Abercrombie & Fitch Co (ANF) 2002 Q4 法說會逐字稿

Good afternoon, my name is Debra.

I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Abercrombie & Fitch Fourth Quarter Earnings Conference Call.

All lines have been placed 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, please press star, then the number 1 on your telephone keypad.

To withdraw your question, press the pound key.

Thank you.

Mr. Lennox, you may begin your conference.

Good afternoon and welcome to our fourth quarter conference call.

After the market closed, we e-mailed you the fourth quarter sales and earnings release, balance sheet, income statement and an updated financial history.

If you haven't received these materials, call Courtney Depenhart 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 identification number 2426057 to access the replay.

You may also access the replay through the Internet at www.abercrombie.com.

With me today are Michael Jeffries, our Chairman and CEO.

Mike is calling from the road today as he was unable to make it back to Columbus due to weather.

We also have Seth Johnson, Executive Vice President and Chief Operating Officer and Wes McDonald, Vice President and Chief Financial Officer.

After Seth reviews our financial results, Mike will have some comments and then we will 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 SEC filings.

Now to Seth.

Good afternoon.

Total sales for the fourth quarter of fiscal 2002 were $534.5 million, up 15% over last year's fourth quarter sales of $466.6 million.

Comparable store sales decreased 4% for the quarter.

For the full year, sales reached $1.6 billion, up 17% over fiscal 2001.

For the year, comp store sales decreased 5%.

By merchandise concepts, comps for the quarter were as follows.

In Abercrombie & Fitch, comp store sales declined in the mid single digits with women's posting a positive comp.

Comps for our kids business Abercrombie were similar to the adult business with girls posting a positive comp increase.

Comps at Hollister for the quarter were positive in double digits.

By region, our comps were strongest in the West and weakest in the Midwest.

Given continued uncertainty in the economy, we entered the fourth quarter with an approach designed to protect the bottom line and the aspirational quality of our brand.

We continued our strategic use of direct mail and bounceback promotions but overall took a much less aggressive approach to in-store marketing and promotions compared to last year.

Pre-Christmas selling environment was very challenging and as expected, comp store sales were negative prior to Christmas.

Comps improved significantly after Christmas resulting in a flat comp for December.

January comps were plus 3%, reflecting strong sales of winter clearance and positive results from our initial spring assortment.

Our fourth quarter strategies were to increase margin rates, average selling prices and profitability.

We also viewed our approach as a way to further differentiate our brand from the highly promotional strategies of many of our competitors.

As you will see as I go through our results in more detail, our strategies were successful in driving the bottom line.

The gross income rate for the quarter was 45.5%, up 80 basis points from last year's rate of 44.7%.

The increase in gross income rates resulted largely from an increase in initial markup, partially offset by an increase in buying and occupancy costs as a percent of sales.

Continued progress in sourcing has been an important factor in improving our markup all three of our businesses.

We continue to be pleased with the progress we're making in Hollister, where the initial markup improved over 700 basis points versus last year in the fourth quarter.

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

For the full year, gross income rate was 41.1% versus 40.9% last year, an increase of 20 basis points.

The increase was driven by improvements in initial markups that were almost fully offset by buying and occupancy costs as a percent of sales.

We ended the fourth quarter with inventories up 12% per gross square foot versus last year at cost.

This is a lower number than our previous guidance due to better than expected January sales which enabled to us be more aggressive in year-end clearance markdown.

As many of you recall, we ended January last year down 30% per square foot in inventory and chased inventory through most of the first half of 2002.

This year, we expect inventory to be up 10 to 15% per square foot versus last year at the end of the first quarter.

The level of increase versus last year should moderate as we get further into 2003.

The fourth quarter SG&A rate was 17.5%, 40 basis points higher than last year's 17.1%.

The increase in rate versus last year resulted primarily from an increase in home office expenses, largely due to higher bonuses resulting from improved financial performance.

For the year, the SG&A rate was 21.5%, 50 basis points higher than last year's rate of 21.0%.

The increase resulted from an increase in store expenses as a percentage of sales due to the inability to leverage fixed costs on a comp store sales decrease as well as higher legal and incentive comp expenses.

During the fourth quarter, we reduced our store payroll hours by 9% per average Abercrombie & Fitch adult store.

In kids stores, we reduced our hours by 3% per average store.

We manage store hours on a weekly basis in order to match hours with sales volume.

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

During the fourth quarter, our productivity is measured in units processed per labor hour, which is 39% higher than we achieved last year.

For the quarter, we processed more units than last year with 20% fewer labor hours.

This year's 39% UPH increase was on top of over a 50% increase last year in the fourth quarter.

We continue to improve the operational productivity of our e-commerce business since we brought our e-commerce and catalog fulfillment in house in mid-April, we reduced our fulfillment costs per order over 20%.

Operating income increased 17% for the quarter from $128.6 million to $149.6 million.

For the year, we achieved a 15% increase in operating income reaching $312.6 million.

We are pleased that after three years of difficult comps, we continue to maintain a roughly 20% operating margin.

For the fourth quarter, net income increased from $79.2 million to $92.8 million, an increase of 17%.

For the year, net income increased 16% versus last year reaching $194.9 million.

Fourth quarter earnings per share on a fully diluted basis were 93 cents versus 78 cents last year, an increase of 19%.

For fiscal 2002, earnings per share on a fully diluted basis were $1.94, an 18% increase versus last year's $1.65.

We opened 14 adult stores, 9 kid stores and 17 Hollister stores during the fourth quarter.

We also closed 3 kids carveout stores.

These were closed in order to increase the square footage and volume potential of the adult stores.

We ended the year with 340 adult stores, 164 kids stores and 93 Hollister stores.

For fiscal 2002, we opened 33 adult stores, 19 kid stores and 60 Hollister stores for a total of 112 stores.

