Abercrombie & Fitch Q4 FY25 Earnings Call Transcript

Abercrombie & Fitch (NASDAQ:ANF) reported fourth-quarter financial results on Wednesday. The transcript from the company’s earnings call has been provided below.

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Operator

Good day and welcome to the Abercrombie & Fitch fourth quarter fiscal year 2025 earnings call. Today’s conference is being recorded at this time. All participants are in a listen only mode. After the speaker’s presentation there will be a question and answer session. To ask a question during the session you would need to press star 11 on your telephone. You will then hear an automated message advised and your hand is raised to withdraw your question. Please press star 11 again. I would like now to turn the conference over to Mo Gupta, Vice President of Investor Relations. Please go ahead.

Mo Gupta (Vice President of Investor Relations)

Thank you. Good morning and welcome to our fourth quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, Scott Lipesky, Chief Operating Officer and Robert Ball, Chief Financial Officer. Earlier this morning we issued our fourth quarter earnings release which is available on our website corporate.abercrombie.com under the Investors section. Also available on our website is an Investor presentation. Please keep in mind that we will make certain forward looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we’ll be referring to certain non GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non GAAP financial measures are included in the release and the investor presentation issued earlier this morning. With that, I will turn the call over to Fran.

Fran Horowitz (Chief Executive Officer)

