Day, and welcome to the Abercrombie and Fitch Second Quarter Fiscal Year 2021 Earnings Call. Today's conference is being recorded. We will open the call to take your questions at the end of the presentation. We ask that you limit yourself to one question during the question and answer session. And at this time, I would like to turn the conference over to Pam Quintiliano.
Please go ahead, ma'am.
Thank you. Good morning, and welcome to our Q2 2021 earnings Joining me today on the call are Fran Horowitz, Chief Executive Officer and Scott Lipesky, Chief Financial Officer. Earlier this morning, we issued our 2nd quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that any forward looking statements made on the call are subject to Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. A detailed discussion of these factors and uncertainties is contained in the company's filings with the And with
that, I will
turn the call over to the operator
for the Q and A session. In addition, we will be referring to certain non GAAP financial measures. Additional details and the reconciliation of GAAP Two adjusted non GAAP financial measures are included in the release issued earlier this morning. With that, I will turn the call over to Fran.
Good morning. I am excited to be here today to share our recent results and provide insights into the start of our back to school season. We entered Q2 well positioned to realize ongoing benefits from the work that we had done heading into and during the pandemic. This included Growing our digital channel, which carries a higher four wall operating margin than stores, rightsizing our store fleet, Expanding our digital and technology teams, adding to our vendor and regional carrier networks and investing in marketing with an emphasis on digital and social. Throughout the late spring summer, our customers took advantage of the warm weather and an increase in social activities.
We were there for all their outfitting needs. Our product acceptance was strong across brands, continuing momentum for the past several quarters. Once again, we reduced market downs and promotions, Tightly managed inventories and made strategic investments across marketing, technology and fulfillment to support near and long term growth. Our proven playbook worked and we achieved our best second quarter operating income and operating margins since 2,008. Before I turn to results, just a quick PSA, as we continue to lap significant impacts from COVID, we will be providing comparisons to both Q2 2020 2019 where applicable.
And due to temporary COVID driven store closures last year, We do not plan to disclose comparable sales. 2nd quarter total sales was 24% to last year and we were up 3% compared Q2 2019. Our largest market, the U. S. Led with sales up 31% on a 1 year and 11% on a 2 year basis.
Results speak to customer attention and spend and to new customers discovering our brands. By channel, Total global store sales rose 55% from last year and were down 20% from 2019. I'm very proud of our stores' performance, which was Despite permanent closures as well as ongoing restrictions in EMEA. As a reminder, during fiscal 2020, we proactively closed 1 137 locations, removing 1,100,000 underproductive gross square feet from our store base. We continue to execute against our number one transformation initiative, global stored network optimization, to further align with our customers' shifting shopping behaviors.
Even with aggressive store sales growth, digital did not skip a beat and remained solid as Digital sales held steady to 2020 levels and grew 52% from 2019. Results are further proof of our ongoing evolution into a digital first global omnichannel retailer and should yield sustainable operating margin benefits. Our total sales growth has been healthy as evidenced by our significant gross margin expansion. For the quarter, we achieved our best Q2 gross margin rate since 2,009. Our total company gross margin rate increased 4.50 basis points on a 1 year and 5.90 basis points on a 2 year basis.
We reduced the depth and breadth of promotions compared to last quarter last year. While customer reaction to products has continued to be We have not and will not step away from our inventory discipline. This is one of the key COVID learnings we will continue to apply going forward. Reflecting our strong top line and gross margin performance combined with ongoing tight expense controls, our operating margin rate was over 1100 basis points compared to last year and 1800 basis points compared to Q2 2019. While we benefited from a good consumer environment, especially in the U.
S, Our results also reflect the body of work done by our global teams to dramatically improve our product, voice and experience. Since I became CEO in 2017, our brands have evolved with our customers and we have focused on being there and supporting them for all their lifestyle needs. Speaking of those lifestyle needs, let's take a moment to talk about some major fashion wins that applied companywide. Mehdi have asked me about Current denim cycle. There's a ton of newness and interest in jeans and has been great for our brands, especially as it is one of our top 3 categories on an annual basis and even more important in the back half of the year.
