a late spring and continued traffic challenges in our flagship locations. Abercrombie also continues to focus on must-win and must-grow categories, which accounted for more than two-thirds of sales, with a balanced performance across genders. Abercrombie's must-win includes categories such as outerwear, fleece, jeans, and pants, and must-grow are those categories with the potential for significant growth, such as T-shirts, swim, and dresses.
Across genders, we saw strong performance in knits, tees, and graphics, and substantial growth in swim. We drove growth in women's bottoms, particularly denim, and in men's outerwear. Overall, customers responded strongly to newness across color, pattern, and details. We were able to chase at scale for the second quarter. Abercrombie Kids also had a strong quarter across genders and categories, with improved traffic and conversion. The Everybody Collection continues to perform strongly. In response to customer feedback and demand, we have plans to further build on this success. At our Investor Day, we explained that in 2018, we entered a transforming while growing phase. Joanne is going to provide further detail on current areas of focus and how we are leveraging our test-and-learn culture across the enterprise.
We continue to operate with balance sheet discipline, providing us a strong base to fund our transformation and the flexibility to accelerate investment when it makes sense to do so. Overall, I am pleased with another strong quarter and progress toward our goal of delivering top and bottom-line improvement in 2018, while we work to transform our business to enable long-term growth and value creation. With that, I will hand it over to Joanne.
Thanks, Fran. Good morning, everyone. This morning, I will add a bit of color to the work underway on our transformation efforts. We're taking a holistic approach across the enterprise to transform our business model to support our longer-term ambitions in a rapidly changing retail environment. As we covered in our Investor Day, we have supported these efforts with the creation of a transformation management office and supplemented our internal teams with external consultants to accelerate our transformation. Our focus at this early stage has been on identifying and prioritizing the areas with greatest potential upside from both a customer experience and an economic benefit perspective. As a result, we are now running multiple pilots across all work streams to inform our investments in people, processes, and systems. We have organized our efforts around four key areas.
The first area of focus is our real estate portfolio and the continuing optimization of our store network. We have made progress over a number of years in this area, but we continue to see opportunity. We have the lease flexibility to make this happen and the tools at our disposal to drive fixed costs down and improve productivity through store closures and rightsizing and expanding our prototype footprint through remodels and new store openings. These actions drive meaningful improvement in real estate productivity and customer engagement. In the first quarter, total square footage was down 3%, and we saw a high single-digit improvement in overall real estate productivity, even after adjusting for foreign currency and the calendar shift. Part of this effort is our focus on complementing or shifting from large format flagship stores with a plan to launch smaller mall-based stores to attract a local customer base.
In the first quarter, we exercised an early kick-out clause in our flagship in Copenhagen. This is a good example of using our balance sheet strength and liquidity to move swiftly on opportunities when appropriate. Another example is the opening of an A&F mall-based prototype store in the U.K. later this fall. We look forward to reading the results as we build a more local customer base. We see this mall-based approach as a key element to growing our penetration in the European market. As we previously discussed, our smaller footprint prototype, optimized for omni and informed by customer feedback, is driving productivity. Our new prototypes are some of the most productive in our fleet. In 2018, we plan to deliver 70 engaging new customer experiences through prototypes and remodels, while also rightsizing or closing some of our less productive stores.
By brand, we're planning for 13 A&F prototypes, including five new stores, seven rightsizes, and one remodel. Seven Kids prototypes, including three new stores and four rightsizes, and 50 Hollister new store formats, including 13 new stores, six rightsizes, and 31 remodels. For the year, we still expect to close up to 60 stores in the U.S., the final number being dependent on lease negotiations and business outcomes. Overall, in 2018, we expect to create new customer experiences in close to 10% of our fleet. By the end of the year, we will have updated approximately a third of our fleet with new experiences while still meaningfully shrinking our total real estate footprint. The second area of our transformation focus is on our digital and omnichannel capabilities. We continue to see the benefits of investments in our IT and omnichannel infrastructure with strong digital growth and penetration.
