Abercrombie & Fitch Co (ANF) 2003 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the ANF first quarter earnings conference call.

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

After the speaker's 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.

I will now turn the call over to Tom Lennox, sir, you may begin your conference.

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

After the market closed we E- mailed to your offices the first quarter sales and earnings release, balance sheet, income statement and an up dated financial history.

If you have not received these materials, please call Courtney Depenhart (ph) at area code 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, 675-5261 to access the replay.

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

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 found in our SEC filings.

That is said.

Now here is Seth.

Thank you, Tom.

Good afternoon.

Total sales for the first quarter of fiscal year 2003 were $346.7 million up 11% over last year's first quarter sales of $312.8 million.

Comparable store sales decreased 6% for the quarter.

Hollister had a double-digit positive comp. with guys and girls both positive.

Abercrombie and Fitch comp. store sales declined slightly more than the company average with women's posting the positive comp.

Comps for kids' business Abercrombie were similar to the adult business with girls comps positive in the mid-single digits.

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

As the comp. numbers indicate, the retail environment continues to be very tough.

Given these conditions, we maintained a conservative approach to managing the business in the first quarter.

During the quarter, we took a much less aggressive approach to in store marketing and promotional activity than a year ago.

This resulted in selling at significantly higher average retail and transaction values than last year.

The average transaction value for the adult Abercrombie and Fitch business was 10% higher for the quarter.

However transactions averaging for ANF stores were down 17% versus last year and this number was probably negatively impacted by our strategy to be less promotional.

The growth income rate for the quarter was 37.0%.

Up 40 basis points from last year's rate of 36.6%.

The increase in growth income rate resulted largely from an increase in initial mark up in a lower mark down rate than last year partially offset by an obvious increase in by and occupancy cost of increase sales.

We continue to make progress in sourcing of all three of our businesses.

We're particularly pleased with the progress we're making in Hollister where initial markup improved over 500 basis points for last year in the quarter.

Increasing in buying and occupancy costs is a percent of sales reflects the inability to leverage fixed cost such as rent depreciation and camp charges of increase.

Markdown rate was lower for the quarter due to our decision to be less promotional in store and we also did not anniversary last year's direct mail promotion.

We ended the first quarter with inventories up 7% per gross square foot versus last year at cost.

This is a slightly lower number than our previous guidance due to timing differences in deliveries.

At this point we expect inventory to be up 5% to 10% square foot lasted year at the end of the second quarter.

Last year inventory was down 9% per square foot so this year's increase will give us back to roughly the level of two years ago.

The level of increased versus last year should moderate during the second half of fiscal 2003.

First quarter SG&A rate was 25.4%, 60 basis points higher than last year's 24.8%.

Increase in rate last resulted primarily from an increase in store percentages as an increase of sales due to the inability to leverage payroll for average store.

During the first quarter we reduced our store payroll hours by 1% for average Abercrombie and Fitch adult store.

In our kids store we increased our hours by 1% per average store.

We also increased hours Hollister to reflect a strong increase in volume per-store.

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

During the first quarter of productivity was measured in units of process labor hour with 38% higher than we achieved last year.

This was on top of a 50% improvement last year.

For the quarter, we processed more units than last year with 24% fewer labor hours.

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

In the first quarter we reduced the fulfillment cost of order over 30% over last year.

Operating income increased 9% for the quarter from $37 million to $40.3 million.

Net income for the quarter increased from $23.3 million to $25.6 million in increase of 10%.

First quarter earnings per-share on a fully diluted basis was 26 cents versus 23 cents last year an increase of 13%.

We opened three adult stores, one kids store and two Hollister stores during the quarter.

We also closed one store where our lease expired and we chose not to renew.

We ended the quarter with a total of 342 adult Abercrombie and Fitch stores, 165 kids stores and 95 Hollister stores for a total of 602 stores.

For fiscal 2003, we planned to open 20 Abercrombie and Fitch stores, 10 Abercrombie stores and 80 Hollister stores for a total of 110 stores.

We also plan to remodel ten Abercrombie and Fitch stores.

Total square footage for the year will grow 17% first 2002.

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

During the quarter the new stores in Abercrombie and Fitch, Abercrombie and Hollister opened during the past 12 months generated over 90% of the sales per square foot of the existing store base.

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

Approximately $50 million will be for infrastructure investments.

The distribution center expansion is completed and we recently started our own container freight station operation to speed the processes of our imported merchandise.

To rollout of our new POS system is going smoothly and 200 stores are operating with the new system.

Remaining stores are due to be on-line by back-to-school.

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

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

At this point it is very difficult to predict the level of business for the balance of the quarter.

The state of the economy and the retail environment remain very uncertain.

Although April business was disappointing, we have yet to experience the sustained warm weather in most of our major markets.

Additionally most of July business will be from our initial back-to-school assortment for which level of business is obviously very difficult to predict.

At this point we are comfortable that we can earn between 30 cents and 34 cents a share in the second quarter.

Now Mike will talk about the results in more detail.

Good afternoon.

The retail environment remains very challenging.

Although we were able to improve our bottom line in the first quarter, April business was less than we expected.

We had some very strong areas of the business, Hollister and ANF women's and girls.

However, the environment gets tougher we're finding it affects all parts of the business.

The areas of strength are a little less strong and areas of softness such as men's are difficult.

This suggests we're facing an overall weakness in demand to traffic as opposed to fashion issues.

