Abercrombie & Fitch Co (ANF) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Summer, and I'll be your conference facilitator today.

I'd like to welcome everyone to the Abercrombie & Fitch second quarter earnings release conference call.

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

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

If you would like to ask a question during this time, simply press star and 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 second quarter conference call.

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

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

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

You will need to reference the conference I.D. number 6755952 to access the replay.

You may also access the replay through the Internet at Abercrombie.com.

With me today are Mike Jeffries, Chairman and CEO; and Seth Johnson, Executive Vice President and COO.

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 second quarter were $355.7 million, up 8% over last year's second quarter sales of $329.2 million.

Comparable store sales decreased 8% for the quarter.

Hollister continued to show strong momentum, achieving double-digit positive comps for the quarter.

Comps were positive in both men's and women's in Hollister.

Comps for Abercrombie & Fitch were negative in the low double digits, largely due to continuing very difficult men's business.

Comps in the Kid's business were slightly negative; with girls positive and boys negative.

After I complete my remarks, Mike will discuss the business in more detail from a merchandising perspective.

By region, our comps are strongest on the west coast and in Florida and weakest in the midwest.

The gross income rate for the quarter was 40.6%, 50 basis points higher than last year's rate of 40.1%.

The increase versus last year largely resulted from higher initial markup and a slowly lower markdown rate, partially offset by an increase in buying and occupancy cost as a percent of sales.

During the quarter, we tonight make progress in sourcing, which resulted in IMU improvements in all three of our businesses.

Improvement was most dramatic in Hollister and Kids and in Hollister, we're on track with our strategy to reach the same IMU as Abercrombie & Fitch by the end of the year.

The increase in buying occupancy costs as a percent of sales reflect the inability to leverage fixed costs such as rent, depreciation and other charges with a comp store decrease.

The markdown rate for the quarter was lower than last year due to tight controlled inventory levels and a reduced level of promotional activity.

This year, we did not anniversary a direct mail promotion that had a significant impact on July and early August business for Abercrombie & Fitch and Abercrombie.

We ended the second quarter with inventories down 4% per gross square foot versus last year at cost.

This reduction was on top of a 9% reduction last year.

We continue to be cautious about the environment and will remain conservative in our inventory commitments until we see a change in trend.

Looking forward, at this point we expect to end the third quarter flat to slightly down per square foot in inventory versus last year.

The second quarter SG&A rate was 24.9%, 10 basis points lower than last year's 25% rate.

Improvement in rate reflects lower expenses for incentive compensations, marketing and the distribution center.

Offsetting these improvements were higher store and legal expenses.

Marketing expenses dropped as a percent of sales versus last year due to savings in printing and postage costs resulting from eliminating second quarter and back-to-school direct mail campaign.

Our distribution center continues to make a major contribution towards our success and expense control.

During the second quarter, D.C. productivity, as measured in units processed per labor hour, was 29% higher than last year.

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

For the quarter, we processed a similar number units with 25% fewer labor hours.

Incentives compensation expense was reduced versus last year at the rate of growth and net income was less than we achieved in last year's second quarter.

Store expenses increased as a percentage of sales due to the inability to leverage payroll with lower sales per average store.

During the quarter, we reduced average payroll hours by 6% per store in Abercrombie & Fitch and 3% in Abercrombie, but these cuts couldn't fully offset the comp store sales decrease.

Legal expenses increased versus last year as we reserved expected defense costs for pending litigation.

Operating income increased 12% for the quarter from $49.6 million to $55.6 million.

Net income for the quarter increased from $31.1 million to $34.8 million, an increase of 12%.

Second quarter earnings per share on a fully diluted basis were 35 cents versus 31 cents last year, an increase of 13%.

During the quarter, we repurchased 1.9 million shares in the open market as part of our previously authorized share repurchase program.

There are 3.1 million shares remaining to be purchased as part of our 5 million share repurchase authorization.

The timing of share purchases will depend upon market conditions.

We opened six adult stores, two kid stores and 17 Hollister stores during the quarter.

Two adult stores closed for remodel and will re-open in the fall season.

We ended the quarter with a total of 346 adult stores, 167 kid stores and 112 Hollister stores for a total of the 625 stores.

For fiscal 2003, we planned to open 19 Abercrombie & Fitch stores, 9 Abercrombie stores and 80 Hollister stores for a total of 108 stores.

Total square footage for the year will grow 16% versus 2002.

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

During the quarter, the new stores in Abercrombie & Fitch, Abercrombie, and Hollister opened during the past 12 months averaged 100% of the sales per square foot of the existing store base.

For fiscal 2003, our planned capital expenditures will be between $120 and 125 million, with the majority of spending for new stores.

The rollout of our new POS system should be complete this week, roughly two months ahead of schedule.

Instruction of additional home office space to support the growth of Hollister and our new concept, is proceeding on schedule and will be complete this fall.

Now I'd like to discuss the profit outlook for the third quarter.

The sales environment remains tough and it is difficult to predict when our trend will improve.

We continue to manage the business very conservatively, focusing on protecting and improving the bottom line.

We expect that with tight controls in place, a continuation of the second quarter comp trend through the third quarter would result in third quarter EPS flat to slightly up versus last year.

Now Mike will talk about our results in more detail.

Good afternoon.

The sales environment has clearly been challenging.

At this point, it is clearly difficult to read what's happening with full price go forward business.

July sales had a strong demand for summer clearance and disappointing for new fall full price merchandise.

With a low level of summer carryover, we couldn't take advantage of the clearance merchandise.

Our promotional stance has also made it tough to get an accurate read of the business.

Last year, we used a significant amount of direct mail to drive the back-to-school business.

To protect our brand image, we did not use any direct mail this year.

This strategy has improved margin, but at the expense of comps.

Since the direct mail coupons were generally used to buy the new fall assortment, some of the weakness in fall selling likely relates to the lack of a promotional vehicle.

Having said that, I'm not satisfied with our level of business and am adjusting our inventory content, to take advantage of classifications where I see trend.

Now I'd like to talk about the business by brand.

I'll start with Abercrombie & Fitch.

The men's basis remains very difficult and we've seen no pickup in trend.

Until we see a sign of improvement in men's, industry-wide, we need to remain cautious in our commitments and expectations.

Unlike men's, there is strong fashion trend in women's and I believe there is sufficient potential to drive enough business in women's to offset the weakness in men's.

The women's business is very solid, but not as targeted as I would like in terms of inventory content.

For back-to-school, we think not taken full advantage of our opportunity in knit tops.

Our lean overall inventory position entering back-to-school has given us the opportunity to go after key categories for the balance of the season, and we will be in a much stronger inventory position in women's knits for late August and September business.

In the bottoms business, we have the potential for a strong season, but are not currently as targeted as we should be by fit.

Overall, I'm very confident that we can have a strong fall season on the women's side of the business.

Hollister continues to outperform our expectations.

As Seth mentioned, Hollister continues to comp in double digits.

As in A&F, women's is driving the Hollister business in tops and bottoms.

I'm pleased where we stand with Hollister.

It's working in a wide range of malls and geographic areas.

The operating margin is approaching the level we're achieving in A&F.

As this brand takes off, I believe we're just starting to see the full potential.