Thanks Mo, Good morning and thanks for joining us today. Before we begin, I do want to acknowledge the situation in the Middle East with associates and stores in the region. Our focus continues to be on their safety and well being. Returning to our results, I’m happy to report the fourth quarter finished on the higher end of the ranges provided in our early January update. Once again, we accomplished exactly what we set out to do. Holiday product acceptance drove record fourth quarter net sales with balanced growth across regions, brands and channels along with growth in earnings per share. As a company, our goal is to set clear commitments and then deliver on them. Leveraging our strong foundation and operating model, we achieved another year of consistent results for 2025 with record sales growth across regions and channels and leading double digit operating margins. Substantial operating cash flows also enabled strong returns of cash to shareholders via share repurchases. Looking forward to 2026, we expect to continue on the path of global growth and add to our track record of consistent strong profitability. For the fourth quarter we delivered net sales growth of 5% which was balanced across regions, brands and channels. It was particularly great to see both brands deliver record fourth quarter net sales. At Abercrombie Brands we achieved our goal of returning the brand to growth with 4% net sales growth on top of a record last year. Hollister brand continues to deliver for the teen customer, producing an 11th consecutive quarter of net sales growth at up 6%. With balanced top line growth and continued financial discipline, we delivered an operating margin of 14.1% including 360 basis points of tariff pressure. I have to recognize the team’s incredible efforts here to meaningfully reduce the impact of these costs on the bottom line. Earnings per share of $3.68 improved 3% on last year’s record quarterly result, demonstrating our ability to create value through a balanced combination of global growth, operational excellence and disciplined capital allocation. Recapping the year, fiscal 2025 net sales were a record 5.3 billion, surpassing 5 billion for the first time in company history. We grew over 6% exceeding our beginning of the year growth projections provided last March. For the third consecutive year, our customers responded to the team’s compelling product and engaging marketing delivering net sales growth across regions led by the Americas up 7%. Sales also grew across channels for the third year in a row. We continued to see great traffic on digital and in store and importantly we continue to see our highest value customers shopping across channels. We delivered an operating margin of 13.3% or or 12.5% adjusting for a one time litigation benefit, a double digit result for the third straight year despite 170 basis points of tariff pressure on the bottom line. We delivered full year earnings per share of $10.46 our second consecutive year of EPS over $10. By far the strongest back to back performance in our 30 year history as a public company. We also remain committed to shareholder return with $619 million operating cash flow. After investing back into the business, we returned $450 million to shareholders via share repurchases totaling 11% of shares outstanding at the beginning of 2025. The team worked hard all year staying fully committed to our customer and our playbooks and I’m proud of the consistency of these results as a clear demonstration of our leading operating model and culture of financial decision. From a regional perspective, 2025 was another year of progress in the Americas. We grew net sales 7% on strong cross channel traffic driven by compelling marketing across brands and continued store expansion in EMEA. Net sales growth of 6% was driven by double digit growth in the UK along with good growth in the Middle East. APAC grew 5% this year, led by solid performance across our digital platforms. Moving on to brand performance, I’ll start with Hollister Brands where we set records across the business. I am so proud of what the team has achieved with the global teen consumer with two consecutive years of 15% growth driven by increases in unit selling and aur on product. We delivered growth across genders and key categories, showing improved balance on both. We saw great response from a variety of exciting marketing campaigns supporting key product drops like our Collegiate Collection, the Grad Shop and engaging collaboration with Taco Bell. We added millions of new customers in 2025 and importantly, we also saw improved retention. Simply put, Hollister’s growth and scale stand out in the team space. We are excited about what is ahead at Abercrombie Brands. After a challenging start to 2025 up against a near perfect 2024, the team rallied and committed to getting the brand back to growth for by the end of the year. We did just that, achieving a return to net sales growth for the fourth quarter. As we have shared throughout the year, we believe Abercrombie remains a leader for our target customer. We continue to see strong traffic along with growth in customer counts and good retention trends. Reflecting our confidence, we invested across stores, digital and marketing to bring the brand to life in new ways throughout 2025. Most recently, the brand hosted several amazing activations leading up to the Super Bowl. As an official fashion partner of the NFL, the first of its kind, we had players and their families, several celebrities and league figures, as well as our target customers at a series of events. I was there and it was incredible to see Abercrombie at the intersection of fashion, sports and culture. A great finish to our 2025 season and the perfect kickoff to 2026. Our ongoing investments across channels continued to pay off in 2025, we saw growth in the stores and digital direct channels for a third consecutive year and both remain nicely profitable. In digital, we continue to see strong performance, finishing the year with that channel delivering 44% of total sales. We also surpassed 1 billion visits across our platforms for the first time, demonstrating the scale and direct reach we have with our customers. Stores matter to them too, and we were net openers for a fourth consecutive year, leveraging our digital demand to help us determine where we can better serve Hollister and Abercrombie customers with a physical location at the center of all These excellent brand, channel and regional cost accomplishments was our ‘read and react’ inventory model. For the third consecutive year we chased millions of units to support product demand at Healthy Aurs, helping to drive top line growth. Inventories remain tightly controlled and we finished the year with units up in the mid single digits. I can’t overemphasize how hard our team works at this coordinating product across functions, geographies, channels and partners all while tariffs were changing the global supply chain landscape week to week. So looking forward we are very excited for 2026. We entered the year with a strong foundation we which includes two globally relevant brands, a proven operating model and a strong balance sheet, all managed by a world class team. For the year. Our goals for the company are as follows. First, to grow sales across brands with continued investments in owned and operated stores and digital businesses while adding growth from partnerships and new product categories like our recent launch of Baby and Toddler in Abercrombie Kids. Second. Second, to stabilize gross margins as we progress through the year by mitigating as much of the tariff impact as possible. Third, to continue to invest in tools and technologies to improve our speed and efficiency across the product and customer journeys. A good example of this is to go live of our new merchandising ERP system this month. We’re also moving quickly to leverage AI to benefit the customer and we’re modernizing systems to help us and finally to maintain our strong profitability by delivering another year of double double digit operating margins and expansion in earnings per share. We also expect to continue our track record of returning excess cash to shareholders through share repurchases. After closing another record year in 2025, we are off and running on these growth objectives for 2026. We have the team, the experience and the track record of delivering for our customers and our shareholders. Many thanks to the entire organization that makes this happen every single day. The work continues and always forward and with that I’ll hand it over to Robert.