Our response will continue to put out the best possible fashion for our customer.

Manage the business very conservatively.

I'm very confident about where we are from a fashion standpoint.

Hollister, in particular, has tremendous momentum and continues to exceed our expectations.

Now we would like to discuss the business from a merchandising standpoint.

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

As Seth mentioned comps were positive for the quarter.

I think we have the right fashion in the business continues to show momentum.

The women's bottoms business has been extremely strong.

Struggling to stay in stock in military bottoms, particularly in pants.

Comps were very high in the first quarter and pants with skirts and shorts also performing well.

In tops we continue to focus on bear, feminine and sexy.

We selling a broad assortment of body conscious tops including layering camis, sheer nets, rapid tees and woven.

Comps continue to be strong in the woven area.

The men's business continues to be difficult and there is no sign of any pickup on an industry wide basis.

I do believe that our men's assortment is balanced in fashion right.

Men's woven business has been very good and we're having a strong season in graphic tees.

New men's fragrance, Fierce, continues to perform very well.

The men's pant business has also been very good again reflecting a military influence.

Looking forward we will continue to remain cautious -- maintain a cautious approach in men's until we see better trend.

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

For the first time, sales per square foot in the Hollister stores exceeded the Abercrombie and Fitch in the same centers.

Comps were positive in both girls and guys but as ANF girls continues to be driving the business.

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

And guys, woven shirts, graphic tees, shorts and accessories performed the best.

I am pleased with where we stand with Hollister.

It is working in a wide range of miles and geographic areas and operating margin is starting to approach the levels we're a catching in ANF.

Seth mentioned the progress we have made in Hollister’s initial markup.

We're touring the ANF level this fall and see it clearly within our reach.

The goal is 80 new Hollister this year demonstrates our confidence and we expect to add at least another 80 stores in 2004.

We also will bee begin selling Hollister merchandise over the Internet in July.

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

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

Knit tops, woven tops, skirts and shorts performed very well in girls.

In boys business continues to be tough and as in the adult business we will continue to be cautious and boys until we see a change in trend.

Although the uncertainty in the business environment in early 2003 provides a major challenge to us as managers, it does not alter our confidence in the future of Abercrombie and Fitch.

We have three well-positioned plans that have significant growth potential.

Over time we have demonstrated that we can consistently sustain profitability in our base-business while also creating and growing new brands.

Our company is very profitable with strong cash flow and a healthy balance sheet.

For these reasons I'm confident that we will maintain our position as a leading specialty retailer by continuing to deliver solid results.

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 would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the queue and A roster.

The first question will com from Mark Friedman with Merrill Lynch.

Good afternoon and good job in a tough environment Mike.

I wonder if you could just update us on at least second quarter thought on promotion has bounced back in the stores now that’s being distributed.

Is that something you always planned to do or are you responding to the environment and is there anything that you can say about plans growing forward is that going to change or are you trying to be less promotional like in the first quarter?

That’s a good question and no the bounce-back was not planned.

We did put it into effect based upon April results.

I think in hindsight we -- we lost business by being -- by having too little promotional activity.

In fact, we had none.

I think there is a healthy balance, we're planning this bounce back.

Over the second quarter we will have less promotional activity than last year but certainly more than first quarter.

I think the -- we could have done better.

It's clearly evidenced by our transaction level for the first quarter.

So it is a reaction to -- to the environment but as in -- as we always claim protecting the brand is the first priority.

Your next question comes from Lauren Levitan with S.G. Cowen.

Thanks, good afternoon.

Mike, you mentioned that this was the first quarter where you saw sales per square foot at Hollister exceeding the sales per square foot in Abercrombie's when you were in the same center.

Can you comment on what the comp. trend in those Abercrombie stores that have a Hollister in the mall that were relative to the chain an maybe give us some update on what you're seeing in terms of potential cannibalization, thank you very much.

The question was potential cannibalization and ANF versus Hollister.

Seth, I'll turn that over to you.

As we have said before, we have tracked every individual center where Hollister is opened versus the ANF store and what the ANF results before and after the Hollister so the results tend to move around quite a bit.

I think we had for the entire sample of stores in the latest we probably had about two-thirds where the ANF business got a little worse when the Hollister opened and about a third of them where the ANF business got better after the Hollister opened so if you net it all out it does suggest some small level of cannibalization.

But obviously a third of the stores are going the other direction so it's something that we're continuing to track for every opening and we'll see where it takes us.

But at this point, as one would expect, any successful business gets business from a lot of other players and so it comes to Hollister likely comes from ANF but the numbers are about two-thirds, one-third per-store that we look at.

Can you talk about the mix of men's and women's at Hollister versus ANF at this point?

The mix is virtually the same.

It's about two to one women's over men's running at about that same level.

It's interesting that all three of our brands are kind of at this same ratio and that is roughly where I expected the business to end up.

Simply stated, there is twice as much women's business as men's business out there and some of the decline in our men's business has been an underdevelopment on the part of women's bust in Abercrombie and Fitch but that is pretty level at this point.

Your next question comes from Janice Kloppenburg with JJK Research.

Hi, guys.

Hi, Janice.

Following up on Lauren's question, Mike, the men's business has become a smaller percentage of the business, the question is given the way the stores are configured, can it get smaller so you can optimize the women's business and let it go where it needs to go?

That is a good question.

I continue to believe that the women's business can offer us more productivity in its existing space and our more -- and more productive stores would argue that.

