The reduction is due to the delay in the opening of the Abercrombie & Fitch Copenhagen flagship and the Abercrombie Fifth Avenue flagship until 2010, and the scaling back of new US mall based stores.
Key questions and answers from the fourth quarter fiscal 2008 earnings call conducted by Abercrombie & Fitch Co. (ANF) on February 13, 2009.
Jeff Klinefelter (Piper Jaffray):
How should we think about your line items on your income statement in particular the S&D in terms of the relationship between the top line?
We can see what happened in 2008, since all of us do have to approach some modeling criteria for ’09 how should we think about the relationship of S&D and your ability to cut that back further or where you’re leverage points are. What’s in that $5 million bucket in Q4?
Jonathan Ramsden: With regard to MG&A expense, we’re very confident that that is going to below 2008 levels because that is directly under our control and doesn’t necessarily vary dollar for dollar with sales. For stores and distribution expenses for any given level of sales we are implementing reductions in that category. It’s tough to give a specific commitment on that because that does in part vary somewhat with sales. We’re very focused on that and for any given level of sales we believe that expense will be lower than it would have been previously.
Brian Logan: In regard to the other income line, the amount that you’re seeing in the fourth quarter primarily relates to gift card. This is gift cards that have been deemed that redemption will be remote and its something that we do on a quarterly basis. The fourth quarter tended to be a little bigger because historically that’s when a large percentage of gift cards are generally purchased.
Dana Telsey (Telsey Advisory Group):
As you think about each brand how are you thinking about positioning of the brand whether its with IMU in this environment and the potential mark down rate that could occur is there any different way you’re looking at it or thinking about it whether its pricing, whether its styling and also flow of product?
Mike Jeffries: Protecting the brands is our priority in this environment as in any. We are working very hard for better quality and in fact better trend. We’re starting to see some better trend product in women’s tops which has been a real priority of ours. It doesn’t look as if we’re going to have a major trend to report in women’s tops but there are a number of different things happening. We hope to see more improvement in that assortment as the season proceeds.
We continue to push for high IMU. We have looked at pricing particularly in the Hollister and the Kids brands and have reduced some of those retails. Those actions will produced some IMU pressure for the first half of the year. We think it is the right thing to do for those brands. However, we will continue to operate at good levels of gross margin.
Christine Chen (Needham & Company):
Talk about the learning’s that you’ve had from Gilly Hicks now that it’s been open for about a year, what’s working and what you would like to improve on?
Mike Jeffries: We are very pleased with the performance of Gilly Hicks; it’s too early to report on any details there. As we have said in prior calls the at home portion of the business opened and is continually successful in the business. The areas that we have to build as a mature business are bras and underwear. We have made more progress in bras establishing the base of the business. We’re very pleased with where we are on the growth curve there. We’re starting to see improvement in underwear and we think we understand that business better than we have.
Having said that, we’re very comfortable that both of those businesses are going to reach the levels that they need to on an average store basis in the time we’ve given them. The response to Gilly has been phenomenal from a consumer point of view, from landlord point of view. From an industry point of view there is in fact a conversation in the intimate apparel industry about the Gilly effect on intimate apparel.
Janet Kloppenburg (JJK Research):
Could you talk about the change in the expense structure given that the Abercrombie store and the Copenhagen store will not be opened this year what effect that would have? With respect to your cost savings implementations in the fourth quarter were you able to attack all you wanted to or should we look for a bigger emphasis on cost reductions as you go through ’09? Could you highlight how some of the new women’s tops were performing?
Jonathan Ramsden: What we did in the fourth quarter represented the savings that we could get to fairly immediately. I’m not going to say painlessly because when you let people go its never painless. They were savings, a lot of them were in MG&A they were things we were able to get to fairly quickly.
Going forward, I think the exercise is going to be one of looking more structurally at how we’re set up and we’re going to be kicking off that second phase pretty much immediately. The effect of that is probably going to be harder to quantify and they’re going to come in over the timeframe. We’re looking at it from the perspective of saying what’s it going to take without counting on a strong economic recovery to get back to what we consider to be acceptable operating margins. That’s likely to require some fairly significant changes in our structural cost base.
Brian Logan: From the pre-opening rent obviously with the number of flagships that we have in line to open up in 2009 which includes Milan and Tokyo in addition to that we have the Kids Fifth Avenue, Copenhagen which are now scheduled to open in 2010, then the Paris location. We will be incurring some incremental pre-opening rent charges this year. This would be incremental to what we incurred in 2008 of roughly about $20 million next year.
Mike Jeffries: We are pushing newness as hard as we can. You will see more and more newness as spring and summer proceeds. There are hits in the stock but it doesn’t look to us as if there’s going to be one major message that’s going to take us through the season, its going to be a series of smaller hits. That’s how our inventories are planned. We have a broader assortment in women’s tops then we’ve ever had and expect to see that through the year. We are operating on shorter lead times then we have. Running a very reactive and we think fashion right business.
Paul Lejeuz (Credit Suisse):
Can you share with us what you think is the Hollister opportunity in the UK long term? What are thinking in terms of that business extending to the rest of Europe at some point? Also wondering if you could share with us your latest thoughts on RUEHL and perhaps quantify how much it did drag you down in 2008.
Mike Jeffries: The Hollister UK opportunity as we’re seeing it right now is 30 locations in the UK. We are proceeding with that kind of a plan. The interesting conversation is the opportunity in Europe. We are negotiating for European sights. We believe that the brand has to be tested in other countries.
However, we do believe that the exciting thing about the UK performance of Hollister, it was terrific and those stores look just like stores in Columbus, Ohio or Omaha. We sell the same experience, the same merchandise to customers that are virtually the same and we believe we’re going to be able to take that around the world.
Brian Logan: Generally we think of our brands as one brand and it’s not a number we like to publish. All I can say is that from a store contribution perspective RUEHL drag in 2008 was slightly more than it was in 2007. We had benefits in our gross margin rate and some of our operating expenses which was then offset by the decline in the sales.