Our teams have done an absolutely amazing job staying on top of Current denim trends. We are viewed as a premier denim destination with newer styles representing over 40% of our jeans volume, up from 25% last year and our customer is not waiting for sale to get what they want. In the Q2, we reduced promotions within this category well below 2020 2019 levels. So what's working? We have high rise, wider legs including mom, dad straight and flare.
Skinny is still there, although becoming a smaller part of the total. And there are new and upcoming trends like 90s inspired low rise, something for everyone. And lengths are changing too. Following years of ankle, we are starting to see interest in fall. We're encouraged that these changes are not limited to one gender.
Customers are also responding to the wider leg openings in men's, which represents another significant opportunity as it's been a long time since he has updated his silhouette. Of course, our customer needs tops to go with their new jeans. In women's, we continue to see customers gravitate to slim and crop tops and to oversize and bodysuits, which further reinforces the proportion play in bottoms. Dresses, skirts, shorts and swim were also popular. As product acceptance is built, our teams have been meeting our customers where they are in the digital landscape.
We are firmly It was certainly a busy and exciting quarter for both Technology and engagement, and I want to take a moment to discuss some of the highlights. We introduced and evolved Gilly Hicks brand purpose and positioning. We launched our newest brand, Social Tourist. We accelerated investments in testing across influencer, paid media and digital, reaching both core and new audiences. And we hired a Chief Digital and Technology Officer to further evolve and accelerate our digital first model.
Starting with Gilly Hicks. On July 15, we took a huge leap forward in our growth strategy by relaunching the brand globally with an evolved purpose and position to bring our customer to their happy place. Given our Gen Z customer is the most stressed generation, the updated purpose is very important. As part of the relaunch, we introduced gender inclusive product In addition, we opened our 1st standalone store at Easton Towne Center in Columbus, Ohio and introduced updated side by side within Hollister store experiences. This included 20 refreshes to existing side by side formats and 3 new locations, all of which incorporate elements from the standalone store.
Wow, what can I say? What an absolutely phenomenal moment for the Gilly team. We are truly feeling the love. Customer feedback has been overwhelmingly positive and the brand is resonating with our Gen Z customer and their mindset. Early results from the brand relaunch and the new store concept have been very encouraging.
Taking a step back, our customers are already responding well to product and the brand, which give us confidence to make the necessary investments to accelerate this exciting growth vehicle. In the second quarter, Sales rose approximately 30% year over year with growth across digital and store channels. This was the 5th consecutive quarter of double digit total sales gains. Loungelet Matchbacks, Sleep, Underwear and our active collection, Gilly Go continue to resonate with our customer. Post launch, our GUY's product and matching collections have also been well received.
Turning to Social Tourist. It's hard to believe it's only been 3 months since we've taken Hollister's Successful partnership with TikTok superstars Dixie and Charli D'Amelio, who combined have over 270,000,000 followers across social platforms to the next level with the launch of our 5th brand. Social tours is a great example of how we are approaching our business differently, Meeting our customer where they are and pushing boundaries of social commerce in new and exciting ways. Since the launch, the brand has had over 700,000,000 impressions and views We continue to build awareness. For the first collection, we had several Instagram exclusive pieces and for the second, we hosted a live TikTok fashion show featuring With social tourists, we have learned So much in a short period of time that up and coming fashion trends, social commerce and the growth of the TikTok platform.
We are optimistic about social tours and its future and have several more exciting events happening throughout the remainder of the year. Now on to our remaining brands. Starting with our largest brand Hollister, which includes Gilly Hicks and Social Tourists, sales rose 20% in the quarter and we achieved our highest Q2 sales in company history. Congrats to the entire Hollister team. Our focus on voice and experience clearly complemented our product, helping to drive higher average transaction values and strong average unit retail growth.
From a marketing perspective, we launched the Hollister Creator Collective, a year long influencer program. In July, we sponsored the Lago Vista Snapchat series Featuring 21 non skippable Hollister Commercials. We rounded out our efforts with a new monthly Instagram live shopping series with influencers. Hollister's site and app also got a refresh during the quarter, further improving the customer experience. Gilly Hicks and Social Tourists now have dedicated tabs allowing users to shop between all three brands with a shared checkout.