I don't -- I want to maintain a very strong masculine presence for the brand and it is important that we do so.

So it is really not necessary to do so to reconfigure the space to get more female productivity.

I believe that is strongly.

We could see the women's business become a bigger part of the business as we go forward even though it has become much bigger?

Yeah, I think so but I think over time, I think this -- this two to one ratio is probably over time going to be where we end up.

I think we're in a particularly miserable time for men's masculine business around the world, but I don't think that is going to last forever.

Okay.

And on the promotional side of things, Mike, is there a way to perhaps buy some product for specific plan promotions so the store could have some promotional activity while still maintaining the integrity of the brand?

Sure.

And honestly we have enough initial markup to do that.

Right.

We're buying very well but I think the promotions that probably work with us are bounce-back direct mail kinds of things which we had halted altogether.

So the answer is, we really have enough margin to promote the business at whatever level we would like but we think bounce back is probably the best way to handle it right now.

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

Hey, guys, two questions.

Seth, conceptually it sounds like you're shaving a bit on the growth rate on Q2 versus Q1.

Just help us to understand what you think will be different because it does sounds like you're pulling some triggers to make the business a little better and second on the gross margin, just doing some back of the envelope numbers it looks like Hollister should have contributed, you know, 80 to 100 basis points to the gross margin.

It sounds like Abercrombie margins were up.

Can you just walk us through how you get to the net of 40?

Well, there were two questions there and the second quarter outlook being less aggressive and then the comp. of gross margin, I'll deal with gross margin first for the first quarter.

The biggest contributing factor was the initial markup being up.

It was up in all three of our businesses.

As I said, it was up the most in Hollister and Hollister is also becoming a bigger share of the total but it's still running at a lesser IMU than ANF adults.

But every -- all the businesses improved in the first quarter.

As we look to second quarter, we're being a little more cautious in our growth expectations on the margin side where in the second quarter we're -- we're starting to anniversary fairly significant initial markup improvements last year so the ability to increase initial markup in the second quarter as much as we did in the first is very difficult.

So that is probably the single biggest contributor to being cautious.

Also, we're just, you know, very uncertain about where business is going.

It's not been warm yet and it's very -- the second quarter is always a very tough period because the summer assortment goes on sale around Father's Day so it's a short selling period and then we have back-to-school.

So we just feel the need to be cautious in a current environment.

But we still feel very good about where the business is.

Great, thanks.

Your next question comes from Jeff Klinefelter from USB Bancorp, Piper Jaffrey.

Could you give us an update on that, people are concerned about what is going on in the Far East with respect to SARS and what might be happening with shipments, but could you give us in general an update?

I know you guys diversify your sourcing across a number of companies.

Any disruptions yet what the contingencies plan is for that?

We have not seen disruption and we are -- we are relying on China for a certain percentage of our production.

We have not seen any slow down in shipments.

I can't tell you that everything is going to be perfect.

The only thing that we have seen at this point is that we can't travel our people to those countries and we can't bring people from those countries to us.

It makes the transfer of information more difficult but at this point we're seeing our way through it.

So we're not -- we're hopeful that it is going to be all right.

We're keeping our fingers crossed.

There is no way that we could take the amount of production that we have in China and transfer that to areas of other areas of the world but China is certainly not a majority of our production at this point.

Where did most of the shortfall in the inventory come at the end of Q1, Mike?

Was that that faster sell through in portions of the women's business or where exactly did that come from?

I think it was just more a time and place --

Yeah, Jeff, it was just more timing differences which were probably fairly consistent across all the businesses.

It wasn't really overselling versus plant -- things in our assortment or our expectations.

Really more of a timing thing than a major change of what we expect.

Okay, thank you.

Thanks, Jeff.

Your next question comes from Barbara Wyckoff with Buckingham Research.

Hi, good quarter in a tough environment.

: Thanks, Barbara.

Thank you.

Talk about let's look to kind of forward for a little bit.

Given the difficulty of the adult Abercrombie business, do you have any plans to change your marketing focus for back-to-school promotionally, the quarterly or print advertising?

Is it going to be pretty much the same?

: The answer is, we really don't like to reveal what our marketing plans are and I would really not -- rather not comment.

I think we did say that we under promoted in first quarter.

We would say that we would be promoting more heavily in second quarter than we did first but that would be less promotional than we did last year.

I would expect the same kind of scenario to go back-to-school.

As soon as we can get more solid trends in the business, which I think has to do with things outside of our control, we'll -- we'll try to cutback on promotional activities as much as possible because our first priority is to keep the escalation of the nature of the bran.

I don't think we're harming it at this point, but we would like to live as -- as Abercrombie and Fitch and Abercrombie with the left promotional activity as possible.

Okay, thanks.

Thanks.

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

Hi, good morning or good afternoon, guys.

: Hi, Bryan.

Just a comment on the use of cash on the balance sheet.

How much is left in the by back program and do you think we're still on track to hear about another growth lag by the end of this year?

We didn't buyback any shares this quarter.

We still have $5 million outstanding.

We'll look at that from time to time and be active just like you guys are when we think that the shares are at an attractive price.

To speak of next concept, it's not any secret that we've been working on other -- another concept for some time within the business for competitive reasons.

I don't think that makes any sense to talk about it at this point.

It's something that we'll announce closer to the time when we're ready to go forward with it.

