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| 8-K - FORM 8-K - ABERCROMBIE & FITCH CO /DE/ | c01374e8vk.htm |
| EX-99.2 - EXHIBIT 99.2 - ABERCROMBIE & FITCH CO /DE/ | c01374exv99w2.htm |
| EX-99.1 - EXHIBIT 99.1 - ABERCROMBIE & FITCH CO /DE/ | c01374exv99w1.htm |
Exhibit 99.3
Final Transcript
Conference Call Transcript
ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Event Date/Time: May 18, 2010 / 12:30PM GMT
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
CORPORATE PARTICIPANTS
Eric Cerny
Abercrombie & Fitch Co. — Manager — IR
Abercrombie & Fitch Co. — Manager — IR
Michael Jeffries
Abercrombie & Fitch Co. — Chairman, CEO
Abercrombie & Fitch Co. — Chairman, CEO
Jonathan Ramsden
Abercrombie & Fitch Co. — EVP, CFO
Abercrombie & Fitch Co. — EVP, CFO
Brian Logan
Abercrombie & Fitch Co. — VP — Finance
Abercrombie & Fitch Co. — VP — Finance
CONFERENCE CALL PARTICIPANTS
Dana Telsey
Telsey Advisory Group — Analyst
Telsey Advisory Group — Analyst
Brian Tunick
JPMorgan — Analyst
JPMorgan — Analyst
Barbara Wyckoff
Jesup & Lamont — Analyst
Jesup & Lamont — Analyst
Richard Jaffe
Stifel Nicolaus — Analyst
Stifel Nicolaus — Analyst
Michelle Clark
Morgan Stanley — Analyst
Morgan Stanley — Analyst
Jeff Klinefelter
Piper Jaffray — Analyst
Piper Jaffray — Analyst
Jeff Black
Barclays Capital — Analyst
Barclays Capital — Analyst
Edward Yruma
KeyBanc — Analyst
KeyBanc — Analyst
Liz Dunn
Thomas Weisel — Analyst
Thomas Weisel — Analyst
Christine Chen
Needham & Co — Analyst
Needham & Co — Analyst
Adrienne Tennant
FBR Capital Markets — Analyst
FBR Capital Markets — Analyst
John Morris
BMO Capital Markets — Analyst
BMO Capital Markets — Analyst
Kimberly Greenberger
Citigroup — Analyst
Citigroup — Analyst
Janet Kloppenberg
JJK Research — Analyst
JJK Research — Analyst
Randy Konik
Jefferies & Co — Analyst
Jefferies & Co — Analyst
Paul Lejuez
Credit Suisse — Analyst
Credit Suisse — Analyst
Michelle Tan
Goldman Sachs — Analyst
Goldman Sachs — Analyst
Lorraine Hutchinson
BofA Merrill Lynch — Analyst
BofA Merrill Lynch — Analyst
Dorothy Lakner
Caris & Co — Analyst
Caris & Co — Analyst
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
PRESENTATION
Good day, everyone. Welcome to the Abercrombie & Fitch first quarter earnings results
conference call. Today’s conference is being recorded. (Operator Instructions) We will open the
call to take your questions at the end of the presentation. We ask you limit yourself to one
question during the question and answer session. At this time, I would like to turn the conference
over to Mr. Eric Cerny. Mr. Cerny, please go ahead, sir.
Thank you. Good morning and welcome to our first quarter earnings call. Earlier this morning
we released our first quarter sales and earnings, balance sheet, income statement, and an updated
financial history. Please feel free to reference these materials available on our website. This
call is being recorded, and the replay may be accessed through the internet at Abercrombie.com
under the investor section. Before we begin, I’ll remind you any forward-looking statements we may
make today are subject to the Safe Harbor Statement found in our SEC filings.
Today’s earnings call will be limited one hour. We will begin the call with a few brief remarks
from Mike, followed by a review of the financial performance for the quarter from Jonathan Ramsden
and Brian Logan. After our prepared comments, we will be available to take your questions for as
long as time permits. Please limit yourself to one question so we can speak with as many callers as
possible. As a reminder, the after-tax operating results for Ruehl for 2009 and prior periods are
now included in discontinued operations on the income statement, and comparisons to prior year
therefore generally exclude Ruehl.
Now to Mike.
Good morning guys. Thank you for joining us. Looking back on the first quarter, I would
summarize it as one in which we continued to focus on the key long term drivers of our business
that we laid out in our last earnings call. We are pleased with the progress we made but there’s
still much work to be done.
First, we are pleased with the overall reported sales growth of 14% for the quarter, and
particularly with the international and direct-to-consumer sales growth within that figure. We
continue to be very focused on achieving sustainable, profitable growth in both our domestic and
international businesses. Internationally, results for the quarter were very encouraging. We opened
three new Hollister mall-based stores in the UK. In Aberdeen, Cardiff, and Newcastle and all three
are doing very well and exceeding our projections. The three Hollister UK stores in the comp base
each comped positively for the quarter. Domestically, we have taken steps in the right direction,
and have seen some progress, evidenced by our overall domestic business which was positive for the
quarter including Hollister. The continued outperformance of the Abercrombie & Fitch tourist and
high volume stores domestically is a significant consideration in our review of the domestic
footprint of the brand.
