Exhibit 99.4
Exhibit
99.4
Final Transcript
Conference Call Transcript
ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Event Date/Time: Nov 16, 2010 / 01:30PM GMT
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
CORPORATE PARTICIPANTS
Eric Cerny
Abercrombie & Fitch Co. IR Manager
Mike Jeffries
Abercrombie & Fitch Co. Chairman & CEO
Jonathan Ramsden
Abercrombie & Fitch Co. EVP & CFO
CONFERENCE CALL PARTICIPANTS
Evren Kopelman
Wells Fargo Securities Analyst
Jeff Klinefelter
Piper Jaffray & Co. Analyst
Scott Robinson
Mirage Capital Analyst
Janet Kloppenburg
JJK Research Analyst
John Morris
BMO Capital Markets Analyst
Liz Dunn
FBR Capital Markets & Co. Analyst
Dana Telsey
Telsey Advisory Group Analyst
Kimberly Greenberger
Morgan Stanley Analyst
Marni Shapiro
Retail Tracker Analyst
Michelle Tan
Goldman Sachs Analyst
Christine Chen
Needham & Company Analyst
Brian Tunick
JPMorgan Chase & Co. Analyst
Paul Lejuez
Nomura Securities Analyst
Robert Samuels
Phoenix Partners Analyst
Richard Jaffe
Stifel Nicolaus Analyst
Lorraine Hutchinson
BofA Merrill Lynch Analyst
Linda Tsai
MKM Partners Analyst
Edward Yruma
Keybanc Capital Markets Analyst
Roxanne Meyer
UBS Analyst
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Jennifer Black
Jennifer Black & Associates Analyst
David Glick
Buckingham Research Analyst
Robin Murchison
SunTrust Robinson Humphrey Analyst
Stacey Pak
SP Research Analyst
Adrienne Tennant
Janney Capital Markets Analyst
Linda McDonough
Waterloo Advisors Analyst
Dorothy Lakner
Caris & Company Analyst
PRESENTATION
Operator
Good day and welcome to the Abercrombie & Fitch third quarter earnings results conference
call. Todays conference is being recorded. (Operator Instructions) We will open the call to take
your questions at the end of the presentation. We ask that you limit yourself to one question
during the question and answer session.
At this time I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny, please go
ahead.
Eric Cerny Abercrombie & Fitch Co. IR Manager
Good morning and welcome to our third quarter earnings call. Earlier this morning we released
our third quarter sales and earnings, balance sheet, income statement, store opening and closing
summary and an updated financial history. Please feel free to reference these materials available
on our website. Also available on our website is an investor presentation which we will be
referring to in our comments during this call. This call is being recorded and the replay may be
accessed through the internet at Abercrombie.com under the Investors section.
Before we begin, I remind you that any forward-looking statements we may make today are subject to
the Safe Harbor statement found in our SEC filings. Todays 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. 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 of Ruehl for
2009 and prior periods are now included in discontinued operations and income statement and related
comparisons to prior year, therefore generally exclude Ruehl.
Now Ill turn the call over to Mike.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
Good morning, everyone. Thank you for joining us. Jonathan will talk to the specifics of the
quarter in a moment but simply put, we are pleased with our performance against our objectives for
the quarter and remain very excited about the opportunities ahead of us across all areas of our
business. Our domestic business has continued to improve, our international results are
outstanding, and our direct-to-consumer business is posting very strong growth. We will share more
details coming into 2011 but I want to take a few minutes to recap where we stand on our key road
map objectives to achieve an operating margin of 15% or better, our goal for fiscal 2012. As you
will recall these include improvements in domestic productivity including store closures, returning
gross margin to historical levels, driving significantly accretive international growth, driving
our direct-to-consumer business through an increased strategic focus, doing all this while
maintaining tight control of expenses, and last, fulfilling the potential of Gilly Hicks.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
I will start with what appears today to be the most challenging of these objectives, returning our
gross margin to historical levels of around 67%. We feel good about the elements of this objective
that are under our control. Namely, benefiting from a growing international component of our
business, and turning the corner on domestic AURs. However, cost pressures from raw materials and
labor costs have only increased as we have gone through the year and transportation costs remain at
very high levels. We think it is possible that some of these factors such as cotton costs may abate
somewhat but that is not something we can count on. We expect to make progress on gross margin in
the first half of 2011 overall. However for receipts later in the season, costs are escalating
significantly and visibility beyond that is limited.