But I think it is important to state that we are working on another concept that we're excited about it and that we feel very comfortable working on another concept because we think all three of our existing concepts are working very well.

Terrific.

Good luck, guys.

Thanks.

Your next question comes from John Morris with Girard Klauer.

Thanks.

Questions on the inventory.

Where you're really investing in men's versus women's, I guess you said you're going to be up maybe five to 10% next quarter.

Is women's sort of the ball park for us women significantly more or, you know, more than that on the run rate average and then also if you can just give us the maintenance question, what were the comparisons promotionally last year that you did in the second quarter last year.

Thanks.

I can give you the promotions first.

Last year in the second quarter we did a 15 off insert in the magazine and catalog.

We also did a 15 off mailer -- is your question for first quarter or second quarter?

Second quarter.

Second quarter.

And we did a bounce-back in the second quarter.

The other question was about the content of the inventory at the end of the second quarter.

Obviously, inventories is a point and time thing and there is a lot of flow of goods over the quarter.

I think we plan to be much heavier in investing in women's and girls and obviously Hollister then men's and boys.

Obviously last year we were all ready significantly reducing our inventory level of men’s and boys so I -- it will be fairly proportional as to how we see the businesses trending.

That is one thing that has been very consistent to our planning for the year is that it is -- we're really making our best in women's and girls and in Hollister.

Your next question comes from Stacy Pak with prudential.

Thanks.

I'm the -- on the weak transaction account, I was just wondering any more thoughts, Mike, without giving away all your secrets, you know, TV, would you think about changing price point?

Is there anything else to do besides cutting prices or bounce-backs?

And then secondly, Seth, if you could comment, there is a pretty big range, you know, versus last year on the earnings guidance for Q2.

What sort of gets you to the high or the low end and are you comfortable with Q3 and 4 consensus out there?

To answer your first question, Stacey, I'm not in to cutting prices.

Our business is fairly inelastic as far as cutting prices in store.

The promotional activities that do work for us tend to be bounce-backs and direct mails which are mailers and that is all I'm going to say in terms of how we go forward.

But clearly, cutting prices is not something that is good for the brand or that really does business for us.

Would you contemplate TV or no?

: No.

Okay.

And, Seth?

Okay, your first question I think was about the range for the second quarter for EPS being fairly wide and what kind of volume assumptions match with that.

Without getting -- that is always a tough thing to address because there are so many other things that go into running the business than just the comp. but I -- I think it is safe to say that a continuation of comps like we had in the first quarter would likely be in the closer of the bottom of the range than the top of the range.

We obviously think that there is, you know, a good chance that we'll do better comps second quarter than we did in first, but to be conservative, that is why we have that range.

Your second question was about Q3 and Q4 consensus estimates.

To be honest, we don't track those that much at this point.

It's too early to give guidance and we're not really commenting on consensus estimates beyond the second quarter for right now.

Okay, thank you.

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

Thanks, good afternoon, everyone.

Mike, could you talk a little bit about the men's business?

You know, you've said the environment is terrible but yet you seem to be finding some things that are working even if just a little bit.

Do I detect any, you know, any signs that -- that there are things that you're finding that are working or are you still just kind of searching for the answer there as everyone else is in?

There are always things that are working because you have to balance things that are working and things that aren't and we try to carry forward the things that are working, Dorothy.

I'm actually pretty pleased with the direction of our men's business.

I wish we were just doing more business at it.

Our stocks are balanced, turning those inventories as well as women's.

I can't -- I really do not want to comment on how it's going forward in to.

Okay, thanks.

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

Thanks, good afternoon.

Just a quick question on your decision to flow product more frequently that you talked about on the fourth quarter call.

I'm curious if you could assess the impact of that strategy to date or if the environment and the lack of promotions has sort of overwhelmed any benefit you might have expected to see there?

I think this is a difficult question to answer but I think you probably answered it best by what you just said.

We're turning the new product very well.

We see that that is the new product is what is driving our business.

And the flow certainly is greater than last year but the overall environment makes it very difficult to really measure those results.

I would say that our women's business would not be as strong as it is had it not been for that -- that strategy and we'll continue to drive the business that way.

The women's businesses is just so tough it is very difficult to make that call there.

But we're not driving that -- we're not flowing the newness in men's that we are in women's.

Okay.

Did your overall inventory position though affect your ability to execute that position?

Or execute that strategy, I'm sorry.

I'm not sure I understand the question.

Well, just given that you're quite a bit below the guidance that you had provided on inventory per foot, I'm wondering if you were able to flow enough product frequently to achieve that -- that strategy?

Oh, sure, sure we were because that is just a case of how much we turn it so that -- that's -- that wasn't an issue.

We did -- we did flow much more newness than we have in the past company-wide.

Obviously you're always running short of the best items.

We would have loved to have had some more women's pants, but there's always something like that in every season and I think overall we had sufficient inventory.

Correct.

Okay, thanks.

Your next question comes from David Burhman with Burhman Capital.

Mr. Burhman, your line is open, sir.

There's no response from Mr. Burhman.

We will proceed to the next question.

Your next question comes from Joe Teklits with Wachovia Securities.

Thanks, hi, guys.

I was wondering if you could categorize, talking about fall business without giving up any secrets, categorize your fall business whether it is a pant or top-driven kind of back-to-school season and even maybe more specifically on the men's side of the business.

And if so I'll just finish the question, if so, if that military car go pants that you talked about for guys and for girls gives you any optimism for back-to-school.