With the recent expansion of our omnichannel capabilities, we now have pop-ins, order in-store, and ship from store in about half of the 20 countries in which we operate. The expansion of these capabilities has helped drive engagement as we're seeing double-digit growth in pop-ins and order in-store. We're focused on delivering the best omnichannel experience in the most efficient manner. Over the past couple of years, we've built the functionality. We're now focused on driving efficiency of the variable cost associated with digital sales and enhancing the customer experience, which is always at the forefront. While we are at the beginning stages of this work, we've seen early wins, for example, around shipping costs. One of our projects is focused on reducing the number of shipments required to fulfill a customer's order, which helps us drive DTC shipping expense efficiency in the first quarter.
Turning to our third area of focus on concept to customer. Our goal here is to drive higher quality sales and improve speed and efficiency throughout our supply chain to be even more responsive to customer preferences and trends in the market. From a quality of sales perspective, we are focused on leveraging data and analytics to drive better product allocation and pricing decisions. In terms of speed throughout our supply chain, we've seen an early win in increasing our chase capabilities by expanding our sourcing base to new vendors and new geographies. This improved chase capability will have a direct impact in the second quarter from units we were able to chase at scale in the first quarter. The fourth and final area of focus is how we engage our customers through our marketing efforts.
We continue to scale our investments in marketing, the measurement, management, and optimization of these investments is increasingly important. We are building capabilities and tools to support these efforts. Early learnings from this work have already enabled us to redirect marketing spend more effectively. We're also focused on driving stronger engagement with our customers by leveraging our data to drive personalization and better targeting offers and experiences to reduce dependency on promotional messaging and increase the lifetime value of each customer. We look forward to being able to share more on these areas of focus and early results of our work in coming quarters. We outlined at our investor day, this transformation process will be a multi-year endeavor, with the initial stages being focused on testing and evaluating potential through pilot programs.
We're making investments in these transformation efforts while maintaining our disciplined approach to capital and expense management. We believe our continued focus on these areas is critical to the next phase of transformation for the company, and we are energized by the possibilities we see ahead of us. Now, I'll turn the call over to Scott to take you through the details of our first quarter results.
Thanks, Joanne. Good morning, everyone. Fran mentioned, we are pleased with our first quarter results. We continue to maintain financial discipline, delivering another quarter of strong expense leverage while investing in the strategic initiatives that are transforming the business and driving top-line growth. I'll cover our first quarter results, then provide an update on our outlook for 2018. Net sales were $731 million, up 11% from last year, with foreign currency accounting for approximately $25 million or four percentage points of the increase, and the calendar shift resulting from the 53rd week in 2017, accounting for approximately $10 million or one percentage point of the increase. Comp sales were up 5%, with positive comp sales in all brands. Pages six and seven of the investor presentation illustrate our recent comp sales performance.
By geography, comp sales for the quarter were up 8% in the U.S. and approximately flat in international markets. By brand, comp sales were up 6% for Hollister and up 3% for Abercrombie. Hollister delivered another quarter of comp sales growth with traffic being the primary driver. Abercrombie posted its second consecutive quarter of positive comp sales, with strength in the U.S. in both channels, where traffic and conversion both grew. Our direct-to-consumer business also continued to perform strongly, with double-digit growth in both the U.S. and international markets. For the quarter, DTC sales were up 14%, with comp sales up 8% and accounted for approximately 27% of total sales. Gross margin rate was 60.5%, 20 basis points higher than last year and better than our expectations coming into the quarter as we stabilize promotional activity. On a constant currency basis, gross margin rate was approximately flat.
I'll now recap the rest of our results for the quarter compared to last year on an adjusted non-GAAP basis. Excluded from our adjusted first quarter results were certain pre-tax legal charges of approximately $6 million. Beginning with expense. Adjusted operating expense, excluding other operating income, was up 2% to last year on significantly higher sales. We continue to maintain tight operating discipline, delivering 530 basis points of expense leverage. Aside from higher sales, the key drivers of expense leverage for the quarter came predominantly from store occupancy costs, coupled with savings from our ongoing continuous profit improvement initiative. This was partially offset by increased investments in marketing, lease termination charges, and a provision for the restoration of incentive compensation. Adjusted operating loss narrowed to $37 million compared to a loss of $70 million last year, and included benefits from foreign currency of approximately $3 million.