In addition, Gilly Hicks and Social Tourists launched their own unique apps and we also updated our membership loyalty program so that customers can earn points and redeem rewards across all three brands. As we look to the remainder of the back to school season, we are focused on continuing to win in jeans. We have styling pop ups in key markets where we have been engaging with local teens and seeding product and thus far has been highly successful. We will also have influencers and affiliates in the U. S.
And EMEA amplified denim across Instagram and TikTok. At Abercrombie Adults, our influencer, affiliate and editorial programs remain one of our top priorities. In the Q2, we grew associated sales by over 70% year over year and increased our already sizable network of digital brand advocates. We also launched a capsule series with top affiliate creators and took part in Facebook's live shopping alpha test, which had fantastic engagement and insights. During the quarter, we continued to leverage TikTok content.
On a year over year basis, we doubled our new to file visits, grew new to file orders and sales by over 80% And continue to break TikTok's benchmarks for paid media. I can't wait to see what the future holds on this important platform. After all, according to POPSUGAR, Abercrombie is TikTok's favorite fashion brand and we are proud to hold that title. All the hard work connecting to our customers has certainly paid off. On our last earnings call, Abercrombie Women's had a breakout moment.
During the Q2, that momentum built with Women's achieving its best Q2 sales since 2012. In total, Abercrombie, which includes kids, grew sales 30% in the quarter. Similar to Hollister, Abercrombie registered higher average transaction values on strong average unit retail growth. Heading into fall, our team is energized. We recently launched our Denim Your Way campaign, which features Abercrombie customers from our Instagram casting call.
We also collaborated with wedding and events experts, The Knot, on a best dressed guest collection. In addition, we teamed up with Zappos as our exclusive domestic third party e commerce provider for a limited selection of jeans and tops and a footwear collaboration. At Abercrombie Kids, if report cards were given out during summer, I would say They received an A. We were highly focused on driving customer acquisition through expansion to new platforms and releasing new products and content franchises. The ultimate summer outfit campaign contributed to sales growth in shorts and swim, which are 2 important seasonal categories, while the release of the Cool Stuff collection and the launch of our active assortments both had over 70% new to file shopper rates and average order values that were over 70% above our goals.
A common theme across the company has been our focus on digital, which is critical for future growth. As we continue our transformation into a digitally led operating model, We have made investments in technology and talent. Over the past year, we've expanded our data and analytics, user experience And technology team, and we recently welcomed Samir Desai to the A and F family in the newly created role of Chief Digital and Technology Officer. Before I turn it over to Scott, I want to take a moment to discuss our thoughts on the health of the consumer and how we are approaching the fall season. In the Q2, the U.
S. Benefited from government stimulus and reopening as customers resumed many of their activities. Nationally, the reopening in many countries, including our largest market, the UK, lagged the U. S, reflecting ongoing COVID related restrictions. As we think about Q3, while global uncertainties remain, we are cautiously optimistic.
We've been pleased with the U. S. Back to school season to date and believe our customers are highly engaged and actively looking to refresh their wardrobe. We are expecting to see an elongated season as many of our larger markets have yet to return. In EMEA, the environment is improving and we have yet to start the back to school season.
Looking ahead, we will continue to execute our proven playbooks. We'll focus on controlling what we can control and will remain on offense. We are proactively managing through industry wide issues around inflation, production and transportation delays. With our solid foundation and strong balance sheet as well as our long standing relationship with our global vendor and supply chain partners, we are well positioned to be winners in the back half and expect to surpass our previously stated 5.8 percent operating margin goal this year. And with that, I will turn it over to Scott.
Thanks, Fran, and good morning, everyone. As Fran mentioned, we will be providing comparisons to both Q2 2020 2019 where applicable will not be disclosing comparable sales. Turning to our results. In the Q2, we delivered total net sales of $865,000,000 up 24% Last year, on a 2 year basis, sales were up 3%. We ended the quarter with all of our 7 33 stores open.
This compares to 92% of our base open at the end of the Q1. As of yesterday, all stores remain open. Store sales rose 55% on a 1 year basis and were down 20% on a 2 year basis. We recouped a significant amount of lost sales due to COVID driven store closures Last year. At the same time, total digital sales dollars remained steady compared to last year and grew 52% to Q2 2019, Representing 44% of total sales this quarter.
