Abercrombie & Fitch Co (ANF) 2004 Q1 法說會逐字稿

Good day, everyone and welcome to the Ambercrombie & Fitch first quarter earnings results conference call.

This conference is being recorded. [Operator Instructions]

Now at this time I would like to turn the conference over to Mr. Tom Lennox, please go ahead, sir.

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

After the market close we emailed to your offices the quarterly sales and earnings release, balance sheet, income statement, and updated financial history.

If you have not received these materials please call Courtney Depenhart [ph], at (614)283-6751 and she will forward them to you.

This call is being taped, and can be replayed by dialing 1-888-203-1112.

You will need to reference the conference ID number 302163, to access the replay.

You may also access the replay through the internet at Ambercrombie.com.

With me today is Mike Jeffries our Chairman and Chief Executive Officer, and Seth Johnson, Executive Vice President and Chief Operating Officer and Sue Riley, Senior Vice President and Chief Financial Officer.

After Seth reviews our financial results, Mike will discuss the business from a merchandising perspective and then we'll take your questions.

Before we begin, I remind you that any forward-looking statements we may make make today are subject to the Safe Harbor statement found in our SEC filings.

Now to Seth.

Good afternoon.

Total sales for the first quarter were $411.9 million, up 19% over last year's first quarter sales of $346.7 million.

Comparable store sales were flat for the quarter.

By business, comps were as follows: In the adult business, Ambercrombie and Fitch, comp store sales declined 2%, with men's and women's both slightly down for the quarter.

In our kid's business Ambercrombie comps decreased 1%, with girls positive and boys negative.

In Hollister comps increased 9% for the quarter, both girls and guys were positive.

On a regional basis, comps were strongest in the west and the southeast and weakest in the Midwest.

The strongest markets continue to be Florida, Southern California, and the New York metropolitan area.

The gross income rate for the quarter was 40.2%, up 320 basis points from last year's rate of 37.0%.

Increase in gross income rate resulted largely from a higher initial markup, partially offset by a higher markdown rate.

Improved initial markup reflects continued progress in sourcing across all businesses; although improvement was most dramatic in Hollister all three businesses had improvement in excess of 300 basis points.

Increased markdown rate reflects our strategy to clear marked down merchandise very quickly to enable to us add more new items to the selling floor.

We ended the first quarter with inventory down 21%, per gross square foot of cost versus last year.

The significant drop versus last year reflects a number of factors.

We planned the business very conservatively this spring, enabling to us turn our inventory much faster than last year.

Additionally a substantial portion of the reduction in cost reflects the reduced cost percentage in our ending inventory resulting from significantly improved initial markup.

Finally the timing of our merchandise deliveries this year has caused more delivery slow to fall in May, versus April, compared with last year.

At this point we expect inventory per square foot to be down slightly versus last year at the end of the second quarter.

The first quarter SG&A rate was 28.7% of sales, 330 basis points higher than last year's 25.4% rate.

The increase in rate versus last year primarily reflects higher legal and store expenses.

Legal expense includes the charge of $8 million resulting from an increase in expected defense costs associated with lawsuits filed in 2003.

The increase in store expense as a percent of sales reflects an inability to leverage payroll costs with flat comp store sales.

Our distribution center continues to achieve record levels of productivity.

During the first quarter, units processed per labor hour were 12% higher than last year.

This year the increase was on top of a 39% increase last year.

We continue to process more units with fewer labor hours.

Our eCommerce business continues to grow rapidly.

In the first quarter, net sales from the Internet increased over 70% versus last year with strong growth in all three businesses.

Our international eCommerce business continues to grow dramatically, reflecting the strength of our brands worldwide.

International sales were more than four times last year's level, and now account for almost 30% of our eCommerce business.

From an operational standpoint, we continue to be more efficient at operating the business.

During the first quarter we reduced expense per order by 27% versus last year.

Operating income increased 17% for the quarter, from 40.3 million last year to 47.3 million.

For the first quarter net income increased from 25.6 million to 29.7 million, an increase of 16%.

First quarter earnings per share on a fully diluted basis were 31 cents versus 26 cents last year, an increase of 19%.

We opened four Ambercrombie & Fitch stores, five Hollister stores and one Ambercrombie store during the first quarter.

We closed one Ambercrombie & Fitch store and two Ambercrombie stores during the quarter.

One Ambercrombie & Fitch store closed for remodel and will reopen in the fall season.

We ended the quarter with a total of 359 Ambercrombie & Fitch stores, 170 Ambercrombie stores and 177 Hollister stores.

For fiscal 2004, we now plan to open approximately 11 Ambercrombie & Fitch stores, 8 Ambercrombie stores and 85 Hollister stores.

We also expect to open five stores for our new concept.

Total square footage will grow roughly 14% for the year versus 2003 and we will end the year with a total of 805 stores.

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

During the quarter new stores in all three concepts, opened during the past 12 months, averaged over 90% of the sales per square foot of the existing store base.

For fiscal 2004, our planned capital expenditures will be between 115 million and 125 million.

The vast majority of these expenditures are related to new store construction, with approximately 25 million invested in Ambercrombie & Fitch store remodels.

During the quarter, we repurchased 599,000 shares in the open market, completing our 5 million share authorized share repurchase program.

During the first quarter of fiscal 2004, we also distributed our first quarterly dividend payment of 12.5 cents a share on March 30th.

Despite our share repurchase, and dividend our cash balance increased to 527 million at quarter end, versus 511 million at the end of last year.

I would like to finish by discussing our profit expectations for the second quarter of 2004.

Assuming a continuation of the first quarter comp trend, we are comfortable with EPS estimates in a range of 38 to 40 cents per diluted share for the second quarter.

Now, Mike will talk about our results in more detail.

Good afternoon.

I'm very pleased with our performance for the quarter.

All three of our businesses showed solid progress in sales and margin.

We are making steady progress in comps and most importantly, are doing it the right way.

Our stores have a less promotional look than in recent years and we are continuing to emphasize quality in every aspect of the business.

As Seth discussed earlier, after a very difficult Christmas, we took a very conservative approach to the first half of 2004 in terms of inventory commitments to drive the top line in in the fashion business we have to give our customer more new items more frequently to do this at a high margin rate we must turn our inventories very fast and this is a major focus of our merchandise planning process this spring.

The significant margin improvement we achieved in the first quarter reflects the success of this fast turn strategy.

Although we are light in inventory overall entering the second quarter our approach has always been to be conservative in planning the summer season.

The full price summer selling period is relatively short, and the profit risks of being overinventoried are far greater than the risk of running a little too tight.

If our sales trend continues to strengthen, we may give up some second quarter volume opportunity, but we'll end back-to-school with very clean, well-controlled inventorys.

Now I would like to talk about our business by brands, starting with the adult Ambercrombie & Fitch business.

I'm delighted with the progress we are making in the men's business.

We had a positive comp in men's in April and almost flat for the quarter.

Initial markup was significantly improved and the markdown rate was reduced versus last year.

From a merchandising standpoint the business is being driven by woven shirts and Polos.

On bottom side, denim has been positive.

I expect the short business to get better as we get more warm weather.

In women's the bottoms business has been very good with very strong comps in the first quarter in skirts and denim.

