Good morning, everyone, and welcome to Abercrombie and Fitch's 2018 Investor Day. Thanks for joining us. We're excited to have you here. And thanks to everyone who's joining on the webcast as well. We have a full morning planned for you.
As you can see, you will hear from a number of our leadership team members this morning. Following their presentations, we will hold a Q and A session to give you an opportunity to ask a few questions. Before we get started, I remind you that any forward looking statements we may make today are subject to our Safe Harbor statement found in our SEC filings. In addition, all 2017 financial references are to our adjusted non GAAP results. For additional information and a reconciliation of GAAP to non GAAP financial measures, please refer to our 10 ks that was filed on April 2.
With that, let's get things started with a brief video featuring our people and our campus as Fran makes her way onto the stage.
Good morning, everybody, and thank you for joining us today. A special thanks for those of you who made it through the New York City rain. I understand it was a bit difficult getting down here, so we appreciate that. And for those of you who have not visited with us in New Albany, Ohio, I hope that this video was somewhat of an eye opener for all of you. It really helps support what I hope to accomplish today and the team hopes to accomplish today, which is introducing all of you to the new Abercrombie and Fitch, the one that you really don't know.
That includes our culture, the true essence of the company, its people and what has always been true since David Abercrombie founded us 126 years ago with one store in New York City, 100 miles from the wilderness and it was filled with experience and adventure. Also, the transformation. The transformation that this company and its brands have been through in the past few years, where we are today and our near and longer term plans for the future. We believe we have differentiated brands, the people and the balance sheet to support the plans that we're going to discuss today. At a high level, our near term plans, that's what we see through 2020, call for us to deliver low single digit sales CAGR through positive comp sales and global market expansion and to double our 2017 adjusted EBIT margin through modest gross margin expansion and OpEx leverage.
We believe we have the foundations to grow the company domestically and internationally, leveraging our omnichannel capabilities to become a leading global omnichannel apparel retailer. I'm really excited today for all of you to hear from the team. Many of you may know Joanne Creboisarett, our COO. Joanne and I have been working side by side for the past 3.5 years, and I really could not have asked for a better partnership. We recently welcomed Scott Lipesky back to the company.
Scott is our Corporate CFO. Some of you may remember Scott was my CFO back in 2015 when I was President of Hollister, and we're thrilled that he's rejoined us. Christian Scott, our Brand President for Hollister and Gilly Hicks, and she's going to share all of the exciting things happening in her brand and her sub brand. And Stacia Anderson, our Brand President of Abercrombie Adults and Kids, and she as well is going to share all of the excitement and the progress being made in her brand. Today, we will walk you through the different elements that give us the confidence in our future.
Those elements are our convictions that guide our actions, the strong foundations we have built over the last few years and the assets and unique advantages we now have at our disposal. Our plan that we've clearly mapped out for delivering top and bottom line growth with a clear focus on quality of sales.
All of our inventory to customer shopping in our stores and ship from store, which enables us to maximize our inventory. While it's invisible to the customer, it allows all of our inventory to be shoppable online, resulting in greater sell through and ultimately, happier customers. The next step in our transformation include investments in store technology, such as a mobile platform for our associates, empowering them to support selling, order in store and checkout to deliver a better customer experience and new register technology to replace legacy equipment with more versatile platforms. And as I said, we continue to test, learn and improve the customer experience as we expand all of these offerings globally. Important part of our transformation focus is on our omni capabilities, and we're undertaking a rigorous cross functional view of our supply chain operations to ensure we're positioned to support our long term vision.
Becoming a leading global omnichannel retailer creates additional complexity to fulfill and delight our customers whenever and wherever they want it. This slide illustrates the many paths available from where our customer starts their purchase with us to where that purchase is fulfilled. The focus in this area of our transformation is on ensuring we can fulfill that customer promise as efficiently as possible, leveraging analytics to optimize fulfillment and execution as we scale these capabilities around the world. Now shifting to our concept of customer focus of our transformation efforts. In this phase, we're focused on improving our end to end supply chain.
And we'll begin with a view of where we are today. Several years ago, we recognized our customers were looking for more fashion and trend in our assortments. So we invested in capabilities to position our supply chain for greater speed, agility and flexibility, translating insights into timely action through strategic fabric platforming, read and react capabilities and short lead time chase capabilities. This allowed us to shorten lead times and have the capability to react to trend and changes in the business, capabilities we've leveraged over these past 2 years and an important contributor to our recent growth. You'll hear both Kristin and Stacia speak to this.
This is all supported by our strong sourcing strategy and supplier partnerships. We've expanded our sourcing base to 18 countries to drive the agility and flexibility we need to support our global business. And as we manage risk and diversify our sourcing network, we expect to continue to reduce our dependency on China. And we're far from done. As we frame the next phase of our transformation, we're focused on optimizing processes around where we source to ensure speed and efficiency.
Our need for speed is not satisfied, and our sourcing teams continue to look for opportunities to partner with factories in different parts of the world with advanced capabilities to improve our responsiveness and speed. We are addressing processes around how we buy and at what depth. We plan to better leverage the data we have to tailor our assortments. And with a growing global CRM database, we're learning daily about our customers' preferences. This data can also help inform how and when we allocate product across our supply chain and around the world.
We also plan to better leverage data and analytics with new size optimization and price optimization tools that we plan to roll out later this year, utilizing new software and analytics to improve AUR and maximize sell through. The 4th area of our focus is on marketing optimization. Over the past few years, we've invested significantly in marketing. And in just under 2 years, we've built a 14,000,000 member strong loyalty program, a strong foundation for our CRM database. With a solid base, the next phase of our transformation focus is on leveraging these assets, while continuing to grow the customer file to support top line growth.
These programs certainly drive engagement, loyalty members shop more often and spend more, and it's how we build a more personal longer term relationship with our customers. This program is probably one of the most tangible examples of our organization's shift to a customer centric mindset. Importantly, we also see it as an invaluable asset to support customer informed innovation. And we plan to continue to invest in the loyalty program by growing enrollment through continued geographic rollout, driving stronger engagement through more experiential features and building a greater sense of community. And as we drive the next phase of our transformation agenda, we see continued opportunity to leverage this growing data asset to personalize our communications with our customer to improve engagement and better target our promotional messaging, which we expect will improve AUR and to optimize our marketing investments for greater efficiency, improving measurement and analytics to drive decisions and placing our assets where they drive the highest return.
And as I mentioned, it will inform many of our investments around product and experience. So I've covered a lot here. But if you step back, you can see we're taking a disciplined but aggressive customer informed approach to growth. We have a tremendously talented team across our global operations who are up for the work ahead. Over the past few years, we stabilized and built a solid foundation.
Building on this platform, with a combination of our capabilities and the execution of the next phase of our transformation plan, we plan to deliver growth on both top and bottom lines while transforming our global operations. We expect these transformation efforts to position the company for accelerated growth to achieve our longer term ambition. I'll now introduce Kristin, who will provide more color on how we're going to harness all of this great infrastructure and investment for the Hollister brand. Kristin?
Thanks, Joanne, and good morning, everyone. I'm actually going to kick us off today with our Hollister brand video. I think it does a great job of showing who we are and what we stand for as a brand. So let's take a look.
At Hollister, we believe in liberating the spirit of an endless summer inside everyone because summer is not a season. It's a free form state of mind. That's why we create effortless California style. Style to live in, to make our own, wherever life takes us. Because summer's freedoms and possibilities should not just exist from June to August.
They should be endless.
So today, Hollister is the largest brand at A&F at over $2,000,000,000 in annual sales. And all metrics showcase a successful, focused execution of our playbook and point to our continued momentum. So as you saw in the video, Hollister's purpose is all about liberating the spirit of an endless summer inside everyone through carefree California style that's effortless and makes freedom and possibilities seem endless. Our goal is to be the brand for the global team, and we see this as a multibillion dollar opportunity with Antina Apparel. We're uniquely positioned and our customer, Gen Z, has global characteristics that align perfectly with our brand purpose and our DNA.
Here are a couple of examples. So we know Gen Z is more stressed out than any other generation. And at Hollister, we celebrate carefree California, where summer is not a season, but a state of mind. We're all about relieving stress. We know Gen Z is very achievement oriented, and we celebrate endless possibilities where every day brings a whole world of opportunity.
And we know Gen Z is also focused on inclusivity and acceptance. We celebrate the freedom to belong. You are always with friends here, no one is judging you and there are no demands other than to welcome others in. We have a strong and unique positioning in a clearly defined space, and it resonates with our target customer from a product, voice and experience perspective. So as you heard Fran say, the last few years have been all about stabilizing while transforming.
And Fran also mentions that the brands are at different places in their journey. However, what you'll hear from Stacia and I is that we're on a very similar path. In 2016, Hollister was able to stabilize, which then set us up to develop momentum and grow last year. Our strategies in 2017 were developed through a closeness to our customer and obsessive attention to detail, from everything from the music that we play in our stores to the product details. We also spent time developing our team and building out our leadership team.