Club Cali, our customer loyalty program continues to grow and we continue to test other brand-enhancing opportunities.

In our kid's business, Abercrombie, girls, in particular, has performed very well with boys remaining difficult.

For the quarter, girls ran a solid positive comp.

We're making slow, steady progress in the kids business and have great potential for further improvement, particularly in girls.

In closing, I am pleased with our financial performance for the second quarter.

Our business is strong and highly profitable.

Although we must control the business tightly until we see an improved sales trend.

I'm confident that we will have a successful fall season.

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 1 on your telephone keypad.

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

Your first question comes from Barbara Wyckoff of Buckingham Research.

Can you hear me?

Yes.

Thanks.

Congratulations.

Good -- good performance in a tough environment.

Thank you.

Mike, could you talk a little bit about the trends in and women's and men's bottoms?

Is there a shift towards more simple silhouettes or still dominated by the cargo utility feeling?

There is a shift to simpler silhouettes in women's bottoms and I'd not like to reveal too much, but there is a continued trend to garments that are -- that are very sexy.

Whether they be in military or more cleaned up silhouettes.

But was I say that -- that military is still part of the assortment, will continue to be, but fit is a very important qualification there.

In men's, military continues as an important part of the business.

I don't see -- and there is some trend to a little cleaner garment, but it's not revolutionary, it's more evolutionary.

Do you see the low-rise continuing?

Yes.

Okay.

Thanks.

Thanks.

Your next question comes from David -- I'm sorry, Kimberly Greenberger of Lehman Brothers.

Great, thank you.

Good afternoon.

Hi.

Mike, I wondered if you could talk a little more about the women's business, you indicated there might be enough strength in women's to offset the weakness in men's.

You said you're not as targeted on the bottoms business.

Can you talk about that specifically, what you guys are doing in the women's business, when we might expect to see a kind of response, I guess, in the overall results?

Well, I think it's -- we're working very hard in the whole business.

I indicated that in tops, we're under-inventoried in knit tops and we're working very hard to raise our inventory levels there and because we have been, I think, we're able to have flow in women's knits that are very, very much on trend.

And each week that goes on, we continue to deliver more of the right stuff.

So, I would hope we'd see an improvement in women's top trend over the next four weeks.

In women's bottoms, I just indicated that we need to adjust our fits in general.

And I responded to Barbara in those terms that it's just a little bit of refining in terms of the breakdown or the percentage of fits by different models.

And that is happening now and will continue right into the Christmas set.

I think the trend is very clear in women's and we're responding to the trend as we see it and I would expect, because we're still flowing and to see improving trend right now into the Christmas season.

Okay.

And Mike, just -- to clarify on the promotions as we get through the next six weeks, is it -- are we done anniversarying the various direct mail and bounce back programs by the time we finish the second week of September?

And at that point, will we get a cleaner read on the business in terms of the comp trend?

I will let Seth respond to that in terms of the weeks.

Well, we're really up against a lot of direct mail business through the first couple of weeks of August.

There was a bounce-back that impacted a couple of weeks in September last year, and then we ran direct mail for holiday.

So, I think the -- for third quarter the big impact is first half of August and a couple of weeks of September.

We are trying very, very hard to get off this promotional merry go round and have felt that this is a good time to do it with a -- with a very strong business, a profitable business that we have at this point.

We'll -- we'll we'll keep you posted.

But it certainly, through the second week of September, we're still up against pretty intense promotional activity.

Okay, great, thanks.

Thanks.

The next question comes from David Berman of Berman Capital.

Hi, guys.

Can you comment, first of all, on the dividends versus the share buyback program in the environment?

And what your thoughts are on given the dividend?

And secondly, store supplies were up $3 million, to a capitalized expense, you know, for the last six months, and instead of going through the P&L, I wondered if you could explain in more detail what your policy is and what it's there for?

Okay, first on the -- the dividend versus share buyback, we continued to discuss both of these types to things on an ongoing basis.

At this point, we've been pursuing share buyback as we build up cash in the future, dividend is always an opportunity, as well.

We haven't made that decision at this point.

In terms of the balance sheet, the store supply, capitalized store supply account really is growing at about the rate of -- of our stores and square footage.

So, it's really -- there's nothing at all aberrational about that.

How many stores did you open in the last six months, because I know the last quarter, I think you opened about 19 stores?

Because I just see -- the numbers, you know, I don't know if it was like 25 stores or 30 stores, about $100,000 a store?

The stores supply account -- I don't -- hang on a second.

The store supply count is up about 6% a square foot versus last year.

So, it's -- what goes into that are hangers, sensor tags, packaging, boxes and shopping bags that get expensed when they're used in transactions.

Sensormatic tags, we capitalize the initial shipment to a new store and then all further purchases, all further shipments are expensed.

So -- and it's the same thing with hangers.

There is nothing different about any of our policies that happened within the last six months.

Okay.

Thanks.

Your next question comes from Rob Wilson of [INAUDIBLE].

Yes, Seth, can you talk about the legal expense accrual you took in Q2 and whether we should look for that in Q3?

Maybe the impact on earnings for Q2?

The impact on earnings in Q2 on an incremental basis was probably around 2 cents a share.

It's not something that I would expect to see more of in Q3.

There were -- there were some suits filed in California and Pennsylvania that the California case is the discrimination case.

The Pennsylvania case is the wage and hour case.

We believe that claims are totally without merit, but we reserved our expected defense costs of litigation.

So, it's -- I think these are a one-time thing for this quarter.

Obviously there's an ongoing level of legal expenditure that goes on in the business, but this is more of a one-time thing this quarter.

And real quickly, what did you spend on your share repurchase in the quarter?

It was about $50 million.

All right, thank you.

Your next question comes from John Morris of Gerard Klauer Mattison.

Thanks, good afternoon.

You know, the SG&A was pretty well-contained in the second quarter with a high single digit increase.

Over last year.

And I'm just wondering where do you see -- where have you planned SG&A spending on a year-over-year basis in the back half of the year?

Thanks.

In terms of SG&A for the back half, I think we'll see higher percentage increases in dollars versus last year.

The key elements of -- of that, where I think it's going to be different -- more difficult to get the leverage, are, first of all, we're getting to the point where we can no longer continue to cut store hours.

We're able to cut 6% of store in Abercrombie & Fitch.

I don't see us able to necessarily do that in third and fourth quarter.

We're hoping we don't have lower incentive comp costs in the fall season, but that will depend on our level of earnings.

The distribution center, we actually spent fewer dollars this year in the second quarter than we did in the prior year.

We're getting up against very big productivity increases last year, and I don't think we can continue to have 29% UPH increases and any other element for the third quarter, is we had a significant save in marketing from not having the cost of printing, producing and mailing the direct mail pieces.

So, those are things that we won't anniversary.

So, the -- I think at a similar comp number in third quarter to second quarter, I would expect deterioration in SG&A percent.

So, I assume that would be back to a high teen year-over-year growth rate?

That's probably a pretty reasonable assumption.

And, Seth, can you just talk a little bit about the POS system?

Did you say it's two months ahead of schedule, it's going to roll now across the chain?

And what kind of productivity and/or other improvements you can talk about or want to talk about -- want to talk about that you've seen, you know, presuming that's been a test.

