Michael W. Kramer: On the gross margin we need to highlight a couple of things. One is to date through this downturn in terms of the economy, our clearance levels in all of our brands have remained relatively consistent year over year, meaning the full price selling is roughly running the same. We are not going to focus in terms of buying sales on a short-term basis. What’s going to help us are maintaining our gross margin rates and not deteriorating them like everybody else is in the mall is going to help us in terms of continue to invest in those things that we are talking about to get us through 2009 and 2010.
Jeff Black (Lehman Brothers): Are you talking mainly price increases at the category level sprinkled across the division because it seemed the implication was you took prices up at Abercrombie and you thought that benefited back in ’05. Is the implication you are taking prices up at Hollister now and you want to see a similar benefit? And then is just the growth rate per square footage in ’09?
Brian Logan: There are some plans of taking some strategic price increases as we deem dictated by both increases in elevated quality or in increasing cost, or in areas where the iconic status of the product dictate. There isn’t a defined plan at this point. We don’t have any guidance at this point to tell you what those would be. I think it’s going to be more opportunistic and strategic.
Mike Nuzzo: We are looking across all of the brands in terms of price increases. As far as square footage guidance for 2009, I think that’s something we would provide a little later in the year. In all of the categories but one we have actually not seen any negative impact to our sales, and we are determining that one particular category, whether that is an economic, macroeconomic situation or not.
Michelle Tan (Goldman Sachs): Give us more color, if you look at the deceleration in the business into July and the planned deceleration for the back half of the year. It seems like the international stores are still holding up well. Has the rate of growth on those stores slowed?
Mike Nuzzo: As far as July goes, we talked about seeing a slowdown across all of our major store segments but if you look at the international business, which continues to be strong, Fifth Avenue, for example, has been at just an incredible growth rate and that ticked down a little bit in July. London remained as strong as it had in the previous quarter in July, and the other domestic tour stores were equally strong as they had been in July. So overall, that performance continues to be good and as we get into the fall, that obviously continues to be the case.
The deceleration has been in the domestic store side and for the most part, it is in our lower volume stores that we’ve seen more of a deceleration, which gets to an issue of our negative 7 comp for Fall. Given the macroeconomic environment that we have seen to date, given all of the pricing and promotion efforts that you see in the mall out there, I think we felt that it was absolutely prudent to use the July run-rate as our assumption go-forward for inventory strategies and for P&L management in the fall of 2008.
Brian Tunick (J.P. Morgan): Could you give us an update on your full-year dilution expectations now for both RUEHL and for Gilly? Also on the auction rate side, are you finding them now more liquid, given what’s happening with the settlements? And does that increase the likelihood for a buy-back program next year?
Mike Nuzzo: If you combine the operating losses for RUEHL and Gilly, look at this year versus last year, it is slightly higher than last year but not - again, slightly, not in a significant way and the reason is we knew that Gilly, once we started into store operations, would have the typical store start-up loss situation, primarily related to the fact that the gross margin is low and in the evolution of a brand, you see that gross margin up-tick over the course of a couple of years.
The RUEHL four-wall loss is stabilized and much of that stabilization came from the cost re-engineering and the efforts that we have done in that business over the past year, so although the comps have declined which again we anticipated, the loss generated from RUEHL has stabilized, if you look at it this year compared to the last couple of quarters. And on RUEHL, looking at the sales trend, we are still in the phase where we are anniversarying substantial clearance levels from last year. We will begin to see that become a little cleaner in terms of a sales trend comparison in the back half of this year and the beginning of next year, so it’s fair to say that we will be watching the sales trend in RUEHL very closely as we get to the end of the year and beginning of next year, and we will keep you updated on that business.
Michael W. Kramer: On the auction rate securities, there were several issues that were called at par during the quarter. We are hearing some encouraging news related to the auction rate securities. At the end of the quarter, we ended up with $54 million in terms of MUNIs and $235 million in terms of student loans. Even with the auction rate securities, if they are left at the levels that they are through the end of this year, we’ve built up a significant amount of cash reserves through the back half of the year - absolutely we will be going back into the market into 2009 and there may even be the possibility in late 2008, depending on the business.