Coming back to international and growth opportunity there. By the end of the year, we expect to
have 34 Hollister stores in Europe and we are working very hard to increase the pace of
international expansion. We have been adding resources where we need to and are at various stages
of laying the ground work in more than 10 additional countries. Our intent is to ensure that we can
keep a steady pipeline of new openings, and we remain very excited about the opportunities we see
ahead of us. We are balancing this accelerated pace with insuring we do not overstore particular
regions or sacrifice quality and end up in locations where we don’t belong. We want to insure that
the locations we choose make sense from a brand perspective, a location perspective, and of course,
a financial perspective. We have made some tough decisions this quarter to pull back on a small
number of locations that do not meet all of these criteria and we will be very disciplined in how
we approach this.
We will not sacrifice quality for a short-term sales opportunity if it doesn’t make sense for us in
the long run. Turning to Abercrombie & Fitch we announced this morning we will be opening a
flagship in Madrid in 2011. Beyond that, we are looking at around 15 additional flagship
opportunities in Europe and Asia through 2012. Again, we will be diligent and disciplined in how we
approach this, but we are very excited about the opportunities ahead of us.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
We also announced today that we will open our first international Gilly Hicks store in London later
this year. This will be a great opportunity for us to see if the international reaction to the
Gilly Hicks brand is strong as the reaction we have seen for A& F and Hollister. With that, I’ll
hand the call over to Jonathan.
Thanks, Mike, and good morning everyone. For the first quarter, the company’s reported net
sales increased 14% to $687.8 million and comp store sales increased 1%. Our direct-to-consumer
business, which was up 42% for the quarter, and new international stores were the primary drivers
of our reported sales growth for the quarter. International sales in total were $119 million, and
up 102% for the quarter. Combining domestic DTC and same-store sales for the quarter, our overall
domestic like-for-like sales for the quarter were up 4%.
Our gross margin rate for the quarter was 62.7%, down 70 basis points. The erosion of gross margin
was primarily due to a 10% decrease in AUR for the quarter which was somewhat greater on a mix
adjusted basis. We expect some further gross margin erosion in the second quarter. MG & A for the
quarter was $96.6 million, up 12% from $86.3 million in the first quarter last year due primarily
to higher legal expenses, incentive compensation accruals and marketing expenses. MG & A for the
quarter included total equity compensation of $8.3 million as compared to $7.9 million last year,
somewhat higher than anticipated at the beginning of the quarter. For the second quarter we expect
MG & A to be approximately in line with the first quarter in dollar terms with roughly half of the
increase over last years Second Quarter being driven by higher incentive equity compensation.
As a percentage of sales stores and distribution expense for the quarter decreased to 51.5% of
sales from 54.9% last year. Store occupancy costs for the quarter were approximately $159 million
or 23.1% of sales compared to $154 million or 25.5% of sales in the first quarter last year. For
the second quarter we anticipate occupancy cost to be a little higher in dollar terms before
increasing more significantly in dollar terms for Q3 and Q4. All other stores and distribution
costs were approximately $196 million or 28.5% of sales for the quarter and we anticipate a similar
or slightly lower percentage for the second quarter.
Operating loss for the quarter was $18.7 million compared to a loss of $33.9 million last year. The
tax rate for the quarter from continuing operations was a benefit of 39.5% compared to a benefit of
28.9% last year. The tax rate for the first quarter included a modest net benefit from both the
settlement of tax audits and the net release of valuation allowances. The reported net loss for the
quarter was $11.8 million or $0.13 per basic and diluted share compared to a net loss of $23.1
million or $0.26 per share last year from continuing operations. Our international stores performed
strongly during the quarter, the three new UK Hollister stores are exceeding our projections and as
Mike mentioned earlier, the three UK Hollister stores in the comp base each comped positively for
the quarter. On an overall basis, four wall margins for international stores were over 30% for the
quarter.
Turning to 2010 store openings, we remain on track to open A&F flagships in Fukuoka and Copenhagen
as well as a Hollister Epic store on Fifth Avenue in New York in the fourth quarter. We now have
confirmed plans to open approximately 25 international mall based Hollister stores in 2010, skewed
toward the end of the year. Additionally, we anticipate opening one A&F store in Canada. Mike
mentioned earlier, today we also announced plans to open the first international Gilly Hicks store
in London in the fourth quarter. Domestically we expect to open three A&F stores, two kids stores,
three Hollister stores and two Gilly Hicks stores, including a prototype of the smaller size store
format we’ve been working on for some time.
We also expect to open five outlet stores. This morning we announced plans to open an A&F flagship
in Madrid in 2011 and we remain on track to open an A&F flagship in Paris in 2011. The Madrid store
is a smaller store with a footprint of approximately 14,000 square feet. It is in a great location
and we expect it to be a successful and profitable store on conservative volume projections. Mike
mentioned earlier we are working hard to increase the pace of our international expansion, while
remaining very disciplined in our approach to this.
Based on current store opening plans and other capital expenditures we now expect total capital
expenditures for 2010 to be in the range of $200 million to $225 million including $165 million to
$190 million related to new stores, store refreshes and remodels and approximately $35 million
related to IT, DC, and other home office projects. This is down from the prior estimate due to
lower store construction costs than previously estimated, a lower number of expected 2010 openings,
other timing shifts and foreign currency impact. During the quarter we opened three Hollister mall
based stores in the UK, domestically we opened two A&F stores, one kid store and one Hollister
store. Additionally, we closed
three domestic stores including one A&F store, one kids store and one Hollister store. We continue
to review underperforming domestic stores for potential closures, and expect to have a clearer view
on that by the end of the second quarter.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
More broadly we continue to work on each of the margin improvement factors we outlined in our last
earnings call and we’ll provide updates on these in subsequent earnings calls as appropriate.