By brand, net sales increased 20% for Hollister, which includes Kelly Hicks and Social Tourist And 30% for Abercrombie, which includes kids. As compared to Q2 2019, net sales increased 2% for Hollister and 4% for Abercrombie. By region, net sales in the U. S. Were up 31% and 11% on a 1 2 year basis, respectively, despite having roughly one In EMEA, sales rose 11% on a 1 year basis, but were down 5% on a 2 year basis.
Customers responded well to localized product voice and experience, which allowed us to reduced promotions in region. We were pleased with results in light of permanent store closures and ongoing COVID related restrictions. Since Q2 2019, We have closed 17 stores, including 8 flagships, as we continue to reposition to a smaller and wider store network focused on local customers. During the quarter, the region as a whole remained in flux as we experienced intermittent temporary closures and reduced operating hours. As a reminder, In region, our penetration is highest in the UK, while Germany and France are also meaningful.
In APAC, sales were down 1% to last year and down 39% Q2 2019. We experienced continued traffic challenges in the region. In our largest market, China, we are encouraged by customer response to new products, Including APAC exclusive collections. On Tmall, we saw a stabilized sales trend and improved profitability as we continue to reduce promotional activity. Globally, we continue to see lower store traffic levels relative to Q2 2019, but sequential improvements off Q1.
From an omni channel perspective, we were pleased with year over year improvements in conversion and average transaction values. Moving on to gross profit. Our rate of 65.2 percent was up 4.50 basis points to last year and 5.90 basis points to Q2 2019, Driven by higher AUR across brands on reduced promotions and markdowns, partially offset by higher AUC, reflecting increased transportation costs. Inventory is controlled in current, ending the quarter down 8% to last year. Reflecting well documented industry related challenges, we did see delivery delays increase The quarter as global shipping congestion continued and there were renewed COVID restrictions across several of our production countries.
We are managing through delays of 1 to 3 weeks on average by pulling forward deliveries, employing fabric platforming and leveraging air deliveries as necessary. Also, we are working through an extended closure of factories in Southern Vietnam, which have been further delayed and are now expected to open the 1st week of September at the earliest. We have and will continue to leverage our strong vendor partnerships in a similar playbook already used in other countries to ensure we get product as quickly as possible upon reopening. I'll cover the rest of our Q2 results on an adjusted non GAAP basis. Excluded from our non GAAP results are approximately $800,000 $8,000,000 of pretax asset impairment Operating expense, excluding other operating income, was up 11% compared to last year, While operating expense as a percentage of sales decreased to 52% from 57.8%.
In Q2, we saw an increase in stores and distribution expense of 5% compared to 2020 and a reduction of 13% compared to 2019. Compared to 2019, store occupancy was down approximately $50,000,000 related to square footage reductions and renegotiated leases and included approximately $9,000,000 of benefits associated with rent abatements and a flagship lease related item. These savings were partially offset by increased shipping and fulfillment expenses. Marketing, general and administrative expense rose 27% from last year And 7% compared to 2019, primarily driven by increased marketing spend and higher performance based compensation expense. We delivered operating income of $116,000,000 compared to operating income of $22,000,000 last year.
As Fran noted, this was our best The effective tax rate was approximately negative 6. In the quarter, we released approximately $30,000,000 of previously established valuation allowances on certain deferred tax assets, primarily in the United States, Germany and the Netherlands. Additionally, the quarter reflected a discrete benefit of approximately $4,000,000 for a U. K. Rate Change enacted in the quarter, which increased the value of deferred taxes in the UK.
Net income per diluted share on adjusted non GAAP basis was $1.70 compared to $0.23 last year. The current quarter includes a benefit of approximately $0.53 related to the tax items mentioned. Our strong financial position continues to enable us to both invest in the business and return excess cash to shareholders. We ended the quarter with cash and cash equivalents of 922,000,000 And total liquidity of approximately $1,200,000,000 During the quarter, we repurchased approximately 2,400,000 shares for $100,000,000 $42,000,000 at par value of our senior secured notes on the open market as a way to deleverage the balance sheet and deploy excess cash. Looking ahead, we will continue to focus on returning excess cash to shareholders, primarily through share repurchases, pending market conditions, Share price and our ability to accelerate investments.