It's actually going to be totally complete in terms of rollout by August 15.

So, it's going to be -- it's fully operational in all stores.

Basically in -- in the difference in the stores, the touch screen environment, which significantly improves training.

It allows for signature capture and it's also combined with a wide area network which makes credit authorization faster.

It also saves us a lot of money in communications costs, and we're also now communicating our floor set documents over the wide area network as opposed to having to Fed-Ex huge packets that we copied at Kinko's.

So, those two things really are pretty much paying for the wide area network.

In terms of the point of sale, we don't know yet whether it's going to speed transactions.

Some of what happens is credit authorizations is faster but we still have to figure out how to take sensormatic tags off the garments, and all the folding, and those elements of the transaction more quickly and that is something that we're making a major focus on for this fall.

So, we can be faster to wrap this.

Thanks.

Thank you.

Your next question comes from Richard Baum of CSFB.

Hi, good afternoon, everybody.

Hi, Richard.

I've got three quick ones.

One is, Seth, can you provide the components of, you know, of the negative comps, they were down 8%, break it down between transactions and average retail...and UPTs if you can do that?

In Abercrombie & Fitch, transactions per store were down 15.

Average dollar sale was up 6.

And UPTs were up about 1.5.

Okay.

In Hollister, we had about a 2% -- 2.5% increase in transactions per store, but a 19% increase in average dollar sale.

And UPTs was up 7.

Kids, we were actually down, we were down 2 in transactions per store, up 4 in average dollar sale and up 2.5 in UPTs.

Great.

Now, just in terms of maybe Mike, if you could talk a little more on the men's side of the business, on women's, you talked about what you felt was working and what wasn't working with the other inventory and you had some fit problems or issues you needed to address, can you do the same in men's and just talk a little bit more about, you know, what you thought was good, what didn't work so well and give us that kind of color?

Yeah, I wish I could be as clear about men's, because actually we are -- our money is where it should be.

We're turning that men's stock well.

I don't think we missed opportunities and we're not in the -- in the mode of really adjusting in men's.

Our knit top business, our graphic top business is very good.

Our woven shirt business, our woven shirt business is very good.

But the total top business, we just haven't been able to improve trend in.

And it's not as many I think we've missed a classification or we're overstocked in a classification.

In men's bottoms, we're continuing to sell military, continuing to sell cargo and we sell jeans, but the trend -- and we're continuing to sell men's shorts at extraordinarily good rates.

We're just not able to improve the trend.

So, we're turning our stocks evenly, well, I'm not in an adjustment mode in men's.

It seems that we're just in this kind of a cycle that God determined what the level of the business was going to be and regardless of what I do, I'm not able to make a difference.

I wish I could be more helpful there.

Just two quick things.

Seth, can you just comment on what prices are like this year?

This past year?

If you can do that, in terms of the basket men's and women's?

Are your prices up, down, the same?

I think they're pretty similar for what you would call light items.

There are obviously some small mixed differences in selling, but in general, you know, our intent is to be pretty much the same pricing this year as last year.

There's a very slight increase, Richard.

Okay.

And then lastly, Mike, concepts four, timing of the announcement of that?

Stay tuned.

We can't -- we can't tell you exactly.

We've said we're working on it and we'll make an announcement at appropriate time.

Okay.

Thanks, guys.

Thanks, Richard.

Your next question is from Stacy Pak of Prudential.

Thanks.

Hi, Stacy.

Hi.

Hey, couple of things, Mike, could you talk a little bit about what's happening in the kids business, why that has picked up?

And when you look at the women's business in July, is there anything that you look at like maybe it's average selling price or I don't know what that tells you, you know, it's okay and -- and the negative you felt in July really was not anniversarying a coupon, which suggests it should get easier going forward and then Vai a couple of follow-ups.

Okay.

Sure.

Kids business is improving.

The boys business is getting slightly better.

Slightly.

But remains just about like the men's business in terms of a very tough cycle.

The improvement in the kids business is really coming from girls, which is improving dramatically.

But the exciting thing there is we have a long way to go.

We have huge upside potential in the girls business.

So, I'm very encouraged by the kids business that we are on track there.

The women's business, I believe could have been better in July, regardless of the -- of the coupon or the promotional activity.

I think that's clearly a factor but I look to that business as always offering opportunity.

We were under-inventoried in knit tops.

We continue to flow in knit tops on a weekly basis, as I said, which gives me hope, because we've committed relatively late for the goods, I think we have opportunities to improve the trend of that business.

In women's bottoms, I've said that I need to make some adjustments in the proportion of fit by style and I would -- I would think that would improve our trend of business there.

Having said that, I certainly think there is opportunity for improvement and I'm pushing for that improvement, but we know that a large percent -- or a good percentage of difficulty came from the lack of promotion.

But I don't want to say that the business was perfect.

Is what you're doing enough to drive a double-digit positive comp in women's?

With or without the promotion?

Ex-ing out the promotion.

Without the promotion, I certainly expect it to be so.

Uh-huh.

And Seth, on the inventory guidance that you gave, can you clarify a little bit, because I'm assuming, you know, Hollister's, lower price, so what's the difference between units and -- and dollar inventories?

And are Hollister inventories up versus last year in Q3?

And then maybe you could just weave in some, on the Hollister model, where -- where it is now versus core -- where the sales per square foot you think can get to margin, any changes in prototype, cost to open, et cetera.

And how long it can continue these incredible comps.

Okay, there are a lot of questions there.

I will try to touch on all of them.

In terms of inventory, the Hollister business is very strong.

So, our intent is to be up in inventory in Hollister during the third quarter.

It's a very strong business, has great momentum, so, in terms of overall inventory, our -- our plan is to be up and -- up in Hollister and flat to down in Abercrombie & Fitch and the kids' business.

The Hollister profit model, I think, has evolved much faster than we expected.

The four-wall profitability per store is now very close to Abercrombie & Fitch.

The biggest contributor to that improvement, it's really two fold, it's the sales productivity increasing significantly and margin increasing significantly that reflects much higher initial markups than we've seen in past years and we think that by the end of this year, probably fourth quarter, Hollister's initial markup will be about at the Abercrombie & Fitch level.

Where the Hollister expense model is still not quite at Abercrombie & Fitch's level, is the -- it still costs probably 10 to 15% more a square foot to build a Hollister store than an Abercrombie & Fitch store.

We continue to work on getting more efficient there.

That effects depreciation expense by a few points.

And that also has -- cost more in terms of store payroll relative to sales in Hollister.

And that really relates to the price points.

Hollister, today, is -- in the second quarter, really had sold more units a store than Abercrombie & Fitch, you know, that sales dollars per store were less.

And so, all of the store labor that's needed to process transaction and processing of freight, maintaining the visual presentation, all of that is more unit-related than dollar-related.

So, those things have required a higher store payroll element to sales in Hollister than A&F, but that said, Hollister's productivity right now is actually surpassed A&F and to the extent that productivity improves, I think the four wall profit and the operating margin for the business should be easily at the A&F level.

What about the men's versus women's?

Then I will let you go.

In Hollister?

Yes, versus the core.

Well, the higher percentage women's in Hollister.