Joe, I would love to tell you about that, I really -- I really can't get into that conversation with you now about what back-to-school is to be.

And --

Can you give us a percentage of business maybe pants say Q3 versus Q1, what it would be for men or women or both?

Well, Q3 versus Q1 it's obviously a bigger percentage, but I really would rather not get into that level of detail.

I would love to but I really can't.

Can I ask another question then?

Sure.

All right, cool.

Your bounce-back that you're going to run here in Q2, $25 off certificate, what is the net discount to your best calculation of that promotion versus a 15% straight coupon?

You have to spend $150 -- I mean a minimum of $150 to redeem it so it would be 25 off of $125 net sales so --

So this is $75 at the -- you have to get it for spending $75 then you have to come back and spend $75 again to get it?

Yes.

As a practical matter, you know, you're generally going to end up with a higher transaction value each time than your minimum because it is hard to match the specific items add up to the right numbers so really generally ends up as a lesser percentage than Wes was describing.

16.6% if you do the math but probably less than 15% at the end of the day?

You're not going to spend the exact amounts on both transactions.

Okay, thanks.

Thanks.

Your next question comes from Kimberly Greenberger with Lehman Brothers.

Great and I would like to give you my congratulations for managing the company well through this quarter here.

Thanks.

Just following up on Dawn's on the inventory, Mike, do you think the decision to flow more in new women's causes you to buy a little less deeply in the items that hit the floor at the beginning of the floor sets?

Yes, absolutely.

Because we look for them to have shorter lives and to be replaced more quickly.

That is absolutely correct.

Okay.

So, for example, when you have a hot item like the military bottom that you identified, is it possible or is it your strategy to try to get back into that item in season or how do you view, you know, something that sales out, you know, in the first, you know, couple of weeks of a new floor set?

How do you capitalize on it?

We didn't run out of the military bottoms because of the concept of flowing more often.

We just weren't aggressive number of in the classification.

It took us by surprise and we did try very hard to replenish.

We were able to replenish not at the end of the first quarter and we were clearly replenishing as we go into the second quarter, but I don't want to connect the concept of on faster turn with not having enough inventory in the classification because there was inventory plan to replace that.

Okay.

If that makes sense to you.

Yeah, that makes sense.

Could you ask two housekeeping questions?

Sure.

Average shimmer count during the quarter and then end of first quarter square footage?

Seth?

Average share count diluted at the end of the quarter was 99835 and I'm sorry was the question square footage at the end of the quarter?

Right, square footage.

4392.

Thank you.

Thanks, Kimberly.

Your next question comes from Kendra Devaney from Fulcrum Partners.

Hi, guys.

Hi.

First of all, in your inventory, Seth, you mentioned that you're sort of gearing to get back in line with the levels back in 2001 and my question is just about, you know, at that point your sales were trending about 420 a foot and now this year you're looking to trend below 400 a foot.

What does that do to the potential mark-downs scenarios that you get towards the end of the spring, summer season and how are you kind of continuing your diligent efforts in managing that and secondly on Hollister, IMU being as strong as it is, how many stores do you need to get to achieve the same kind of expense ratio as what you have at the Abercrombie brand?

There are two questions, the first one on the inventory, the productivity in ANF is less than it was two years ago, same time the productivity in Hollister is much higher than it was, but we obviously have many more Hollister stores.

I think we will be at -- I think we are planning to have the same kind of season-end pricing on our carry-over inventory exiting the second quarter that we always have.

That is not something that we -- you can defer.

So I think we're -- we'll be in a well-managed position there and then a good portion of the -- in the second quarter inventory are the new back-to-school goods.

There's a lot of flow in inventory that covers third quarter and obviously fourth quarter that comes after the end of the second quarter.

So to be up slightly to L-Y at that point doesn't add any additional risk to the fall season for us.

There is a lot of slow left and so there is -- it's not really any statement of our taking on any additional mark-down risk.

Is that part of your concern on the margin there will be some additional margin pressure for Q2 and that is contributing to the range of estimates you're giving?

No, that is not correct.

That range really doesn't relate to carry over inventory.

It more relates to anniversary and a lot of initial markup improvement.

The mark-down rate generally is higher every year in the second quarter than the first just because as I said before it is a short selling period at full price because you get promotional around Father's Day.

Right.

And obviously none of this -- the seasonal styles really carry through as well as they would from first to SEC.

So it's not any different than it has always been.

We're not lowering guidance because we're planning to have higher Mark down rate than last year.

If anything, our expectations today are that our mark-down rate in the second quarter should -- will likely be less than what it was a year ago.

Great, thanks.

Thanks, Kendra.

Your next question comes from Rob Wilson with Tiburon Research.

Yes, can you speak to the Midwest.

I think you mentioned the last four or five conference calls your calls to the Midwest have been your worst performing region and also, can you talk about your container freight operation?

Let me talk about the Midwest first.

It has been and interestingly enough it has been the same for most of our competitors.

And so I don't know what to read into that in terms of how we're operating the business except to say that that seems to be the weakest part of specialty retailing today in terms of advances.

Container you said?

The container station is something that allow us to process goods faster.

Previously we had to have goods delivered to a third-party to where they would be broken down and would clear custom so this really allow us to eliminate that step and saves us -- probably saves the day in processing through the facility here and there are also some cost savings as well because we can breakdown and sort the 48 cheaper ourselves than having the third-party do it.