For fiscal 2003, we plan to open 30 Abercrombie & Fitch stores, 10 Abercrombie stores and 70 Hollister stores for a total of 110 stores.

We also plan to remodel 10 Abercrombie & Fitch stores.

Total square footage will grow 17% versus 2002, slightly less than last year's rate.

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

During the quarter, the new stores in all three concepts opened during the past 12 months generated approximately 100% of the sales per square foot of the existing store base base.

During fiscal 2002, our capital expenditures were $93 million.

The vast majority of these expenditures were related to new store construction with approximately $20 million invested in IT and distribution center projects.

After capital expenditures and share buybacks, the business generated free cash flow in 2002 of over $160 million.

For fiscal 2003, our planned capital expenditures will be between 120 and $130 million.

Approximately $50 million will be for infrastructure investment.

Our distribution center expansion should be completed during the second quarter and the rollout of our new point of sales system should be complete for Back to School.

In addition, we have started construction planning for additional home office space to accommodate the growth of Hollister.

Now I would like to discuss our profit expectations for the first half of fiscal 2003.

Although we feel very positive about our spring assortment, the economy remains very uncertain.

In addition, the heightened alert for terrorist activity combined with the threat of war in the Middle East may lead to further consumer uncertainty.

As a result, we're maintaining a cautious stance in our spring planning.

At this point, we remain comfortable with our previously-announced EPS guidance of 25 cents per diluted share for the first fiscal quarter and 34 cents per diluted share for the second quarter.

Now Mike will talk about our results in more detail.

Good afternoon.

I'm extremely pleased with our fourth quarter and year end results in what has continued to be a difficult retail environment.

Despite weak consumer confidence, a shortened holiday shopping season and an uncertain economy, we maintained our focus on the elements that drive the bottom line.

Tight inventory management, strong merchandise margins and expense control.

We are proud of our financial results but more importantly we kept our collective eyes on the long-term health of our brands.

Now I'd like to discuss the business from a merchandising standpoint.

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

As Seth mentioned, comps in women's were positive for the quarter.

The fashion is on track and the business has maintained momentum.

Key classifications during the quarter included woven shirts, knit tops, outerwear, pants, sweats and underwear.

Fashion focus for spring continues to be bare, feminine and sexy.

We have a broad assortment of body conscious tops, including layering camis, sheer knits, graphics tees and wovens.

In bottoms, there is a military influence which we have in pants, shorts and skirts.

Low-rise bottoms and mini skirts, again, are important.

We will continue to focus on providing more frequent newness.

Items will flow in faster and remain in stores for a shorter time period.

This strategy gives the customer more new items without an increase in inventory investment.

The men's business continues to be difficult and there's still no solid trend industry wide.

Despite the challenge, we had a strong balanced assortment for Christmas with knit tops and woven shirts performing well.

We're now very pleased with the performance of our new men's fragrance, Fierce.

Looking to spring, we will maintain a cautious approach in our men's business until we see trend.

As in women's, we're focusing on more new items more frequently.

For spring we expect strong business in woven shirts, polos, graphics tees and military bottoms.

The assortment features a vintage look, emphasized in washes, colors and marketing.

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

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

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

Knit tops, sweats, woven tops, pants and outerwear performed well in girls.

In boys, denim and sweats performed best.

As in the adult business, we continue to be cautious in boys.

Hollister performed very well throughout the fourth quarter and achieved a strong double digit comp store increase.

Sales per square foot in the Hollister stores were 87% of the Abercrombie & Fitch adult stores in the same malls for the fourth quarter.

We're very much on track to get Hollister as productive if not more productive on a per square foot basis than Abercrombie & Fitch.

Hollister's high level of sales productivity supported by 60 new store openings this year enabled the business to be solidly profitable in fiscal 2002.

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

For the quarter, the best performing girls classifications were woven shirts, knit tops, sweats, skirts and denim.

In guys, denim, knit tops, graphic tee-shirts, sweatshirts, and accessories performed best.

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 continue to target reaching the same 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 summer, we've issued over 1 million Club Cali membership cards, which have accounted for over 60% of in-store transactions.

Based on the participation rates, there is 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.

The brand is starting to gain traction with the target market and I plan to open 70 stores next year demonstrates our high level of confidence in Hollister.

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

Sales in our direct business grew by over 25% in the fourth quarter as compared to last year.

We remain on track to add a Hollister e-commerce business for back-to-school 2003.

In closing, the future of our company has never looked better.

We have three well-positioned brands that have growth potential.

Our financial strength allows us to fund all of our growth while maintaining a very conservative balance sheet.

More importantly, we have developed management processes that have allowed us to maintain and grow our profit even in difficult environments.

This gives us confidence that we can continue to deliver strong results for years to come..

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.

At this time, I'd like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad.

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

Your first question comes from Steve Kerncrought with Berman Capital.

Hi, guys, it was an impressive quarter.

I wanted to know if you could kind of go into your inventory situation going into the first quarter?

Because you originally estimated that your inventory would be up 20% and I guess it's at 12%.

Do you think you're potentially starving the stores still, or still under-inventoried?

Some of your competitors have close to double the number of days inventoried that you have, even with a 12% increase right here.

Seth, would you like to tackle that?

Sure.

The question is about our inventory level, we're up 12% per square foot versus LY.

Earlier in the quarter we had projected 20%.

The difference between 12 and 20, as I said in my remarks, largely reflects we -- we had better sales than we expected in January -- in December and January and we -- we were able, because of better sales, to afford to be more aggressive in -- in clearing some slower selling clearance merchandise.

In terms of positioning for Spring, as I said before, we were down 30% last year versus the prior year at the end of January so being up 12, we're still down to two years ago.

We think we will have the sufficient inventory for spring business.

Last year we couldn't build the stores at the level we were at.

It had maximized our profit in the fourth quarter, but it hurt us in Spring.

I think we're in position to go after the Spring business where it's trending.