It's about 70% women's and 30% men's.

Does that stay constant now?

I think so, yeah.

Okay, thank you.

Thanks.

Next you have a question from Eliot Laurence of Jefferies and Company.

Good afternoon.

Hi.

Mike, let me quote from a pretty good merchant in their first quarter release.

We lost business by having too little promotional activity.

I think there is a healthy balance.

Yeah.

Well maybe the person who gave you the quote and I know it was me, I have this huge overwhelming desire to run the best aspirational businesses that I can.

I think that that means being limiting promotion as much as is possible.

And I've really decided, we've really decided to take a posture that is as limited promotionally as we possibly can.

I think we did run away from promotions first quarter, at the beginning of second quarter, I made that statement and we promoted a little second quarter.

I don't think it was -- it was probably too little too late and I don't think it did a lot for the business because we didn't -- we weren't as aggressive as we'd been in the past.

I just believe that being on this promotional merry go round, over time, deteriorates the business.

And we have a chance to limit that very severely at this point, which is what we're doing and I think it's right for the brands and over the long-term.

Mike, let me go a little further, then.

Last year at this time, you had Chelsea Jean at $39.50 for back-to-school.

Today, you cannot buy a woman's pair of jeans for less than $59.50.

That's correct.

And I was wondering why we couldn't have maybe a clean ticket jean at, you know, $39.50, $49.50, or a clean ticket hoodie on the adult side that might be $39.50on or somewhere along those lines, to drive that business without reducing the importance of the brand.

That's really a good question and we do try for some opening price points.

In fact, we did tests in opening price point jean and it did not do a lot for the business.

But I'm continually looking for the opportunities.

I think your comment is -- is a good one.

I don't think we needed to be in the jean business or our tests indicated it tha it didn't expand the total volume, but we will continue to look at opportunities like those.

I'd much rather do that than run a promotional direct mail business; your point is well taken.

And the last before I beat this horse to death.

That's okay.

Isn't there a certain aspirational quality to a store that has a lot of people like ringing up sales?

I'm just concerned that, you know, that people are seeing a less busy Abercrombie & Fitch store when they go into it and that by itself is reducing the aspirational quality of the store.

Well, I think that's a good comment, but my visit to the malls, I think were pretty crowded as compared to the competition still.

Okay.

Thank you.

Thank you.

Your next question comes from Richard Jaffe of UBS.

Thank you very much lot of my questions have been answered.

Is there an opportunity in the second half to build the brand in an aspirational way and drive traffic without using price, to take some of the dollars spent a direct mail campaign and be more clever about the content of that, to get the customers back into the stores to drive top line September and October and then holiday?

Is anything you considered either direct mail or print or something along those lines?

Richard, quite honestly, we've experimented with television, other direct mail that's not promotional and have found no results from it.

I'm open to suggestions but our tests have not given us much encouragement there.

We will be doing some very clever things at Christmas that will not be promotional, that are related to the brands and I think are in line with what you're talking about, but wouldn't be considered traditional means of advertising of the brands.

But there are some things that we have in store.

You don't want to share those with us, do you?

I'd love not to.

Thanks.

For fear -- because I have some competitors who listen.

Thank you very much.

Thank you.

Your next question comes from Eric of Credit Suisse First Boston.

Thank you, question has been answered already.

Okay.

Next question is from Dawn from Pacific Growth Equities.

Thank you, I've just got a couple of quick ones.

First, can you update us on productivity of Hollister and A&F stores in the same malls?

Okay.

We will update you.

You mean for the quarter -- let me get that number.

Hollister was about 13% higher than A&F.

In dollars per square foot.

In dollars per square foot.

Which resulted in lower dollars per store because the stores are smaller than Abercrombie & Fitch.

Got it.

Okay.

I wondered, also, if you might break out the contribution to second quarter EPS from Hollister?

No, we're not -- we're not giving out business contributions.

Okay, then just last one, I'm curious about the continued improvement and initial markups across the three divisions.

I'm curious how much longer you think you can improve IMUs without sacrificing quality?

I don't -- first of all, we don't believe in any of the IMU improvement really is related to sacrificing quality.

It's really been more strategic in sourcing strategy.

We improved in all three businesses this year.

As we go forward in the year, we get to be up against higher and higher numbers.

But we -- we see some further improvement as we go through the balance of the year.

But Hollister and kids have improved very significantly so their rate of improvement is going to slow down.

But we're already -- in Abercrombie & Fitch, we're operating at very high initial markups and I don't think there's any significant improvement that we should depend on in the future.

Okay, thank you.

Thank you.

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

Yes, thanks, just a follow-up to a previous question.

You said Hollister, I think, was about 70% women's in the quarter.

If you could just give us those figures for Abercrombie and then the kids' business?

Thank you.

Okay.

For the second quarter in Abercrombie & Fitch it was about 62% women's and kids' business it was about 64% girls.

Great, thank you.

Thank you.

Your next question comes from Ellen Schlossberg of William Blair & Company.

Thanks, hi, everyone.

A couple of follow-ups on Hollister.

You commented that Hollister sales per square foot was 13% higher than those Abercrombie in the same mall, but was there a noticeable differential between the Abercrombie and Hollister malls and those that weren't?

And also for the second quarter it seems that pricing on Hollister was up.

Was that having anything to do with mix?

Or less promotional?

What was driving that?

And should we look for that in the back half of the year, as well?

I will take it.

Yeah, I think the -- the pricing issue in Hollister somewhat relates to selling, it's a mix difference more than anything and it's selling fewer goods at markdown price this year versus last year.

I'm sorry, what was the other --

Stores in --

Oh, stores in --

In different malls.

In different malls.

Abercrombie & Fitch stores.

Yeah, I think what we're finding is the -- the productivity in Hollister seems to be fairly similar, whether there's an A&F in the mall or not.

We've seen a small impact on A&F business when there's a Hollister first opens that impact pretty much it appears after the Hollister store's anniversary.

So, it seems to be a one-year phenomenon of some small level of cannibalization.

Okay, and Mike, with respect to merchandising for Hollister, are you developing any new categories at all?

Or making bigger deals out of certain categories?

Anything we should know there?

No, nothing dramatic.

We're just working as hard as we can to -- to grow the -- the key classifications.

We're not very heavily invested in the accessory business or the underwear business because candidly we don't need to be at this point.

We're seeing great growth opportunities in the core classifications.

Okay.

Can you give us a sense of how much the buying and occupancy deleveraged, cost you, as a percent of sales, basis point change?

I'm sorry, which period are you --

For the quarter.

I don't really want to get into providing -- giving the numbers for every piece of margin because then we will just end up going down the page of every line item and, you know, I don't think that's productive.

All right, well then can you give us an update as to the store breakout by quarter for '04 if you have that?

What we should expect.

We haven't remain given out an '04 calendar yet.

At this point, I would expect probably a similar number of stores and I would calendarize it similarly to this year.

Okay.

All right.

Thank you.

Thank you.

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

Hey, guys, a couple of quick questions.

First of all, Seth, on the IMU in the second quarter, was it up across all the businesses?

Yeah it was up in all businesses.

The improvement in Hollister was the greatest and then kids and then Abercrombie & Fitch.

Okay.

