Now at this time, I'd like
Thank you. Good morning, and welcome to our Q1 earnings call. Earlier this morning, we released our Q1 sales and earnings, income statement, balance sheet, store opening and closing summary and an updated financial history. Please feel free to reference these materials, which are available on our website. Also available on our website is an investor presentation, which we will be referring to in our comments during this call.
Joining me today are Fran Horowitz, Chief Executive Officer and Joanne Kavoiserat, Chief Operating Officer and Chief Financial Officer. Before we begin, I remind you that any forward looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. In addition, we will be referring to certain non GAAP financial measures during the call. Additional details are included in the release issued earlier this morning. With that, I hand the call over to Fran, who will provide color around current performance and an update on our strategic initiatives.
Thank you, Brian, and good morning, everyone. Our overall results for the Q1 were largely in line with our plans. A continued challenging promotional environment saw a tougher than expected February, a strong Easter peak led to an improved March April as a whole. Progress has been made, although we are far from satisfied. There's still much work to be done, and we continue to focus on aggressive execution of our plan.
And what we expect will be a continued promotional and generally challenging retail environment in the Q2. Our largest brand Hollister built momentum from its now solid base to deliver a 3% increase in comp sales as we leverage customer insights from our loyalty program and in store research to engage with and respond to customers. At Abercrombie, top line results were in line with our expectations. We continue to apply learnings in the Hollister evolution and improve fundamental processes around assortment architecture and planning, and work through the tail of the assortment architecture issues we identified last quarter and referenced on our last call. The tail has taken a little longer to work through than we would have liked, and there will be some residual carryover into the Q2 that will weigh on gross margin.
We would still characterize Abercrombie as a work in progress. The foundation for its revitalization are being put in place. With strong leadership and the brand's new positioning and purpose work almost complete, we are optimistic about the prospects for the STORY brand, which has outfitted presidents, pioneers, adventurers and explorers and celebrates its 125th birthday later this year. Before we turn to our brand level progress this quarter, I'll provide an overview on the progress we're making across the business as a whole, underpinning our continuing confidence in our strategy and the team's ability to execute against it. Store traffic headwinds in a commercial environment remain an industry challenge, so we remain focused on inspiring customers, innovating and developing leaders to strengthen our brands and adapt to the evolving landscape.
We've previously spoken about meeting our customers whenever, wherever and however they choose to engage with our brand. That means omnichannel must truly be seamless and frictionless, allowing customers to start in one medium, migrate to another and engage the brand and complete sales across platforms and locations. Understanding a fundamental shift in retail was underway, we were early to invest in building our direct to consumer infrastructure. It is paying off, with DTC now accounting for 27% of sales, up from 24% in the prior year period. We have now rounded out our omnichannel capabilities.
We have fully integrated Abercrombie and kids websites. We are optimized for mobile, including apps, payment and tracking across multiple social media platforms. We offer pop ins and in store reservation and online in store returns, and we have fast growing, highly engaging loyalty program. This full omnichannel offering has been successfully rolled out in the U. S, Canada and the U.
K. Across both brands. We are now planning to roll it out internationally, including local language apps throughout the remainder of 2017. On a related note, Total Retail in conjunction with Radial recently conducted its 1st ever ranking of 100 publicly traded retailers by their omnichannel capabilities. The survey showed Abercrombie and Fitch is in an excellent position, tied for 4th place overall.
In a constantly evolving environment, we are confident we have invested in the right foundations and capabilities to allow us to stay ahead of the curve and to deliver the frictionless omni channel experience that consumers demand. Loyalty programs have been a particularly important customer touch point for us. With successful rollouts across the Hollister and Abercrombie brands providing timely customer insights, driving customer engagement and a meaningfully higher average level of customer spend. It is clear to us, there is an important relationship between our physical stores and our digital presence. The presence of a store still acts as an important gateway to the brand, both as a physical store presence, but also as a local brand hub for online engagement and the direct interplay between the 2, such as order in store, pop ins and reserve in store.
This understanding shapes how we think about total stores footprint from a broader regional perspective and our overall CapEx spending. Joanne will speak more on that in a moment. Our experience has shown that we are able to create inviting spaces, often on smaller footprints that encourage brand engagement and product trial and drive conversion. Our first A and F prototype store is demonstrating improved productivity on a smaller footprint. This is an approach we'll be extending to our prototype rollouts this year.