In hindsight we could have done a lot more first quarter business in women's denim, had we been in a better stock position.

We are planning to be in a much stronger inventory position in denim for back-to-school.

Building denim inventory at back-to-school will give us more volume potential in a strongly trending classification while adding minimal markdown risk.

In women's tops we had some inventory content issues early in the quarter which limited our women's volume.

The women's woven top and the graphic t business have been tough, but the knit tops business has improved significantly as we have have received more deliveries in better selling styles.

Hollister had a very strong quarter and this business continues to have great momentum.

As Seth mentioned earlier comps in Hollister were 9% for the quarter with both guys and girls positive in high single digits.

Trends by classification in Hollister have been similar to A&F with denim skirts and knit tops very strong in girls and woven shirts and denim very good on the guys side.

Overall I'm very pleased with where we are with Hollister.

Sales productivity is over $400 per square foot on a trailing 12 month basis and the productivity of new stores continues to be very close to the average for the business.

I'm very confident about Hollister's prospects for the balance of this year, and beyond.

Although our comps were slightly negative in the kids business for the quarter, I believe we are making progress.

Girls had a solid positive comp store increase, and I believe boys will start to reflect the progress we are making in the men's business.

From a marketing standpoint, I'm very pleased with the direction we are going.

Our in-store photography is new and fresh, and our in-store signage is cleaner and much less promotional in look.

Many of you have seen our new billboard campaign.

We are excited about this as a means to further reinforce the A&F brand image.

As we go forward we expect to continue to use a number of marketing vehicles, including magazine advertising, lifestyle direct mail and billboards.

In our last quarterly call I announced the timing for the opening of our first stores for the fourth concept.

We remain on track to open four stores in August, and a fifth store in late November.

Although the details of this business remain confidential for competitive reasons, we are very excited about its potential.

As I look at the balance of this year, I feel very confident about our business.

Our volume trend is stabilized and we are starting to gain top line momentum.

We are running a very high margin, well-controlled business, and we'll continue to focus on organization initiatives to drive volume and improve the operation of our stores.

Now we are available to take your questions.

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

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

Thank you very much, sir. [Operator Instructions]

The first question comes from Stacy Pak of Prudential Equites Securities.

Wow, I wasn't expecting that.

HI, that IMU in that margin, can you just dig into that a little more?

I guess where I'm going is, is that sustainable?

Can you give us a little more detail how you got it?

Sort of what is IMU looking like going into the back half of the year?

And should SG&A dollars grow with square footage for the rest of the year?

There are a few questions there.

I will try to address them all.

First of all, we had strong performance in all of the businesses and IMU, as I said, was over 300 basis points in each business.

I think that was primarily cost based.

I think our sourcing effort has been very successful across all three businesses.

As we look forward, we should expect decreasing levels of initial markup improvement versus last year as we go through the balance of the year.

But up nonetheless, Seth, was that from shifting countries or what exactly, I mean that was large?

Yeah, we -- I'll comment on that, Stacy.

We're constantly focusing on new countries, new factories, that can give us terrific quality at better cost, and it is been successful in all the brands.

The rate of increase was bigger in the Hollister and the kids business than A&F but it was still significant in A&F.

Okay.

And so it is up for the remaining quarters just up less?

Correct.

I think there will be some improvement throughout the balance of the year, but it will decrease on a quarterly basis relative to last year versus the first quarter?

Okay.

And then the SG&A dollars?

The SG&A dollars, I would expect those to grow in excess of the rate of square footage growth.

Like, you know, 11.2 or two times.

We don't give out specific SG&A projections, and that's what I would be doing if I gave you a percentage increase.

Can you help us just --

Bye, Stacy.

Oh, okay.

Moving on, we'll now take a question from Dana Cohen of Banc of America Securities.

Oh, hi guys.

Hi, Dana.

Hi.

Following up on the last question, can you give us any sense order of magnitude of the gross margin side, you know, how much is IMU versus markdown just so we can think about this because, I mean, it is obviously a pretty large increase.

And then, just nitpicky, the legal expense, should we be thinking that obviously as one time?

[inaudible] IMU, the gross margin improvement, I think as Seth said, it all came from IMU, or primarily from IMU because the markdown rate was slightly increased over last year, isn't that correct, Seth?

That's correct.

Even though you were less promotional?

Beg your pardon?

Even though you were --

-- less promotional Yeah, we just used the markdowns to clear.

It was not a promotional strategy at all.

And the less promotional focus is really more in terms of the marketing setup of the store.

We didn't -- in past years, we have had a spring sale, where we had major signage and marketing in the stores for a sale event.

Our strategy this year was to just clear markdowns during the normal course of business, based on how items were turning and how we needed to prepare ourselves for new delivery.

So our focus has been to turn these goods very fast, and clear the goods as quickly as possible.

The any initial markup improvement is allowed us to be able to do that.

Your question about the legal number, that is a one-time expense as it affects this quarter.

We're not projecting a number that magnitude for the balance of the year.

Okay.

Great.

Thanks so much.

Thanks, Dana.

And next with Piper Jaffray, we'll go to Jeff Klinefelter.

A question for you, Mike.

Clarifying the women's top issue that you had.

Can you talk a little bit more about, retrospectively, what you would have done differently and maybe contrast that with the success that you had in Hollister on the women's side, the different trends you are seeing between the two.

It is interesting that in women's tops the graphic business for us is not strong in any of the women's businesses and the slack has been taken up by fashion knit tops.

I think we were able to move a little more quickly in the Hollister business than we were in the A&F business to be in the trending classifications.

This business is moving faster than it ever has before, and it's -- it's -- we had to just get our steam up to get to the right pace of business.

It happened slowly during the quarter, but we really saw the impact of newness at the end of the first quarter.

Okay great, any quick update on the cannibalization between Hollister and Ambercrombie?

Are you seeing, kind of, stabilization of that across your market.

Yes, I see it as being very stable.

As we said, the cannibalization that we see happens in the the first year of operation, and then it goes to practically nothing after that.

Is that well stated, Seth?

Yeah: And I think the -- another useful way to think about the overall impact is at this point, probably 40% of our new Hollister stores in a season are in centers that don't have an Ambercrombie and Fitch store.

So at most we're impacting around 15% of the A&F stores in terms of a new Hollister at a point in time.

So when you factor down the cannibalization on 15% of the business, it becomes a very small number.

Okay.

Great.

Thanks a lot.

Congratulations.

Thanks Jeff.

And the next question will come from John Morris of Harris Nesbit.

Thanks, good afternoon.

On the SG&A, can you tell us a little bit Seth, other expenses that would have been in that number, for example, spending for concept four, or your new marketing initiatives and related to that, how much legal expense would you see occurring in Q2 because it was not quite clear whether you are done with it for the time being.

And then my follow-up would be, you know, in terms of the trends, Mike you had talked in the press release about being happy with better trends and so I'm curious with, you know, sort of the monthly comps last quarter being kind of back and forth, you know, did you see an improvement in the last couple of weeks of the month?

Can you give us a feel there?

Thanks.

Do you want to respond?

I will talk about the SG&A first.

In terms of the legal, the $8 million charge, we talked about relates to one specific litigation.