And then you're saying on SG&A that you think SG&A, the run rate, is more like high teens for the back half?

Yes, I think that's accurate.

Even though it was up, you know, 4%, excluding the litigation in the second quarter?

That's right.

I think -- I think there's some things that went the other direction from the litigation.

I think the -- the drop in incentive comp expense, the drop in marketing dollars and the drop in distribution center expense, I think those are things that on an ongoing basis, you know, should be increasing versus LY in dollars as opposed to dropping.

Okay, and then lastly, Mike, we've talked a lot here on this call about the pricing issue.

But I guess putting it another way, at what point do you say you've pulled back too far on the promotion so that it's hurting the business?

I mean what would be the signs you'd be looking for that maybe you've pushed too far.

Well, I have to take it on a -- on a week by week basis.

I -- I really want to get through this week.

We were heavily promotional through the first two weeks of August and then we're not in the last two weeks of August.

I want to see what the differential is.

I just have to keep playing it with an open mind.

With the idea that I want to reduce it as much as I possibly can.

But I'm not dogmatic about it, Dana.

When you say you were promo the first two weeks of August, that was last year?

Last year.

And so the second half of the month is more apples to apples?

Correct.

Great.

Thank you.

Your next question is from Brian Tunick of JP Morgan.

Good afternoon, guys.

Hi, Brian.

A few questions.

I guess first, Hollister contribution to the company comp at year-end, how many Hollisters will be in the comp base at the end of the year?

And did you talk about how you expect Hollister to comp against these numbers next year?

No, I think we'll have just under 100 Hollisters in the comp base at the end of the year.

We haven't given comp guidance for any of our brands ever.

So, we don't intend to start with Hollister.

Okay.

Good try, Brian.

Okay.

Thanks.

Second question, we talked about the "wear now" emphasis for back back-to-school this year.

Did it pay off in any categories versus last year?

I think clearly in the knit category and cammie category, but it seems to me that what happened in July, that summer started late and people were very hungry for summer merchandise at very low prices.

Which we were not really able to provide because we didn't have much.

But we saw that what we did have just evaporated.

I think most of our stock was what we would consider "wear now" this year, but I think there's a huge appetite for real, real summer at real low prices.

Okay.

And I will be the last to ask about the price point question.

I mean the -- your view of the industry landscape today versus, you know, five years ago, when you guys were doing, you know, obviously $500 a foot of productivity and great comps, the landscape has gotten a lot more competitive.

Question is are you adapting at all to that landscape?

Or are you viewing the brand as being aspirational?

But first the first time you're seeing flat EPS growth.

This is the first time where protecting the bottom line doesn't seem to be good enough.

How do you view Abercrombie today versus five years ago?

Versus the industry?

Well, I think that we clearly there is a lot more clutter, there is a lot more competition and that kind of reinforces my point of view that we need to stand out from the pack.

Having said that, I think we need to be competitive.

If you look at our prices, they are much lower than they were five years ago.

I think we are competitive as the aspirational brand.

And I think we provided another brand that is even more -- more competitive of price point-wise, but aspirational, as well.

I don't -- I don't think we're keeping our heads in the clouds, and we're looking at this -- getting off this promotional merry go round in a very careful way.

I am saying that we're evaluating it on a month by month basis.

I think we're going where we need to go.

And I think when all is said and done, we're going to -- we're going to survive as the aspirational brands and that's -- that's our point-of-view.

Where are we today and tomorrow?

Okay, terrific.

Good luck, thanks.

Thanks, Brian.

Your next question comes from Janet Kloppenberg of JJK Research.

Hi, guys.

Hi, Janet.

Hi.

Congratulations on a great quarter.

Thank you.

Mike, I just want to clarify a couple of things, on the direct mail, are you ruling out any direct mail promotions for the back half?

Or are you saying you're going watch the business and see what happens.

I'm going to watch the business and see what happens to see -- to try to really determine what the effect was last year and to evaluate each month as it comes upon us.

Okay.

And I'm not dogmatic about saying I'm just cutting it off.

I am trying to wean this business from it.

And it's a -- it's a difficult proposition.

But over time, we will be weaned.

I got it.

Okay.

Moving on to what you just talked about, the customer wanting some -- the summer clearance product.

I'm hearing a little rumble that, you know, stores, customers, saying they're not ready to buy fall I mean could we be going through a change in the business cycle, where kids are going to stop buying later or closer to the time when they do go to school?

God, Janet, I hope so.

Do you sense anything like that?

I put my head on my pillow and say please let that happen.

But do you sense anything like that?

I don't know about kids buying later, I think everybody's buying later.

I think the summer season started later, you know, it -- it really did.

And then when it really got hot, people -- people were wanting things at promotional prices because they were out there.

God knows there was enough out at very low prices.

Right.

So, I think there is a little bit change in thinking.

I think buying is getting later and later and we've seen that every season.

Would that make you think twice about having more summer clearance next year, to extend that season?

Sure.

Absolutely.

Okay.

Another question I had, if I could flush out the girls' business a little bit, my takeaway here is that you didn't have enough of the knit tops and I'm not clear on the fit issue for the -- for the -- for the bottoms.

Was there a problem in some fits?

Or did you not have enough of a really good-looking fit?

I'm not sure.

Well, it's just adjusting.

I don't want to get into a lot more detail than that because I don't want to reveal where we're going in that regard, but it's adjusting into a certain extent.

Okay.

And it's something that both issues, the knits being --

Too light in inventory.

Those can be corrected by the end of August, both of them?

We're working on them, yeah.

But the -- the knit situation more quickly than the fit situation.

But the fit situation is just an evolution and will evolve into Christmas and I think exactly where we need to be.

Is that I think I heard you say once you adjust these you thought that the women's increases could offset the men's decreases.

Did I hear that correctly?

Yeah, we're hoping.

So, there's a very strong trend in women's at the adult A&F brand, if the inventory were line aligned in the correct way?

Yes.

Thank you very much.

Thanks, Janet.

Your next question comes from Neely Tamminga of Piper Jaffray.

Thank you.

Can you hear me?

Yes, how are you.

Great, fine, thank you.

Good.

Most of my questions, of course, have been answered and asked.

But I just had a question for Seth on terms of the cost to build a Hollister.

Seth, can you give us an idea of where the cost to build has come down either from last year's second quarter or from the first quarter?

I can't give you a specific number from quarter-to-quarter.

I would say we -- when we rolled out Hollister we were at a -- in the first stores, we were at a very high cost.

I think we've taken probably 30% out of the cost in the last couple of years.

We're still about 10 to 15% higher than an Abercrombie & Fitch store.

And that's -- that's the gap that we're working on.

Now, at the same time, I -- see don't consider it any major problem for this brand if we never get to the exact cost of the Abercrombie & Fitch store.

I mean the -- the other elements of the profit formula are so strong, 10 to 15% in construction costs isn't significant in an operating margin.

But we continue to work on all -- all elements of the profit formula.

And then, thanks.

And then in terms of the POS system.

Is the POS system very similar to the one that was rolled out to Hollister?

Or is this a whole new system for all brands?

No, it's the same.

Okay.

It's the same system, we rolled it out first in Hollister.

Okay.