For example, we have one A and F location identified where we expect the prototype will be able to deliver similar or greater in store sales and profits in less than half of the floor space that the store is replacing. Still on the physical store side of things, we continue to work with partners with deep retail expertise that can act as our regional guide, partner and steward of our brand in growth markets. That includes partners such as Grupo Axo in Mexico and Majid Aploutain Fashion or MAC in the Middle East. In the Q1, MAP opened 4 new stores under franchise in Qatar, and we look forward to further openings in the region with them during 2017. We also seek to build partnerships and collaborations wherever they can enhance our ability to engage with customers authentically and at scale, while maintaining the integrity of our brand.
We have been early and enthusiastic adopters of social media to engage with our customers. Our close partnership with Snapchat and Instagram have given us access to alpha and beta programs. These have led to our geo filters and initiatives being some of the most successful on those platforms, resulting in high levels of brand engagement and additional opportunities to drive engagement around specific points in calendar, both traditional and non traditional, such as Galentine's Day and April Fool's Day. We struck an innovative content partnership with Awesomeness TV, specialists in mobile video content specifically designed to engage with our teen Hollister audience. This initial year long partnership incorporates multiple experiential touch points, including music, concerts and opportunities for comprehensive yet unobtrusive product placement around a specially commissioned series called This is Summer.
The series premiered last weekend on its YouTube channel, which has more than 5,000,000 subscribers and is off to a strong start. During the quarter, we also launched the house surf games designed on the Rovio gaming platform, designed for mobile phone play, is also accessible through our Instagram, Facebook and Snapchat assets. With more than 27,000,000 impressions across the platform and significantly longer average viewing times, results far exceed our expectations and Rovio's. These types of initiatives are important drivers of brand consideration and engagement and speak to the multifaceted customer journey for our core teen Hollister demographics as well as our 20 something Abercrombie demographic. Our wholesale partnership allow us to maintain brand control, provide a platform for expanding our reach in certain markets and explore their potential without having to make additional immediate physical infrastructure investments.
In the Q1, Hollister and Abercrombie Products started to offer through our partnership with leading e commerce platform, Zalora. This move generated significant buzz in market and provides a platform for Zalora's more than 600,000,000 customers across Southeast Asia to engage with our brand. Our ongoing process of learning continues to inform our people, processes and product. We can adapt and execute better and faster, ensuring more consistent delivery of the right product at the right time with the right brand voice and for the right brand experience. While the market remains challenging and the process of revitalizing an iconic brand, no simple task, we have the right people and processes in place to allow us to continue to make progress and be successful for the long term.
Now turning to the specifics of how we did at a brand level. At our largest brand Hollister, we characterized it as stabilized last quarter. We've now started to capitalize on that stability and deliver growth. We made top line progress following a strong performance in our core categories of denim, fleece and outerwear, where we saw double digit growth. We also set a record for the most jeans sold in any Q1 in the brand's history.
Our emerging growth categories, which include intimates and swim, more than doubled. It's clear that our marketing strategies focused on these core and emerging growth categories and comprising a mix of in store, email and social is driving meaningful improvement in engagement, conversion and most importantly, sales. We remain focused on staying close to our customer. In order to understand and adapt to their needs, the insights from our voice of customer and CRM programs continue to provide valuable insights, and our Club Kelly loyalty program also has an important role to play. It continues to add about 250,000 members a month and ended the quarter with more than 5,700,000 members.
In addition to helping us understand customer preferences and trends, members spend on average significantly more than nonmembers. Our team is also active with testing in store, which means we can respond swiftly and lean in when the real time data points to an opportunity. For example, we were able to successfully chase about 30% of orders, including a significant amount of swimwear to impact our spring season. As you'll recall, our customer feedback was a driver to our relaunch of Gilly Hicks last quarter. After a phased product introduction in 2016, the product is now set in all stores around the world.
We've seen continued positive reaction to its reintroduction and have a much better sense of its potential for growth. We plan to test this aggressively throughout the remainder of 2017 with dedicated space carve outs being added to 5 domestic U. S. Stores and 15 international stores. Now turning to Abercrombie.
The brand performed as we expected in a tough promotional environment and with the team still working through the architecture and planning related issues called out last quarter. As I mentioned earlier, this was the key internal contributor to the pressure on gross margin in the Q1. With increased depth of buy and inventory investment in top 30 items and ongoing reduction in number of SKUs, our assortment now has more focus. This process has taken somewhat longer than expected to work through and the team continues to work methodically through the whole assortment. With more focus and balance with each new floor set, we are building sustainable long term improvement.
We saw our core focus category increase as a percentage of total sales with positive comps in sweaters and pants across genders. We also saw meaningful improvement in our targeted growth categories, such as swim and dresses, which outpaced overall growth. Similarly, the investment in architecture and assortment on the kids' brand is paying off. Our closeness to the customer continues to serve us well in our revitalization journey. The multiple customer and business touch points online and in store allow us to react and respond swiftly when we see an opportunity.