As we look at the second quarter, I think we would just expect a normal level of legal expense in the business.

So it would not be anything significant relative to last year.

The balance of SG&A, obviously includes store payroll expenses, which we were unable to leverage in terms of rate with a flat comp.

So we had some expense rate deterioration from store payroll.

The other -- the other the expenses that go into SG&A, obviously are distribution center expenses which were roughly flat to last year.

OUr marking that hits the SG&A category was pretty flattish in terms of dollars spent versus last year so there was slight improvement in rate.

But overall, the main impact driving the rate up is the lack of leverage in payroll expenses in store [inaudible] and home office, and the impact of the legal charge.

And the -- the spending for concept four, was there any of that?

And is that tracking about on plan?

That's tracking about on plan.

We've been budgeting in the payroll expenditures for staff, for concept four all along as we've been developing the business.

And it's the same approach we took to developing the Hollister business.

We have to cover the cost of this kind of additional head count in our normal budgeting process.

So it's really the profit generated by the more mature businesses have to fund the start-up and that's what's happening with concept four.

Let me respond to your question about trends.

It's clear that the men's trend, masculine trend across all of our businesses is improving.

And I think Seth said that men's was positive in April, had been slightly negative before that.

We're very happy with the total masculine trend of the business.

And I don't think we're supposed to break out the business by week after that.

But the -- the men's trends clearly improving.

And we're happy with the total feeling of the business right now.

I mean, you know, any color at all on the final two weeks, Mike?

I don't think I'm aloud to say that, am I Seth?

I'm in New York and Seth can't reach across the table and beat me so I better --.

I can't kick Mike under the table.

Exactly.

All right, I tried.

I'm having a great time here, though.

Thank you.

Thank are you.

Okay.

And moving on we'll go to Mark Friedman with Merrill Lynch.

Thanks.

Good afternoon, guys.

Great job in the quarter.

Thank you.

Thank you.

Mike, any update behind the strategy for some higher price point items that you're planning in the back half of the year?

Also noticing in some stores you are moving around some of the furniture in the gym issue area.

Anything behind what you are doing there as far as store renovation or changes?

Okay.

First, the better goods we announced last time that we're going to be adding a layer of what we call premium product.

I think a lot is made of that, we think it's going to be a nice addition to the business and it is truly just addition, it is on top of our current business.

It will, for the back-to-school season represent about 5% of our total business, an increase of 5%, and for the Christmas season, about 8%.

That's -- that's the order of magnitude-- and we really believe it is additive and not cannibal.

It will not cannibal existing business and that's in the Ambercrombie and Fitch business only.

In terms of store, we continue to work on the quality level of our presentation, and the motion we try to engender in store, we have reconfigured the canoe room.

There will be some more re-figuring for back-to-school.

I'm not at liberty to tell you, but I think it will be a just a constant upgrade.

I think the point of the -- the format for Ambercrombie & Fitch is that it is very classic.

And we can continue to update that -- that, what we call the canoe generation of stores, without spending a significant amount of money, but continue to make them look pretty fresh.

Great.

Thank you.

Thanks, Mark.

And next up we'll go to Kimberly Greenberger with Lehman Brothers.

Great.

Thank you.

Good afternoon.

Hi, Kimberly.

Mike, or Seth, I'm not sure who wants to take this.

I wondering if we can get our arms a little bit around the inventory situation?

If you can talk about, maybe on a unit basis, so that we can understand what percentage of the decreased inventory is due to a reduction in the cost and the unit inventory level would sort of factor that out, versus, you know, whether you planned it down or not and then if you could just address your second half of the year or your fall inventory plan that would be great.

Seth do you want to tackle that?

Sure.

I would say, it was probably a little less than half of the drop at -- overall relates to the drop in cost related to initial markup improvement.

I think the rest really relates to turning goods faster, and a difference in delivery flow.

We're delivering much more merchandise in March -- in -- excuse me in May this year, versus last year compared with April.

Our deliveries in total were down this year versus last year in April and they are up significantly in May.

So there's a timing element to that.

As we go through the balance of the year, ending second quarter, again, we expect to be down slightly due to the markup difference.

We also have -- are planning to have a buildup in our denim inventory, which should drive higher retail inventories, but the rest of the [inaudible] should be pretty flat down slightly.

We very much are continuing to have a strategy of turning goods very fast, to drive newness in the assortment.

So I think as we go further, -- its the best guidance probably ending third and fourth quarter is to be relatively flattish.

Okay.

Can I ask one --

Let me comment on that.

I think it is a very important point about our business that as we go into the third and fourth, you will see higher inventories in denim, but, in fact, less inventory in the rest of the classifications, because I'm taking a very strong hand or role in this faster turn conversation.

I'm very much involved with the strategy work sheets for the company and working with planners and merchants to turn out of goods much faster than we've ever done before.

So, Mike as follow-up to that can you talk to us about how you assess the change in your merchandise flow strategy so far, and particularly the women's business given what we saw in the first quarter?

Well, I think we're still perfecting it.

I think that it's -- it's enabling us to get closer to trend.

I don't think we're perfect yet.

I think we have to -- we're investing a lot in the company in terms of being better trend predictors and I think the way the future is making big bets and then moving on to the next thing.

And that's a process that we're really working our way into.

I think it is starting to work very well.

And I think we'll see a lot of -- a lot of benefit of this ongoing.

Thanks.

Thanks.

Next up with CS First Boston we'll go to Richard Baum.

Good afternoon, everybody.

Hi, Richard.

Hi Richard.

And congratulations, of course.

Thank you.

Just a follow-up to a couple of Kimberly's questions.

In terms of the -- you know the faster turns, Mike, are you -- how much of this or how are you changing the number of SKUs that you have, the number of styles and the depth that you are buying into these various styles, that's number one?

And then number two, is there any sort of system implication here that you have new systems to handle this better?

Are you able to use your existing systems to do it.

And the answer is we're able to use our existing systems to do it, but it's a retaining the people we have to use them in a new way.

The answer to the question is that there are more SKUs bought in less depth, because we're planning each of these items to stay at -- at a regular price for a shorter period of time, because we want to move in and out of them.

So the process is more -- more product in the pipeline, which adds to more SKUs, less depth because we want to sell them for a shorter period of time.

And that's -- that's really the strategy.

And on -- you know, have you noted that the trend has improved and, of course, men are notorious for never -- you know, never wanting to be fashionable.

What are --

Thank you, Richard!

Except for you, of course.

Yeah.

What are you attributing the improvement in the men's business?.

I think there are two factors.

One, i think the men's business is improving, as I see it nationally, internationally, and, two I think we're more right in terms of fashion.

It is a fashion business.

Then just last for Seth, this is just -- well, two things, one is when you -- you said the marketing spend was about the same, but when you -- does that include layering the elimination of expenses for the magalog versus what you are spending in advertising and marketing?

No, I think the question has been -- previously was the marketing that is part of the SG&A line, the marketing expense related to the magalog and the catalogue show up in -- in margin and that expense is down for the first quarter.

So we did have some margin improvement from reduction in that area, from not -- from not having the magalog.

Was it a complete elimination of those expenses in the first quarter?