Looking at last year from a playbook perspective, namely product, voice and experience, it's helpful in illustrating all the progress we made, passing the $2,000,000,000 annual sales mark, improving all of our brand health metrics that we monitor and how the changes that Fran described, particularly the customer centricity aspect, have taken root. I can confidently say that we know our customer. Last year, we received feedback from a 1000000 customers. We collectively as a team went on 2,000 store visits and we engaged with nearly 40,000 customers through surveys, focus groups and wear tests. We also focused on being where the team is and we were inspired by newer events that capture thousands of teens in their element.
A couple of examples of this are BeautyCon, which is a beauty fest of sorts, where 15,000 teens gather under one roof and experience everything they love in beauty or SneakerCon, where 20,000 teens get together to buy, sell and trade sneakers, which is one of the hottest trends amongst teens today. And we've been spending time at the high schools and high school hangouts as well, like sporting events and after school frappuccino runs, getting direct feedback from our target customers. These are incredible new sources of inspiration for us, where we can interact with our target customer and understand things like fashion trends or how their language is changing or what experiences they might be relating to today. The insights that we gained last year from all of this customer interaction has now been applied from everything from product to voice to experience. So starting with product.
From our closeness to our customer and utilizing all the data at our fingertips from our 10,000,000 loyalty members at the end of last year, we have a really good sense of what our customers want. We eliminated distractions last year and focused on products we refer to as our must win and must grow categories. In fact, all of our growth last year came from these categories. We define our must win as categories that our customers know and love us for, essentially our core products. And our focus is on gaining further market share in these categories.
A great example of this from last year is denim. So denim is our largest category at Hollister and we had a record year last year. We had double digit comps, set a new record for the brand, largest year in the history of the brand in denim, and we did this by innovating on fit and fabric, but also on segmenting our assortments based on customer preference around the world. This was the first time we had tried this strategy and it was quite successful, so we're anxious to apply it to other key categories this year. Our must grow categories are defined as adjacent categories that fulfill our lifestyle or fill a white space in the market.
We see this in both swim and in Gilly Hicks, which is a sub brand of Hollister that was created for her intimate lifestyle. Our unique positioning focused on the team allows us to differentiate from the competition in terms of waste and product. Last year, we nearly tripled these businesses. We're very excited about the possibilities for our must grow categories and we've seen strong engagement and the sound that these are driving new customers into the store and to the brand. Now let's take a quick look at a video that shows how Gilly's brand is positioned.
Now on to voice. Our success last year came down to innovative marketing. We were truly a standout in the industry. Informed by research and our team's closeness to the customer, we truly understand our customer, their shopping behaviors and preferences, their personal interests, their social media activity and how they want to engage with us. We know how, when and where we need to be a part of their lives as they begin their purchase journey.
And another thing we know about Gen Z is that the majority of their purchases do begin with some sort of online discovery. So one of our key initiatives last year was to become part of that discovery journey. And a key component of that is social engagement. Within social, we have industry leading engagement rates on Instagram. We have close relationships with our social media platforms to help us create best in class strategies.
And in fact, last year, we participated in 6 alphas and betas with our social and search partners. We also have best in class collaboration with Snapchat. Our Black Friday Snapchat filter was rated 1 of the best filters of 2017 by Snapchat. In addition to social engagement, we focus on video, which we know is a critical part of our content strategy. Teens spend more time online and watching video than they do sleeping.
So last year, we partnered with Awesomeness TV, a leading teen channel on YouTube, to create a show called This is Summer. We generated double digit lifts across all key brand metrics, including affinity and purchase and recommendation intent, all of which were well above branded content performance averages. And we generated 300,000,000 impressions with this show. This informed our programming for this year, which I'll share in a moment. Music is a critical part of the team's life, not just for listening, but they're also now inspired by the fashion that they're seeing within music.
We've integrated our brand into music. And a couple of examples from last year are that our Spotify mobile headliner, which we ran on the Wednesday before Thanksgiving, which is the busiest travel day of the year, generated over 1,000,000 views. We also partnered with platinum recording artist, Charlie Puth, to feature him and his top song of summer in our back to school and fall campaigns. Mobile ad gaming was also a part of our strategy. We saw millions of plays and an average of more than a minute of engagement versus average attention span of about 8 seconds.
2 of our mobile gaming ads, a denim focused one at back to school and a holiday focused one, generated the equivalent of 15 years of playtime and brand engagement. Within experience, Joanne spoke to real estate and omni as critical elements of our transformation and these and the interplay between physical and digital as fundamental to our brand experience. Starting with omni, as you've heard, we are an industry leader in omni channel experiences, allowing customers to shop where, when and how they want. We're very encouraged by the engagement that we're seeing with our pop ins and all the other omni initiatives that Joanne mentioned. In addition, our loyalty program, Club Cali, launched less than 2 years ago and already had more than 10,000,000 members globally at the end of the year.
Last year, club members spent 75% more on average than non members and transacted 90% more than non members. So these are clearly very valuable customers for us. Real estate has also been a key part of our experience strategy. Remodels are creating a more engaging customer experience and providing easier associate interaction in a bright, open and easy to shop environment. We've now completed remodels for approximately 70% of our best malls, and this will continue to be a big part of our growth strategy.
Last year, we made a lot of progress in staffing. We empowered our associates. Talent development and store training helped to deliver improved conversion and a better customer experience and was a great source of customer loyalty and insights for us. We circulated new training tools and best practices company wide that enabled stores globally to connect on successful approaches to best serve the customer. We delivered some robust training around product, metric deliverables, coaching tools, as well as peak time and campaign goals.
And we empowered our associates, who are closest to our customer, to drive their business and engage with customers more authentically, while reacting to their individual store nuances. So looking ahead to 2018 and beyond, the second phase that Fran referenced, transform and grow, we're building on positive momentum. We have a strong playbook and pipeline of growth initiatives, all bringing us even closer to our customer. Within product, we'll continue to drive our growth in must win and must grow, gaining market share in our core. We're very excited about the potential within our must grow categories.
We'll be expanding the Gilly Hicks brand with more side by side and carve outs. We're continuing to test and learn from our customers around the world in this brand, and we're very encouraged by what we're seeing and know this will be a new source of growth for us. We're also seeing tremendous growth in swim. This category fits perfectly with our brand DNA and has white space in the market. This year, we're focused on getting even better at distorting our product and trends across geographies based on customer preferences, building on what we learned on last year in denim.
We'll be applying this strategy to our must win and must grow categories this year. As Joanne mentioned, we're very focused on speed to market. This is a continuous test and learn approach for us. As an example, we recently went on a trip to new factories to explore opportunities to innovate on both product and speed to market. Our first test orders have just hit the stores this week, so I'm really excited to see how they do and what the potential is with this new speed initiative.
But to be clear, we're not looking for a trade off here. We have no desire to be disposable fast fashion. We're focused on speed, agility and flexibility, while also maintaining our obsessive attention to quality. We'll be able to satisfy our customers' desire for trend and further enhance our ability to act on our new customer insights through read and react capabilities, strategic fabric platforming and short lead time choose capabilities. So I've got a great example from last year of how this benefited us in Q4.
Our guys design and merchant team, they were on a trip in June, an inspiration trip, and they came back really excited about the emerging trend in Rose themed graphics. And so they quickly put test in order for back to school, and they developed some graphic tees that had Rose content on them. Those tees sold out so fast. And as we were in stores, our associates were so excited about the content and the reaction from the customers. And they said and by the way, girls are also shopping the guys' product because they love it so much.
And we hadn't seen the trend happening in girls, but we looked into the associates and saw their excitement, went back and designed into more Guys and Girls' Rose products that we were able to get in for Q4. We were able to deliver over $10,000,000 in this product in the Q4. It hit our top 10 in both guys and girls in a peak season, and it was something that we didn't have on our radar when we first concepted the season. So it's a great example of how we're able to react to trends quickly, listen to our associates and make big ideas bigger with our new agile supply chain. This behavior and the capability certainly contributed to our positive twelve pump in Q4.
As it relates to voice, we are constantly innovating and investing with a focus on getting even closer to our customer, driving top line growth and reiterating our brand purpose. In 2018, we're focused on evolving our content based on the team's ever changing preferences and engaging more with teams by bringing experiences to where they are. We've created disruptive and innovative marketing strategies. Our 2018 platform is called Carpe Now and it means live like it's summer every single day. It's much easier to watch this in video form than for me to try to explain it, so let's take a quick look.
So this platform, Live Like It's Summer Every Single Day, supports our brand purpose of celebrating endless possibilities and relieving stress. The most integrated campaign we've ever done. It's incorporated into everything we do from experience and content. Based on success of programs in 2017, we've taken these learnings and evolved our partnership with Autonomous TV. This year, we'll be incorporating influencers to expand our reach.
We'll build content around experiences, and we're incorporating live events and music into the programming. And so far, we're very pleased with the results. Our first three episodes achieved a 1000000 views in a very short amount of time. One of the themes we heard from our customers was the importance of experiences, which led us to launch the High School Nation Tour. It's a music festival on high school campuses around the country.