Overall, our ability to respond to learnings and chase into new assortments enabled us to chase approximately 20% of orders. As the impact of the learnings take hold, we expect to able to further improve the scale and efficacy of our chase abilities. Our prototype store continues to deliver transferable, scalable learnings and useful feedback through our various customer touch points and systems as well as direct customer feedback. And we look forward to the rollout of another 6 prototypes throughout the course of 2017 and continue learning and evolution through those experiences. Our loyalty program, the A and F Club, had a strong start to its rollout in the first quarter, incorporating learnings to the Hollister Club Cali program.
By the end of the quarter, it had more than 1,700,000 members signed up, and we're adding approximately 200,000 new members every month. We are encouraged by its performance, which is driving excitement and engagement with our customer. It is ahead of Hollister's strong performance on the most relevant KPI over that initial period, namely customer enrollment identification. Overall, we've made some solid foundational progress at Abercrombie, benefiting from our targeted architecture changes and supported by strategic inventory investments. We saw outperformance in sweaters, pants and swim across genders during the quarter.
However, the full impact of some of the merchandising improvements we continue to make will be fully realized later in the year. On the marketing front, we hired a new CMO, Will Smith. In addition to driving improvement in the basic marketing, blocking and tackling, Will has been focused on sharpening the Abercrombie and Fitch brand positioning and purpose and developing a supporting campaign. We'll be sharing more on that in the coming quarters. Overall, I am encouraged by the progress that has been made.
In a still challenging and heavily promotional retail environment, we are making meaningful improvements to our business and showing progress across a range of financial and non financial metrics. We continue to name a disciplined approach to our cost structure with a balanced focus between dealing with short term reality and driving towards our long term ambition. I remain confident in our strategic direction and our team's ability to execute on our plan. And with that, I will hand it over to Joanne.
Thanks, Fran, and good morning, everyone. As Fran mentioned, our overall results for the quarter were largely in line with our expectations coming into the quarter. We delivered sequential quarterly top line improvement across all brands in a highly promotional environment. We continue to make progress on our strategic initiatives and are focused on tightly managing the business in a difficult environment. I'll briefly walk you through our Q1 results, then update our full year outlook.
Starting with the Q1, net sales were $661,000,000 down 4% from last year, with foreign currency adversely impacting sales by approximately $12,000,000 or 170 basis points. Comp sales for the quarter were down 3% with broad improvement from last quarter delivered across all brands, geographies and channels. While traffic remained a headwind, the trend improved from last quarter and conversion trends remained positive. As shown on Page 4 of the investor presentation, by geography, comp sales for the quarter were down 3% in the U. S.
And down 2% in international markets. By brand, comp sales for the quarter were up 3% for Hollister and down 10% for Abercrombie. Hollister continued to capitalize on momentum, delivering positive comp sales in both U. S. And international markets for the quarter.
Abercrombie also made progress with comp sales improving from last quarter across both geographies and channels. In addition, comp sales in our flagship and tourist stores improved from last quarter despite continued traffic headwinds. The investments made in store training and CapEx focused on enhancing the customers' in store experience are starting to pay off as conversion trends improved from last quarter. As Fran mentioned, we continue to leverage the early and continuing investments we've made in mobile, omnichannel and fulfillment capabilities with our DTC business delivering another quarter of solid growth in both the U. S.
And international markets. For the quarter, the direct to consumer business grew to 27% of total sales compared to 24% of total sales last year. Gross margin for the quarter was 60.3%, 130 basis points lower than last year on a constant currency basis, as a reduction in average unit cost was more than offset by lower average unit retail. While we expected gross margin to be pressured during the quarter as we contended with steep traffic headwinds early on and also worked through the assortment issues identified last quarter, the competitive environment resulted in more promotional activity than planned. We expect gross margin will continue to be pressured into the Q2 as we work through the tail of the assortment issues and as the competitive environment remains promotional.
Moving to operating expense. We are on track to deliver at least $100,000,000 in expense reductions that we announced last quarter. A portion of this, as you recall, will be reinvested to support revenue driving activities. During the quarter, stores and distribution expense decreased $9,000,000 marketing, general and administrative expense decreased $5,000,000 which was net of incremental investments in marketing and in direct to consumer and omni channel capabilities to drive growth. Operating loss for the quarter was $70,000,000 compared to $55,000,000 last year, which included the adverse effect from FX of approximately $5,000,000 The effective tax rate for the quarter was 18%, significantly lower than statutory rates primarily due to a discrete non cash income tax charge of $9,000,000 related to a change in share based compensation accounting standards as we announced last quarter.