Because that would be easier than to get it in a whole business initially.

So, it's the same system in all three brands.

Okay, great.

Thank you.

Your next question comes from Mark Friedman of Merrill Lynch.

Thank you, good afternoon, everybody.

Hi, Mark.

How you doing?

Good, and you?

Not too bad.

Okay.

A couple of quick questions for you.

Seth, I wondered, is there -- as you look at the A&F stores -- Abercrombie stores, what kind of percentage can you give us that are performing significantly below the chain average?

Mike, I just was curious, you know, you've always talked in the past how you've got your staff doing a lot of intense research on the college campuses, talking to kids, what kind of research are you doing to understand what -- you know, some of the issues behind some of the continued sluggish trends?

And then, have you ever thought that as an aspirational brand, maybe the reality is that your clothes are saturating your market share and that you're very happy as an aspirational brand and you just have to accept that position and focus on Hollister and the new concepts?

Let me start with the last first.

You very well could be right about point 3, but we're going to work our asses off to make it as good as we possibly can.

And I see opportunities I see more opportunities, honestly, in the women's business than in the men's business because it's constantly changing and I think we're developing real expertise in terms of getting on top of that customer through, as you say, contact of college customers but also with our our -- our expanded conceptual ability and design.

So, we'll continue to push there.

And I'm never going to be happy at any level, truthfully, Mark.

So, that answers the third question.

The second question was what we're hearing from our -- our college groups and conceptual design.

In the women's business, it's still about being sexy.

And that's -- that permeates our brands.

And when we get off that track, we get into trouble.

In the men's business, I think we are aware the men's customers want to be guys, boys, men, as we're defining them, and it's basically kind of uniform dressing and it clearly hasn't changed.

We're in the uniform, we keep pushing for some change that would stimulate some more business, but we haven't been able to find it yet.

And none of our research tells us that we're -- we're missing where we should be there.

Mark, I think your first question was Abercrombie & Fitch stores that were much less profitable than the average?

I don't have any specific statistics, but we have very few stores in any of our businesses that don't make a profit on an annual basis.

It's a very small list.

And it's not -- it's not changed that much.

I think comps have been difficult for Abercrombie & Fitch.

It's been more of a -- it's not from our own, any significant number of stores into the red.

Okay.

Thanks.

And good luck, Mike, on finding that next thing.

Thanks, Mark.

Your next question comes from Dana Telsey of Bear, Stearns.

Good afternoon.

Hi, Dana.

Hi, can you talk a little bit about Lounge 22, Hollister, how that's done?

And with something like that translate into the Abercrombie concept?

And also in your inventory planning, you spoke about chase versus planned merchandise, how is that mix changing?

And how do you see it changing go forward?

And then just, Seth, I wanted to catch up with you on legal costs going forward, obviously 2 cents this quarter.

Do any of those extraordinary legal costs continue in Q3/Q4?

And I noticed the tax rate tweaked a little bit to 38.4.

Does that continue to go forward?

Thank you.

Dana, I knew you'd pick up Lounge 22.

Lounge 22 is a test that we're -- Lounge 22 is what the center room is called in Hollister now.

It is -- I assume you're talking about the after-hours parties that we're testing.

We're seeing good results and there -- it's just another way to market the brand in an aspirational, not promotional way.

And -- and there was a question earlier about what could we do with Abercrombie & Fitch in a non-promotional way?

And that could play into Abercrombie & Fitch's future as well.

But I really don't want to comment on it.

But we are -- I think we're doing very creative things in all the brands to grow them in an unpromotional way.

Second question, chase versus plan, I think we probably got too much on the chase mode in women's knits for back-to-school.

Did not plan high enough initial inventories and were hurt by it.

So, that's got to be -- that's got to be a balance.

But because we are chasing so aggressively, I think we're going to be more right than had we committed everything up front.

But there is a balance that's clearly the chase mode is an important part of the strategy to get close to the customer and I think that that is working for us.

I'll turn this over to Seth about the legal costs.

Your first question about legal on a go forward basis.

The -- it seems we talked about in making reserves for this quarter were fairly significant suits we don't consider that something that happens on a quarter by quarter basis, so we don't expect that level of expense ongoing.

There's obviously some level of legal that we tend to incur on an ongoing basis that I think will pretty much anniversary, on a quarter by quarter basis, so, I don't see it as a dramatic increase in future quarters as it was in Q2.

In terms of the tax rate that moves around somewhat based on the level of tax-free securities we're investing in.

I think for the third and fourth quarter, our best guess right now is that the effective rate would be about 38.7.

Perfect.

Thank you very much.

Thank you.

The next question comes from Joseph Teklits of Wachovia Securities.

Thanks and hi, everybody.

Hey, Joe.

Mike, there seems to be a lot fewer, call it 14 or 15-year-olds, running around in your Abercrombie & Fitch stores, versus a couple of years ago.

Can you tell us if you're making a really concerted effort to age those stores older again?

Whether it be merchandising or pricing?

And what impact that might be having if you can see any on the business?

It's a difficult thing to comment about, whether there are fewer.

We just concentrate as hard as we can on an 18 to 22-year-old at A&F.

And that's just a concerted effort.

Just as we concentrate as hard as we can on 14 to 18 in Hollister.

So, if there are fewer, it's -- it's a function of us targeting older.

I don't think it's a renewed effort and -- and to be really honest, I think these -- these age groups come in waves, you know, they will be younger, then older, but it doesn't change our focus on the business.

I just remember one of your districts or regions or something saying because Hollister is now in place and -- and doing so well, we need to separate the two concepts and have merchandise in Abercrombie & Fitch stores that are attract an older customer.

That's -- that's never been done that way?

We always have, truthfully.

And we knew that Hollister was coming and we knew that A&F had to hit that niche.

I think when someone commented about five years ago, five years ago we selling to 12 to 15 years olds in Abercrombie & Fitch.

Clearly understood that that isn't a place that we could maximize any kind of return with any kind of a multiple brand concept and really started at that point to age the brand and I think we've been consistent since.

Okay, thanks, good luck.

Thanks.

Your next question comes from Bob Buchanan of AG Edwards.

Yes, good afternoon.

Congratulations on No. 44.

I was just wondering, Mike, if -- if you could just help with what kind of product costs you're able to secure out of the Far East?

Can you quantify what the prices are down year-over-year?

Well, we're in a -- we're in a deflationary time, but we don't just source out of the Far East, our sourcing strategy is worldwide and one of the keys to our initial markup improvement is we've been able to source in new countries with new factories at better labor costs.

I don't know, can we give any -- I don't think we can give any color other than to say we are in a deflationary cycle in terms of apparel and the figures are pretty well published.

But I think we're doing better than the deflationary number would indicate in terms of how we're costing, because that's the result in the initial markup that's doing better.

Mike, what are some of the countries you're getting product out of now?

You name the country, we're probably producing there.

More out of India or China?

India -- China, China continues to -- in fact, grow as a percent of our -- of our -- of our total production.

Although, other Asian countries decline.

We're seeing decline in Korea, Singapore, certainly Hong Kong, which is a hugely expensive market for anybody today.

But -- but -- but we're seeing some -- some growth in the Mideast, in India.

We're literally all over the world, but in quality factories.