This event gives high school students the ability to experience our brand through exclusive product, Instagramable moments, great music and a chill and relaxing setting. This year, we've also added lunch programs to this tour to support our purpose of freedom to belong by promoting inclusivity and anti bullying. Another thing that we heard from our customers was the influence and trust they have with their friends, which led us to launch what we call the H Collective. This is the first ever on the ground grassroots high school brand ambassador program. This program helps us get our message into the world, but it also gives teens the responsibility and for many their first job, giving them the ability to achieve, which we know is very important to them.
We've been in a test and learn mode on this since last back to school and we're seeing great results. Our first three markets are showing an increase in both traffic and brand consideration. We're also seeing this opportunity literally change these ambassadors or as we call them agents' lives. We're helping them achieve things they never dreamed possible and giving them confidence to do so much more, going back on our purpose of endless possibilities. In February, we had our agents on our New Albany campus for a weekend of training before setting them loose in their markets.
And this next video and my final video is actual footage from their training weekend. It perfectly captures their excitement and love for the brand as well as how this new role is impacting them personally.
My initial like expectations for this was it's going to be like a boring like job training thing. Within the first five minutes, I was like, yeah, that's not that's not what we're going to do. As
a Hollister brand agent, I share my passion and love for the company and I have all those supporting them.
Having input and what's being brought out to, like, kids my age, that's such an amazing role in the game. I get to share the fun of Hollister with all my friends. That's my job.
This program honestly changed my life. I have this
So
we are now in the process of expanding this program to impact back to school beyond, and we're extremely excited about the potential we see. Finally, on to experience. As you learned earlier, we're investing in real estate. We're doing this by opening new stores in our underpenetrated international markets and also investing in remodeling existing stores. We continue to be very pleased with the results of these, both from an overall productivity standpoint and a customer engagement standpoint.
We've identified about another 100 to 150 stores that we can remodel over the next few years. And as I mentioned earlier, we're investing in Gilly Hicks. We're rolling out more side by side stores and more carve outs around the world, and we'll continue to test different experiences for the brand. Looking forward, we'll continue to evolve our successful Club Cali program to be an industry leading, adding unique experiences and early access to product and engagement in an authentic brand right manner. It's worth noting that more than 70% of our customers come into the store to redeem their Club Cali rewards and they spend more than their reward.
So a double benefit of driving traffic to physical stores and driving attachment purchases. As Joanne mentioned, omni is growing an important part of our mix. We plan to continue to create an even more customer focused experience, bringing elements of our digital experience into the store for the benefit of both our customers and our associates. We see a longer term opportunity for growth without sacrificing the specialty brand experience, and we see a sizable addressable market opportunity that far exceeds our penetration. In summary, we are uniquely positioned to win.
We have an iconic global brand in Hollister, strong foundations to build on and the right people and plan to capture this global opportunity through both category growth and market expansion. And as Fran said before, we have the absolute best team in retail. So now we're going to take a quick 15 minute break before Stacia shares the latest on the A and F and Kids brand story with you.
Okay, if everyone could take their seats, we're going to get started again. Okay, thank you. We're going to get kicked off again. So Stacia is going to come on stage and review the Abercrombie and Fitch and Abercrombie Kids brands. Thank you.
Welcome back. 2017 was a landmark year for us, used to stabilize our business and allowing us to look forward and write the next chapter in the 126 year history of Abercrombie and Fitch. We made it the year of our customer, putting millions of different points of feedback, we through millions of different points of feedback, we've accelerated our learning about millennials and now increasingly Gen Z. As we know them better, we can serve them better. This generation is often miscategorized in the media.
The truth is they're change agents, poised and eager to make their mark on the world, now with greater independence and responsibility than ever before. They're digital natives, so they have to more information and more choice than any customers before them. They are incredibly discerning and influential. They're loyal to creativity and innovation and they trust their tribe more than institutions. We love these customers.
They inspire us to move forward because these are the same values that are instilled in our brand. The same values that drove us to deliver results this past year, keep the faith during some tough times and keep our eye on the prize, building our playbook for 2018 to return this iconic brand back to greatness. We believe that only through the pursuit of adventure can you feel truly alive. Abercrombie and Fitch readies you for life's everyday adventures. With a spirit of daring and audacious optimism, A and F pushes you to discover new experiences.
We have a passion for creating all American casual style. The Abercrombie and Fitch legacy is rooted in a heritage of 126 years of quality craftsmanship. It is our privilege to outfit the next generation in classic effortless style. I wanted to give you a sense of how this brand comes to life, so I want to show you a quick video. Let's take a look at the new Abercrombie and Fitch.
For more than 125 years, we've outfitted adventurers in the fearless pursuit of life. The ones who never settled, never sat back, never watched. They were restless and reinvent yourself, these are the years. This is the time to let emotions take the wheel, to risk everything. These are the years of crazy joy and hard work, to pick your path and become your true self, to find what's new and next.
We make effortless all American style for your life, for you, the ones who know that if you're going to squeeze every last drop out of a life stretch in front of you, this is the time.
We effectively reintroduced the A and F brand with a tight focus on a 21 to 24 year old post college bullseye with the majority of our customers starting to engage at age 18, drawing on the brand's authentic heritage as an outfitter of everyday adventure. We are happy to see this audience responding, helping us achieve strong Q4 results, ending the year on a positive 5 comp with improvement across geographies, channels and genders driven by strength in core categories. We're excited by this momentum. We saw several important positive inflection points from our methodical progress across our playbook in product, voice and experience. Turning to product first.
We went back to our DNA, what the brand has always stood for. We're focusing on offering versatility and comfort, remaking every fit for more comfort and injecting more fashion into our assortment. And our customer has responded. We have transformed our product architecture in several ways, and it's been a big driver of our performance, such as our focus on SKU count. We put inventory where it matters, in top items and in top stores.
That resulted in driving improved conversion and sales comp. We also leveraged our chase capabilities to react even faster to our customers' preferences. For example, we had strong performance in our men's outerwear in Q4. When we were in stores, we heard a common theme from our associates. They told us that we were a destination for outerwear, that our customers were coming into the store specifically for that.
The feedback was that they valued the functionality and warmth of the pieces we offered at the incredible value we provided in the market. Armed with that information, our team went to work, focusing on every detail, from the warmth of the jacket to the fleece lined pockets to the depth of the hoods and the length of every piece. We offered our top items in a breadth of color and ensured that our outerwear was versatile enough for every occasion. We saw double digit sales growth over year and had outstanding reviews from our customers. There really is no better way for you to see how passionate we are about product than to give you a peek behind the scenes.
To show you the type of detail we're known for, here's a short video to show our talented team hard at work creating our limited edition product, similar to that created for our JFK inspired heritage collection. Turning to voice. This is the time our first fully integrated marketing campaign for the A and F brand. It clearly resonated with our customers and is moving the needle in both sentiment and sales. It was the first time we released an integrated national campaign through social media, TV and cinema, meeting our customer where they are and directing our media buying to the places and media where we know our 21 to 24 year old customer is.
In addition to the positive momentum in brand health metrics generated over the course of the year, we saw an immediate response to the campaign. We saw a 30% increase in positive social media conversation from the year before and a total of 300,000,000 views of the campaign in spaces where we knew we could find our 21 to 24 year old target. We know our customers crave content. We are creating original content with partners, including Snapchat. As an example, in partnership with E!
We created a new Snapchat show, earning us almost 50,000,000 impressions among 18 to 24 year old Snapchat users. We are investing more heavily in social platforms to join the conversation with our customers and meet them where they are. And it was our first time co sponsoring spontaneous events near college campuses, hosting early screenings of Thor and Justice League on 35 college campuses across the country, giving our customers early and impromptu access to the films. We hosted completely packed screenings, which is always true when you give college students something for free, helping us reach thousands customers at the front end of our target age band. And last but not least, experience.
Our brand was built on providing unique experiences and that remains central to who we are today. We focused on connecting with our customer whenever We focused on connecting with our customer whenever, wherever and however they choose to shop. That's led us to enhance our omnichannel offering with a focus on creating a seamless customer experience. We were early to see the promise in omni and invested accordingly. Our omnichannel customer experiences now enable customers to shop completely on their terms and at their pace.
As Joanne showed you with the advancements in our 5 Star app, we are helping our customers shop on their terms. We're continuing to see explosive growth in pop ins, proving to us that our customers want to come to the store to experience A and F. We launched our customer loyalty program, the A and F Club. By the end of 2017, in less than 1 year, we added more than 4,000,000 loyalty member accounts. Members spent 75% more than non members and drove almost 70% more transactions than non members in the past 12 months.
As Fran spoke to earlier, we are looking at opportunities outside our own real estate to reach our global customer. We launched J and F on Tmall in China. With the initial success that we've seen, we know there is a large growth opportunity on this platform. As a point of reference, Tmall is responsible for the majority of all e commerce sales in China. With that kind of reach, we were thrilled to be the number 1 ranked men's store on launch day on the platform.
We more than doubled our 2017 sales expectations, and A and F's Tmall site has grown to be our largest e commerce site in Asia. Fran shared with you our convictions, and one of them is that stores still matter. The store experience is still important. Last year was the first time in 15 years that we'd updated our stores' design. It was created with our customer and our customers' journey today as our focus.
