Abercrombie & Fitch Co (ANF) 2002 Q3 法說會逐字稿

Good afternoon.

My name is Erika, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Abercrombie & Fitch third quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

At this time, I would like to turn the call over to Mr. Tom Lennox.

Sir, you may begin your conference.

Good afternoon, and welcome to our third quarter conference call.

After the market close, we E-mailed to your offices the third quarter sales and earnings release, balance sheet, income statement, and an updated financial history.

If you haven't received these materials, please call Courtney [Devoncourt] at 614-283-6751, and she will forward them to you.

This call is being taped and can be replayed by dialing 1-800-642-1687.

You will need to reference the conference I.D. number, 2626048 to access the replay.

You may also access the replay through the internet at www.Abercrombie.com.

I repeat the conference I.D. number, which is 2426048.

With me today are Mike Jeffries, our Chairman and CEO, Seth Johnson, Executive Vice President, and COO, and Wes McDonald, Vice President and CFO.

After Seth reviews our financial results, Mike will have some comments and then we'll take your questions.

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 S.E.C. filings.

Now to Seth.

Good afternoon.

Total sales for the third quarter of fiscal 2002 were $419.3 million, up 18% over last year's third quarter sales of 354.5 million.

Comparable store sales decreased 5% for the quarter.

By business, counts for the quarter were as follows: Abercrombie & Fitch, comps declined in the mid-single digits with women's stronger than men's;

Comps for the kid's business, Abercrombie, were slightly better than in the adult business, with comps declining in the low single digits;

Girls' business continues to improve and achieve the positive comp for the second-straight quarter.

By region, our comps were strongest in the northeast and west and weakest in the midwest.

The gross income rate for the quarter was 39.8%, down 70 basis points from last year's rate of 40.5%.

The decrease in margin rate resulted largely from an increase in buying and occupancy costs as well as a higher markdown of percent of sales.

The increase in the buying and occupancy costs reflects the inability to leverage fixed costs such as rent depreciation and charges with the comp store decrease.

The third quarter markdown rate was higher than last year due to our desire to end the quarter as clean as possible in back-to-school carryover inventory.

With better-than projected October sales, we were able to be more aggressive in markdowns of our remaining back-to-school merchandise, also impacting the markdown rate somewhat was our continuing strategy to use direct mail and bounce-back promotion.

Largely offsetting the increases in occupancy and markdown rate was a significant improvement in initial markup in all three concepts, continued progress and sourcing has been an important factor in improving our markup in all three of our businesses.

We continue to be pleased with the progress we are making in Hollister where our initial markup improved over 800 basis points versus last year in the quarter.

We end the third quarter with inventories up 4% per square foot for last year at cost.

The end of quarter number was reduced slightly by the west coast port strike.

When the west coast lockout began, we switched deliveries of important items to air wherever possible.

We also used very conservative assumptions in projecting when merchandise that was already delayed would arrive.

So far, the shipments delayed on the west coast have arrived earlier than we assumed in our planning and we expect to have most key items in store prior to Thanksgiving.

At this point, we estimate that incremental air freight costs will negatively impact our fourth quarter margin by $2 million to $3 million.

As we enter the holiday season, we will anniversary significant decreases in inventory last year.

As many of you may recall, we ended January last year down 30% per square foot in inventory, a level that we believe negatively impacted our first quarter 2002 volume.

To protect our spring 2003 volume and profit, we are planning inventory to be up over 20% per square foot versus last year at the end of the fourth quarter.

This level will be below where we ended fiscal 2000 and a level of increase versus last year will moderate as we get further into spring 2003.

The third quarter SG&A rate was 21.5%, 100 basis points higher than last year's 20.5% rate.

The increase in rate versus last year resulted primarily from an increase in store expenses reflecting the difficulty in leveraging these expenses with negative comp.

During the third quarter, we reduced our store payroll hours by 2% per average Abercrombie & Fitch adult store and held part-time hourly wage rates flat versus last year.

In our kids' stores, we were able to hold both hours per average store and part-time hourly wage rates flat to last year.

We continue to be extremely pleased with the performance of our distribution centers.

During the third quarter, our productivity as measured in units processed per labor hour was 41% higher than we achieved last year.

For the quarter, we processed 25% more units than last year with fewer labor hours.

We continue to improve the operational productivity of our e-commerce business.

Since we brought our ecommerce and catalog fulfillment in house in mid April, we've reduced our fullfillment cost per order almost 30%.

Operating income increased 8% for the quarter from 70.9 million to 76.4 million.

Net income increased 9% for the quarter, from 43.9 million to 47.7 million.

Third quarter earnings per share on a fully diluted basis were 48 cents versus 43 cents last year, an increase of 12%.

During the quarter, we repurchased 850,000 shares in the open market as part of our previously authorized share repurchase program.

At this point, the total number of shares authorized for repurchase is 5 million.

The timing of share purchases will depend upon market conditions.

We opened 10 adult stores, one kid store and 16 Hollister stores during the third quarter, giving us a total of 326 adult stores, 158 kid stores and 76 Hollister stores.

For fiscal 2002, our current plans are to open 34 Abercrombie & Fitch adult stores, 18 kids' stores and 60 Hollister stores, for a total of 112 stores.

Total square footage growth will be 19% over last year, and we will end the year with 600 stores.

For fiscal 2003, we now plan to open 25 Abercrombie & Fitch adult stores, 20 kids' stores and 80 Hollister stores for a total of 125 stores.

Total square footage will grow 18% over 2002, roughly the same rate of growth as this year.

We continue to be pleased with the sales productivity generated by our new stores.

During the quarter, Abercrombie & Fitch adult stores opened during the past 12 months generated approximately 95% of the sales per square foot of the existing store bids.

This relationship has remained fairly consistent over the past several years.

For fiscal 2002, our planned capital expenditures will be between 105 and 115 million dollars.

The vast majority of the expenditures relate to new-store construction with the remainder invested in IT and distribution center projects.

For fiscal 2003, with a higher store count, our planned capital expenditures will be between 125 and 135 million.

The use of these funds is similar to 2002, with the majority relating to new-store construction, the remainder for IT and distribution center projects.

Now, I'd like to discuss our profit expectations for the fourth quarter.

Based on the continuing uncertain economic environment, we must be very cautious in our expectations.

Additionally, as you know, this year there will be six fewer shopping days between Thanksgiving and Christmas, with Thanksgiving falling in week four of fiscal November versus week three last year.

This change will have a significant negative impact on November comp.

We will also have to anniversary the significant expense reductions and productivity improvements we achieved last year in the fourth quarter.

These factors will limit our ability to achieve significant earnings growth without an improvement in the comp trend.

As we stated in our sales recording last week, at this point, we are comfortable with an EPS estimate of 79 cents a share for the fourth quarter.

Now, Mike will talk about the direct results in more detail.

Good afternoon.

I'm pleased that our organization was able to deliver solid financial performance despite the continuation of a difficult economic environment.

Our results were due to continued focus on the key elements that drive the bottom line.

Tight inventory management, margin protection and expense control.

Our organization continues to become stronger and more efficient, and I believe we are making progress in all three of our businesses.

I would like to start by discussing the business from a merchandising standpoint.

Based on the strong trend toward wear-now merchandise, this year's back-to-school assortment was much more focused on items such as short-sleeve polos and tees, with the exception of trending classifications like fleece, corduroy and sherpa, we planned more of the flow of heavier-weight goods to deliver later in the quarter.