Robert Ball (Chief Financial Officer)

Thanks Fran and good morning everyone. I’d like to add my thanks to our associates around the world for staying agile and executing consistently throughout 2025. We’re really proud of what we’ve achieved and we have so much further to go. Starting with Q4 results, we delivered net sales of $1.67 billion, up 5% from last year on a reported basis. Comparable sales for the quarter were up 1% with approximately 100 basis points of benefit from foreign currency by region. Fourth quarter net sales increased 5% in the Americas, 8% in EMEA and 9% in APAC on a comparable sales basis. Americas was up 2%, EMEA was down 3% and APAC was approximately flat. Within the brands, both Abercrombie and Hollister delivered record fourth quarter net sales. Abercrombie Brands returned to net sales growth up 4% over last year on a comparable sales decline of 1%. Hollister brand’s net sales grew 6% on comparable sales growth of 3%. Across the business we saw mid single digit AUR growth and low single digit unit growth on increased traffic across regions and brands. The spread from net sales to comparable sales was driven by net new store openings, third party channel performance and favorable foreign currency. Operating margin was 14.1% of sales coming in at the high end of the outlook w

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Operator

You As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced and to withdraw your question, please press star 11. Again we ask that you please limit to one question and one follow up. The first question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Telsey Advisory Group Analyst

Hi. Good morning everyone. And certainly nice to see the progress. Fran, after the building blocks that you put in place for 24, for 25, the collaborations that you did with the businesses and frankly returning to growth in the Abercrombie brand and certainly saw what you saw with the super bowl and being the fashion partner, how do you think of the Merchandising drivers of 2026 and what you’re most excited about to drive growth? And then, Rob, as you think about the building blocks for margins in 2026, how do you think of aur growth relative to price increases from tariffs and the impact of tariffs on margins going forward? Thank you.

Fran Horowitz (Chief Executive Officer)

Hey, Dana, good morning. So excited about what we just delivered for both the fourth quarter as well as the year. Most excited that that was delivered with balance across regions, brands and channels. And what’s driving our confidence, you know, as we head into 2026, is that it’s the first time the company has ever done more than $5 billion in revenue. It’s proof that our model is working. We delivered all of that to your point last, the last three years, actually. Double digit margins, operating margins. So our playbook is working. Our model of chasing, you know, we didn’t start the year with an expectation of Hollister to drive 15%, but with that model we were able to chase millions of units to hit another 15% for Hollister. So I’m excited about the opportunities ahead and I’m really looking forward to 2026.

Robert Ball (Chief Financial Officer)

Yeah, Dana. So excuse me. So on the tariff impact here, so our outlook does reflect that 15% being kind of held all the way throughout the balance of the year. Obviously Section 122 here in the front half of the year. And then we’re making the assumption of something pretty substantially similar to that carries us through the back half of the year, how that kind of cadences out. So Q1, we talked about this 290 basis point of impact on operating margins that will be fully incremental year over year. We’ll start to lap small amounts of tariffs in Q2, really towards the back end of Q2, we talked about about $5 million of tariff impact in Q2 of 2025. So we’ll start to lap a little bit of that. But again, largely incremental in Q2 before kind of neutralizing in Q3 and then flipping to a bit of a tailwind for us for Q4. So that’s kind of the cadence throughout the year. Total impact, you know, incremental impact of about $40 million here for tariffs on a year over year basis. So that

‘s roughly 70 basis points. You know, feel good about the mitigation strategies that we put in place here as it relates to country of origin changes, supplier negotiations, product costing and then to your last point around pricing, we did take that pricing on spring products starting kind of late Q4 that will ramp as we move through Q1. So really only expecting some slight AUR improvement here in Q1 and then kind of that will build throughout the balance of the year. So give us some modest AUR improvement AUR growth on the full year. So we feel good about the mitigation strategies we put in place. You know, we’re tracking to another year of double digit profitability. So excited to take that into 2026.

Telsey Advisory Group Analyst

Thank you.

Operator

Thank you. And the next question is going to come from Corey Tarlow with Jefferies. Your line is open.

Jefferies Analyst

Great, thanks. And good morning everybody. I wanted to ask first on Hollister, how you think about the right growth algorithm, if you will, for that segment. Areas of success from Q4 and then areas of opportunity in 2026. And then I have a follow up.

Fran Horowitz (Chief Executive Officer)

Hey Corey, good morning. Super excited. Big shout out to the Hollister team. I mean congrats to them on the best year ever, the 11th consecutive quarter of growth. And what’s driving that is really being dialed into that teen consumer. For holiday specifically, we saw winners in categories like fleece and graphics and outerwear. We’ve invested nicely into that business. We opened lots of new stores this year, refurbished a bunch of stores, spent money on marketing. Our Taco Bell collaboration on Cyber Monday was a terrific success. So I’m excited about the team staying dialed into that customer, staying close to that customer Spring. We’re already seeing some nice response from the consumer. So we’re excited to see another year of growth.

