Interest income was $1.8 million, compared to $4.1 million last year.
As expected, the reduction is partially attributed to a lower average return on investments and the addition of net interest expense from borrowings under the company’s line of credit agreement.
Net income for the quarter was $77.8 million versus $81.3 million last year.
- Second quarter net income per diluted share was $0.87, following the $0.01 charge versus $0.88 last year.
- Second quarter capital expenditures were approximately $109 million.
In the quarter, the company opened six new Abercrombie Kids stores, 23 new Hollister stores, two new RUEHL stores, and three new Gilly Hicks stores.
- End-of-quarter total gross square footage was approximately 7.7 million.
- Domestic and international store growth initiatives continue to represent substantial return on investment and brand enhancement opportunities.
Abercrombie & Fitch recently finalized a new lease deal for both an A&F and Abercrombie Kids flagship in Milan, Italy, to open in late 2009. This adds to the 2009 flagship opening schedule which currently includes Hollister Soho in late Spring, Abercrombie Kids New York in late Fall, Copenhagen adult in mid Fall, and Ginza adult in late Fall.
Abercrombie & Fitch is in lease negotiations on a number of additional sites in both Europe and Asia.
In addition, the company has signed leases for three Hollister chain stores in the U.K. opening in 2008 - Westfield London, Blue Water, and Brent Cross. The fourth store location is now planned to open in Spring, 2009.
In Canada, Abercrombie & Fitch is entering the Vancouver market with a Hollister store in 2008 and an adult store in 2009. The kids business opens in Toronto in 2008 with stores in Eaton’s Center and Sherway Gardens. By the end of 2009 with current lease deals, the company expects to have five adult, three kids, seven Hollister stores in Canada.
For fiscal 2008, Abercrombie & Fitch plans to increase total gross square footage by 9% to 10%.
In addition to the three U.K. Hollister stores, in North America the company now expects to open 99 new non-flagship stores, including two new Abercrombie adult stores, 66 new Hollister stores, 12 new Abercrombie Kids stores, six new RUEHL stores, 11 new Gilly Hicks stores, and two new outlet stores.
Since the first quarter release, one Abercrombie adult store, one Abercrombie Kids store, and three Gilly Hicks stores are now expected to open in 2009 due to a shift in possession dates for construction.
The 2008 flagship construction work remains on schedule and other capital expenditure estimates remain consistent, with approximately $15 million for complete store remodels, $50 million in store refresh, and $73 million in home office infrastructure, information technology, and distribution center investments.
The estimated total capital expenditure level for the year is $405 million to $410 million.
On the information technology front, Abercrombie & Fitch continues to make progress on its new retail merchandising system, which has a two-stage implementation in 2009. The system is expected to improve efficiencies and work quality and it is also essential for supporting the logistics of the company’s international growth.
Guidance information related to inventory and EPS for Fall 2008:
For inventory levels, Abercrombie & Fitch expects to end the third quarter of 2008 with inventory up 10% to 15% at cost on a per square foot basis versus the third quarter of 2007. The increase in the inventory level assumes a third quarter comp trend similar to July.
Abercrombie & Fitch intends to set more items at Christmas floor set at the end of October than last year in an effort to lower the floor update workload for stores in November. This strategy results in an increase in the third quarter Christmas merchandise deliveries compared to last year. Even with this expected increased, the company has triggers in place that will allow it to react to fall deliveries in a manner that should result in an end of fourth quarter inventory per square foot at cost level in the flat to slightly positive range compared to 2007.
The company expects between $3.40 and $3.45 net income per diluted share for the second half of fiscal 2008, a 7% to 8% reduction from Fall 2007.
The full year EPS range is between $4.95 and $5.00.
The full season earnings guidance reflects the following:
- a negative 7% comp store sales level in Fall, consistent with the trend in July, to achieve the low-end of the guidance range;
- an incremental benefit during the fourth quarter from higher contributing new stores scheduled to open later this year, including the three Hollister U.K. stores and three Canadian stores;
- in stores and distribution expense for Fall, around $10 million in additional expense related to store minimum wage and manager salary increases;
- the following estimated pre-opening rent expenses levels: $5 million for the Tokyo flagship, $4 million for Hollister Soho, and $2.5 million for other flagships, including Copenhagen and Milan;
- a Fall MG&A expense per quarter of between $114 million and $116 million;
- a total Fall season effective tax rate of 38%.
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