UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 28, 2014
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| | | | |
| | ABERCROMBIE & FITCH CO. | | |
| | (Exact name of registrant as specified in its charter) | | |
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| | | | |
Delaware | | 1-12107 | | 31-1469076 |
(State or other jurisdiction of incorporation) | | (Commission File Number) | | (IRS Employer Identification No.) |
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| | | | |
| | 6301 Fitch Path, New Albany, Ohio 43054 | | |
| | (Address of principal executive offices) (Zip Code) | | |
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| | | | |
| | (614) 283-6500 | | |
| | (Registrant's telephone number, including area code) | | |
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| | | | |
| | Not Applicable | | |
| | (Former name or former address, if changed since last report) | | |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition.
On August 28, 2014, Abercrombie & Fitch Co. (the “Registrant”) issued a press release (the “Release”) reporting the Registrant's unaudited financial results for the thirteen weeks (quarterly period) and twenty-six weeks (year-to-date period) ended August 2, 2014. A copy of the Release is included as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference. The Release contains non-GAAP financial measures reflecting adjustments to the Registrant's net income and net income per diluted share for the thirteen and twenty-six week periods (quarterly and year-to-date periods) ended August 2, 2014 and August 3, 2013. A reconciliation between the relevant GAAP financial measures and the non-GAAP financial measures is contained in the Release. As used herein, "GAAP" refers to accounting principles generally accepted in the United States of America.
The Registrant also made available in conjunction with the Release additional unaudited quarterly financial information as of and for the quarterly periods for Fiscal 2013 and 2014. Additional financial information was made available for the fiscal years ended February, 1, 2014, February 2, 2013, January 28, 2012 and January 29, 2011. The additional financial information is furnished as Exhibit 99.2 to this Current Report on Form 8-K and is incorporated herein by reference.
The Registrant also made available in conjunction with the Release an investor presentation of results for the quarterly period ended August 2, 2014. The presentation, which is available under the “Investor Presentations” tab in the “Investors” section of the Registrant's website, located at www.abercrombie.com, is furnished as Exhibit 99.3 to this Current Report on Form 8-K and is incorporated herein by reference.
The Registrant's management conducted a conference call on August 28, 2014 at approximately 8:30 a.m., Eastern Daylight Saving Time, to review the Registrant's financial results for the thirteen-week period ended August 2, 2014. A copy of the transcript of the conference call is furnished as Exhibit 99.4 to this Current Report on Form 8-K and is incorporated herein by reference.
Item 8.01. Other Events.
In the Release, the Registrant also announced that the Board of Directors of the Registrant had declared a quarterly cash dividend of $0.20 per share in respect of the Registrant's Class A Common Stock. The dividend was declared on August 20, 2014 and is payable on September 10, 2014 to shareholders of record at the close of business on September 2, 2014.
Item 9.01. Financial Statements and Exhibits.
(a) through (c) Not applicable
(d) Exhibits:
The following exhibits are included with this Current Report on Form 8-K:
Exhibit No. Description
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99.1 | Press Release issued by Abercrombie & Fitch Co. on August 28, 2014 |
| |
99.2 | Additional Unaudited Quarterly and Fiscal Year Financial Information made available by Abercrombie & Fitch Co. in conjunction with the Press Release on August 28, 2014 |
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99.3 | Investor presentation of results for the quarterly period ended August 2, 2014 made available by Abercrombie & Fitch Co. with the Press Release issued on August 28, 2014 |
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99.4 | Transcript of conference call held by management of Abercrombie & Fitch Co. on August 28, 2014 |
[Remainder of page intentionally left blank; signature page follows]
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| ABERCROMBIE & FITCH CO. |
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Dated: August 28, 2014 | By: /s/ Joanne C. Crevoiserat |
| Joanne C. Crevoiserat |
| Executive Vice President - Finance and Chief Financial Officer |
INDEX TO EXHIBITS
Exhibit No. Description
| |
99.1 | Press Release issued by Abercrombie & Fitch Co. on August 28, 2014 |
| |
99.2 | Additional Unaudited Quarterly and Fiscal Year Financial Information made available by Abercrombie & Fitch Co. in conjunction with the Press Release on August 28, 2014 |
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99.3 | Investor presentation of results for the quarterly period ended August 2, 2014 made available by Abercrombie & Fitch Co. with the Press Release issued on August 28, 2014 |
| |
99.4 | Transcript of conference call held by management of Abercrombie & Fitch Co. on August 28, 2014 |
ABERCROMBIE & FITCH REPORTS SECOND QUARTER RESULTS
New Albany, Ohio, August 28, 2014: Abercrombie & Fitch Co. (NYSE: ANF) today reported unaudited financial results that reflected GAAP net income of $12.9 million and net income per diluted share of $0.17 for the thirteen weeks ended August 2, 2014, compared to GAAP net income of $11.4 million and net income per diluted share of $0.14 for the thirteen weeks ended August 3, 2013.
Excluding certain charges, the Company reported adjusted non-GAAP net income of $14.1 million and adjusted non-GAAP net income per diluted share of $0.19 for the second quarter compared to adjusted non-GAAP net income of $13.0 million and adjusted non-GAAP net income per diluted share of $0.16 for the second quarter of last year.
A reconciliation of the GAAP financial measures to the non-GAAP financial measures is included in a table accompanying the consolidated financial statements with this release. As used in the release, "GAAP" refers to accounting principles generally accepted in the United States of America.
Mike Jeffries, Chief Executive Officer, said:
"In the past quarter, we believe we have made great progress in evolving the fashion component of our assortment, and this progress is clearly evident in our Back-to-School presentation. In a continued challenging environment, our sales for the second quarter were somewhat below plan, but we have seen modest improvement since the Back-to-School floorset. We are confident that the evolution of our assortment will drive further improvements going forward, in particular as we move past the headwind of adverse likes in our logo business as we work to strategically reduce that element in our assortment.
Despite the challenging conditions, we were able to exceed our earnings expectations coming into the quarter through continued excellent progress on our profit improvement initiative. We remain highly focused on returning to top-line growth and driving long-term value for our shareholders."
Second Quarter Sales Results
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| | | | | | | | | | | |
| | | | | Comparable Sales |
($ in millions) | Net Sales | | % Change | | Stores | | Direct-to-Consumer | | Total |
U.S. | $ | 546 |
| | (9)% | | (8)% | | 5% | | (5)% |
International | $ | 345 |
| | (1)% | | (16)% | | 21% | | (9)% |
Total Company | $ | 891 |
| | (6)% | | (11)% | | 11% | | (7)% |
U.S. comparable store sales for the second quarter showed slight sequential improvement, while International comparable store sales for the second quarter sequentially declined, particularly in Europe. Direct-to-Consumer comparable sales were positive in the second quarter, but by a lower percentage than in the first quarter.
Net sales by brand for the second quarter were $349.6 million for Abercrombie & Fitch, $70.9 million for abercrombie kids and $464.6 million for Hollister Co. Comparable sales by brand, including direct-to-consumer, decreased 1% for Abercrombie & Fitch, decreased 6% for abercrombie kids, and decreased 10% for Hollister Co.
Additional Second Quarter Results Commentary
The gross profit rate for the second quarter was 62.1%, 180 basis points lower than last year, reflecting an increase in promotional activity.
Stores and distribution expense for the second quarter was $426.3 million, down from $471.7 million last year. Stores and Distribution expense for the quarter included $1.2 million of charges related to the profit improvement initiative. The stores and distribution expense rate for the quarter was 47.9% of net sales, down 200 basis points from last year, driven primarily by savings in store payroll partially offset by higher direct-to-consumer expense.
Marketing, general and administrative expense for the second quarter was $111.0 million, a 6% decrease compared to $117.6 million last year. Marketing, general and administrative expense for the quarter included $0.7 million of charges related to the profit improvement initiative. The decline was primarily due to a reduction in compensation expense, partially offset by an increase in marketing expense.
Net other operating income was $4.3 million for the second quarter, compared to $4.4 million last year, both of which included insurance recoveries.
The effective tax rate for the second quarter was 26.3% compared to 34.7% for last year. On an adjusted non-GAAP basis, the effective tax rate for the second quarter was 29.2%.
The Company ended the second quarter with $550 million in inventory at cost, a decrease of 13% versus the prior year.
During the second quarter, the Company repurchased 1.5 million shares of its common stock at an aggregate cost of $60 million. As of August 2, 2014, the Company had approximately 11.0 million shares remaining available for purchase under its publicly announced stock repurchase authorizations.
The Company ended the second quarter with $311 million in cash and cash equivalents and borrowings of $188 million, compared to $335 million in cash and cash equivalents and borrowings of $143 million last year.
A summary of store openings and closings for the second quarter is included with the financial statement schedules following this release.
Other Developments
On August 7, 2014, the Company, completed the previously announced refinancing of its credit facilities. The new credit facilities consist of a $400 million Asset-Based Revolving Credit Facility, subject to a borrowing base, and a $300 million Term Loan Facility. A portion of the proceeds from the new Term Loan Facility were used to repay the outstanding balance of approximately $128 million under the previously existing Term Loan Facility, to repay outstanding borrowings of $60 million under the existing Revolving Credit Facility, and to pay related fees and expenses associated with the transaction. The balance of the proceeds will be used for working capital and general corporate purposes, including potential share repurchases in accordance with the Company’s previously announced stock repurchase authorizations. As of August 7, 2014, the Asset-Based Revolving Credit Facility had not been drawn upon.
As previously announced, on August 20, 2014, the Board of Directors declared a quarterly cash dividend of $0.20 per share on the Class A Common Stock of Abercrombie & Fitch Co., payable on September 10, 2014 to stockholders of record at the close of business on September 2, 2014.
Outlook
The Company continues to expect full year diluted earnings per share in the range of $2.15 to $2.35. The guidance is based on the assumption that full year comparable sales will be down by a mid-single-digit percentage.
The guidance also assumes a gross margin rate for the full year that is down slightly compared to Fiscal 2013, with
average unit retail pressure and lower shipping and handling revenues partially offset by average unit cost improvement. In addition, the guidance includes an increase in interest expense associated with the refinancing of the Company's credit facilities, and a full year effective tax rate in the mid 30's, which remains sensitive to the mix between international and domestic income.
The above guidance does not include charges related to the Gilly Hicks brand restructuring, the Company's profit improvement initiative, certain corporate governance matters, other potential impairment and store closure charges, or the effect of additional share repurchases.
The Company now anticipates opening a total of 14 full-price international stores throughout the year, including 8 Hollister stores and 5 Abercrombie & Fitch stores. The Company also plans to open approximately 8 to 10 international and U.S. outlet stores during the fiscal year. In addition, the Company now expects to close approximately 60 stores in the U.S. during the fiscal year through natural lease expirations.
The Company continues to expect total capital expenditures for the fiscal year to be approximately $210 million to $220 million.
An investor presentation of second quarter results will be available in the "Investors" section of the Company's website at www.abercrombie.com at approximately 8:00 AM, Eastern Daylight Saving Time, today.
About Abercrombie & Fitch Co.
Abercrombie & Fitch Co. is a leading global specialty retailer of high-quality, casual apparel for Men, Women and kids with an active, youthful lifestyle under its Abercrombie & Fitch, abercrombie, Hollister Co. and Gilly Hicks brands. At the end of the second quarter, the Company operated 836 stores in the United States and 161 stores across Canada, Europe, Asia, Australia and the Middle East. The Company also operates e-commerce websites at www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com and www.gillyhicks.com.
Today at 8:30 AM, Eastern Daylight Saving Time, the Company will conduct a conference call. Management will discuss the Company's performance and its plans for the future and will accept questions from participants. To listen to the conference call, dial (877) 741-4240 and ask for the Abercrombie & Fitch Quarterly Call or go to www.abercrombie.com. The international call-in number is (719) 325-4920. This call will be recorded and made available by dialing the replay number (888) 203-1112 or the international number (719) 457-0820 followed by the conference ID number 7867881 or through www.abercrombie.com.