Looking ahead, we continue to expect fiscal 2021 CapEx to be approximately $100,000,000 Bringing the total to 18 for the year to date period and closed 12 for a total of 20 year to date. In the back half, we expect to open roughly 20 stores bringing the total for the year to approximately This year, we have about 240 leases up for renewal. We look forward to having thoughtful conversations with our landlord partners I'll finish up with how we are planning the remainder of the year. We will stay on offense and leverage a portion of our structural cost savings to support top line growth, including investments in marketing across brands, The digital experience and growing Gilly Hicks and social tourists. Reflecting ongoing global uncertainty, we will continue to maintain inventory discipline as we manage through supply chain disruptions and the costs and delays associated with it as well as read and react to the operating environment in each market around the world.
Recently, we have been encouraged by back to school results in the U. S, where we expect to see an extended back to school season. We are excited for some of our Largest School Districts, including New York to return in the weeks to come. For the Q3, we are planning as follows using 2019 as our comparison period. Net sales to be up 2% to 4% from 2019 level of approximately $863,000,000 We expect the U.
S. To continue to outperform EMEA and APAC. At this point, our plan assumes a modest impact on sales due to supply chain constraints with the larger impact coming from cost inflation, which I'll cover momentarily. We will work to manage through the disruption using all available tools in our toolkit, including airing inventory and shifting production as necessary and if possible. Gross profit rate to be up at least 300 basis points to 2019 level of 60.1%, including an Operating expense, excluding other operating income, to be up low single digits to 2019 adjusted non GAAP level of 494,000,000 Lower store expenses will be partially offset by higher fulfillment costs.
We also plan to increase marketing spend compared to 2019 as we look to further drive momentum We expect to see benefits from this marketing throughout the back half and into 2022. And the tax rate to be in the low 20. Looking to the full year, as compared to 2019, we are planning as follows. Net sales to be up low to mid single digits to 2019 level of $3,600,000,000 Gross profit rate to be up around 300 basis points 19 level of 59.4 percent. Operating expense, excluding other operating income, to be down 3% to 4% to 2019 adjusted non GAAP level of $2,070,000,000 Assuming we deliver against these expectations, we would expect operating margin at or above 9% for the full year, which is well above our 2018 Investor Day target of 5.8%.
We are excited about the significant progress we have made on our operating model and cost structure. While plenty of hard work remains, we are optimistic about our future and we'll provide additional detail on our 2022 assumptions on our year end earnings call. With that operator, we are ready for questions.
We will begin with Paul Lihue with Citi.
Hey, thanks guys. Fran, wonder if you could talk a little bit more about Gilly Hicks brand and just how you're thinking about that brand in 2022, how big it can be for you guys both near term and long term. Also curious what you're seeing on the promotional environment as you begin in back to school, what you expect for the second And then, Sky, I think you still have some pricey debt. Just curious how you're thinking about what to do as far as using cash, whether
Hey, Paul, good morning. We'd love to talk about Gilly. What an Exciting quarter for Gilly. We're building off momentum that we were already feeling in Gilly. The team has been hard at work Building that brand over the past couple of years, we had an opportunity to really get close to the customer, understand that this is the most Stressed out generation, the Gen Z generation and to come up with a brand purpose that really helps them find their happy place has been just a huge win.
The brand is resonating. The product is resonating. We opened up a freestanding store, as a test and learn in Easton, just this couple of weeks ago that has Really well received. We also took some of those assets and used them in our side by sides around the world, about 20 of them, and have seen a nice pickup from that as well. Adding this gender inclusive and size inclusive to it has just been an all around win.
We are excited about where we're headed and we have Not declared as part of the Hollister number today. I think your second question, let's see, promotional environment for the second half, Yes, we are thrilled with the progress that we have made. I think you have been on this journey with us for quite some time and being able to actually reduce our promotions To the extent that we have thus far this year has been just a huge win for us. We are holding our inventory tight. As we That's one of the biggest learnings coming out of COVID and we intend to remain there.
So the back half is more promotional than the first half. We will continue to monitor the situation, but we expect to continue to make progress.
All right. I'll grab the 3rd piece here on cash usage. Yes, year to date, we have put some cash to use. We put about $250,000,000 of our cash to use, dollars 135,000,000 in share repurchases Around $110,000,000 to delever the balance sheet. Back in Q1, just as a reminder, we paid about $65,000,000 to settle a multiyear obligation related to our SoHo Hollister store.