Inventory for the quarter was up 17% on a cost per square foot basis, excluding Ruehl. This was
somewhat higher than anticipated at the beginning of the quarter, partially due to timing of
receipts and higher DTC inventory but was in line with the overall increase in sales. We expect a
greater increase at the end of the second quarter in part reflecting that we believe we were under
inventoried at the equivalent point last year. We ended the quarter with $600 million in cash and
cash equivalents and our standing borrowings and letters of credit of $95 million compared to $464
million in cash and outstanding borrowings letters of credit of $143 million at the comparable
point last year.
Now to Brian who will provide some additional detail on our first quarter performance.
Thanks, Jonathan and good morning to everyone. As reported first quarter net sales increased
14% to $687.8 million and comp sales increased 1%. Our direct-to-consumer business which was up 42%
for the quarter and new international stores were the primary drivers of reported sales growth for
the quarter. For the quarter, average transactions per store increased 16%. Average transaction
value decreased 4%, and average unit retail decreased 10%. All metrics reflect an increasing
proportion of sales coming from international.
Across all brands for the quarter, the masculine categories continued to out pace the feminine
categories as male comparable store sales increased by a high single digit while female comparable
store sales decreased by a low single digit. From a merchandise classification standpoint on the
total Company basis for the quarter, male graphic tees was a weaker performer while woven shirts,
knit tops and fleece were stronger performing categories. Female knit tops and sweaters were weaker
performers while dresses, woven shirts, and graphic tees were stronger performing categories.
For the quarter, store gross square footage was relatively flat. We closed a total of three stores
during the quarter including one Abercrombie & Fitch, one Abercrombie Kids and one Hollister store.
We opened a total of seven new stores, including three UK Hollister mall-based stores and
domestically, two Abercrombie & Fitch stores, one Abercrombie Kids store and one Hollister store.
We ended the quarter with a total of 1100 stores. 341 Abercrombie & Fitch, 205 Abercrombie Kids,
507 Hollister and 16 Gilly Hicks domestically, and six Abercrombie & Fitch, four Abercrombie Kids
and 21 Hollister stores internationally. For fiscal 2010, we now expect pre-opening rent expense to
be slightly lower than the $35.4 million incurred during fiscal 2009.
This concludes our prepared comments section of the call. We are now available to take your
questions. Please limit yourself to one question so that we can speak with as many callers as
possible. After everyone has had a chance, we will be happy to take follow-up questions.
QUESTION AND ANSWER
Thank you, sir. (Operator Instructions). For our first question we go to Dana Telsey with
Telsey with the Telsey Advisory Group.
Good morning everyone. Can you talk a little bit about, Mike, how you’re feeling about each of
the brands progress and the product on men’s and women’s and pricing? Thank you.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Sure. I think that from a product point of view, men’s is and has been very much on track.
It’s performing very well, especially men’s tops and we’ve been on a track that’s a long one and I
only see that getting better. Our problem has clearly been female and within female, we have had a
female tops problem. I believe that we’re making progress in female. The comp gap is narrowing
between men’s and women’s and I believe that those of us who have followed our business for a while
can take a look at what we’re doing in that business, and how we’re merchandising that business,
and how it differs from the recent past. I urge you all to go to the stores on Saturday, take a
look at the classification statements that are being made.
We’ve spent a lot of time determining trend, getting on trend, and then backing trend up with
merchandise. I think you’ll see more of that as we go into back-to-school and you clearly won’t see
our back-to-school assortments as of Saturday, but you’ll see a merchandising strategy that is very
much in our DNA. Clearly, Hollister is the brand that is the most sensitive, that we believe will
be most sensitive on an ongoing basis, and we think we’re getting smarter about how we’re pricing
that product. Pricing and promoting the product and you know promotion isn’t a fundamental strength
of ours, but we’re getting much much smarter in Hollister in terms of what we promote, how we
promote it, where we promote it. You will see continued promotion in Hollister, because that’s a
way of life, but you will see less promotion and you can already see that in Abercrombie & Fitch
and Abercrombie.
Thanks, Dana.
And we go next to Brian Tunick with JPMorgan.
Thanks, good morning guys.
Good morning.
Just a little more clarity on some of the international comments. You gave us the number of
Abercrombie flagships you expect over the next two years. Can you maybe do the same for Hollister
or maybe talk about the total number of Hollisters you see potentially internationally, and then
the second question is, are we still on track for $200 million in revenues between the UK, Ginza
and Milan stores and anything you’ve learned from the Ginza opening? Thanks so much.
Good morning, Brian. The A&F flagship number of 15, that’s the flagships we are currently
looking at. We aren’t necessarily saying we’re going to commit to all of those but they are the
ones that we currently have where we are actively looking, we’re reviewing locations, some of them
are at different stages than others, but they are ones that we have the potential to think to do in
the next between now and 2012.
In terms of the number of Hollisters, we haven’t at this point spoken to anything beyond 2010.
We’ve updated the number to approximately 25 for this year and clearly we’ve been speaking to the
fact we would like to accelerate that in 2011 and beyond and we’re working hard to add additional
resources there and get people on the ground researching all of the real estate opportunities with
the caveat that as Mike spoke to earlier on we aren’t going to sacrifice the financials of those
deals just to get to a higher number of store openings. In terms of the overall aggregate volume in
the flagships we haven’t updated that number. We probably will at some point in the future, so
nothing to add-on that at this point, and in terms of the question of anything learned from Ginza,
can you just be a little more specific on that?
