Good day, and welcome to the Abercrombie & Fitch Fourth Quarter Year-End Fiscal Year 2022 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Moh Gupta. Please go ahead.

Mohit Gupta - Vice President of Investor Relations

Thank you. Good morning, and welcome to our fourth quarter 2022 earnings call.

Joining me today on the call are, Fran Horowitz, Chief Executive Officer and Scott Lipesky, Chief Financial Officer. Earlier this morning, we issued our fourth 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 the 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 mention today. A detailed discussion of these factors and uncertainties is contained in the company's reports and filings with the Securities and Exchange Commission.

In addition, we will 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 Investor Presentation issued earlier this morning.

With that, I will turn the call over to Fran.

Fran Horowitz - Chief Executive Officer

Good morning, and thank you for joining us today, and a warm welcome to Moh's return to A&F leading our Investor Relations efforts.

I'm excited to share our fourth quarter and full-year results. We finished the quarter with sales surpassing the outlook range we provided in our early January business update for a strong close to the year. 2022 was another year of twists and turns and I'd like to thank our global associates as well as our partners for once again stepping up to deliver solid financial results while making progress against our long-term strategic priorities.

As geopolitical disruption and inflationary impact accelerated early in the year, we laid out plans to pivot our investments to optimize sales growth, operating margin and inventory. Our teams rallied to deliver on each of those dimensions, leveraging the agility we have gained from our transformation efforts these past few years.

At the start of every year, my goal is to make this organization stronger, and we have done that once again in 2022, allowing us to start 2023 from a position of strength with so much opportunity in front of us. Today, I'll cover our fourth quarter and our full-year 2022 results reflecting our progress in the past year. Then I'll conclude with our objectives and priorities for 2023.

For the fourth quarter, we grew sales 3% year-over-year on a reported basis and 5% on a constant currency basis. This growth was enabled by having inventory on-hand to meet demand during the peak holiday period. We purposely build inventory in the second and third quarters with the target to be around flat to last year by year-end. We delivered on that goal with inventory finishing down 4% to year-end 2021.

While sales trends improved sequentially across brands, performance was once again led by continued strength in Abercrombie & Fitch brand. I'm incredibly proud to report the Abercrombie brands, which include Abercrombie & Fitch and abercrombie kids grew 14% from Q4, 2021 or 16% on a constant-currency basis. All the work we have done to bring this brand back, it was incredibly special to the Abercrombie & Fitch women's business achieved its highest quarterly sales in brand history, an impressive follow-up to a similar record in the third quarter. I was also thrilled to see growth in the men's business accelerate sequentially from Q3.

At Hollister, we saw sequential trend improvement delivering sales down to 4% in 2021 on reported basis and down 2% on a constant-currency basis. While we still have progress to make, we're beginning to see trend improvement on product and organizational actions taken in late summer, something we will carry-forward into 2023, which I'll talk more about in a moment.

Taking a step-back from the quarter and reflecting on the full-year, one word comes to mind, complex. With the conflict in Ukraine, rising inflation and continued COVID-related measures impacting the consumer, a back to normal did not happen in retail. With all this uncertainty, our focus was simple, control what we could control. Well, that's not making short-term strategic decisions, we also kept an eye on the long-term. In June, we held our first Investor Day since 2018 and presented our 2025 Always Forward Plan, transitioning our mindset from transformation to growth.

The Always Forward Plan is underpinned by three key pillars, delivering focused brand growth, executing an enterprise-wide digital evolution and operating with financial discipline. Starting with the first pillar, focused brand growth. In June, we discussed Abercrombie & Fitch brand as our number one growth opportunity for the company. Having completed one of the most impressive brand turnarounds you will see in this industry, our team has continued to build momentum with this brand. Abercrombie brands finished 2022 at $1.7 billion in total sales, a growth rate of 11% year-over-year and 13% on a constant-currency basis. Through Abercrombie & Fitch brand, our assortment, marketing and values continue to align with our customer as we look to offer them from an in-office workdays to their long weekend adventures.

A few other highlights for the year in Abercrombie. Our women's bottoms business had the highest full year sales in the history of the brand. The Best Dressed Guest franchise helped us deliver the best year ever for women's dresses and we launched our newest franchise YPB, Your Personal Best in Q1 to an amazing customer response. YPB leggings and squareneck tank were both named to the best leggings and best tops list in the SELF Magazine Activewear Awards along with multiple A&F brand items featured in men's health, Esquire, Refinery29, People Magazine and more.