Aside from the gross margin objective we are positive about the other components of our road map
objectives. On domestic productivity, our objective is to be at 85% or better of 2007 productivity
by 2012. Weve made solid progress on that this year-to-date with some strengthening as the year
has gone on and the domestic closures scheduled for this year and next will help. Beyond that we
will need mid single digit increases in same-store sales in each of the next two years. We intend
to achieve this by continuing to provide an assortment that is trend right, premium quality, and
offers a healthy balance of fashion and basic heritage items. Over the last year, we have become
much better at how we deliver impactful fashion right assortments with attractive price points and
will continue to improve on this process as we push for sales improvement.
Moving to our international business we crossed a milestone this quarter with the opening of our
first Hollister stores in Spain, one in Madrid and one in Barcelona. Both are running ahead of
projections. We also opened our second Hollister store in Germany in Oberhausen, and early signs
are that this will reaffirm the very strong response we saw to our first opening in Germany last
year. Meanwhile, our UK Hollister stores comped double digits for the quarter and our Italian
business got even stronger. Looking forward, we need to accelerate our Hollister expansion in 2011
and 2012, beyond the 20 stores we will open this year, and are putting a huge amount of effort into
making that happen. The focus is equally strong on A&F flagship opportunities and in both cases we
expect to give more concrete guidance coming into 2011. We are also looking very hard at the
pipeline further out to make sure we are fully capitalizing on the opportunity ahead of us.
Turning to direct-to-consumer, our business is up 40% year-to-date with both international and
domestic up strongly. The direct-to-consumer business now represents around 10% of our business and
we continue to believe strongly in the growth opportunity it offers. Over the course of this year,
we have made or will be making many different investments in our direct-to-consumer business,
including headcount. Additionally we have launched mobile sites, added on figure key looks,
improved the shopability of our sites, are adding much stronger analytics capabilities and are
experimenting with paid search and other initiatives. We have also invested in country specific
websites in each of the countries where we currently have store locations. On expenses, we are
maintaining a strong focus on validating ROI and our visibility to that is being enhanced by a new
budgeting and reporting system in place for our current budget cycle as well as by continuing
improvements in our testing ability.
Finally, turning to Gilly Hicks, our likes stores are comping in the 40s year-to-date, on track
with our productivity goals. We are looking forward to our first UK opening on Saturday, November
27th in London. If anyone happens to be in London over Thanksgiving weekend, hopefully youll
notice some buzz around that.
In summary these are very exciting times for us. Theres a huge amount of work to be done to
execute our plans, but we have a very clear view of what we need to do and I know that we have the
team in place to get it done, a team obsessed with enhancing our iconic brands.
With that, I hand the call over to Jonathan.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Thank you, Mike, and good morning, everyone. Our results for the quarter are summarized on
page three of the investor presentation and Ill start with the highlights of those results. Sales
for the third quarter were up 18% to $886 million including a comp store sales increase of 7%.
These results were very close to what we had planned coming into the quarter. Our DTC business was
up 32% for the quarter. Our international sales were up 87% for the quarter and represented 18.5%
of total sales. Our gross margin rate for the quarter was 63.7% down 40 basis points versus last
year. This was slightly better than we had anticipated as a result of a currency benefit and lower
freight costs than originally budgeted. We
now expect a similar level of erosion in the fourth quarter and the gross margin rate for the
season as a whole will therefore be slightly below our prior expectations.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
A summary of our operating expenses is included on page seven of the investor presentation. Overall
operating expenses for the quarter came in somewhat lower than anticipated at the beginning of the
quarter. Store occupancy costs were $165 million, lower than expected due to lower depreciation
charges. We anticipate fourth quarter store occupancy costs to be in the high $160 millions
excluding costs associated with store closures and potential impairment charges resulting from our
annual review of store related assets. All other stores and distribution expenses were
approximately $220 million or 24.8% of sales for the quarter. For the fourth quarter we anticipate
a continued modest leverage benefit in these expenses versus last year. MG&A for the quarter was
$103 million, up 17% to last year. This was at the higher end of the midteen percentage growth we
anticipated at the beginning of the quarter primarily due to higher incentive comp. MG&A for the
quarter included total equity and incentive comp of $15.6 million compared to $10.3 million last
year, accounting for approximately 600 basis points of the increase. The impact of an insurance
recovery in the prior year accounted for approximately another 300 basis points of the increase.
For the fourth quarter we expect MG&A to be up slightly above the third quarter in dollar terms.
Operating margin for the quarter was 8.8% and represented a 250 basis point improvement over last
year. The tax rate for the quarter was 35.6% compared to a benefit of 4.7% for the third quarter of
2009. The 2009 rate was favorably impacted by a trueup in the year-to-date rate. On a full year
basis for 2010 we now expect the effective rate to be around 35%. Net income for the quarter was
$0.56 per diluted share.