We know that more often than not, our customers start their shopping journey by browsing online. When they come to the store, they want an easy to shop environment. They want to try and close in spacious and customizable fitting room with viewing areas, so it can be a social experience with friends and family. From listening to our customers, we knew there was a white space in the market in the fitting room experience, and we set out to create the best experience in the mall. Our aim with these prototypes is to provide the best omnichannel experience, the best fitting room experience and the best customer service experience.
And our customer feedback and the store's performance is telling us we got it right. We have added technology in store to more support our customer shopping experience. That's customer facing as well as the tools that our associates now have to enhance customer service. Our fitting rooms were designed to be the best in the mall, where our customers can create their own escape. They are in control of the lighting levels, the music volume and when an associate is needed to help them.
We also made sure that every fitting room had a charging station, allowing our customers to recharge their devices as well as themselves. We also invested in elevating the training in these stores, ensuring every associate is equipped to have an authentic conversation with our customers about the versatility and fit of our clothing. And they have the technology to help support product discovery and checkout for a seamless, easy shopping experience from start to finish. All of this leading to strong improvement in our voice of customer scores, one of the best measurements of how our customers are engaging with these stores. Finally, these stores are on a smaller footprint.
And as Joanne mentioned earlier, many of them are proving to be highly productive as was evidenced by our Hong Kong store. As Fran indicated, these past few years have been about stabilizing while transforming, setting us up for the next transformation while delivering growth. With a solid foundation underneath us, we are excited to be moving forward with our 2018 goals. We expect to grow market share and reassert ourselves as an aspirational, desirable lifestyle brand. We are confident that we can continue to build on the encouraging signs we saw in 2017 through a closer relationship with our customer, focusing on our key areas of opportunity and continuing to execute on our playbook.
So looking to our 2018 playbook, I'll walk through some of the key elements of the next phase of transformation and growth for this brand through the lens of product, voice and experience. Driving category growth is a key element of our overall growth plan. We continue to focus on must win, must grow categories, ensuring that our efforts are distorted where we can have the most impact. Our reputation was built on high quality product and our sourcing capabilities allow us to deliver the product our customer expects while continuing to increase our flexibility. Being a global brand with deep global operating expertise, we are attuned to see different customer preferences across geographies.
We are tailoring our assortment appropriately and can be nimble and responsive, continuing to read the business and distort to the product and trends that we see our customers responding to. We are taking full advantage of our improved speed to market capabilities, reacting even faster to the trends we see in the business. We have already impacted 1,000,000 of dollars of products that will be in our stores in May June based on our customers' reaction to our product in the Q1. We plan to make further marketing investments and experiences, communicating with our target customers through the right channels and creating authentic customer inspired events. We are going to co host big events with some of the biggest names in music and entertainment.
We are excited to have been named the official fashion partner of a prominent upcoming music festival, which attracts about 150,000 attendees with a strong match up to our target demographic and features approximately 70 acts across all musical genres, including some of the biggest names in music today. If you want to join us, I suggest you join the club, a little hint there for you. The diversity and reach of the event made it a natural fit for us from a brand voice perspective. It allows us to provide experiences for our customers. The event itself is live streamed and the social media engagement reach around the event itself runs over 1,000,000,000 across key platforms that our customers are on.
And last, but by no means least, the event itself also benefits organizations that support an important number of causes that we and our customers care about. I look forward to sharing more about this partnership soon. We're also going to create a groundswell of brand love through an original A and F Brand Ambassador program in key markets across the U. S. This will be starting in just a few weeks.
These will be our own brand advocates, helping tell our story and further allowing us to have authentic two way conversations and receive timely feedback on all aspects of the brand. We're building out experiences for club members to deepen their connection and loyalty to the brand. You can expect to see some exciting exclusive opportunities for members of the A and F Club. We've already talked about what is effectively a key building block of our global transformation project, namely our physical stores experience. We're using our new prototype store model and expanding that both domestically and globally.
As Joanne described, we evaluate on a market by market basis, which channels are best suited for each market based on a range of factors. That includes where we are as a brand locally from a brand health awareness and penetration perspective and the unique dynamics of each location and related customer preferences and shopping patterns. We have a broad range of options to help us build out market presence from wholesale to digital to opening new prototype stores, all based on our understanding of unique local customer preferences and demand. It's picking the right tools in the right market to drive global growth. And we have proven global operating infrastructure and experience like few others.
As Joanne shared, we are in a test and learn phase of evolving from stand alone flagship to primarily mall based stores. Recently, we announced that we will be opening our first A and F prototype in the U. K. Later this year, and the early reads from our test and learn approach are encouraging, and we're committed to building out our footprint in Europe and Asia with a primarily based mall approach. We are also going to be creating new experiences directly in the middle of our target markets lifestyle, city based college campuses.
As I mentioned earlier, our customers start shopping with us at the age of 18, and this reaches directly at a population spanning our bull's eye and those coming into it. We'll be using this new store space to introduce even more customers to our brand. We'll use our brand ambassador program to build relationships with these universities, and we will hold on campus events in these spaces to drive traffic and showcase our brand. We will also be using these stores as learning labs. They will provide us insight into operating small spaces with an omni platform.
We are building out dedicated space in these locations to support an increased amount of pop ins, and these stores will be supported with technology that allows us to show our customer additional choices not available in those stores. As excited as we are about the strong progress we've made with our namesake brand, we are also excited about reenergizing our kids brand, Abercrombie Kids. So turning to kids. The team has been laser focused on establishing this brand as a true kids brand. Not long before I arrived, the brand was essentially a mini version of A and F.
Today, we're getting even closer to our customers to align product, voice and experience to be focused on kids, and our customers are clearly responding. We celebrated a great 2017, the strongest the brand has had in many years. Now we've been doing this for a couple of hours and you came through the subway in the rain. So it's time for my secret weapon, videos of cute children. Are you ready?
So I want to show you a hot off the press video for fall showing our kids in action. When those are your customers, you have to completely rethink the brand, ensuring it appeals to both parents and kids alike. Our product is made for adventure and play. It's tough enough to stand up to everyday adventures, but there's also play value in the clothes themselves. Whether it's light changing graphics or sequence that flip from a unicorn to a positive message, we make sure our clothes are the ones that kids reach for again and again.
Our kids are ahead of the trend and they're telling us what they want. We are listening and engaging with customers constantly, that's both parents and kids, to ensure product and brand experience is evolving to meet their changing needs. The team gained insight that many customers when shopping across genders don't necessarily want to be restricted by styles and colors. Parents and kids don't want to be confined to a certain section of the store when shopping for a boy or a girl. Enter the Everybody Collection.
Items that appeal equally to boys and girls created in a fit that's comfortable for any kid. 1 assortment in 1 size run that covers the trends that kids want in color, style and fit. The reaction to the collection even surpassed our wildest expectations. It generated close to 400,000,000 media impressions and global media coverage following its launch via a single press release. It has been such a hit with kids and parents that we're continuing to offer this product and expanding it in seasons to come.
This has been a largely undiscovered brand, so we're working to reintroduce it to speak to both parents and kids. Our aquarium event is a good example of how we've engaged with parents and their kids. In February March, we brought adventure and exploration to life through strategic partnerships with 3 of the nation's largest and most popular aquariums: Long Beach, SHED and the Georgia Aquarium. We drove store traffic, increased revenue and raised funds for conservation. We held in store events with touch tanks with tortoises, iguanas and more.
We invited kids and their parents to spend the night in the Georgia Aquarium and encouraged them to share their experiences on social media. We know our moms are social, so we engaged influencers in experiences and pushed out their content through both our channels as well as the influencers and aquarium networks. We're also reinventing the in store experience for our kids brand. We introduced a new kids store prototype this year on a smaller footprint that's more productive. As with the adult store, it is more open and provides a welcome shopping environment.
With open sightlines, our associates can more easily respond to our customers and our customers can more easily move throughout the space. Additionally, the store provides a seating area with Wi Fi and mobile device outlets and a customer accessible restroom with a changing table. We know parents are busy and they don't always have time to make it to a store. So we want to be there whenever and wherever they choose to shop. The omni capabilities that we've built as a company are critical to the growth of this brand.
So stepping back to look at the Abercrombie brand as a whole, A and F and kids. We are excited about just how far we've come on this iconic brand's revitalization journey. And we've only just started to scratch the surface of all of the possibilities. We see longer term opportunity for growth, building on the brand's heritage and its relevance through making personal, emotional connections with our customers, both new customers and those who are ediscovering us and falling in love with us all over again. We are truly an iconic global brand.
That's undeniable. With stable foundations and the right people, resources and plan to capture a global growth opportunity, I couldn't be more excited about the future as we enter this next phase, transforming while growing. Thank you. I'll now hand it over to Scott, who will bring it all together and talk in more detail about the various levers of our financial performance and how we're planning to reach our targets.
All right. Thanks, Tasia, and good morning, everyone. I'm excited to spend some time with you today, obviously. I'm also excited to meet many of you in person. I haven't been able to see many of you in the 1st couple of months that I've been So it's been great to put some faces to the names.
My main goal today is to give you a better sense of the key drivers around our financial plan. You've probably been wondering what amazing videos we would pull together for finance. We have none, which is good. We couldn't come up with anything either. So before I get into the details, I'd like to spend a minute recapping what you've heard from the team as it really sets the foundation for the financial objectives.