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Yes, obviously, there’s some noise about the fits or sort of the marketing efforts versus the
customer base, so I was just curious, was there any surprises there? I know you said you had a
record opening in the beginning but it’s been a couple months now. Just anything you could add
about how Ginza is tracking.
Ginza is tracking very well, as we say we virtually sell the same thing around the world.
We’re selling an awful lot of Fierce in that store regardless of what the noise was.
Good luck guys.
Thank you.
We go next to Barbara Wyckoff with Jesup & Lamont.
Oh, hi, everybody.
Hi, Barbara.
Can you talk really about how you’re approaching new store opening criteria in the US for A&F
and kids and presumably these will be offset by some store closing at the end of the year. Could
you talk about the new projections on that?
Jonathan?
Sure. Yeah, Barbara, good morning. We expect to have very few A&F kids openings going forward.
There’s just a number of locations where we think it’s appropriate but to your point, we are
continuing to review our store closure plans and we would certainly expect overall the size of the
footprint of both brands in terms of store count would be reducing rather than staying flat or
increasing. It’s just the magnitude of the number of stores that we’re going to close which I think
is yet to be fully determined but as we mentioned, we expect to have a much clearer view on that by
the end of the second quarter but will likely over time continue to be the occasional A&F and kids
opening if we see an appropriate opportunity.
Okay, thanks.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Thank you.
And we go next to Richard Jaffe with Stifel Nicolaus.
Thanks very much guys.
Rich.
Just a follow-up on the domestic closing plan and the decline in occupancy expense and want to
know if we should anticipate in terms of store closings both this year and next year and how we
should anticipate the occupancy expense to trend?
Good morning Richard. I guess in terms of closings, first of all any closing we make for this
year are going to be heavily skewed right towards the end of the year given when our leases
generally expire so there’s going to be a pretty limited impact in 2010 and then the impact in 2011
will clearly be a function of the number of stores that we end up closing. We spoken in the past to
the number of expirations we have between now and the end of 2012, so in terms of occupancy, that’s
clearly a significant driver in terms of percentage of sales, domestic productivity is clearly
another significant component of that so I think at this point it’s hard for us to give terribly
specific guidance about 2011.
Any pushback on store closing or any support on the other hand from landlords?
I think it’s probably premature for us to comment on that. We are working through a process
and I think when we’re more complete with our process we’ll speak to it to where we are.
Thank you.
We do ask that everyone limit themselves to one question. We go next to Michelle Clark with
Morgan Stanley.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Thank you and good morning. Mike, it sounds like from a sourcing standpoint at the very early
stages of realizing efficiencies, can you just discuss the opportunity there from a sourcing
standpoint to lower costs and how much longer you think that can play out for us?
Sure. I’ve had that conversation about the fact that we are doing better in understanding the
strength of our pencil by category because we are category specialists. We’re doing a much better
job of bundling fabric, trend, and make, and seeing really good efficiencies from that. We are
pushing for the best average unit costs that we can achieve, while maintaining our quality levels
and we have seen results. We are facing a very serious problem in terms of increased cotton prices,
which is putting more and more pressure on us to achieve these AUC reductions, but we’re doing the
best we can, so there is a fundamental reason for us getting better average unit costs. We probably
have more headwind as we get into Spring than we’ve had in the past, but we’re still doing what we
should be doing to achieve them.
And the opportunity on vendor consolidation putting more in the hands of your top suppliers,
still an opportunity there?
Absolutely. That is going on. We see an opportunity to do a little more consolidation. We’ve
done quite a bit of that but there’s also conversation about being with vertical factories who can
service as well so there is work to be done on that part of the business.
Great. Thank you.
We go next to Jeff Klinefelter with Piper Jaffrey.
Yes, thank you. Hi guys.
Good morning, Jeff.
Wanted to just first Jonathan can you just repeat what you said about the gross margin going
into Q2, what you expect that I just missed what you said and then my question is really on
Hollister. I understand eCommerce has been tracking obviously much better than the absolute comp
for the last several months. Between that and what you’re seeing in your international stores what
are you learning about the brand online internationally that you might be able to cycle back into
the stores to improve productivity?
Just on the gross margin point, Jeff, what we said was that we were expecting further gross
margin erosion in the second quarter. And then your question was about Hollister.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Yes, about Hollister and how it is outperformed the stores in direct-to-consumer and what we
could learn from that and it’s a very very interesting question and we think that it’s being driven
primarily by two factors. One, the breadth of the assortment on the website. We have put the Epic
assortment on the website, so the broader assortment is driving more volume and two levels of
inventory. Both very interesting points for us in terms of how we’re looking at the Hollister
business, very astute question, Jeff.
We go next to Jeff Black with Barclays Capital.
Thanks, good morning guys.
Hi, Jeff.
Can you give us some color on inventory? I would have thought unit costs were coming down
inventory levels would have been a little bit lower. Can you shed some light on where you’re
increasing inventory by category if that’s the case, maybe units versus cost and how does that
really impact what’s possible in Q2? I mean you said a little bit of erosion but what are your
thoughts there specifically around gross margins in Q2? Thanks.
Yes, I guess, Jeff, again on gross margin what we’re saying is we do expect some further gross
margin erosion with AURs likely to be continuing to be fairly down year-over-year and by more than
the other cost reductions, and the net effect of all of the other items flowing into gross margin.