Jefferies Analyst

That’s great. And then just more for Scott and Robert, there have been periods throughout, I guess the last five plus years where Abercrombie has invested in ERP systems and you haven’t called out impacts. What’s different about this implementation? Specifically what does it allow you to do going forward? And then how should we be thinking about again that impact? Is it acute or will there be any longer lasting impacts from it? Thanks so much.

Scott Lipesky (Chief Operating Officer)

Yeah, great question, Corey. As you noted, this has been a multi year undertaking for us and it’s great to have go Live Insight here. So the system that we’re replacing was originally built and released about 15 years ago and it was really architected for a very different business than what we’re running today. This new Enterprise Resource Planning (ERP) system allows us to support both the owned and operated Omni business that we have as well as the expectations of growth that we have across channels and categories in a more efficient way. In terms of what you’re seeing here in Q1 and the reason we haven’t called out any sales impact in the past is really it’s been been building, right? This has been building the system, getting ready for this go live what you’re seeing here in Q1. You know, we’ve been running parallel with this non production instance for quite a while now. We’ve completed all the testing, final development and now we’re ready to go live. And that’s what’s coming up here in the next days and weeks. You know, we feel like we’ve done the right work to ensure that we’ve got the units in the stores to support the sales during this transition. But the risk that we’re calling out here in the outlook is primarily related to some temporary interruptions in third party and some product interruptions in Chase over the next couple of weeks. In the end, it’s all about making us faster as we think about new growth opportunities. So we’re really excited to get this new system in place and we feel like any sort of disruptions kind of contained to this couple of week period here, middle of Q1 and we’ll be in good shape as we head into Q2.

Jefferies Analyst

Okay, great. Thanks so much and best of luck.

Operator

Thank you. And our next question will come from Matthew Boss with JP Morgan. Your line’s open.

JP Morgan Analyst

Great, thanks. So Bran, on your target for sales growth at both brands this year, how are you managing the intersection between Abercrombie’s return to growth and the moderation at Hollister relative to last year? What do you see as normalized growth for the two concepts?

Fran Horowitz (Chief Executive Officer)

Hey Matt, good morning. I mean our goal is obviously to grow both brands each year mid single digits would be a definition of success for us. We’re excited to see our model working. I mean to come out of fourth quarter where we grew the business again on top of a record and actually having another record year on top of 2024 is certainly proof that our operating model is working. I’m excited that you’re already seeing confidence in the consumer about some of our. The increases in prices that Robert talked about a little, those are ramping up in our assortment. But the Acceptance to spring has been good so far. So excited. I think Q4, what it defines, honestly, Matt, is a balanced performance, which is growth across brands, regions and channels. And that is definitely our objective in 2026.

JP Morgan Analyst

Great. And then maybe a follow up for Robert. Could you just break apart the drivers by brand that supports the embedded revenue improvement in the back half of the year?

Robert Ball (Chief Financial Officer)

In the back half of the year in terms of sales, Matt, is that what you’re looking at?

JP Morgan Analyst

Yeah, yeah. Top line improvement first quarter relative to the year.

Robert Ball (Chief Financial Officer)

Yeah. You know, so again, if you think about where we came out of Q4, around that +5 and again, to Fran’s point, really balanced across brands, regions, channels, you know, that’s kind of what we’re carrying into 2026. The big difference in what you’re seeing in kind of that step down from Q4 into Q1 with that 1 to 3 guide is really just that ERP impact that we’re talking about. It’s a couple of points here, but otherwise it’s a pretty consistent build as we kind of think about the full year, 2026. And that’s how we’re running this business. We’re setting these clear expectations. We’re going to control, we can control and we’ve got. The operating model allows us to chase into revenue as we see those trends develop. So feel like we’re in a really good place, driving growth on growth and excited to continue that Trend here into 2026 and Q1. Yeah. Matt.