It's always tough at this time of year to have the stores look full because we're transitioning from the heavy Fall goods to the lighter-weight Spring goods.

It's always somewhat of a struggle, but we think we're position positioned to chase the business and have a strong spring season.

I can't really comment on the competition because I don't know how they run their business, but we intended all along to be up in inventory through the first quarter and into the second quarter and so I think -- and we're pretty much on track there.

Thanks, Steve.

Your next question comes from Jeff Klinefelter with USB.

Yes, congratulations on a great finish to the year, you guys.

Thanks, Jeff.

A quick question, Mike, on the men's business.

I understand it continues to be challenging.

With this sort of military look or some people call it a grunge influence coming back a little bit into women's, in your opinion, from a merchant perspective, could it be a precursor to the demand rebuilding in the men's bottoms with respect to the cargo styling.

I praying for it;

I think so, but you know I'm always optimistic.

Honestly, I think we will see some transfer there from, you know, there's a lot of transfer from women's to men's and back and forth today.

I think it will be meaningful in the men's business.

I'm absolutely counting on it.

Okay.

Thank you.

Okay.

Your next question comes from Dana Telsey with Bear Stearns.

Good afternoon, everyone.

Hi, Dana.

Hi.

You had talked about the flow and freshness of the stores increasing a bit.

How does it differ than last year?

And is it different in men's versus women's?

Well, if it weren't different from last year, I wouldn't have said it!

The difference in the number of SKUs were flowing on a monthly basis.

There is more flow in women's than in men's.

There is more flow in tops than in bottoms.

But considerably more flow in terms of numbers, styles, load per month per classification of business.

And with your sourcing agents overseas, how do you work that?

Are you expanding to new factories?

As we've said over and over again, our strategy is to -- to grow into new factories.

That has enabled us to achieve the kinds of initial markup percentage increases that we have achieved.

But by saying that, you also assume that each factory we deal with has a limited capacity.

That's not true.

The apparel business is not a great business today.

So, getting that capacity is not a serious problem.

Thank you.

All right.

Your next question comes from Kindra Devaney with Fulcrum Global.

Okay, thanks.

Additional question on the inventory, guys.

Where are your major investments?

Obviously girls or womens is performing well.

Is it more heavily weighted toward Hollister, given the success of that concept?

Can you give us an idea about the inventory?

Sure.

I'd start the question and turn it over to Seth by saying it's related to where our business is trending.

Okay.

So, -- and we've stated womens is trending much better than mens in terms of increases and Hollister is -- is -- is trending very, very well.

But it's not -- it's -- we fund each business to its potential and it's not as if there's a limited pot.

Where is women's now as a percent of your business at Abercrombie?

It's running over 55% now.

Great.

Thank you.

Good luck.

Thanks.

Your next question comes from Stacy Pak with Prudential Securities.

Hoping you could talk a lot more about Hollister, both Mike and Seth.

The type of real estate that you think that the concept operates best in, how many stores you think it can have, what you've learned about the customer, how much the margin could increase as you increase that base from 100 stores to say 400 over the next several years, you know, what else you can do to reduce the store opening costs, improvements in IMU, cannibalization, all of that stuff, about store model.

I will give you a brief run through as best I can.

Type of real estate, the exciting thing about Hollister is that it is performing well in all markets.

Markets across the country and as exciting in suburban areas, real suburban areas as opposed to large urban areas or large suburban areas related to urban areas.

And that's very exciting for the potential of that business.

It's performing in malls that we would not put an Abercrombie & Fitch in in terms of price point.

This gives us the very strong belief that it will be a 600 to 800-store business as opposed to 400 for Abercrombie & Fitch.

That answers how many stores.

The profit matrix, we're trying to achieve the same IMU that we are achieving currently in Abercrombie & Fitch.

The -- the model to reach Abercrombie & Fitch's operating margin counts on the productivity per foot of Hollister exceeding that of Abercrombie & Fitch because the stores are slightly smaller than Abercrombie & Fitch.

So, they must, in terms of dollars per foot, be a little higher.

If the IMU is the same, we assume the markdowns will be the same.

If we achieve slightly higher dollars per foot than Abercrombie & Fitch, there is no reason this business can't provide the operating margins of A&F or an 800-store of even higher.

That's our headset.

Cannibalization, we're not experiencing much cannibalization, we're looking at it on a mall by mall basis, we're -- we're looking at each store -- each A&F store before the Hollister store opened, looking to trend after.

There is some cannibalization in some stores, but to this moment, I can't say that that won't change as -- as this chain exceeds, you know, 100% of the -- of the productivity of A&F, which I'm sure it's going to do, but I don't think it will be a significant factor.

Thanks, Stacy.

Your next question comes from Richard Baum with CSFB.

Hi, Richard!

Where are you stuck, Mike?

New York!

What a horrible place!

I'm stuck here, too, I agree!

Two questions, one, Seth, you alluded to your plan in the fourth quarter to increase your AURs and transactions, so on, can you provide detail to the that to the extent that you have it?

And then I have a follow-up question, too.

Okay.

Excuse me, the AUR in adult was up 4%.

And how about the number of transactions per store and, you know, the other parts to that equation?

In adult, for the quarter, the transactions per store were down 11.

So, the average transaction value was up 7.

And the --

That's all for adult.

Okay.

Marketing wise, could you just talk about what your calendar is for the first quarter and how it lines up versus last year and any differences in that calendar?

Our calendar in terms of major floorsets is fairly -- will probably be fairly similar to last year.

At this point, we're not really for competitive reasons, interested in talking about other elements in the marketing in terms of promotional things.

I think we -- we don't want to tip off the competition to that.

And how about advertising-wise?

Apart from, you know, just the floorsets, are you --

We're not -- as we've always done, we're -- we're focused on in-store marketing, there's no significant media advertising plans for this spring.

Okay.

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

Yes, can you hear me?

Yeah.