I believe our focus on wear-now was correct and was on trend from a fashion perspective.

I'm pleased with the position of our women's business.

I believe the fashion is right and our customer is responding to our approach of providing more newness.

Key women's classifications for the quarter were woven shirts, knit tops, outerwear, pants, jeans, and underwear.

The sweater business continues to be disappointing, but we were able to offset much of this business by aggressively building our women's outer wear business.

Our women's sherpa jackets continue to be some of the hottest selling items in the business.

I believe we missed business during the quarter in outerwear and fleece.

Men's remains difficult without an underlying fashion trend in the business.

Despite this challenge, I believe our assortment was on track for back-to-school.

We focused on wear-now for back-to-school and had strong, short and polo tee shirt businesses.

Similar to women's, the sweater business has been tough.

Denim performed well and was, once again, an important classification for back- to- school.

We continue to make solid progress in our kids' business.

Kids had a better comp than the adult business with girls posting a positive comp for the quarter.

As we have seen in our women's business, the girls' customer responds immediately to newness.

Sweats, outerwear, pants, accessories and jeans performed very well in girls with denim and knit tops doing well in boys.

I'm extremely pleased with the performance of Hollister.

Sales per square foot in the Hollister stores were 93% of the Abercrombie & Fitch adult stores in the same malls for the third quarter.

We are very much on track to get Hollister as productive, if not more productive, on a per-square-foot basis as Abercrombie & Fitch.

The girls' business continues to be more significant than guys', representing approximately 65% of the overall business.

As the Hollister store base expands, we continue to work on reducing store construction costs and improving initial markup.

Going forward, we see additional opportunity in both of these areas, and we remain on track with our plan to be at a similar initial markup as the A&F business in 2003.

Our Club [Cali] program, which rewards Hollister's most loyal customers continues to grow rapidly.

Since we kicked off the program this past summer, we've issued 600,000 Club [Cali ]cards, which have accounted for over 60% of in-store transactions.

Based on these participation rates, there's no doubt that Club [Cali] will play an important role in Hollister's brand-building strategy.

I couldn't be more pleased with where we stand with Hollister.

This brand is just starting to take off and our plan to open 80 stores next year demonstrates our high level of confidence.

Our e-commerce business continues to become a larger part of our business.

Internet sales in both the kids and adult businesses grew by over 50% during the third quarter as compared to last year.

We remain on track to add a Hollister e-commerce business in 2003.

For Christmas, I feel we have the right fashion and our businesses are well positioned.

However, with the environment still uncertain, we will remain disciplined in our approach to managing the business.

Going forward, I am confident that the strength of our brands will enable us to continue to grow the business and increase our profits.

Now, we are available to take your questions.

Please limit yourself to one question so that we can speak with as many callers as possible.

After everyone has had a chance, we will be happy to take follow-up questions.

Thank you.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Lauren Levitan of SG Callen.

Thanks, and good afternoon.

Mike, you've commented the last couple quarters about the improvement in the kids' business.

I'm wondering if you could comment on any shifts in the pricing and promotional strategy, and if you attribute any of the improvement there, and if slightly lower entry price points is part of the success?

Is that a strategy that you might consider deploying at the Abercrombie & Fitch adult stores?

Thanks.

The real success of the building momentum in the kids business, I think, totally has to do with product and not price, Lauren.

It is just getting faster fashions to kids, particularly in girls.

The girls' business is one of immediate reaction in newness.

That's where we're getting the biggest response, and that's what's growing the business.

The prices are relatively the same as they have been in Little Abercrombie and Abercrombie & Fitch, and I'm very pleased with those levels, and I'm not looking to lower them at all.

I don't think that has resulted in us increasing business, and I don't think it would in the future.

So it's clearly just getting closer to the customer in terms of fashion, and I think we're getting better and better at it.

And can you comment on the promotional expectations for the holiday season?

Obviously, you've had the history now associated with some of the bounce-back and direct-mail campaigns.

Can you comment on how proactive versus reactive you will be with those kinds of programs as we head into the holiday season?

I think that we are going to protect ourselves with the promotional strategy, but it is -- we are not counting on a promotional strategy to drive the business fourth quarter.

We are really more interested in new fashion more often than competing at any kinds of price levels.

We're going to offer value in terms of a promotional strategy, but we're not looking to outhammer the competition in terms of price point this quarter.

Okay.

I think we're uniquely positioned that we don't have to, and, again, our position is protect the brand and protect the bottom line, and those things have worked for us in the past and I think will continue to do so.

And given the success of the Club [Cali] program at Hollister, is that something, in terms of a loyalty-based program, that you think could translate to the other brands?

No, I don't think so.

I think that's -- that's a peculiar program to Hollister.

I think -- I think many people misread the success of that as a brand-loyalty strategy in terms of price.

I view it more as a marketing concept to tie the customer to the brand and the romance of the brand.

The success of that is not the price orientation.

And I think that's a really important point.

Great, thank you very much.

Thanks.

Your next question comes from Mark Friedman of Merrill Lynch.

Good afternoon, guys.

Hi, Mark.

Good job on a tough environment.

Thank you.

Mike, could you just talk a little bit more about on the marketing side, do you have the mega log this year?

You decided to not send it last year given the environment.

Do you see that having any impact?

Is there anything else that you're doing on the marketing side?

And then, as far as your -- your previous comment, are you changing anything from a product flow to keep up with the statement you made about more fashion more often, being so important to the success of the brand in the fourth quarter?

I think that's really the legitimate question, Mark.

That is our strategy.

More fashion, more often, and to get more trend right.

That is our strategy for the business fourth quarter and ongoing.

The marketing -- the fact we have the mega log this year versus last I don't think will impact volume at all.

I love the mega log.

I love the Heidi issue, and I think it's a lot of fun.

It's caused a lot of comment, but I don't think that's going to be a significant volume driver.

So I don't look to marketing as the driver of the business for fourth quarter.

I look at it as product.

Okay.

And there's nothing you can call out, you're saying, as far as this more fashion more often?

No, I really can't, because I don't want to tip my hat but that is what's happening.

Okay.

Thank you.

Thanks, Mark.

Your next question comes from Bob Buchanan of A.G. Edwards.

Yeah, just want to say congratulations on the quarter.

And, also, establishing Hollister as a growth vehicle for the longer term.

Mike, I just wondered if you'd comment on the source of the 800 basis-point improvement in initials at Hollister?

Yeah, it's due to really better sourcing.

We're in factories that offer us the ability to have a better cost structure, but, also, the primary issue is that we -- we're getting the critical mass in that business so that we can buy better.

Prior to this, with fewer than 100 stores, we were hard-pressed to get the economies a scale that we're used to in the Abercrombie & Fitch business.

We're now able to get those in the Hollister business.

It's a combination of factory structure, base, which is different from Abercrombie & Fitch's, and the fact that we reached this critical -- critical mass in term of stores.

So, for the most part, it's different factory, Hollister versus Abercrombie?

Totally different structure.

And then, for Seth, I'm thinking you guys have now been up, including your time with those part of The Limited, 41 quarters in a row in earnings?

Is that about right?

That's right.

Thank you.

Thank you.

I love you bringing that up.

Thanks a lot.

We didn't want to say it ourselves.

Thanks, Bob.

All right.

Appreciate it.

Your next question comes from Jeff Klinefelter of U.S. Bancorp.