Well we did-- we had a -- was it a complete -- no -- elimination because we had a direct mail lifestyle piece, which was less expensive to produce than the magalog.

We also had national magazine advertising.

Right.

So I think there's been a reallocation of dollars where if you sum it together for the first quarter, it's down slightly, as we look -- go forward in the year.

I -- I think it's safe to assume that we would spend about the same dollars overall that we were spending last year.

It's just reallocated.

Okay.

Great.

Thank you.

And the next question will come from Dorothy Lakner with CIBC World Markets.

Thanks.

Seth, looking at the SG&A again a second,if we take out the $8 million legal expense, does that give us a more normalized run rate for the balance of the year as we're thinking about the model?

And then second question, could you give us a breakdown by business of how the comps lay out by transactions, units per transaction, AUR, so forth?

Thanks.

The first question about SG&A, I think if you eliminated the -- if you took the $8 million out of the SG&A, I think that gets you up probably 25% or so.

Yeah.

I -- without giving a specific number out, I think we should expect increases of at least that amount as we go through the year.

We haven't budgeted the back half of the year in detail yet.

We're obviously growing the business and we have initiatives in -- that we're working on in stores and home office to continue to drive business.

So I don't think it's as simple as just extrapolating out 25% every quarter.

But --

Okay.

I would not assume the $8 million occurs every quarter.

Okay.

And then comp?

The -- in terms of transactions per store, in -- for the quarter, adult was -- adult A&F was down 4.9, the kids business up 4.6, Hollister down 1.5.

Average transaction value up 2.1 in A&F, kids down 4.6, and Hollister up 5.5.

And the direction of the average unit retail?

Average unit retails were down in all three businesses for the first quarter.

Okay.

And some of that relates to just turning sales good very fast.

Some of it relates to some mixed businesses and, for example, on the women's tops business, the woven shirt business has been tough.

Right.

And so that's driven down the average selling price of a top.

The men's business the AUR was up a little bit in A&F.

Again that goes the other way, the woven business has been very strong there, but all three businesses were down slightly for the quarter, and --

Right.

In AUR.

Okay.

And then one last question for Mike.

In terms of the women's business at Ambercrombie, are you comfortable in the tops business that you are moving in the right direction?

Is the knit tops business, can that make up for some of the difficulty in woven tops or graphic t's or do you think that even those businesses you are in the process of correcting.

No, I think we're absolutely going in the right direction.

I think that as I have said, that this business has been strengthening weekly and I think we're really getting on trend there.

Okay.

Thank you.

And next we'll go to Rob Wilson of Tiburon Research Group.

Yeah, can I follow up on the earlier question, talking about catalog and direct mail and which line items those costs are included in and also the magazine from last year?

Seth, I'll let you tackle that.

The cost of the magalog in terms of the production and mailing expenses, is a margin item.

And the SG&A piece of marketing is really the cost of advertising, in store photography, photo shoot-related expenses, media advertising with the SG&A.

So the direct mail as well as magalog is considered cost of goods sold?

Yes.

And Seth, you guys had a note disclosure this year that talked about your shrink reserve, versus last year.

And I guess it had declined $8 million.

Could you discuss that?

Certainly.

That difference really just relates to the timing of when we actually bought the shrink results against our inventory balance.

When you -- until you actually book the shrink, you are just accruing it at the rate you expect to have.

It takes some period of time after you take an inventory to handle all the adjustments to get the shrink properly reported by store and so until you are ready to finalize that you do an accrual, this year we finalized the results much soon ser so we booked the actual adjustment before the end of the quarter.

That reduces inventory dollars and also reduces the shrink reserve.

The year before we had not yet booked against the inventory.

There's really no impact on the bottom line, because until you book it, you just accrued it at the rate that you have incurred.

There's really no P&L impact from that reserve being lower.

Fair enough.

One last question you guys generally every quarter suggest the Midwest is your weakest region.

Does that impact where you locate your new stores?

That's a good question.

Historically we had always been more developed in our store base in the Midwest, and the northeast in Ambercrombie & Fitch.

So most of our growth in recent years in Ambercrombie & Fitch has been more West Coast focused, just because that's -- that's where we were not yet located in large numbers.

In Hollister, I think we're finding -- even though the comps have not been as strong in the Midwest, we still make a lot of money in all parts of the country.

So in terms of new stores in Hollister, we really have a hit list of the best centers and we open the stores when we get the right real estate spaces and the right geoeconomics.

I don't know that we think it's a permanent trend that comps are weaker in the Midwest.

I think we're very productive everywhere and the stores are profitable in all the regions.

Fair enough.

Thanks for taking my call.

Sure.

And next with SG Cowen we'll now go to Lauren Levitan.

Thanks, good afternoon.

Hi, Lauren.

Hi, Mike.

Last quarter you spoke a lot about not just the premium pricing but some of the other merchandising initiatives that we should be looking for for the back half of the year including some modifications on the men's business in terms of top fit and things like that.

I'm wondering if you can give us an update on how much of that we should be seeing for back-to-school, versus for holiday and if you tested any of these initiatives, either on the premium pricing or the fit issues and if so what the results of those tests or market researches have shown you so far.

Also related to that just curious if we should be looking for the premium pricing should addressing both the men's market and the women's market pretty equally.

Good questions.

The premium pricing will be men's and women's.

Bigger percentage in women's than men's.

But in total, I said about 5% in total business for third quarter.

We've not been able to test that.

And I'm -- we're pretty confident of where we're going, but we are not risking any of the base business while going after that.

I consider that to be an incremental business and we're very optimistic about it, but we're not in the position to test it.

The men's sizing issue is something that we're just -- just easing up slightly.

It's not going to make a huge difference in -- in most of the fits.

The men's medium is going to be exactly what it was before.

We're easing up the large and the extra large a little bit and adding an xxl, which we think will be a customer that we've not served before.

This is not revolutionary.

It's pretty evolutionary.

We still stand for a body conscious kind of fit for a body conscious guy.

We're just sizing up to offer that to a little bigger guy.

Is the timing on that back-to-school as well.

Yes, it is back-to-school.

Right.

And one follow-up for you, with the completion of the share repurchase, with the most recent share repurchase program, could you comment on additional appetite for, that given the remaining cash balance and then also, Seth I was just hoping you could clarify one answer you gave earlier.

I thought you said that Hollister average transaction value was up 5.5 and transactions per store were 1.5, but you said earlier the comp was 9, so I'm just trying to figure out what needs to be reconciled there.

[inaudible] Hollister per unit per transaction were up fairly significantly.

Okay.

The other question about share buyback, we -- we talk about that on an ongoing basis within the senior management and with our Board of Directors.

And we're always trying to be the most efficient while giving ourselves downside protection in terms of our cash, the dividend was a new initiative for us this year, so I -- we don't have anything to announce at this point about further share buyback, but it's something we talk about on an ongoing base with the board.

Great.

Thank you.

Thanks, Lauren.

And next from Flatbush Watermill [inaudible] we'll go to John Schwartz.

Hi, guys.

How are you?

Hey, good.

How are you?

I'm a little sick so sorry about the voice here.

My question, actually has been addressed, but I just want to make sure, Seth what's the assumption period over which time you think this accrual is to be spent on the legal?