Your next question comes from Richard Jaffe with UBS.

Thanks very much.

I guess I'm intrigued with the promotional activity and inventory build-up in the second quarter.

It seems to make sense that maybe the pendulum swung a little too far in the first quarter and wondering if that cadence, the inventory build up and promotional count will continue into the second half or if you've got a different outlook for the second half?

At this point, Richard, I don't think we can really get into our second half marketing strategy.

I think obviously some of it relates to how strong the business is at that point and it's also a competitive -- there is a competitive reason why we wouldn't want to give out that strategy.

The inventory build-up is really not really related to promotional activity.

I would hesitate to classify it as a build-up we're talking about five to 10% up to LY when LY was down 9%.

I think over the back half of the year, we expect the changes for last year to be smaller than you have seen first or second quarter because we were in a better in-stock position last year in the third and fourth quarter.

We're still a little bit chasing up against the period last year when we were still chasing goods.

So I appreciate the clarification on the inventory and if I understand it correctly, the promotional initiative that we're seeing for the second quarter were made on a more timely basis as third quarter approaches, business trends have improved, you'll do less; if they're weaker, you'll perhaps do more?

That is exactly right.

Well stated.

Exactly right.

Okay.

Your next question comes from Richard Baum with CSFB.

Good afternoon.

Hi, Richard.

I was about ready to give up on you guys.

Mike, you talked about the kinds of classifications that worked pretty much across the board in men's, women's and kids in the first quarter.

You didn't talk very much about what didn't work.

If you could kind of take us through that same journey, you know, any insights as to why some of these items or categories didn't work would be helpful.

Yeah, I think that the -- it is not a question of didn't working.

It would be a question of didn't grow and I'd say across our businesses, denim did not grow first quarter and I think that would be the biggest single factor that we could look at across all the businesses.

And however I have to say, we weren't expecting it to either.

And just your thoughts about, you know, have we reached kind of a plateau, does everyone have enough denim in their closets now because it has been pretty much on fire category for the last two or three years.

It's just different cycles, I think.

I think we'll continue to do a lot of business in denim.

It just depends on -- upon the level.

So we were conservative in our plans.

The business did not attain last year's levels.

It went elsewhere.

And do you think that is going to be the -- that theme is going to carry out for a while now?

You're pretty sneaky.

I can't comment.

Only through back-to-school.

That is all I'm really asking.

I can't comment on that, Rich.

Okay, thanks, Mike.

I'm sorry.

Your next question comes from Jennifer Lamerse (ph) from Lamerse Equity Research.

Hi, thanks.

I'm wondering about your store count in your KU had 30 adult ten kids and now 201080 and I'm wondering if something happened last month to make you shift the numbers or can you talk about that some more and are you renegotiating leases for that for that change?

I think the question is about the store count.

The numbers we just gave out today have more Hollister and fewer Abercrombie and Fitch stores.

I think when we commented on store count recently we said we were targeting at least to have 70 Hollister and at this point we're still doing the yields for this year so we're not canceling any leases.

They're still leases to be done.

Right, we're not canceling any leases.

We've executed already.

They're still -- we can still make deals for stores that open this year probably up till later this month but all along we have been aggressively going after as many Hollister deals as we could get done in places we wanted to be and could get the right economic.

Ends up we have been able to get some more and at this point with Abercrombie and Fitch, we don't have that big of a universe of malls to still go to get to our 400 stores.

So a lot of going from a number of 30 to 20 just reflects that the particular spaces in some places didn't materialize for this year.

: And we're very committed to getting that store count to 400 as fast as we possibly can.

Great, thank you.

Thank you.

Your next question comes from Marcia Jung with Fenders, Morris and Harris.

Thanks, good afternoon.

Can you tell us the number of Hollister stores that are currently in the comp. base and can you quantify the merchandise margin differences between guys and girls for Abercrombie and Fitch and Hollister and finally, with over -- with approximately 110 new store openings planned for this fiscal year, should we expect the same level of store openings in fiscal '04?

There's 43 stores in the comp. base for Hollister.

On the merchandise margin, you know, women's is a little better than men's but I wouldn't say it is significant.

And I would think that the number of stores that we're going to open for 2004 will be pretty similar to what we opened this year.

And that includes the break out between Hollister and Abercrombie?

We have not gotten into that level of detail yet.

We're still be working on the deals in the fall for those, but in total we'll probably hit 110, 120.

Okay, great.

Thank you.

Your next question comes from Margaret with Goldman Sacks.

Hi, Margaret Major from Goldman Saks.

I have a couple of questions.

First of all, during how are you achieving your higher initial markups through your sourcing?

Can you give a little bit more depth in your explanation of that than just better sourcing?

Isn't there usually a trade off between price speed and quality versus the equation --

To answer that question there is absolutely not.

Okay.

It is not a trade off.

What we do is to seek out quality factories around the world, labor changes country to country, region to region, it migrates in terms of cost.

Higher costs, countries tend to be less important as we get into countries where there is better labor cost and that is how we cost better as we go forward.

We do not compromise quality or speed for a price.

We're able to -- we're able to achieve through the concept that I just described to you opening up new markets and new factories with better labor costs, excellent quality and good speed.

Really, okay, all right.

And we have been doing that -- if you would study our business, we have been doing that consistently for the last ten years.

Yep.

Yeah.

Just I kind of think of lower cost countries as being less accessible to shipping but we can talk about that at a future point.