Oh.

Thanks.

I was just wondering, going back to Hollister a minute, you had talked about the -- the double-digit comps in the quarter and if you were planning on any time soon releasing monthly comps on Hollister?

And then if you could give us how many Hollister stores that share a mall with A&F at this time?

And how did the openings this year break down that way?

Thanks.

Seth, would you like to tackle this thing?

Yeah.

I think at this point we've -- we'll be giving information on Hollister comps that are at the same level we're doing it for the kids' business.

So, on a monthly basis, we will be giving directional guidance like we do for all of our -- all our businesses.

It's not a big enough business yet nor is the kids', where I think it's useful to provide very specific numbers.

But we'll be giving --

Color.

We'll be giving directional information on a monthly basis going forward.

I don't have an exact count right now, but -- but the vast majority of our Hollister stores are in malls with A&F.

There probably aren't --

83 of the 93 stores are in A&F malls.

So, there's 10 stand-alone.

Okay.

And going forward, it -- it will be, again, mostly malls that have A&Fs right now, you know, there will be a similar amount a year that -- that aren't A&F initially.

Okay.

Great.

Thank you.

Your next question comes from Dawn Donor with Pacific Growth Equities.

Yes, good afternoon.

Thanks.

Just curious, I got the update on your Cap Ex plans for '03.

I'm curious if you could give us more insight on what you plan to do with the growing cash balance you have?

Seth?

Thank you, Mike.

Obviously we're -- we're building our cash balance which we feel great about.

Obviously this is a very -- retail is a risky business as well as we've done, there is no assurance that that always continues.

The environment is tough.

There are a lot of political things going on that everybody knows about that can affect things.

So, we don't really want to get to a low cash balance and put the business at any downside risk.

At the same time, we've strategically bought back stock when that's made sense.

We have a 5 million share authorization for share buyback and we will pursue that on a strategic basis.

Great.

Okay.

Just one follow-up.

Can you give us store opening plans by concept, by quarter?

For 2003?

Right.

Yeah.

For the 30 adult stores, these are just estimates, 3 adult in the first, eight, 6 and 13.

For kids, 1, 2, 5 and 2.

For Hollister, 2, 15, 30 and 23.

Your next question comes from Richard Jaffee with UBS.

Thanks very much, guys.

I guess I was trying together a better sense of the quality of inventory, Seth, this year versus last year, the balance of fall versus spring, if you could provide any color on that?

And then just a quick follow-up on Hollister?

Questions about the quality of our inventory, we're -- we think the quality is where we want it to be at this point in the season.

We probably -- end of January, up very slightly per store in winter clearance goods, which is really where we wanted to be.

We didn't have enough last year to generate any real February business.

There's still a good bit of business in February that comes from winter clearance.

So, we are -- we are at a good -- a good level there and I -- I think we're in a much stronger position this year in the initial spring goods.

So, you know, you're always chasing the best items, but I think relative to where we've been, I think we're in a solid position.

To follow up on Hollister, how close or how far away is Hollister from Abercrombie & Fitch's sales per square foot or productivity level?

Well, as we said before, we're -- we're at 87% I think for the fourth quarter of A&F productivity in the same malls.

I think overall it's slightly higher than 87% when you factor in all the mall.

But that's for the age of the Hollister brand, we think that's great and we -- we expect it to get closer to A&F in '03.

Now, at the same time, we're -- we're working as hard as possible to improve A&F's productivity, so, you know, we think we'll get better in both areas, but Hollister is -- is very close to getting to the A&F level.

Thanks, Richard.

Your next question comes from Barbara Wyckoff with Buckingham Research.

Hi, guys, congratulations.

Thanks, Barbara.

On the store openings, it looks like if 400 is the number for saturation for the adult Abercrombie, looks like after this year, you're one to two years away from reaching saturation.

I wonder what that number is in kids?

And, you know, would it be likely that you'd be accelerating Hollister beyond the 70 a year that you're going to be doing this year after that?

And then just last question, what was just the total square footage at the end of the year?

Seth, I turn it over to you again because you've got the figures.

Okay.

Obviously, A&F at 340 will -- will reach 400 in a few years.

We think kids ultimately could operate in a similar number of malls to A&F but I think we're -- we're most excited about the potential in Hollister.

If it's as we believe that Hollister can be in 600 to 800 centers, that means we can have significant square footage growth just from Hollister.

I think it's a good -- it's a good idea that you're putting forth that Hollister can grow at more than the 70 a year.

We think right now our total square footage growth is in about the right level of increase with Hollister at 70, but beyond this year as the thing continues to gain momentum, we could add more than 70 a year.

We, in fact, are looking to grow the square footage percentage at about what we're growing it on a yearly basis now and we think it's our responsibility to provide the input for that to happen over the foreseeable future.

Okay.

Then you're going to keep the Hollister stores at the same size box or is it likely that some very, very strong malls might have bigger boxes?

We've been so far averaged about 6500 square feet in a Hollister store.

In -- in the stronger centers, we have been pushing for little bigger square footage, you know, between 6500 and 7,000.

So, the size of the Hollisters may creep up somewhat, but to be honest, we're very happy with how the store works right now.

Okay, great.

And then the total square footage at the end of the year was what?

4358.

Okay, thanks.

Thanks, Barbara.

Thank you.

Next you have a question from Ellen Schlossberg with William Blair.

Hey, Ellen.

Hi.

A couple of questions on Hollister.

Mike, you commented throughout the variety of conference calls the differences that you see in Hollister merchandising versus the adult business, I wondered if that evolved at all, if you can share insight into Hollister merchandise?

And with respect to the cannibalization issue, historically you guys have maintained that there hasn't been much and mow say there is maybe a little bit, which is understandable.

I wonder how the cannibalization has grown as the Hollister stores are open longer in the same mall, how much is assumed in your plans?