For further clarification, this charge primarily related to awards that expired unexercised during the quarter, which under previous guidance would have been reported to additional paid in capital on the balance sheet. In addition, the core tax rate was 31%, slightly lower than expected coming into the quarter and continues to be highly sensitive at lower levels of estimated full year earnings. Net loss per diluted share was $0.91 compared to $0.59 last year and included the adverse effect from FX of approximately $0.05 net of hedging. In addition, the tax items I just mentioned adversely impacted net loss per diluted share for the quarter by approximately $0.19 Turning to the balance sheet. We ended the quarter with cash of $421,000,000 compared to $491,000,000 last year and gross borrowings outstanding of $268,000,000 compared to $293,000,000 last year.
Additionally, we continued to tightly manage inventory, ending the quarter with total inventory down 8% compared to last year. Overall, inventory levels and content are well balanced. Going forward, we expect to continue to drive incremental improvement in inventory productivity, but expected to be more in line with sales performance. Details of our store openings and closings for the quarter are included on Page 89 of the investor presentation. At the end of the quarter, we operated 705 stores in the U.
S. And 188 stores across Canada, Europe, Asia and the Middle East. With regard to our outlook for the balance of the year, we expect comp sales to remain challenging in the second quarter with trend improvement expected in the second half of the year as our strategic investments in marketing and loyalty programs, omni channel capabilities and the store experience gain traction. In addition, we expect the gross margin rate for the full year to now be down slightly to fiscal 20 sixteen's adjusted non GAAP rate of 61%. We expect the gross margin rate to remain pressured in the Q2.
However, we expect margin rate growth in the second half of the year, driven by lower average unit costs and stabilized average unit retails as the merchandising improvements we are making take hold. After providing for reinvestment in growth driving activities, we expect operating expense to be down at least 3% from last year's adjusted non GAAP operating expense of $2,000,000,000 We expect the net year over year savings to be weighted toward the second half of the year as we lap key investments and actions taken last year. Operating efficiency continues to be a focus across the entire organization, and we will continue to pursue additional expense savings opportunities throughout the year. We expect the full year effective tax rate to reflect a core tax rate in the low 30s, which remains highly sensitive at lower levels of pre tax earnings. Additionally, we expect the effective tax rate to reflect the full year impact from discrete non cash income tax charges of approximately $11,000,000 This is due to the previously referenced change in share based compensation accounting standards, the majority of which is reflected in our Q1 results.
As we look at our ongoing channel optimization program, we are focused on allocating our resources to better serve our customers wherever they choose to shop. For the past several years, we've been actively managing our channel mix and store fleet to address shifts and customer shopping preferences, and we are making strategic decisions with a focus on driving greater productivity in this changing environment. These decisions may result in a variety of potential actions. On the brick and mortar side, these actions include remodeling, relocating, downsizing or closing store locations as well as investing in select new store openings. On the digital front, actions include further investments in web and mobile experiences, omnichannel capabilities and further enhancing CRM capabilities.
With respect to capital allocation, we expect capital expenditures to be approximately $100,000,000 for the full year as we focus on projects that are aligned with our strategic priorities and provide the highest return. For 2017, this includes approximately $70,000,000 for store updates and new stores and approximately $20,000,000 to support the continued global rollout of omnichannel and CRM capabilities. For the year, we expect to close approximately 60 stores in the U. S. Through natural lease expirations and to complete approximately 40 Hollister remodels, about 10 of which will include a downsizing of an existing location.
We expect to complete 7 new A and F prototype stores, 4 of which will include a downsizing of an existing location, and we expect to open 7 full price stores, including 6 in the U. S. And 1 in international markets as well as 2 outlet stores. Importantly, with about 50% of our U. S.
Leases expiring by the end of fiscal 2018, we continue to have significant lease flexibility as we move forward to drive the right balance and an engaging experience for our customers in an evolving omnichannel environment. The dividend also remains an important element of our capital allocation philosophy. Last week, we announced that our Board of Directors approved the $0.20 quarterly dividend. We have a strong balance sheet and a disciplined approach to managing capital and operating expense. We continue to expect to generate the cash necessary to invest in the business, meet our debt obligations and maintain the dividend.
As we did in the Q1, we will continue to tightly manage the business, positioning our resources behind our strategic priorities to drive both bottom line improvements while funding top line growth initiatives. Now I'll turn the call back over to Fran for some closing remarks.
Thank you, Joanne. As I said earlier, we made meaningful progress this past quarter, but we are far from satisfied. We are focused on continual improvement on the basics, delivering excellence in all aspects of our execution with a view to inspiring customers, innovating throughout all aspects of our business and developing our leaders to help drive our future success. We will deepen our customer connections. We will be ever more engaging storytellers, activating new campaigns and exploring innovative new ways to engage customers.