As we set new records across key product categories, We continue to leverage our marketing efforts to drive customer engagement and conversion. Our authentic and innovative initiatives across platforms resulted in two amazing awards this year. We received the Performance Marketing Strategy of the Year Award by LTK, the world's largest influencer and creator commerce platform, and the brand was named to the Brands That Matter list by Fast Company.

With the brand firing on all cylinders, we opened 21 stores and rightsized another four across Abercrombie & Fitch and abercrombie kids brands. We continue to focus on smaller, more productive stores, which is a key enabler of improved 4-wall operating margin. We believe store expansion and marketing execution nicely positions Abercrombie brands for the growth expectations in the Always Forward Plan.

Turning to Hollister. 2022 was certainly a challenge. Hollister, including Gilly Hicks and Social Tourist finished the year with $1.96 billion in sales down 9% to 2021 or down 6% on a constant-currency basis. The teen apparel space took a step-back earlier this summer as global inflationary pressures mounted. While macro factors certainly impacted the business, we had opportunities within our own operations to realign product, voice and experience to better match the changing customer mindset. We quickly addressed these opportunities, making multiple changes this summer, spanning people, process and inventory investments to get back on-track and allow us to more quickly respond to changes in the marketplace. Our teams have made shifts across the assortment to provide better balance. As an example, we're leaning into more cargoes and dresses.

On top of these product shifts, we are reviewing every aspect of the Hollister brand voice and customer journey. Our team customer continues to favor the in-store experience with more than two-thirds of Hollister sales happening in-store in 2022. During the year, we opened 38 stores, finishing 2022 with 529 stores globally. Towards the end of the year, we introduced our evolved store design in a few locations, which continues to open up and brighten the shopping experience, while offering improved product placement flexibility. You will continue to see the store playing integral role at Hollister as we move forward, and combined with assortment evolution, our team will have all the pieces in place to stabilize the brand and return to growth later this year.

For Gilly Hicks, in 2022, we evolved the brand positioning and assortment readying it for a move into our freestanding stores, a majority of which opened in the fourth quarter. In 2023, we are focused on delivering our active lifestyle assortment to the customer across physical and digital touchpoints. The shift into activewear is a key part of the evolution for Gilly Hicks. Up until recently, Gilly Hicks been weighted to Intimates & Sleepwear as it started as a complement to the Hollister brand. We are now broadening categories to get to our target assortment mix between active, lounge and intimates, something we'll continue learning more about as we go through the year.

Lastly, a quick update on Social Tourist. We've continued to use the brand to push fashion content in Hollister and leverage learnings around social engagement across all brands.

In summary, our ambition of focus brand growth will be apparent in 2023. For Abercrombie brands, we expect to distort resources to digital marketing and store expansion to capitalize on the momentum. For Hollister, the work is underway to optimize the product and brand voice, positioning us for growth in the second half of the year. And for Gilly Hicks, we'll continue to read results from the above assortment mix with a trigger strategy in-place to allocate additional resources to drive customer acquisition later in the year.

Moving on to our second pillar, executing an enterprise-wide digital revolution. For context, at $1.6 billion in sales, our digital business was approximately 44% of our total sales in 2022. Across brands, our customer journeys are different and ever evolving, necessitating a robust set of tools and technologies. Our team has been hard at work modernizing our technology foundation. A focus area in 2022 is evolving our data infrastructure to enable faster, more predictive insights, which will largely conclude in 2023.

We also kicked-off a multiyear upgrade of our retail merchandising ERP, touching several key systems to provide a platform with more flexibility. These monetization efforts are integral to enabling future organic growth and incremental go-to-market opportunities like wholesale, franchise and/or partnerships. These projects will take time, so we've designed a deployment scheduled to realize value as quickly as possible.

On the customer experience side of our digital evolution, we are improving experience across the web, mobile apps and stores. We've set up continuous feedback and delivery loops to ensure we are finding and focusing on the highest impact opportunities. One example we've talked about is share to pay, a feature that enables our customers to easily share their digital shopping to either a family member or a friend to complete the purchase. Share to pay is an example of how our new digital teams are applying customer analytics and agile development to uncover and quickly deliver against customer opportunities.

For 2023, we will continue modernizing our foundation to support our digital revolution. We expect to be largely complete with our foundational data infrastructure efforts and to continue progressing on our ERP transformation, while maintaining a relentless pace of digital experience improvements to win and retain customers.