And also, when you put in the new POS system, can you track customers across concepts so you can measure that?

Okay, let me tackle each.

Differences, there are -- the -- the fact that we target a different customer -- I keep -- I think keeps us very much on track in terms of the differences.

The younger customer is faster, is into faster fashion, is into more aggressive logoing and I think the track we're on there is -- is a good one and I think by being so targeted by concept, we'll stay on track and -- and look different for -- for each -- each concept.

And I -- I don't think that's -- I don't think that's a real problem that we face.

And the cannibalization I addressed is minimal.

Seth can talk to that in a little more detail but it's -- it's really minimal at this point.

It's not a factor that we're -- we're -- we're losing sleep over.

Tracking customers, I can't answer that, maybe Seth can.

I -- I think in cannibalization in general, we look -- as Mike mentioned, we look at every single store and what's happened.

We found that there are a good number of malls where the -- the A&F store's gotten better than trend when a Hollister has been there and then there are a number where it's gone the other way and there are some where it's unaffected, when you net it all out, it's not really significant.

At the same time, as Hollister gets stronger and stronger, it stands to reason that it likely will take some of the business -- some business from Abercrombie & Fitch and like it will take business from everybody else in the mall.

To be honest, we don't worry a great deal about that.

We're not adding total square footage to the universe.

Hollister is taking space that has somebody else in it right now.

So, I -- I think any strong brand is going to get business from a lot of different places.

All of our market shares for all of our businesses are extremely small overall.

So, there's plenty of business for Hollister to do great while Abercrombie & Fitch does, as well.

Conceivably, we could track customers across brands with our technology, but I'm not sure that -- that tells us that much, to be honest.

Our -- our -- as Mike has said, as long as we're differentiating these brands to the customer with unique lifestyles, I don't think we need to worry about that.

It's not the same business, it doesn't look at all like Abercrombie & Fitch and so I -- I don't think it's really an issue.

Plus, if we can get it operating at the same profit level, it sort of becomes transparent.

So -- so, is there any cannibalization in the plans for the A&F stores or no?

Well, we don't -- we don't plan the A&F stores down because in our internal plans because we're putting a Hollister in there sometime --

Because we haven't really seen cannibalization, when I say it is slight, it's just practically negligible in total.

To be honest, the way we run our business is we react very closely to the level of business we're generating in the stores.

So if A&F's business is being affected, which it really isn't, we would be reacting in our inventory commitment.

But there -- there's no -- you know, we don't really build up our merchandise plan by accumulating sales plans for specific stores.

It's really a merchandise-driven planning process.

Thanks, Ellen.

Your next question comes from Lauren Levitan with SG Cowen.

Thanks, good afternoon.

Hi, Lauren.

How are you?

Good, how are you?

Great!

I know it seems like a long time ago at this point, but I know we went into the quarter with great concern about the cost impact of the West Coast port situation.

Can you quantify how much of an impact it was on the actual gross margin?

And secondly, when we look at the expense controls that you've had, you've obviously been cutting the costs at the store level very efficiently and effectively over the last several quarters.

Can you give us a sense as to how much opportunity remains there to be efficient on costs?

And maybe any other cost buckets where you see opportunity continue to try and get some leverage even on a low level of comp store sales.

Thank you.

Okay, so, maybe Seth can go first.

Gross margin impact of the dock strike?

I got it, Mike.

It was between 3 and $4 million, because of incremental air freight costs due to having to charter our own planes out of specific countries and just level of demand.

As far as the store goes, I think there's additional opportunities should sales continue to be soft in the adult business.

I think there's very little opportunity to continue to cut hours if sales were to get worse in the kids business.

And I think Hollister is running very efficiently and with a double digit comp increase, I don't expect to have to worry about that in 2003.

We've obviously made significant cuts in store hours in the last few years and, you know, you never say never about anything, but we don't believe there's that much left to do as Wes said.

We have to run the stores at the right quality level of in-store experience for the customer and that requires a certain level of hours that we can't go below.

So -- so I -- none of us see the opportunities there that we've had in recent years.

Your next question comes from Brian Tunick with J.P. Morgan.

Hi, Brian.

How are you guys?

Good, how are you?

Excellent.

Excellent.

Two questions for you.

First one is on planning and allocation.

You know, to your -- you know, you definitely did a good job, doing a better job of putting the wear-now merchandise in the stores.

Is that measurable yet in the gross margins?

Or do we have to see more opportunity in '03?

Well, I think the -- that -- that -- well, there are a bunch of issues.

Is it wear-now or is it more newness that you're discussing?

Well, you know, my view it's --

Wear-now in terms of seasonality?

Yes.

Or more newness from a fashion point of view.

It's more, having the wear-now merchandise more than the newness yet as far as what we saw at the beginning of spring.

It's different by season, Brian.

Like we're selling tanks like crazy right now and it's snowing out.

I think -- I think it has to do with -- I think our margin improvement, we had a significant margin improvement for back-to-school because we were more wear-now it terms of seasonality.

That's a different -- that's a different concept from going into spring and Spring Break, truthfully.

Our margin improvement is going to come from more -- more newness faster because it's -- they're going to buy the new and more exciting things.

And I can't -- we're not planning the gross margin improvement, what we should see, hopefully over time, is volume improvement as we -- as we drive that kind of business.

Okay.

And I guess the second question is, you know, hoping you'd be willing to discuss somewhat the profitability by division or at least directionally versus last year?

You know, really trying to focus in on the kids' business, obviously, and the adult business.

I mean how did each of those businesses perform on the EBIT line versus last year?

Seth?

We obviously don't give out divisional profit information but I think we had solid profit improvement in all the concepts versus last year.

And Hollister, in particular, had dramatic improvement.

In other words, on a very small base.

Right, of course.

You're saying kids and the adult business were both up versus last year?

Well, I mean the -- the company couldn't have generated $195 million of net income without having profit improvement.

In all the businesses.

