Abercrombie & Fitch Company (ANF)

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Abercrombie & Fitch (ANF)

Q4 2011 Earnings Call

February 15, 2012 8:30 am ET

Executives

Eric Cerny - Manager of Investor Relations

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

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

Analysts

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

Janet Kloppenburg

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

Michelle Tan - Goldman Sachs Group Inc., Research Division

Lizabeth Dunn - Macquarie Research

Stacy W. Pak - Barclays Capital, Research Division

Christine Chen - Needham & Company, LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

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

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

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

Jeff Black - Citigroup Inc, Research Division

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

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

Jennifer Black

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Marni Shapiro - The Retail Tracker

Presentation

Operator

Good day, and welcome to the Abercrombie & Fitch Fourth Quarter Earning 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.

Eric Cerny

Thank you, good morning, and welcome to our Fourth Quarter Earnings Call. Earlier today, we released our fourth quarter sales and earnings, income statement, balance sheet, store opening and closing summary, reconciliation of GAAP to non-GAAP financial measures 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. Joining me today on the call are Mike Jeffries and Jonathan Ramsden. We'll 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. Now I'll turn the call over to Mike.

Michael S. Jeffries

Good morning, everyone. Thank you for joining us today. The fourth quarter results we announced today were below our expectations. The difficult macroeconomic environment we saw in the third quarter continued into the fourth quarter and was exacerbated by all-time high cotton costs, unusually warm weather, both in the U.S. and in Europe, and a highly aggressive promotional environment.

In this environment, we were unable to sustain higher AURs and therefore, unable to offset the increases in AUC we saw both from cotton cost increases and an elevated mix we built into our fall and winter assortment. These effects put pressure on our selling margin beyond what we anticipated at the beginning of the quarter, and resulted additional markdowns on higher carryover inventory. These effects were most significant in fleece, sweaters and outerwear.

As we look to 2012, and particularly the back half of the year, we are seeing a significant reversal in that AUC trend. In addition, while our results for the fourth quarter fell below our expectations overall, there are a number of indicators that give us confidence that we are on the right track strategically. The first point is the biggest takeaway today. The overall economics of our business in Europe remain very strong. Our top line in Europe grew 85% for the quarter.

Hollister Europe, which now represents approximately 2/3 of our store business in Europe, continued to comp positively despite a very difficult environment and despite some cannibalization of existing stores by new store openings. Those new stores performed in-line with expectations and ahead of original approved volumes. And overall, four-wall margins in Europe remained above 30%.

Second, our DTC business was very strong for the quarter. This was the case, both for the U.S. and for our international DTC business, which showed strong sequential acceleration from Q3 to Q4, reflecting the growing awareness of our brands across Europe and beyond.

Third, we are pleased with the start we've made in China over the past few months. It is still very early days, but we have seen a steady increase in momentum. We will open our third mall-based store in China in March, and expect more Hollister openings during 2012. In addition, we are working toward an A&F flagship there opening in 2013. Our overall business with Chinese customers is very modest today, including our U.S. and European tourist stores. And we see growing awareness and familiarity with our brands in China as a major opportunity.

During the quarter, we addressed some underperforming areas of our business, as well as other real estate issues. This included closing 68 U.S. stores, bringing our total closures for the year to 71, downsizing our Ginza and Hollister SoHo stores and converting the Fukuoka store to an outlet, as we work to sublet the space.

Overall, we believe that the key elements of our long-term strategy are on the right track. These include: One, continue to provide high-quality trend-right merchandise and a compelling and differentiated store experience; two, continue to close underperforming U.S. chain stores; three, invest in our DTC business, particularly the International business; four, continue with our highly-profitable international real estate plan; and five, continue to seek ways to operate more efficiently and leverage expenses.

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