We will be present wherever our customers are, continuing to build on our omnichannel capabilities, develop partnerships and create new store experiences to engage customers whenever, wherever and however they choose to connect with our brands. We will continue to run a tight ship from a financial management perspective. I remain confident in our strategic direction and our team's ability to execute on our plans, and I would like to thank all our teams for their energy, passion and dedication to continuing to move our brands forward. Now I will turn the call back to Brian.
Thanks, Fran. That concludes our prepared comments. With respect to preliminary discussions we have had with interested parties regarding a potential transaction with the company, we will not be providing any commentary during this call nor do we plan to comment until those discussions are complete. At this time, we will be happy to take your questions. As a reminder, please limit yourself to one question so that
we can speak to as
many of you as possible. Thank you.
Hi, this is Shuichi on for Sumit. Thank you for taking our questions. It was mentioned that comps are expected to continue to be challenged next quarter, but improved in the back half. Could you provide detail by brand and geography and if that back half improvement means less negative or getting to positive comp? Thank you.
Sure. Good morning. It's Fran. So yes, we expect in the second quarter for the environment to remain competitive and promotional as we mentioned. As we head into the back half of the year, with our strong team and improved processes in place, we do expect better execution this year in the back half.
Those strategic initiatives and investments in marketing and omnichannel, training and store environment begin to take hold. We see that evolution happening in the back half of the second quarter and through the second half of the year.
Okay. And any quantification there on if you're expecting those comps to be positive or just less negative in the back half?
Yes. Our outlook as we said in our outlook, we expect the trends to improve as we move through the back half of the year.
Okay, great. Thank you.
Next, we'll go to Brian Tuohy with Royal Bank of Canada.
Yes, hi. This is Kate on for Brian. Thanks for taking our questions. I guess just trying to understand the gross margin outlook here for 2Q. Should we expect pressure similar to what we saw in Q1?
And then I guess just when we're thinking about the gross margin by brand go forward, Should we continue to expect HOLLIS to improve whereas it's the core adult brand that continues to lag? I guess, how are you thinking about gross margin opportunities by brand go forward? Thank you.
Good morning, Kate. I'm going to pass that question to Joanne.
Yes, as it relates to the gross margin outlook for Q2, Kate, much of the environment we think will remain challenging very similar to Q1. We expect to have AUC benefit in the Q2 and running through the back half of the year. But as we saw in the Q1 with the challenging environment and the work we're doing on our assortments, we expect AUR pressure to offset the AUC any AUC benefits we have in the Q2. As we move into the back half of the year, from a we haven't been specific about the brand improvement, but we do expect margin improvement as our assortments become better balanced. As you know, our inventories are well managed.
So we expect that as we drive stronger engagement with our customers and better balance of our assortment, we expect to be able to step away from some of the discounting to drive through drive our sell throughs and to stabilize AUR.
Next, we'll go to Steven Albert with Bank of America.
Good morning. I just wanted to ask about the deleverage impact from increased shipping costs in 1Q. And just wanted to confirm that your shipping expenses for your online business, they flow through stores and distribution, not GM, which is somewhat different than how other retailers present it, correct?
Yes, I'll jump in. The shipping cost does flow through stores and distribution. All of the DTC variable expenses flow through our stores and distribution lines in our expense reporting. And we do see higher variable costs with that DTC business growth. We have expected to invest in the DTC business, and that has been part of our understanding and our management of our overall P and L as we've entered the year.
We did find $100,000,000 worth of savings and are executing against that and have said we are reinvesting some of that savings back into fund our growth, both in marketing and DCC channel and the shipping cost would be an element of that.
And Youssef, I'm just going to underscore, our investment in omni and the fact that we're 100 percent omni capable between the U. S, U. K. And Canada is a nice proof point for us because our true omni customer is actually more profitable than a single channel customer. So the teams are focused our marketing team is focused on making sure that we leverage that true omni customer.
And now we'll move on to Anna Andreeva with Oppenheimer.
Good morning. This is Sam Landman on for Anna. Thanks for taking our question. I just have a couple of questions on international. The trend improved again sequentially.
Can you expand on what drove that? Did you see a difference between flagships versus local store improvement? And then additionally, on your store fleet internationally, can you remind us of the timing for those leases coming due? And curious if we could see additional store closures, especially at flagships? Thank you.
Good morning. So I'm going to take the first part of that question. It's Fran. So we've invested in our store training. We've made some CapEx investments and we've also focused on our regional assortments.