Mike, have a quick question for you on Hollister, considering that significant improvement in productivity, can you just kind of reframe for us what the store model is for Hollister, kind of the sales per square foot you're expecting now for that division, and is the pricing relative to Abercrombie adults still similar, and then anything else that's kind of changed in the last six months on the strategy?

Well, I'll let Seth talk about the productivity expectations.

I will say that I'm expecting the productivity at some point in the future to exceed the dollars per foot of Abercrombie & Fitch.

I cannot tell you the exact month that it's going to happen, but I think we're clearly on that growth curve.

And I think you'll notice, and the people who notice out there, that the stores are becoming more and more popular and we're seeing that in the productivity figures.

In terms of the rest of the profit equation in Hollister, I think our margins should approximate Abercrombie & Fitch's sometime in the spring season with our initial markup being probably about the same level.

So we would anticipate the same kind of operating return at some point in the future, I can't pinpoint the exact month.

Does that answer your question, Jeff?

Yeah, and then in terms of the price --

Yeah, pricing is about 70% of A&F, and we're doing a really good job of monitoring that on a week-by-week basis current, and in the plans go forward.

So that parity is fixed.

Mike, one last thing, is there anything you can point to in the current environment in the trends for that age group -- fashion trends, lifestyle trends that reinforces why you've so successful with this?

Is it the west coast lifestyle that you think is more popular, more prevalent than it's been in the last few years?

Maybe.

I think there could be more romance to it.

We see other successes in that business.

I just think it's something new and something intriguing for this age group, and I think we will be able to sustain the popularity brand as we have with A&F, because it's got -- it's a very fertile area to mine in terms of newness and imagination ongoing.

Okay.

I don't really look at the California thing as a -- this year only, or this kind of fad.

I think tying ourselves to that lifestyle offers us continued kind of rightness and opportunity.

Okay, great.

Congratulations.

Thank you.

Your next question comes from Janet Hoppingberg of AJK Research.

Hi, you guys.

Hi, Janet.

Congratulations.

Thank you.

Good job.

JK [inaudible], congratulations.

Thanks.

I wanted to ask a couple more questions.

You had said the IMU was up significantly in all businesses, and except at Hollister.

Can you talk about that growth in A&F and kids and how much longer you think that could go on in those businesses?

And I wanted to ask about inventory levels as well.

The answer is, we never project improvement in that business, but we'll continue to strive for it.

I'm laughing, because we've been saying that since our initial public offering, but that we wouldn't plan an increase, but we continue to see it.

I think we are very good at new factories, at sourcing today, and I think we're in a very enviable position in terms of our brands being strong enough to command full price and good prices.

We're not fighting it out in the malls with lower price points than anybody.

We have aspirational brands that can command good retails, and if we continue to run our brands as the coolest brands in the malls, we're going to be able to command that kind of gross margin that we're accustomed to.

And that's just our ongoing strategy.

So the IMUs, then, continue to improve?

Well, I didn't say that.

But I'll work on it.

Okay, thanks.

Thanks.

And, then, Seth you had said the inventories on the care footage basis going into Q4 are up about 4%?

Yes.

Do you have an idea where they were when you went into the fourth quarter last year?

You gave where they were going into the first quarter of this year, but not into the fourth quarter.

I don't have it right in front of me.

I think they were down in the mid-single digits.

Okay.

So they were lower than --

they were lower than prior year.

2000.

Right.

Okay.

And the air freight of $2 million to $3 million, I would assume that is included in your comfort level with a 79 cent fourth quarter?

Is that correct.

Yes.

Correct.

Okay.

And the only last thing I wondered about, Mike, if you could talk about the percentage of woman's business to men's business at the adult Abercrombie & Fitch stores?

You had talked about it at Hollister.

And I wonder if there's any changes going on with women's growing at the expense of men?

Certainly, our women's businesses is better than men's, so as a percent of the business, it's growing.

It is --

62% in the third quarter.

-- 62%.

So it's growing to the level of a Hollister, which I think I've been saying for a long period of time.

I would anticipate it would be -- we would be a pretty normal mall-based men's to women's ratio of about 65 to 35, in that range.

I think that's where it's going.

Thanks very much.

Thank you.

Your next question comes from Barbara Wyckoff of Buckingham Research.

Barbara?

Hi.

The ratio of boys to girls, or girls to boys, is that also -- should we assume that's also in that 65/35 range?

Or it's going towards that?

Not -- not yet.

But it's going there.

He'll you where --

57 girls, 43 boys.

And it's going in that direction, Barbara.

Okay.

And when do you think it would get up to that 65 range?

By next -- first quarter, second quarter?

I can't -- I don't really know.

I think that's a very difficult thing to project.

I would assume that next year we'd be closer to that level.

So are you distorting inventories to get there?

Yes, clearly.

Yes.

Okay.

Yes.

As we have in women's for the last few years.

Okay.

And then, just this last question, percentage of goods that you're doing domestically, which presumably would have a shorter lead time, to give you more flexibility.

The answer to that question is, we do practically nothing domestically, because the flexibility is not there.

We have much greater flexibility offshore than onshore.

Okay.

And that's a really important point.

We have great flexibility offshore, greater quality control.

It's a very tough business domestically.

In terms of quality and timing.

Okay.

And then, just one last question.

Sure.

You talked a couple quarters ago about really lack of a new uniform in men's.

Is there anything on the horizon that looks interesting, things that --

Barbara, I am the eternal optimist, and I always think we've got it, and it's out there.

So I don't want to tell you what I think it is.

I think there is something emerging, but I've sure been wrong before.

But we're sure going in a direction as if there is.

Okay.

Great.

Thanks.

Thanks.

Your next question comes from John Mars of Gerard Klauer.

Can you hear me okay?

Hi, John.

How are you?

Great.

Couple of questions, first on Abercrombie versus Hollister, clearly Hollister really hitting its stride now.

What can you tell us about what you see with the performance of the Abercrombie adult stores in those locations where there -- in the same mall as a Hollister store, compared to the overall average and how you would track whether or not there's heavy crossover cannibalization?

Okay, the answer to that, and Seth will give you more details, is that we look at it very hard.

To date, we have not seen significant cannibalization.

We do track it on an every-mall basis by week.

There are some stores that have been affected.

There are some stores that have not been affected.

As we look at the trend line, there are fewer stores that have been affected than have been affected.

So we would say in total at this point -- and believe me, this is something that we all look at weekly -- there is not cannibalization, or certainly not cannibalization that's worth talking about.

However, we'll continue to track it.

And I would assume at some of the -- as this thing continues to gain momentum, there will be some, but it doesn't look to me like it's a serious problem.

Seth could comment from there.

Yeah, I -- I just would reiterate what Mike said.

What we're seeing so far, looking at every single store, is we have a number of them where the A&S seems to get better and a number where it seems to get worse, and there's a lot of dispersion to the results.

So it's hard to get any real trend, but it's something that we're going to continue to look at.

If you were to fast forward a couple of years and tell us about your -- from the perspective of your real estate strategy, from about five miles up, how much of an overlap -- direct overlap, you know, within the same mall do you see the two divisions?

You know, is it 80/20 or not necessarily --

I think it will be in all -- I think eventually we would have a Hollister in just about every center that has an Abercrombie & Fitch, if you just think about Hollister being 600 to 800 stores, and Abercrombie & Fitch being 400.