Is this, like, a two-year thing or one quarter?

Oh, I think we'll be spent over probably a multi-year period.

Okay.

So, I mean, I just want to make sure so in analyzing the business, I mean -- I don't want to mix any words, but you guys grew on an 18% revenue growth, 18.8, we grew the bottom line.

If you back that out I assume it's fully -- it was fully taxed, so 60% added back.

To me, I come up with 36 cents and I just want to make sure that, you know, in terms of your spend on every other line, was this a normal quarter that you weren't holding back?

I just want to get a sense of that.

Well, I would say it was a normal quarter in that we operated the business using the same kinds of strategies.

We have always tightly controlled the business.

And we will continue to do so.

There aren't any other unusual items, if you will, other than the fact that marketing expenditures overall were somewhat lower because we had not -- we had eliminated the magalog.

Okay.

Last year.

So -- but I don't think that was a big impact.

Event.

No.

So, I mean, just generally I just want to make it clear.

The way I look at this, assuming nothing else -- if we don't have a horrendous comp performance, just things are stable there's no terrorist activity this company, it just seems -- we were able to grow our EPS, if you back that out, 40%, 35% net income growth.

I just felt like it was worth coming on and highlighting.

I think you guys are doing a great job.

Thank you.

I appreciate that.

Thank you.

And the next question comes from Joe Teklits of Wachovia Securities.

Thanks a lot.

Hi, guys.

Hey Hi Joe.

Hi, Mike.

Mike, you said on the last conference call a couple of things.

First you said you were going to focus this year on driving the top line, and I'm wondering if you are following through with that, even though you said you could give up some Q2 volume due to your conservative inventory plans.

And also along those lines maybe Seth can quantify payroll hours for us as a driver of maybe top line, just because it looks like there's more people, more sales help in the stores.

And you also said, Mike, that you didn't think the Ambercrombie & Fitch stores were differentiated enough from the competition, and I'm curious what type of progress you think you are making there as well.

Okay.

I'm writing this down.

Top line growth, you know, I have to -- I have to say we are pushing it as an -- it's a focus on -- on making the comps positive, but doing it the right way, Joe.

We're also doing it while making the stores less promotional, improving the quality level of the merchandise, of the total experience, and it's not a mindless pursuit of volume and it never will be in this company.

So I think there has to be that asterisk that we'll drive the top line as best we can, using the strategy that is related to the quality aspirational business per brand, and it is, in fact, being less promotional than we've ever been, having better quality in all aspects of our business, and not sacrificing that for a mindless pursuit of top line.

I think that's important that I make that clear.

In terms of differentiating A&F from the competition, it just has to do with that.

Are we perceived as the best quality brand for each of our age groups?

And I've challenged the organization to work harder at that.

Have we made progress?

Yes, I think we have.

I think we're going to make a lot more progress for back-to-school and I think you will see clearer and clearer differences between us and the competition and it's really related to quality merchandise, quality environment, quality experience.

So it's not a style issue?

It's more of a differentiating --

Yes.

Quality.

Okay.

Mike, any payroll average you can give us -- I mean, Seth.

Seth, do you want to say that?

During the quarter we had small percentage increases in each business, in store payroll hours per store.

That wasn't -- I wouldn't say that was related specifically to a selling strategy.

I think it is related to everything Mike was just talking about.

To be an aspirational high quality brand we need to have the best looking store, and we spent the hours we felt we needed to -- to make the stores look as good as they could, to process the transactions as well as we could, and operationally run the best store.

It was not a strategy of getting aggressive sellers to drive volume.

Right.

And I have to ask you, Seth, I don't -- I don't quite get this Hollister comp, sorry.

You said units per transaction were up big, but isn't that already factored into average transaction value?

Isn't that just the AUR.

Yeah.

Well, I think there is a difference in the comp versus sales per average store that comes from the new stores not being quite as productive per store, as the average store.

So your transactions and your average transaction value numbers were for the average store include --

Right because we can't capture that by like-store, versus non-like stores in our systems.

Some of those stats have to be average store.

Cool.

Okay.

Thanks, guys.

Good luck.

Thank you, Joe.

Next we'll go to Barbara Wyckoff of Buckingham Research.

Hi, everybody, congratulations.

Thank you, Barbara.

Hi, a couple questions, Hollister operating margins, how are they running relative to adult A&F, I seem to remember they running at similar levels at the end of last year?

Is that the same for spring -- I mean first quarter?

And then second question is with the growth of international and eCommerce, I know it's very small, but, you know, with the growth, does that give you any confidence to extend the A&F brand outside the U.S.?

You know maybe to Canada, UK, Tokyo, Japan, I mean?

Okay, Seth do you want to take number one, Hollister operating margins, and then I will grab number two.

Okay, number one, the operating margins were on a four-wall basis, were almost exactly the same as in Hollister versus the adult A&F.

So --

Okay.

Okay.

But let me tackle the second part of the question, international opportunity there's no question that there's international opportunity for the A&F brand, and I'm sure there will be for Hollister.

We're besieged with requests to do so.

But the fact of the matter is, we -- with our concept of coming out -- or developing new brands, we have the ability to open a number -- lots of locations in this country where our return is really greater than it would be in an international organization.

And we can run businesses that are much less complex.

We continue to look at it.

I think there will be international opportunity for these businesses in the future.

I don't see it in the near future.

Okay.

Thanks.

Thank you.

And next up we'll go to Robin Murchison with Jefferies & Company.

Hi, thanks for taking my question.

The percentage sales business men's/women/adult division, I too have seen in stores where it seems like you are moving the seated, the TV, the leather chair area to the middle of the guy section, thus absorbing square footage.

So can you address -- I think historically it's run about 62% women's and the reciprocal for men.

Can you address what that was first quarter versus first quarter last year.

Seth, would you like to --

Are you asking about the square footage allocation or the volume share?

Well, the volume, the sales volume.

Okay.

I can give you that.

It should have been pretty well even to last year.

Yeah, women's was about -- was 63% of the business, in Ambercrombie & Fitch, which was about what it was a year ago.

Kids was 67% of the business with girls, that's up from last year and Hollister, 69% was girls and that's up very slightly to last year.

Okay.

So sales volume is not changing between the sexes in the adult store, despite the move of -- or the absorption of square footage hence less -- it appears to be less inventory on the guy's side?

That's correct.

There is.

We're turning it faster.

All right.

All right.

Thank you very much.

Correct.

Thank you.

Next we'll go to Burt Berkay [ph] with ERN.

Hi, guys.

Congratulations on your results.

Again going back to the margin discussion, on your -- on your guidance for the second quarter, 38 to 40 cents, if you take out the $8 million on the first quarter, it seems like 38, 39% increase on the net income line and 38 to 40 cents guidance when you take the high point of that, that seems like a very conservative guidance.

If you take the similar assumptions on comps which are going to be on an easier comparison and same level of SG&A dollar increase, like even if you take, 20, 25% increase, and run flat margins, still it seems like you will be able to increase the guidance.

Would you like to comment on that?

Well, I -- the guidance was meant to give a scenario that was reasonable with a continuation of the current comp trend.

It's not our intention to give out line by line P&L.