The adjusted effective tax rate for the quarter was 5%, as tax benefits on a pre-tax loss were reduced by tax charges of $8 million related to a change in share-based compensation accounting standards that went into effect last year. Adjusted net loss per diluted share improved to $0.56 compared to a net loss per diluted share of $0.91 last year, and included benefits from foreign currency of approximately $0.03. Turning to the balance sheet. We ended the quarter with $592 million in cash, compared to $421 million last year, and $253 million in gross borrowings outstanding, compared to $268 million last year. We continue to maintain a strong balance sheet to ensure we have the necessary liquidity available to execute against our strategic plans. We ended the first quarter with inventory up 2% compared to last year, in line with our expectations coming into the quarter.
Our inventory is well-balanced, reflecting our ongoing focus on assortment architecture and tight inventory management, balanced with continued investment in our must-win and must-grow categories. Looking forward, we expect to end the second quarter with inventory up low single digits. Turning to our outlook for 2018. We now expect both comp sales and net sales to be up in the range of 2%-4%. For the second quarter, we expect net sales to be up high single digits, including benefits of approximately $10 million from foreign currency and approximately $30 million from the calendar shift. For the full year, we expect foreign currency to benefit net sales by approximately $50 million, and the loss of 2017's 53rd week to adversely impact net sales by approximately $40 million, as detailed on page 12 of the investor presentation.
We continue to expect gross margin rate for the year to be up slightly to the 2017 rate of 59.7%, with higher average unit retail, including net benefits from foreign currency, to be partially offset by slightly higher average unit costs. For the full year, based on the midpoint of our sales outlook, we now expect GAAP operating expense to be up approximately 2% from 2017 adjusted operating expense of $2 billion. Relative to our prior full-year outlook, this includes certain legal charges of $6 million, lease termination charges of $4 million, and volume-related expenses on higher sales. We are maintaining a disciplined approach and continue to expect to drive operating leverage for the year.
For the second quarter, we expect operating expense to be up mid-single digits from fiscal 2017 adjusted non-GAAP operating expense of $479 million, reflecting higher volume-related expenses, including the impact of foreign currency and the calendar shift, as well as increased marketing spend to improve our brand reach. We expect the full-year effective tax rate to be in the mid-30s, including tax charges of approximately $9 million related to the share-based compensation awards, the majority of which were reflected in our first quarter results. For the remainder of the year, we expect the effective tax rate to be in the mid to upper 20s. Beyond 2018, we currently do not anticipate share-based compensation significantly impacting the effective tax rate. Moving on to capital allocation. Coming out of the quarter, we continue to maintain a strong liquidity position.
Consistent with what we said at our investor day, as we move through 2018, we expect to exceed our minimum liquidity target of $700 million as we evaluate opportunities to accelerate potential investments. These would include store closures, including flagship lease buyouts and kick-outs, store remodels and right sizes, new store openings, as well as investments to accelerate our transformation efforts. For 2018, we now expect capital expenditures to be in the range of $135 million-$140 million, up from our previous expectation of $130 million, reflecting accelerated investments in systems and tools informed by early findings related to our transformation efforts. Our CapEx plans for the year include approximately $85 million for new store and store updates, and between $50 million and $55 million for the continued rollout of omni-channel and CRM capabilities, including our loyalty programs and IT systems and tools.
After investing in our business in those projects that have the highest return on a risk-adjusted basis, our remaining capital allocation priority is to return cash to shareholders through dividends and share repurchases, which are evaluated quarterly with our board of directors, considering both liquidity and valuation factors. During the first quarter, we repurchased approximately 800,000 shares at an aggregate cost of approximately $19 million. As of quarter end, we had approximately 6 million shares remaining available for purchase under our publicly announced stock repurchase authorization. We recently announced that our board of directors approved a $0.20 quarterly dividend. With that, I'll turn the call back over to Fran.
Thank you, Scott. We had a strong first quarter of execution. We are on track to deliver another year of progress, including top and bottom-line growth in 2018 while investing in our ongoing transformation.