All three of those are beginning to show improvement in our international and our flag stores through our conversion metrics. In the back half of the year, we're actually looking forward to rolling out our domestic loyalty programs internationally and the success of those, as well as our omni capabilities are in store for the back half of the year. And I'll turn it over to Joanne to balance the question. Yes. In terms
of the international store fleet leases, we do have flexibility in the leases, a little bit less flexibility in the flagships than the balance of the fleet, but we do have kick out clauses that give us flexibility to close stores internationally. And as we've said in the past, our international stores remain very profitable and our flagship stores in the aggregate are profitable and we wouldn't expect to close many. However, when we have the ability and we have kick outs and it makes financial sense, we're also not shy to close as evidenced by the Petter Street in Korea decisions we made last year. We have no new closures to announce at this point.
And now we'll move to Janet Kloppenburg with JJK Research.
Good morning, everyone. I wondered, Fran, if you could talk a little bit about the A and F repositioning. I'm wondering if it has more to do with product and pricing architecture, or more to do with brand awareness and the repositioning awareness of the brand's repositioning. If you could talk a little bit about what you think is the more greater challenge there and the revenues you have in place to restore a brand following in A&F, that would help a lot. And just at Hollister, when you think about the back half, I think you're thinking that you can put both at a lower cadence than you did in the first thing you're going to in the first half.
And I'm just wondering if that has to do with your view on the environment or if there's some merchandising upgrades or marketing that we could expect to drive that? Thank you.
Good morning, Janet. It's Fran.
So let's start with the first part of the
question, which is the A and F brand. So A and F is a very strong brand with 125 years of history and heritage. And the current objective is really just to sharpen our focus a bit. We've learned a lot over the past year. We've also added, as you know, our new CMO as well as a new outside agency, and they're helping us to sharpen that focus.
I think we've talked a couple of times about the fact that domestically specifically 80 percent of our consumers start to shop with us at the age of 18 and we are focused on the 20 something consumer, but narrowing that focus down to really the early 20s, the 21 to 24 bullseye for that brand. As far as the ticket pricing, I think specifically you asked, we feel we are well positioned with where our current ticket prices are. But again, just to reiterate, a lot of learnings in Hollister continue to help us make sure that we are moving ahead in Abercrombie where we need to. We've taken recently some focus groups around the country and we have pressure tested where we're headed for the back half of second quarter and into the fall and we've been able to adjust from those learnings. So we continually keep ourselves close to the customer and listening to what our opportunities are.
Yes. And just to underscore, Janet, you hit on pretty much every aspect of our customer touch points, and we are focused on making progress in all of those touch points. They all matter. It's voice through our marketing, but it's also product and it's also experience. And we've talked a lot about having the right balance in our assortment and the right depth behind the items that matter and making sure that our assortments are relevant to our core customer.
And that work continues is underway at Abercrombie. We don't expect a big departure from our ticketing structure or our core category structure, but we continue to improve our execution around our assortments. We are making investments to improve the store experience, and Fran touched on all the work that's going on in marketing to shape that Abercrombie go to market strategy as we move forward. And I'll just jump in on the Hollister promotional aspect. I think it's across our entire assortment.
We do have an opportunity to execute better in the back half. And it's a little bit about stepping away from promotions. It's also about having the depth behind the items to drive the business at the right time. So there's a combination of making sure that their assortment architecture supports, the big businesses that we expect to do in the back half of the year and also making sure that our marketing efforts are tied in. And Hollister, as we've moved through the Q1, as Fran mentioned, we are having success when we tie that marketing message to our assortment architecture and the in store experience, we see the customer respond nicely to that and that's our area of focus and that's our expectation for improvement in the back half.
A great example of that, Janet, I just said, I'll go back on that for a minute. So in the Q1 for Hollister, we sold the most amount of denim in the history of the brand for the Q1. And that was a great engagement between our inventory, our marketing and our customer engagement. And those are the learnings that we will continue apply as we go throughout the year.
Next, we'll go to Adrienne Yeh with Wolfe Research.
Good morning. This is Doug Drummond on for Adrienne. I want to focus on DTC. It looks like DTC sales accelerated nicely to a high single digit growth rate for the quarter. So I'm curious how are you approaching your promotional strategy with respect to online versus brick and mortar?
And just to clarify some comments earlier, is the DTC portion of the business both gross and op margin accretive to the overall mix? Thanks, Lon.
So yes, Doug, we are also pleased with our progress in our DTC channel. It's an investment that we have made from an omni perspective very early on in our investment history. So the success of that moving to 27% was a nice accomplishment for this quarter. We do expect that to continue as we move through the year. Our approach to it though is to have a seamless opportunity for our consumer to shop wherever, whenever and however they choose to shop with us.