Fran Horowitz (Chief Executive Officer)

Hey Just want to add towards the end there as we think about store growth. As Robert noted, we’re net store growers here for the fourth year in a row. We’ll do that again in 2026. And that store growth really ramps up towards the middle half. So that’s a nice fuel to the fire there as we get into the back half of the year.

JP Morgan Analyst

Great color. Best of luck.

Fran Horowitz (Chief Executive Officer)

Thank you.

Operator

Thank you. And the next question will come from Paul Leguz with Citi. Your line’s open.

Citi Bank (Equity Analyst)

Thanks, guys. Robert, just a clarification on the ERP system impact. Is that something that we are going to see throughout the entire quarter or is that still in front of us? And maybe if you can talk about what you’re running quarter to date versus what you expect the next two months to be. Just want to understand the cadence of that, of that impact. That’s just the first question.

Robert Ball (Chief Financial Officer)

Yeah, I’d say cadence is relatively consistent. Again, great ends to fiscal 25 with Q4 carrying that into Q1. The ERP timing is really kind of a two week period. We’re kind of right in the middle right at the start of it here with the go live. So it’s really contained to that couple of weeks. We’ve gotten the inventory to our stores to support the Easter peak and those spring break timelines. So we feel good about providing and supporting our stores through there. It’s really just a function of this third party impact here over the course of the next two weeks. So is the right way to think about it that you’re running up, let’s say three to five outside of that two week period and that two week period’s got to be down significantly to have a 100 to 200 basis point impact on the whole quarter. Is that the right way to think about it? Yeah, I don’t know that it’s down significantly. It’s really. It actually is more of a. Because of the way the third party flows through, it’s really more of a comp to non comp compression that you’ll see here over the course of the next couple of weeks. Got it. And then can you just give us an update on your sourcing base, how you’ve made changes where you sit as we look out to F26 just so we can monitor if there are any changes in tariffs by country that we might be able to keep tabs on that. Yeah. So obviously we’ve talked a lot about our sourcing footprint over the course of the last year or so. Really proud of that diversified network that we have in place and it’s taken us years to build. We currently source from over 16 different countries. That’s been obviously a core enabler for us and our read and react model here approach isn’t changing. Paul, we’re always evolving this network to make sure that we can service our brands, help with speed, optimize costs. To your point, the tariffs have clearly introduced some complexity to the supply chain. But you know, our position here has been pretty consistent and you know, changes here take time and you obviously want to get them right and maintain quality levels. So we’re focused on building the right partnerships for the longer term. I think as it relates to some of the more near term news in the Middle east, you know, we do have some sourcing operations there in the region, haven’t experienced any disruptions that would have any sort of meaningful impact to the receipt plans here that underpin our outlook. And so, you know, we’ll keep monitoring that and we’ll keep agile with our sourcing base in total.

Citi Bank (Equity Analyst)

Got it. And then last One just on the APAC strategic review. What’s just what prompted that and when should we expect to hear something from you on the outcome of that review?

Fran Horowitz (Chief Executive Officer)

I’ll jump in on this one. So we have just finished our third year of growth in that region and we really do believe in a long term opportunity there. I’ll tell you, it’s just a matter of assessing our go to market strategy within that region. We currently go to market several different ways there and it’s our responsibility to make sure that we are doing that in the most profitable way for our shareholders. And so that’s what the announcement is about. Any timing on that, Fran? Early days. I would say the process is just getting started. So we’ll provide updates as we as we can go forward here. As appropriate.

Operator

Thank you. And the next question will come from Marnie Shapiro with the retail track. Are your lines open?

Retail Track Analyst

Hey guys, I’m curious if you can give us a little bit of an update on some of your licensing efforts, particularly in kids and what that looks like. And then also, just also on international, you’ve had some wholesale efforts. I know. I think you’re on asos, for example. I’m curious if your go to market in maybe in EMEA and APAC would include more wholesale opportunities like that to sort of build your brand regionally alongside your own efforts.