What we did say is that we will have less initial markup improvements in the second quarter than we had in the first quarter so the level of margin improvement will be less versus last year and we're ramping up the business for the balance of the year and that will have SG&A investments.

So I think the guidance is what the guidance is, I'm not going to get into the detailed line items.

Sure.

I just -- I was curious about -- about the specific -- like the level of increase, as a level of increase will decrease what you still expect an increase on the gross margin line.

I think that's my question when it comes down to.

Yes there will be a small increase.

Probably less than it was in the first quarter.

Sure.

Okay.

Thank you very much.

Thank you.

Next we'll go to Janet Popenberg with JJK research.

Hi guys.

Hey, Janet.

Hey, Janet.

How are you?

Good how are you?

Good thanks.

I just have a couple of follow-ons Mike.

It seems that the women's top business has been over performing with respect to inventory levels over the last -- you know, the third quarter, the fourth quarter now the first quarter we've had some inventory issues that have held back the performance of that business and I'm wondering if there's some specific or unique characteristics with that business with respect to sourcing or leadtimes that's making it more difficult for you to plan and react to that business.

And if so, if smooths itself out or gets better in the fall or if it will remain a challenge.

And then I have a follow-up for Seth.

Okay.

I would say there's nothing about the sourcing of systems.

It's just that the business is moving much, much faster --

Right

-- ever has before, and we're getting closer to being on target --

Will you plan that business more aggressively for fall?

You said you would plan denim more aggressively, but you would be careful in other areas.

Actually, from an inventory point of view, I can be pretty aggressive -- I can be aggressive with sales and conservative with inventory and that's kind of what supply posture is.

Is that just a flow situation?

Yeah, it's just -- I can just -- the tops business is how many styles on a weekly basis.

Mm-hmm.

And it's a riskier business than it was before because you've got to hit right and then move open.

Mm-hmm.

But I think we have the -- the -- all the people in -- and knowledge in place to get better and better there.

So you don't see it being even with inventories being held conservatively for the fall you don't see the top business --

No, I see us as having good opportunity in the tops.

Okay.

Can you talk a little bit --.

I see us as having good opportunity in the whole business and the fact that I'm restricting inventory doesn't have anything to do with my optimism about the business it has to do with how we just turn in and out of goods more quickly.

Okay.

Great.

And on the denim side can you talk about what's made that business so much stronger this spring?

Is it fit?

Is it --

I think we're in a denim cycle.

Clearly the denim business is terrific and I think we are getting better at it.

I think our fit is better.

We really concentrated on it.

And I -- I think that we're -- we're -- that the cycle doesn't look like it's about to end to me.

Last year in the fall it was a tough outer wear season for you, Mike.

How do you see it being this year?

I -- I'm not sure.

I think it is made up of lots of different components.

I'm not sure if there's going to be one big one that going to hit.

Mm-hmm.

I think we've -- we've spread that business over a lot of styles, and we'll see what happens.

Okay.

That's good.

And Seth just to help me on a more simple basis.

If I look at the SG&A rate, you say that you had $8 million of these legal fees.

Does that mean $8 million higher than legal fees you accrued last year?

How do I get an adjusted SG&A so that it's apples to apples to last year?

I would take out $8 million.

That -- it was $8 million related to one specific litigation.

Okay.

So the 36 cents analysis that another analyst did a few minutes ago is a fair and true analysis.

Correct.

Thank you.

Next up we'll take a question from Michael Dollahan with Jeffries and Company.

Good afternoon, congratulations

Thank you.

Thank you.

I just want a little clarification on the inventories for the second half.

Certainly understand your description of the flows, at the same time, this is a key item business and that is at the end of the day what tends to drive businesses.

Will there be an effort -- or what effort will the merchants and planners do to ensure that denim in Q3 and then maybe sweaters and hoodies in Q4, whatever the merchandise identifies as the key items are kept in stock on a daily basis while you continue the flow to fashion goods?

That's the business we're is in identifying key items, and flowing them.

I think -- I think that there is very little that we'd consider basic in tops today.

Almost all of our business is a fashion business in tops.

In bottoms there are key items that stay in stock for a longer period of time.

But the top business is -- is much more volatile today.

So does that mean that the holiday gift giving strategy or tactics may have to change a little bit in the tops?

Change from what?

I'm not following you.

Well, you used to be able to rely on a few key sweaters or hoodies or something --

That absolutely true.

-- to drive the business and if I'm hearing you right, you can rely on that less now.

That's absolutely correct.

And so will there be a broader assortment within the subclass the merchants identify as the key fashion trends?

No we'll still have -- we'll still have items that we sell in great quantity, but we would change them more quickly.

So maybe --

Not have the same --

Sure.

The item the first week of November as the third week of December.

But there would still be items that we sell in great depth each of those weeks.

Right.

Maybe analogous to the way the great execution on the men's wovens this spring?

Yes.

Correct.

Right.

Where the tables stayed full but the patterns and the colors change.

The patterns change for the interest, that is exactly right.

Right.

Good luck to you.

Great job.

Thank you.

And next with Bear, Sterns we'll hear from Dana Telsey.

Good afternoon, everyone.

Hey, Dana.

Hi.

Last time, Mike you spoke about design management changes and some of the adjustments you had made.

Any updates on the progress there in the process and if some of the initiatives with flow that you are talking about come from that and then you mentioned that you moved up inventory to March this year from April in Q1, anything like that, that we should expect to see in Q2?

Well, let me take each point.

One, the management's initiative in terms of key people in key positions working very well.

I'm really delighted with the key people who took on additional responsibilities.

Our men's design group is working very well with new leadership.

The Ambercrombie & Fitch women's top area is making enormous progress.

So that -- that is very key to the strategy of more news more often, having just superb design input.

The second part of your question was -- I'm not clear about the --

On the flow strategy you brought in goods earlier -- we're seeing many retails bring in goods earlier and flowing merchandise earlier.

It sounds like it happened in your first quarter.

Is it going to happen in the second quarter too.

Yeah, the flow by week is -- is -- I -- let's put it this way, I think the flow by week is more consistent.

There's more consist flow and less moving of major amounts of inventory to the beginning [inaudible] that lasts until the send.

Okay.

And then on A&F, it sounds like -- are there a couple of fewer core Ambercrombie -- core Ambercrombie store openings this year versus last -- this year versus earlier expectations, is it 11 versus 16 earlier?

And just what was cap ex and D&A for the quarter.

Seth, can you tackle those?

Yes, we took down the store count expectations, I think by three -- three or four stores in Ambercrombie & Fitch, and that really relates to a few centers where it's a new center and we just don't think the project will be ready to open next year.

And it will probably go into next year, and there's a deal that we're not sure somebody will meet their co-tenancy requirements and it might die for that reason.

But that's -- that's what's happened there.

Cap ex, are you looking for an annual number?

Well, the annual you said 115 to 125.

Right

Q1 cap ex and Q1 D&A.

Okay.

Cap ex was 32.8 million, depreciation, 19.3.

Okay.

And Mike, lastly I've seen some of the billboards they look great.

We saw the "Vanity Fair" magazine and everything, should we be seeing more of that go forward.

Yes, you should.

I'm very excited about that.

I think in fact, taking this money from the magalog and spreading it to the different vehicles is going to be really meaningful for the brand.

