Abercrombie & Fitch Company (ANF)

ANF 
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Abercrombie & Fitch (ANF)

Q1 2011 Earnings Call

May 18, 2011 8:30 am ET

Executives

Eric Cerny - Manager of Investor Relations

Brian Logan - Vice President of Finance and Controller

Jonathan Ramsden - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Dorothy Lakner - Caris & Company

Carla White

Dana Telsey - Telsey Advisory Group

Jeff Black - Citigroup Inc

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Christine Chen - Needham & Company, LLC

Randal Konik - Jefferies & Company, Inc.

Betty Chen - Wedbush Securities Inc.

Adrienne Tennant - Janney Montgomery Scott LLC

Paul Lejuez - Nomura Securities Co. Ltd.

Michelle Tan - Goldman Sachs Group Inc.

Brian Tunick - JP Morgan Chase & Co

Pamela Quintiliano - Oppenheimer & Co. Inc.

Barbara Wyckoff - CLSA Asia-Pacific Markets

John Morris - BMO Capital Markets U.S.

Jeffrey Klinefelter - Piper Jaffray Companies

Kimberly Greenberger - Morgan Stanley

Evren Kopelman - Wells Fargo Securities, LLC

Lorraine Hutchinson - BofA Merrill Lynch

Janet Kloppenburg - JJK Research

Presentation

Operator

Good day, and welcome to the Abercrombie & Fitch First Quarter Earnings Results Conference Call. Today's conference is being recorded. [Operator Instructions] And at this time, I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny, please go ahead, sir.

Eric Cerny

Thank you. Good morning, and welcome to our first quarter earnings call. Earlier today, we released our first quarter sales and earnings, income statement, balance sheet, 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 abercrombie.com under the Investors section.

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 are speaking to you today from Paris, where we are excited to open our Abercrombie & Fitch flagship on des Champs-Élysées tomorrow at 10 a.m. Joining me today on the call are Jonathan Ramsden, Brian Logan, and Rocky Robins. We will begin the call with the review of the financial performance for the quarter from Jonathan and Brian. After Our prepared comments, we'll be available to take your questions for as long as time permits. Now to Jonathan.

Jonathan Ramsden

Good morning, everyone, and good afternoon to those of you here in Paris. Thank you for joining us today. Mike is not able to be with us today since he is working on the final preparations for our flagship opening here in Paris tomorrow morning. We do expect him to join our earnings call in August. I want to start with an overall comments on the first quarter, after which Brian will provide some additional color. As Mike said in our press release this morning, we are pleased with our results for the quarter, which exceeded our internal objectives, and gives us strong start to achieving our goals for the year. With regard to the top line, for the first quarter, the company's net sales increased to 22% to approximately $837 million. Total domestic sales, including direct-to-consumer, were up 13%, while total international sales were up 64%.

Overall, DC sales including shipping and handling were up 32%. Comparable store sales were up 10% for the quarter, with Europe the strongest region. Our gross margin rate for the quarter was 65%, representing a 230 basis points improvement from last year's gross margin rate of 62.7%. AUR was approximately flat for the quarter, with a benefiting gross margin being driven primarily by a lower average unit cost, favorable international mix, including foreign currency impacts and other gross margin items, such as a freight benefit. Our operating income for the quarter was $38.7 million versus a loss of $18.7 million a year ago. Operating margin increased 730 basis points, of which 230 basis point was due to gross margin, and 500 basis points was due to expense leverage. A summary of our operating expenses for the quarter is on Page 5 of the investor presentation.

MG&A for the quarter was $107.7 million, up 11% versus last year's expense of $96.6 million. The increase was due to increases in comp and benefits, marketing and other expense. MG&A in the quarter included equity and incentive comp of $14.4 million versus $10.4 million last year. Stores in distribution expense of approximately $399 million for the quarter included store occupancy costs of approximately $167 million. All other stores and distribution expense represented 27.7% of sales, somewhat better than projected at the beginning of the quarter. As indicated at the beginning of the quarter, these expenses also included approximately $4 million of additional depreciation related to our DC consolidation.

Turning to the balance sheet. We ended the quarter with total inventory of cost up 13% versus a year ago or up 7%, excluding in-transit. We ended the quarter with approximately $742 million in cash and cash equivalents, compared to approximately $591 million last year. During the quarter, we repurchased approximately 429,000 shares at an average cost of $59.40, bringing our total repurchases over the last 3 quarters to approximately 2 million shares at an average cost of $50.55.

Turning to the outlook for the second quarter and referencing Page 9 of the investor presentation, we are targeting mid-single digit same-store sales growth for the quarter, and expect this to be augmented by continued strong growth from non-comp stores and DTC. We continue to expect the gross margin rate for the spring season as a whole, comprising the first and second quarters to be approximately flat to slightly up compared to last year, meaning that the second quarter gross margin rate will be down.

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