Adrienne Tennant (Friedman Billings Ramsey): My question is back on the inventory build in the third quarter. What’s the rationale for bringing in the product in the late October timeframe? And what happens in the event that you have a very conservative outlook for sales but to the extent that the economy is even more sluggish, what happens to carryover inventory at the end of a season? Does it go to the outlets since you are not going to mark it down to move it off the floor?
Mike Nuzzo: Two issues; one, the last couple of years, we really felt like we had stores doing larger updates in November in preparation for post-Thanksgiving, and we feel like it took away from the focus on preparing the business for that heavy shopping time period. The second thing is we also wanted to make sure that we had some product, we had some key product slides last year - not slides that severely impacted the sales trend as we got into Thanksgiving but certainly it impacted the sets that we were doing leading up to Thanksgiving, and so we wanted to make sure one, we had the discipline to ensure that we got all of our deliveries on time, and two, we wanted to alleviate some of the workload on the stores in the sets that we would do in November. So that’s why the Christmas floor set is going to be a little bigger this year and the subsequent floor sets will be smaller. So that explains a little bit as to the build-up of inventory that you would see in our third quarter.
As far as if sales are lower than our expectations and our carryover concerns, I can just tell you that it is something that the planning team here monitors on a weekly basis. We look at sales trends. We have some sophisticated sales modeling that we run based upon what the current business looks like and in terms of managing and modifying late season deliveries we certainly can do that to manage the carryover level. We do take the merchandise that is carried over at the end of the season and we maintain some of it in our stores in sale and we distribute it after a certain period of time to the outlet stores. But when you are managing your inventory levels, you’ve got in Fall two very large selling periods, and so it gives you a good opportunity to more effectively manage your triggers and your deliveries to again make sure you are relatively clean coming out of the season.
Lorraine Maikis (Merrill Lynch): I just wanted to touch on the product inflation that you are starting to see for ’09. Can you quantify the magnitude of that, and can you also talk about your strategy on how to handle that? Do you expect to continue to raise prices or take some quality out of the product, or just take a margin hit?
Mike Nuzzo: I can’t give you a lot of detail on the product inflation issues that we are seeing in 2009, and as we get closer and we get into the back half of the year. But what I do want to emphasize is in the discussion about price increases, we are focused on two things - one, we are focused on building and elevating the quality level of the merchandise and two, we are paying very close attention to the cost structure of the merchandise and using those two elements to base our strategy for price increases. The third piece of that is how our brands are positioned and just long-term brand positioning by category.
Christine Chen (Needham & Company): Your knit-tops business has been lagging other categories for some time now and some of the comments have been that there is no fashion newness. What are you doing to address that, maybe for the holiday season or for Spring?
Mike Nuzzo: The only thing I will say about the newness issue is I don’t know that there is a trend out there that we are missing the mark on and that somebody else is doing exceptionally well in the women’s fashion knit-top business. It’s been an industry trend throughout the season and we are focused literally every week on making sure that we are driving that side of the business and that we are driving quality in that business with each new update that you see.
Jennifer Black (Jennifer Black & Associates): I’m curious if you are gaining leverage with the landlords with leases on your new stores as well as your lease renewals.
Mike Nuzzo: The answer to that question is yes.
Kimberly Greenberger (Citigroup): It strikes me that not just in the knit-top category but across the assortment, there’s a lot of repetition in the fashion and in the absence of a broad-brushed macro trend, are you having your internal trend people go out and look at some things, look at different fashion trends that are going on around the globe, or what is it that you are doing in the absence of an overriding macro fashion trend to help drive your assortment forward?
Mike Nuzzo: I don’t know that it’s anything different than we have done quite effectively for a number of years. We’ve got conceptual design offices in London. We’ve got a pretty strong conceptual design presence in Asia and we have them on the West Coast and in New York City, and so just continuing to do what we have done always in terms of looking for what’s next and what is driving the fashion. But everything we talk about in terms of fashion, we always get back to how is it best interpreted in our brand? And if there’s a fashion trend that might be hot, if it’s really not appropriate for Abercrombie & Fitch in that classic, casual style, we won’t do it and I think that’s part of maintaining our focus on being the brand that we are - premium casual lifestyle.
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