I also am curious about your statement that your business is not -- does not have price elasticity.

That seems like a very odd concept in apparel so I would be wondering about that.

I guess you said two questions but if you can indulge me if not that is okay, but, you know, this whole idea of your sector being completely saturated in terms of square footage and other segments of apparel not being saturated where there is opportunity, IE an older demographic.

What is your reaction to that?

Okay, let me talk a minute.

First price elasticity and second, the sector being in fact full.

Our business is not as price elastic but in the ranges that we operate it is surprisingly in-elastic.

We have aspirational brands and price is not the first objective of our customer in terms of the business.

So it's not totally in-elastic but less elastic as you would imagine.

In terms of maximizing margin it is fairly in-elastic and those are two different exercises.

The second question in terms of the sector being -- our sector and how do you define our sector?

she's gone.

Youth market, this whole thing about square footage in the malls being very saturated at the -- in the targeting youth whereas an older demographic it looks like there is an opportunity there and I guess I'm curious for your reaction to that and also is there a skill set at Abercrombie that would allow you to go after an older customer than you have so far targeted?

Okay, I guess I don't really want to comment on that because it would -- it would tip our hat in terms of where we're going with another concept and I really would rather not comment on that today.

Your next question comes from Anne-Marie Peterson with Thomas Weisel Partners.

Hi, good afternoon.

Given the weak transaction trends that you have been seeing, how do you assess the aspirational brand sort of premium pricing approach?

How do you assess it in it has a strong appeal as it does to your consumer in the past, what type of consumer surveys do you do if any?

If you could just comment on that, that would be great.

Thanks.

Well, we don't do -- we don't do consumer surveys internally, but there are a number of Wall Street firms that do these kinds of surveys and the ones we have seen have generally shown that Abercrombie and Fitch is still viewed as one of the coolest, if not the coolest brand in apparel sector for our customer.

But I think our Abercrombie and Fitch brand has been -- we've been running it for over ten years now and it still has profitability -- profitability numbers that suggest it's still very strong and it's still obviously very attractive to the customer.

Your next question comes from Jennifer Black with Wells Fargo.

Good afternoon and congratulations on --

Thank you, Jennifer.

I was just curious to know in thinking about your marketing plans, I know you can't actual give it away but I wondered if you are thinking about something more towards guys than girls because it seems as though the girls already are coming in?

Actually, you mean for this quarter, Jennifer?

Well, for this quarter and however many more quarters the men are not coming?

Good question.

We really haven't but perhaps we should.

I really haven't thought about it in those terms.

We're going after second quarter with the bounce-back just to strengthen the total business.

We'll think about it.

I mean, I don't think that guys necessarily react to coupons.

I think that they react to other things and so I would -- that is why I'm just asking about this.

Okay, I think that --

Since you're not exactly politically correct, I'm sure you could come up with something.

You're right about that.

Okay.

That is -- that stimulates me, thank you, Jennifer.

You're welcome.

Your next question comes from Dana Kelsey from Bear Stearns.

Good afternoon, everyone.

Hi, Dana.

Accessories, how is it doing, what are you seeing out there?

Is that a bigger emphasis going into the fall and back-to-school, we've been hearing about it out there.

What is your read on the accessories area?

I think we're seeing increases in accessories.

We don't run an accessory business that is broad-based.

We run an accessories business that is related to the look of the season and how it is necessary to complete the look of the season.

We'll grow our accessory business -- we have been growing our accessory business on a quarter by quarter basis and we should continue to do so.

When we add sleepwear and underwear to that we're seeing really significant growth.

Does that have anything to do with the average transaction and there is a difference in accessories in Hollister versus the Abercrombie division?

The accessory business in Hollister is not as developed as the accessory business in Abercrombie so it offers us more opportunity, but it's run the same way.

Thank you.

Thanks.

You have a follow-up question from Barbara Wyckoff with Buckingham Research.

Hi, sorry to ask another question but I haven't talked really about the new POS system.

What will it do for you versus the old system?

Can you kind of walk us through that?

Well, I think it's in conjunction with the wide area network we put in, it should keep our credit card transactions a little more stable so maybe it will increase the through-put in the lines.

It's also a touch screen based system so it will be much easier to train when we bring on newer people for back-to-school and holiday.

It's also going to have a built-in scheduler so we can have our stores build a schedule fairly easily and fairly quickly.

And it's going to allow us to get signature capture and get debt cards which should reduce maybe our cost of transaction a little bit.

So there is a lot of uses for it.

The big use is really the Internet that we haven't really touched upon yet and we'll use that in terms of doing some in store training and things of that nature.

I think we'll see the big benefits probably not until next year.

Will that speed the transactions through the store?

: It will sort of be like self-scanning.

You think you're going falter but you might not be because it's going to probably take us longer to told the cleats and put them in the bag than it does to run the actual transaction.

Okay, thanks.

Your next question comes from Stacy Pak with prudential.

Hi, just a few clean-ups.

Mike, just on shorts in particular, are you getting any doesn't read where it is warm, it has got to be warm somewhere in the country.

Are you getting any doesn't read on shorts?

What are you seeing regionally?

You know, can you comment there?

Yes.

Where it is warm, we sell shorts.

That is kind of historical.

The men's short business is excellent when it gets hot and it's not so great when it's not.

I'm confident that we're going to end up with a pretty good men's short business.