I think overall as we said, inventory was somewhat higher at the end of the quarter, but if you
look at it as a relationship to sales it’s not too far off and there were some timing issues at the
end of the quarter that made it a little higher than we expected, so given what was coming off from
last year, I think on a two year basis, we’re still down 14% on a per square foot basis, so
inventory levels I think overall are still quite conservative, but we’ve clearly been speaking for
a while to the fact that we are looking to be somewhat less conservative as we came into this year
and as we go through.
Okay, thanks, good luck.
Thanks, Jeff.
We go next to Edward Yruma with KeyBanc.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Thank you for taking my question. You’d indicated you’re lowering the amount of new
international stores that you’re opening this year given your desire not to overstore. With returns
in excess of 30% or four wall cash basis, can you talk about why you backed away from some of these
locations and additional scrutiny you’re placing on new locations? Thank you.
Yes, Jonathan and I will both talk about it. We have to protect the brands, and they have to
be positioned in places that are a right level to support the brand. We believe that we had 30 mall
locations in Germany that would be brand appropriate in terms of quality level, demographics, et
cetera, and I took a visit to the mall that was number 28 on the list in Munich and it clearly
didn’t meet our quality requirements, so perhaps the mall goal for Germany is 26 instead of 30.
Those are the kinds of things we’re going through. We want to make sure that we are positioning
this brand around the world in the right quality locations because we will expand around the world,
but we can’t get greedy.
And just to speak to the financial part of it, I think when we look at what’s happening with
the Euro and the Pound at the moment, that reinforces the need from our standpoint of being very
disciplined about requiring margins of 30% or greater when we’re opening these new stores
internationally so we give ourselves the room to absorb some currency fluctuation and volatility,
and we’ve spoken in the past to some of the stress testing we do when we open new stores, and
clearly the temptation to start opening stores with lower margins, but we think in terms of the
long term health and profitable sustainability of the profitability we want to drive, we need to
remain very disciplined and drive for those higher returns.
And I think this gets to the point of our conversation last time about the fact that we have a
lot of levers to push to get to our 15% plus operating margin, and let’s just talk about what they
are again for a minute. Improving domestic productive chit includes reviewing underperforming
stores and this is very much a focus. We did open stores in the Abercrombie & Fitch chain that we
shouldn’t have opened. We overexpanded that chain and we’re not going to do that in the future. We
can achieve international growth, which we’re talking about, but in a reasonable, at a reasonable
rate.
We can return and are in the process of returning gross margin to historical levels, that’s third.
We’re maintaining tight expense controls, we’re achieving the Gilly Hicks road map goals which by
the way Gilly Hicks had a great quarter and its testament to that we’re taking it to international
as a test and we now see that we can grow DTC at a faster rate, so we have a lot of levers that we
can push to get to this 15% plus operating margin and we don’t have to be doing things in the
short-term that are going to take us off track for the long term and I think that’s the point of
this conversation but thank you.
Thank you.
We go next to Liz Dunn with Thomas Weisel Partners.
Hi, good morning. I guess my question relates to sort of the distance between the brands both
between Hollister and Abercrombie, both on style and price. How do you think about that as you move
forward with some of the pricing changes?
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Hollister is clearly going to be highly, is going to be highly competitive on a retail basis
in the mall, and we are saying that A&F is not going to be at the same level, it’s approximately
30% higher than Hollister, and Kids is a little bit higher than Hollister, but from a promotional
point of view, there’s many fewer promotions in the A&F brands, and promotions will stay at a
pretty high level in Hollister, because that’s where we have to drive that business. In terms of
style, all brands are classic casual American. As always, Hollister has a bias to Southern
California and the Southern California lifestyle, and I think that does clearly identify that brand
as different from the A&F brands.
So you feel comfortable that you’ve maintained that distance in terms of the price and with
the style, a lot of these dresses, it’s kind of a young look. Just how do you differentiate?
Well, it is, we run a young business, and our customers do cluster around the ages that we
target. Little Abercrombie 12 year olds who want to be 17, Hollister 16 and A&F 20, and there’s a
lot of business around each of those age-groups. Of course, it overlaps, but we are in total a
young business. That’s what we do well, and when we get off track is when we start to think we’re
not.
Okay, great. Thanks.
We go next to Christine Chen with Needham & Company.
Thank you.
Hi, Christine.
Good morning. You called out that your opening five outlets in the US this year. I was
wondering in this environment does it make you rethink your outlet strategy and as you expand your
footprint internationally how do you think about outlets internationally, thank you.
Good morning. Hi, Christine. We’ve never viewed outlets as being strategic. We viewed them as
a way of dealing with excess inventory from our full priced stores and as of now that continues to
be our point of view, so the outlets we are opening are to absorb additional excess units in total
within the system. There is a question about what we do in Europe for excess inventory and
clearance there that doesn’t sell-through in the stores and we’re still reviewing a number of
options that haven’t set a final cause. We are concerned about opening up outlets frankly in Europe
at a time when we’re also doing a roll out of full priced stores so we’ve been very cautious about
doing that so far.
Can you share with us the break out of the five outlets? Is it skewed towards one brand or the
other?
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
We’ll follow-up with you on that, Christine.
Okay, great. Thank you.