Fran Horowitz (Chief Executive Officer)

Hey Marty. Good morning. I’ll kick that one off. So yes, to your point, we launched a global licensing opportunity this year with our Kids brand and we were very pleased with the results. In fact, we think it’s actually created a halo for many people who didn’t even know many consumers that didn’t know we carry a kids brand. So we saw some nice growth in both our owned and operated as well as for our licensed partner, we recently launched Baby and Toddler, which is also very exciting. So we can now capture that customer from age 0 and carry them all the way through for lifetime value. Regarding your second question, I would say we are entertaining all concepts, licensing, wholesaling, franchising, what we’re doing as we keep talking about, you know, diversifying our operating model. So all of those are opportunities.

Scott Lipesky (Chief Operating Officer)

Yeah, Marty, as you know, the Europe business is Europe retail business very different than here in the United States. So all of those different opportunities are available to us. We have, you know, done a few of them in the past, mainly the digital players that you called out. But there are opportunities in the future in each country to be in department stores, run wholesale businesses, potential concessions way down the line. So we’re looking at all of that as we think about how we go to market in Europe.

Fran Horowitz (Chief Executive Officer)

Yeah, if you think about it, it’s actually a very exciting time for us. We’re getting lots of reach outs with the health and strength of both of our brands. There’s a lot of interest out there, so more to come on.

Retail Track Analyst

Fantastic.

And can I just ask you one, follow up on the tariffs once we get to the back half of the year and we anniversary all the noise from 25 and I guess we’re more in a steady state as you think Forward into say 27. Even after 28. Should you be able to rebuild Marge product margins or is this kind of the new normal for you guys and for the world?

Robert Ball (Chief Financial Officer)

Yeah, I mean, I think we’ll see. We have a fantastic sourcing network. We’ve got a great sourcing team. We’ve been able to maintain these double digit operating margins despite all of these different headwinds that we have we face, whether that be supply chain disruptions, input cost inflation, inflation across all of operating expenses and now tariffs. So we’re working hard. We feel like as long as we put great product out there, connect with our customers, continue to give them a great experience, we’ve got an opportunity to grow aurs and continue to grow this business and provide a really healthy operating margin. So the goal would be obviously to try and offset as much of it as possible longer term. But that’s, that’s a process and that’s what we’re kind of working towards here in 2026 with some modest AUR growth and we’ll see how all that goes.

Retail Track Analyst

Great. Thanks you guys.

Operator

Thank you. And the next question will come from Mauricio Cerner with UBS. Your line’s open.

UBS Analyst

Great. Good morning. Thanks for taking my questions. First, I just wanted to ask, I mean, what have you seen so far in terms of consumers reaction to your ticket increases? And just wanted also to make sure I understood like best by quarter to date, it sounds that the growth has continued to be consistent versus what you were seeing in Q4. I just wanted to get that clarification. Thank you.

Fran Horowitz (Chief Executive Officer)

Hey, good morning, Mauricio. So first on the ticket prices. So we mentioned during our last call that our strategy was to start to see some of these ticket increases increases for our spring product. So as a reminder, we deliver spring around December week four, January week one. And it was going to be very judicious in things and categories like fashion, for example. And we’re holding our commitment to our consumer. We did not raise prices in Key categories like denim and opening price point T shirts. So we are ramping up. You know, it’s a portion of our inventory today. The initial response has been good and we’re going to continue with this strategy and we’re going to continue to test and learn as we head through 2026.

Robert Ball (Chief Financial Officer)

