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Abercrombie & Fitch (ANF)

Q3 2010

Earnings Call

November 16, 2010 8:30 a.m. ET


Eric Cerny - Manager, IR

Mike Jeffries - Chairman and CEO

Jonathan Ramsden - EVP and CFO


Evren Kopelman - Wells Fargo

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Good day, and welcome to the Abercrombie & Fitch third quarter earnings results conference call. [Operator Instructions.] At this time, I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny, please go ahead.

Eric Cerny

Good morning and welcome to our third quarter earnings call. Earlier this morning, we released our second quarter sales and earnings, balance sheet, income statement, store opening and closing summary, and an updated financial history. Please feel free to reference these materials available on our website. Also available on our website is an investor presentation, which we will be referring to in our comments during this call.

This call is being recorded and the replay may be accessed through the internet at under the Investors section. Before we begin, I'll 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. 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 as many callers as possible.

As a reminder, the after-tax operating results of Ruehl for 2009 and prior periods are now included in discontinued operations and income statement and related comparisons to prior year therefore generally exclude Ruehl.

Now I'll turn the call over to Mike.

Mike Jeffries

Good morning, everyone. Thank you for joining us. Jonathan will talk to the specifics of the quarter in a moment, but simply put, we are pleased with our performance against our objectives for the quarter and remain very excited about the opportunities ahead of us across all areas of our business. Our domestic business has continued to improve, our international results are outstanding, and our direct to consumer business is posting very strong growth.

We will share more details coming into 2011, but I want to take a few minutes to recap where we stand on our key roadmap objectives to achieve an operating margin of 15% or better, our goal for fiscal 2012. As you'll recall, these include improvements in domestic productivity, including store closures; returning gross margin to historical levels; driving significantly accretive international growth; driving our direct to consumer business through an increased strategic focus; doing all this while maintaining tight control of expenses; and last, fulfilling the potential of Gilly Hicks.

I will start with what appears today to be the most challenging of these objectives, returning our gross margin to historical levels of around 67%. We feel good about the elements of this objective that are under our control, namely benefitting from a growing international component of our business and turning the corner on domestic AURs. However, cost pressures from raw materials and labor costs have only increased as we have gone through the year and transportation costs remain at very high levels.

We think it is possible that some of these factors, such as cotton costs, may abate somewhat, but that is not something we can count on. We expect to make progress on gross margin in the first half of 2011 overall. However, for receipts later in the season, costs are escalating significantly and visibility beyond that is limited.

Aside from the gross margin objective, we are positive about the other components of our roadmap objectives. On domestic productivity our objective is to be at 85% or better of 2007 productivity by 2012. We've made solid progress on that this year-to-date, with some strengthening as the year has gone on, and the domestic closures scheduled for this year and next will help.

Beyond that, we will need mid-single-digit increases in same-store sales in each of the next two years. We intend to achieve this by continuing to provide an assortment that is trend right, premium quality, and offers a healthy balance of fashion and basic heritage items. Over the last year, we have become much better at how we deliver fashion right assortments with attractive price points and will continue to improve on this process as we push for sales improvement.

Moving to our international business, we crossed a milestone this quarter with the opening of our first Hollister stores in Spain, one in Madrid and one in Barcelona. Both are running ahead of projections. We also opened our second Hollister store in Germany, in Oberhausen, and early signs are that this will reaffirm the very strong response we saw to our first opening in Germany last year. Meanwhile, our U.K. Hollister store has comped double digits for the quarter and our Italian business got even stronger.

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