Turning to inventory, total inventory at quarter end was up 47% at cost versus last year, or up 43%
excluding inventory in transit. This was in line with our expectations at the beginning of the
quarter. We expect the year-over-year inventory increase to moderate towards a closer alignment
with sales at the end of the year. We remain comfortable with our inventory levels which we believe
are appropriate to drive the business.
We ended the quarter with approximately $618 million in cash and cash equivalents and outstanding
borrowings and letters of credit of approximately $68 million. During the quarter we purchased
669,000 shares under the Companys existing share buyback authorizations at a total cost of $29.2
million. Going forward we expect the share buyback program to continue subject to performance, to
market conditions, and to a healthy net cash cushion. With regard to CapEx we now expect total
CapEx for 2010 to be approximately $190 million.
Turning to the fourth quarter, a summary of our gross margin, expense and tax rate expectations is
included on page 11 of the investor presentation. Our store opening plans for the year are on track
with the guidance previously given and reflected on pages 12 and 13 of our investor presentation.
With regard to closures we now expect 2010 store closures to be slightly above the previous figure
of 60 planned closures. As previously indicated we will record additional charges in the fourth
quarter associated with these closures.
This concludes our prepared comments section of the call. Were now available to take your
questions. Please limit yourself to one question so that we can speak with as many callers as
possible. If others have had a chance we will be happy to take follow-up questions . Thank you.
QUESTION AND ANSWER
Operator
(Operator Instructions) Well now take our first question from Evren Kopelman out of Wells
Fargo.
Evren Kopelman Wells Fargo Securities Analyst
Good morning. Thank you. My question is about the when we look at the delta between the
sales and comp growth, its about 11 points this quarter, how should we think about that going
forward, especially as more and more international stores enter the comp base? Can you give us some
color or help in terms of how we think about how that impacts comps? I assume positively given some
of the numbers you gave for the Hollister UK stores comps but how should we think about the delta?
Thank you.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Good morning, Evren. I understand that people externally focus on that metric. Its one that
we dont particularly focus on internally. I think what we have seen over the past few months is
some volatility in that spread caused by different seasonality in the DTC business, and in the
European business, which follows a slightly different seasonal path than our US business. I think
going forward its hard for us to be too specific about where that spread is going to be because
youve got a lot of things moving in and out of the comp base. So its typically something we
havent given guidance on in the past. But I think your best way of getting there is to model in
the volume of the stores that are opening during the quarter and some assumption about DTC, and
that will lead you to a spread expectation for the quarter.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Operator
Our next question comes from Jeff Klinefelter out of Piper Jaffrey.
Jeff Klinefelter Piper Jaffray & Co. Analyst
Yes, thank you. Congratulations, everyone, on a good quarter. Its on the international
stores. Mike and/or Jonathan, if you could just address, the Hollisters seem to be opening very
very well in continental European markets. Could you compare and contrast those openings with your
experience in the UK? And then also, just with respect to the international business how should we
think about the profit margins on a fully loaded basis? Is there a certain scale you have to
achieve per country in order to get to that point of maximum contribution? Thank you.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
Ill start the answer by saying were very pleased, as I said, with the openings in Spain.
They are exceeding our projections very handily. The second German store continues to be really a
strong volume store. I think its tough to say how did they open, or how did they open versus UK.
They are all opening very well and very well versus projection, and clearly, at volume levels that
are multiples of the Hollister stores in the US. With that Ill turn it over to Jonathan.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hi, Jeff. I think as you know, from what weve said in the past, we target a four wall
operating margin for all new international stores of at least 30%, and generally speaking if they
are exceeding their sales projections that means they are doing better than that. When we look at a
specific country, there are some unique country costs associated with each new country we go into,
so as we think about the plan going forward, we do have to look at the total store count potential
in each country and look at that in the context of those country specific costs to make sure the
overall country margin is still at an acceptable level. So thats broadly how we look at it.
Operator
Well go next to Randal Konik with Jefferies & Co.
Scott Robinson Mirage Capital Analyst
This is actually Scott Robinson with Mirage Capital. A couple of questions or actually one
question. Can you provide some color on your e-commerce vision going forward and how do you plan to
sell marketing services through your website?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Didnt quite hear the second bit.
Scott Robinson Mirage Capital Analyst
Can you provide some color on your e-commerce vision going forward and how do you plan to take
advantage of the enormous opportunity in 2011 to sell more goods and services via your website to
allow customers to have a better shopping experience?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
I think as Mike said on the call, we think DTC is a huge opportunity for us going forward.