Yeah. And on your quarter to date trends here, Mauricio, so obviously very encouraged here. Coming off a record fourth quarter with balanced performance across brands and regions. Off to a good start here across both brands and regions for the first quarter. End of January and the start of February was a little bit choppy with, you know, the winter storms that we saw in the US but we’ve seen things pick up here once we’ve kind of gotten out of that disruption period. Most of the volume for the quarter is still ahead of us and you know, we’re expecting growth in Q1 across brands and again, the only other piece of disruption would be this ERP implementation that we’ve got going live here in the next couple of weeks. So that’ll provide a little bit of a one time headwind for us. But by and large happy with where we are and excited about how the quarter started. Got it. And just a couple of follow ups on the Q1 guide on the, you know, on the freight. You call out the tailwind for the quarter, is that based on contracted rate and does that remain a tailwind for the year or is that like Q1 peak? And then the other point on SG&A, you know, excluding the marketing deleverage, should it be, you know, in line with last year in terms of like dollars or percentage of sales? You’re trying to get that, that point of clarification. Yeah. So I’ll give you some of the building blocks here for Q1. So Tyr, you called it out. So We’ve got this 290 basis points of tariff headwind that’s all incremental to last year. We do have offsetting tailwinds here. So we’ve got freight that’s about 160 basis points of tailwind that has to do with how we’ve shipped product and you know, our contract rates are in place. So that. That’s a yes on that answer. We do have some slight AUR improvements as well that’ll help offset some of that tariff headwind. And then we’ve got this, this hundred basis points of headwind from the ERP go live this month on the expense, you know, really kind of flowing through. On the expense side. You called out marketing, you know, it’s it’s about a 50 basis point headwind for us in Q1. That’s really just timing on the year. Marketing will be around flattish to last year as a percentage of sales. And then the rest of the expense base should be largely in line with last year’s Q1 as a percentage of sales.

Operator

Thank you. And the next question comes from John Kipor with Goldman Sachs. Your line is open.

Goldman Sachs Analyst

Hi everybody. Good morning. Thanks for the question. Just one more thing. On the Q1 gross margin last year you guys were lapping carryover inventory drag. It sounds like you won’t be. There won’t be any benefit from lapping that. Just wondering how that factors in. And then as a follow on what does that sort of imply about your promotional levels going into 1Q and I guess if you could give a forward looking statement about where you think promo may or may not be going for the rest of the year. Thank you.

Robert Ball (Chief Financial Officer)

Yeah, John, so you’re right. We’ve talked about this lapping of carryover. So that’s really a 2024 Q1 Dynamic Q1 of 2025. It was kind of normal. That’s the more normal base. So as you think about where we are coming into 2026, nothing that’s like a major mover up or down related to carryover levels or anything like that. In terms of promos for Q1, we feel great about where our inventory sits coming into the quarter again, once you pull out the kind of front loading of the inventory that we had to execute here for the ERP, we’re up 2% on units. That’s a great place to be for us. Both brands are really in chase position now and that obviously gives us the best opportunity to kind of grow the Aurs here. So from a promo standpoint, we feel good about it all baked into that slight aur improvement that we’re expecting here for the first quarter. And we’re in a good position to kind of eke that up and get units flowing and inch that aur up as we move through the quarter.

Goldman Sachs Analyst

Great. And then just one more follow up if I can. Can you guys bracket out what the I guess the difference in your expectations between for the full year between the low end and the high end of the guide. So what has to happen to hit the low end? What are you guys baking into to hit the high end?

Robert Ball (Chief Financial Officer)

I mean, at the end of the day, John, it’s all going to be about product execution. Right? We got to put the right product out there, which, you know, we’re off to a great start. We feel good about our assortments here in the first quarter. We got to keep doing it and keep executing as we move throughout the balance of the year. We got to make sure that our marketing is resonating. You know, we’ve consistently driven positive traffic to these brands. We’ve got millions of customers coming into these brands, and we got to keep that going here. And, you know, we’ll do that with consistent marketing spend here. And then we got to provide a great experience in our stores and, you know, all of those things kind of that 3 to 5 range. It’s all just ranges of outcomes in terms of how we’re executing here as we move throughout the year.

Fran Horowitz (Chief Executive Officer)

The exciting thing, though, John, is that the operating model that we’ve created and our ability to chase and stay very agile is key to winning for us. And the example, you know, with Hollister last year, we certainly didn’t set out expecting to pick up 15%, but our ability to chase millions of units and respond to the customer in real time has enabled us to do that. So we’re approaching this year the same way with the expectation for both brands, obviously to grow in 2026.

Goldman Sachs Analyst

Thanks very much. Good luck. Thanks, Josh.

Operator

Thank you. And the next question comes from Rick Patel with Raymond James. Your line is open.

Raymond James Analyst

Thanks. Good morning. Looking for more color on the building blocks of growth at anf. Nice to see the expectation for growth. Do you anticipate growth in every quarter? And how do we think about the timeline for a return to positive comps?