The women's short business has been -- we projected the women's short business as much better than it turned out to be first quarter but pants were much better than projected.

As we are seeing pockets of warm weather, the women's short business is becoming better.

Having said that, the women's short business is better than last year; the men is not as good but we will end up with a good short business by the time the hot weather is over.

Okay, then a couple of other just sort of random follow-ups.

Can you say what the comp. is in a core store?

You said the percentage of stores that have shown ahead but can you say what kind of comp. hit you see when a Hollister opens in the same mall?

: I don't think that is useful to do because we'll be asked to update a number every time we have a call and that -- that is not -- it's a number that moves around a lot.

I don't think it's really tells you very much and we're not going to get into starting to give that out all the time.

Okay.

Then the average inventory in Q2 because you gave us a point in time is the -- are the inventories are average going to be up more in Q2 versus last year than they were in Q1 versus last year?

I don't have a weekly average here to talk about but I think it's fairly safe to say that we'll be a little higher this year than last -- than first quarter because first quarter last year we were extremely low at the start of the quarter and we were very much chasing inventory all through the first quarter.

We still were a low second but not as low as the first.

Okay.

Then the last question, what do the Easter shift wind up being for you guys and in the end, what does that tell you about high school customers versus college customers?

Have you looked at all of that?

That is a good question.

I'm not sure what we would conclude from it.

We had a normal build for Easter business from the prior week versus history of Easter weeks but businesses in the week prior to that was a little weaker than we expected and business after Easter was a little weaker than we expected.

So I don't know that there is anything solid to conclude about the high school versus the college.

We didn't -- we didn't -- we can't separate out all the different elements.

Because the closings were different for this year versus last for both elements.

To be honest, Stacy, when you plan things like Easter, you look at -- as everybody does you go back and look at the years of history where the calendar was the same and you plan it that way and then invariably it comes out a little different.

And again that was true this year but I -- I think the thing to takeaway from the full period is that the business is -- is tough.

Okay, thank you.

Thanks.

You have a follow-up question from Kimberly Greenberger with Lehman Brothers.

Just if you can tell us what direct sales were as a percentage of the total sales during the first quarter.

It was about 5% which is about the same as it was last year.

Great.

Thanks, Wes.

You have a follow-up question from Rob Wilson with Tiburon research.

Just quickly CAPEX and depreciation for the quarter.

CAPEX for the quarter was for first quarter was $25 million.

Depreciation was $ Seth Johnson 16 million.

Thank you.

You have a follow-up question from Dawn Donor with Pacific Growth Equity.

Yes, hi.

I was just wondering if you could tell us the timing of the back-to-school line deliveries for each brand?

The store set for each brand will be the -- the week after the 4th of July.

All stores will go up at the same time.

Okay, great.

And then just a follow-up to a comment you made about an opportunity at Hollister in the accessories category.

I'm just wondering if you could talk about any other product classifications you might be contemplating for Hollister?

Actually the accessory classifications are -- was growth, there will be growth in additional personal care, additional fragrances.

There will be growth in -- at some point in the future of underwear and sleepwear in the girls classification.

Okay.

Then just a question for West, should we be using 38.1% for the tax rate going forward?

I would use that for second quarter but I would use 38.5% for the fall.

Okay, thanks.

Okay.

You have a follow-up question from Joe Teklits from Wachovia Securities.

Hi, thanks again.

One more merchandising question Mike if I can on the guys side of the business, your muscle fit knit shirts are getting quite shrunken and I'm curious if you're narrowing your universal customers too much or what might be the objective there?

I think it is -- that is an interesting question and it is amazing to me the body consciousness of our customers in all of our brands.

It's clearly lessened in little Abercrombie where kids have not developed their bodies but in Hollister where we have a larger fit for guys on the top, we're having to bring it in because of the body consciousness of guys in the country today.

And clearly that is the case with college students.

I think for the first layers we're dead-on in term of what these guys are looking for.

I think there needs to be a little more ease with second layers and I think that's -- that's not a question in our stock right now because we don't have those but is an issue on-going.

So, a bottom line, I don't think so.

I think we're pretty targeted to our customers.

Okay, thanks.

You have a follow-up question from Jennifer Black with Wells Fargo.

I don't think you talked about this.

I was curious to know what kind of ratio on the girls side of the business, what you were selling as far as shorts versus cropped or capris and can you just answer that?

I really don't think I want to get into that level of detail, Jennifer.

The crop business is very good.

The short business is better than last year. capris or ankle length are not a major business for us.

Is that all?

Yeah, I’m getting the reason I was asking the question is there are some girls that may not want to wear the super short-shorts so I just wondered if there was additional market share in the girls side that you may be getting with your great looking cropped pants.

: You mean in terms of offering shorts that are longer?

I'm a little unclear about that.

Well, if you're in the higher size range you may not want to wear super short-shorts.

So there is more opportunity in crop?

Yes.

We do have more opportunity in crop.

We're turning crop much too fast.

Okay.

We're trying very hard to build those inventories.

And we are doing so.

As a matter of fact, in all the brands we'll have increased inventory levels.

It just seems like --

Next week.

That would be a big opportunity because of there would be a number of girls that wouldn't want to wear the really short-shorts.

There really is and we're working to build inventory in that classification.

Okay, thank you.

Thanks.

There are no further questions at this time.

Do you have any closing remarks?

Thank you very much.

Thank you.

This concludes today's ANF first quarter earnings conference call.

You may now disconnect.