I mean, one of the things we do find is Hollister doesn't seem to have its performance impacted as much by the quality of mall sometimes as Abercrombie & Fitch, which we think is a plus to it.

But we would ultimately see it in almost every mall that has an Abercrombie.

Right.

Obviously, thrid be some benefits there, too.

The question I had, Mike, in terms of the outer wear, you mentioned you left a little on the table for the third quarter.

Yeah.

Will you be back to where you want to be for Q4?

What's your prediction there?

We are.

We are.

I think we're going to maximize the outer wear trend for Q4, and that's -- assuming we have some weather in our benefit.

It's amazingly weather-related, but I think we're absolutely going to maximize it for quarter four.

Would you say that's been the strongest trend out there at play?

Yes.

Okay.

Clearly, yeah.

Yeah.

Third trend outerwear is the strongest trend we're experiencing.

Yeah, good luck for holiday.

Thank you.

Yeah, thank you.

Take care.

As a reminder, please limit yourselves to one question.

After all the questions have been answered, we will be happy to answer any additional questions that you may have.

Your next question comes from Emme Kozloff, Sanford Bernstein.

Hi.

Can you guys talk about the men's business at Hollister and how it's comping relative to the women's business?

I mean, even if it's substantially positive, are you seeing the same spread that you have at Abercrombie?

Virtually the same.

Yes.

Okay.

Can you hear me?

Yeah.

Yeah, it's virtually the same spread as -- but the comp -- the comp history in Hollister is a little more difficult than in Abercrombie & Fitch, because the store base was relatively small through third quarter.

So what we're really looking at is the productivity per foot versus Abercrombie, but, in fact, the comp figures do show about the same spread in Hollister's.

Okay.

And could you give us color on the promotional cadence at Hollister?

Was it as promotional as you consider A&F to be in the third quarter?

About the same.

Yeah, just about the same.

Okay, thanks.

Thank you.

Your next question comes from Marcia Aaron of Pacific [inaudible] Equities.

Can you talk about the design organization -- any changes you're making either there or in merchandising, and then can you talk about newness in women's.

Are you providing the same level of newness in men's and is that something you're thinking about?

The answer is we are really working on it, because I really believe it's important to do so, because I think all the more subtle, there is a lot of fashion change happening in men's.

We continue to invest in conceptual design or research in our business for all the brands, and I think that we're getting better at it, we're getting better information, we're [rootenizing] it better and I think it's impacting our business.

I couldn't believe more strongly in what we're doing for all of the businesses.

It's a very good question, because men's is -- is changing, and we're really pushing that change.

So you do see something out there at this point?

Absolutely.

But, Marcia, you know me, I always do.

We would hope you would.

What's new?

Sometimes it works, sometimes it doesn't.

Anything on the logo front?

Are you seeing any improvements, weakness?

What's happening with logos, both, you know, as it relates to men's and women's at A&F?

Still very strong.

We sell things that are branded in this company, because the brands are aspirational.

Having said that, the Hollister business is more brand-oriented, more logo-oriented than the Abercrombie & Fitch business, simply because I think that younger customer is more into logo branding than the older customer.

And I would continue that -- I would expect that to continue.

Great.

Thanks.

Good luck this holiday.

Thanks, Marcia.

Your next question comes from Robby Ohmes of Morgan Stanley.

Oh, thanks.

My question is, I was hoping I could get a little more clarity on the inventory comment made earlier.

Is it -- did you guys say inventory will be up 20% at the end of the year?

And I know it's an easy comparison.

Can you tell us, you know, how you're going to effect that in terms of broadness, versus going deeper, and, also, how that will build, you know, through the quarter, and then, also, how it will build year over year through the first half of '03?

Thanks.

Sure, Robby, we'll give that to you in just a sec.

Well, we thought we'd be up at least 20% at the end of the year.

That's on top of -- down 30s last year, and last year we, to be honest, had a lot of problems in the first quarter trying to drive business on that level of inventory.

So it's really having a much stronger position opening the first quarter in spring goods than we had last year where we were down fairly significantly.

As we get through the first quarter, the level of increase versus LY will drop.

You have to be aware that we were pretty much chasing it all through the first quarter last year.

We ended the first quarter last year still down 19%.

So I think as we probably get into second quarter, I think the increase versus LY would be very -- very minimal.

And to answer the second part of that question, I think, Robby, is it, we don't think by increasing our beginning of February inventory levels as we've described are going to impair our ability to still react to the season, because we do react from December tests for deliveries in February, and even from January tests for our deliveries the beginning of March.

We think it will give us the ability to drive better business the beginning of the quarter, but we still have the ability to react very quickly during the season.

And, Mike, will this be a broader assortment at the beginning of the quarter?

Or will it be -- you'll just be deeper in the items you weren't as deep in last year?

It'll be broader, because part of our strategy is more newness more often.

So it is a broader assortment, not a deeper assortment.

Great, thank you very much.

Thanks, Robby.

Your next question comes from Brian Tunick of JP Morgan.

Hi.

Hi, Brian.

Good afternoon, guys.

Two quick questions.

I guess, Seth, first of all, you know, given the calendar shift, some of your competitors have come out in the past few days -- given some kind of idea of where they see the November and December -- sort of two months, sort of shaking out.

Would you guys comment on where you see November or December comps?

No.

No.

I'd love to see their crystal ball.

Maybe they could send that information over here.

We don't know.

No, we -- we've never given comp guidance in the past, and this certainly wouldn't be the time to start doing that.

We're just not good at predicting that sort of thing.

Okay.

But for the fourth quarter, the 79 cents, you're comfortable with that, assuming -- have you already given what kind of comp it assumes --

No.

No.

We would say we're comfortable with that.

Good try asking the same question, Brian.

Yeah I appreciate that.

On the bounce-back, have you guys changed the number of days of distribution or redemption that you're looking to run the program with?

Well, it's changed slightly verse last year, but a lot of that relates to -- the calendar -- -- when the calendar of Thanksgiving falls.

Okay.

So I don't think it's dramatically different.

The answer is, again, Brian, we're not looking to drive the business this year versus last year in a more promotional nature.

Okay.

That's really not our strategy.

Okay.

I think if the end of the world happens, we could react, but that's not our plan as of this moment.

Terrific.

Thanks very much.

Thanks, Brian.

Thank you.

Your next question comes from Joe Teklits of Wachovia Securities.

Thanks.

Hi, everybody.

Hi, Joe.

Seth, do you have any contingency plans for the west coast stock problems given the dispute is not yet settled for Q1, for spring, and how that would impact your margins if you do?

That's a good question.

We're paying very close attention to it, and to be honest, if we're at all concerned about whether an item's here for opening spring assortment, we'll --

we'll air it.

-- we'll be airing that item.

So I guess our contingency plan is we already have more air shipment planned into our inventory levels.

Plus, we're also routing goods by sea to ports other than the west coast.

You gave us, like, $2 million to $3 million Q4 margin impact.

Could you give us a similar number for Q1?

Well, I think we -- we don't know really at this point what's going to happen Q1 for air rates.

Yeah.

Some of it depends on whether the -- when the thing is settled.

I don't think at this point we can be giving out a number.

There's too much time to pass.

And we've built pretty conservative plans.

I think the thing everybody has to understand if the air rates are changing daily, and will continue to do so.

Okay.

Can you answer another question for me, quick?

Sure.

Will Hollister be profitable this year?

You've been saying break-even.