This is a very sensitive question by the way. We’re very very sensitive to this. We in fact,
we’re contemplating opening an outlet in Italy and with our success in Italy it came to our
attention that a new hot brand would be looked at very negatively by having an outlet in that
country. Our purpose was only to clear old inventory but we stopped it. We’re being very
disciplined about our use of outlets.
We’ll take our next question from Adrienne Tennant with FBR Capital Markets.
Good morning.
Good morning.
My first is really a comment about the Spring inventory. The Spring seasonal looks great, and
I know at the beginning of February you had to ship out some goods, so really did you feel that you
were a little bit sort of at risk in terms of not having sufficient seasonal and are you at the
balance that you want, and then really quickly for Jonathan, just on the overhead for
international, how should we think about the 30% four wall, how much should we shave off for the
overhead, and do you need to make further investments in the international investment base or can
you just leverage what you have? Thanks.
Thanks for your comments. Yes, we were light of inventory because I did send a lot of it to
outlet because we didn’t want to sell it in regular stores and we’ve been pushing very hard to get
into statements. I think they are getting better and again, I hate to say this but go into the
stores on Saturday. I think you’ll like what you see in women’s.
It’s been consistently improving, so good luck, good job there.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Hi, Adrienne. On the second part of the question, we spoke on the last call about the flow
through rate of incremental international sales being about 20% flowing through the operating
income for the year, and we haven’t specifically updated that but clearly that was anticipating
your four wall margins would be roughly in the range that we’re seeing north of 30%.
Over time we think that the MG&A or the fixed cost component of that can decline as we start to
leverage DC costs and some of the other pre-opening store specific costs and new country costs that
are baked in at the moment. There are some additional investments we need to make as we rollout but
as we spoke to it in the past what we’ve been trying to do is to hold our overall home office
infrastructure of pretty much close to its current level going back a few quarters and fund
additional international investments through offsetting efficiencies and for the most part to date
we’ve been fairly conceptual in doing that but at the same time as we’ve discussed earlier on we’re
very interested pooling the resources we need to behind accelerating the pace of international
expansion given what we’ve been seeing.
Okay, keep up the great progress and good luck.
Thank you.
We go next to John Morris with Bank of Montreal.
Thanks, good morning. Two quick questions. One SKU talk a little bit about the difference or
the learning that you’re seeing about the differences to the extent that there are any between the
European consumer and the American consumer particularly as it relates to the Hollister brand,
learnings that you’ve seen and maybe just a brief commentary about, hearing it in your words I
think would be helpful to assess the success of the gift card marketing campaign that you began
about six months ago. I mean clearly you can see it in some of the metrics but thoughts with
respect to how you plan to go forward with that and do you plan to anniversary that? Thanks.
Let me take the first part, the difference between the European and the American customers.
Number one, the European customers are just buying a lot more of everything, but it is pretty much
in the same proportion as we sell product in the US. There’s some categories that are skewed and
some of that skewing has to do with a little more advance fashion. We think Europe is giving us a
great heads up on next, so it is more advanced in some categories. It is pushing us to be more
advanced and getting us I think smarter on the curve in the US, but essentially when you look at
how we sell product around the world, ratio male, female, by category, it’s amazingly the same.
Jonathan?
Hi, on the gift card, I think the first point to note is that the gift card was just one of a
number of things we’ve done over the last few months rather than being the only thing. I think it’s
probably got a disproportionate amount of attention perhaps in part because of the accounting
consequences of it. Clearly we thought it was accretive to likes and gross margin back in the
fourth quarter when we did it so we brought it back. We also thought it was a brand appropriate way
of delivering a lower AUR and was relatively brand positive, so it’s certainly something that’s in
our arsenal going forward and we may use it again at an appropriate point but again it’s just one
of a number of different things we continue to deployment.
Great. Very helpful, thanks.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Thank you.
We go next to Kimberly Greenberger with Citi.
Great. Thank you, good morning. Michael? You talked about the 15% operating margin goal and
part of it is to restore your gross margin to historical levels. I’m wondering if you can look out
this year and tell us when do you think you might be able to stop seeing some pressure on the gross
margin and indeed start to see some of that recovery, and if you could just share with us,
Jonathan, the average unit cost savings that you were able to achieve in the first quarter, that
would be great. Thanks.
I wish I could tell you the day. What I can say Kimberly, is that we are doing everything we
can at this point to influence those levels, and the first thing is average unit cost, and as I’ve
said we’re putting severe pressure on average unit cost. We’ll see better progress this year versus
last in the third quarter than the fourth, because we start to anniversary better fourth quarter
AUCs last year but we have less pressure on the AUR fourth quarter, so we’re doing everything we
can from a cost retail perspective.
I think the other part of the equation is to make sure that we’re not over-inventorying the
organization so that we’re forced to liquidate goods which would be margin negative. I can’t answer
the questions in terms of specific date. I can tell you that we’re doing everything we know how to
do to get there.
Hi, Kimberly. On the second part of your question we haven’t spoken specifically to the
quarter but we said in the past that we expected approximately a 10% like-for-like reduction in
average unit cost for the whole of the Spring season and that still remains what we expect.
Great. Thank you.
We go next to Janet Kloppenberg with JJK Research.
Hi, everybody and congratulations on good progress this quarter.
Thank you, Janet.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
You’re welcome. I wanted, Mike, first a clarification on the flagships. I think you said 15
flagships in Europe by 2012. That implies an acceleration in flagships perhaps in 2011 and 2012,
maybe you could comment on that, and also, if you could comment on Gilly Hicks and if the
merchandising approach to the brand remains the same or if you’ve shifted that approach, a younger
customer, older customer, price points, categories, et cetera, and also for Jonathan, if you could
address any FX pressure we should be thinking about this year given the change in the value of the
Euro. Thank you.