Our efforts are focused on transforming our operating model to deliver an improved customer experience in a rapidly changing retail environment. Through our transformation efforts, we are testing and learning across multiple fronts and have the balance sheet to accelerate investments where we see promise in omnichannel experience, marketing, and tools and technology to strengthen our execution and customer engagement. Thank you. With that, I'll hand it back to Brian.
Thanks, Fran. That concludes our prepared comments. We will now be happy to take your questions. As a reminder, please limit yourself to one question so we can speak to as many of you as possible. Thank you.
Thank you, sir. If you'd like to ask a question, again, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our queue. We again ask that you please limit yourself to one question. It's star one to enter the queue. We'll take our first question from Lorraine Hutchinson with Bank of America.
Thank you. Good morning. I wanted to ask about the European business. I know you're doing some transformation of your real estate and store base, but I was wondering if you could comment on pricing and the price differentials between Europe and the U.S. Do you feel that the pricing in Europe is appropriate, or are there any actions that you need to take there to spur demand?
Hi, Lorraine, this is Joanne. Yeah, we spend a lot of time looking at our pricing, particularly our ticket price structure. We do that on a regular basis, and we look at our ticket prices as it relates to what the customer sees and relative competition in the region. As we've done that, as I mentioned, we do that regularly every season as we set every floor set. Back in 2015, we did an analysis and a lot of customer insight and research work that told us that our pricing was a little out of line. We did some testing at that time to lower pricing across both brands. It was more prominent in the Hollister brand at the time. We did some testing on that, and we saw the returns both in unit velocity and gross margin dollar accretion, and we did make investments in price.
I would say this is back to school time in 2015. We have continued to monitor our ticket pricing structure to make sure that we are in line. We feel good about where those ticket prices are now.
Thank you.
Next, we'll go to Doug Drummond with Wolfe Research.
Good morning. Thank you for taking our question. Joanne, how many international flagships have you identified for potential lease kick-outs in 2018? In that vein of real estate optimization, as you shift your store rollouts into new prototypes and we get into the final inning of that strategic move, how much do you expect to see productivity rise in terms of sales per square foot from where it is today? Thank you very much.
Yeah, we've been very encouraged by the changes we've made in our real estate optimization efforts across the board. We are driving productivity improvements, which is nice to see, but we have a lot of room to go there. Specifically with the flagships, we have no new kick-outs to announce. We did exercise a kick-out in Copenhagen, and we continue to work on improving the performance of those stores and negotiating with our landlords. Our long-term strategy is to move away from the large format flagship stores that are underperforming in some locations, and in other locations, just to complement those stores with mall-based stores in the regions to cultivate a more local customer base and not be as dependent on the tourist customer. We did that in Hong Kong, as an example, and have seen really terrific success.
In that case, we've tripled the productivity of that Hong Kong location. We are very encouraged by what we're seeing, and we continue to prioritize creating that mall-based chain.
Great. Best of luck.
Thank you.
Next, we'll go to Tiffany Kanaga with Deutsche Bank.
Hi. Thanks for taking our questions. Would you break down your first quarter gross margin performance in terms of AUR versus AUC, what you're seeing in terms of the promotional backdrop at the mall, and also quantify for us any benefit in the quarter from accounting changes like the gift card breakage moving to revenue? Additionally, what are you expecting in terms of potential gross profit margin improvement in the second quarter, given a similar compare as in the first quarter?
This is Scott. I will kick it off with the Q1 performance. We did see slight expansion in Q1, 20 basis points. On an FX neutral basis, we did see a slight increase in AUR offset by a slight increase in AUC. Some of that AUC is related to some transportation headwinds. As we think about the year, it is really a similar story. Slight expansion for the year with a slight increase in AUR offset by a slight increase in AUC with some of that inflation. I will also grab the accounting standards, a very minimal impact to the top line in Q1 related to the rev rec changes.
As it relates to AUR, I think there are a couple of things that we expect to drive the AUR improvement. One is we continue to expect some benefits from FX as we move through the year, in addition to tracking our brand health metrics, which continue to improve, and that is helping us step away from some of the promotional intensity.
