Abercrombie & Fitch Co. (ANF: chart)
Q1 2009 Earnings Call Transcript
May 15, 2009 8:30 a.m. ET

Executives

Eric Cerny - Manager of Investor Relations
Mike Jeffries – Chairman and Chief Executive Officer
Jonathan Ramsden - Chief Financial Officer
Brian Logan – Principal Accounting Officer

Analysts

Jeff Klinefelter - Piper Jaffray
Brian Tunick – JP Morgan
Liz Dunn - Thomas Weisel Partners
Michele Tan – Goldman Sachs
Jeff Black – Barclays Capital
Paul Lejeuz - Credit Suisse
Janet Kloppenburg - JJK Research
Adrienne Tennant – FBR Capital Markets
Barbara Wyckoff - Guerrilla Capital Management
Dana Telsey - Telsey Advisory Group
Christine Chen - Needham & Company
Robin Murchison – SunTrust Robinson Humphrey
Lorraine Hutchison – Bank of America/Merrill Lynch
Kimberly Greenberger – Citigroup
John Morris - Bank of Montreal
Linda Tsai – MKM Partners
Richard Jaffe – Stifel Nicolaus
Michelle Clark – Morgan Stanley
Jennifer Black - Jennifer Black & Associates
Roxanne Meyer - UBS
Marni Shapiro – The Retail Tracker

Presentation

Operator

Good day everyone and welcome to the Abercrombie & Fitch first quarter earnings results conference call. (Operator Instructions) Today’s conference is being recorded. If you have a question at any time during the conference you may signal us by pressing ‘*1’ on your touchtone telephone. We will open the call to take your questions at the end of the presentation. We ask that you limit yourself to one question during the question-and-answer session. At this time I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny please go ahead sir.

Eric Cerny – Manager of Investor Relations

Good morning and welcome to our first quarter earnings call. Earlier this morning we released our first quarter sales and earnings, balance sheet, statement of operations and an updated financial history. Please feel free to reference these materials available on our website. The figures in these materials, as well as comments we will make this morning regarding our financial results for the first quarter ended May 2, 2009, do not include the effect of a non-cash impairment charge, currently being determined, which is to be recorded in the first quarter in connection with a strategic review of the RUEHL business and will be discussed in greater length later in our prepared comments.

This call is being recorded and the replay may be accessed through the Internet at abercrombie.com. Before we begin, I remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Today’s earnings call will be limited to one hour. We will begin the call with a few brief remarks from Mike, followed by a review of the financial performance for the quarter from Jonathan Ramsden and Brian Logan. After our prepared comments we will be available to take your questions for as long as time permits. Please limit yourself to one question so that we can speak with any many callers as possible, now, to Mike.

Mike Jeffries – Chief Executive Officer

Good morning everyone. Thank you for joining us today. The first quarter was clearly a difficult one for us. With the challenging economic environment, we continue to face a headwind where the consumer is reluctant to spend on premium brands. There is a price consciousness dictating shoppers'' purchases today, unlike anything I have seen before. We''ve spent years building our brands to compete on quality, aspiration, and the unique store experience, not on price. There are also fashion headwinds. We are currently in a cycle that lacks a dominant trend in the female business, trends that appear to have some traction but not the long-term trend of classic, casual, preppy, all-American sportswear that is core to our heritage. Our belief is that all of these phenomena are temporary. However, we are approaching the current conditions with a conservative mindset until we see a clear improvement. We see 2009 as a transitional year and are focusing our efforts on laying the groundwork for our long-term success and prosperity.

We took a number of steps in this direction during the first quarter. First, we pushed forward with our international expansion efforts and continue to be more than excited about the extraordinary opportunity this represents. The future is tied to our international expansion. Second, there are actions we have taken to improve product and pricing. We are actively planning for meaningful reductions in our average unit retails, while remaining committed to protecting our initial markup percentage and providing quality product. We are pleased with the feedback from our customers regarding newness in fashion currently being offered in our assortment and we look for this to continue to improve in summer and back-to-school. We believe we missed some female fashion trends in the first quarter, but as you can see, we are addressing it. We continue to believe that we can take the trends that are doing well in female fashion and turn them into our handwriting.

Third, we made significant changes at our home office that will enable us to operate more efficiently going forward and will also result in significant cost savings. These were difficult decisions but they were made with an eye to the future. As we have said before, examining our cost structure is an ongoing effort. Jonathan will provide more on this in a moment. We expect to reap the fruits of all of these efforts, partly in 2009 but more significantly in 2010 and beyond. In the meantime, our long-term priorities will continue to be concentrated around protecting the brands, preserving cash, and growing internationally in a seasoned, disciplined and controlled way.

With that, I will hand the call over to Jonathan but will be available to answer your questions at the end our prepared comments, Jonathan.

Jonathan Ramsden – Chief Financial Officer

Thank you Mike and good morning everyone. While we are disappointed with the loss in the first quarter, as Mike said, we are taking steps to better position us to achieve stronger results going forward. For the first quarter, net sales decreased 24% to $612.0 million while comp sales decreased 30%. Our gross margin rate for the quarter was 63.3%, down 350 basis points, reflecting a higher markdown rate for the quarter. We continue to test and evaluate our approach to markdowns but anticipate continued pressure on the gross margin rate for 2009 as a result of markdowns. As you know, over the last six months we have been focused on improving our cost structure, both for 2009 and the longer-term. For the purpose of this exercise we have been using what we believe is a conservative view of the medium-term domestic sales levels and evaluating all of the actions we can take to improve our expense structure. This process is still ongoing, although we have made progress in a number of areas.

As Mike mentioned, we implemented changes at our home office that will enable us to operate more efficiently in the future. These changes are reflected in our MG&A expense for the quarter, which was $89.5 million, down 14.5% versus last year''s expense of $104.7 million. The reduction in MG&A includes, savings related to employee compensation and benefits, travel, outside services, and marketing. The annualized effect of net home office headcount reduction since January, based at a base salary only, is approximately $13.0 million and approximately $20.0 million relative to October 2008. Included in MG&A for the quarter is a benefit of $1.1 million, arising from the net effect of a legal settlement, severance expense, and certain home office asset write-offs. We expect a comparable or slightly higher percentage reduction in MG&A expense in the second quarter relative to the prior year. We expect that the percentage reduction in MG&A will moderate in the latter half of the year as we begin to anniversary 2008 savings and potentially restore incentive and related accruals, if warranted by improved performance.

Within stores and distribution expense, occupancy costs, comprising rent, depreciation, and other related charges, represented about 47% of total stores and distribution expense and were up approximately 15% versus prior year. This is a significant component of our cost base that at least in the short term, is largely independent of same store sales levels.