In all the businesses.

And lastly, the real estate community is buzzing about a potential new Abercrombie concept for '04.

Is this something that, you know, we could expect maybe to hear from you guys, you think, this year?

We are working on a new concept and we're working on it hard, but we're not prepared to talk about a time in action yet, Brian.

Okay.

We will!

Okay.

Good luck, guys.

Thanks, Brian.

Your next question comes from Jennifer Black with Wells Fargo Securities.

Good afternoon.

Hi, Jennifer.

And congratulations.

Thank you.

Hi.

I just have a few questions.

I wanted to know how long do you think the -- that the favorable sourcing environment will last?

That coupled with, you know, your great ability to pick great fashion.

I mean how do you see the sourcing environment?

It seems like you guys have done a great job and there's been excess capacity.

Do you have any comments there?

I -- I think that -- that we have a great sourcing team and that we'll be able to continue to source quality product to whatever level we need in terms of quantity.

I don't believe that we'll be able to see the kinds of cost improvements that we've seen continue at the rate that they've happened.

I wouldn't count on that.

But I think we have enough -- we'll be able to source in enough factories to -- to supply our -- our needs at the -- at what I think are pretty much current costs.

I don't see big cost improvements over time.

And we wouldn't count on them.

Is over time like over this next year?

Over this next year we obviously are because Hollister's -- Hollister's initial markup percentage is going to very much approach A&F's.

And those are almost -- those are in the plan.

I'd say after that it is probable that there won't be significant cost improvements for each of the brands over time.

Okay.

And then I had one other question and this is kind of bizarre, but are you happy with the number of dressing rooms that you have per store in both the A&F concept and in Hollister?

It -- the reason I'm asking is it seems like when business picks up, there's really long lines and it seems like there could be people walking out.

I wondered your feelings on that note?

I know we have some problems in some stores!

I've been alerted to it in New York here over the last weekend.

I -- I -- I do not know that it's a national problem, but with your heads up, we will look into it.

Okay!

All right, thank you and good luck.

Thank you.

Your next question comes from Mark Friedman with Merrill Lynch.

Good afternoon, guys.

Hey, Mark!

Hi, Mark!

Nice job.

Thank you.

Mike, on the newness, can you just clarify -- does this mean you are now buying less deep on items to be able to turn the inventory?

Correct.

To have more SKUs.

Correct.

That's absolutely correct.

And are you doing any of this in Hollister at this point?

Yes!

Yes!

Faster in Hollister, in fact, than A&F, to tell you the truth.

Okay.

And is that always -- is it at an upgraded stage for spring or at the same pace it's been?

It's upgraded in all the brands.

By SKU.

And I just -- I'm delighted to sell out of something and make somebody unhappy she couldn't get it.

She will come back next time.

Exactly.

Accessories; that involved in this at all?

And where do you see accessories in '03?

I don't see huge accessory growth in '03.

We have begun growing the accessory business.

We've decided to take a stand there that's a major clarification stand by season.

But right now I'm not seeing huge accessory growth in the business growth rate.

Great.

Thanks.

Thanks, Mark.

Your next question comes from Josh Schwartz with Flatbush Watermill.

Hi, guys, how are you?

Hi, Josh.

Congratulations!

Great year!

Thanks.

Thanks.

I just wanted to cover three quick things, hopefully.

Mike, you made comments twice alluding to an issue once, that it's your objective to be able to grow the square footage at the projected I guess 17% rate for a couple of years to come and you will do everything you need do to combine with this Concept 4.

I guess can I take that that it's the goal to gross 17%?

Is that what you were saying?

I'm saying over time, yeah, I think what I was really saying is that we have in our current arsenal the ability to do that.

I was reinforcing the point of view that Barbera brought up, we could open more Hollister stores to get to that right and we're committed to doing that as far in the future as possible.

That's why there is a Concept 4 that we're anticipating.

Okay.

Josh, we don't -- you know, 17 is not a magic number.

It doesn't have to be 17% a year.

That's the level we're at now and -- and that's a comfortable level.

It -- it doesn't --

I guess I ask --

It doesn't have to be exactly like that, but I think Mike's point is we view ourselves very much as a growth business and we're going to develop the concepts that we need to continue to grow our square footage so we can generate strong, you know, double-digit profit growth year in and year out.

And we're not interested in in doing it by over-exposing our current brands.

That's why we're going to limit Abercrombie & Fitch to 400 stores.

It's an as aspirational brand, we want to keep it that way and don't want on every street corner.

I understand.

That helps me.

The comments you're making help me value the company.

That's why I ask.

Okay.

Cool!

A couple of other things here, you throw out this word, I'm a little nervous that the questions are getting here, but cannibalization, but I have a question for you, how do you know when the A&F store goes down and you've opened up a Hollister that the guy went from A&F to Hollister and not to American Eagle or Gap?

You don't!

But if you get any kind of -- I think Seth can comment this, we're looking at trend analysis over a lot of stores over time.

What's the trend before opening, what's the trend after?

And you don't really, but, again, I think a lot is being made of this that shouldn't.

Okay.

It's not -- if it were a significant problem, we'd flash it.

Okay.

I had one question on accounting, Wes.

This deferred tax liability, that's gone up.

I guess you guys are now under the new Bush plan and were able to accelerate depreciation on new stores?

Right.

There are two reasons for the increase.

One is just over the last few years, we've had a lot more new stores that have been added to the base than we've had in previous years, but, yes, the post-9/11 bonus depreciation was a big portion of that, as well.

Now, in the fourth quarter, I've been looking at the company now for a couple of years, but your PP&E dropped, you know, $20 million and, I guess was there an unusually large amount of depreciation running through the income statement?

I'm not sure I see that drop $20 million --

From quarter-to-quarter I mean.

Didn't it go from 416 to 390, roughly?

So...

I'm talking Q3 to Q4.