Thank you so much. Can you comment on your expectations for the second quarter, please?
The expectations for the back half of the year are consistent with a slight expansion in gross margin. The rest of the year, I should say.
Next, we'll go to Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much. Good morning. I wanted to just try to get my model straightened out here on the calendar shift. Scott, did I hear you say the calendar shift in the second quarter would be a $10 million benefit to revenue? Is that right?
Yeah. Let me clear through this. The calendar shift in the first quarter was $10 million. In the second quarter, it'll be a $30 million benefit as we pick up that first week of August, which is obviously a peak back to school week, and move that into Q2. We will have to give back as we get into the back half of the year. Q3 is about a $20 million hurt, and Q4, where we'll obviously lose the full week from last year, is about a $60 million hurt. If you look at the front half in total, we're picking up about three points in total for total sales impact, then we give back about four points in the back half of the year. Hopefully that helps clear it up a bit.
Very much. Thank you for that color. I just wanted to follow up on your gross margin commentary. It sounds like pricing is starting to stabilize. You mentioned higher AUC. Is that just simply being driven by transportation or the weak dollar, or are there any other sort of inflationary pressures in the sourcing cost structure that you could share with us? Thanks.
On the AUC side, I'd say it's primarily being driven by transportation at this point. We're keeping our eyes on commodities. As you notice, cotton is ticking up a little bit, so our sourcing teams are on top of that and doing whatever they can to offset any potential inflation we see in commodities in the back half. At this point, primarily related to transportation. On the AUR side, again, driven by being able to pull back on some of that promotional intensity to offset the AUC up.
Great. Thank you.
Next, we'll go to Brian Tunick with Royal Bank of Canada.
Great. Thanks. I'll add my congrats to the team. I guess one short term, curious about monthly performance in the first quarter. It sounded like it was pretty tough out there around the spring break timeframe. Just curious what kind of maybe deviation you may have seen from month-to-month perspective throughout Q1. Then on the second question, really around the timing of the improvement in the A&F international flagships that you're talking about. I think you mentioned merchandising changes, loyalty, going after a local customer. Can you maybe hit on sort of when you think those will have impacts on the flagship business internationally? Thank you very much.
Sure. Hey, Brian Tunick, it's Fran Horowitz. Let's start with the first question regarding the quarter. Based on the amount of energy that we've put into our assortment architecture and the balanced assortment that the team has put into place for both brands, we were really able to navigate the quarter. We started off with a strong business in our lightweight outerwear and our denim. We saw shorts accelerate throughout the quarter. Within the quarter, we had terrific business in swim across both brands. We saw a strong performance throughout. The next question was timing of improvement on-
On the A&F flags, I'll pick that one up, Brian Tunick. We have been working to improve our execution in our flagship locations, really to make the most of the traffic that we are seeing to those locations. As we've commented, we've seen persistent traffic headwinds in those locations, which are primarily high street tourist locations. We've done a couple of things, including rolling out our loyalty programs, and investing in those stores to improve conversion, and we have seen benefits there. However, they have not been able to offset the headwinds we're seeing in traffic. Longer term, we expect to complement those locations with mall-based locations to cultivate, particularly for the A&F brand, a more local customer base.
We're also driving our digital business in those markets, and our digital business remains strong, both our own business as well as the business we have with our wholesale partners in those regions. We continue to prioritize working our way through the flagships and building a stronger base, particularly in our international markets.
Next, we'll go to Paul Lejuez with Citi.
Hey, thanks, guys. Can you talk about inventory by brand, what carryover levels look like, either by brand or geography as you enter 2Q, and what's the plan for the back half? Thanks.
Our current inventory levels, Paul, as we mentioned, are up about 2%. They are at the low end of our expectation. We're actually quite pleased with where we are starting the quarter. The assortments are very balanced. We are very focused on our must-win and our must-grow categories. We have really heavily invested in those categories. We also mentioned our opportunity to chase goods out of Q1 and heading into Q2, where we also focused in on bestsellers and known information about those. The agility of our supply chain has helped us really create quite a balance in our inventory.