And for our last pillar, operating with financial discipline. It was another year where we needed to flex this muscle. With over $250 million of inflation hitting us in 2022 compared to 2021, we needed to balance playing offense and defense. On offense, we opened 59 new stores and accelerated key digital and technology investments. On defense, we managed expenses and inventory tightly. For inventory, our objective was to be approximately flat to 2021 at the end of 2022 and we achieved that goal with inventory down 4% at year-end. We are optimistic that we've gotten through the worst of freight costs and supply chain disruptions.

Importantly, each of our brands entered 2023 in a position to chase inventory and we will continue demonstrating agility in managing the cost side of the business, while balancing the long-term investments that enable growth.

As we ramp-up, just one more thought on our industry-leading team and culture. While the past three years have been the most challenging I've seen in my 35 years in retail, the learnings and collaboration we've achieved has made both our company and our associates stronger. I was so proud of our company to be recognize yet again as a Best Workplace in Retail by Great Place to Work in Fortune.

Additionally, we received a perfect score on the Human Rights Campaign's 2022 Corporate Equality Index for the 16th year in a row with designation as One of the Best Places to Work for LGBTQ+ Equality. As we say regularly, change is the only constant in retail and our team will continue to balance reactive to shift in the market, while staying focused on our long-term strategic priorities to drive sustainable, profitable growth in 2023 and beyond. We entered the year well-prepared, focused and ready to execute across the three pillars of our Always Forward plan.

With that, I'll hand it off to Scott to provide more color on our results and additional details for our 2023 outlook.

Scott Lipesky - Executive Vice President and Chief Financial Officer

Thanks, Fran, and good morning. I'm also proud of how our teams wrapped up 2022, delivering improved results in both the third and fourth quarters. I'll start by covering Q4 results on both year-on-year and sequential comparisons, along with a rundown of our full-year 2022 performance. I'll then provide some color on our 2023 outlook.

For Q4, we delivered net sales of $1.2 billion, up 3% to 2021 on a reported basis and up 5% on a constant-currency basis. This was above the range we provided in early January, due to a better-than-expected finish to the month. As Fran mentioned, we saw trends improve sequentially in both Abercrombie and Hollister. Net sales at Abercrombie, which includes kids rose 14% compared to 2021 on a reported basis and 16% on a constant-currency basis. This compares to Abercrombie's Q3 reported and constant-currency growth of 10% and 13% respectively. Hollister, which includes Gilly Hicks and Social Tourist declined 4% or 2% on a constant-currency basis. This compares to Hollister's Q3 reported in constant-currency declines of 12% and 9% respectively.

By region, net sales increased 9% in the U.S. Internationally, we saw a decline of 13% or 6% on a constant-currency basis. By region, EMEA was down 14% on a reported basis and 7% on a constant-currency basis and APAC was down 21% on a reported basis and 13% on a constant-currency basis. In EMEA, our strongest markets continue to be the Middle East and the UK, but the region largely remained soft. In APAC, while sales were down to last year in the fourth quarter, we are excited to see the region reopen with the lifting of the Zero-COVID policy in China.

Gross profit rate was 55.7% versus 58.3% last year. Key drivers of the year-over-year change were the adverse impact of exchange rates of 100 basis points and higher product costs of 160 basis points with higher cotton costs and inventory reserves more than offsetting lower freight costs. On a constant-currency basis, AUR was up slightly with Abercrombie higher than last year and Hollister lower than last year as we had a strong push to sell-through Hollister clearance product.

On inventory, we ended the quarter down 4% to last year, which was better than our expectation of around flat that we have discussed the past couple of quarters. Across brands, we are positioned to chase inventory this spring and beyond.

And I'll cover the rest of our Q4 results on an adjusted non-GAAP basis. We excluded $4.7 million and $1.9 million of pre-tax asset impairment charges for this year and last year respectively. These charges adversely impacted results by $0.07 and $0.03 this year and last year respectively. Q4 operating expense excluding other operating income was $575 million compared to $581 million last year, with lower marketing and incentive-based compensation partially offset by operating cost inflation.

Operating income was approximately $92 million compared to a $100 million last year. Changes in foreign currency adversely impacted operating income by approximately $18 million. The tax-rate for the quarter was 49.7% at the high-end of our expectation, primarily due to our inability to realize the benefit on certain tax losses incurred outside of the U.S.

Net income per diluted share was $0.81 compared to $1.14 last year. Changes in foreign currency adversely impacted earnings per share by approximately $0.23.

Turning to full-year 2022 results, which I'll cover on an adjusted non-GAAP basis. Full-year results excluded approximately $14 million of pre-tax asset impairment charges, which adversely impacted results by $0.20. In 2021, we excluded $12 million of pre-tax asset impairment charges, which adversely impacted results by $0.15.