And then we bought back in some of that pricey debt that you mentioned there, Paul, in the Q2 here for about $45,000,000 So As we think about that debt in the future, first good opportunity there is we have a non call provision on that debt that comes up here in 2022. I can't believe it's happening already, Sneaking up on us, so that's when our first decision point there will be. So in the meantime, it makes sense for us to buy a little bit of that in here in Q2. So more to come there as we get into Q1 of next year. As we look forward to the back half and cash usage, I mentioned We're going to be focusing on share repurchases, pending stock price and the ability to invest in the business.
Got it. Thank you, guys. Good luck.
Thank you.
Next, we will hear from Susan Anderson with B. Riley.
Good morning. Nice job on the quarter. I guess just to touch on the gross margin, I think you mentioned the highest since 2009. And if you look back historically, it looks like it's been even higher in the upper 60s. So I'm just curious if you think there's more room there and how confident you are in maintaining that margin level And then just for Q3, it looks like, you're expecting gross margin to be a bit below Q2.
Is that really just all increased freight costs?
Hey, Susan, it's Scott. I'll grab this one. So yes, thinking about gross margin, yes, Hyacinth 2009, extremely pleased with Great and a huge thanks to our merchant and design teams. Thinking about the past, I don't think we'll get back to our peak. The business was very different back in 2,006 and 2007 than it is today, but we are making great progress on that gross margin.
Thinking about, let's see the second part of the question was what?
The 3rd quarter gross margin expectation versus second. Yes.
Yes. So bringing it back to the Q3, yes, so we are seeing the increased freights coming into us on the Q3. So it started to build here in the first half. Some of that gets booked up into your inventory and then we'll start to flow that through here in the Q3. So it will be a little bit down there versus Q2, but the great thing is, we're still talking about 300 basis points up versus 2019 and that's baking in 300 basis points to 400 basis points pressure from hopefully transitory freight inflation that will hopefully sort itself out in the future, but we'll see when that happens.
So Really pleased with the progress on gross margins.
Great. That sounds positive. Thanks a lot. Good luck in the back half.
We'll now move to a question from Jay Sole with UBS.
Fran, you mentioned that there's lots of newness in denim and lots of styles are working for both women's and men's. Can you give us a sense of what you think This fashion trend has meant for the growth rate for the category. So in other words, if before the pandemic, it was growing at 1%, do you think it's Growing at 5% now, 10% now. And secondly, do you think that growth rate can persist for a few more quarters?
Hey, Jay, good morning. So what an exciting time for denim. It doesn't happen very often where our industry sees such an incredible trend happening. So the newness in denim, skinny jeans will just start there. They've been around for a decade.
So to talk about all of this newness in denim, we see a long, long runway. And there So many things happening between the leg openings, the high rise, the low rise because of the 90s influence. I mean, I could go on and on and on about all the exciting things that are happening and what's great is that they're happening across brands and they're happening across genders. So our expectation is that we expect to see This newness continuing well into the future.
Got it. And then maybe you talked about Increasing some marketing expenses, which sort of implies you really like how the Hollister and Abercrombie and Fitch and also social tours and all the different things, Gilly Hicks, you're doing with brands But specifically on Hollister and Abercrombie, given all the work that you've put in over the last 5 years to reposition these brands, what are the KPIs that you're looking at that tell you that these brands Really are where you want to be and are ready to be really invested in a big way to continue to increase engagement you're already seeing with consumers.
Hey, Jay, it's Scott. I'll grab this one. Yes, loving where the brand positionings are for each of our brands, all 4 of them, all 5 of them, including kids. So we are increasing marketing. This is a great position we have with a strong balance sheet having that cash and seeing that expense savings across the store base.
It's what we've been trying to do over the years is to move from more fixed into more variable and marketing is our number one variable cost and we love to spend it. So The teams that we have built across our brands are just firing on all cylinders like brands that earlier, and we're going to give them more cash to fund that marketing. We love what's happening across social and across digital. We're finding great new partnerships. We're seeing Across social and across digital, we're finding great new partnerships.
