Abercrombie & Fitch's CEO Discusses Q3 2011 Results - Earnings Call Transcript

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Abercrombie & Fitch (ANF)

Q3 2011 Earnings Call

November 16, 2011 8:30 am ET

Executives

Eric Cerny - Manager of Investor Relations

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

Michael S. Jeffries - Chairman, Chief Executive Officer and Member of Executive Committee

Analysts

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Stacy W. Pak - Barclays Capital, Research Division

Jeff Black - Citigroup Inc, Research Division

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Brian X Tunick - JP Morgan Chase & Co, Research Division

Michelle Tan - Goldman Sachs Group Inc., Research Division

Omar Saad - ISI Group Inc., Research Division

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

David J. Glick - Buckingham Research Group, Inc.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Lizabeth Dunn - Macquarie Research

Kimberly C. Greenberger - Morgan Stanley, Research Division

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Christine Chen - Needham & Company, LLC, Research Division

Randal J. Konik - Jefferies & Company, Inc., Research Division

Janet Kloppenburg - JJK Research

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

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

Eric Cerny

Good morning, and welcome to our third quarter earnings call. Earlier today, we released our third 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 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.

Joining me today on the call are Mike Jeffries and Jonathan Ramsden. 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. After our prepared comments, we will be available to take your questions for as long as time permits.

I'll turn the call over to Mike.

Michael S. Jeffries

Good morning, everyone. Thank you for joining us today. I ended my comments on our last earnings call by saying that there were greater challenges and uncertainty in the back half of the year, but that we remain confident in our strategy and in the underlying strengths of our brands.

Clearly, our results for the third quarter were impacted by some of those challenges. Equally, however, our confidence in our long-term strategy and the strength of our brands and in our ability to create long-term shareholder value, in particular through our international expansion, is unchanged.

So I would like to start this call by being very clear on 2 points: First, that our strategy is unchanged; second, that our financial objectives are unchanged. As you know, our strategic objective is to leverage the international appeal of our iconic brands to build a highly profitable, sustainable, global business. This means continuing to open highly profitable stores in Europe and beyond that, in Asia and other new markets. In the U.S., it means driving productivity back toward peak levels while closing underperforming and nonbrand-right stores. In direct-to-consumer, it means investing to drive greater penetration, particularly internationally, in this very profitable channel.

With that, I would like to make some specific comments on our performance during the quarter. First, our European business. While slowly -- while slowing somewhat during the quarter, it is very robust and healthy by any objective measure. If anyone doubts that, I strongly encourage you to visit London, Milan or Paris to see firsthand what is happening in our flagship stores there or to visit our recently opened stores in Dublin, Paris, at the Wijnegem Shopping Center in Antwerp or at the Gallerian mall in Stockholm. In each of which, we are annualizing at over $10 million.

Our London flagship remains highly profitable, second only to A&F Fifth Avenue in overall profit contribution but with a higher four-wall margin. The Milan and Paris flagships are not far behind. And just 2 weeks ago, we had another very successful flagship opening in Madrid.

Just 3 years after we opened our first Hollister store in Europe, we now have 50 stores annualizing at well over $0.5 billion.

In the U.K., our most mature European market for Hollister, four-wall margins were very strong while we continue to comp positively and opened 5 new stores during the quarter. We are proud of what we have accomplished in just a few short years in Europe, but more important, we are excited about the opportunity ahead of us.

We are not immune to the macroeconomic environment, so we demand high profitability levels from our new stores based on conservative assumptions, and this underpins our belief in the long-term sustainability of our brands.

If anyone is inclined to believe that a softening of our business in Europe, this quarter, in the face of severe macroeconomic headwinds is a major issue for our model, frankly, I think they are missing the forest for the trees.

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