Investor Contact:
ICR, Inc.
(203) 682-8275
Brian Logan
Abercrombie & Fitch
(614) 283-6877
Investor_Relations@abercrombie.com
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
A&F cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Press Release or made by management or spokespeople of A&F involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we assume no obligation to publicly update or revise our forward-looking statements. The following factors, in addition to those included in the disclosure under the heading "FORWARD-LOOKING STATEMENTS AND RISK FACTORS" in "ITEM 1A. RISK FACTORS" of A&F's Annual Report on Form 10-K for the fiscal year ended February 1, 2014, in some cases have affected and in the future could affect the Company's financial performance and could cause actual results for Fiscal 2014 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Press Release or otherwise made by management: changes in economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, could have a material adverse effect on our business, results of operations and liquidity; changing fashion trends and consumer preferences, and the ability to manage our inventory commensurate with customer demand, could adversely impact our sales levels and profitability; fluctuations in the cost, availability and quality of raw materials, labor and transportation, could cause manufacturing delays and increase our costs; a significant component of our growth strategy is international expansion, which requires significant capital investment, adds complexity to our operations and may strain our resources and adversely impact current store performance; our international expansion plan is dependent on a number of factors, any of which could delay or prevent successful penetration into new markets or could adversely affect the profitability of our international operations; we have increased the focus of our growth strategy on direct-to-consumer sales channels and the failure to successfully develop our position in these channels could have an adverse impact on our results of operations; our direct-to-consumer operations are subject to numerous risks that could adversely impact sales, failure to successfully implement certain growth initiatives may have a material adverse effect on our financial condition or results of operations; fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations; our business could suffer if our information technology systems are disrupted or cease to operate effectively; comparable sales, including direct-to-consumer, may continue to fluctuate on a regular basis and impact the volatility of the price of our Common Stock; extreme weather conditions may negatively impact our results of operations; our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours; our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions in which most of our stores are located; our net sales fluctuate on a seasonal basis, causing our results of operations to be susceptible to changes in Back-to-School and Holiday shopping patterns; our failure to protect our reputation could have a material adverse effect on our brands; we rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business; interruption in the flow of merchandise from our key vendors and international manufacturers could disrupt our supply chain, which could result in lost sales and increased costs; in a number of our European stores, associates are represented by workers’ councils and unions, whose demands could adversely affect our profitability or operating standards for our brands; we depend upon independent third parties for the manufacture and delivery of all our merchandise; our reliance on two distribution centers domestically and four third-party distribution centers internationally makes us susceptible to disruptions or adverse conditions affecting our distribution centers; we rely on third-party vendors as well as other third-party arrangements for many aspects of our business and the failure to successfully manage these relationships could negatively impact our results of operations or expose us to liability for the actions of third-party vendors acting on our behalf; we may be exposed to risks and costs associated with credit card fraud and identity theft that would cause us to incur unexpected expenses and loss of revenues; our facilities, systems and stores, as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters, pandemic disease and other unexpected events, any of which could result in an interruption to our business and adversely affect our operating results; our litigation exposure could have a material adverse effect on our financial condition and results of operations; our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets; actions of activist stockholders could have a negative effect on our business; fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results; the effects of war or acts of terrorism could have a material adverse effect on our operating results and financial condition; our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-insured exposures might increase our expenses and adversely impact our financial results; operating results and cash flows at the store level may cause us to incur impairment charges; we are subject to customs, advertising, consumer protection, privacy, zoning and occupancy and labor and employment laws that could require us to modify our current business practices, incur increased costs or harm our reputation if we do not comply; changes in the regulatory or compliance landscape could adversely affect our business and results of operations; our asset-based revolving credit facility and our Term Loan Facility include financial and other covenants that impose restrictions on our financial and business operations; compliance with changing regulations and standards for accounting, corporate governance and public disclosure could adversely affect our business, results of operations and reported financial results; our inability to successfully implement our long-range strategic plan could have a negative impact on our growth and profitability and our estimates of the expenses that we may incur in connection with the closures of the Gilly Hicks stores could prove to be inaccurate.
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Abercrombie & Fitch Co. |
Consolidated Statements of Operations |
(in thousands, except per share data) |
| | | | | | | |
| Thirteen Weeks Ended | | Thirteen Weeks Ended |
| August 2, 2014 | | % of Net Sales | | August 3, 2013 | | % of Net Sales |
| (Unaudited) | | (Unaudited) |
Net Sales | $ | 890,605 |
| | 100.0 | % | | $ | 945,698 |
| | 100.0 | % |
Cost of Goods Sold | 337,649 |
| | 37.9 | % | | 341,576 |
| | 36.1 | % |
Gross Profit | 552,956 |
| | 62.1 | % | | 604,122 |
| | 63.9 | % |
Stores and Distribution Expense | 426,301 |
| | 47.9 | % | | 471,722 |
| | 49.9 | % |
Marketing, General and Administrative Expense | 111,033 |
| | 12.5 | % | | 117,646 |
| | 12.4 | % |
Restructuring Charges | 419 |
| | 0.0 | % | | — |
| | — | % |
Other Operating Income, Net | (4,290 | ) | | (0.5 | )% | | (4,411 | ) | | (0.4 | )% |
Operating Income (Loss) | 19,493 |
| | 2.2 | % | | 19,165 |
| | 2.0 | % |
Interest (Income) Expense, Net | 2,020 |
| | 0.2 | % | | 1,750 |
| | 0.2 | % |
Income (Loss) Before Taxes | 17,473 |
| | 2.0 | % | | 17,415 |
| | 1.8 | % |
Tax Expense (Benefit) | 4,596 |
| | 0.6 | % | | 6,045 |
| | 0.6 | % |
Net Income (Loss) | $ | 12,877 |
| | 1.4 | % | | $ | 11,370 |
| | 1.2 | % |
| | | | | | | |
Net Income (Loss) Per Share: | | | | | | | |
Basic | $ | 0.18 |
| | | | $ | 0.15 |
| | |
Diluted | $ | 0.17 |
| | | | $ | 0.14 |
| | |
| | | | | | | |
Weighted-Average Shares Outstanding: | | | | | | | |
Basic | 72,436 |
| | | | 77,382 |
| | |
Diluted | 73,756 |
| | | | 79,267 |
| | |
|
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Abercrombie & Fitch Co. |
Consolidated Statements of Operations |
(in thousands, except per share data) |
| | | | | | | |
| Twenty-Six Weeks Ended | | Twenty-Six Weeks Ended |
| August 2, 2014 | | % of Net Sales | | August 3, 2013 | | % of Net Sales |
| (Unaudited) | | (Unaudited) |
Net Sales | $ | 1,713,033 |
| | 100.0 | % | | $ | 1,784,467 |
| | 100.0 | % |
Cost of Goods Sold | 648,418 |
| | 37.9 | % | | 627,178 |
| | 35.1 | % |
Gross Profit | 1,064,615 |
| | 62.1 | % | | 1,157,289 |
| | 64.9 | % |
Stores and Distribution Expense | 843,872 |
| | 49.2 | % | | 920,848 |
| | 51.6 | % |
Marketing, General and Administrative Expense | 234,614 |
| | 13.7 | % | | 236,425 |
| | 13.2 | % |
Restructuring Charges | 6,052 |
| | 0.4 | % | | — |
| | — | % |
Other Operating Income, Net | (7,910 | ) | | (0.5 | )% | | (5,228 | ) | | (0.2 | )% |
Operating Income (Loss) | (12,013 | ) | | (0.7 | )% | | 5,244 |
| | 0.3 | % |
Interest (Income) Expense, Net | 4,017 |
| | 0.2 | % | | 3,378 |
| | 0.2 | % |
Income (Loss) Before Taxes | (16,030 | ) | | (0.9 | )% | | 1,866 |
| | 0.1 | % |
Tax Expense (Benefit) | (5,236 | ) | | (0.3 | )% | | (2,301 | ) | | (0.1 | )% |
Net Income (Loss) | $ | (10,794 | ) | | (0.6 | )% | | $ | 4,167 |
| | 0.2 | % |
| | | | | | | |
Net Income (Loss) Per Share: | | | | | | | |
Basic | $ | (0.15 | ) | | | | $ | 0.05 |
| | |
Diluted | $ | (0.15 | ) | | | | $ | 0.05 |
| | |
| | | | | | | |
Weighted-Average Shares Outstanding: | | | | | | | |
Basic | 73,459 |
| | | | 77,853 |
| | |
Diluted | 73,459 |
| | | | 79,709 |
| | |
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| | | | | | | | | | | |
Abercrombie & Fitch Co. |
Consolidated Balance Sheets |
(in thousands) |
|
| August 2, 2014 | | February 1, 2014 | | August 3, 2013 |
|
ASSETS | (Unaudited) | | | | (Unaudited) |
Current Assets | | | | | |
Cash and Equivalents | $ | 310,740 |
| | $ | 600,116 |
| | $ | 335,023 |
|
Receivables | 75,679 |
| | 67,965 |
| | 92,886 |
|
Inventories | 550,227 |
| | 530,192 |
| | 633,483 |
|
Deferred Income Taxes | 26,464 |
| | 21,835 |
| | 47,057 |
|
Other Current Assets | 105,983 |
| | 100,458 |
| | 107,621 |
|
Total Current Assets | 1,069,093 |
| | 1,320,566 |
| | 1,216,070 |
|
Property and Equipment, Net | 1,098,240 |
| | 1,131,341 |
| | 1,252,841 |
|
Other Assets | 395,843 |
| | 399,090 |
| | 373,932 |
|
TOTAL ASSETS | $ | 2,563,176 |
| | $ | 2,850,997 |
| | $ | 2,842,843 |
|
| | | | | |
| | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current Liabilities | | | | | |
Accounts Payable and Outstanding Checks | $ | 160,280 |
| | $ | 130,715 |
| | $ | 195,728 |
|
Accrued Expenses | 277,592 |
| | 322,834 |
| | 291,772 |
|
Deferred Lease Credits | 31,397 |
| | 36,165 |
| | 36,994 |
|
Short-Term Portion of Borrowings | 75,000 |
| | 15,000 |
| | 15,000 |
|
Income Taxes Payable | 14,955 |
| | 63,508 |
| | 39,733 |
|
Total Current Liabilities | 559,224 |
| | 568,222 |
| | 579,227 |
|
Long-Term Liabilities |
| | | | |
Deferred Lease Credits | $ | 128,678 |
| | $ | 140,799 |
| | $ | 157,956 |
|
Leasehold Financing Obligations | 59,937 |
| | 60,726 |
| | 61,126 |
|
Long-Term Portion of Borrowings | 112,500 |
| | 120,000 |
| | 127,500 |
|
Other Liabilities | 211,473 |
| | 231,757 |
| | 233,369 |
|
Total Long-Term Liabilities | 512,588 |
| | 553,282 |
| | 579,951 |
|
Total Shareholders' Equity | 1,491,364 |
| | 1,729,493 |
| | 1,683,665 |
|
| | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 2,563,176 |
| | $ | 2,850,997 |
| | $ | 2,842,843 |
|
|
| | | | | | | | | | | | | | | |
Abercrombie & Fitch Co. |
Schedule of Non-GAAP Financial Measures |
Thirteen-Week Period Ended August 2, 2014 |
(in thousands, except per share data) |
(Unaudited) |
| | | | | | | |
| GAAP | | Excluded Charges (1) | | Prior Period Excluded Charges(2) | | Adjusted Non-GAAP (3) |
Income (Loss) Before Taxes | $ | 17,473 |
| | $ | 2,383 |
| | $ | — |
| | $ | 19,856 |
|
| | | | | | | |
Tax Expense (Benefit) | 4,596 |
| | 788 |
| | 410 |
| | 5,794 |
|
| | | | | | | |
Net Income (Loss) | $ | 12,877 |
| | $ | 1,595 |
| | $ | (410 | ) | | $ | 14,062 |
|
| | | | | | | |
Net Income (Loss) Per Diluted Share: | $ | 0.17 |
| | | | | | $ | 0.19 |
|
| | | | | | | |
Diluted Weighted-Average Shares Outstanding: | 73,756 |
| | | | | | 73,756 |
|
(1) Excluded charges for the second quarter include pre-tax charges of $2.0 million related to the Company's profit improvement initiative and $0.4 million related to restructuring of the Gilly Hicks brand.