Fran Horowitz (Chief Executive Officer)

Eric, good morning. So, yes, excited. You know, the team was hard at work last year. Excited to see that the commitment that we made to returning to growth for the fourth quarter came to be as a reminder, you know, being down one of the full year, top line was up against our best year ever in 2024. It’s just been proof that the brand is healthy. We’re going to continue to invest in stores and in marketing. Some of the strength that we saw in the fourth quarter were key categories. Fleece, outerwear, ypb. And we’re seeing nice acceptance already for spring. So our expectation is to continue to grow throughout 2026

Raymond James Analyst

and just to follow up on inventory. Appreciate that you’re in chase mode, but how do we think about how you’re planning units as we think about the price changes that are happening and the potential for demand elasticity?

Robert Ball (Chief Financial Officer)

Yep. So thanks, Rick. Units in control. Nice clean up 5% on the print. Again up 2%. Once you exclude that ERP, you know how we Operate here. We’ll keep units tight and aligned with our forward growth expectations for the brands. You know, we’re in good shape here leaving 2025 and heading into 2026. You know, we’ll continue to flex that muscle and make sure that we’re ready to chase across both of the brands.

Raymond James Analyst

Thanks very much. Thank you.

Operator

And the next question will come from Janine Stichter with BTIG. Your line is open.

BTIG Analyst

Hi, good morning. So on the product execution, can you speak to what you’ve been seeing on conversion, particularly at the Abercrombie brand? I think it was down a bit and. But you did see some improvement as the year went on. What did you see in Q4 into Q1 and then maybe some comments on Hollister conversion as well. Thank you.

Fran Horowitz (Chief Executive Officer)

Yeah, I would say it’s more of the same, Jeanine. We were making progress. The teams leaned in on the ANF side, stayed focused on that consumer, executed against key learnings all the way throughout the year. And at the same time, again, going back to Rick’s point here, we kept units in control all the way through and that allowed us to kind of chase through that drove improvements in conversion as we moved throughout the year and we kind of saw more of the Same headed into Q4 and similar story there with Hollister conversion. Been a nice. It’s been something that’s kind of built as we move throughout the year, so reflects the confidence that we have in the assortments that we’re putting out there for our consumers and we’re kind of looking to do more of the same here as we move into 26.

BTIG Analyst

Okay, great. And maybe just a follow up to Marnie’s question. It’s been a while since you issued a long range margin target. A lot has changed, 12% to 12.5% this year. Is that kind of the right level for the business? And if we were to see upside to that, excluding changes to tariffs, where would that come from?

Fran Horowitz (Chief Executive Officer)

Yeah, great question. Not going to provide guidance beyond 26 today, but I think we can talk through some of the underpinnings of the margin constructs that we’re talking about, which I think addresses both yours and Marnie’s questions. I think it’s important for us to anchor ourselves that over the past few years this operating model has delivered double digit operating margins across all different kinds of environments. The last three years we’ve gone through freight changes, we’ve had inflation input costs from a product standpoint have fluctuated all over the board. And obviously tariffs here for the last bit. And as you think about what underpins this business, it’s highly cash generative. We’ve got highly profitable stores and digital businesses and we’re building capabilities in third party to really accelerate that growth in more of a capital light way. Our balance sheet’s in great shape and it allows us to kind of fund into all of these things and invest in these brands and still return hundreds of million dollars to our shareholders through share repurchases, which I think is kind of in our track record. We’ve delivered over $1.2 billion back to shareholders through cash since 2021 here through share repurchases. And we’re looking to do more of the same here. So all of that really gives us a lot of confidence as it relates to the durability of this model. So while I’m not going to sit here and extend any sort of guidance beyond 26 today, we do think that the fundamentals of this business are incredibly strong and they position us well to maintain these healthy earnings growth as we continue to build here in the long term.

Operator

Perfect. Thanks for the caller. Thank you. I show no further questions in the queue at this time. I would now like to turn the call back over to Fran for closing remarks.

Fran Horowitz (Chief Executive Officer)

I just want to thank everyone for joining the call today and we look forward to updating you all on our progress soon.

Operator

This concludes today’s conference call. Thank you for participating and you may now disconnect.

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