Terrific.

Thank you.

Thanks, Dana.

And next up we'll hear from Eliot Laurence with Jefferies & Company.

Good afternoon.

A bunch of little questions because I know that the conference call has gone for a little while.

On the SG&A of 25% or so, netting out the legal expense in the third and fourth quarters of last year, the expense trend was close to 13 to 14%.

Is this related to -- you understood the negative comps were fairly significant in the second half.

You had a little more breathing room this first half, and you were going to manage the expenses a little more liberally, given the stronger sales numbers or is there something more to that?

I think that's fairly accurate.

We were in a very tough comp situation last year, and we -- we were as tight as possible in how we managed the expense side of our business.

I think our [inaudible] trends improved and we need to invest in the business.

So I think that is part of it.

So there were, in fact, some -- maybe some areas of discretionary spending that you had kind of kept a lid on over the last, three, four quarters that may have seen a little bit of the light of day this -- Well, I think that's clearly true.

I mean discretionary things such as -- as travel, we've been very tight on and we still are.

Store payroll hours, I think we did feel that we had reduced those about as far as we could and we needed to really focus on making the stores look better.

So I don't think they are major expenses that were deferred that hurt the business, but I think we -- in a business growing as fast as we are, with the number of different brands we have and the complexity of the business, it's not realistic to grow SG&A 13%.

Okay.

On the -- on the square footage increase, it was about 15% or so in the first quarter.

The comp was flat, but the gross sales number was up closer to 19%, implying the new store productivity and a lot of that was Hollister, while it might not have been as strong as the mature Hollister, it seems to imply it's a lot stronger than a mature Ambercrombie & Fitch store.

As in the new square footage comps online.

Well, I think the thing you are missing there is the part of the difference between the square foot growth of 15 and the 19 is the -- the rapid growth of the eCommerce business.

That goes into the total, but it is not in the comp.

So it wouldn't be necessarily fair to say the new square footage was more productive than mature square footage.

No.

No.

Okay.

So then, therefore, it is not necessarily an offset -- that is, you still can't really leverage occupancy expense with a flat comp you are going to need at least a slightly positive comp to leverage occupancy expense?

Yes, I think that's accurate.

And this is kind of a flip question, Mike, and -- and I don't mean to be obnoxious because it was a great quarter, but how are the men's woven tops so great and the women's woven tops in the spring so mediocre?

It's a different business.

It's just a different -- we're on a different cycle.

That's all.

We're in a -- getting into a -- we're in a woven cycle in men's and continues as a knit cycle women's.

Oh, so it is not a woven's cycle in women's as well.

No, absolutely not.

It's different fashion.

I see.

If it were that easy, if they ran parallel, I would be -- I would have a lot of free time.

Next up we'll hear from David Greenberg of Glenrock Capital.

I'm sorry my question was answered already.

And we'll move to Julie Learner of Metropolitan Capital.

And hearing no response we'll move to Adrienne Tennant with Wedbush Morgan.

Good afternoon, and congratulations.

Thank you.

I just had a couple of housekeeping questions.

The first is, which one litigation piece was that, that was $8 million and then if you could give me ending square footage, and then the share count at the -- the diluted share count for Q1 and what we should model for Q2 and then finally do you expect to have any negative impact from Sarbanes-Oxley compliance in the second quarter?

Thank you.

Whoa that's a long list.

But they are easy!

Seth, I think they are all yours.

They are all very easy.

The first question was about the litigation.

The $8 million relates to a discrimination suit filed in California I believe in June of last year.

Okay.

Second was ending square footage?

Correct.

Thats ending square footage for the quarter.

Mm-hmm.

That would be 5,065,000.

The third was store count ending quarter, I believe, was that right?

Share count the [inaudible] share count.

I'm sorry.

Mm-hmm.

I can't read my own writing.

96.7 share count at the end of the quarter.

Okay.

And were most of those shares purchased at the end of the quarter so we should --

No, they were actually purchased throughout last year.

And the reason why the count is down a little has to do with the weighting impact of the timing of the buyback last year.

Okay.

But the -- was I mistaken that you said 600,000 this quarter.

Yeah, they were purchased pretty much in the middle of the quarter.

Okay.

So we should use kind of -- I mean is that the same --

I'd take it up to about 98, 98.5, 98.7 for the second quarter.

Okay.

Great.

Obviously the share count will be somewhat affected by what the fully diluted piece is, which relates to what our stock price ends up being over the quarter.

Exactly.

So I think your final question was the impact of Sarbanes-Oxley.

Mm-hmm.

Obviously, Sarbanes-Oxley is created -- has creates additional accounting and reporting requirements.

We had to make some investments in the accounting and finance area to get these things done, but nothing that I would say is going to be material to the -- to the bottom line in the second quarter.

Okay.

Great.

Thanks so much and good luck.

Thank you.

Thanks.

Next up we'll go to Joel Locker of Benchmark.

And hearing no response we'll go to Jennifer Black of Jennifer Black Associates.

Hi, Jennifer.

Hey, good afternoon.

Hi, Jennifer.

I wanted to know, you said the business is moving faster and faster and you guys have always done a great job on the sourcing side of the business and if you could talk a little bit about what impact this change in China will have and do you have enough quota and do you see any impact or is it just a non-event?

Seth do you want to tackle that?

I think that it's not a non-event, but I don't think it will have much impact on our business.

Our business, right.

We are very diversified in our sourcing base and because of our quality requirements, we want to have a stable factory base so we are not moving production around all the time just for cost differences.

So I think we're very comfortable that we've protected ourselves in terms of deliveries for this year based on what's going to happen over there.

I have think we are very comfortable that we've protected ourselves in terms of deliveries for this year based on what is going to happen over there.

I think as we go forward, into next year, I don't think anybody knows for sure what will ultimately happen, but I don't think there will be any dramatic impact on -- on our business.

Our business.

It seems to be some feeling that there will be an impact positively on people who buy lower priced merchandise in huge quantities, but we're not -- we don't see it as a benefit to our business at this point.

But longer term could it be a benefit.

It's sounding like there might be a slight benefit, but it's -- it's -- I sure wouldn't count on it.

Okay.

All right.

Congratulations.

Thanks, Jennifer.

Next with JP Morgan we'll go to Brian Tunick.

Okay, thanks guys.

Two questions.

First off, can you remind us what promotions that you won't be "anniversarying" in the second quarter?

And is there any change in the number of days for your clearance events?

That's question number one.

There's a bounce back that we're not anniversarying.

All right that happened in -- that affected part of May and the early -- early part of June last year.

In terms of the timing of our sale event, in the second quarter, we really don't like to give out the start date for those things because it's a competitive --

Okay.

But do you think the Memorial Day shift is going to have a major impact on the month?

No, I don't -- I don't think so.

Not from a promotional stand point.

Okay.

And then just from -- second question just on Hollister, you obviously have more history now.

What kind of ramp are you seeing in year two and three, of the Hollister stores that have been opened?

That's a good question.

I don't know that we see anything -- we've noticed anything in Hollister.

That was much different from Ambercrombie & Fitch but, you know, we still have a pretty young store base.