Weve been making a lot of investments in it over the course of this year, some of which Mike
enumerated a minute ago. There are other things we have in the pipeline, so we certainly think its
a great growth opportunity for us and it should be highly accretive growth, even net of some of the
incremental investments we need to make in building that business. I think in terms of specifics
for 2011 what were going to be selling I dont think theres anything additional we can add on
that.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Operator
Well go next to Janet Kloppenburg with JJK Research.
Janet Kloppenburg JJK Research Analyst
Hi, everybody. Congratulations. Nice quarter. I had a couple questions on the gross margin.
First, Jonathan, you went quickly over why the gross margin for the fourth quarter would be down. I
didnt fully understand that. I was expecting it perhaps to be flat to slightly up. And secondly,
Michael, if you could talk a little bit about the cotton price pressure for the second half, I was
wondering if the impact of a higher number of international stores, which I believe generate a
premium margin, could help to offset some of the higher sourcing costs. Thanks so much.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Janet, good morning. On the first bit, I think our prior guidance for the whole season was
that gross margin would be flat to slightly down for the season. What were saying is were going
to be a little bit below that but only slightly for the season as a whole as we currently see it,
so there was a little bit of a shift between Q3 and Q4. Were not talking about major shifts, by
the way, a couple of tenths for a couple different things. So I think as weve cautioned in the
past, our intra-quarter guidance during the quarter is less precise than our viewpoint for the
season as a whole and were slightly off what we thought for the season, and then there was a bit
of a shift between the quarters in our gross margin expectations.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
The second part of your question, Ill answer the latter first. And that is that our
international stores do offer us the opportunity for enhanced rate but also to enhance the total
quality level of our offerings. And Id like to make two points with regard to the cotton prices.
Obviously it escalated, they are clearly a problem, but were not going to over torque on this
problem because of our perspective, and Janet you understand this, our long term objective in the
business which is our perspective is long term. And weve always believed that some problems could
be opportunities. Were looking at this way. We think lots of people are going to take a lot out of
their product at this time. Were not, were going to use this opportunity to enhance the product
offering and we can get paid for it, particularly in international locations.
The second point Id like to make, and maybe this is the strongest point Id like to make, is that
our perspective is long term and our relationship with our factories, our vendors is a long term
relationship. And I couldnt stress more strongly how grateful we are to them that they have held
our hands during this time, been fair with us in terms of whats happening with cotton prices and
other increases. But I think they know that were there for them for the long term as they have
been there for us and will be there for us because they are as obsessive as we about creating
beautiful product at fair prices.
Operator
Well go next to John Morris with BMO Capital.
John Morris BMO Capital Markets Analyst
Congratulations, too, on a great start to the back half here. Jonathan, just following up
there on that gross margin question. Can you just clarify for me why the shift between Q3 and Q4,
whats going on there. And then as you look out to the back half of 2011, besides cotton
potentially being a difficult cost component, are there other cost pressures that you are referring
to and can you just give us a little bit more color on that?
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Sure, John. Good morning. Yes, in Q3, as we said a few minutes ago, we expected gross margin
to come in a little lower. It got better partly because of currency, which helped over the latter
part of the quarter. And also we our budgeted our freight costs came in a little lower than
budgeted. In the fourth quarter, weve added some markdowns which is incrementally lowering the
gross margin rate modestly. But I think I want to caveat all of that by saying these are not major
shifts in the gross margin rate. These are relatively minor. And if you look at the season as a
whole were pretty close to where we thought we were going to be. And as I said a second ago, the
splits between the quarter are less of a focus for us than looking at the overall season. So I
think Id just like to caveat all of that with those two riders.
With regard to the back off of 2011, I think we and other people have talked about labor costs
continuing to be an issue beyond cotton costs, and Mike alluded to that earlier on. As Mike said,
we think there is some possibility that cotton costs may abate. For labor costs, the rate of growth
may change over time but, directionally, they are likely to continue heading upwards.
Operator
Well go next to Liz Dunn with FBR.
Liz Dunn FBR Capital Markets & Co. Analyst
Hi, good morning. I had a question on inventory. I see that in the presentation materials on
your website youve added a chart with inventory days, which is really helpful to provide some
historical context. But I think last quarter you broke down how much was attributable to some
buckets. Could you tell us specifically how much supports the new store openings and the
direct-to-consumer business, or if not specifically, some context around that?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hey, Liz. I dont think we could tell you specifically but certainly with international store
openings in the fourth quarter that does create a need for additional inventory. And as we roll
through year-end, all those stores coming on stream in the fourth quarter will continue to be a
factor causing an overall increase in inventory levels, as well as continuing to support DTC
growth. So aside from the underlying comp business, those factors are both causing inventory to be
running at somewhat higher levels. But overall, I think the key point is that were comfortable
with where we are. We expect the year-over-year increase to moderate as we come out of the year and
as were lapping more normalized levels from the prior year.