(2) Relates to prior period excluded charges, in the first quarter, for a benefit in the effective tax rate primarily as a result of the application of the estimated full year tax rate to the year-to-date results.
(3) Non-GAAP financial measures should not be used as alternatives to net income and net income per diluted share and are also not intended to supersede or replace the Company's GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company's operating performance.
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| | | | | | | | | | | |
Abercrombie & Fitch Co. |
Schedule of Non-GAAP Financial Measures |
Twenty-Six Week Period Ended August 2, 2014 |
(in thousands, except per share data) |
(Unaudited) |
| | | | | |
| GAAP | | Excluded Charges(1) | | Adjusted Non-GAAP (2) |
Income (Loss) Before Taxes | $ | (16,030 | ) | | $ | 17,981 |
| | $ | 1,951 |
|
| | | | | |
Tax Expense (Benefit) | (5,236 | ) | | 6,104 |
| | 868 |
|
| | | | | |
Net Income (Loss) | $ | (10,794 | ) | | $ | 11,877 |
| | $ | 1,083 |
|
| | | | | |
Net Income (Loss) Per Diluted Share: | $ | (0.15 | ) | | | | $ | 0.01 |
|
| | | | | |
Diluted Weighted-Average Shares Outstanding: | 73,459 |
| | | | 74,741 |
|
(1) Excluded charges for the year-to-date period, include pre-tax charges of $6.9 million for legal, advisory and other charges related to certain corporate governance matters, $6.1 million related to restructuring of the Gilly Hicks brand, and $5.0 million related to the Company's profit improvement initiative.
(2) Non-GAAP financial measures should not be used as alternatives to net income (loss) and net income (loss) per diluted share and are also not intended to supersede or replace the Company's GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company's operating performance.
|
| | | | | | | | | | | |
Abercrombie & Fitch Co. |
Schedule of Non-GAAP Financial Measures |
Thirteen-Week Period Ended August 3, 2013 |
(in thousands, except per share data) |
(Unaudited) |
| | | | | |
| GAAP | | Excluded Charges (1) | | Adjusted Non-GAAP (2) |
Income (Loss) Before Taxes | $ | 17,415 |
| | $ | 2,575 |
| | $ | 19,990 |
|
| | | | | |
Tax Expense (Benefit) | 6,045 |
| | 930 |
| | 6,975 |
|
| | | | | |
Net Income (Loss) | $ | 11,370 |
| | $ | 1,645 |
| | $ | 13,015 |
|
| | | | | |
Net Income (Loss) Per Diluted Share: | $ | 0.14 |
| | | | $ | 0.16 |
|
| | | | | |
Diluted Weighted-Average Shares Outstanding: | 79,267 |
| | | | 79,267 |
|
(1) Excluded charges for the second quarter include pre-tax charges of $2.6 million related to the Company's profit improvement initiative.
(2) Non-GAAP financial measures should not be used as alternatives to net income and net income per diluted share and are also not intended to supersede or replace the Company's GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company's operating performance.
|
| | | | | | | | | | | |
Abercrombie & Fitch Co. |
Schedule of Non-GAAP Financial Measures |
Twenty-Six Week Period Ended August 3, 2013 |
(in thousands, except per share data) |
(Unaudited) |
| | | | | |
| GAAP | | Excluded Charges(1) | | Adjusted Non-GAAP (2) |
Income (Loss) Before Taxes | $ | 1,866 |
| | $ | 2,575 |
| | $ | 4,441 |
|
| | | | | |
Tax Expense (Benefit) | (2,301 | ) | | 930 |
| | (1,371 | ) |
| | | | | |
Net Income (Loss) | $ | 4,167 |
| | $ | 1,645 |
| | $ | 5,812 |
|
| | | | | |
Net Income (Loss) Per Diluted Share: | $ | 0.05 |
| | | | $ | 0.07 |
|
| | | | | |
Diluted Weighted-Average Shares Outstanding: | 79,709 |
| | | | 79,709 |
|
(1) Excluded charges for the year-to-date period, include pre-tax charges of $2.6 million related to the Company's profit improvement initiative.
(2) Non-GAAP financial measures should not be used as alternatives to net income (loss) and net income (loss) per diluted share and are also not intended to supersede or replace the Company's GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company's operating performance.
|
| | | | | | | | | | | | | | | | |
Abercrombie & Fitch Co. |
U.S. Store Count |
(Unaudited) |
Thirteen-Week Period Ended August 2, 2014 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Store Activity | | Abercrombie & Fitch | | abercrombie | | Hollister | | Gilly Hicks | | Total | |
| | | | | | | | | | | |
May 3, 2014 | | 253 |
| | 131 |
| | 456 |
| | 1 |
| | 841 |
| |
| | | | | | | | | | | |
New | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| |
| | | | | | | | | | | |
Closed | | — |
| | (3 | ) | | (2 | ) | | (1 | ) | | (6 | ) | |
| | | | | | | | | | | |
August 2, 2014 | | 254 |
| | 128 |
| | 454 |
| | — |
| | 836 |
| |
| | | | | | | | | | | |
| | | | | | | | | | | |
Abercrombie & Fitch Co. |
International Store Count |
(Unaudited) |
Thirteen-Week Period Ended August 2, 2014 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Store Activity | | Abercrombie & Fitch | | abercrombie | | Hollister | | Gilly Hicks | | Total | |
| | | | | | | | | | | |
May 3, 2014 | | 23 |
| | 5 |
| | 129 |
| | — |
| | 157 |
| |
| | | | | | | | | | | |
New | | 2 |
| | — |
| | 2 |
| | — |
| | 4 |
| |
| | | | | | | | | | | |
Closed | | — |
| | — |
| | — |
| | — |
| | — |
| |
| | | | | | | | | | | |
August 2, 2014 | | 25 |
| | 5 |
| | 131 |
| | — |
| | 161 |
| |
|
| | | | | | | | | | | | | | | | |
Abercrombie & Fitch Co. |
U.S. Store Count |
(Unaudited) |
Twenty-Six Week Period Ended August 2, 2014 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Store Activity | | Abercrombie & Fitch | | abercrombie | | Hollister | | Gilly Hicks | | Total | |
| | | | | | | | | | | |
February 1, 2014 | | 253 |
| | 131 |
| | 458 |
| | 1 |
| | 843 |
| |
| | | | | | | | | | | |
New | | 1 |
| | 1 |
| | 1 |
| | — |
| | 3 |
| |
| | | | | | | | | | | |
Closed | | — |
| | (4 | ) | | (5 | ) | | (1 | ) | | (10 | ) | |
| | | | | | | | | | | |
August 2, 2014 | | 254 |
| | 128 |
| | 454 |
| | — |
| | 836 |
| |
| | | | | | | | | | | |
| | | | | | | | | | | |
Abercrombie & Fitch Co. |
International Store Count |
(Unaudited) |
Twenty-Six Week Period Ended August 2, 2014 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Store Activity | | Abercrombie & Fitch | | abercrombie | | Hollister | | Gilly Hicks | | Total | |
| | | | | | | | | | | |
February 1, 2014 | | 22 |
| | 5 |
| | 129 |
| | 7 |
| | 163 |
| |
| | | | | | | | | | | |
New | | 3 |
| | — |
| | 2 |
| | — |
| | 5 |
| |
| | | | | | | | | | | |
Closed | | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) | |
| | | | | | | | | | | |
August 2, 2014 | | 25 |
| | 5 |
| | 131 |
| | — |
| | 161 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Abercrombie & Fitch Co. |
Financial Information |
(Unaudited) |
(in thousands, except per share data and store data) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fiscal 2013 | | Fiscal 2014 | | |
| 2010 | | 2011 | | 2012 | | Q1 | | Q2 | | Q3 | | Q4 | | 2013 | | Q1 | | Q2 | | YTD |
| | | | | | | | | | | | | | | | | | | | | |
Net Sales | $ | 3,468,777 |
| | $ | 4,158,058 |
| | $ | 4,510,805 |
| | $ | 838,769 |
| | $ | 945,698 |
| | $ | 1,033,293 |
| | $ | 1,299,137 |
| | $ | 4,116,897 |
| | $ | 822,428 |
| | $ | 890,605 |
| | $ | 1,713,033 |
|
| | | | | | | | | | | | | | | | | | | | | |
Cost of Goods Sold | 1,251,348 |
| | 1,607,834 |
| | 1,694,096 |
| | 285,603 |
| | 341,576 |
| | 382,253 |
| | 532,030 |
| | 1,541,462 |
| | 310,769 |
| | 337,649 |
| | 648,418 |
|
| | | | | | | | | | | | | | | | | | | | | |
Gross Profit | 2,217,429 |
| | 2,550,224 |
| | 2,816,709 |
| | 553,166 |
| | 604,122 |
| | 651,040 |
| | 767,107 |
| | 2,575,435 |
| | 511,659 |
| | 552,956 |
| | 1,064,615 |
|
| | | | | | | | | | | | | | | | | | | | | |
Stores and Distribution Expense | 1,538,870 |
| | 1,820,226 |
| | 1,980,519 |
| | 449,125 |
| | 471,722 |
| | 481,233 |
| | 505,607 |
| | 1,907,687 |
| | 417,571 |
| | 426,301 |
| | 843,872 |
|
| | | | | | | | | | | | | | | | | | | | | |
Marketing, General and Administrative Expense | 400,804 |
| | 437,120 |
| | 473,883 |
| | 118,780 |
| | 117,646 |
| | 126,750 |
| | 118,608 |
| | 481,784 |
| | 123,581 |
| | 111,033 |
| | 234,614 |
|
| | | | | | | | | | | | | | | | | | | | | |
Restructuring Charges | — |
| | — |
| | — |
| | — |
| | — |
| | 44,708 |
| | 36,792 |
| | 81,500 |
| | 5,633 |
| | 419 |
| | 6,052 |
|
| | | | | | | | | | | | | | | | | | | | | |
Asset Impairment Charges | 50,631 |
| | 68,022 |
| | 7,407 |
| | — |
| | — |
| | 43,571 |
| | 3,144 |
| | 46,715 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | |
Other Operating (Income) Expense, Net | (10,056 | ) | | 3,472 |
| | (19,333 | ) | | (818 | ) | | (4,411 | ) | | (9,851 | ) | | (7,994 | ) | | (23,074 | ) | | (3,620 | ) | | (4,290 | ) | | (7,910 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Operating Income (Loss) | 237,180 |
| | 221,384 |
| | 374,233 |
| | (13,921 | ) | | 19,165 |
| | (35,370 | ) | | 110,950 |
| | 80,823 |
| | (31,506 | ) | | 19,493 |
| | (12,013 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Interest (Income) Expense, Net | 3,362 |
| | 3,577 |
| | 7,288 |
| | 1,628 |
| | 1,750 |
| | 1,655 |
| | 2,513 |
| | 7,546 |
| | 1,997 |
| | 2,020 |
| | 4,017 |
|
| | | | | | | | | | | | | | | | | | | | | |
Income (Loss) from Continuing Operations Before Taxes | 233,818 |
| | 217,807 |
| | 366,945 |
| | (15,549 | ) | | 17,415 |
| | (37,025 | ) | | 108,437 |
| | 73,277 |
| | (33,503 | ) | | 17,473 |
| | (16,030 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Tax Expense (Benefit) for Continuing Operations | 78,109 |
| | 74,669 |
| | 129,934 |
| | (8,346 | ) | | 6,045 |
| | (21,381 | ) | | 42,331 |
| | 18,649 |
| | (9,832 | ) | | 4,596 |
| | (5,236 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Income (Loss) from Continuing Operations | 155,709 |
| | 143,138 |
| | 237,011 |
| | (7,203 | ) | | 11,370 |
| | (15,644 | ) | | 66,106 |
| | 54,628 |
| | (23,671 | ) | | 12,877 |
| | (10,794 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Income (Loss) from Discontinued Operations (Net of Taxes) | — |
| | 796 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | |
Net Income (Loss) | $ | 155,709 |
| | $ | 143,934 |
| | $ | 237,011 |
| | $ | (7,203 | ) | | $ | 11,370 |
| | $ | (15,644 | ) | | $ | 66,106 |
| | $ | 54,628 |
| | $ | (23,671 | ) | | $ | 12,877 |
| | $ | (10,794 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fiscal 2013 | | Fiscal 2014 |
| 2010 | | 2011 | | 2012 | | Q1 | | Q2 | | Q3 | | Q4 | | YTD | | Q1 | | Q2 | | YTD |
Net Income (Loss) Per Share from Continuing Operations: | | | | | | | | | | | | | | | | | | | | | |
Basic | $ | 1.77 |
| | $ | 1.65 |
| | $ | 2.89 |
| | $ | (0.09 | ) | | $ | 0.15 |
| | $ | (0.20 | ) | | $ | 0.86 |
| | $ | 0.71 |
| | $ | (0.32 | ) | | $ | 0.18 |
| | $ | (0.15 | ) |
Diluted | $ | 1.73 |
| | $ | 1.60 |
| | $ | 2.85 |
| | $ | (0.09 | ) | | $ | 0.14 |
| | $ | (0.20 | ) | | $ | 0.85 |
| | $ | 0.69 |
| | $ | (0.32 | ) | | $ | 0.17 |
| | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Income Per Share from Discontinued Operations: | | | | | | | | | | | | | | | | | | | | | |
Basic | $ | — |
| | $ | 0.01 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Diluted | $ | — |
| | $ | 0.01 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | |
Net Income (Loss) Per Share: | | | | | | | | | | | | | | | | | | | | | |
Basic | $ | 1.77 |
| | $ | 1.66 |
| | $ | 2.89 |
| | $ | (0.09 | ) | | $ | 0.15 |
| | $ | (0.20 | ) | | $ | 0.86 |
| | $ | 0.71 |
| | $ | (0.32 | ) | | $ | 0.18 |
| | $ | (0.15 | ) |
Diluted | $ | 1.73 |
| | $ | 1.61 |
| | $ | 2.85 |
| | $ | (0.09 | ) | | $ | 0.14 |
| | $ | (0.20 | ) | | $ | 0.85 |
| | $ | 0.69 |
| | $ | (0.32 | ) | | $ | 0.17 |
| | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Weighted-Average Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | |
Basic | 88,061 | | 86,848 | | 81,940 | | 78,324 | | 77,382 | | 76,456 | | 76,467 | | 77,157 | | 74,483 | | 72,436 | | 73,459 |
Diluted | 89,851 | | 89,537 | | 83,175 | | 78,324 |
| | 79,267 | | 76,456 | | 77,568 | | 78,666 | | 74,483 | | 73,756 | | 73,459 |
| | | | | | | | | | | | | | | | | | | | | |
Comparable Store Sales | 7 | % | | 5 | % | | (5 | )% | | (17 | )% | | (14 | )% | | (18 | )% | | (16 | )% | | (16 | )% | | (11 | )% | | (11 | )% | | (11 | )% |
| | | | | | | | | | | | | | | | | | | | | |
Comparable Direct-to-Consumer Sales | | | | | 24 | % | | (6 | )% | | 14 | % | | 11 | % | | 24 | % | | 13 | % | | 27 | % | | 11 | % | | 19 | % |
| | | | | | | | | | | | | | | | | | | | | |
Comparable Sales (1) | | | | | (1 | )% | | (15 | )% | | (10 | )% | | (14 | )% | | (8 | )% | | (11 | )% | | (4 | )% | | (7 | )% | | (6 | )% |
| | | | | | | | | | | | | | | | | | | | | |
Actual Shares Outstanding | 87,246 | | 85,638 | | 78,445 | | 78,306 | | 76,384 | | 76,395 | | 76,402 | | 76,402 |
| | 72,775 |
| | 71,363 |
| | 71,363 |
|
| | | | | | | | | | | | | | | | | | | | | |
Number of Stores - End of Period (2) | 1,069 | | 1,045 | | 1,041 | | 1,042 | | 1,044 | | 1,049 | | 1,006 | | 1,006 |
| | 999 |
| | 997 |
| | 997 |
|
| | | | | | | | | | | | | | | | | | | | | |
Gross Square Feet - End of Period | 7,756 | | 7,778 | | 7,958 | | 7,970 | | 8,006 | | 8,069 | | 7,736 | | 7,736 |
| | 7,682 |
| | 7,683 |
| | 7,683 |
|
(1) Includes comparable store and direct-to-consumer sales.
(2) Prior period store counts have been restated to count multi-brand outlet stores as a single store.