We do find that we get -- sometimes huge grand openings volumes when we reopen in centers, and sometimes that happens in the more second tier centers, we see a huge initial impact, but in terms of -- we've never seen our business move that much base in comps, based on maturity of stores.

It's really more the strength of the merchandise assortment and how -- how hot the brand is.

I think as Hollister becomes a hotter and hotter brand with the customer.

That really lifts all the stores.

That's what we saw in A&F as that developed.

And just finally on Hollister, how is the loyalty program working? -- the loyalty program working.

It's good.

I believe we have at this point, 2.6 million members, and probably half of those we would define as active, meaning they are actually -- you know, they are using their card, and I -- about 35% of our transactions use a Club Kali card.

So we're pleased with where it is.

Terrific.

Good luck.

Thanks very much.

Thanks, Brian.

And the next question will come from Margaret Mager with Goldman Sachs.

Hi.

Hi, Margaret.

How are you.

Good, how are you?

Fine, thanks.

I wanted to know if you could tell us how much of the improvement in the gross margin, if any, came from the magalog expense savings.

Was it -- was it meaningful?

No.

It was -- it was insignificant.

It was -- it was quite a bit less than a percent.

Okay.

Will there be any -- when you say a percent do you mean of the 29% improvement in gross profit.

I didn't say it was a percent.

It was probably around half a percent, of sales.

Oh, okay.

And is there -- the magalog, was the expenses spread evenly by each quarter or was this a seasonal activity?

Well, we generally had expense in each quarter because there were four -- there were four issues a year.

Okay.

But it didn't -- you didn't do a lot bigger expense and back-to-school versus, you know, second quarter?

No, not -- not of any meaningful amount, no.

Okay.

And then with the back-to-school season coming up, when is the back-to-school products starting to come into your stores and when is the setup complete?

It's the end of the first week of July that we go up with back-to-school.

Okay.

And it's the same for both Hollister and Ambercrombie.

For all the brands, right.

Okay.

And then I'm just curious, on your goal to turn your inventory faster, is this any quantitative target that you're driving for for inventory turnover, or --

Not in total.

We -- we really planned the business from the item level up.

There is a -- a turnover statistic that we require by classification when we mark the item down, which limits the amount of stock that we put into each item.

Mm-hmm.

So are you changing, like the number of weeks that you're willing to work with an item?

Yes.

The number of -- the number of weeks that many of our items are at regular price has been reduced.

That allows us to flow more items.

And then when we mark them down, we're looking at how many we have to limit the markdown.

That's where the statistic comes in that I mentioned before, what is the turnover requirement for that item and we mark it down.

And we're very tight with that.

Okay.

It's difficult to come up with an overall turn number, Margaret, because it's very mix affected.

You obviously don't turn denim because of all the sizes and washes, you don't turn that as fast as tops.

So you -- you get a --

Right.

And it's really the markdown statistic, we can turn a -- a knit top on a 2.5, the week we mark it down a bottom would probably be more like five.

Wow!

Yeah that was really -- that was leading to my next question.

Which is, is there any change in your mix of replenishment-type businesses to fashion businesses that would help to move the needle for the total company?

Move the total in terms of inventory turnovers?

So would you need to mix a bit more towards fashion items and also change your -- reduce your number of weeks in order to really get the inventory turnover number to change for the total company?

And I'm wondering if there's any mix --

That's not how with really look at it.

We don't set the number for the total company because turnover is really a result.

But have you to use it to maximize the profitability, which is really gross margin dollars of each item.

That's why you have to do it from the bottom up.

In terms of intensification, we -- we're -- I think we are looking at some intensification in our bottoms businesses in terms of sizes, and weeks of supply will, in fact, be having longer weeks of supply in our bottoms business, primarily in denim, and that's why Seth said that our inventory levels in denim would be up August 1st pretty remarkably over last year.

Right.

And balanced by the faster turnover in tops.

Okay.

All right will well, you really do put a lot of science into a business that people think is all -- is all art.

We try!

It is amazing.

One last question, the Hollister stores the four that are opening, will those be in all different markets, or will you try --

They are all different markets.

The concept four store.

Right, thats what I meant, concept four, exactly.

Yeah, different markets.

Because they are -- they are really test stores and we have to develop a concept that will work in different areas.

Okay.

Good.

All right, we'll look forward to that.

So thanks for the education on inventory management.

Any time.

Take care.

Bye-bye.

Bye-bye.

Next up we'll hear from Julie Learner With Metropolitan Capital.

Hi, yes.

Can you hear me now?

Yes.

Yes

Hi.

Yes, a quick question.

In light of interest rate fears, and rates going up, fears about consumer spending going down, could you just comment a little bit about your experiences in -- if it will impact your business at all?

I have no history with that.

Seth, would you comment?

Yeah, I don't know that we've ever been able to draw great correlations between interest rate changes and our business.

I think our -- our market share is -- even though our business is gotten much larger, our market share is very small, and I think we -- we target a young customer, and if we get the fashion right, there's plenty of business for us to do.

And we react very closely to demand in how we run.

The business.

So we will inventory the business to the level of demand that we are seeing.

So I -- we're not good enough to project these macro economic trends on to our business so we really just react to what we see happening and that's allowed to us control the business better.

Great.

Thank you.

Thank you.

And we'll now take a follow-up from John Morris of Harris Nesbit.

Thanks.

Hopefully we're getting towards the end.

Quick question, for you guys, the accounts payable in the quarter looked like it was up fairly significantly compared to last year.

Seth any comments about that.

I think it was up something like 57%.

What's going on there?

I think that would be probably driven by the legal [inaudible].

It is.

Oh, okay.

Great.

Thanks.

And we'll now go back to Rob Wilson with Tiburon Research Group.

I'm sorry, the eCommerce business as a percent of overall sales.

Okay.

Just a minute.

It was about 6% of the total for the quarter.

6%.

And what was the basic share count?

You are saying diluted was 96.7.

Yeah.

Fully diluted.

Fully diluted.

And you are saying next quarter we should model in 98.5?

Well, I think that's -- Well, I think that's --

No, it depends on the stock price.

I think that a conservative number, but we can't project the stock price.

Can everyone hear that Sue Riley is on board, our new CFO who is contributing in the corner.

I just wanted to get a number for the next quarter.

We'll get back to you.

Next back to Barbara Wyckoff.

Hi guys.

When you talked about being in a denim cycle, I guess Mike, do you see any changes in silhouette happening in a vis-a-vis, [inaudible] women's low rise and stretch going to be still going to be the most important thing and what about the destroyed look so important and what is new in washes.

I would love to comment open that, but I think that's competitive at this point.

Would you talk offline? [ LAUGHTER ]

I really can't, Barbara.

I would love to.

I'm really curious.

Okay.

Thanks.

Next back to Dorothy Lakner.

Thanks.

Yes, could you quantify the increase in SKUs in the Ambercrombie business.

No, I really can't.

I'm sorry, I can't do that.

Not, not even a little color there.

It's not really a number we track in our system that is easily --

We track -- we track SKUs delivered by week by business, but we don't queue them in.

Okay.

Thanks.

Thanks.

That does conclude this Abercrombie conference call.

We'd like to thank you for your participation.

And have a great day.

Thank you, everyone!

Thank you.