Interestingly enough, many of them tend to be controlled by Hong Kong families.

And has this had any -- offset any impact on your sourcing times?

Your turn around times?

I know you guys do a lot of air into this country.

Yes, some of these countries are longer lead times, so, the trick of some of these countries is -- is balancing them with faster lead time countries.

So, each -- each sourcing base for each classification has to be a mix of longer lead time, which probably offers us higher IMU with shorter lead time, which offers us more restricted IMU, but we blend it for each business.

Lastly, just to get a feel for it, as you try to reposition women's tops, say, in the core business, how fast can you do that?

Can you do it in three or four weeks?

No, I wish I could do it in three or four weeks.

We can do it in about 45 days, depending on whether -- the factories own piece goods for us or not, but women's knits is the fastest classification to reposition, certainly within two months.

Okay, thank you very much.

Thank you.

Your next question comes from Jennifer Black of Wells Fargo.

Good afternoon.

Hi, Jennifer.

Hey, congratulations.

Thank you.

I wondered if you could update us on your store potential for Hollister.

Sure.

We --

I think, Jennifer, we -- we still believe that it's 600 to 800 stores domestically.

That's what we said when we opened the business and there's nothing that's that -- happened that is telling us any differently.

It's really reconfirming that view, we're finding it's working in lots of different types of centers, there doesn't seem to be much reduction in productivity when you get into D or C kind of center.

So, we're very comfortable with 600 to 800.

Okay, I just wanted to make sure that that was what you were still thinking.

Thank you very much.

Thank you.

Your next question comes from Michael [INAUDIBLE] of Jefferies.

Good afternoon.

I'd like to follow-up on Eliot's question and get a better understanding of what the strategy was as -- as you were building the -- the girls' jean assortment?

What was the thought process that went into saying $59.50 will be the opening price point when I've got khakis at $39.50' a guy's jean at $39.50 about, but a girls' jean, we will start at $59.50.

I'm struggling with the strategy behind that decision.

There really isn't a guys jean at $39.50.

The strategy was to offer the best wash assortment at our price-point in the world.

Well, the guy's carpenter jean cost is $39.50 unless I'm reading the website incorrectly.

That's really a sell-out jean.

That's a jean we're not resupplying, but selling out of the stock that we had.

But it is on the floor now?

In a very small way.

It's not a very popular jean, we're just selling it down and out.

It doesn't represent anything.

And that maybe argues in my favor.

It's not really a right jean and not selling at $39.50.

It's essentially a sell-out.

So, so our concept is to offer the very best quality assortment we can at best retails.

And if you look at our jean assortment, the washes and the processing that we put into our jeans, we're really not competing with the lesser priced jeans, we're competing with more jeans that you would -- that -- what we build into the jeans, jeans that sell from probably $80 to $120.

Fair enough, but is the sell-through suggesting that the consumer might be struggling with $59.50.

No, the sell-through is just terrific.

Again, we're turning our women's jeans on too fast to supply now.

So, as we assess July, you're comfortable hat women's knits and women's jeans were not a source of the negative comp, or are not a problem going forward.

Both knits and women's jeans were a source of negative comps because we didn't have enough of them.

That's very helpful.

Thank you.

Our next question comes from Dennis Van Zelfden of SunTrust Robertson.

Good evening, everyone.

Seth, in light of your comments on running out of a lot of the variable cost to cut, as well as you've now anniversarying a lot of your big sourcing efficiencies, how much longer after the third quarter do you think you can produce flat to modestly up earnings if sales don't rebound?

That's a difficult question to answer because we continue to look for sources of efficiency, it just gets tougher.

We're comfortable that the fourth quarter can be managed in a similar fashion as third -- at this point -- I don't think it's productive to start talking about quarters next year.

I think it's -- it's just safe to say that the bar keeps getting raised in terms of productivity improvements.

I think that as you look at the way we've run the business, we handle it on a quarter by quarter basis and we have two priorities, to continue improving the brands and to protect the bottom lines and the strategy becomes different based upon the external environment.

I think we've proven over a lot of quarters that we're very facile at that.

Thanks.

Thank you.

Ashley Keller is next of Clipper Capital.

Good afternoon.

Just a quick follow-on to Dennis's question there.

For the Q3, does your guidance assume any share repurchases, you bought back a lot in the second quarter.

No.

I think the guidance that I gave in terms of profit could be applied to either EPS or net income.

We're not putting out some -- a number with the idea that can be manipulated by share repurchase.

That's not the way we think about it.

Right.

And then just extrapolating from the guidance, can we assume that August to date is trending the same as the second quarter?

And then on the fourth quarter, should we assume the same as the third quarter, if the trend continues from the second, maybe same as last year on an EPS basis?

Well, first of all, in our history as a public company, we've never talked about partial month performance --

I had to give it a shot.

Right!

Good try!

We're not going to do it now, I don't think it's productive.

The guidance we gave in our call related to third quarter, not the fourth quarter.

I think we're comfortable that we can have similar expense in margin controls in fourth as third.

But we'd rather talk about the fourth quarter when we're further into the third and know more about the trend of business.

Great.

Thanks a bunch.

Thank you.

Your next question comes from Dana [INAUDIBLE] of Bennett Lawrence.

Hi.

My question relates to the third quarter outlook.

You had indicated that third quarter earnings would likely be flat to up slightly if comps remain at the down 8% level in Q3.

And I'm wondering if there are any reasons to really think that comps are likely to stay down 8 in the third quarter, especially given that comp comparisons on the two-year basis get significantly easier in Q3 and inventory levels should be better?

Well, I think the way we think about guidance is that we feel that we need to talk about what would happen to profit if current trends continue.

That doesn't necessarily mean we think it has to continue.

We obviously believe that we're doing things that can improve that trend, we just don't know how to predict the number at this point beyond what's going on in the second quarter.

So, I think the guidance was meant to be what it is.

We're finding it difficult to predict sales for the quarter, but if it is a second quarter trend, we're comfortable we can be flat to up slightly.

We're trying on a daily basis to do better than that.

Okay, thank you.

Your next question comes from Mark of Millennium Partners.

The question has been withdrawn.

I will proceed to the next question.

It's from Josh Schwartz of Flatbush Watermill.

Hey, guys, how are you?

Josh!

Hope all is well.

Mike, I wanted to ask you, I've been sitting on the call for an hour and a half, I'm trying to read into your words here, I want to be sure, when you're talking about -- clearly it seems you lower price at all if you don't have to.

You'd rather not promote at all.

Right.

So, what's -- what's the -- why promote at all?

I guess -- I mean -- I have an idea, I don't want to play games, is your goal ultimately, you want to maintain this EPS or the net income growth?

Is that ultimately the --

I want to do both.

I have a responsibility to improve the brands as best I can, which means getting out of a promotional posture, but I have a stockholder responsibility to -- to give as much earnings per share growth as I can.

So, I've got to balance to do over time.

And the ultimate goal is to get out of the promotional business.

That's the ultimate goal.

And I guess ultimately -- I guess you feel -- bringing your prices down just is going to not on x -- I mean you said this in the past, it's not improving your profitability that much now, you mention elasticity not being huge.

It's not very elastic.

That's a difficult thing for people to understand.