INVESTOR PRESENTATION 2014 SECOND QUARTER
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 A&F cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this presentation or made by management or spokespeople of A&F involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we assume no obligation to publicly update or revise our forward-looking statements. The factors included in the disclosure under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014, in some cases have affected and in the future could affect the Company’s financial performance and could cause actual results for the 2014 fiscal year and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this presentation or otherwise made by management. OTHER INFORMATION All dollar and share amounts are in 000’s unless otherwise stated. Sub-totals and totals may not foot due to rounding. 2
Q2 ADJUSTED P&L SUMMARY * 2013 2014 % OF NET SALES % OF NET SALES NET SALES GROSS PROFIT OPERATING EXPENSE OTHER OPERATING INCOME, NET OPERATING INCOME INTEREST EXPENSE, NET INCOME BEFORE TAXES TAX PROVISION NET INCOME NET INCOME PER SHARE BASIC DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING BASIC DILUTED $890,605 $945,698 604,122 586,793 (4,411) 21,740 1,750 19,990 6,975 $0.17 $0.16 $13,015 552,956 72,436 73,756 77,382 79,267 535,370 (4,290) 21,876 2,020 19,856 5,794 $14,062 $0.19 $0.19 100.0% 100.0% 63.9% 62.0% -0.4% 2.3% 0.2% 2.1% 0.7% 1.4% 62.1% 60.1% -0.5% 2.5% 0.2% 2.3% 0.7% 1.6% * The Q2 Adjusted P&L Summary for the current period is presented on an adjusted non-GAAP basis and excludes the charges set out on page 4. A reconciliation between GAAP and non-GAAP results is included as an appendix to the presentation. 3
Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 YEAR TO DATE FULL YEAR 2014 2013 5,025 13,8392,575 $44,708 $36,792 3,674 3,144 $43,610 7,590 43,571 $95,869$2,575 3,061 1,964 6,903 46,715 6,903 - $17,981 $142,054 $15,598 $2,383 $6,052 $81,500 $5,633 $419 -- GILLY HICKS RESTRUCTURING CHARGES PROFIT IMPROVEMENT INITIATIVE CHARGES CORPORATE GOVERNANCE CHARGES TOTAL GILLY HICKS RESTRUCTURING CHARGES PROFIT IMPROVEMENT INITIATIVE CHARGES OTHER IMPAIRMENT CHARGES TOTAL -- - - EXCLUDED CHARGES (PRE-TAX) 4
TOTAL COMPANY GEOGRAPHIC: U.S. INTERNATIONAL BRAND: ABERCROMBIE & FITCH abercrombie kids HOLLISTER CO. - 7% - 5% - 9% - 1% - 6% - 10% Q2 COMPARABLE SALES * 61.3% U.S. 38.7% INTERNATIONAL GEOGRAPHIC SALES MIXQ2 * Includes comparable store and DTC sales 5
TOTAL COMPANY GEOGRAPHIC: U.S. INTERNATIONAL BRAND: ABERCROMBIE & FITCH abercrombie kids HOLLISTER CO. - 6% - 5% - 7% - 1% - 6% - 9% YTD COMPARABLE SALES * 61.3% U.S. 38.7% INTERNATIONAL GEOGRAPHIC SALES MIXYTD * Includes comparable store and DTC sales 6
Q2 ADJUSTED OPERATING EXPENSE* 20132014 % OF NET SALESSECOND QUARTER % OF NET SALES bps(3) STORE OCCUPANCY (1) ALL OTHER (2) STORES AND DISTRIBUTION MARKETING, GENERAL & ADMINISTRATIVE TOTAL 279,273 471,722 115,071 $190,786 $192,449 234,270 425,056 110,314 $535,370 $586,793 20.3% 110 29.5% (320) 49.8% (210) 12.2% 20 62.0% (190) 21.4% 26.3% 47.7% 12.4% 60.1% * Excludes charges set out on page 4. (1) Includes rent, other landlord charges, utilities, depreciation, and other occupancy expense. (2) Includes selling payroll, store management and support, other store expense, DTC, and distribution center costs. (3) Rounded based on reported percentages. 7
* Operating Income excludes the charges set out on page 4. A reconciliation between GAAP and non-GAAP results is included as an appendix to the presentation. (1) Operating Income for U.S. Stores and International Stores is reported on an aggregate four-wall basis, and excludes pre-opening costs. Also includes third party sell-off of excess merchandise. (2) Store Pre-Opening Costs include pre-opening rent, payroll, travel, and other expenses. (3) All Other includes Store Management & Support, DC and Other Expenses, net of Other Income. $449,202 $504,674 286,727 154,297 - $51,117 $58,973 69,359 55,008 (40,841) 11.4% 11.7% 24.2% 35.7% 67,173 25.1% 31.6% 54,862 (110,314) (115,071) (5,688)(3,515) (37,447) $21,876 $21,740 267,881 - - -- - 173,522 $890,605 $945,698 SALES SALES2014 OPERATING INCOME 2013 OPERATING INCOME U.S. STORES (1) INTERNATIONAL STORES (1) DIRECT TO CONSUMER MARKETING, GENERAL & ADMINISTRATIVE EXPENSES STORE PRE-OPENING COSTS (2) ALL OTHER, NET (3) TOTAL Q2 ADJUSTED P&L ANALYSIS* 8
Q2 SHARE REPURCHASES 3,825.7 1,459.4 - - $150,000 $60,000 - - $39.21 $41.11 - - 349.7 $16,305 $46.63 $39.73 $99,501 $48.94 $210,000 $115,806 $48.605,285.1 2,382.7 2,033.0 SHARES REPURCHASED SHARES REPURCHASEDCOST COST AVERAGE COST AVERAGE COST FY 2014 FY 2013 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL 9
CUMULATIVE STORE COUNT - INTERNATIONAL HOLLISTER YEAR END 2007 3 3 6 9 6 9 12 12 12 12 26 29 31 31 77 107 129 131 11 17 18 18 5 8 10 10 8 12 12 12 1 1 1 1 2 3 3 3 1 2 2 2 2 2 2 2 4 7 14 14 3 6 6 6 2 4 7 8 2 2 2 1 1 3 3 2 2 1 1 2 3 1 1 19 38 4 3 3 3 10 18 1 1 2008 2009 2010 2012 2013 Q2 20142011 CANADA UK GERMANY ITALY SPAIN IRELAND SWEDEN HONG KONG BELGIUM FRANCE AUSTRIA CHINA S. KOREA NETHERLANDS POLAND AUSTRALIA JAPAN UAE TOTAL 10
*Guidance for the full year does not include charges related to the Gilly Hicks restructuring, other potential impairment and store closure charges, the Company’s profit improvement initiative, certain corporate governance matters, or the effect of any additional share repurchases. FULL YEAR DILUTED EARNINGS PER SHARE IN THE RANGE OF $2.15 - $2.35 FULL YEAR COMPARABLE SALES DOWN BY A MID-SINGLE-DIGIT PERCENT GROSS MARGIN RATE DOWN SLIGHTLY TO FISCAL 2013 FULL YEAR TAX RATE IN THE MID-30s WEIGHTED AVERAGE SHARE COUNT OF APPROXIMATELY 73.6 MILLION SHARES CAPITAL EXPENDITURES FOR THE FISCAL YEAR OF APPROXIMATELY $210 TO $220 MILLION FULL YEAR GUIDANCE UPDATES 11
Q2 STORE COUNT ACTIVITY * Asia includes Australia and UAE. TOTAL U.S. CANADA EUROPE ASIA *ALL BRANDS HOLLISTER CO. A&F abercrombie kids START OF Q2 2014 OPENINGS CLOSINGS END OF Q2 2014 START OF Q2 2014 OPENINGS CLOSINGS END OF Q2 2014 START OF Q2 2014 OPENINGS CLOSINGS END OF Q2 2014 START OF Q2 2014 OPENINGS CLOSINGS END OF Q2 2014 998 841 18 119 24 117 22 18 5 -- - - - - - -3 21 -- - - -- - - --- - - - - - 2 21 - - -(6) (6) (2) (2) 997 836 276 136 585 456 12 101 101 12454585 2 2 131 133 128 253 279 254 4 13 6 3 2 2 6 3 16 18 (3) (3) 4 15 12
(1) Excluded charges for the second quarter include pre-tax charges of $2.0 million related to the Company’s profit improvement initiative and $0.4 million related to restructuring of the Gilly Hicks brand. (2) Prior period excluded charges, in the first quarter, for a benefit in the effective tax rate primarily as a result of the application of the estimated full year tax rate applied to the year-to-date results. (3) Non-GAAP financial measures should not be used as alternatives to net income and net income per diluted share and are also not intended to supersede or replace the Company’s GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company’s operating performance. $0.19 $14,062 $19,856 5,794 $0.17 73,75673,756 $12,877 $17,473 4,596 788 410 $1,595 $(410) $2,383 - GAAP EXCLUDED CHARGES(1) ADJUSTED NON-GAAP (3) PRIOR PERIOD EXCLUDED CHARGES(2) INCOME (LOSS) BEFORE TAXES TAX (BENEFIT) EXPENSES NET (LOSS) INCOME NET INCOME (LOSS) PER DILUTED SHARE DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING: APPENDIX: RECONCILIATION OF Q2 2014 NON-GAAP FINANCIAL MEASURES 13 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THIRTEEN WEEKS ENDED AUGUST 2, 2014
(1) Excluded charges for the year to date period include pre-tax charges of $6.9 million for legal, advisory and other charges related to certain corporate governance matters, $6.1 million related to restructuring of the Gilly Hicks brand, and $5.0 million related to the Company’s profit improvement initiative. (2) Non-GAAP financial measures should not be used as alternatives to net loss and net loss per basic and diluted share and are also not intended to supersede or replace the Company’s GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company’s operating performance. $0.01 $1,083 $1,951 868 $(0.15) $(10,794) $(16,030) (5,236) $11,877 6,104 $17,981 73,459 74,741 GAAP EXCLUDED CHARGES(1) ADJUSTED NON-GAAP (2) INCOME (LOSS) BEFORE TAXES TAX EXPENSE (BENEFIT) NET INCOME (LOSS) NET INCOME (LOSS) PER DILUTED SHARE DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING APPENDIX: RECONCILIATION OF 2014 YTD NON-GAAP FINANCIAL MEASURES 14 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) TWENTY-SIX WEEKS ENDED AUGUST 2, 2014
15 APPENDIX: RECONCILIATION OF Q2 2013 NON-GAAP FINANCIAL MEASURES (1) Excluded charges for the second quarter include pre-tax charges of $2.6 million related to the Company’s profit improvement initiative. (2) Non-GAAP financial measures should not be used as alternatives to net loss and net loss per basic and diluted share and are also not intended to supersede or replace the Company’s GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company’s operating performance. $0.16 $13,015 $19,990 6,975 $0.14 $11,370 $17,415 6,045 $1,645 930 $2,575 79,267 79,267 GAAP EXCLUDED CHARGES(1) ADJUSTED NON-GAAP (2) INCOME (LOSS) BEFORE TAXES TAX EXPENSE (BENEFIT) NET INCOME (LOSS) NET INCOME (LOSS) PER BASIC & DILUTED SHARE BASIC & DILUTED WEIGHTED- AVERAGE SHARES OUTSTANDING (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THIRTEEN WEEKS ENDED AUGUST 3, 2013
(1) Excluded charges for the year to date period include pre-tax charges of $2.6 million related to the Company’s profit improvement initiative. (2) Non-GAAP financial measures should not be used as alternatives to net loss and net loss per basic and diluted share and are also not intended to supersede or replace the Company’s GAAP financial measures. The Company believes it is useful to investors to provide the non-GAAP financial measures to assess the Company’s operating performance. $0.07 $5,812 $4,441 (1,371) $0.05 $4,167 $1,866 (2,301) $1,645 930 $2,575 79,709 79,709 GAAP EXCLUDED CHARGES(1) ADJUSTED NON-GAAP (2) INCOME (LOSS) BEFORE TAXES TAX EXPENSE (BENEFIT) NET INCOME (LOSS) NET INCOME (LOSS) PER DILUTED SHARE DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING APPENDIX: RECONCILIATION OF 2013 YTD NON-GAAP FINANCIAL MEASURES 16 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) TWENTY-SIX WEEKS ENDED AUGUST 3, 2013
THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call EVENT DATE/TIME: AUGUST 28, 2014 / 12:30PM GMT OVERVIEW: ANF reported 2Q14 net sales of $891m and adjusted non-GAAP diluted EPS of $0.19. Expects 2014 diluted EPS to be $2.15-2.35. THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
C O R P O R A T E P A R T I C I P A N T S Brian Logan Abercrombie & Fitch Co. - VP of Finance & Controller Mike Jeffries Abercrombie & Fitch Co. - Chairman & CEO Jonathan Ramsden Abercrombie & Fitch Co. - EVP & COO Joanne Crevoiserat Abercrombie & Fitch Co. - CFO C O N F E R E N C E C A L L P A R T I C I P A N T S Randy Konik Jefferies & Company - Analyst Kimberly Greenberger Morgan Stanley - Analyst Paul Lejuez Wells Fargo Securities - Analyst Janet Kloppenburg JJK Research - Analyst Steph Wissink Piper Jaffray - Analyst Dana Telsey Telsey Advisory Group - Analyst Matt McClintock Barclays Capital - Analyst Christian Buss Credit Suisse - Analyst Janine Stichter BMO Capital Markets - Analyst Anna Andreeva Oppenheimer Securities - Analyst Jennifer Black Jennifer Black & Assoc. - Analyst Thomas Filandro SIG - Analyst Betty Chen Mizuho Securities - Analyst Barbara Wyckoff CLSA - Analyst Gene Vladimirov Nomura - Analyst Jennifer Davis Buckingham Research Group - Analyst Susan Anderson FBR Capital Markets - Analyst Richard Jaffe Stifel Nicolaus & Company - Analyst Liz Dunn Macquarie Research - Analyst John Kernan Cowen and Company - Analyst P R E S E N T A T I O N Operator Good day, everyone. Welcome to the Abercrombie & Fitch second-quarter 2014 earnings results conference call. As a reminder, today's call is being recorded. (Operator Instructions). 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 Brian Logan. Mr. Logan, please go ahead, sir. 2 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Brian Logan - Abercrombie & Fitch Co. - VP of Finance & Controller Good morning and welcome to our second-quarter earnings call. Earlier this morning we released our second-quarter sales and earnings, income statement, balance sheet, store opening and closing summary and an updated financial history. Please feel free to reference these materials which are 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. Today's earnings call is being recorded and the replay may be accessed through the Internet at Abercrombie.com under the Investors section. The call is scheduled for one hour. Joining me today are Mike Jeffries, Chief Executive Officer; Jonathan Ramsden, Chief Operating Officer; and Joanne Crevoiserat, Chief Financial Officer. 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. After our prepared comments this morning we will be available to take your questions for as long as time permits. With that I hand the call over to Mike for some opening remarks. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Thank you, Brian, and good morning, everyone. I will comment on the numbers in a moment. But I want to start by saying the most significant development over the past quarter has been the great progress we believe we have made in evolving the fashion component of our assortment. Many of you have seen and commented on this with regard to our back-to-school floor set and we could not be more excited about it within the Company. Sales for the second quarter were somewhat below our plan, but we have seen modest improvement since we set back-to-school in mid July. Importantly, we have been able to achieve this improvement despite adverse likes in our logo business as we work to strategically reduce that element of our assortment. We are confident that the evolution of our assortment will drive further improvements in sales as we go forward. While we continue to operate in a challenging environment, we are pleased that we were able to exceed both our earnings expectations coming into the quarter, and prior year earnings, as we continue to manage expenses tightly and exceeded expectations on our profit improvement initiative. We're also pleased that for the second quarter in a row our A&F brand comped close to flat and we continue to see sequential comp sales improvements in our US stores overall. From a merchandise standpoint, we performed well during the quarter in jeans, dresses and skirts. Chase represented approximately 20% of the female assortment in the quarter and we expect to roughly double that figure for spring 2015. And while Chase currently represents a much smaller percentage of the male assortment, we will be looking to significantly expand its use there as well. Meanwhile we continue to make good progress on AUC with like-for-like AUCs expected to be down for the balance of the year and through 2015. To complement our evolving assortment, we continue to focus on increasing brand engagement through enhanced marketing initiatives and campaigns and are making great progress that many of you have also noticed. For back-to-school our marketing initiatives have been focused on developing digital editorial content around our newest product and key trends. Being on track with our core merchandising and marketing initiatives is critical to our efforts to stabilize and improve productivity levels in both our US and international stores. And while some of these initiatives will take time to fully pay off, we remain confident we are on the right track. Turning to our international performance, we continue to be pleased by our expansion efforts in Asia. During the quarter we opened our eighth Hollister store in China and on Saturday we will open our first mall-based A&F store in Chengdu. In Japan we opened our third Hollister store during 3 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
the quarter at LaLaport Tokyo Bay and we remain very pleased with the volumes and profitability of our Hollister stores in both China and Japan. We look forward to accelerating our store openings in both markets in 2015. We also continue to be excited about the Middle East where we plan additional openings in Dubai and Abu Dhabi this year. In Europe comps remain challenging. The general economic situation in Europe remains difficult and if anything weakened during the quarter. But we believe that our companywide merchandising initiatives, as well as pricing, marketing and other initiatives, within key markets in Europe can help us stabilize productivity. In Canada we've now comped positively for the fourth time in the last five quarters. Among other factors we believe that the adjustments we made to pricing in 2012 have contributed to the sustained improvement we have seen since then. As you know aggressively growing our DTC business is a key component of our long-term strategy. We launched a redesigned Hollister website for back-to-school which included increased mobile optimization. In addition, we are focused on expanding our international infrastructure to support future growth there, on which Jonathan will go into more detail in a moment. Turning to our organizational structure, we continue to make good progress in our evolution to a branded organizational model and look forward to welcoming Christos Angelides to the Company in October. Our search for the Hollister Brand President is still ongoing, but we remain confident we will find the right person to lead that brand as well. I will conclude these opening comments by stating clearly that we remain highly focused on returning to growth and believe we are absolutely taking the right steps to accomplish that, especially in the evolution of our assortment. Now over to Jonathan. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Thanks, Mike, and good morning everyone. We're very pleased to have Joanne Crevoiserat join us for her first earnings call this morning. Joanne has been spending much of her first few months with the Company in the merchandise planning and inventory management areas but is now transitioning to take over day-to-day CFO responsibilities. Joanne is going to walk through our financial results for the quarter and then I will provide an update on the long-range plan initiatives and our outlook for the remainder of the year. Over to Joanne. Joanne Crevoiserat - Abercrombie & Fitch Co. - CFO Thanks, Jonathan, and good morning, everyone. It is great to be here with you on my first earnings call as the Company's CFO and I look forward to meeting many of you over the coming months. As you have seen in this morning's press release, net sales for the quarter were $891 million, down 6% to last year. Including direct-to-consumer, total comparable sales were down 7%. US comparable sales were down 5% while total international comparable sales were down 9%. By brand comp sales, including direct-to-consumer, were down 1% for Abercrombie & Fitch, down 6% for abercrombie kids and down 10% for Hollister. Comps by gender were approximately in line. Within the quarter comparable sales were weakest in June. Changes in foreign currency exchange rates versus a year ago benefited sales by approximately $13 million. The gross profit rate for the quarter was 62.1%, 180 basis points lower than last year, reflecting an increase in promotional activity including shipping promotions in the direct-to-consumer business. However, promotional activity was somewhat lower than we anticipated coming into the quarter, leading to modestly higher gross profit rates than planned. 4 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Stores and distribution expense for the quarter was $426 million or 47.9% of sales, down from $472 million or 49.9% of sales last year. The decreased expense was driven primarily by savings in store payroll, which was offset partially by higher direct-to-consumer expense. Marketing, general and administrative expenses for the quarter was $111 million, a 6% decrease compared to $118 million last year. The decline in MG&A expense was primarily due to a decrease in compensation expense partially offset by an increase in marketing expense. Excluding pretax charges of $2 million, which are detailed on page 4 of our investor presentation, adjusted non-GAAP operating expense for the quarter was $535 million, down $[51] million from last year representing 190 basis points of leverage. Savings were greater than anticipated coming into the quarter due to continue tight expense management and realization of incremental benefits from the profit improvement initiative on which Jonathan will provide more detail in a moment. Other operating income was $4 million for the quarter, flat to last year and included insurance recoveries of $3 million. On an adjusted non-GAAP basis, operating income for the quarter was $22 million, approximately flat to last year. The effective tax rate for the quarter, excluding the effect of charges, was 29.2% reflecting the application of the estimated full-year tax rate to the year-to-date results. For the quarter the Company reported adjusted non-GAAP net income per diluted share of $0.19, which was ahead of our expectations coming into the quarter. Turning to the balance sheet, we ended the quarter with $311 million in cash and cash equivalents and borrowings of $188 million. During the quarter we repurchased approximately 1.5 million shares at an aggregate cost of $60 million. This brings our total year-to-date repurchases to approximately 5.3 million shares. Subsequent to quarter end we completed the refinancing of our credit facilities. The new credit facilities consist of a $400 million Asset-Based Revolving Credit Facility and a $300 million Term Loan B facility. A portion of the proceeds from the term loan B facility were used to repay outstanding borrowings of $188 million and pay fees and expenses associated with the transaction. The balance of the proceeds will be used for working capital and general corporate purposes including potential share repurchases. As of the end of the quarter we had approximately 11 million shares remaining available for repurchase under our previously announced stock repurchase authorization. We ended the quarter with total inventory at cost down 13% versus last year. We expect inventory cost on a year-over-year basis to continue to be down double digits at the end of the third quarter. At the end of the quarter we operated 836 stores in the US and 161 stores in Canada, Europe, Asia, Australia and the Middle East. With that I will hand it back over to Jonathan. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Thanks, Joanne. as mentioned, I'm going to give an update on some of our long range planned strategic initiatives and will then provide an update on our outlook for the remainder of the year. As a reminder, our objective for our long-range plan is to achieve a significant increase in return on invested capital through a combination of disciplined and focused capital allocation and operating margin improvement. As Mike mentioned, aggressively growing our DTC business is a key component of this strategy. We continue to expect another year of strong growth in 2014, particularly in our international business, with the second margin remaining in the mid-30s on a full year basis. We are on track for the conversion of one of our distribution centers here in New Albany to be a dedicated direct-to-consumer facility which will support processing speed, throughput and service. 5 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
We are also on track to launch localized sites and in-country fulfillment in China next month as well as regional fulfillment (inaudible)from Hong Kong for other Asian countries, giving us local or regional fulfillment coverage of all of our major markets in North America, Europe and Asia. In addition, we expect to open a Hollister store on [T-Mall] in China later this quarter, launch a localized website in Japan later this year and launch in-country e-commerce fulfillment in Japan next year. With regard to omni-channel, order in store is on track to be completed for all US stores during the third quarter. In addition, we are proceeding with our ship from store pilot with a roll out planned for approximately half of the US fleet early in the fourth quarter. We expect to have reserve in-store and in-store pickup activated during 2015. Importantly, the combination of our technology and international fulfillment investments puts us in a strong position to roll out omni-channel capabilities as they increase in relevance in our international markets. Near-term we see the UK being our highest priority market. Turning to our profit improvement initiative, while some of the lower-than-expected expenses to date are coming from continued tight expense management, we are also exceeding our goals for savings from the profit improvement initiative. As a result, we now expect gross savings from the initiative to exceed $200 million versus the prior projection of at least $175 million of which $30 million was recognized in 2013. In addition, we expect to realize some additional savings beyond 2014 that are not included in this figure. As we have previously stated, these savings will be partially offset by an approximately $30 million increase in marketing expenditures in 2014. We continue to expect total capital expenditures for 2014 to be approximately $210 million to $220 million with the priority remaining on DTC and IT investments to support growth initiatives. During 2014 we now anticipate opening a total of 14 full price international stores including eight Hollister stores and five A&F stores. We also plan to open 8 to 10 international and US outlet stores during the year. As we think about capital allocation for 2015 and beyond, we expect to increase our allocation to new stores, particularly in Asia, but will continue to invest in support of our growing e-commerce footprint. In addition we remain pleased with the results of the Hollister store front remodel and we are working on a storefront remodel for A&F, which we expect to be in testing later in the third quarter. We expect to allocate capital to accelerate the rollout of these new store fronts in 2015. In broad terms we continue to expect that CapEx will remain at approximately $200 million annually. US store closures remain a key part of our strategy to position our brands appropriately in the US, achieve an optimal balance between our bricks and mortar and online presence, and improve average store productivity. We now expect to close approximately 60 stores in the US during 2014 through natural lease expirations. We expect to close a similar number of stores into the next couple of years and expect to retain significant flexibility thereafter. Moving on to our earnings outlook for the rest of 2014, we continue to expect full-year diluted earnings per share in the range of $2.15 to $2.35. The guidance is based on the assumption that full-year total comparable sales will be down by a mid-single-digit percent. The guidance continues to assume a gross margin rate for the full year that is down slightly compared to fiscal 2013. We continue to expect average unit retail pressure on lower shipping and handling revenues to offset average unit cost improvement and a benefit from the Company's profit improvement initiative. We expect gross margin rate improvement in the back half of the year as we begin to benefit from lower AUCs and go up against more favorable AUR comparisons. On a sequential basis we expect a lower year-over-year decline in operating expense in the back half of the year as we begin to anniversary savings realized last year. The guidance includes an increase in interest expense associated with the refinancing of our credit facilities and includes a full-year effective tax rate in the mid-30s which remains sensitive to the mix between international and domestic income. 6 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