Operator
Well go next to Dana Telsey with Telsey Advisory Group
Dana Telsey Telsey Advisory Group Analyst
Good morning, everyone. Youve been trying different promotional or marketing messages
throughout the quarter and even throughout the past two quarters. What are you finding is working?
Does it work differently in Hollister or in Abercrombie in both domestically and overseas,
particularly in the Hollister mall stores at all? And as you think about the AUR trends which are
down around 11% how do you see that progressing into next year? Thank you.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
I think, Dana, theres a limit, obviously, to what we can say about what our plans are for the
next couple months. I think what we have said, and Mike spoke to it earlier on, is that we see
domestic AURs turning the corner coming into 2011 and being in positive territory. But I think, as
weve said in the past, the month to month pattern may not be linear and I think we obviously cant
say too much about our specific plans for the balance of this season in particular.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
But one addition, Dana, and thats that we do not promote in our international stores at all.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Operator
Well go next to Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger Morgan Stanley Analyst
Great. Thank you. Good morning. I was wondering, Michael, if you can talk about how far out
youve secured product and how much visibility you have as to pricing in the first half of the
year? And when you talked about costs escalating meaningfully, could you just help us understand
the magnitude on that? That would be helpful, thanks.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
I cant tell you the magnitude. I can say that for first quarter, we are committed to AUCs
that are about even to last year and we are seeing pressure on the second half of summer
deliveries, and back-to-school. I cant give you an order of magnitude.
Operator
Well go next to Marni Shapiro with The Retail Tracker.
Marni Shapiro Retail Tracker Analyst
Congratulations. The stores look great. And I hate to harp on the whole pricing but if we
could just think about it in terms of two buckets within sourcing and pricing, it seems to me
youve been a lot less promotional. And if the increase in pricing in the back half of the year is
what Im hearing, shouldnt you be able to, with your brands, offset that with better promotions
that maybe arent as deep and with fewer markdowns as Ive seen over the last couple of weeks and
maybe a month or so?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Marni, are you talking the back half of 10 or back half of 11?
Marni Shapiro Retail Tracker Analyst
Middle of 11 and into back-to-school in 11. It seems to me that you have strong enough
brands and Ive watched you pull the lever back on the promotions the last couple of weeks and
months, suggesting that maybe theres a little more wiggle room for you guys than some other
players out there.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Overall, we clearly have felt that were getting better at how we execute some of those
initiatives. We do have the benefit of the international mix coming into play more and more as we
go forward. And I think if cost pressures remain very significant, then were going to keep an open
mind to pricing generally, although we certainly havent made any decisions on that. But I think
all of those factors, we continue to look at.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
By the way, I missspoke because we do promote in Canada, but thats treated by us as much as
North America, but we dont promote internationally other than Canada.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Operator
Well go next to Michelle Tan with Goldman Sachs.
Michelle Tan Goldman Sachs Analyst
Thanks. Jonathan, I was wondering if you could give us anymore color on how you think about
the minimum cash cushion that you want to maintain as you look at buyback going forward from here?
Is there a dollar level per quarter or annually that youre thinking about?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hey, Michelle. There are two guard rails in how we think about this. Were always going to
want to maintain a healthy net cash cushion which we define as our cash on hand less anything weve
got drawn down on the revolver and any letters of credit we have outstanding against the revolver.
I think historically we used to talk about a $300 million cash cushion going forward. I think were
thinking more in terms of a $350 million net cash cushion, so cash on hand less outstanding
revolver drawdowns in LCs so we would never want to be below around $350 million, is our current
thinking. So thats one guard rail. I think on the other end, weve seen our share count creep up
over the last couple of years due to equity plan issuances and I think going forward we would at a
minimum look to offset those equity plan share issuances with buybacks. So theyre really the two
guard rails.
Where we end up between those two guard rails will be a function of how were feeling about
business, how we see our cash flow requirements in general going forward, market conditions
obviously, and potentially other factors. But we would expect to be somewhere within that range,
with the floor being as of today that we would never go below a $350 million net cash cushion. But
that isnt to say that were going to be at that level. Its just that would be the guard rail at
the lower end.
Operator
Well go next to Christine Chen with Needham & Company.