Yeah. I'll just add to that, Paul. Our inventories are in great shape, and our teams are doing a great job with a lot of discipline, driving our investments behind the things that matter in our must-win and must-grow. In terms of where it's positioned, we do have inventory positioned in fueling our digital business, which continues to show strong growth as well as it being well balanced across geographies.
Gotcha. Thanks. Just one other, just higher level. I'm curious, what was the biggest surprise to you in the quarter, both positive and, if there's anything that fell short, would love to hear that as well.
I think overall, we were quite pleased with the quarter, obviously off to a strong start for the year. From a positive sense, we're excited to see that the brand health continues to improve for both brands. We're seeing that both from positive, from internal and external sources. I think the most exciting thing, potentially, is our effective marketing. We've had a really terrific Hollister integrated campaign this season called Carpe Now. We've seen 1.6 billion impressions across all campaigns and platforms, and almost 78 million engagements with that. I would say all in, that's probably the most exciting thing that we've seen. Across the board, lots of positivity happening.
Yeah. I will just add to that, Paul. It is nice to see that consumer confidence is improving. The backdrop in the space has been nice to see, and that they're voting on apparel certainly is a help in the industry. The other place I think that we've been pleased with the pace of our improvement is in the margin line where, with all of the efforts that Fran just mentioned, we were able to step away from some promotional activity and see some stabilization on the pricing side. That's been a plus for us in the first quarter and gives us confidence in our outlook of slightly positive gross margin performance for the year.
Once again, everyone, that is star one if you'd like to ask a question. We'll next go to Omar Saad with Evercore ISI.
Thank you for taking my question. It's nice to see the progress. One housekeeping question. Did you mention in Europe if you saw a turn in the business when the weather started to improve there? We've heard from a lot of retailers, U.S. and local European soft line retailers there, that the weather was a drag to start the spring. I also wanted to ask about, I thought you guys did a really good job at the Investor Day presenting the brand positioning for the Abercrombie & Fitch brand, leveraging the heritage. You're doing such a great job activating Hollister using digital marketing. Maybe talk a little bit about plans to activate the A&F side.
Yeah. I'll pick up the first part of that, Omar. In terms of Europe, we did see weaker traffic across the board as we moved through Q1 beyond just our flagship stores. We saw that more in Northern Europe as well, and we saw it in our seasonal categories. We have seen some improvement with the weather change.
I'll jump in on the second question, Omar. Thanks for that feedback. We talked a lot about our playbooks and Hollister being a little bit ahead of A&F as we talked about a bit on our journey and getting product voice and experience together. A&F is still a little bit further behind than Hollister is on that journey, but we're learning a tremendous amount as we move along. We had a successful campaign, like we talked about, for the fourth quarter that ran into the first quarter, the This Is The Time campaign, which started to build nice new perceptions about the brand. We will continue to test and learn, and continue to focus on integrating all of our channels for A&F as we have done for Hollister. We continue to get very close to our customer. We've also talked about that.
Associates are spending a lot of time in the stores talking to our customers, really understanding where they are, where they are interested in speaking with us on all of our different channels. Staying close to the customer and continuing on our playbooks as we head into the future.
Thanks. Good luck.
Next, we'll go to Mark Altschwager with Baird.
Great. Good morning. Thanks for taking the question. Just quickly on OpEx, to confirm, does the increase in the OpEx growth guidance just reflect the lease charges and legal charges, or any changes to your underlying spending plans excluding those items? Separately, just wanted to ask about Gilly Hicks. Obviously an evolving competitive backdrop in those categories. Can you frame up the medium-term opportunity and just any differential in merch margin as you grow those categories? Thank you.
Hey, Mark. It's Scott. I'll grab the first piece. On the OpEx, the 1%-2%, the one piece you left out there is the variable expense due to the higher sales guidance, the 2%-4%. Kind of raising that midpoint brings along some variable with it. That would complete the loop there.