The guidance also assumes a weighted average share count of approximately 73.6 million shares, which does not include the impact of any additional share repurchases over the remainder of the year. The guidance does not include charges related to the Gilly Hicks restructuring, the Company's profit improvement initiative, certain corporate governance matters, other potential impairment and store closing charges. This concludes our prepared comments and we will now be happy to take your questions. Thank you. Q U E S T I O N S A N D A N S W E R S Operator (Operator Instructions). Randy Konik, Jefferies. Randy Konik - Jefferies & Company - Analyst I guess a question for Mike. Can you give us some -- I guess expand upon some color around the stuff you're -- I guess the improvement you're seeing in the non-logo business? Give us a little perspective on when the like-for-like's I guess ease in that logo business and any color of what -- how far down you want to take the logo business. And then I guess that is domestically. And then internationally, just give us a little bit more, I guess, color if you could on different country-by-country performance within the quarter. Thanks. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Okay. We are really (technical difficulty). Randy Konik - Jefferies & Company - Analyst Hello? Operator (Inaudible) we resolve our issue. Ladies and gentlemen, thank you for standing by. One moment while we connect our call. Okay, gentlemen, you have rejoined the call. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Randy, did you hear Mike's answer to that question? We are not sure when the call got dropped. Randy Konik - Jefferies & Company - Analyst I think it was just -- I think everybody got dropped right when he first started speaking. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Okay, here we go again. 7 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Randy Konik - Jefferies & Company - Analyst Take two. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Yeah. We are thrilled with the rate at which we are selling fashion. I think everyone has seen that in our assortments and it is working. We are up against big logo likes. We are looking to decrease that aggressively. For the fall season we are saying that we are going to be halving the amount of business we did last year. In the spring season we are looking to take the North American logo business to practically nothing, but protect logo in international stores. More color around the country by country performance. I think this is a really interesting question in total. And the first comment is that Europe remains really challenged and this contributes to a big percentage of Hollister's total comp lag to A&F because of the size of the Hollister business in Europe relative to A&F. This is a really important statement, guys. In responding to country by country performance, the worst country is Italy and the best country is Poland, which doesn't do us much good. Randy Konik - Jefferies & Company - Analyst Is there any color on the UK? Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO UK remains tough, slight improvement in the UK. Randy Konik - Jefferies & Company - Analyst Got it. Thanks, guys. Appreciate it. Operator Brian Tunick, JPMorgan. Unidentified Participant Yes, hi, good morning, this is (inaudible) on for Brian. I was wondering if you could speak to the improvement that you are seeing thus far during the back-to-school season. Is it across all brands as well as any color on the international and US businesses? And then also just -- you are in the early stages of implementing the lower AUR strategy at Hollister. Just if you could share any early learnings from that, that would be great. Thank you. 8 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO We are seeing improvement in fashion selling in all brands. The North American business is clearly better than international business on a likes basis because of the difficulties in Europe, which I just mentioned. The logo business is larger in Hollister and that becomes a little more difficult to overcome than it has in A&F, although we are overcoming that in both brands. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO I think the second question -- sorry, go ahead, go ahead. Unidentified Participant No, just in terms of the lower AUR strategy. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO I think we are still working into elements of that. What we have actually said is that we anticipate overall AURs to be up against slightly more favorable compares in the back half of the year. But in general we are taking AURs down in Hollister selectively and continue to test into that. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO And that is primarily an international strategy. Unidentified Participant Great, thank you. Operator Kimberly Greenberger, Morgan Stanley. Kimberly Greenberger - Morgan Stanley - Analyst Mike, I wanted to just ask you about the Hollister business. It sounds like that negative 10 comp was being weighed on particularly by the international comps. Do you happen to have the Hollister brand US numbers that you might be willing to share with us? Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Have the Hollister -- hold on -- I'm sorry I don't understand, do I have the Hollister --? Kimberly Greenberger - Morgan Stanley - Analyst The Hollister US comp. So I think that (inaudible) the global comp including (multiple speakers). 9 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Yes, you are right. You are right. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yeah, I think what we can tell you, Kimberly, is the gap in North America was closer than the overall gap between the brands. Because the gap, to Mike's point earlier, was wider in Europe. So the North America Hollister and A&F comps were closer together than the total comp. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Exactly. And go back to what I said -- the big percentage, and that is the lion percentage of the difference, is due to Europe. I would also say if we just look at the total Hollister lag behind A&F, the lion's share is due to the European -- size of the European Hollister business. Second, the logo headwind skews toward Hollister. And third, I think there is still a little bit of a difference, and I think that while Hollister has done a good job in evolving its assortment, it is still slightly behind A&F. But that is a small difference. Kimberly Greenberger - Morgan Stanley - Analyst That all makes sense. Thank you. Operator Paul Lejuez, Wells Fargo. Paul Lejuez - Wells Fargo Securities - Analyst Just looking at your increased DTC revenues, it doesn't seem to be driving incremental operating profit. I was just wondering if that is more of a result of having to be a bit more promotional online or is it a function of shipping revenue pressure. And if it is shipping, can you talk about how big that piece is of the DTC revenue line? Thanks. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO A couple of pieces on that. First of all, we do expect on a full-year basis that we will see incremental operating profit from DTC. So the effect you are seeing in the first half of the year where operating profit dollars are kind of flat on sales growth, we do see on a full-year basis that converting into being incremental operating profit dollars with the segment margin remaining in the mid-30s. To your point, a big part of the pressure is around the shipping and handling revenue and expense, partly as we have begun to offer shipping promotions in Asia, and internationally generally when we do those the shipping expense there is greater particularly for Asia. One of the bits of good news on that is as we enable fulfillment within Asia our shipping expense, when we run those free shipping promotions, with threshold will be much lower than it is today. So part of the effect is just the shipping and handling revenue coming down as we have continued to use shipping and handling promotions and been competitive on that. But also because of the skew of our business to international and the rapid growth in Asia when we run those promotions there's greater shipping expense, which as I just said will alleviate as we enable the regional fulfillment. 10 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Paul Lejuez - Wells Fargo Securities - Analyst And then any color on the size of that line, that shipping revenue line? Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO I don't think we have broken out the figures specifically. But it is the biggest driver of the lack of flow-through to the bottom line in terms of the sales improvement that you are seeing in the segment. Paul Lejuez - Wells Fargo Securities - Analyst Okay, thanks, guys. Good luck. Operator Janet Kloppenburg, JJK Research. Janet Kloppenburg - JJK Research - Analyst Congrats on the progress being made. Just a couple of quick questions. Mike, if you could talk a little bit about the impact that the logo decline might be having on comp so we can understand what kind of traction you are getting in the fashion business that might help. And also some visibility on how long this impact may impact the comps, perhaps hiding the improvement that you are seeing in the fashion business. And I also was wondering if you could talk about your perspective on pricing in Europe given the success that you had in Canada with lowering pricing. And, Jonathan, if price (inaudible) come down, if you have offset to that, to maintain a healthy margin in Europe. Thank you. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO The first part of the question, Janet, I think I can say this, is that we are making up the logo decline in the business in terms of comps, which says that we are doing better in the rest of the business, which we are, and that is fashion related. There is wonderful traction in fashion partially due to our Chase strategy. Chase is working wonderfully well for us. How long the impact of logo will last, clearly through this year into first quarter of next year. But as I just said, we would say in North America we would want to be out of the logo business essentially by next spring. It will remain a factor in the rest of the world. I would say that by this time next year we will really be over the major dollars. I think the question on our perspective on pricing in Europe is really a good one given the success in Canada. We are testing pricing in Europe, a pretty extensive testing as we talk now. We think there is opportunity there. And we think we have the ability to work on pricing given where we are in AUC. But that is a really good question, Janet. Janet Kloppenburg - JJK Research - Analyst Comment on the fashion top results, Michael? 11 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO On, I beg your pardon? Janet Kloppenburg - JJK Research - Analyst Can you comment on the performance of the fashion tops for the back-to-school? I thought they looked terrific, but you didn't highlight them when you called out the category for strength. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Fashion tops are performing very well. The top category in total is negative because of the logo impact. But we are delighted with fashion tops. Operator (Operator Instructions). Steph Wissink, Piper Jaffray. Steph Wissink - Piper Jaffray - Analyst I would also add my congratulations on the progress. If I can ask one clarification question. Jonathan, I think you mentioned that you are raising the cost take-out guidance essentially two $200 million versus $175 million previously. Could you just talk about what area of the expense structure you are finding that incremental saving? And then, Mike, I was wondering if you could just talk about some of the early feedback on the incremental marketing expense, some of the initiatives, particularly the more social media-based initiatives around the Hollister brand. If you could talk a little bit about some of the success there, that would be great. Thank you. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Steph, just on the first part, the primary driver of the increased savings is coming out of the stores, store payroll and other variable expenses within the stores. That is certainly the biggest component of it. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO In terms of marketing, Steph, it is still early days but we are seeing benefits particularly in terms of improving brand sentiment and brand engagement. I think as everyone knows, these efforts take time to realize the full benefits in traffic and sales. But we are pretty delighted with where we are there now. Steph Wissink - Piper Jaffray - Analyst Thank you. Operator Dana Telsey, Telsey Advisory Group. 12 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Dana Telsey - Telsey Advisory Group - Analyst Mike, can you give any comments on denim? How denim is doing, what is happening with price points of denim? And then on the performance on men's and women's, anything you are seeing that is any significant improvement from last quarter? It certainly seems like fashion is coming on. And just lastly, given the beat you had this quarter and the cost savings running ahead, is there something offsetting it that prevented you from raising full-year guidance? Is it the margin picture and the pricing environment? Thank you. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO We are happy with how denim has performed. As we said, comp sales were up but gross profit was up too. We're able to drive the business through expanded assortment, I think compelling price points, and engaging store and DTC presentations that were supported by lifestyle marketing. Your second question, we are seeing performance on men's, women's an improvement -- I'm trying to think of what the statistics would say. We are seeing North American improvement in both. Joanne Crevoiserat - Abercrombie & Fitch Co. - CFO Yes, and I can jump in here. Men's and women's comps were relatively in line. As Mike mentioned earlier, we are seeing a lot of traction in our chase, which represents a 20%- -- 20% of our women's assortment. It is lower in men's overall, but we expect that to be increasing as well. So men's and women's are in line in terms of performance. And we expect as those Chase components continue to (technical difficulty) for us to continue to improve in both. In terms of offsetting improvement in margin as it relates to guidance, we do expect the back half guidance in -- or the back half margin to be an improvement driven by the AUC inroads we are making as well as profit improvement initiative efforts that will have some impact on margin in the back half. And we do also see AUR pressure abating somewhat as we move into the back half as we see inventory in the segment normalizing. Operator Matt McClintock, Barclays. Matt McClintock - Barclays Capital - Analyst Jonathan, you actually talked a lot about some exciting omni-channel initiatives that you are rolling out back half of this year going into next year. I was wondering, as you think about some of these initiatives shipped from store (inaudible) urban store, etc., it seems like the focus is the United States. How do you think about using those initiatives in international markets? Thank you. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Matt, I think that is a great question. I think the state of omni-channel varies a lot as you go around the world but is generally not as far along as it is here in the US. Certain -- UK is probably relatively far along within Europe. In Asia omni-channel is still relatively undeveloped. But I think the key point is we -- through a combination of us building the technology to roll out omni-channel in the US, that same technology would be applicable internationally. And then by virtue of moving to regional fulfillment now in Asia in addition to Europe, the combination of those two things puts us in a very strong position to roll out omni-channel as it becomes relevant in key markets going forward. 13 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
So we foresee the UK as a priority. We are looking at the rest of Europe. We will continue to monitor Asia. But I think the important point is that we'll be ready to roll out omni-channel as it becomes significant in each of those markets. Operator Christian Buss, Credit Suisse. Christian Buss - Credit Suisse - Analyst I was wondering if you could talk a little bit about how you are thinking about the European business developing over the next six months. What are you doing to try and stabilize that business? And how much control do you really have? Or what the (technical difficulty) point is for productivity for the flagship locations there? Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yes, I think there's -- we talked about it a little bit in the prepared comments, Christian. There are market-by-market -- first of all, the broader initiatives we're undertaking with regard to the assortment in particular we believe will benefit European business as well as the international business. But also within specific markets in Europe there are local pricing, marketing, other initiatives. And going back to the prior question, omni-channel could become a part of the equation going forward in certain markets. So there are a combination of the global initiatives we're undertaking particularly around the assortment, and then market specific initiatives which we will be increasing over the next 6 to 12 months. Christian Buss - Credit Suisse - Analyst That is very helpful. Thank you and best of luck. Operator John Morris, BMO Capital Markets. Janine Stichter - BMO Capital Markets - Analyst Hi, it is Janine Stichter on for John Morris. I was just wondering just given what you're saying about the European business if you could comment a little bit on some of the tourist locations within the US and whether or not they are an overall drag to the total Company comp. Thank you. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO We, you know, generally haven't broken that out. I think we can dig that out and see if there is some color we can give around that. So why don't we go on to the next question and we will see if we can dig out something on that. Operator Anna Andreeva, Oppenheimer. 14 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Anna Andreeva - Oppenheimer Securities - Analyst Great, thanks so much. And let me add my congratulations to continued improvement in the business. A follow-up on the gross margin. You guided down slightly for the year. Should we expect gross margin to be up in the third quarter and fourth quarter, or that improvement to be more fourth-quarter weighted? And just a follow-up on the buyback. It looks like you guys bought back a little bit less than in the first quarter. Maybe talk about the appetite from the Board towards completing the remainder of the buyback in 2014. Thanks so much. Joanne Crevoiserat - Abercrombie & Fitch Co. - CFO Yes, we do expect gross margin to be down in -- to be improved in the back half. Again, based on our AUC efforts, those do become bigger in the fourth quarter than the third, but it is relative. We do see improvement in both, as well as our profit improvement initiatives that have margin implications kicking into the back half. So slightly skewed to fourth, but I think the bigger issue in that equation is really the relief we expect on the AUR pressures we've been seeing as the inventories in the segment normalize through the fall season. In terms of buybacks, we have said that we -- and have authorization to continue to buy back shares of stock. We make those decisions -- our practice is to make those decisions on a quarter by quarter basis. And really it is contingent on the stock price and managing to our liquidity target of $350 million. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO I will just come back on Anna's last question. So we typically don't give a lot color on the US tourist stores, but what we can tell you is that they performed somewhat below the US chain stores, but better than the international stores for the quarter. And that was relatively consistent with the first quarter. Anna Andreeva - Oppenheimer Securities - Analyst Thanks so much, guys. Operator Jennifer Black, Jennifer Black & Associates. Jennifer Black - Jennifer Black & Assoc. - Analyst Let me add my congratulations. And, Mike, you probably think that is what I'm going to ask. With your streamlined look with less logo it seems like accessories -- you could really do a lot. And I know (multiple speakers). Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO (Laughter) of course. And, Jennifer, I have to congratulate you because you have been on the push for less logo for a while. So you are a forecaster there. Thank you. 15 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
We are engaged in developing the accessory business. I think going to a branded organization is really helping us as we develop these accessories because being more brand focused by category, I am feeling that we are going to make progress. So I hope to report something to you in the future about accessories, okay. Jennifer Black - Jennifer Black & Assoc. - Analyst Do you think we will see something in the next quarter? Are we looking six months? Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO I really think it is going to be spring that you are going to start to see more exciting brand right accessories. Jennifer Black - Jennifer Black & Assoc. - Analyst Okay, I am looking forward to it. Thank you very much. And everything does look much improved. Thank you. Operator Thomas Filandro, SIG. Thomas Filandro - SIG - Analyst Welcome to Joanne. Nice job to all in executing on the strategic initiatives. I was hoping you guys could offer some insight into these online exclusives, the collaborations, the license product. And in relation to that, can you give us some sense -- are you seeing any change in the profile of the shopper either at Hollister or Abercrombie? And my final one is what is the style differentiation now between the brands and how much longer do you have before you get to where you want to be on that target of style differentiation? Thank you. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Okay, first question, Tom, we currently have partnerships in footwear, accessories and apparel. And they have all been successful. We have a long list of additional collaborations in the works which we are going to be introducing in the coming months. We know that the customer does value these relationships and we believe they can improve our brand positioning while driving incremental sales and margin. We are early days here but we are happy with where we are going. Style differentiation -- we have changed the profile of customer both brands. I think that we see that we are aging the A&F customer which is exactly what we're trying to do. I think if you look at the Abercrombie and Hollister websites, look at them today, I think you can see a real difference in terms of the customer that we are targeting -- more sophisticated, a little older in A&F, clearly young in Hollister. But the difference, I think it's pretty apparel when you turn on the DTC and our websites. I think the differentiation is an ongoing thing. I believe we are going to get there pretty quickly. I can't say that it is February 2, 2016, but we are on a track that we are comfortable with. 16 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Thomas Filandro - SIG - Analyst Thanks. Best of luck, Mike. Operator Betty Chen, Mizuho Securities. Betty Chen - Mizuho Securities - Analyst Congratulations on a great quarter. I was wondering, Mike, if you can talk a little bit more about plans to expand the Chase program? It sounds like that's been a key factor (technical difficulty) success. And in terms of doubling back for next year, is that mainly coming from women's or men's and which category? Any additional color would be really helpful. Thank you. Joanne Crevoiserat - Abercrombie & Fitch Co. - CFO Yes, the chase strategy is really working for us and we are embedding it in our business practice. And simply stated, it is an integral part of our business and we are doing all the things we need to do to make sure that we can support Chase moving forward and grow it. In the female business we talked about doubling the amount of Chase. We will be leveraging specific strategies like fabric platforming to help us get there as well as collaborating with our vendors and reserving the open to buy to make sure it happens. The numbers we quoted were specific to female. As I mentioned, it is not as big a piece of the male assortment today, but we expect that to continue to grow as well, so on both sides of the aisle. Betty Chen - Mizuho Securities - Analyst And, Joanne, did you leverage about across all types of product or more so in certain buckets than others? Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO I would answer that, it really is across the assortment but more intense in fashion -- what we call real fashion categories. Fashion tops is a huge percentage. Betty Chen - Mizuho Securities - Analyst Great, thank you so much. Rest of luck. The stores look a lot better. Operator Barbara Wyckoff, CLSA. 17 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Barbara Wyckoff - CLSA - Analyst Good progress. What is happening with the kids' business? Can you talk about the sales and margins there, thoughts on consolidating some locations into the adult store? And then just a second question, what percentage of the back-to-school assortment was pretested in A&F and Hollister? Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Okay, kids business. The girls' business has been tougher than the boys' business. I think we are just getting on our feet in terms of an assortment there that is clearly differentiated from the adult assortment and I'm happy with where we are going. We are opening a kids store, by the way, in London on Saturday, which I have to say is about the cutest store in the world. If you're in London, you have got to stop to see this thing. But I think it -- looking at that store you can see where we are taking the kids' business. It'll clearly have a personality -- has more personality of its own. We are testing carve-outs in the kids' business. Joanne Crevoiserat - Abercrombie & Fitch Co. - CFO Yes, and I can jump in on the carve-out test, where in an effort to drive productivity in our boxes, we are testing about 10 stores where we have put kids into the adult stores. And I would say during the test we are watching to make sure we get the expected increase in productivity within the store. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO For percentage of back-to-school assortment, I can't give you an exact percentage. We look at testing in two ways: one, electronically; two, in-store test. That increase is increasing. I've said we are going to be 100%. It is not possible to be 100%, but it is a very high percentage. Barbara Wyckoff - CLSA - Analyst Great, thank you. Operator Simeon Siegel, Nomura Securities. Gene Vladimirov - Nomura - Analyst This is Gene Vladimirov on for Simeon, thanks for taking our question. I was wondering if you could talk a little bit about your thoughts about the promotional environment out there. I believe you mentioned promo activity is a bit lower than you expected. So I was wondering if you expect that to continue and how your strategy may have changed going into the back half of the year. Thank you. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO I think, Gene, we are assuming that the environment will remain promotional. I think there are some indications that it may become less so. And certainly as we look to the back half of the year inventory levels are probably going to be more rational and normalized than they were a year ago, which should help to see some year-over-year relief. But generally speaking we would expect the environment will remain fairly promotional. 18 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Gene Vladimirov - Nomura - Analyst That's helpful, thank you. Operator Jennifer Davis, Buckingham Research Group. Jennifer Davis - Buckingham Research Group - Analyst Most of my questions have been answered. But I was wondering if you could just talk a little bit about I guess what percent of the assortment is logo right now so we can just kind of get an idea around that? And then just some color on the impact of the cost savings on the second quarter. And if you could remind us how much they were in the first quarter. Thanks. Hello, is anyone there? Operator One moment, we will reestablish the line again. Okay, please go ahead. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Jennifer, I think you were just starting your question. So if you could go back to the top on that, we would appreciate it. Operator Ms. Davis, please go ahead with your question. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Why don't we go to the next question, operator? Operator Okay, moving on. Ms. Davis, I'm sorry, was that you? Go ahead. Jennifer Davis - Buckingham Research Group - Analyst I was just wondering if you could give us a little bit of color on the amount of savings you realized in the second quarter and also remind us the first quarter. And then what percent of the assortment right now is logo, just to give us an idea around that, please. Thanks. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yes, I guess on the first part I think you can see on the face of the statements the magnitude of the savings in Q2 which was a little over $50 million total expense reduction for the year versus last year. And obviously you have the comparable number from the Q1 reported figures. 19 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
I think as we have said, we have taken the overall expectation from profit improvement initiative in terms of savings from $175 million to at least $200 million. That benefit on a full-year basis is less in the back half of the year particularly in the fourth quarter as we start to lap the realization of benefits when we launched many of these initiatives in the latter part of 2013. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Percentage of the assortment which is logo I can't give you, but I believe if you go into the stores and look you have to look pretty hard to find it. Operator Susan Anderson, FBR Capital Markets. Susan Anderson - FBR Capital Markets - Analyst Congratulations on the improvement too, really impressive. I was wondering if you could talk about the inventory. It looks very clean which is good. But is it at all holding back the comp or do you feel like you have enough ability to Chase? And then also on the social media campaign, it looks like you guys are doing a better job. Do you guys feel like you are getting a better return on that versus historically? Thanks. Joanne Crevoiserat - Abercrombie & Fitch Co. - CFO I will pick up the inventory question. We are happy with where we are in terms of inventory levels. We don't think the inventory is holding back our comps. As we've talked about on this call, the Chase strategy is working, it gives us much more agility in our assortments and allows us to get into the things that are working. So we feel good about the content as well as the level of our inventory. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO On the second part of the question, I think we have continued to dial up those investments. We think we have seen a benefit in terms of brand engagement and brand sentiment. I think as Mike alluded to in the prepared comments, we would expect there will need to be a sustained period of investment to drive the full benefit from these new marketing efforts that are underway. Susan Anderson - FBR Capital Markets - Analyst Great, thank you. Operator Richard Jaffe, Stifel. Richard Jaffe - Stifel Nicolaus & Company - Analyst Just a follow-on question. The current penetration or percent that you described as a logo business in 2Q and what you think it will be in 3Q -- let's say the rate of change you anticipate as a percent of total. 20 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO The rate of change, Richard, it is about -- we are looking at halving that business in 2Q and 3Q. Richard Jaffe - Stifel Nicolaus & Company - Analyst Wow, okay. And just a follow -- sorry? Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO Yes. Big number. Richard Jaffe - Stifel Nicolaus & Company - Analyst Yes. No, it is exciting. And the store count, do you see that the store editing an ongoing process? Obviously it has been very effective the last couple of years. Can you anticipate it going into 2016 and 2017? Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yes, absolutely, Richard. I think we said in the prepared remarks that as well as 60 closures this year we would anticipate a similar run rate for the next two years, although we have significant flexibility around that since we have a very high number of lease expirations up between now and the end of 2016. And then either way we plan to keep significant flexibility beyond that. So as of today we would anticipate roughly another 60 or so closures in each of 2015 and 2016 beyond the 60 closures for this year. Richard Jaffe - Stifel Nicolaus & Company - Analyst Excellent. Thank you very much. Operator Liz Dunn, Macquarie. Liz Dunn - Macquarie Research - Analyst Congrats on all of the progress. I had a question on the expense savings. I guess could you just refresh us on how much is coming from COGS, how much is stores and distribution and how much is marketing and G&A? As I look at it, it looks like the bulk is stores in distribution. And as I look at marketing and G&A over the last kind of six or seven years it is up 25%, which is more than twice what sales are up. So is there more opportunity on marketing and G&A? Thanks. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yes. So on -- the piece that is going into COGS is relatively modest. I think we had indicated at the beginning of the year probably in the order of $10 million on a full-year basis. That number has moved around a little bit since then. 21 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
So the great majority of the $200 million plus number is in expense and the great majority of that is in the stores and distribution line with a lesser component in MG&A. We have said we anticipate some additional savings beyond the $200 million in 2015, but I think it is a little early to be too specific on that. Liz Dunn - Macquarie Research - Analyst As you have invested in marketing have you found offsets in sort of some of your more traditional marketing efforts? Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yes, we have. And there is some reduction of offsetting components in marketing. Liz Dunn - Macquarie Research - Analyst Okay, great. Thanks. Good luck. Operator John Kernan, Cowen and Company. John Kernan - Cowen and Company - Analyst Just a quick question relating to your DTC business. It looks like on our numbers it could be as big as 25% of your total business by the end of the year. As you close more stores in 2015 and 2016 how big do you think DTC can get (technical difficulty)? It already seems like it is higher than many of your competitors. And then in terms of the fulfillment centers in all the major Asian markets, do you expect any incremental expenses associated with the rollout of those? Thank you. Jonathan Ramsden - Abercrombie & Fitch Co. - EVP & COO Yes. So, on the first question, I think back in our Investor Day last November we referenced DTC getting to 25% of the business over time. I think we then said earlier in this year that we thought that number was slightly conservative and we see it continuing to go higher. I don't think we are in a position where we could say a specific percentage. I think there are a lot of factors that will flow into that. But we certainly believe very strongly that DTC is going to be a growing part of our business over the next few years and we are investing behind that as a very high priority. In terms of the fulfillment expenses, no, most of that is really behind us in terms of the investment we've made to set that up. And in fact, as I alluded to in an earlier question, the fact that we now have the fulfillment capability within Asia lowers our shipping and handling expense which we think is a positive in terms of what that can help us do with the business going forward. But we don't anticipate significant incremental expense as a result of setting up those fulfillment capabilities. Mike Jeffries - Abercrombie & Fitch Co. - Chairman & CEO What I would like to add is that the really thrilling part of DTC is the international growth. 22 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
John Kernan - Cowen and Company - Analyst Okay, thanks, guys. Good luck. Operator And that concludes today's question-and-answer session. I would like to turn it back over to our speakers for any additional or (technical difficulty). Brian Logan - Abercrombie & Fitch Co. - VP of Finance & Controller I think that's it, thank you. Operator Okay, that does conclude today's conference. We thank everyone again for their participation. D I S C L A I M E R Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. ©2014, Thomson Reuters. All Rights Reserved. 5459464-2014-08-28T20:12:00.917 23 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. AUGUST 28, 2014 / 12:30PM, ANF - Q2 2014 Abercrombie & Fitch Co Earnings Call
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