We're seeing TikTok explode. So we can put more money to work For all of our brands and to drive those KPIs, we want new customers, we want to drive retention and so on and so forth. And that's what our teams have been executing on and we appreciate that.
Great. Thanks, Kevin.
We will now move to Matthew Boss with JPMorgan.
Great. Thanks and congrats on the continued momentum.
Thank you.
So maybe relative to your 2nd quarter net sales up 3% relative to 2019, what have you seen in August How best to peg the continued momentum that you cited? And then Scott, just on profitability, what are some of the puts and takes Maybe as we think about the bottom line operating margin this year relative to maybe how best to think about it moving forward.
And I'll kick off. So we are pleased with the momentum that we've seen heading into August. Back to school For the Hollister and the kids brand because Abercrombie, we really call back to fall. So it's really focusing on Hollister and kids from it. Back to school, we're seeing nice reception to the product.
The early states like Texas and Florida and Georgia have seen a nice start to back to school. Our expectation is a nice, I guess slow and steady wins the race, right? So we're looking for a longer season for back to school. In the past, we've always talked about these big Peaks and valleys that we've seen throughout the country as the states peak, that's a bit different this year. The consumer was spending a lot Time and vacationing and then their social activities that they got back to.
So we saw a lot more wear now selling and now we're seeing them go into more wear forward selling. So Excited about what we're seeing so far.
Yes, Matt, on the puts and takes for profitability, it comes down to really 3 levers for us. It's the store expenses, It's fulfillment and then it's marketing. And we've taken out a significant amount of occupancy coming into this year and through this year. We expect to make Continued improvements in occupancy as we go forward. And whenever we close stores, reduce stores, we do see a savings come through with other store expenses.
On the fulfillment side, we've seen inflation there and we've seen higher volumes. So we'll see how that plays out in the future, but that will offset some of those store savings somewhat. And then marketing is really where we want to accelerate our spend to grow the brand. Because I think what we've seen more recently specifically is that when we can grow that top line, Thinking about the plus 3 we just talked about the 2019 and Q2, we can see an amazing flow through and we've seen great profitability here in the first half And that's our goal go forward is to continue to elevate that profitability, drive the top line and see that flow through.
We'll now move to a question from Jeanine Stitchter with Jefferies.
Hi, good morning. I wanted to ask about the complexion of the sales guidance 2% to 4% versus 2019, would you expect that the sales growth would start to improve in Europe and maybe a bit of a moderation in the U. S? And then also Curious what you saw within the quarter in Europe as stores reopened, interested in the cadence there. Thank you.
Sure, Janine. I'll grab this one. So thinking about the 2 to 4, Go back in history a little bit, up 5 ish in Q1, up 3 ish in Q2. And so we're kind of right around that same range here in Q3. A couple of things happening here in Q3.
We're hopeful and optimistic that Europe will slowly reopen. It's been slowly reopening. It certainly has lagged What's happening here in the U. S? So optimistic and kind of vaccine rollout will continue and people will start to get out a little bit more.
On the other side of it is Inventory challenges and supply chain challenges that we have seen. So inventory is kind of dribbling in here as we go through the quarter And we expect to see a little bit of a hit there in Q3. Our in stocks are not exactly where we want them to be. So we're doing everything in our power and a huge thanks to our transportation teams to get our products here as quickly as possible. So those things are kind of balancing in and it just keeps us right on track with where we've been for the first half.
Okay, great. And then just on the gross margin, the 300 to 400 basis points of incremental freight, did you quantify what that was in either 2Q or the First half, just curious how that just trying to get a sense of what the underlying merchandise margin improvement you're expecting in the back half versus what you saw in 2Q?
We didn't put in there, but I'd say in Q2, a couple of 100 basis points drag on gross margins from the freight. So a little bit of a growth here as we see that really start to flow through the inventory as those higher rates, we're bringing the product into spring and selling into fall. So It's been a drag, but the great thing is that underlying margin, how you merchandise margin, how you framed it is we're seeing great AURs. And we're seeing through the product acceptance and the inventory and the marketing, it's all working together to see great AURs to offset that cost pressure. And so that's our expectation here In Q3 and we'll update Q4 whenever we get there.
Great. Thanks so much.
Now moving to a question from Janet Kloppenburg with JJK Research.