Christine Chen Needham & Company Analyst
Good morning. I wanted to piggyback off of the inventory question. Maybe another way to look
at it, youre up against a down 30 something, but whats the break out between the merchandise that
has less fashion risk versus the fashion product? And how much of that inventory is finished goods
versus maybe work in process, i.e., material that you might have bought that you can make into
whatever you want to mitigate the sourcing cost increases? And then if you could just talk about
rollout of Gilly next year since its doing so well. Thank you.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hi, Christine. On the inventory question, first of all, most of it is finished goods. There is
the inventory in transit component which accounted for a percentage of the increase but we stripped
out inventory in transit in the chart thats in the presentation. I think, as we said on the prior
earnings call, weve never historically had issues with inventory and we feel very comfortable
about the inventory position we have, and we think we need the inventory levels we have to drive
the business. So were comfortable with where we are and I think in a historical context, the chart
we have in the presentation illustrates that we are not really out of line with where weve
historically been at this stage in the year.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
The second part of the question, Christine, Ill take the rollout of Gilly. Were obviously
very pleased with the results. Were very pleased with the 5,000 square foot store we opened in
Roseville and were going to see how we do in London on the 27th. Were not in a position to make
an announcement on anything other than that at this point. But thanks for the question.
Operator
Well go next to Brian Tunick with JPMorgan.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Brian Tunick JPMorgan Chase & Co. Analyst
Thanks. Good morning guys. Just two quick ones. First, are you guys reiterating your mid
single digit comp guidance for the fall season? And then as we try to get some more thoughts around
the store closings for 2011, can you give us some idea whether its occupancy or stores in
distribution, what kind of number can we expect to lower for next year based on the store closings?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Brian, on the first point, wed said I think what youre alluding to is we said we bought
to a mid single digit comp for the fall season. We havent specifically updated that but clearly
our results for the third quarter are consistent with our buying assumption for the season and we
havent spoken to anything subsequent to that.
On store closings in 11, wed originally said 110 over 10 and 11. A few of those are pulling
forward into 10 but we still expect to be in the 40 to 50 range in 11. The primary reason why
those stores are unprofitable is low volume which does tend to result in very high, first of all,
low gross margin rates, so closing those stores helps with the gross margin. And then high
occupancy cost as a percentage of sales, in some cases, although not all. So I think youre
generally going to see and then clearly because we have to staff them to minimum levels, those
variable expense items tend to run as a high percentage of sales. I think youre going to see the
impact of gross margin in both components of stores and distribution expenses from a leverage
benefit. But also keep in mind that were talking about 67 or so stores this year and another 40 to
50 next year, so you have to keep it in that overall context.
Operator
Well go next to Paul Lejuez with Nomura Securities.
Paul Lejuez Nomura Securities Analyst
Thanks, guys. Just a couple more questions on the store closings. I know you havent closed
many yet this year but Im wondering if youve looked to see if nearby stores are getting a bump
from those stores closing. Also, how many of the stores are at lease expiration, the ones you plan
to close this year? And then last, is there any near term negative impact on the gross margin line
in 4Q as you clear merchandise in closing those stores? Thanks.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hi, Paul. On the first question, its something we will be looking at as we close these
stores. But as you say weve only closed a few so far but well certainly be tracking what happens
as we close the balance through the next couple of months to see what happens in terms of
transferring business. And well also, by the way, be trying to do some things to help that process
as we close the stores. There will probably be some modest incremental markdowns associated with
store closures but not particularly significant in the overall scheme. And the vast majority of the
stores that are closing are by way of natural lease expirations this year. Maybe not the vast
majority but certainly the majority. There are a few buyouts and early closures included in the
total.
Operator
Well go next to Robert Samuels with Phoenix Partners.
Robert Samuels Phoenix Partners Analyst
Hi, good morning, guys. Can you just elaborate a little bit more on the international
Hollister stores and what differences youre seeing, if any, by location and country?
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
By location. The business is pretty uniformly strong. The one thing I can say thats
interesting about our business is that I think, as many of you have noticed, more and more of our
stores are requiring crowd control.
Operator
Well go next to Dorothy Lakner with Caris & Company.
Dorothy Lakner Caris & Company Analyst
I wanted to come back for a second just to the product cost issue because, obviously, over the
last year, youve been working really hard to get your average unit costs down, and Im wondering
if theres more room to go there. In other words, are there certain things that will help you in
2011 offset things like the increasing cotton prices and so forth?
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
I think the answer to that, Dorothy, is youre very smart to know how hard we have worked at
that. We will continue to do those things that will help us with AUC, and those things involve
purchasing fabric for cross-branding, things that dont involve taking quality out of the product.
Were, in fact, getting better at cross-branding of fabric and bundling of like items and well
continue to do that, and that should give us benefits. But we do have headwind in terms of cotton
and labor prices.
Operator
Well go next to Richard Jaffe with Stifel Nicolaus.