Okay, I’ll start with flagships. We said 15 Europe and Asia, and that is an escalation.
Obviously we couldn’t feel better about our flagship performance. These are the most productive
stores in the world and there are obvious cities where they belong. We are working very hard to
make these deals and to build the kinds of stores that deserve to be built in these cities.
Does that imply there could be more than two flagship stores opened in fiscal 2011? I think
right now it’s Paris and Madrid.
What should I say? Janet, we’re working hard. I’ve spent a lot of time on that airplane
recently.
Okay.
And there are exciting opportunities. In terms of Gilly, you heard me say that Gilly had a
great quarter.
Right, I did.
It did. I think that we’re doing a lot right with Gilly. We’ve focused the customer younger.
She’s clearly 20 years of age. We’re merchandising to that. The product is more fun. It’s more
colorful, and there’s a style emerging for Gilly that I think is pretty thrilling. The Gilly Girl
is appearing in front of it so that’s the most important thing.
We’ve made strides in terms of pricing, we are more competitive in the key categories and we have
made strides in terms of how we’re marketing, in store and out of store, so this is something we’re
very proud of. Obviously we are to take it to White City, we’re going to be there with the big
boys, but we think there is potential here. It’s a test, but I’m excited about it.
Good luck.
Thank you.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
On the FX component, I guess first of all for the first quarter we actually got a small
year-over-year benefit from currency given where the rates ended up for the quarter, it was pretty
modest. For the balance of the year, we are obviously very focused on what’s happening with the
currency. We do have some hedging in place for particularly the second quarter and then to a lesser
extent the back half of the year so we have a degree of protection in the short-term which
progressively diminishes over time so something we monitor very closely and I think it goes back to
as we rollout internationally that we have the operating margins that are strong enough to
withstand currency fluctuations. There are other things we can look at over time that would also be
ways of mitigating a long term erosion of the currencies in the countries we are going to operate
in.
Okay, great. I’ll talk to you guys later. Thank you.
Thanks, Janet.
We go next to Randy Konik with Jefferies & Company.
Yes, thanks a lot. Want to focus on Hollister.
Hi, Randy.
Hi what’s going on? If you look at the average number of transactions you guys seen a nice
positive pick up and then the average transaction values moderating a negative trend, obviously it
looks like you obviously are getting more people in the doors. You’re at a point where you are
getting that price elasticity of demand from the consumer, you think that like you said pull off
the promotions a little bit more. How do you see the transaction, the number of transactions versus
transaction value, how are you trying to balance those levers as we go through the rest of the
year?
I think, Randy, you have to look at the international and the domestic business as really
separate and it includes the dynamics and the two are quite different, so I think the metrics we
provide are on a consolidated basis and include both parts of the business. Maybe you could just
elaborate a little bit more on your question.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
If we think about the US business just in isolation, do you think you’re getting the
corresponding price elasticity demand from the consumer with your more competitive prices in the
most recent couple quarters and how do you see that playing out over the next couple quarters
especially as the AUR compares or average transaction value compares will get easier in the back
half of the year?
Okay, great.
I think it’s a week by week proposition Randy and I think we’re starting to learn more of what
works and what doesn’t. It wouldn’t be fair to say we’re just on a straight curve. As I said in the
beginning of the presentation, this promotion isn’t in our DNA, but we are learning what is
working, what’s not working. We are seeing more elasticity in what’s working and I think we’ll do
more of that, but it is a work in progress. Is that fair?
Absolutely and we now have an 18 month period where we’ve done testing on pretty much
everything we’ve done and we’ve seen what’s worked and what hasn’t worked as well and typically any
promotion we do, we hold out 20 or 30 stores and we don’t go there and we track their performance
and we do various parts of that testing so we have a much clearer view of the things that are
effective and those which we can apply going forward.
Is there any particular category or type of promotion you’ve seen or you think that has been
most successful for you that you can share with us?
We can’t really share that, but we’re learning.
And we go next to Paul Lejuez with Credit Suisse.
Hi, thanks guys.
Hi, Paul.
A little bit more on Gilly. Is there any way you can quantify how much better of a quarter
Gilly had? What was the drag on you on the EPS line first quarter this year versus last year and
also wondering if you have any thoughts of putting Gilly product into mall based Abercrombie &
Fitch stores and then just finally, you mentioned that adjusted for selling on the gross margin
line, adjusted for selling mix AUR declined would have been greater. How is that going to look
going forward? Should we expect the same thing in future quarters? Thanks.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Let me just start by responding about distribution of the Gilly product. You all know that
what we really do is specialized in categories. We are category specialists and we have added two
categories to our list of category which is we specialize, bras and underwear, so we are building
what I think is a really strong bra and underwear business. We have in front of us a number of
options in terms of what we can do with those categories and I don’t have to state them. We can
build more stores domestically, we can build the stores internationally. We could put product
within our stores, we could brand that product to our own. We could brand it Gilly. There are a
number of options open to us in this category and that’s what makes it so compelling and so
exciting that we are seeing such progress in developing that product. I’ll turn it over to
Jonathan.