I don't have that in front of me to be honest.

Okay, I will follow-up.

Okay, call me afterwards and we will follow up on that.

Thanks, Josh.

Thanks, Josh.

Thanks.

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

Congratulations.

Hi, Bob.

I see your receivables went way down and payables went way up.

Congratulations on that, too.

Just want to ask, first of all, Seth, on the systems front, you talked about the D.C. productivity.

I wonder what kind of software and hardware you're using there?

And also, what the hardware and software brands are with respect to the POS upgrade?

The D.C. has a RETAC warehouse management system and that -- I mean that's obviously been a driver in our productivity in the distribution center.

But to be honest, I -- I think it's more than the systems.

I think we -- we have an extremely strong management team there that's done a superb job in -- in challenging themselves to drive productivity.

So, part of it systems, but part of it is the design of the facility but I think the biggest peace is the workforce we have there.

Wes, do you want to comment on the store system?

Sure.

The store system is -- Data Advantage is our software provider.

They're one of the industry leaders and we've been working with them on customizing the things we do to manage store hours by week and their product.

And the hardware is going to be IBM, sheer POS.

It's going to be touch-screen driven.

So, we're hoping to decrease the amount of time that the cashiers have in training.

We're also going to have the ability to do signature capture.

We've also put in a wide area network that's going to allow to us reduce our store communication costs because we'll be able to do voice-over IP as the basis for our long distance service.

Wes, what was the software on the POS?

It's called Data Advantage.

Okay, sure.

Fine.

And then, last question, for Mike, and I guess this is in left field, but what are you doing these days stay close to the customer?

When I talked to Betsy McLaughlin at Hot Topic, she's a big reader of the customer comment cards.

What's your approach to that?

Obviously it's working, whatever it is.

I spend a lot of time in malls.

I spend a lot of time looking at -- looking at the customer.

I spend a lot of time talking in our stores to brand reps, to find out what -- what they like because they are our customers, what they like, what they don't like.

We have a pretty sophisticated customer focus group or -- organizer and organization and I spend a ton of time traveling around looking.

I'm stuck in New York because that's what I'm doing now.

I tend to learn a lot outside of Columbus, Ohio.

But I think it's not just me.

It is the whole organization that I think we really have targeted to -- to each customer, pretty obsessively.

That's what gives me the confidence I do have in the business go-forward.

I think it's really the processes are working in that regard.

Your next question comes from Joe Teklits with Wachovia Securities.

Hi, everybody.

Hi, Joe.

One question left, it is a follow-up to the SG&A question.

Can you maybe try to quantify that for us a bit?

The past two years, SG&A as a percentage of sales has been up 30 basis points and 50 basis points on -- on negative comps, so, looking at flat comps to make it easy in the next year, is that a similar range that we can look for an uptick in SG&A?

I -- without getting into specific numbers, I think it's fair to say that with a flat -- negative comp, SG&A -- we won't get leverage there.

But is it going to start to deleverage if you have to add costs back to the business or can't continue to cut costs, corporate or store?

That's a good question, Joe.

I think in terms of cutting costs, it's not so much that we just slashed a bunch of costs that we have to add back in.

It was the cost reduction really came from -- becoming more efficient in how we run the business.

So, from a -- from a store standpoint, we cut hours but we didn't -- I think we got better at using the hours we've been using.

I think in the home office, we just figured out how to get what we need done with fewer people.

So, there aren't huge amounts of expense we have to add back because we deferred, if you will, what we have to add are the number things we have to add to grow the business, meaning the new areas like Hollister and infrastructure areas that -- that get driven by --

Store growth.

Store growth and just having a bigger business.

So, it's not that there will be some huge chunk of expense added back in because we've deferred it as long as possible.

You know, I think that's a really interesting question and I think it addresses our more savings possible in the future?

We always say no, as we always say probably not in terms of margin improvement.

But I think this is a business of creativity on all levels and how can we do the job better with less is very much what we're all about.

The -- along those lines, for example, we've had almost been 80% improvement D.C. productivity in the last two years.

And that -- I don't think any of us would have counted on that a couple of years ago.

But, you know, our -- so, can we keep going at that rate?

Obviously not, but we're not done trying to increase productivity there, and we have a D.C. team that's very focused on trying to keep doing better.

It just gets -- the more efficient you get, the harder it gets to do better.

I don't want to sound like an old man, but I recall our IPO tour, Seth, and we were asked if we could improve our IMU and gross margin?

We said no, we think we're about as high as we can go.

If we looked at '96 to last year, there would have been some significant improvement.

And back then, we wouldn't have believed we could have gotten to where we are today.

Exactly.

Exactly.

That's a helpful discussion.

If I'm looking at Q1 and Q2 guidance that -- it's like 8 to 10% EPS growth and, you know, if you're looking at store openings, and flattish comps, 18 to 20% sales growth.

So, somewhere in there there's some deleveraging.

I guess the question I want to ask, I'm afraid to, are you assuming negative comps in the first two quarters, because I'm afraid you're not going to answer it?

We're not, you know that!

I know you're not.

That's the only way you can get to the numbers, though.

Negative comps, that means SG&A has to be up fairly significantly.

Well, again, we can't get into comp guidance, I don't think that does anybody any good.

We -- we feel the profit guidance we've given is a number that we feel we -- we can -- we can achieve given a difficult environment.

And it's very uncertain out there, everybody knows what the issues are that are out there and I think it's not prudent to be more aggressive at this point.

Your next question comes from Janet Hoppingberg with JJK research.

Hi, guys.

Hi, Janet.

Congratulations.

Thank you.

Just a couple of questions, I know you must be exhausted.

Mike, you said the women's business is now about 55% of sales at the A&F adult stores.

Do you see that evolving to become even larger as it is in Hollister?

Yes.

And do you want to give us an idea of where that would be?

I -- I think we're going to end up at 2:1 like 66/33 in all the brands.