Richard Jaffe Stifel Nicolaus Analyst
Thanks very much guys. A follow on, on Hollister. Given success in the European community, has
your vision for Hollister expanded beyond that community? And are there things that youve learned
in Europe that can be brought to the United States?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hey, Richard. Yes, were certainly looking at countries outside of Europe for future Hollister
expansion. I think well incrementally give more color on the specifics of that as we go forward,
but certainly were looking beyond Europe both for A&F and for Hollister.
Operator
Well go next to Lorraine Hutchinson with Bank of America Merrill Lynch.
Lorraine Hutchinson BofA Merrill Lynch Analyst
Thank you, good morning. Just a question on the real estate. As you try to accelerate the
Hollister openings in 2011 and 2012, can you talk a little about the availability and pricing of
the deals that youre getting and perhaps how many leases youve secured for next year at this
stage?
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
Jonathan, do you want to take that?
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Sure. I think with regard to specifics on number of stores next year, well be clearer on that
coming into 11. Were still working through that, as Mike alluded to earlier, putting a lot of
effort to getting that closed down, so well be more specific on numbers of 2011 openings in
February. In terms of rents, frankly, they vary significantly from country to country. They are
certainly in somewhere like the UK or Germany running significantly higher per square foot than
they do domestically but that makes sense given the much higher volumes we see. I think the key
point for us is that when we open a store, we focus on that four wall margin and that we can
generate a sales volume that enables us to cover that rent and all the other expenses and still
generate that four wall margin of 30% or hopefully better. And thats really the single critical
factor that we focus on in each of these new deals.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
With a conservative sales estimate.
Operator
Well go next to Linda Tsai with MKM Partners.
Linda Tsai MKM Partners Analyst
Yes, good morning. Your comments about the mid single digit increase over the next two years,
what are the components of that? Specifically, how do you expect average unit retail to trend over
the next few quarters?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Linda, as weve said, we see domestic AURs turning the corner coming into 2011. The increasing
international component of the business helps from a mix standpoint as does the closure of
underperforming, high markdown domestic stores. I think beyond the first half of 2011, certainly a
component beyond that will be what we see continuing to happen on the cost front. But generally
speaking, we expect to be in positive territory going forward on AURs, and exactly how that plays
out quarter by quarter, I think well see and give clearer guidance on as we go forward. But
overall, in terms of getting to those mid single digit comps the premise is certainly that AURs
turn positive as opposed to continuing to decline.
Operator
Well go next to Edward Yruma with KeyBanc.
Edward Yruma Keybanc Capital Markets Analyst
Hi, thanks very much for taking my question. Can you talk a little bit about pricing youre
seeing out of your competitors, and if, in fact, youre seeing competitive response to some of the
more significant pricing actions youve taken over the past couple months? Thank you.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
We dont really look at the business that way, Ed. We aggressively have been driving our
business. I cant really answer that question.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
I think the only thing I would add or say is that the strongest correlation we see is how we
plan our own business, not with what others are doing, and we saw that in the third quarter. We
were extremely close to what we planned for the business in terms of comps in particular, and I
think we feel more and more comfortable going forward about our ability to have clearer visibility
on the trend of the business, and that what were planning is the single most important determinant
of how we end each quarter.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Operator
Well go next to Roxanne Meyer with UBS.
Roxanne Meyer UBS Analyst
Great. Thank you. Good morning. Im wondering when you mentioned your long term gross margin
goal of 67%, can you tell us what that assumes about where the US business can get to over time?
And then separately, can you just remind us if theres any average unit costing opportunities still
in the fourth quarter? Thank you.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
On the second part, there is we continue to get average unit cost benefit in the fourth
quarter year-over-year. Its a little less than the third quarter which was less than the spring so
year-over-year its abating as we go through the year. In terms of the long term gross margin goal,
to be at that level, and in general to be back at that 15% operating margin level, domestic margins
would be south of 15%, with international margins being a good bit north of that. So we would not
be back at our historic peaks for the domestic business by any means to be back at that overall 15%
operating margin goal.
Operator
Well go next to Jennifer Black with Jennifer Black & Associates.
Jennifer Black Jennifer Black & Associates Analyst
Good morning and let me add my congratulations. Your accessories look great and it looks like
youve increased the penetration, especially at the Abercrombie division. And I wondered, if thats
the case, what are your thoughts about it going forward? And then within accessories, can you talk
a little bit about the fragrance business? I know thats a really big opportunity for you. Thanks a
lot.
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
Thanks, Jennifer. The fragrance business does offer us huge opportunity, as weve said. Fierce
is currently this year, I think, going to be an $88 million business and we dont have a female
equivalent. So if we could just come up with that we would have a lot of business. In regard to the
rest of accessories, were pushing, were seeing success in male and female accessories as of this
moment, but we have a long way to go.
