Abercrombie & Fitch Executive Insights: Economic Headwinds and Europe’s Woes

On Wednesday, Abercrombie & Fitch Company Class A (NYSE:ANF) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Economic Headwinds

Jeffrey Klinefelter – Piper Jaffray: Few questions this morning. One on Europe, Mike and Jonathan, I’m wondering if you could just give a little bit more color on what you’re experiencing recognizing the headwinds, the economic headwinds. And on a sequential basis, between Hollister and your flags particularly the key to London, Milan and any updates on Asia or Tokyo? Then, with respect to Hollister specifically, it seems like that’s really where more of the sequential deterioration has come from, could you talk about that and then how you’re viewing traffic trends into the second half of the year for those businesses? Then, just a couple of housekeeping issues, Jonathan tax rate, are you forecasting the tax rate from Q1 through the balance of the year in your guidance and then also inventory units versus dollars, thank you.

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Jonathan E. Ramsden – EVP and CFO: Maybe I’ll start with the last easy part. Jeff, the tax rate guidance for the year is the same as we’ve given out in February which was slightly below 35% for the full year. The Q1 rate has just distorted because of the low absolute level of operating income and some of the discreet period items so that isn’t reflective of what we would anticipate for the full year. I think just going back to your question on trends, clearly the overall environment in Europe and the trending of business was tougher in this quarter than it was in the fourth quarter, Hollister did move, from having comp positively to comping negatively. Having said that, we’re up against very strong comps in the first couple of quarters of last year I think 20% for Hollister Europe, although relatively few stores in the comp base so we were slightly against that. As we said in the guidance for the year, we are basically assuming run rate for the trend in Q1 continues on a full year basis, so we are projecting down mid single-digit comps for the full year. As we said, that doesn’t allow for any potential further deterioration of the trend but it also doesn’t allow any benefit for lapping of the sequential easier compare as we get into the later part of the year.

Jeffrey Klinefelter – Piper Jaffray: I guess I’m curious about any changes that you’re observing in terms of overall competitive promotional cadence, you mentioned cannibalization in terms of impacting your comps, although you also said that you’ve been factoring in lot of these trends in your modeling for new stores, I think that’s probably the greatest concern that people would have is, what is factored in in terms of top line tolerance in stress testing these new stores. So I was just wondering if you could share a little bit about the environment that you’re observing and then also what kind of downside protection you have in your model?

Jonathan E. Ramsden – EVP and CFO: I think the key point Jeff is, as Mike said in his comments, when we open new stores, we want to be confident that we can hit that 30% four-wall margin even after allowing for the effect of cannibalization of other stores. So, we take that into account when we look at those stores and we put a conservative volume on one that believe is conservative and as of today, as we are opening new stores, we are looking at volumes based on the current trend of the business. So, the key point remains that we want to be opening stores that incrementally are delivering a 30% margin on a conservative volume figure. As Mike said, if you look at great majority of our stores or (indiscernible) look at our stores in aggregate in the majority of stores today they are operating above that 30% four-wall margin.

Michael S. Jeffries – Chairman and CEO: We are finding Jeff that we are probably our biggest competitor internally in Europe.

European’s Woes

Dana Telsey – Telsey Advisory Group: By the way I was in Paris on Saturday, and it looks terrific, want to just get some more color. As you think about Europe, macro versus cannibalization, how do you think about the slicing and dicing of the environment and just cannibalization? Also, as you think about inventory levels, how do you see inventories progressing, and is the inventories more U.S. or international? Just lastly on prices, I think you are going to adjust prices in Europe, have they been adjusted or what do you see there?

Michael S. Jeffries – Chairman and CEO: Macro versus cannibalization; I think the biggest factor in the down trend in Europe is clearly macro. Cannibalization would come second, and then I think the third issue is the incredible opening rate and the fact that it was some of these rates weren’t sustainable. We are, as Jonathan said, planning cannibalization into our future model and it is a factor. We are planning for the macro environment to stay the way it is, we’re not planning for it to get worst but our assumption is that it’s going to stay the same for the rest of the year. You want to talk about inventory levels?

Jonathan E. Ramsden – EVP and CFO: Sure. In terms of inventory Dana, we do expect to the rate of growth to moderate significantly at the end of Q2. Part of what you see at the end of Q1 is essentially a timing effect. We have a lot of the spring goods sitting there today and as we look to the balance of the year, we are planning based on that negative mid single-digit likes assumption in terms of how we’re planning inventory through the end of the year. So, on that basis, we have reduced receipts over the last couple of months on a full year basis, although, that had limited impact on where we were at the end of Q1.

Michael S. Jeffries – Chairman and CEO: The last part of the question, pricing, in Europe, we are slightly above last year, but the spring season will be slightly below for the fall season.