Hi, Paul. I guess on the Gilly impact on Q1 it was roughly comparable to last year for the
first quarter on an operating income basis. The comp itself was a healthy positive number. We
haven’t yet started to break that out specifically. In terms of the selling mix impact on AUR,
directionally what we said is that the 10% AUR decline for the quarter would have been greater on a
like-for-like basis so that is the true comparison with the 10% like-for-like average unit cost
reduction and directionally we probably expect a similar pattern in the second quarter.
Thanks guys, good luck.
Thank you.
We go next to Michelle Tan with Goldman Sachs.
Great. Thanks. I was wondering if you guys could give us a little more color on Hollister
stores. You mentioned that the ones you opened in the UK were above plan this quarter. Is there any
update you can give us on where the volume is in these international Hollisters versus the US and
also any sense of magnitude on how those three stores in the comp base are comping? Is it strong
double digit, single digit, what kind of comps are you seeing?
Hi, Michelle. I guess firstly on the relative performance of the UK Hollisters, we spoke on
the last earnings call to the average volume of those existing UK stores to our average US store
and we have I think a metric of six times at that point. We haven’t specifically updated that if it
fluctuates a bit with currency and other factors and we also said at that point that on average the
stores we were in at that point were likely to be the relatively more productive stores than one we
completely built out with the chain in the UK, but the relationship remains extremely positive in
terms of the performance of the UK stores.
I don’t think we’re at a point where we’re going to break out the comp performance of the UK stores
more specifically. They did each comp positively for the quarter. Frankly if they had been flat or
slightly down we would have still been pretty happy given the incredibly strong opening of each of
those stores so the fact they are comping positively we think directionally is a very positive
sign.
Okay, great. Thanks.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Thank you.
Our next question we go to Lorraine Hutchinson with Banc of America Merrill Lynch.
Thank you, good morning.
Good morning.
With the cash balances starting to build up on the balance sheet, can you just talk about your
expected uses of that cash and if there’s a specific cash cushion level that you’ll wait for until
you perhaps begin returning it to shareholders?
I will turn it over to Jonathan but I have a very strong point of view that the use of our
cash is go to be to build stores and we will all see the biggest return there than anywhere. That’s
my bias and I’ll turn it over to Jonathan.
Well, I think clearly, to Mike’s point, we certainly believe the best possible use of our cash
today is opening new stores and the strongest returns are there, and that’s why we’re particularly
interested adding additional resources and accelerating the pace of international expansion. We’ve
always wanted to operate with a healthy cash cushion. I think to make the point or likely there
will come a point where we feel we’ve reasonably satisfied both of those objectives and then we’ll
address that when we get there but in the short run, our focus is on deploying our capital for
growth.
Thank you.
We go next to Dorothy Lakner with Caris & Company.
Thanks, good morning everyone.
Good morning.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Just wanted to ask if you could give us some update on the work you’re doing on systems,
particularly on the international side.
Yes, Dorothy. There are a number of projects we’ve been investing in fairly significantly over
the last couple of years, but are at varying stages. We had a very significant implementation that
went in last year, Oracle RMS, we have an IPOS system that is in place for our international stores
that we are retroing into the domestic stores so the overall infrastructure we’re very
significantly through that from an international standpoint, there was a lot of country specific
work that has to take place on a country by country basis and we’re working through that, but
overall, I think the investment we’ve made and the time it’s taken us to get there and the capital
dollars put us in a very good position.
Do you feel like you’re in a good position internationally obviously with this acceleration
that you’re potentially looking for through 2012?
Yes, I think we have the infrastructure in place. As I mentioned there are some country
specific things we need to address country by country as we go but the basic infrastructure is in
place.
So when you talked about adding additional resources that’s people, getting people on the
ground in order to make sure you’ve got what you need to get the stores open?
Well, I guess additional resources in terms of first of all getting the real estate pipeline
full and making sure we have people on the ground in the countries we’ll want to be in 18 months,
two years, three years time so we keep that pipeline full and then for each country there are some
local country resources we need to have in place, finance, payroll, HR, for example, which is not
really IT related but there are some country specific resources we need to have in place relatively
modest frankly, but again, as Mike mentioned earlier, there are fairly large number of countries
where we’re already putting those resources in place and laying the ground work.
And I think you know how disciplined and paranoid we are about putting that infrastructure in
place on a country by country basis. There’s a whole bunch of conversation about China right now
and I’m surprised the question didn’t come up, but we—
Would you like to comment on it?
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
Yes. We understand that and I think everybody on this call understands that China is going to
be a huge market for our brands, but it’s got to be approached in a very thoughtful, disciplined
way for lots of reasons. I could put a push cart out on the Nanjing road and start doing business
tomorrow, but that’s not how we approach going into a country, as I think you know.
We do already have resources focused solely on China, even though we haven’t yet set an
opening date.
Okay, so you feel you’re set up and should you choose to accelerate the flagship openings in
2011?
Well, yes, I did just want to come back to that point because the answer to the question
earlier about where we are with regard to 2011 openings was not meant to imply that it’s out of the
question we could open in 2011. There are still some opportunities that we could consummate and it
will be effective late in 2011 in addition to Paris and Madrid and then a large number of
opportunities in 2012.
Okay, all right, great. Thank you.
And ladies and gentlemen, we do apologize, however due to time constraints, this will end our
question and answer session and this will end today’s conference call. We do appreciate your
participation.
Thank you.
Thank you.
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May 18, 2010 / 12:30PM GMT, ANF — Q1 2010 Abercrombie & Fitch Co. Earnings Conference Call
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