For the year, net sales were $3.7 billion, flat to 2021 and up 2% on a constant-currency basis. For the year, digital sales penetration was 44%. By brand, Abercrombie delivered 11% growth on a reported basis and 13% growth on a constant-currency basis. Hollister declined 9% or 6% on a constant-currency basis. By region, the U.S. grew 4% for the year, while the international business was down 11% on a reported basis, or 4% on a constant-currency basis.

Gross profit rate was 56.9% compared to 62.3% in 2021. For the full-year, foreign currency adversely impacted gross profit rate by approximately 40 basis points. For product costs, we saw approximately $200 million or 520 basis points of higher input costs including approximately $90 million for freight and $110 million for cotton and other raw materials. While AUR improved over 2021 levels and remains well above 2019, the growth was not enough to offset the higher cost.

Operating expense, excluding other operating income was $2 billion or 54.1% of sales compared to 52.9% of sales in 2021. Compared to 2021, the increase was driven by inflation, digital investments and higher digital fulfillment expenses, partially offset by lower marketing and incentive-based compensation.

Operating income was $107 million or 2.9% of sales compared to $355 million or 9.6% in 2021. The reduction was due primarily by the lower gross profit rate and due to higher freight and raw material costs as well as operating expense deleverage. Foreign currency further reduced operating income by $30 million compared to 2021.

Effective tax-rate for the year was 74.6%. Net income per diluted share was $0.25 compared to $4.35 in 2021. We exited the year in a strong financial position with cash and cash equivalents of $518 million and total liquidity of approximately $866 million.

Capital expenditures were $165 million for 2022 with about half spent primarily on stores and the other half on digital and technology. For the year, we repurchased a total of 4.8 million shares for approximately $126 million and $8 million of secured notes.

On the store fleet for the year, we opened 59 stores and closed 26, ending the year with 762 stores. As we focus on brand growth, we expect to be in a net store opening position again in 2023, although we expect to open fewer new stores than in 2022. As mentioned in our June Investor Day, we expect to see only modest changes in gross square footage and occupancy dollars.

I'll finish up with our thoughts on 2023. For the full year, we expect net sales growth in the range of 1% to 3% from $3.7 billion in 2022 with Abercrombie brands leading the growth. We expect the growth will be tilted towards the back half of the year, driven primarily by the 53rd reporting weak in the fourth quarter and net new stores.

Geographically, we expect the U.S. to continue to outperform international. For the international business, our inventories are in good place, and we are ready to chase if necessary as we see trends improve. As a reminder, our largest countries outside North America are the UK, followed by Germany, China and France.

We expect full-year operating margin to be in the range of 4% to 5% compared to reported and adjusted operating margin of 2.5% and 2.9% respectively in 2022. In terms of drivers, we expect around 200 basis points from a net benefit and product cost with freight savings partially offset by higher cotton and raw material costs.

For operating expense, at the midpoint of our sales outlook, we expect to see modest deleverage driven by the combination of inflation and increased investment related to our Always Forward Plan initiatives, including our retail merchandising ERP upgrade.

For the tax rate, we are forecasting a rate in the mid 40s. On inventory, we will continue to manage tightly and work to keep all brands in a position to chase. We see continued opportunity to reduce inventory, especially in the first three quarters of the year compared to 2022 where we front-loaded inventory due to ongoing supply chain uncertainty.

Regarding capital allocation, we expect capital expenditures of approximately $160 million, just over half the spend will cover digital and technology and the remaining will primarily cover stores. For excess liquidity, we expect to continue to focus on share and debt repurchases, pending cash flow, business conditions and market prices. Entering 2023, we have approximately $232 million remaining on the $500 million share repurchase authorization established in November 2021.

For the first quarter, we expect net sales to be approximately flat to the Q1 2022 level of $813 million. Our sales outlook assumes an adverse impact of approximately 140 basis points from foreign currency.

Operating margin to be in the range of breakeven to 2% compared to reported and adjusted operating margin of approximately negative 1% in the first quarter of 2022. Similar to the full year outlook, we expect operating margin to benefit year-over-year from the net reduction in freight and raw material costs, partially offset by the impact of inflation as well as operating expense investments related to the 2025 Always Forward Plan. For the tax rate, we expect it to be volatile in Q1 on expected low levels of income. We expect to incur tax expense regardless of the level of taxable income or loss.