Yes. And I'll just jump in on the in the margins picture. It is the DTC business has a higher variable cost component to it, but a lower fixed cost. And we have laid the foundation to capture that business. As we've seen customer shopping preferences change and shift, we as Fran mentioned, we're early adopters and have made investments to drive that business.
We think we continue to invest to make that experience frictionless to improve the engagement of our websites and our interaction on mobile devices where we're seeing much, much stronger growth and the customer continuing to shift on that device. And we have invested in localized fulfillment as well as our localized websites across the globe, we are able to leverage those investments to capture this business, and it is operating margin accretive
to the business in total.
Okay. Thanks a lot. Appreciate it.
Yes.
Our next question comes from Tiffany Kanaga with Deutsche Bank.
Hi. Thanks for taking my question. Would you break out in more detail where you're driving the $100,000,000 in expense reduction and in particular where you're finding upside versus the original guidance of the down 3% for the year? And additionally, as I look out beyond this year, do you see incremental opportunity for further reductions without cutting into essential items and where they could be? Or in other words, where is the right level of SG and A spend for the organization assuming comp stabilization?
Yes. We had a lot of success as we came into the year in identifying expense savings. That expense savings, the $100,000,000 we really found throughout the P and L. So there wasn't one large bucket, it was in a lot of smaller areas. And as an example, in the Q1, we leveraged our occupancy cost and some of that was rent savings, but some of that was utility savings where we implemented LED lighting in our stores and are able to save some utility costs.
So that's just an example, but we have found savings throughout the P and L. We are reinvesting a portion of that back in to marketing to support marketing and DTC, as we mentioned earlier. So the net save that's reflected in our results will be net of those reinvestments. And as mentioned, that marketing investment sits in the MG and A category and the DTC investments are in stores and distribution. We do expect to continue to focus on this.
Operating efficiency is a focus of us of our organization. We have embedded an expense savings program throughout our organization. We're getting participation, strong participation from all levels of the organization in what we call our CPI program. It's a continuous profit improvement program. And we expect to continue to find savings as we move forward, both this year and in the future.
Our next question comes from Marni Shapiro with Retail Tracker.
Hey, guys. Congrats on the progress. So I had one clarification. The denim at Hollister, which is very impressive, did that include an acceleration or sales in both men's and women's? And does it include denim shorts as well as long pants?
Good morning, Marty. It's Fran. Yes, it is across both genders. We had a strong performance in both guys and girls and that is specifically full length down including ankle, but not including shorts.
Excellent. And then can I ask sort of bigger picture question here? In the past when you would set a new product line, which you've had success with at Hollister, some of these new fashion sets, the customer would discover it coming into the store and you'd see the conversion immediately. Could you just pull back a little bit and talk a little bit about how is the customer engaging with this new product? Is she discovering it by clicking through your emails?
Or is she liking it on Insta? And what kind of response are you seeing to for that product specifically for these fashion hits to reserve in store? And is this collectively driving traffic to the store because you're able to support these new fashion hits with all this together?
The answer to the question, Marty, is essentially all of those channels, both social, e mail, etcetera, are helping to engage our consumer. We learned a lot about connecting our marketing and our inventory investments this past quarter, specifically in Hollister, which helped drive the results, the top line results that we were pleased with. So a good example of that is, we've had a nice swim business for the Q1. We went out early on e mail. We talked to the customer early on to make sure that they knew that we were a destination for swim and that drove their awareness, as well as their engagement conversion.
Are you finding a better response when it's a more focused conversation, so swim being a good example versus a branded conversation?
Yes, we are. When we marry the marketing and the inventory investment and speak to the customer very specifically, we are absolutely seeing that.
And did you mention is it driving the bricks and clicks?
Yes, it drives the quality of the The reserve in store. The reserve in store. Yes, it drives the entire omni experience. So that whenever wherever, whenever and however they choose to shop, it
has been driving that opportunity. And just the reserve in store functionality is fairly new. We have just rolled that out this quarter. So we I wouldn't say that, that is one specific lever that the customer is voting they want want to use. All of our omnichannel offerings are being leveraged by our customers.
I think this underscores our need to make sure we're engaging with our customers where they are. We're finding tremendous response and engagement on Instagram, response from our e mails. But importantly, too, our loyalty program, we have been leveraging the loyalty program, and that's been building momentum in Hollister since middle of last year. And we've successfully leveraged that program to drive traffic to our stores.
That's fantastic. Best of luck for next quarter, guys.
Thank
Next we'll go to Oliver Chen with Cowen and Company.
Hi, it's Courtney Wilson on for Oliver today. Just on mobile, you mentioned you're fully optimized. Can you comment on conversion and any traffic trends that you're seeing in mobile? And then in malls that you're located in that have had department store closures, can you talk about the traffic impact there, if any, that you're seeing? Thank you.