It sounds better than that.

Oh, yeah.

Yes.

Hollister's profitable this year.

And the 80 stores you'll open, was there previous guidance, was it at least the same as '01 or'02 for that -- Well, we haven't really given a guidance number before for '03.

Okay.

So I -- this is the first time we've really put the number out there.

But we're very pleased with where we are, and we're going to be aggressive with the store opening.

Good, super.

Good luck.

Thanks.

Thanks.

Your next question comes from Liz Dunn of Prudential.

Hi, can you hear me?

Yeah, sure.

How are you, Liz?

Hi.

I was just wanting to dive back in a little bit on an earlier question.

I know that you're not really ready to give a comp expectation for the fourth quarter, but last quarter, you said your guidance sort of assumed no acceleration in comp trends.

Can we feel okay modeling that sort of scenario?

I think you can assume that the 79 cents that we're prepared to make that number with a negative comp, and then we also have to be aware the calendar shift, so we're not -- we're not assuming any dramatic improvement in comps.

That's correct.

That's correct.

Okay, great.

And I was wondering if you could talk a little bit about the 15% off coupons and the bounce-backs.

I was wondering, have you seen a -- I'm sure you've seen the sequential increase in the redemption and use of those -- those tools.

When do you think that'll level off, just looking at when we can kind of anniversary this sort of activity?

This year --

well --

we start anniversarying it this quarter.

We started fourth quarter of last year.

Understanding that.

But has it been building?

And when could it get to a level that you really don't think it will increase much?

Well, I, first of all, I don't think we're going to give out quantities of coupons and things like that that we might be doing.

I think that's a competitive factor that we don't want to disclose.

We're going to be anniversarying -- doing some of those things for the first time last year in the fourth quarter.

Okay.

Whereas in the first three quarters of this year, we weren't -- they were new.

Okay.

Can I ask another question, about the IMU differential between Abercrombie and Hollister, understanding that you expect Hollister to get to the levels that Abercrombie is at now, what is the current differential between those two businesses?

We don't want to really give you that difference now, but it's not too far away.

Okay.

And then, the final question, just back of the envelope math, it looks like Hollister is turning substantially faster than Abercrombie in the neighborhood of around 30%.

Is my math right?

I'm not sure -- the stock turnover?

Yeah, inventory turns.

I don't know.

I don't think we've given out any inventory information for Hollister.

So I don't know how you'd be getting to that.

We'd really rather not comment on that.

Okay, thanks.

Good job, guys.

Bye.

Your next question comes from Kindra [inaudible] of Fulcrum Global Partners.

Couple questions on the operating margin -- I know you mentioned Hollister operating margin probably at some point to be equal to Abercrombie -- I'm assuming that's an expense issue -- the many number of stores.

How many stores do you think you need to have?

I think it's more than expenses per store.

It is that, but it's getting the margins at the same rate, which we said we're on track of doing in terms of IMU.

By spring, right?

Yeah, and it is covering some central expense, but it's also getting the expenses as a percent of sales in line with A&F, which we think is a function of productivity, and getting to that 100% -- or exceeding 100% dollars per foot of A&F.

We can't give you an exact month when that would happen.

If you'd like to comment, Seth.

A lot of it's a productivity issue. -- expense ratio, and we're still working on a few elements of the expense structure, where Hollister costs more.

The Hollister stores still --

right.

-- cost more to build than Abercrombie & Fitch stores.

We've made significant progress -- Seth's trying to convince me to take out the lightbulbs, but I won't.

we may cut the wattage down.

Yeah, a little tension there.

Yeah, we're still working on it.

We think we're making a lot of progress, but we're not quite there yet.

But fundamentally, the real drivers of the operating margin will be getting the sales productivity and the gross margin, which we think we're very close to at this point.

Okay.

And then on the kids' business, you sound much more optimist be than you did, say, a year ago.

Historically, you've said it wouldn't be able to achieve any kind of operating margins close to the adult.

Do you feel like that could be closer now or --

I think operating margin will not reach the A&F level, because it's the kids' business.

Okay.

It made strides and will make strides in the initial markup percentage there.

I think we'll make continued strides in the productivity, but I can't foresee a day that it will return the same kind of operating percentage as either A&F or Hollister, and I think that's a function of the target customer.

I just don't think it's in the cards.

Has Hollister surpassed the kids business?

In terms of --.

Operating margins?

Well, I don't -- I don't think so at this point, because you still have the -- it's not the size of kids yet.

And you still have -- so it's difficult to cover the home office and the fixed expenses.

Mike, you've always talked about a fourth concept.

I know it's a tough environment.

Is it on the back burner because of that?

Absolutely not.

Okay, when should we expect to hear something about that?

I'll keep you posted.

I can't say anything now.

But I don't think it's -- a tough economic environment effects us at all.

I have to emphasize, I'm really delighted with the progress in all three of our businesses, and we would expect to make an announcement, but not at this point.

Do you want to stay in the teen area, or kids area?

I can't comment on that.

All right, great thanks a lot.

Thanks.

Your next question comes from Richard Balm of CSFB.

Good afternoon, everybody.

Can you hear me okay, Mike?

Yeah, hello, Richard.

Hello, guys.

If I may take the liberty of two questions.

The first is, just a follow-up on Kindra's question on kids.

You know, you've long said you felt that the potential for the number of kids stores is equivalent to the number of A&F stores.

Is that still your feeling at this point, and if so, why would you -- why are you opening stores at a slower pace in kids than you are an adult, or has your thinking changed?

Well, a little of both.

I think our emphasis now is on getting Hollister to continuing to get to this critical mass, and we see the potential return of Hollister being much greater than Little Abercrombie as a percent of sales.

We also think that Little Abercrombie is probably not play -- clearly doesn't play in as many locations as Hollister, but probably will not reach the 400 levels of A&F as well.

I can't tell you what that number is.

It's still a significant number of stores.

We see it as a significant profit contributor, but the return is clearly going to be much greater in Hollister.

Okay.

Richard, I think cutting the number of kids' deals down really reflects a few things.

Number one, as Mike said, with the growth of Hollister, we don't need the square footage growth overall that would require more kids stores.

Also, since we're not at the productivity level that we want to be at in that business, we have to be very disciplined about the real estate and make sure we're really driving the economics in the deals, and we think we can do that in around 20 deals a year right now.

Okay.

I think that makes sense.

And then secondly, I want to come back to a comment Mike made earlier, maybe it's a mantra of sorts, you're looking for more fashion, more often, more trend, right?

Did I quote you correctly on that, Mike?

That's correct.

And it is a mantra.

It is a mantra.

I guess the question I would have, it is a little bit like, I guess, God, apple pie and the flag.

I don't know.

I think it's honestly changing -- it's moving faster and faster, really.

Here are my -- that wasn't my question, by the way.

Okay.

The question was, one, what should we look at as investors in the metrics that would tell us that you are doing more fashion, more often?

Would we -- are you -- would we expect to see faster inventory turns if we wanted to kind of take to you task on that, what would we look at?

I think that's a very difficult figure to look at in terms of what we -- how we invest in future seasons, future stores.

I don't think the tell-all is in that number.

I think the tell-all has been just looking at us, Richard, and looking at how as a real retail observer, go in and look at the stuff.

How right is it on a weekly basis?

How often are we changing what we're doing?

I think it's very difficult to tell from the matrix.

I think you'll see it in the bottom line of our business, businesses in terms of the continued health of them.