I think that's the ratio of men's to women's business out there.

Okay, so we're seeing the business evolve, you know, seeing the women's business become a bigger business and seeing the flow of product newness be bigger -- I mean be more current and more frequent.

Right.

I wonder if that puts demands on the marketing program, not the promotional strategy, but the marketing program.

Do you need to evolve that program as well?

And then I have a follow-on question about initial markups.

You mean in terms of just more --

You put out a quarterly -- no, no, I mean you put out a quarterly -- or should it -- are there plans to evolve that, as well --

There aren't, at this point, really.

I think the issue really is product.

I think it's -- it's -- it's -- it's just the flow of newness and getting -- and I think if -- if you have interesting new product, that's going to pull people to the stores on a weekly basis.

I absolutely believe that.

So, I think that's where our emphasize is and that's where we should -- we should go.

Okay.

And I heard you loud and clear about not promising any additional gross margin improvement or IMU improvement as well.

Right.

But I'm assuming for Hollister as it becomes a larger business that, there would be opportunity for higher IMUs.

Gross margin improvement.

Yes, higher initial markups?

Yes, I'm saying we should get very close to the A&F initial markup this year, 2003, we're within a hair's breath at this point.

Wouldn't have tha have an impact on overall reported gross margin?

Well, some of the difficulty with that, Janet; that there are mix differences in initial markups, too.

For example, the tops business tends to run higher initials than bottoms and as an example, women's bottoms business is very strong right now.

So, I think if everything --

I understand.

Stayed equal, you might have improvements in Hollister --

Janet that, was a great question.

Thank you, Michael.

Good question!

My other question, just for bookkeeping is of the Hollister stores that you ended the year with, which I believe were 93, can you tell me how many were in the reported comp base?

34.

Thank you very much.

Thanks, Janet.

Your next question comes from Dennis Van Zelfden with SunTrust Robinson.

Humphrey!

Thanks, everyone.

My question was just answered.

Thanks.

Okay.

Your next question comes from Dana Cohen with Banc of America.

Hey, Dana.

Hi, guys.

Just one quick question.

Seth, you talked about the IMU being up about 700 basis points at the Hollister business.

Is that essentially the proxy for the merchandising margin?

Is that -- I'm not sure I understand --

You're saying that the initial -- [ OVERLAPPING SPEAKERS ] You talked net, maintained margin.

No, he's saying that's the initial markup.

Initial markup.

That's not the -- that's not the maintained margin after markdowns and shortage.

Can you give us some sense, you know, with directional improvement there.

If your IMU is up 700 basis points, your maintain should be up pretty big, as well.

I think directionally it would be a similar level of improvement to the markup improvement.

Probably better.

The markdowns at the same level cost you less.

Great.

And Mike, second question, you said at this point you're within a hair's breath of the core business.

So, sometime in the middle of the year you start to -- I mean you should probably get there?

Are we talking maybe by summer to get to the A&F IMU?

I can't say exactly.

We're close and driving as hard as we can to get there, but there are some mix differences there that can take you one way or the other.

We're -- we're -- we're getting very close.

Great.

Thanks so much.

Thanks, Dana.

Your next question comes from Rob Wilson with [Tiburon] Research.

Thank you.

Could you give us a sense of how big your web/catalog business is?

And maybe what's -- what drove the improvements this past year?

Sure, Seth, can you talk to the size .

Internal is about 5% of the total business.

It's grown faster than the retail business, but that's fairly common.

Common.

Through industrywide.

The one thing we were pleased about is our -- our catalog and magazine business was fairly strong in the fourth quarter.

I don't think we've suffered a decrease in that business that some out in the industry have.

But I think we're -- that e-com business continues to grow faster than retail.

How long that lasts, we don't know but I think we can take advantage of that and we'll get some further growth by having a Hollister e-com business for back-to-school.

But it's never going to approach the store business in terms of importance to us.

And the -- one quick question, are you -- are you willing to comment on the potential age, maybe subtly shifting higher, of your customer?

Have you seen any shift at all in the overall age of your average customer?

I really believe that over the last five years our -- our A&F business has come closer to our target age, which is 18 to 22.

I think we skewed a little lower four or five years ago and think we are more to -- we're more in the -- in the -- within the parameters that -- that -- that I described as the target customers.

It's not to say that we don't have younger and older but I think we're closer to that target than we were four or five years ago.

And we've consciously worked on it because we really wanted to create that opportunity for Hollister.

Your first follow-up question is from Stacy Pack with Prudential Securities.

That's okay.

Thanks.

Your next question comes from Richard Baum with CSFB.

Thanks, my follow-up was answered.

Your next question comes from Barbara Wyckoff with Buckingham Research.

Hey, guys, I have a follow-up.

How many Hollister stores do there have to be to get the operating margin close to the adult A&F levels?

Seth?

I -- I don't -- Barbara, I don't think it really relates to numbers of stores.

I think we already are at the size of business where we can achieve that.

I think it relates to sales productivity.

Sales productivity.

And margin.

And I think one of the reasons for that, Barbera, we've been circumspect about how we've staffed that business from a central organization point of view.

It's not the size of A&F yet.

We're growing it with the size of the business.

Okay, great, thank you.

Your next question comes from Kindra Devaney with Fulcrum Global.

All set, thanks.

Your next question comes from Ellen Schlossberg with William Blair.

Just a quick follow-up.

Wes, can you comment on what tax rate you're expecting for '03?

I think our effective base rate is going to be 38.75 unless the interest rates continue -- if they rise, then maybe we will invest more in taxable.

But I would use 38.5 for next year to account for the tax-free impact.

Okay, thanks.

Your next question comes from Richard Jaffee with UBS.

Sir, you may proceed with your question, sir.

I don't think he's there.

At this time, there are no further questions.

Great.

Okay.

Thank you.

Thank you.

Thank you.

Thank you.