Hi, everybody. Can you hear me? Yes. Congratulations on a great quarter. Thank you.
Between the U. S. And Europe in the second quarter. And second, as the e comm business continues to be pretty steady, How we should think about getting back to pre pandemic productivity levels in the stores, particularly the mall based And Scott, in relation to the Supply chain constraints and the transportation costs, it feels like it's getting a little bit worse. And I'm wondering How you think we should think about the Q4 and maybe the Q1 too?
Are you cautious there that things could Actually, it worsened from 3Q or do you think and I understand these are just temporary headwinds, but I'm just trying to get the model right. What do you think that we could get some improvement as we move through the rest of the year and into next year? Thank you.
Okay. So starting from the top. So productivity levels, yes, clearly the U. S. Currently that we're starting to see some green shoots and a little bit more consistency in EMEA, but we had lots of COVID restrictions throughout the countries, particularly the UK, which is our largest country throughout the whole Q2.
So productivity in the U. S. Has been stronger and we're actually very pleased with our U. S. Performance being up 11% to pre pandemic levels in total, We see it as a big, big win.
Your second question, let's see, digital isn't strong, getting back to I guess, same answer. We continue to focus very closely on our leases, Janet, and making sure that our Stores are in the right location, the right economics and the right size. It's been a big, big initiative of ours since I mean for years now And we're continuing on that. We've closed the 130 stores and took out 1,000,000 square feet out of our base. We've got a lot of leases coming up in the back half and we'll continue to stay focused on it.
Hollister just as a last step before I hand it over to Scott, we have Most of our Hollister most of the stores in Europe are in our Hollister business. So with that, I'll hand it over to you.
Yes. I'll tag on a little bit to that Jan, it's when we think about the new normal, when you think about store productivity and store traffic, some malls have regained that traffic from 2019, but a whole lot of malls haven't. And so we're I'd say back to school was kind of the first test of people coming back and really seeing how that store Traffic looks versus 2019, and it was solid, but definitely not back to those levels on average. So we'll get through a holiday season and understand that. So We're all still learning on what the productivity levels of these stores will be and where that traffic settles in.
And to Fran's point, we have flexibility in our leases to make sure that We can either continue to shrink our stores to drive productivity that way, get rent deals that better fit the new sales level for that store and so on and so forth. On the supply chain constraints, yes, I'd say, right now, it's tough out there. All the articles you read are real and we're all those of us on this side are living through it every day. So those costs are in our inventory. It hit us in Q2.
It's going to hit us in Q3. It's going to hit us in Q4. I'd say the one thing that we're thinking about is just the reopening of Vietnam and getting those units in here September into early Q4 and there'll be some air that And as we think about the Q4 or the kind of the full year outlook that we put out there, we have that baked in there, but we'll see how it plays out, out of our control at this point.
Thanks so much.
You're welcome.
We'll now move to Mark Altschwager with Baird?
Hi, good morning. This is Sarah Goldberg on for Mark. Thanks for taking our question and congrats on the quarter.
It was impressive to see
the digital sales hold flat despite significant strength in 2020. And I'm just curious how you're thinking about the
Go ahead.
Okay. Yes, I'll kick this one off and Frank can chime in. But we're very happy with the digital sales hanging up. That was one of our first big learnings coming through as the world kind of reopened specifically here in the U. S.
Is what was going to happen to digital whenever the stores reopen. So With the fleet work that we did last year and the huge jump that we saw last year in digital sales because of the COVID related closures, It was great to sustain that this year. And what I love from the finance perspective is to see that flow through and to see our different The P and L and operating model flow through to much greater profitability with that sales mix being at 44% of digital versus back in 2019 where it wasn't. So as we think about going forward, it does have an implication on the store fleet. I mean this business is about omnichannel now.
We need to make sure we have the right size stores in the right locations to support a bigger digital halo within a certain market. And that's how we look At each market that we're entering, we want to maximize that omni business. So it absolutely has an implication and we'll be thinking about that as we go into the back half of this year when we have those 2 40 leases
It looks like that's all the time we have for questions today. I will turn the call back over to Fran for any additional or closing remarks.
Thank you for participating in our call today. I look forward to speaking with you in November when we report our Q3 results.
With that ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation. You may now disconnect.