I honestly believe that you see that in Abercrombie & Fitch now in terms of an ability to hold a position in terms of aspirational brand and profit during very difficult times.

I think that's the bottom line.

Okay.

And then, just lastly, on your comments about being more trend right, I've always felt that you were always trying to be more trend right anyway.

Is there anything that you're doing with regard to process that will help you be even more trend-right than you have been in the past?

Yes.

Yes.

And can you --

continued investment in that process, people process, and that's benefiting all of our brands.

I think if you had to ask me what I most am excited about in our total business, is that, is that process and developing the ability to respond quickly and appropriately to it.

It is much more sophisticated than it was two years ago, and the level of sophistication versus five years ago is astounding.

So that's -- that is the reason for my enthusiasm.

Are there any examples that you can provide --

No.

I'd really not, because anybody else who's listening to this call, go out and do the same thing, you know, as much as hiring my -- thinking they can solve their problems by hiring the people who do my focus groups.

No, love to tell you, but it's going to stay here.

Okay, thank you.

Thanks.

Your next question comes from Dorothy Laettner of CIBC World Markets.

Good afternoon, everyone.

Hi, Dorothy.

I wanted to ask about the sweater business.

I know you said it was disappointing in the third quarter.

Do you think there were -- that was mainly a weather issue, are there changes you've made in your assortments for the fourth quarter that you think might do a little bit better, or there are other categories that might take up the slack, such as the outerwear you've done very well with?

And I had a second question about the accessories business, which you talked about on the last call, and seem to be pretty excited about for the second half of the year.

Okay, sweaters, I think there are -- one, the sweater business picked up for us and everybody as soon as cold weather happened, so I think sweaters are turning out to be another wear-now classification, and they just rejected even cotton sweaters third quarter.

But there is more of a sweater business fourth quarter that's related to weather.

Having said that, I still don't think we're in a very strong sweater trend.

So while sweaters have picked up this year versus last, I don't think they're going to offer us increases for the fourth quarter.

I think we have a compelling -- we had a compelling sweater assortment, but I don't think we're in a huge sweater trend again at this moment.

Men's, women's, boys', girls'.

Accessories, a business that has -- has given us increases, it's a very specific business.

We've seen increases in belts in women's.

I think we're going -- we're experiencing increases in knit hats, men's, women's.

I think if we hit the accessory right, we see good business, and I think that's how it's going to continue.

I don't see it as a business that you develop on an ongoing basis.

I think it's this season, within accessory, next season another.

But I think we're seeing increases in it.

And as a percent to sales, are you seeing the kind of increases you wanted to see?

We're seeing it tracking as a bigger percentage of sales in our men's and women's business, but not significantly yet.

But I think we're on a curve.

Okay.

And then, outerwear, relative this year, relative to last year.

Just absolutely outstanding in the women's businesses, not as good in the men's businesses.

Okay.

Great, thank you.

Thanks.

Your next question comes from Kimberly Greenberger of Lehman Brothers.

Great, thank you.

Good afternoon.

Hey, Kimberly.

Just looking at your operating margin and incorporating your fourth quarter guidance, we're looking at something, you no, in operating margins still north of 18% and it continues to be one of the strongest in the sector.

You know, going back a couple of years to '98 peak -- or '99 peak, I'm looking at, we've got about 300 basis points or a little more than that off in the gross margin line.

It sounds like the IMU has been coming up.

Is the decline then strictly a function of the negative comp and the loss of leverage on the B&O side?

And how should we sort of think about, you know, the profitability of the business going forward?

This is sort of a longer-duration question, not necessarily, you know, next quarter or, you know, first half of next year.

Can you just sort of help us think through the way we should think about the profitability of the business?

What does it take to show some operating margin improvement from here?

And is a positive comp necessary in that equation?

That's a good question.

I think you're correct in that the decline in recent years has really related to the negative comp and the inability to leverage expenses against that.

We have protected the bottom line through expense reduction, and particularly through margin management and increased IMU has been a big factor.

I think the key to improved operating margin is to start generating better comp store increases, and we think that that will come.

We can't predict a specific month, but we think we're doing the right things, and given the right environment, we are very confident that, you know, we'll be doing plus comps in the future, and that'll drive operating margin.

Seth, do you think that the positive comp opportunity -- is it going to be a function of the right inventory position, the right fashion, a better economy, an increase or improvement in mall traffic?

What are the sort of metrics that you guys think surround the ability to turn comps into positive direction?

See, the economy, which is related to mall track, I think that's a key factor.

Okay, thanks --

I think when we say -- honestly, we've been working ours off year after year to become better and better, but we're up against good performance, so I think the real turn will be when this economy heats up and people start doing a lot more business.

Mike, when you say you're up against great performance, are you referring to the very high sale per square foot numbers --

yeah, sales per square foot and the operating margins.

You know, we've -- we've run a good business consistently.

We just reported our 41st consecutive quarter of profit improvement.

That's not bad.

What's that?

Thanks to Bob.

Thanks to Bob.

Yeah.

Okay, great, thanks.

All right.

Your next question comes from Jeff Stinson of Midwest Research.

Seth, you talked about payroll cost savings in the third quarter.

Are there further opportunities for that in the fourth quarter and any other SG&A cost-cutting opportunities you could point out within the business?

We, in the fourth quarter, we think we already are managing the store payroll hours to the level of volume.

I think there's potential to make some reduction in the adult business versus LY if the comps are tough.

And the kids' business, it's very tough.

I think we were at very low staffing levels there, and I don't know how much we could cut further.

In the rest of SG&A expense, we are targeting to have another fairly significant increase in distribution center productivity in the fourth quarter.

We'll continue to have e-commerce productivity improvement.

And so, we're being very judicious in adding head count, and we're managing travel very tightly, and all those things.

So it's -- you know, we're doing what we think we need to do to protect the bottom line, but in store hours, it's really something that there's a limit to how far you can go.

From a wage standpoint, do you think there's further opportunities market by market?

No.

I think we've sort of flattened out there, depending on what markets we go into, we've seen some favorability in Hollister, because some of the markets we're going to are in non-urban areas, but it's not going to be a big opportunity for the fourth quarter.

I think we did a very good job with the wage rates last fourth quarter.

It's tough to go beyond that.

Thanks.

Thank you.

Your next question comes from Rob Wilson of RSI Research.

Has the cost to build up the Hollister stores decreased this year materially?

Yes, it's -- we're probably down at -- in the neighborhood of probably 20% per square foot versus where we were last year.

20% down, not --

20% less cost this year than last year.

and that's still north of the square footage costs of an Abercrombie store?

Yeah.

Okay.

Also, last quarter, you mentioned the e-commerce business, I believe, was up some 40%?

Was that similar in Q3?

Yeah, both the adult and kids business were up over 50% in Q3.

And the e-commerce?

Yes.

And quickly, do you have share counts and square footage counts?

For the end of the quarter?

Yes, sir.

The basic shares were 97,229, diluted were 99,568 square footage at the end of the third quarter was 4110.

Thank you.

You guys do a great job.

Thank you.

Your next question comes from Josh Schwartz of Flatbush Water Mill.

Hey, guys, how are you?

Hi, Jeff.

How are you?

I'm good.

I'm good.

I had two quick ones -- well, two questions here.

Mike, I just want to make certain -- because I spent a lot of time trying to understand how you managed to gross margin, and you made a couple of comments about, I guess, in response to questions regarding promotion, and is there any change in your view about the level of promotion that you think this brand should be doing?