As Fran mentioned, we remain cautiously optimistic on consumer demand in 2023, while broad inflation is yet to abate, we are pleased with the reductions we've seen in freight and cotton over the past six months. These benefits will work through the income statement on a different cadence with freight benefits weighted to the first half and moderating in the second half, we expect cotton to be a headwind in the first half and moderate in the second half, netting to a headwind for the full year. From there, we are funding necessary investments in the customer experience and in the modernization of our systems to improve agility and speed, while focusing on generating the free cash flow necessary to maintain our strong financial position.

And with that, operator, we are now ready for questions.

Question & Answers

Operator

And thank you. [Operator Instructions] And our first question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.

Dana Telsey - Telsey Advisory Group - Analyst

Hi, good morning, everyone. As you think about the Hollister business and the improvements that you're seeing, how do you frame it for 2023 whether stores or digital and how you're thinking about it? And then also, Scott, can you talk to at all the breakdown of the margin opportunity for 2023 in terms of freight and how you're balancing that given your clean inventories with pricing in the environment? Thank you.

Fran Horowitz - Chief Executive Officer

Hey, Dana, good morning. So, let's talk about Hollister for a few minutes. We were very pleased to see the improvement with Hollister and the sequential improvement that we saw from the third to the fourth quarter. As you know, we were on a journey with Hollister last year, around back-to-school, the whole team market took a little bit of a step back at that time. And what we did was we really dove into see how much of that was driven by macro and how much of that did we own. We assessed our situation, and we made some changes, as I mentioned earlier, people, product, we made sure our receipts were back in line for our trend in the back half and we were chasing the product that was working like cargoes and dresses. So, the inventories are clean, as we now head into '23, we're pleased with the inventory levels are and what's most exciting is that we have to chased back in our business, that is a very exciting work, particularly for that teen market, because in '22, with all the constraints on the supply chain it was much harder for us to chase really be able to react to what's going on. So, we are cautiously optimistic as we head into '23 as we discussed, and our expectation is to return to growth in the back half of the year.

Scott Lipesky - Executive Vice President and Chief Financial Officer

Let me pick up the margin piece. So, as we look to 2023, our expectation is operating margin of 4% to 5%, that's up from 2.9% in 2022. Our past there is we do expect to see about 200 basis points from gross margin expansion which would come from mainly from the net pickup in freight. We still see cotton as a headwind for next year but do see a good amount of that freight coming back in 2023. From there, we do expect a little bit of deleverage on the expense base just due to inflation as well as some the longer-term investments we're making in digital and technology. So, for the year, again 4% to 5% on the operating margin line. As we think about balancing that with inventory, Fran hit it for the Hollister brand, but in total, all of our brands are in position to chase right now, that gives us an opportunity on the AUR front as we go into 2023. We're not assuming anything big there, obviously the dynamics out there with the consumer and inflation are in flux everyday but we have the opportunity with lower inventories across all of our brands to hopefully raise AUR this year.

Dana Telsey - Telsey Advisory Group - Analyst

Thank you.

Operator

And thank you. [Operator Instructions] And our next question comes from Corey Tarlowe from Jefferies & Company. Your line is now open.

Corey Tarlowe - Jefferies - Analyst

Hi, good morning. Thanks for taking my question and congrats on the continued strong results. So could you talk a little bit, Fran, about the success that you drove in the fourth quarter at Abercrombie & Fitch. I know that you've seen some really great momentum in women's and dresses as well, but maybe could you talk a little bit more about why you think that, that momentum is sustainable and should help to continue to drive results throughout the next year? And then Scott, just on stores, I know that yet again, I think you're going to be a net opener of stores, but it sounds like you're actually going to be opening fewer than you were last year. But all that said, it's only going to be I think a modest change you said in gross square footage and occupancy dollars. So could you talk a little bit about how you're going to be really thoughtful around opening stores and still keeping costs in control?

Fran Horowitz - Chief Executive Officer

Hey, Cory, good morning. I'd love to talk about continuing our momentum at A&F. Coming off another strong year for the brand was just super-exciting what we've been able to accomplish in this turnaround. And there are so many exciting things happening and certainly to come. So, a great example of that is women's bottoms, our best of every women's bottoms and that goes way beyond just denim. So, there's a whole trend happening in pants, which women are now wearing that to work, they're going back to the office. They're able to use as a transitional outfit to wear then to go out because we know how social our Abercrombie customer tends to be. We also launched a new franchise called YPB, which is our activewear. We launched that because our customers said to us, we know you can do this while we'd love to see some activewear from you and they really responded nicely. So, there's lots of opportunity, our Best Dressed Guest franchise. We talked a lot about all the weddings in 2022, there's even more to come for 2023, and they're coming to us for all those special occasions. And to your point, men's is also second quarter positive comps for men's and we're excited to see that starting to roll as well. So, there's just lots of opportunities heading into the year with nice momentum.