Regarding Gilly Hicks, yes, we are quite pleased with the customer's response to the Gilly Hicks brand. We now carry it in all stores, but we still are in early stages, and we're still really testing and learning. What was exciting during the first quarter is we had success across all categories. Bralettes, undies, sleep, cozy. It's exciting to see that the customers are really responding across the board, and it's not driven by any specific category. It's continuing to bring in new customers, and we have lots of plans for it going forward. For example, we talked a little bit at Investor Day about creating some testing, some side by sides and some carve-outs and different presentations within the stores. We are really in a test and learn for Gilly at this point and looking forward to understanding the opportunities we had as we move ahead.
Yeah. In terms of merchandise margins, those margins are at or above, and we see it as accretive in total, the growth of Gilly.
Thanks. Best of luck.
Next, we'll go to Marni Shapiro with The Retail Tracker.
Hey, everybody. Congratulations. Great quarter. The store's looking fantastic. I wanted to talk a little bit just about your social media engagement as it relates to actual sales.
Yeah.
You're obviously seeing very good engagement on your social media and on all of your videos and things like that. You've been one of the first to have click to shop on Instagram, and things like that. I'm curious, are your customers clicking through on Instagram to actually make purchases and onto your site? What kind of traffic are you seeing? Are they using things like scan in store from your app or are these kind of a nice to have, not a need to have?
Marni, can you just repeat that last part because there was something that came across.
You have on your app, a scan in store, so you can scan the barcodes. Are your customers using that or is it just kind of a nice to have item, but they're not really using it?
Yeah. I guess I'll jump on that, Marni. It's Joanne. Our social media, as you mentioned, we've been very innovative, particularly, in the social media space and helping our customers navigate social media and browse and shop from our social media platforms. We are investing in our app. I don't have the specific details around the number of clicks through. We are seeing significant traffic improvement from our mobile sites and our apps and our investments in both social media engagement as well as the investments we've made in our app, are driving very strong growth in traffic, but also strong growth in conversion. We're seeing double-digit growth in conversion from the changes we're making in delivering, in those spaces, again, on both the mobile web as well as in our apps. We talked at Investor Day.
We continue to innovate in that space and look for rolling out more functionality for our customers, including shop the look, seamless sharing across platforms, which we know is important to our customers. We're staying very close to our customers to understand those things they prioritize, the things that they value. We've got a very agile test and learn approach in delivering this functionality where we can learn about customers' preferences and build and roll out very quickly. We're continuing to focus on those.
Next, we'll go to Janine Stichter with Jefferies.
Hi, good morning. Just wanted to ask about the Abercrombie prototype. Know it's still early days here, but wanted to see if you could expand on any of the learnings from the new prototype and how would you compare the initial lifts you're seeing versus what you saw with Hollister a few years ago. Then maybe any data you have on whether it's helping to attract a new customer versus an existing customer. Then on Hollister, any changes to the lifts you're seeing as you remodel more stores and expand the program across the fleet? Thank you.
Okay, Janine, it's Fran. Starting with the ANF prototype. We continue to be quite pleased with the performance of our prototype. We're really seeing 2 very important indicators. Number 1, productivity. As we've mentioned it several times, we're becoming more productive and less based. That is true throughout our prototypes as we look forward to expanding those, as we head throughout 2018. We're also hearing very strong feedback in our Voice of the Customer and from the customers that are visiting us in the store from the service levels to the fitting rooms to the assortments. Lots of very positive feedback from the customers directly as well. Relative to the Hollister a few years ago, Hollister continues to be strong. The prototypes continue to perform year-over-year. We are seeing similar engagements that we saw from the Hollister customer that we're seeing with the ANF customer.
Great. Thank you.
Next, we'll go to Dana Telsey with the Telsey Advisory Group.
Hi. Good morning, everyone, and nice to see the continuing improvement. As you think about the upcoming back to school and products for each of those divisions, how do you see the differentiation this year? Is there any marketing or what should we be noticing about back to school that will be different this year than in the past? Thank you.
If we think about back to school, Dana, we do have, as we've talked about, two different customers. The Hollister customer really focused on the high school consumer. We have our kids business, and we have our ANF business, which is targeted to that 21 to 24 year old. Yes, the shopping habits of those consumers will be a bit different as we head into back to school. We're focused on our must win and our must grow. Our key categories are already seeing strong performance in from the first quarter. The teams are out reacting to the business and making sure that the reorders that we talked about are really focused into those must win, must grow categories, and the best sellers that we already have.