Operator
Well go next to David Glick with Buckingham Research.
David Glick Buckingham Research Analyst
Good morning. Just a follow-up on Gilly Hicks. I know that its premature to talk about the
extent of the opportunity but I was just curious, Mike, how you look at the US versus Europe.
Clearly the US potentially a bigger market. The competitive landscape seems a little more devoid of
competition in Europe, and Im wondering if you see that as perhaps a faster rollout in that region
versus the US?
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
David, I dont really know. We havent opened a European store. We will at the end of this
month. It is possible that Gilly has the same potential as Hollister in terms of worldwide
locations but were taking it very easy and were looking at it in a very hard way.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Operator
Well go next to Robin Murchison with SunTrust.
Robin Murchison SunTrust Robinson Humphrey Analyst
Thanks very much. Congratulations, guys. If you could just remind me please of the split this
year air versus ocean, and if you expect it to remain the same for the outyear, for next year.
Thank you.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Hey, Robin. Air versus ocean has been down. Weve been boating much more this year than we
historically did. Im not sure weve given specific percentages but its a relatively low
percentage thats now coming in by air and thats one of the factors thats driven that increase in
inventory in transit. I think going forward, given where air rates are at, well be looking to stay
close to the current mix. There will always be some air, but were seeking to continue to have most
goods coming in by boat.
Operator
Well go next to Stacey Pak with SP Research.
Stacey Pak SP Research Analyst
Hi, thanks. Can you just follow-up on the Q4 gross margin guidance? I just am trying to
understand, if I look at your comparisons, especially going back to 08 versus Q3, it looks an
awful lot easier. And your AUR was really nicely flat in October. So Im still struggling to
understand why the gross margin should be down equivalent to Q3. And am I right, your guidance is
basically implying the Street needs to come down about $0.08? Am I on line there?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Thats certainly not what were saying specifically. I think everyone has their different
models. A couple of points there, Stacey. Firstly, average unit cost, as I said a second ago, is
moderating in terms of the year-over-year benefit were getting in the fourth quarter. So we do
expect year-over-year AUR declines to also moderate but the two things are moderating together. And
I think, as weve said in the past, you cant read too much into one month. So October AUR was
pretty much flat but were not saying that any given month is indicative of what were going to be
seeing for the balance of the season. So we do expect AURs to continue to be down in the fourth
quarter and the reason why the gross margin is roughly equivalent is because the AUC, the benefit
were getting year-over-year is less than it was a year ago, as well as a couple other minor
factors year-over-year in some of the other gross margin components.
Operator
Well go next to Adrienne Tennant with Janney Capital Markets.
Adrienne Tennant Janney Capital Markets Analyst
Hi, Mike. Hi, Jonathan. It looks like the strategies are really starting to take shape so
congratulations on that. My first question, Mike, is for you. You sort of touched on the fact that
the stores in Europe and Asia performed similarly. Can you talk about the customer buying behavior?
And the success that youve had in Japan, does that open the door to go into China? What would need
to happen to move into China and Hong Kong? Thanks.
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Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
Mike Jeffries Abercrombie & Fitch Co. Chairman & CEO
First answer is that our stores respond very much the same around the world. We sell the same
product, we offer the same environment, experience, all of what we bring to the retail experience.
I think the difference is theres just a different level of volume. So we offer the same experience
in the US as Europe, we just are doing more business on a store by store basis in Europe, on an
average store basis in Europe than we are in the US today. But the product break down in terms of
what we sell by store, the percentage is basically the same.
The second part of your question, what would it take for us to announce that were going to China,
I think Jonathan has said we are making no announcements at this point. But we have very strong
belief that what is happening in Hollister and A&F around the world can be duplicated in many
places.
Operator
Well go next to Linda McDonough with Waterloo Advisors.
Linda McDonough Waterloo Advisors Analyst
I had two questions. I wondered if you could quantify the FX impact in the quarter and also
the lower depreciation that you had mentioned?
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Yes, hi, Linda. The FX impact year-over-year for the quarter was slightly negative, I think
less than 1% of sales adverse effect year-over-year. It was slightly better than we had budgeted
based on where the rates moved from the beginning of the quarter. And the second part of the
question was lower depreciation. There were some assets that we thought would potentially go out of
service during the quarter which didnt and that was the primary reason for that reduction.
Operator
That does conclude todays conference. Thank you everyone for your participation.
Jonathan Ramsden Abercrombie & Fitch Co. EVP & CFO
Thank you.
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Final Transcript
Nov 16, 2010 / 01:30PM GMT, ANF Q3 2010 Abercrombie & Fitch Co. Earnings Conference Call
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