As Fran mentioned, for the past 3 years, we focus on stabilizing and transforming our people, products and process around the customer. We better defined our target customer and developed a deep understanding of what they value. At the same time, we've continued to assess our global market opportunity. We've leveraged this work to create the playbooks that we mentioned quite often. Coming out of 2017, we've stabilized the business and we have the team and the structure in place to move to the next phase of transformation and growth.
Joanne covered the investments we've made building and enhancing our operating platforms to support the playbooks. These investments have been weighted towards improving the customer journey and the experience throughout across digital, across stores and then the omni channel tools that connect the 2. And also how we engage our customer through improving the experience in our loyalty programs and our innovative marketing approach. As we move forward, we will expect to accelerate investments in data and analytics to help enable us to keep up with this rapidly changing environment. As we sit here today, we have the foundation and the baseline infrastructure in place to drive growth through this next phase of transformation.
Kristen and Stacia talked about where we are in the evolution of each brand and a deep understanding they have of their respective target customers. They also spoke of the opportunities they see across product voice and experience, which are expected to be key drivers of our sales growth going forward in this next phase. With this backdrop, we'll get into the numbers a bit. As Fran mentioned, over the next 3 years, our goal is to grow the top line and double EBIT margin off the 2017 adjusted base level of 2.9%, while still funding the investments necessary to drive the business. I'll dig into each of these a bit more, but first from a high level.
To start with the top line, we believe that our continued focus on the customer and execution of our playbooks can drive a low single digit total sales CAGR through the combination of positive comp sales and select global market expansion. On the EBIT margin side, we expect to drive growth through modest gross margin expansion, mainly through planned investments and systems and processes to help us leverage our data to make smarter decision making across the product life cycle. The goal here, as Fran mentioned, is to drive higher quality sales growth. Next, improved productivity against fixed costs and ongoing expense reductions are expected to drive to offset our investments in strategic initiatives that are driving the business. We expect OpEx leverage to be the primary driver of EBIT margin expansion going forward.
The result is a strong double digit adjusted EBIT CAGR, while still funding the transformation investment necessary to drive longer term growth in sales and EBIT margin. We realize the path may not be a straight line, but we believe we have the plans in place to achieve our goals. Digging deeper into positive comp sales growth. We believe the continued execution of our playbooks across product voice and experience will drive our comp. Kristen and Stacia covered the many opportunities they see going forward.
To get a bit more tactical, we see the benefit in comp resolving from the following. The first and primary driver is conversion. Clearly, this is an area where we have the most influence on the outcome. Highlighting a couple of the key drivers we see, continued growth in our must win and must grow categories. Kristen and Stacia both mentioned the strength they've seen in these categories as they continue to distort their focus.
Continued investments in tools and processes to optimize the customer experience around the omni channel tools that we've delivered. Investments in our store associates through training and incentives to improve the experience. Fran mentioned the transformation we've seen in our stores team to drive a customer service focus. There's more to come. Personally, I've been visiting stores here for about 7 years.
So I've lived both sides of this transformation. And it really has been amazing, the change in the stores. In the past, when we would walk into the stores, we would focus on lighting, how the stacks looked, how the trees looked. It was all about the visual presentation, not a lot of discussion about the customer, no discussion about the business. When we walk in today, before we even cross the threshold, we've already covered the customer, their feedback on the products, how the business is trending, how the team is driving the KPIs, loyalty sign ups, traffic and conversion, basket size.
So it's happened pretty quickly,
pretty rapidly over the last three size, loyalty sign ups, traffic and conversion,
basket size. So it's happened
pretty quickly, pretty rapidly over the last 3 years. And a quote that Fran had was, it was simple but not easy. Changing this culture in 900 stores in a short amount of time has been pretty great. So then move on to traffic. We include the combination of both digital and store traffic.
Couple of drivers here loyalty, as we invest in the experiential side of the program to drive even better customer engagement Marketing from both an increase in spend to expand our brand reach as well as investing in the capabilities to better personalize the customer experience. As a company, it's very important to understand our brand marketing initiatives are only a couple of years in the making. In the past, as I said, we leveraged our in store visual and our in store photography as our main marketing message to the customer. Over the past couple of years, both Kristen and Stacia mentioned the significant progress we've made in reaching our target customers and the places and the channels where they spend their time. Finally, we continue to roll out our store remodels and prototypes across the world and we expect this to have a benefit to both traffic and conversion.
The final piece is AUR, which I'll cover in more detail shortly, but the key drivers are investments in data and analytics to drive smarter pricing decisions, supported by improvements in brand health, as Christa and Stacia mentioned. To round out the sales opportunity, we believe we can also drive the top line through select global market expansion. This slide summarizes our sales in these markets. As you can see in the gray boxes, in 2017, we had around $800,000,000 of sales in Europe and around $400,000,000 in Asia and Rest of World. Fran and Joanne both provided an overview of the opportunity we see in Europe and China.
We are focused on increasing our penetration in these markets against a $1,500,000,000 addressable market opportunity. It's important to understand that we will take a disciplined approach to expanding in these markets. 1st, we'll leverage digital and wholesale to expand our reach, grow brand awareness and assess customer demands. If we see demands, we will leverage data and analytics to inform the best opportunity to drive further growth, whether it's through continued digital investments or adding stores. To be clear, we will only add additional square footage where we have a high probability of return and see a clear need for a physical presence.
As we think about our path forward on real estate, we expect to continue to close unproductive stores and replace that volume with smaller, more productive stores. As we have seen in this trend over the last 3 years, over the period, we closed 152 stores and opened 59 stores. And these new stores delivered over 3 times the productivity on average per square foot compared to the stores we closed. We expect to see this trend continue as we reposition the fleet going forward. In North America, while we plan a net reduction in store count and square footage, we still have the opportunity to open new stores, But this will be primarily focused on filling in markets where we are under penetrated as well as entering high traffic centers where we currently do not have a presence.
Outside of North America, we expect to continue to fill in that white space that we've been talking about across Europe and China. We are being measured in the near term as we read our results. Moving forward, we expect to use our strong balance sheet to accelerate these investments where we are seeing strong returns. Moving on to gross margin. We see the opportunity within gross margin to drive a healthier overall business.
We believe there will be a couple of drivers here, both related to AUR. First, we see opportunities through the concept of customer initiative that Joanne covered, where we expect to optimize the systems and processes across the product life cycle. A couple of examples here that are expected to benefit margin. First, improving our speed to market, as Kristen and Stacia both mentioned, to drive a higher potential full price sell through. Also leveraging pricing and promotion software to drive process improvements and drive smarter pricing decisions.
A key theme across this entire effort is embedding more data into analytics to drive more data driven decision making. Next, as Krista and Stacia continue to drive improvement in our brand health, we expect to unlock opportunities in AUR through reduced promotional intensity. On the AUC fronts, we expect to see some pressure build on raw materials and transportation costs moving forward. We expect to be able to offset a portion of this inflation through our ongoing sourcing initiatives and smarter purchasing. So we expect AUC to be flat to up slightly over the 3 year period.
As we execute against these initiatives and leverage new systems and processes, we expect to be able to deliver slight gross margin expansion in 2018 and modest annual gross margin improvement thereafter. Moving on to OpEx, where we'll spend a couple of minutes. This is an area where we've been focusing for several years, as many of you know that have been covering our story. Since 2013, our OpEx reductions and our continuous profit improvement efforts have eliminated over $400,000,000 of gross expense from our cost structure. Some of this has been reinvested back in the business through omnichannel, digital and customer acquisition, as well as improving the overall brand experience.
As Fran mentioned, expense discipline is now fully embedded in our culture. A question we get often is what's next? As we look out over the next few years, we expect operating expense leverage to drive the majority of our EBIT margin expansion. We see the following opportunities. 1st, leveraging We see the following opportunities.
1st, leveraging fixed expenses on comp sales. 2017 was a good example of our ability to leverage expense on sales growth with over 400 basis points of total expense leverage on an adjusted basis. Next, we expect to reduce expenses, driven first by store occupancy. Within store occupancy, we expect to see a couple of drivers. 1, we expect to continue to close and right size underproductive stores.
Over the past 3 years, we've reduced our total square footage by approximately 4% per year, mainly through closure activity. Going forward, net of openings, we expect total square footage to decline in the lowtomidsingle digits annually, contributing to both productivity improvements as well as cost efficiency as the customer continues their shift to digital. We also expect to leverage lease expirations to drive rent reduction. In 2017, we reduced total store expense by over $30,000,000 year over year, excluding the impact of lease termination charges, while growing the top line. We continue to work to better align our occupancy with our store productivity.
As Joanne mentioned, we have about 60% of our leases expiring over the next couple of years, which means we have many opportunities to further drive rent savings. We also expect to drive efficiencies through the next phase of our transformation efforts and ongoing continuous profit improvement initiatives. A couple of examples here. 1st, optimizing, as Joanne mentioned, the tools and processes around fulfillment as we continue to see great adoption of the omnichannel tools we've delivered. Next, an example within our concept to customer initiative, where we are pursuing cost savings by changing how and when we deliver to our stores each week.