We're looking forward to continuing our effective marketing and certainly, our loyalty programs and the strong relationship that we have with our consumer. Regarding marketing, we'll have to wait and see where we are with that, not to share on the call.
On the merchandise margin, whether it's denim or the other categories, is there opportunity for improvement in that merch margin go forward? Thank you.
Dana, we see opportunities to improve margin slightly this year, as we've mentioned, really through stabilization in price, and stepping away from the deep discounting from a ticket price structure. As I mentioned earlier, we feel good about how our ticket prices are positioned. As we've seen the customer respond to our product, and the closer we get to our customer and the improvements that we've made in our chase capability, help us deliver healthier margins. As our brand health improves, we also have been able to step away from some of the promotions. We saw that in the first quarter, where we exceeded our expectations in terms of the stabilization of price, that continues to be a focus of ours as we move forward.
Next-
I will add, Dana, let me just add to that we also expect some benefits from FX to support margins as we move through the year.
All right. Next, we'll go to Susan Anderson with B. Riley FBR.
Hi. Let me add my congrats on a nice quarter. I guess for both the A&F and Hollister brands, can you remind us what % of the fleet is now remodeled in the new format? Are you still seeing those formats outperform the older formats?
Yes, Susan, this is Joanne. We expect by the end of 2018 to have about a third of our fleet in new formats. If you think about our trajectory and when we started this, we really started in the Hollister brand. There's a much higher penetration in Hollister, approaching 50% of the fleet in the new format. We're just at the beginning stages in the A&F brand. Less in the A&F and Kids brands, much more deeply penetrated in new formats in the Hollister brand. I think if you look at our A store locations and A mall locations in Hollister, it's over 70%, or it will be over 70% by the end of the year. We're making nice progress. We started earlier in Hollister, and we're continuing to see strength in these remodels.
As we perform the remodels, we're seeing lifts in sales and nice returns well above our cost of capital. We have been very disciplined about how we approach remodels and new stores, in fact, all of our capital investments, and we do expect a return from these investments. We're prioritizing the investments where we expect to see the highest return. That's why we're further penetrated in A locations. We're also partnering with landlords and leveraging them to help us complete more and more of these remodels as we negotiate lease expirations. We feel great about.
Great.
Yeah, our remodel performance.
Great. That sounds good. Also maybe if you could just talk about your performance by brand online. Was it similar to the company average DTC performance?
Yes. We did see lifts across both brands online. I will mention that we had a very balanced performance this quarter in terms of sales. We saw positive comps online, but we also saw positive comps in our stores, which is obviously critically important. The online business, to your question, performed strongly across both brands and across geographies. Still very strong digital performance.
Great. That sounds good. Congrats again. Good luck next quarter.
Thank you.
Next, we'll go to Matthew Boss with J.P. Morgan.
Great. Thanks. This is Steve Zaccone on for Matt this morning. Thanks for taking our question. We have a follow-up on gross margin. Do you expect the benefit from FX to gross margin to continue at a similar level that you saw in the first quarter through the balance of the year? Can you talk about the underlying performance of gross margin by concept in the first quarter? Were you pleased with both concepts' reduction of promotional activity? Where do you see the
You got cut off there at the end, but I think I know where you were going. On the expected benefit from gross margin from FX, the outlook for the year is around $50 million impact to the top line on FX. Obviously, a lot of that flows right through to the margin line. $25 million of that has already been realized in Q1, so that will absolutely moderate as we go through the rest of the year. The gross margin by concept, yes, we saw the moderation of promotions across the two concepts, the three concepts, throughout the quarter. We do expect both brands to increase AUR as we go through the rest of the year, and that's embedded in our guidance.
That does conclude the Q&A portion of today's call. I'd like to turn it back over to Ms. Fran Horowitz for any additional or closing remarks.
Thank you. We are excited about the important year ahead of us. Our global team is prepared and well-equipped to compete and to deliver top and bottom-line growth in 2018, I look forward to updating all of you on our progress in August.
That does conclude today's conference. We thank everyone again for their participation.