Yes. This is Joanne Courtney. I'll jump in on that. On the mobile phone conversion in total, we are seeing traffic trends continue to grow in mobile. So our customer continues to shift to leverage their mobile phone, for not only shopping, but browsing and interacting with the brands, through our loyalty programs, through our apps.
We have invested in those experiences and that continues to be of growing importance to our customer. In terms of conversion, actual shopping conversion on the phone, the phone is probably our lowest conversion medium from if you sort of measure conversion from the store through the web down to mobile. However, we are seeing very, very strong double digit increases in conversion as we invest in improvements in our capabilities on mobile. We have made that shopping experience and continue to improve it to make it easier and seamless for the customer to go from viewing and browsing to buying. But they're using their mobile phone for more than just shopping.
They're interacting with our brand in a number of different ways on the mobile phone. In terms of the department store closures and malls, I don't have any specific metrics to point to. I would say that we have seen mall traffic declining for some time, and I believe that where some of those stores are closing, they are in places where mall traffic has been declining. And in some cases, we have seen improvements where landlords have redeveloped that space to be have more engaging dining and entertainment options, and it drives more traffic to the mall overall. So it's a mixed bag, and I don't have any specific traffic patterns I can point to.
And now we'll go to Mark Altschwager with Robert W. Baird.
Great. Good morning. Thanks for taking the question. I wanted to follow-up on gross margin. Joanna, if you could just maybe talk about some of the drivers to gross margin improvement for the back half of the year.
It sounds like there's going to be some overhang in Q2, but is there an expectation that the broader promotional environment is going to improve in the back half? Or is this primarily the corrections on the design and allocation front that you're working on? And any other controllable drivers that you're baking in? Thanks.
Yes. The controllable drivers on margin in the back half include AUC benefit. So we continue to expect to have AUC improvement as we move through the back half. And as it relates to the AUR stabilization, it's related to improved execution on our side from having better assortments, weight and depth behind the key items and key ideas where last year, as we moved through the back half of the year, we disappointed a number of our customers and were out of stock in the key items. Our assortments got were broken early, and we had to work through them at deeper levels, and also the way we leverage our loyalty program and marketing.
And then from an inventory management standpoint, that also plays a role, and we continue to manage our inventory tightly and expect that we'll be able to drive inventory productivity and better sell through as we move through the back half of the year.
Our
next question comes from
Kimberly Greenberger with Morgan
Our next question comes from Kimberly Greenberger with Morgan Stanley.
This is Lauren Caswell on for Kimberly. I think last quarter you indicated that you were seeing minimal sales recapture from your closed doors. Wondering if you have any update there? And then if you could just comment if you're seeing any differences in your comp performance between mall and off mall locations and then within AJ and C Mall?
Yes. In terms of sales recapture from closed stores, we monitor and look at that on a long term basis. It won't move much quarter over quarter. We are very focused on engaging our customers and driving loyalty to be better able to retain customers in locations where stores close. So that is the genesis and the focus of our efforts as it relates to driving stronger loyalty programs, stronger CRM capabilities behind our loyalty programs so that we can retain that customer.
In terms of comp performance between mall and off mall locations, most of our locations, chain store locations are on mall. The off mall locations tend to be our flagship in tourist stores, where we're seeing persistent headwinds in the headwinds in the tourist locations, particularly in international markets. However, we did see some trend improvement in our international and flagship and tourist locations. In the first quarter with slight improvement, and we still see traffic headwinds there. So that is the biggest driver of our differences in our comp performance.
Now we'll go to Susan Anderson with FBR Capital Markets.
Good morning. This is Luke Hatton on for Susan. Just asking about going along sort of with the department store closures theme and you talked about some rent expense savings. Are you seeing any concessions from landlords and how does it differ between the AV and CMOL?
Yes, we are very focused on rightsizing our fleet. We talked about it in our prepared remarks. We've seen the customer shift in terms of their shopping preferences and we're working and have been working for several years to right size our store footprint and that includes closing stores and locations in certain locations, but it also includes downsizing and remodeling stores to drive productivity and that is our focus. We continue to partner with our landlords on all of those conversations. We have a portfolio of stores with them and they have a portfolio of malls and we work to strike the right balance for our business of making sure we have the right footprint in terms of having store locations in the right malls and making sure those stores are productive in the right size.
And those conversations are ongoing.
Great. Thank you very much.
I understand that was the last question. I just want to thank everybody again for participating this morning. I'd like to reiterate that overall, I am encouraged by the progress that has been made in a still challenging and heavily promotional retail environment. We are making meaningful improvements to our business and we remain confident in our strategic direction and our team's ability to execute on our