These savings opportunities are expected to be partially offset by investments in our strategic initiatives as well as inflationary pressures. On the investment side, we expect to increase our marketing spend to expand our brand reach and drive increased customer engagement. And as I mentioned multiple times, so far, we plan to increase investments in data and analytics capabilities. On the cost side, the shift to digital is expected to bring along additional variable costs and we also expect to see continued inflation in wages and transportation costs. As we move forward, our focus is reduce and leverage our fixed cost structure to drive a healthier, more variable operating model while continuing to fund our strategic initiatives.
Turning to capital allocation. We believe a disciplined approach to managing capital is core to our role of creating shareholder value. When it comes to deploying capital, our philosophy is and will remain the same. Our number one priority is to invest in the business as we lead the brand through this critical period of transformation and we build on the foundations we've laid for sustainable long term growth. Over the next 3 years, we expect annual capital expenditures of between $125,000,000 $175,000,000 which could trend higher based on the evaluation of potential opportunities that I'll cover shortly.
Compared to 2017 levels, our current plan reflects a slight acceleration of new store expansion as well as projects to improve fleet productivity and drive customer engagement through the digital channels. This would include investments in store remodels, store prototypes, marketing tools, omni capabilities and loyalty and digital infrastructure. For remodel specifically, we see the opportunity to remodel 100 to 150 Hollister stores over the next 3 years and 50 to 75 A and F stores over the next 3 years. Our next priority is to return excess cash to shareholders through a dividend of share repurchases. We have paid a dividend of $0.80 per share annually, which we expect to maintain.
As we've said in the past, we also consider share repurchases as a way to return cash to shareholders, which we evaluate on a quarterly basis. In the Q1 of 2018, we repurchased approximately $19,000,000 worth of stock and with close to 6,000,000 shares remaining on our current repurchase authorization, we will continue to evaluate share repurchases against other potential uses of our excess liquidity. Our capital allocation strategy is designed to ensure we maintain a strong balance sheet, to ensure we have the appropriate resources available to execute against our plans. Based on a risk bearing capacity analysis, reflecting the volatility of our industry and where we sit in our transformation, we've established a minimum target liquidity of $700,000,000 which includes gross cash and available borrowings under our ABL facility. Due to the seasonal nature of our business, our actual liquidity will trend higher than this minimum as we move through cash flow peaks and troughs throughout the year.
After a strong finish in 2017, we came into 2018 with $935,000,000 of liquidity. As we move through 2018, we expect to exceed our liquidity target as we evaluate the acceleration of potential investment opportunities. This is in addition to the $125,000,000 to $175,000,000 capital level I mentioned a minute ago. Some of these opportunities that we see, accelerating store closures, including flagship lease buyouts and kickouts. We've discussed a couple of examples today in Hong Kong and Denmark for Abercrombie.
Store remodels including rightsizes. In Hollister, we've been on this path for a while now, but at the end of 2018, we expect to only have less than 50% of our global footprint in the new prototype. New store openings in markets where we are under penetrated. We've talked a couple of times about Europe and China and the opportunities we have there. On the last point, we expect our transformation initiatives to highlight areas for incremental investment, including, for example, store technology, back end system enhancements and data and analytics tools.
I'll close with a summary of our financial objectives. We believe we can drive sustained value creation and shareholder return through the multiple growth opportunities the team has outlined today. Performance in 2017 demonstrates the EBIT margin expansion we can deliver when we execute and invest in our playbooks. With a solid foundation in place and a clear plan of action, we expect to drive sustainable top line growth, improve gross margin and leverage operating expense to double adjusted EBIT over the next 3 years. We have a strong balance sheet and a disciplined approach to managing capital and our liquidity.
We will leverage this to drive investment through our next transformation phase, which will enable continued sales and EBIT margin expansion when we reach the 3rd phase that Fran mentioned, accelerated growth. I'll now hand it back to Fran for closing remarks.
Okay. Well, thank you, Scott and Joanne and Kristin and Stacia for sharing our story today with everybody, all the work that we have done over the past few years to stabilize the business and build this platform, the exciting opportunity that we have ahead of us and the details of our near term plan and how over the next few years through 2020, we will continue to transform the business while growing. But before we take your questions, I want to spend a few minutes talking about our culture. In the past few years, there has been increasing importance put on culture and what I'd like to call corporate character to an organization's competitive advantage. And yet, that's one of the areas that's probably least understood about us as a company, and we want to make sure you leave here today understanding who the real A and F is, our company and our people.
We are committed to global human and labor rights and to ensuring that our products are only made in safe and responsible facilities. We partner only with those suppliers who respect local laws and share our dedication to the best practices in human rights, labor rights and workplace safety. We believe that business should only be conducted with honesty and respect for the dignity and rights of all people. Since 2,008, we have partnered with Health Enables Returns Project Initiative or Her Health to promote sustainable partnerships in emerging economies to improve the general and reproductive health of female workers. We've also partnered with Room to Read since 2008.
We've been able to identify areas in need near factories where A and F can make significant contributions to local libraries. We're also a signed partner for buyer partner Better Work, a partnership between the International Labor Organization and the International Finance Corporation that brings together government, employers, workers and international buyers to improve compliance with labor standards and promote competitiveness in global supply chains. Since 2013, A and F has donated more than $5,000,000 in clothing to World Vision, a global humanitarian organization. And for the past 12 years, we have received a perfect score 100% on the Human Rights Campaign's Corporate Equality Index. The CEI evaluates LGBTQ related policies and practices, including non discrimination workplaces, domestic partner benefits, transgender inclusive health care benefits, competency programs and public engagement with the LGBTQ community.
Our culture is what has kept us a tightly knit team, so resilient during the tough times and focused on the future and brought us into this exciting, transforming, while growing phase. It's honestly one of the first things that drew me to explore this opportunity at A and F and ultimately to join the company when its future was far from certain. It's why I really do love going to work every day, whether that's to our beautiful home office campus, our stores around the world or spending time with our vendor partners also around the world. The energy and passion that our teams have is really contagious. We have a truly diverse company, open, welcoming, collaborative, curious, generous, passionate and compassionate.
We aim to have a positive impact in all the many communities in which we are present. All our various philanthropic endeavors reflect that aim. And one of our most important partnership in this area is with Sirius Fund Children's Network, founded by actor and philanthropist Paul Newman. Sirius Fund is a global community of camps and programs for kids with serious illnesses and their families, specially designed facilities and programs to allow every child the opportunity to experience the magic of camp, always free of charge. Whether through summer camp, sibling and family weekends, hospital outreach programs or a number of other camp inspired activities, being sick takes a back seat to being a kid.
Our associates are incredibly passionate about this partnership. In fact, my family has also spent time volunteering as camp counselors. It is an amazing and truly life changing experience. With this video, I think you'll understand who A and F is today. And after the video, we are going to welcome some questions up on stage.
So thank you.
It
was amazing to watch all the kids grow in their confidence day to day as they were trying new things and taking on things that they used to be afraid of. And to anyone that's thinking about volunteering with Serious Fun, I would highly recommend it. It's such an amazing organization and I'm so thankful to have been able to be a part of it.
I'm at Camp Quarry in Washington and it is beautiful. Just look at this scenery behind me.
So we just finished the Color Olympus. We had a great time. Okay. So we're going to take some questions. Just give us one minute to get our seats arranged up here.
So as the team assembles, I thought I'd go through a couple of ground rules. If you have a question, if you wouldn't mind, please raising your hand and we'll bring a mic over to you. We also ask that you state your name for the benefit of those listening on the webcast. And also if you could try to please limit yourself to one question, so we can get to as many as possible, we'd appreciate it. I think we're ready for questions now.
It looks like the team is situated. Thanks. Go ahead, Matt.
Matt Boss, JPMorgan. So if you exclude the changes in store occupancy, I guess, what's the underlying trajectory in operating expense dollars as we think about the 3 year plan? Meaning, is it lower store occupancy more or less offsetting your growth investments or just the best way to think about the expense trajectory the next couple of years?
Yes, I'll kick that one off. So as we came into 2018, our outlook was for a +1 in total operating expense. As we move over the 3 year period, we do expect, as you mentioned, store occupancy to be a key driver of leverage for us as well as cost reduction. But it doesn't stop there. We get back to our continuous profit improvement initiative.
There is additional opportunity throughout the P and L, where we will find additional savings and we will use those savings to help invest back into the business through marketing, through loyalty, through omnichannel. And this will help us accelerate through this transformation phase. So there is no finish line here. We will continue to look for more opportunities to drive expense leverage.
Lorraine? Lorraine Hutchinson from BofA. Driving positive comps and gross margin expansion is it's the goal. It's certainly a tricky one. How are you thinking about quality of sales?
And how confident are you that the customer is ready for you to reduce the promotional cadence and for them to pay a higher price to drive that gross margin?
Thanks, Doreen. I'll start. So as we talked about today with our playbooks, when we get the product, the voice and the experience correct, our customer responds. And as we've seen the progress that we've made over the past several years, that has proven to be true, certainly in the Q4 where we saw the return to positive comps for A and F and certainly a very nice trajectory continuation for Hollister throughout the year. Brand health and quality of sales is something that is intrinsically important to us for our long term growth.