Scott Lipesky - Executive Vice President and Chief Financial Officer

Okay. On the store side, yes, net opener in 2022 first time I think in over 10 years or around there, we opened 59, closed 26. We will slow down to 59 as we go into 2023. As we look at 2022, there were tons of great malls that we wanted to get back into and we were able to find the right deals with our landlord partners and they were successful. Looking at those stores, the productivity on a square footage basis, new stores versus the old almost double as we continue to have that opportunity to close some of these bigger legacy stores and open these smaller new format stores. So, we like what it does for the brand, and we like what it does financially. So, we're going to keep that going here in 2023 and beyond, we'll moderate a bit, but we still have great opportunities around the country and really around the world.

Corey Tarlowe - Jefferies - Analyst

Great. Thanks so much and best of luck.

Fran Horowitz - Chief Executive Officer

Thanks, Corey.

Operator

And thank you. [Operator Instructions] And our next question comes from Paul Lejuez from Citi. Your line is now open.

Kelly Crago - Citigroup - Analyst

Hi, Fran, hi, Scott. This is Kelly on for Paul. Thanks for taking the question. Any chance you can talk about brand performance, specifically in the U.S. and then how are trends performing in COVID overall, but also by region, we've heard from others that maybe the macro is starting to take a toll in Europe in 1Q. And then just bigger picture, how are you thinking about the Europe region, is it possible you could maybe look to close some stores in Europe just given difficulties you've seen over the last couple of years? Thanks.

Fran Horowitz - Chief Executive Officer

Okay. We're going to start a little bit backwards. So, you were at our Investor Day with us back in June and we talked about the fact that we still believe that we have an opportunity, nice long-term opportunity in our international business as part of our Always Forward Plan. Coming out of COVID, we've had a little bit of a starter, starting back up in some of those countries, but we believe long-term in both regions, EMEA and APAC, we're excited to see in APAC, particularly removing of this Zero-COVID policy, we've got a team there in place, ready to go and chase goods at this point. And in EMEA, we're still seeing a strong business in the UK and the Middle East. We have work to do, admittedly, but we still believe in the long-term opportunity.

Scott Lipesky - Executive Vice President and Chief Financial Officer

On the U.S. piece of it, Abercrombie continues to do extremely well here in the U.S., the growth is strong double-digits for the Abercrombie & Fitch brands. So really excited about that. And back to the previous question, hopefully more momentum coming in the future. As we think about Hollister, also made a really good comeback, we had a second quarter low here in the U.S. where it steps back as that inflation started to rage, and we saw that teen space come in Q2 and that group is really built-up in Q3 and then into Q4, and a lot of that has been driven here in the U.S. So nice to see it come back in Hollister. As Fran mentioned, we have some work to do in the future, and we're very focused on that brand, but happy with the progress we've made to-date.

Kelly Crago - Citigroup - Analyst

Got it. And then just a follow-up on the A&F brand, you sound very excited about the opportunity in '23, but I was just wondering if you could talk more specifically about what's driving the growth, is it coming from AURs, is it coming from local units, and then beyond YPB which you've talked a lot about, which is in the other categories to call-out for '23? Thanks.

Fran Horowitz - Chief Executive Officer

So, Kelly, let me just reiterate a little bit here what we talked about. So, we've been focusing on franchises, so we focused on We are Curve Love franchise for denim, which has been very successful, which has helped us reach our best-ever year in denim for A&F women's, we launched this YPB franchise, Best Dressed Guest, lots of exciting things happening. Our Sloane Pants is something that is now caught on incredibly well. We named the pant, named and claimed it as we'd like to say in retail and now everyone is referring to it, it's one of our best-selling items that we have out there for women's. The growth is going to continue through product innovation, getting that product voice and experience on target as we've been doing, there is potential. We've grown AURs extremely well since pre-pandemic up over double digits. And there is a focus we continue to believe we have opportunity there as well.

Kelly Crago - Citigroup - Analyst

Thank you.

Operator

And thank you. [Operator Instructions] And our next question comes from Marni Shapiro from Retail Tracker. Your line is now open.

Marni Shapiro - The Retail Tracker - Analyst

Hey guys, congratulations. The stores look beautiful. I'd love to just talk about two quick things, if I can. Can you on the real-estate are you finding that the market is a little tighter and are you able to still get the deals you want to be in those malls? And if not are you are you holding back and willing to wait? And then could you just give us a quick update on your loyalty programs, I'm curious what the engagement looks like and are people signing-up and are they engaged and using the perks?