Because I'm looking -- I guess -- I don't want to get into all the funny math that I can do, but it seems -- I know your IMU is going up, and it seems like you've been willing to sell clothes at a lower price, but not necessarily a lower IMU.

That's exactly right, because we've been -- we've been costing goods better.

We've been sourcing them better.

And so, how does that figure into your -- I mean, that's a relative pricing issue?

I think it's an ongoing issue.

It's an -- we try to do everything better, and we have a very good sourcing area that is working with the world to provide better quality clothing at better prices.

And I think, bottom line, Josh, we are in a deflationary cycle for apparel, so we should be paying less for it.

I think the thing that's changing in my mind, is I don't know how price elastic we are as a business.

I think we probably have given away some volume and profit dollars in the past by thinking we had to sell cheaper than we did.

So I'm changing a little in that regard.

Okay.

The value of the brand, strengths of our brands gives us the ongoing ability to command higher retail.

But I guess I'm looking at the numbers, Q2 of this year versus Q3, you know, in the second quarter, this company generated the equivalent -- the highest operating margin it's ever created, or generated.

You know, equal to, I think, the '99 or 2000 year, on 30% lower dollars per foot in sales, and so, I would have thought, you know, given -- you had less square footage growth this quarter year over year than second.

It seems to -- I guess just looking at numbers, you decided to clear out the inventory at lower prices than you would have historically.

At the end of --

the end of this quarter.

Correct.

That's correct.

Because we had the opportunity to do so.

We could afford to do so.

Okay.

Again, and that relates to our comment about more newness more quickly, that's where our heads are now.

I gotcha.

So historically, would you have sat there with the same inventory longer, more hesitant to discount it?

Exactly.

Okay.

I had one other question.

I'm curious, have you guys done anything about the buy-back window?

Have you changed it for the fourth quarter?

No.

And is there a board meeting coming up --

Well, Josh, we don't -- we don't think it's appropriate to change the trading windows --

can I just make a comment then?

I want to discuss this.

I'm not even talking about you buying the stock.

You've shown just -- you've shown the interest in doing so, and, you know, just -- the fourth -- it's my understanding that the fourth quarter is almost completely blocked out, and I understand the company has historically -- went through some stuff with this whole comp thing, you know, years ago, and this is probably where this arose, but I just think that you guys should at least consider -- it actually is damaging to us as owners.

It's not at all good -- and I'm not even saying if -- that you would buy it back, but to not have the opportunity to repurchase shares when you've shown a willingness to do so, in a quarter where you get 40% of your operating earnings, you know, where people tend to freak out a lot, I just think that you should consider it.

Well, Josh, I think our windows are designed to be fair to all investors, and I think the idea that once Thanksgiving business is in, we have much more information about what's going on, then the -- you know, the average shareholder, and we should not be taking advantage of that.

So we believe strongly in that, that everybody should have access to the same information, and so, I think --

I guess -- I understand -- I understand, and I wouldn't tell you to do anything terrible.

My last comment would just be that you should -- you should have the investor in mind, in my opinion, of the guy who will be around for five years and doesn't care whether the Thanksgiving sales are bad in one year.

Josh, we thank you, and we're listening to you.

Okay, thanks.

Take care.

Your next question comes from Richard Jaffee of UBS Warburg.

Thanks very much.

A long-time listener, first-time caller.

Appreciate it.

A couple of questions on Hollister versus Abercrombie and the -- I don't know if you want to break them out, or if you do, the average price -- average ticket per --

70% of A&F.

And the average price at A&F, I know has been falling a bit, and how that changes the metrics in running A&F that you need to sell more units to generate the same kind of sales?

We've seen that, but the matrix -- we're not falling at this point.

The average unit per retail for fourth quarter should be up slightly to last year.

And keeping the distance then from Hollister as well?

But it will be the same parity.

Right.

And I guess the challenge in running Hollister at lower price point is to turn more quickly the more units for the store?

Have to sell more units, exactly.

And your plans to inventory the store?

What's been the metric?

Do you inventory the store higher or run the product through more quickly and that's part of the distribution center process?

Can you talk about that a little bit?

Well, we buy to the project the level of sales, and, in fact, I don't want to share our turnover figures with you, but we do end up turning the units faster.

At Hollister than Abercrombie --

yes, we will over time, yes.

Great.

Thanks very much.

Thank you.

Your next question comes from Elliott Lawrence of Jeffries & Company.

Good afternoon.

Hey.

How are you?

I'd like to go back to the inventory a little bit.

Last year, as you were running these promotions for the first time, and you were cutting inventories pretty aggressively, at any point between Thanksgiving and Christmas, did you feel, well, gees, we have an uncomfortable lead, low-level of holiday product given the acceleration and traffic in the malls during the last 10 days?

Yeah, I think -- no, I think last year's inventory before holiday really was a result of wanting to protect the bottom line in a very weak environment.

So I think that was the right thing to do then.

But I think the answer to your question is that we did.

I think -- I think in those 10 days before Christmas, we realized that we probably would have liked more inventory.

I think the answer to that question is, yes.

I think we did the right thing to protect the business, but probably we could have done more business had we had more business the last 10 days before Christmas.

So effectively with the shift of the -- of Thanksgiving, there may be a fairly significant -- if you have higher levels of inventory, if the mall traffic like the last 10 days of last year is stronger, and more consolidated Christmas selling season, there might be a fair amount of shift in the business out of November and into December?

Well, there will be.

We're counting on that.

But having said that, we're still going to be -- we are going to build the inventory, but we're still going to be pretty conservative.

It's very tough to tell what's going to happen out there.

It really is.

Let me switch gears, though, a little bit.

Stretch in the denim.

Is that something Abercrombie is going to head into going forward?

It seems to be like lycra and the tops these days, that stretch seems to be well received by most people in the denim area.

Yeah, that's a good question.

A great part of our appeal in the denim business is the wash and the authenticity of the wash.

It is very difficult to achieve the same level of wash character in a fabric with stretch.

We sell more stretch in the girls' business, in the Hollister business, than the A&F business.

It is a factor.

But it does -- the -- its washability, in terms of character, does impede us dramatically in the A&F women's business.

It's not a factor in men's at all.

I don't like it in men's at all.

It's related to the age group we're going in.

Okay.

And lastly, I thought it was interesting that in fourth quarter of this year, you were kind of features a non-denim bottom on the gals' side of the business in terms of corduroy.

Several non-denim bottoms.

Any implications for spring and what you see happening on the gal side in terms of twill and canvas, et cetera, for spring season in the bottom area?

I'd love to tell you, but I can't.

Okeydoke.

Thanks very much.

Your next question comes from Lauri Brunner of RBC Capital Market.

Hi, thanks very much.

Mike, you mentioned sherpa jackets and the success you've had there.

It seems like nobody else had the presentation that you did in Q3, but recognizing it's a pretty fast fashion marketplace, do you think you guys can maintain that proprietary edge going into the fourth quarter and the holiday?

Thanks.

Okay, I don't know.

I think we have to date -- In fact, pretty well as Seth said, we pretty well ran out.

We did not maximize the business in September in the first three weeks of October.

We're clearly in stock now, and I think we will be for fourth quarter.

I think the trend is so strong that even if our competition loads up on it, it's -- it's a very wanted classification.