Perhaps we could talk about one of the
Yes. I would say the speed to market initiatives that we have going on and the closeness to our customer, those combined give us a lot of confidence in being able to sell more at regular price. We're already seeing it, the example I gave you at the roses, we had such a high sell through on that product and it was because we were fast and the customer really, really loved it. So the more we were able to execute those speed to market initiatives and continue to be close to our customer, we've got a lot of confidence.
And Lorraine, I'll jump in with just a couple of other examples. We are now beginning to implement some pricing data and analytics, which we haven't had in our arsenal before. So we expect to make better decisions around pricing through the life cycle of that product as we apply those new tools. And we talked a little bit about leveraging our loyalty program. It's a pretty new program for us.
We've got 14,000,000 members now. We believe that as we segment use that data to segment our promotions and target them better for our customers, we'll also be able to drive improvement in AUR.
Thanks, Lorraine. I think Brian has a question. Thanks. Brian Tunick, RBC. Two questions.
One, maybe can you talk about AURs, maybe where they are now versus 5 years ago, maybe by brand? Where is the biggest opportunity in AUR or category? And then maybe from a margin perspective to get to a 6% -ish operating margin, any views by division, by channel, by geography? Anything you could help us get some more color on that operating margin target? Thank you.
I'll kick it off with the AUR comment, Brian. We have seen pressure over a number of years in AUR, both with just the competitive environment as well as FX has been a driver of AUR pressure for us. We believe that we have opportunity to reduce the promotional intensity. Our ticket price structure, we feel, is adequate, and we're positioned where we need to be from a ticket price structure. So we don't expect significant changes in the way we position our tickets and our assortments to our customers.
But we do have an opportunity to reduce the intensity, the promotional intensity and the depth of those promotions out the door through a lot of the initiatives that we've talked about. And in terms of where we see that applying, we do see that applying broadly across both brands. And as it relates to the geography question, we have seen a return of a much healthier business in North America in 2017 specifically. We're very pleased with the progress we've made in North America. It's super important for our business.
But also, as we increase the penetration of our international businesses, that business is more productive and more profitable. So that should also be a benefit.
Marni?
Thanks, guys. You talked a lot about the customer. Could you update us on what you're doing with personalization, both side and on the marketing side? And then also specifically in China, can you talk about the use of KOLs as you grow the business there?
I think that's a perfect question for the Brand Presidents. Go ahead.
Okay. Personalization is, as you know, the next frontier for us. And part of the reason we're so passionate about the loyalty program is because it gives us the data individually about customers, about how they shop, what appeals to them and how we can best send them the right message at the right time. So we're using the data from the loyalty program to segment how we might communicate with our customers. We're early on the journey.
We're in a test and learn phase. But that is a good example of a way that we're continuing to gather the data and then make sure that we respond. From a marketing standpoint, as you all know, we get real time feedback on social media. It's they like us immediately. They show us what they like and they show us what they don't.
And we can sort of dig into that information to better customize what we're delivering to what audience at what time and make sure that that's really how we're engaging with them. We're both working with KOLs because we know that that's what our customers really respond to. But they're smart. So we have to be strategic. We have to make sure it's an authentic conversation.
There's a big difference between a paid to play post and somebody who's authentically connected to our brand. And so that's why the tie in both brands between experiences and putting the KOLs in those experiences to provide the authentic content is so much more important than somebody holding up a sweatshirt and saying, please buy this. So that's really what we're working through.
I would add to that a couple of things on product and personalization. The segmentation example that I shared with denim was the first time we'd really gotten into that level of personalization within products. So really understanding a store in Germany being very different than a store in London in terms of the denim assortments that they want. So that's the first step for us in really getting to know the customer and getting the product right by store based on customers. So I would consider that personalization.
And then the KOL question, even looking at the H Collective that I shared, that's an initial strategy for us in the U. S, but we want to learn from that and of course expand it broadly. So we'll be taking what we learn from them and expanding it internationally.
Joanne had mentioned our TMO, our new transformation engine office, and this is one of the work streams that's embedded within that to make sure that we are focused on marketing, personalization and loyalty.
Thanks for the question, Marni. Janet has a question upfront.
Janet Kloppenburg, JJK Research. Just a couple of points of clarification before my question is if there were flagship closings, they would be upon lease exploration? Just a question. And on AUC pressure, I assume you feel like you have more room for AUR improvement to offset that cotton pricing increase. If you could and then just for the brand presidents, just
talk a
little bit about your filter and how you keep the brands distinguished. So Stacia talked about the music festivals for A and F, and right now on the website for Hollister, there's a big music festival theme going on. So I did see the brands become better differentiated during the fall, but right now they feel a little closer. Actually A and F feels a little younger. So I was just wondering if you could talk a little bit about that filter.
Thanks so much.
So I remember the first question. Go ahead with the flagships.
I'm going to answer that one and yes,
no, no, no.
The flagships, I remember the first question. On the flagships, Janet, they won't necessarily be all at lease expiration. We do have lease expirations that go from now and into the future, but we're also actively working with our landlords on different solutions. And in the case of our Hong Kong, Petter Street lease, it was not at a termination. We did have a kick out embedded in that lease that we exercised, but did pay an early termination fee for that.
And that is
one of the uses of capital that we expect as we continue to negotiate with our landlords overseas. And similarly, as you mentioned too, we just recently did a kick out in Copenhagen. Same thing, it was not the end of the lease, but it was a kick out that had an opportunity for us.
Yes, on the AUR, AUC side, yes, we expect AUR to slightly outpace the AUC growth over the 3 year period to drive the margin.
As far as the customer and how we keep them differentiated, the teams are very, very, very focused on the target customers. So at Hollister, it's about the team. And as Stacia mentioned, the target customer is 21 to 24 at Abercrombie. But there are trends that cross over all ages. So the festival, using your example, what we learned from our customer research is that while a lot of teams aren't necessarily going to Coachella, they aspire to be at the festival.
And so what we did with our campaign was more around festival sound. And we had the kids creating the festival in their hometowns and really celebrating the festival mindset. And we did have some kids at Coachella as well, but it was really about festival found and how can all teenagers participate in the festival without actually being there, different than the way Abercrombie handled it. So it's all about the projection and making sure that it's appropriate for a teen projection versus what a 21 to 24 year old might be doing?
So we spend across our brands, we spend a ton of time with our customers. And quite frankly, we learn from each other. So as you look at the playbooks and product and voice and experience, there are things, like Kristen said, that are going to cross across brands, where we can learn from each other and then figure out how it might apply to our customer. But the festivals are a great example. We will invest where our customers are and weekend getaways and spending time with their friends.
We learned a lot about them, which is basically they all have different income streams at the first part of their career. And so generally, the ones that make the least amount of money, the ones that make more money come to them. So you might live in New York City or live in Ohio and the kids in Ohio may come to New York City for the weekend. So weekend getaways are super important to our target customer and we want to make sure we're meeting them there differently than where a teenager might watch Coachella or see it and then sort of participate in it at home. So we're very focused both product, experience, voice on specifically what our store environment looks like, who our customer is and how we communicate with them.
I think just
to add one more thing to that. The High School Nation tour that I mentioned, that's a high school music festival that we bring to the high school. So it's on campus, but it's a music festival on campus. So it's really just making it appropriate for the age.
So I think that I'm going to add one more thing. No, I think we started today talking about the journey and where we started, Janet, and how similar the product was specifically in the stores when I made the fleet to join. And when you go to the stores today, you will see that the teams are very focused on knowing who their customer is, and the product is very differentiated. As I go through Creative Concepts and all the other milestone meetings that we have getting ready to deliver our product, it is very clear that the teams know who their customers are and that they are differentiated. It's been really exciting to watch the auto growth and the whole evolution of it.
And hopefully, even with the setup outside, you can see that the different the outfit looks. Hopefully, you see the difference in the brands.
Thanks, Janet. I think Kimberly has a question.
Thanks so much. Kimberly Greenberger, Morgan Stanley. I have just one clarification on CapEx. My question is on revenue. On CapEx, I think you've guided $130,000,000 for this year.
During the presentation that Scott made, you mentioned CapEx could go higher. I wasn't sure if you meant it might go higher this year or we should maybe expect a rising trend in future years. So I just wanted to clarify that. And then on revenue, Fran, you talked about a $5,000,000,000 family of brands and last year revenue was $3,500,000,000 So I'm trying to just understand the bridge from $3,500,000,000 to $5,000,000 given the guidance for total revenue growth of low to mid single digits? And what sort of a time frame would you put around the $5,000,000,000 target?
So I'll start with the second part and you can go to the first part. So today, we talked a lot about the 3 phases of our journey. The one that we just completed, which was the stabilizing part of our journey. Phase 2 is growing while continuing to invest in the business. And Stage 3 would be the accelerating phase.