Fran Horowitz - Chief Executive Officer

Hi. I think you've heard me say many times, right, as far as stores matter, absolutely, got to make the right location and right economics, and as we've shown over the past several years, yes, we'll hold if we're not getting the deals that we need to make it economically viable for us. That said, we opened some really terrific stores in 2022, royalty back in some of the best malls, they walked away from, and now we have all our new prototypes in them and doing nicely. So, it is a - there is no finish line to real-estate for us, we're always out there exploring and understanding what the opportunities are, but some, yeah, just quick answer is, yes, we will hold unless we have the right deals.

Scott Lipesky - Executive Vice President and Chief Financial Officer

And on the loyalty programs, we continue to drive these, our identifiable customer rate has gone up dramatically over the past few years. So, it's great to see customers signing-up for this, we can share information back and forth and really leverage this group that kind of help us with product and also on the top-line. So, we are still signing people up. We refresh these programs, each brand over the past 12 months and excited about what that brings to us really from an identifiable customer perspective.

Marni Shapiro - The Retail Tracker - Analyst

Great. Thanks guys. Good luck with spring.

Fran Horowitz - Chief Executive Officer

Thank you.

Operator

And thank you. [Operator Instructions] And our next question comes from Janet Joseph Kloppenburg from JJK Research. Your line is now open.

Janet Kloppenburg - JJK Research - Analyst

Good morning, everybody. Congratulations on the progress. I got on a little bit late, but I guess just to talk about Hollister U.S. trends in the fourth quarter. Did you say if they were directionally positive or negative? I think they were better than the European trend in the third quarter but still negative, maybe mid-single-digits. And another question is, you're looking for the sales rates to decelerate from the fourth quarter to the first quarter of fiscal '23 and I'm just wondering what's involved in that or if you're seeing some resistance from the consumer or if you're not as optimistic about Hollister, maybe you could give us an indication of what led to that topline guidance? And just lastly, I think, Fran you said that Hollister was really clean, but I wondered how the markdown levels were and if the seasonal product clearance was in good shape and had been cleared? Thank you so much.

Scott Lipesky - Executive Vice President and Chief Financial Officer

All right, Janet. Let's get it rolling. So, on Hollister U.S. trends for Q4, the Hollister U.S. business was around flat for Q4 and that's a really nice improvement off of where we were kind of that negative - yeah, versus where we were in Q2 and even in Q3, so really nice progress there. As we think about the Q1 outlook kind of the sales rates Q4 into Q1 as we're sitting here today, Q1 is our toughest comp on a one-year basis and a multi-year basis, there's obviously a lot of inflation that's still happening out there and we haven't really gone full circle on inflation when it really, really started to spike last year kind of in the early Q2 period. So, we're really factoring all of that into our outlook. The volumes, February is a low month, and the volumes really going to start to ramp-up here with spring break and the Easter holiday, so getting kind of to that next question on inventory. We like where the inventory sits on a spring basis for each of the brand. So, we're ready for that volume, and again, sitting here cautiously optimistic. And on the Hollister piece around how clean we are, we've made a lot of progress. It was a kind of grind there in 2022, whenever that business fell off in Q2. Through Q4, we were pressing the gas on getting through that clearance, a lot of that was from that back-to-school period and early fall. We've made great progress on that, you saw a little bit of that margin take there in Q4 to make that happen, but very happy to say that the Hollister brand is in a nice chase position now for spring and beyond just like Abercrombie & Fitch has been.

Janet Kloppenburg - JJK Research - Analyst

Did you see any improvement in Europe, Scott, as for Hollister in the fourth quarter or how did that shake out?

Scott Lipesky - Executive Vice President and Chief Financial Officer

Yes, that business has been obviously lagging the U.S. that's been a multi-year trend for us coming out of COVID, something that we're very focused on as we're going through the spring season. And we do feel that all the changes that we're making that are going to help here in the U.S. will eventually help us in EMEA as well as APAC. So again, cautious optimism as we look to the global business for Hollister.

Janet Kloppenburg - JJK Research - Analyst

And I think Fran said that maybe she expects Hollister to inflect this year, maybe you said second-half, I'm not - I can't remember, but I was just wondering if you thought it may inflect in the U.S. in the first half?