Is that because when you markdown, you markdown across the whole country, so, I mean basically, you know, you're not being selective, I guess your profit goes down in every single unit.

I'm trying to understand how you think about it?

What happens is that when we -- when we markdown or reduce prices, we don't sell enough more units, more -- enough units to make up the difference for the markdown.

So, we come out kind of -- kind of flat or down.

That's been the -- the recent history of the business, which says that it's just not terribly price elastic.

Okay.

But we continue to test and we're not closed to looking at these opportunities.

Somebody raised the issue much why didn't we have a $39 price opening jean.

In fact, we tested it and it did nothing for total volume or profit.

So, that's -- that's not a wise way to go.

Okay.

I just -- two other quick things.

Do you know -- I mean I don't have the experience, I thought you might, but I've never been privied to seeing, you know, a brand like this go through whatever this is, a recession, you know, a slowing in demand, overall in the economy, that is just fully integrated, doesn't sell wholesale.

I think Polo is the only one I know of that even has a component like it.

Do you have any sense of if this is out of the ordinary or just what you know?

I'm just curious, your experience?

No, this is -- I think every year is different, truthfully.

It's -- it's tough to look back and see what history says here.

Okay.

I think we're returning a different business.

And then the only other question I had, you mentioned and talked about this a lot, investing in the process, a lot of being on top of women's fashion.

Yep.

Do you feel -- or is there anything you're doing on the men's side towards the same end?

Yeah.

The same thing.

It's exactly the same process.

Okay.

With as much talent and as many dollars spent on the men's side of the business as women's.

I gotcha.

So, I shouldn't be thinking that you've focused on building that up and women's and not the men's, it's just that you're not finding something.

That's what's so frustrating, I work my ass off in the men's.

I know you do!

I think you guys are doing a great job.

We will see picked up demand at some point.

I'm amazed at the operating margin.

At some point, we will all have a nicer time, but great job.

Absolutely.

Thanks, Josh.

Next is Margaret Major of Goldman Sachs.

This is Randall [INAUDIBLE] for Margaret Major.

Can you walk us through the total square footage number at the end of the quarter?

Yes.

I have a couple of additional questions, please.

4,538,000.

Square footage.

And thinking about the total square footage growth, you know, guidance for 2003 was given last year, you know, total square footage has slowed, you know, from maybe 18% to 17% to now 16%.

You know, will you look further to maybe ratchet down expansion plans, especially in I guess the, you know, adult and kid, after the third quarter shakes out and, you know, to all your growth plans about 100 per atom for a Hollister still sort of in fact for going forward?

Why should we ratchet the growth plans going forward?

Excuse me?

Well, I'm just interested in the question.

Why should we ratchet those growth plans down?

With regards to the adult business, you're starting -- it's starting to slow, you go from expanding to about 30 units --

Let me just address that.

The Abercrombie & Fitch expansion in terms of stores and square footage is declining largely because we are starting to get closer to our 400 store target.

For how many A&Fs we want to have in the U.S.

So, we're around 350 stores now .

And if you just think about the real estate process as the universe of available centers get smaller, you can't efficiently do as many deals a year.

So, I would expect the A&F level of deals to continue to decline.

In terms of Hollister, we're opening about 80 this year, we think next year can be again at least 80.

And there's been absolutely no change in our plans there.

If anything, the decision would be should we expand it a little faster than that.

But we want to be disciplined in terms of the real estate deal and the spaces that we get.

The kids business, we have slowed that down in the last year and that really was due to the fact that we wanted to hold the total square footage growth to, you know, a 15 to 20% range on an annual basis and since we were growing Hollister rapidly, we didn't need to add in a lot of kids' stores, we can always do that in the future.

But overall square footage growth should kick down somewhat over the years as we get to be bigger, the base gets bigger.

So, you need more stores that have the same percentage increase.

But we've also wanted to be very disciplined about it.

You can't run a long-term real estate strategy by gyrating it up and down based on how you perform in a particular quarter.

Our stores also are very profitable in the first year, so, it puts more -- more pressure on the bottom line to cut back store growth.

And then you just said, you know, your comments stated that, you know, you expect the A&F domestically to be about 400 stores.

Can you provide us with where you see internationally, what's most conducive to the A&F brand in your mind, if you were to pursue an international strategy?

Well, obviously there's a lot of demand for A&F in both Asia and in Europe.

We've looked at international expansion in the past.

It's probably something we will look at again in the future, but at this point, we've chosen not to go forward with it because -- for one thing, we don't need the square footage growth right now and it adds an element of complication and distraction to the business that we don't want to add right now.

I think we can make much more money faster by continuing to grow Hollister and adding our fourth concept domestically.

But internationally is always something we can do in the future.

Thank you.

Thank you.

A a follow-up question from Rob Wilson of Tiburon Research.

What was the share count in the quarter, diluted?

100,128,000.

Thank you.

Thank you.

Your next question comes from Joe Teklits of Wachovia Securities.

Hi, real quick follow-up, trying to follow the rules here.

It seemed like a couple of weeks ago you flipped the floor set on the women's side for sure, maybe on the men's side of your adult A&F stores, as well.

Most of the store people said it was to focus the stores on denim, was that planned or reacting?

It was planned that would have a mid cycle change to make the store look -- look different and fresh.

Okay.

Because both denim and twill is performing -- both are performing.

Okay.

Thanks.

Thanks, Joe.

Your next question comes from Dan [INAUDIBLE] of Buckingham Capital.

Hi, Mike.

Hey, Danny.

Mike, can you talk about the marking studies, what they show?

Now, about Abercrombie and what they showed over the last three or four years, if there's been any changes?

The answer to that is absolutely none.

It's really the top-ranked aspirational brand in every survey that we see.

The only interesting thing that's happening is how Hollister is moving up in the charts so quickly.

With such a small store base, it's very highly regarded and while -- while A&F is kind of the -- I think the most aspirational brand in its size after Sony and Nike, and that's been very consistent for five years, Hollister is down there around number five at this point.

So, virtually no change in -- in perception of what the -- virtually no change in what the brand is or represents to our customers over the last five years.

And I think that's antidotal, too.

I think everybody who has kids in this age group feels the same thing.

And has Hollister been increasing as more stores are coming on board?

Yes.

Okay.

Great.

Thanks a lot, Mike.

Thanks, Danny.

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

Hi, thanks.

Are you technically off this promotional merry go round, then, in the third quarter?

And did I hear you correctly, you're going to evaluate it month by month or will that be a plan you stick with quarter to quarter going forward?

Thank you.

We will be evaluating it on a month by month basis.

So, then with respect to Q3, are you pretty much off the promotional calendar versus last year?

I would suspect so, but again, I said I'd get through this week and look at next week when we're not up against any promotional activities to see what the difference is to try to critique it.

If I had to do a small amount for September, I would consider it.

I'm not going to be deaf to taking us off this thing gradually.

But at this point it looks doubtful that Q3 will have any promotional activity.

Definitely not direct mail.

Okay, thank you.

Thank you.

At this time, there are no further questions, Mr. Lennox, do you have any further remarks?

No, that will be it.

Thank you very much.

Thank you.

This concludes today's conference call, you may now disconnect.