So when we discussed the addressable market that's out there, what we did was we used our U. S. Market penetration to understand what those opportunities are. So in the next few years, we're going to do a tremendous amount of testing and learning, like we've talked about, opening up stores, understanding how quickly we can move. Once we have all of that understanding, we move to Phase 3, that's when we will be discussing the attainment of the $5,000,000,000
Yes. On the capital, no change to our outlook for 2018 of $130,000,000 of capital. The $125,000,000 $175,000,000 range is more meant to be over the 3 year period. So we would expect that to increase if we find those opportunities within real estate would be a key driver.
We have a question with Dana Alia Dana in the front, sorry. Dana
Telsey, Tag. As you look at the remodels that you've done, can you just go over the cost and return profile, how it differs by brand and what you're looking for? And then just on the wholesale opportunity, how do you see that by brand and what that margin contribution can be? Thank you.
Yes. Go
ahead. Okay. I'll jump in on that, Dana. We haven't disclosed the cost for each remodel. We are making sure that we deliver the right return, which is why the pace of remodels have been what we've rolled out.
We want to make sure that we deliver a return on those investments, and we make sure that we have the lease term available. We're in a space that we want to be in for the length of time that we need to be there to see that return. And we've been very pleased with the results we've seen. As we mentioned, from a top line standpoint, in the Hollister brand, where we've had a little bit more experience here, we've seen those remodels deliver a high single digit sales comp, a lift versus the control stores. And that change has been sustained.
So as we've been continuing to roll out these remodels, we're choosing the locations we believe that will drive a return, and we've been pleased with those returns. As it relates to the A and F remodels and prototypes, they're pretty new, and we're still reading them. We're very pleased with the level of productivity and the response we're seeing from our customers. We continue on both sides of the equation to focus on the cost of those remodels to decrease the cost because the lower we get those costs, the more stores that we can remodel. So there's motivation all around this.
These 2 all want all of their stores to be remodeled tomorrow. So we apply equal pressure to
the teams to lower the cost. And to that point, we're testing even in that realm so that can test different versions of the remodel to see how they impact the customer experience and sales.
But the key to the strategy, though, has been becoming more productive. And what's really exciting, I think the slide that Scott had shown that the stores that we've opened in the recent couple of years have been the most productive stores that we have in our fleet. So we really feel that, that is a nice set for our strategy going forward.
I can't remember the second part of your question. The wholesale opportunities, yes. The way we think about wholesale, it has been and continues to be a way to extend our brand reach in markets where we're underpenetrated. So as we entered with those wholesale partnerships in Europe, specifically with Zalando, Next and ASOS, it was a great way to get our brands on their websites and in front of more customers. And as we mentioned today, we have an opportunity to further penetrate those markets.
So from a brand awareness perspective and getting our brands in front of new customers, it's been a real win. And we see those partnerships continuing to grow. On the other side of the equation, we see Asia with Tmall. I think Stacia mentioned it. Most of the digital business in China is done on Tmall.
And it's been a great partnership for us. It's not a wholesale relationship.
It's more
of a marketplace platform that we've leveraged, but with the same objective to really get our brands extend the reach of our brands and drive brand awareness.
Thanks, Dave. Next question is right here in the front. Go ahead, Alia.
Thank you. Doug Drummond, Wolfe Research. Scott, given the puts and takes for the OpEx line and the potential for incremental lease kickouts, how should we think about the required comp to leverage OpEx over the next 3 years? Thank you.
Yes. Like I said, there are puts and takes within that formula. It's hard to give you a specific number. As we came into 2018, our outlook was a 1% OpEx increase as well as a low single digit sales increase. So we will see the leverage there.
As we move forward, a couple of variables we'll see is the continued our ability, I would say, on the gross margin line to improve to stabilize and improve the gross margin as well as continue to see the sales growth in the OpEx. On the OpEx side, as I mentioned earlier, we will continue to drive efficiency throughout the model. We will reinvest that back into the business to drive acceleration through this phase. So in the end, we expect the ability to double our EBIT margin over the next 3 years.
So that will be primarily driven, Doug, from Through
the OpEx.
Through the OpEx leverage. We do expect modest gross margin expansion, but the majority of the EBIT expansion will be through OpEx leverage.
Let's go back to Dylan in the back.
Thank you. Dylan Carden, William Blair. So in regards to the 6% EBITDA margin, what are the structural headwinds to kind of get you past that level in the context of the comment that you would ultimately look to be sort of in line with the industry profitability? And I guess embedded in that question, what is the ultimate drag? I get that online is more profitable currently.
But as you see as you sort of ramp up stores from a profitability standpoint, how has that become a drag? And are you growing profitability in that space now? Thanks.
I think in terms of accelerators beyond that time line, it really depends on how fast we get traction on a number of fronts, both the data and analytics capabilities that we're investing in, we expect to drive a lot more efficiency in the way we fulfill product, particularly in our omnichannel efforts and our DTC business. The pace of remodels and new stores will be driven by the response we see from our customers to the stores that new stores and new experiences we're rolling out. So I would say it's a pacing conversation about how quickly we get traction on a number of the initiatives that we're embarking on.
Next question.
Susan Anderson, B. Riley FBR. Just to follow-up on the pricing data and analytics that you mentioned. Just curious, were you using any tools before? I think you said you're implementing them now.
So how long before they are implemented? And you start to see a benefit from them? And then also, are these new tools? Or are they something as simple as markdown optimization?
We I'd like to say that we had very sophisticated pricing tools that we were already using, and this was the next phase. This is actually our first foray into price data and analytics, leveraging that. We've done some light lifting, I would say, on analytics to inform our pricing. We do a lot of benchmarking and making sure that we are our ticket pricing and we do the elasticity analysis around that to make sure it's effective. But the tools that we're putting in now are pricing tools, price and promotional optimization.
We'll be implementing that throughout this year. We would expect to really see the benefits as we move into 2019. On the other side, I talked about size optimization tools. And that's a situation where we have tools today that we're improving. And we expect that the improvements in the size optimization tools will drive better allocation decisions and allow us to drive better sell through at reg price.
We'll take one. I guess, we'll just stick back there since the mic is back there. Go ahead, Mackenzie. Thank you.
Janine Stichter from Jefferies. Can you just give us a little bit more color on the evolution of the Abercrombie brand away from a flagship based international strategy towards a more mall based one? What the timeline look like for the rollout of mall based stores there? And then can you give us any sense of what the 4 wall profitability currently looks like on the flagships, if there's any variance between the flagships? And then maybe how that compares to where the Hollister International Mall based stores are right now, just so we can have a point of comparison and what the opportunity is?
Thank you.
I'll start with the evolution of the flagship stores in Abercrombie. And it really is we are really excited to be moving to a mall primarily mall based approach in Abercrombie. We've had a lot of success in that approach in Hollister, and we've proven that's really where our customer is and where we can develop a local customer. So we're incredibly encouraged to be doing that. One of the best examples is in our Hong Kong market.
We took a store
off the Flagship location, which was a very big
store, some of you have probably been there. Location, which was a very big store. Some of you have probably been there, very dark and intimidating. And we moved to Harbor City Mall to a much, much smaller space where we're doing the same sales volume out of the smaller space that we were doing in the flagship stores. So it's more than tripled the productivity in those stores.
So we're testing and learning our way through these new flagships. It really or these new mall based stores, it really is on case by case basis. So every flagship we run has a different landlord, has a different lease situation. And so we're working to move toward that, but we certainly know that the opportunity is there. That's been proven in both the Abercrombie brand and has been proven in the Hollister brand.
In terms of the profitability profile, in aggregate, our flagship stores in Europe are profitable. And we just we know that we've seen pressure in traffic, and that's been consistent pressure with
tourist traffic dropping off over a number of years. So we
are working over a number of years. So we are working very hard to make sure we're cultivating not only that tourist customer, but a local customer. There are a couple of pieces to how we're driving that. One is a mall based strategy to get our brands in malls where we see more local customers on a regular basis, but also rolling out our loyalty programs internationally so that we can cultivate a more local and a more loyal customer base and enable us to reach out to them more frequently.
And just last piece on liquidity. We are holding the liquidity as we move through 2018 to be able to attack these opportunities as they come up 1 by 1.
Thanks for the question. I think we have time for one more question. We'll take the one upfront.
Thanks so much. Tiffany Kanaga, Deutsche Bank. I know today has been much more long term focused, which is great. But is there anything you can provide around quarter to date trends or recent qualitative observations to show continued progress in your transformation now that the Q1 is just about wrapped up?
Well, to say I guess to say it back to you, Tiffany, today really was about our long term. We really wanted to make sure that everybody left today understanding the A and F of today, the journey that we've been in, the 3 phases of transformation that we the 2 phases of transformation that we talked about and then certainly our 3rd phase of accelerated growth. So we look forward to chatting with everybody on our Q1 call, but we are can't discuss current business
That concludes the Q and A. But before we leave you, I think Fran wanted to make a couple closing remarks.
Right. I just really want to say thank you to everybody for coming today. And for those of you that are on the web with us, We hope you leave today with our goals intact, which is certainly understanding who the new A and F is, understanding that we have iconic global brands and 2 promising sub brands, An incredible team and company, really poised for continued execution and, an ability to get those playbooks continuing to work, in our favor. And our ambition, as you asked many questions about, for our long term growth as well. So again, we're just excited that you're all here today and we could share with you, and thank you for coming.