Scott Lipesky - Executive Vice President and Chief Financial Officer

Yeah, we've seen some inflection here obviously in the fourth quarter, but I think what we're all waiting for is how we lap that Q2 period. Obviously, the whole teen space fell off Q2 of last year as we kind of ramp in the back-to-school, there were a lot of things happening from a macro perspective and the economy with inflation ranging etc. so, I think all of us in the teen space are excited to lap that and we're also especially are setting up our businesses to do that in a good way, but time will tell, and what we'll see what happens as we get to that point.

Janet Kloppenburg - JJK Research - Analyst

Thank you, so much, and good luck.

Fran Horowitz - Chief Executive Officer

Thank you.

Operator

And thank you. [Operator Instructions] And our next question comes from Alex Stratton from Morgan Stanley. Your line is now open.

Alex Stratton - Morgan Stanley - Analyst

Great. Thanks so much for taking the question. Just a couple from me. I think I just wanted to zero-in on your cautiously optimistic commentary on consumer demand. Can you just talk about kind of what data points are informing that? And then secondly, this ability to have chase back in the business, great to hear. But is there any way you can kind of quantify where you're at now versus what's normal or what was going on in 2022, just so I have a reference point. Thank you so much.

Scott Lipesky - Executive Vice President and Chief Financial Officer

Absolutely. On the consumer demand side, we're always looking at employment levels as well as wage levels, both of those things remain very strong and that's very helpful for our customer on the discretionary side. When you think about some of this cautious optimism, we don't know what the Fed is going to do here in the U.S. and how that's going to kind of ripple through the economy as we go throughout the rest of the year. And as you watch TV or read the news every day, depending on how the winds blow, it's good or bad, so we'll see. But the real point gets to your number two is, the things we can control and the best thing we can do is remain in a chase position in inventory. We got cut-off a little bit with Hollister there as the business fell off in Q2 of last year. We have been able to get through that, get all the brands and chase and the environment out there for chase, you've heard a lot of others talk about it already is very good. The supply chain isn't back to where it was in 2019, but it's getting closer and we're able to do things, we're able to test in-stores like we haven't been able to in a couple of years and we're able to chase inventory in a quicker way than we have been in 2022. So, the amount that we're leaving open for chase, we're not going to give you a percentage, they are much higher than they were in '21 and '22 and that's great for our business.

Alex Stratton - Morgan Stanley - Analyst

Thank you.

Operator

And thank you. [Operator Instructions] And our next question comes from Mauricio Serna Vega from UBS. Your line is now open.

Mauricio Serna - UBS - Analyst

Hi, good morning, and thanks for taking my questions. Just a couple from my end. Just was wondering, I don't know if you mentioned on your sales outlook, where you talked about Abercrombie outperforming Hollister, does that imply Hollister sales are flat or return to positive or just trying to understand like how much of a outperformance should we be thinking about? And then maybe you could talk about AUR trends across each of the brand. And then lastly on the tax rate, I know you guided for high tax rates for this year, but any thoughts on where that could actually converge or converge in the long-term, that would be very helpful. Thank you.

Scott Lipesky - Executive Vice President and Chief Financial Officer

Okay, Mauricio. I can grab a couple of these. So, I'll start with the tax rate. So yeah, the tax rate remains elevated to where it was kind of in that 2019 before COVID period, that's something we're laser-focused on, we're not getting the ability as the European and APAC business that's step-back coming through COVID, not getting the ability to realize some of those tax losses that we're seeing there. So very focused on that and bringing back the international business, and that will obviously help the tax rate.

On the sales outlook. I mean, there's many pads as we all know, there's many scenarios as we go through 2023, we would just expect that Abercrombie would outperform Hollister and likely see the U.S. business outperform the international business. But again, we've been talking about this for the last couple of years. Those are the trends we've been seeing and we're just going to assume we're going to keep seeing them until we don't, and that's really how we're setting up 2023.

Fran Horowitz - Chief Executive Officer

Yeah, and regarding AUR trends, it's interesting if you take a step-back and you think about the last several years of disruption, one of the positive outcomes that has come out of that, our AUR growth. If we look at pre pandemic levels to today, we actually have double digit AUR growth in both brands and our goal is to hold on to those AUR growths as well as hopefully maybe even grow a little bit into the into the future. The opportunity really comes in the AUC, like we've talked about a couple of times this morning and the reduction of the freight costs as well as the cotton in the back half.

Mauricio Serna - UBS - Analyst

Got it. Thank you so much.

Operator

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Fran for closing remarks.

Fran Horowitz - Chief Executive Officer

Just want to say thank you all for joining us today and we look forward to speaking to many of you soon.

Operator

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Q4 2022

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