So I don't see it as being a problem for meeting our projections for fourth quarter.

Great, thank you.

-- seeing more of it out there.

Thanks.

Your next question comes from Eric Becker of Widell & Reed.

Hi.

Hey.

Just a question on Hollister with regard to Abercrombie.

You quoted Hollister as being 93% of the productivity of Abercrombie store.

Mm-hmm.

On a square-foot basis.

Right.

We know the productivity of the Abercrombie stores have been coming down for quite a long time now.

Yes, it's an abominably low level, right?

No, no, it's still a good level.

But I'm trying to gauge if you look back, say, two years and say Abercrombie was running at, you know, say $500 per square foot, it seems to me based on the math that Hollister's perhaps around the 300, 325 level.

Is there any chance of getting up to the historically high levels?

Absolutely.

There is.

And can you tell us what the trend has been on an absolute basis over the past three or four quarters?

No.

But it's absolutely moving in the right direction.

Okay.

I think that -- the reason I responded the way I did is we're still, you know, among the highest productivity of mall retailers.

Right.

So to say that it's come down, I think these brands sustain kind of fad, and then I think the mark of a brand is what you're able to sustain in terms of the bottom line and a decent level of productivity.

I understand.

And I think -- yeah, I think that Hollister will go through that same surge that Abercrombie & Fitch did, and then we'll steady again just as Abercrombie & Fitch did.

Okay.

I'm sorry if I sounded negative.

I'm very sensitive to that.

I think the mark of a good brand is that after it runs that cycle, that it can settle to a consistent level of productivity and profit.

Okay.

And then, in terms of the man's business, in the Abercrombie stores, have you had any complaints regarding fit?

A lot of muscle tees, a lot of muscle sweaters, that kind of stuff, it seems kind of exclusionary for people that perhaps don't have a great physical seek.

I'm wondering if that's ever been an issue or come up at all in some of your marketing studies?

The answer is that my target customer is an 18 to 22-year-old college guy who has a good body and is aspirational.

Gotcha.

If I exclude people, absolutely.

Delighted to do so.

Thank you.

Forces us in the office to get in better shape.

Absolutely.

We are the cool brand.

Thank you.

Your next question comes from Dana Telsey of Bear Stearns.

Good afternoon, everyone.

Hi, Dana.

Can you talk a little bit, you mentioned increasing the flow of products.

Does this change the number of SKUs or how do you look at it in terms of your assortment?

Can you talk about the size of the stores?

You had mentioned Hollister will tweak up a little bit.

Thank you.

You want us to talk about the --

again, in terms of store size, we've been averaging around 6,500 gross square feet in Hollister.

We're starting to target closer to 7,000.

So we're thinking we can use more square footage in Hollister.

And the answer to the breadth of the assortment is in Hollister we are broadening the assortment and turning it faster.

If you'll go into the stores, after Thanksgiving, you see that we have added to the store fixtures, we've added fixtures to the bottoms of the fixtures so that we can get more styles out, and we are turning them faster.

And then on Heidi [Clum], I think --

I was hoping you would ask about her.

I want to hear more about Heidi.

Obviously, I see her in the mega log and also a presence in the stores.

How is she doing?

Should we look for other celebrity, perhaps, celebrities in some of your materials, marketing materials going forward?

It all depends on how we're feeling quarter by quarter.

I think the wonderful thing about A&F is we do what we have fun with, and that was a natural, because it was based on this tad pole movie, older woman, younger man, a fun thing to do.

Depends on what's stimulating us and our customers we go forward.

This was a run, right thing to do, an we'll think of things that are fun, I think.

It looks great.

Thanks.

Thank you.

Your next question comes from Tom Lincoln of GE Assets Management.

Hi, guys.

Could you just take a step back again?

I'm somebody that's newer to the story, and I think obviously understands these days it's a tough economic environment.

If you look back over the last three years or so, there's times there where at least from a consumer standpoint it was a much better environment, and yet you were still comping very negatively.

So can you just talk about the analysis you've done that gives you the confidence to continue to grow square footage so aggressively so that you don't end up like some of the other specialty apparel guys that have grown too fast?

Have you done some cannibalization type analysis that you could give me some confidence that that's the right square footage growth?

I think you have a whole bunch of questions in your question.

Pick one and answer it, I guess.

I don't know.

Okay.

But I think the cannibalization question is that we study the cannibalization very carefully.

We have seen not much cannibalization, if any at all, in the new Hollister brand to A&F, and we've looked at that weekly.

We will not be in a position to cannibalize A&F, because we're restricting the growth of that brand to 400 stores.

So do not expect an A&F on every corner -- [ inaudible ] -- that brand.

Growing from 400 stores to our current level of three -- where are we today? 320.

It will not open us up to cannibalization.

And that's the heart of our strategy, is new brands to new target customers, so we don't cannibalize.

Well, would you --

I see -- Little Abercrombie 7 to 14, Hollister 14 to 18 and A & F 18 to 22, and I think we've pretty much hit those numbers as you look in our stores.

Right.

Would you then attribute some of the negative comps in the past and better economic times to cannibalization in the past?

No, I -- absolutely, I believe it is a young business that becomes a fad, and then cools off.

And, as I just said to the last questioner, I think that's the mark of this business being well operated, that we hit that fad level -- pulled off the fad, but were able to continue to target this customer in a quality way, maintain the aspirational level of the business at a lower level of productivity.

The same thing will happen to Hollister.

It will peak.

It will come down, but remain one of the most productive businesses in the mall in terms of dollars per foot and profitability, because we'll continue to target that customer well, and we will protect the brand when that happens.

We will not throw out the baby with the dish water when that inevitable kind of down turn comes.

You cannot sustain the faddishness of one of these brands forever.

I think some of people who are new to following us don't really understand what the sales trend was prior to last few years.

The entire year of 1998, we had a 35% comp store increase.

Yeah.

A year plus 35 and then a year after that was plus 10, so if you think about that level of business that just increased in, you know, one to two-year period, we've had single digit decreases for a few years since then.

But in hindsight, maybe it would have been nicer if plus 35 didn't happen in all in one year.

That was the demand for the brand.

That's fair.

So I think you can't expect that to be sustained, and I think we've managed it in a very disciplined way to maintain it as a very highly profitable --

most profitable business.

You know, in that year of maximum fat, the most popular song in America talked about the Abercrombie & Fitch girl.

Yeah.

That's not sustainable.

But I think if you look at this business, we've done the -- the group here, and I don't want to pat ourselves on the back -- but the admirable job is maintaining the aspirational nature of this brand, and it is a most aspirational brand around the country, at a high level of productivity and profitability.

It's stores that continue to look terrific.

Thanks, guys.

Thank you.

Your next question comes from Emme Kozloff of Sanford Bernstein.

A housekeeping question.

Last quarter you guided to a 38.75% tax rate.

Can you just tell us what accounted for the 38.3 rate this quarter and what we should be assuming for the full year and afterwards?

Thanks.

It's most of our cash investments have been in tax-free instruments, so you take that effect, and our base tax rate is the 38.75, and that's just doing the math to get to the 38.3.

For the fourth quarter, I would use 38.5.

The income that we'll earn from the tax freeze, it will be pretty similar.

However, our gross income level will be much higher in the fourth quarter.

Great, thanks.

Okay.

At this time, there are no further questions.

Okay, thank you.

Thank you.

Thank you for participating in today's conference.

You may now disconnect.