At this time, I'd like to turn the conference over to Brian Logan. Mr.
Logan, please go ahead.
Thank you. Good morning and welcome to our Q4 earnings call. Earlier this morning, we released our Q4 sales and earnings, income statement, balance sheet, store opening and closing summary and an updated financial history. Please feel free to reference these materials, which are 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.
Today's earnings call is being recorded and a replay may be accessed through the Internet at abercrombie.com under the Investors section. Joining me today are Arthur Martinez, Executive Chairman Jonathan Ramzan, Chief Operating Officer Joanne Kavoiserat, Chief Financial Officer and Fran Horowitz, President and Chief Merchandising Officer. After our prepared remarks, we will be available to take your questions for as long as time permits. We ask you to please limit yourself to one question so that we can speak to as many callers as possible. 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.
With that, I hand the call over to Arthur for some opening remarks.
Thank you, Brian, and good morning, everyone, and thanks for being with us today. Our steady improvement throughout the year culminated in a return to positive comp sales in the 4th quarter, our first since Q3 of 2012. That, coupled with higher average unit retails, drove higher gross margin and resulted in a meaningful improvement in adjusted operating income in constant currency for the quarter. Inventory continues to be well managed and we generated strong free cash flow for the year. These results achieved against the backdrop of a very challenging environment underscore the significant progress we made across all of our strategic initiatives throughout the year and continue to validate that we are on the right course.
During the year, we continued to lay the foundation for future growth and profitability. We completed our transition to a branded structure and strengthened our teams and core processes. We measurably improved our customers' experience, both in store and online. We also took important steps in our evolution toward a better balanced and trend right assortment. This progress is the direct result of the hard work of our teams and I thank them for their efforts.
While we accomplished a lot, we are far from done. There is still much more work to do to maintain our momentum and realize the full potential of our brands, particularly in our efforts to clearly define and convey our brand positioning. While we have seen strong conversion gains through 2015, these refined brand positionings will be important in driving traffic. As we look ahead to 2016, we expect market conditions to remain challenging, but we believe our ongoing focus on delivering customer centric shopping experiences and compelling assortments based on clearly defined brand positions will lead to continued improvements. Our ongoing investment in direct to consumer closure program will also support our progress.
Now let me hand it over to Jonathan to provide additional comments regarding our strategic initiatives.
Thanks, Arthur, and good morning, everyone. As Arthur mentioned, we were pleased to deliver solid results for the Q4 in what remains a difficult environment. Our comp sales metric turned positive during the quarter for the first time since 2012 and we delivered meaningful adjusted EBIT growth on a constant currency basis for the 3rd consecutive quarter. Of particular note and as reflected in the charts on Pages 67 of our investor presentation, we achieved sequential quarterly comp sales trend improvement in the presentation, we achieved sequential quarterly comp sales trend improvement across all brands and geographies throughout the year. Our improved results reflect strong progress across our 6 strategic areas of focus, which as you know include being customer centric, developing compelling and differentiated assortments, defining clear positionings for our brands, optimizing our brand reach and channel performance, continuing to improve efficiency and reduce expense, and ensuring we are organized to win.
Customer centricity means putting the customer at the center of everything that we do. During 2015, we made numerous changes to make the shopping experience for our customer easier. We rolled out a new Hollister prototype store, is performing very well with traffic and sales up double digits relative to the control group. We will continue this rollout in 2016. On the digital side, we continue to enhance our mobile capabilities with improved site design and upgraded apps.
Mobile now accounts for over 60% of all online traffic and nearly 40% of direct to consumer revenue and continues to experience double digit increases in year over year conversion rates. And our omni channel investments continue to enhance our ability to serve our customers' needs in a seamless manner. Important milestones in the year included expanding ship from store to another 2 90 stores in the U. S. And activating Click and Collect an online returns store in the U.
K. In 2016, we will continue to invest in digital to improve the customer experience, including the rollout of omni channel capabilities outside the U. S. During 2015 we rolled out a number of new tools to enable us to track how our customer is responding to changes in our store experience and merchandise assortment. It is early days for us with these tools but in the meantime the strong conversion gains we saw across channels and geographies validate that many of our customer focused initiatives are gaining traction.
Our efforts to enhance and optimize our brand reach also saw some notable milestones in 2015. We opened 6 new stores in China, including 3 mall based A and F stores. Combined with strong e commerce business, Greater China is now our 4th largest market by sales volume. We opened our first 3 franchise stores in Mexico and grew our wholesale business with ASOS and NEXT to $10,000,000 in revenue. In addition, we launched Fierce in Sephora stores and in select duty free shops through our partnership with Inter Parfums.
Meanwhile, we continue to right size our U. S. Store fleet with 55 closures during the year, bringing our cumulative closures to approximately 3 40 stores for about a third of the fleet over the past 6 years. Importantly, we do not view these closures as a defensive move, but as a proactive one to ensure that we are properly positioned to respond to the dramatic changes in how our customer chooses to shop. In a similar vein, we opened 9 new outlet stores and converted 8 stores to MFO merchandise during the year.
Our strategy in outlets will continue to be measured responding to customer demand in this channel while ensuring an appropriate balance between full price and outlet stores. We continue to build our organization by hiring talented and experienced new leaders across many areas of the company, while promoting members of our existing team to new positions of leadership. We continue to enhance internal accountability and coupled that with spending more time communicating to and hearing back from our associates. Hand in hand with our efforts on continuous profit improvement, we made excellent progress on sustainability during the year through numerous initiatives in our stores and at our home office campus. In addition, we were pleased to expand our partnership with World Vision's Gifts in Kind program to donate merchandise to developing countries and launched a new partnership with Blue Jeans Go Green to recycle worn denim into home insulation.
Overall, our progress in 2015 is the result of the hard work and dedication of our talented associates across the organization. I would like to take this opportunity to thank them all for those efforts. With that, I will hand it over to Joanne to go over our Q4 results.
Thanks, Jonathan, and good morning, everyone. As Jonathan mentioned and also evident in our financial results, the 4th quarter reflected continued improvement on many fronts as our strategic efforts continued to gain traction. Recapping results for the quarter, starting with sales. Net sales for the quarter were $1,113,000,000 up 2% to last year on a constant currency basis. Foreign currency was a continued headwind during the quarter and adversely impacted sales by approximately 3 percentage points or $29,000,000 Total comp sales were up 1% for the quarter.
By brand, comp sales for the quarter were down 2% for Abercrombie and up 4% for Hollister. By category, we continue to see strength in our female tops business where comps remain solidly positive. And while overall male business lags female, the male comp trend continues to move in the right direction, particularly in tops. For the quarter, dresses, accessories and sleepwear also performed well, while cold weather categories of outerwear and sweaters underperformed. By geography, comp sales for the quarter were down 1% in the U.
S. And up 6% in international markets. We continue to see considerable improvement in international markets. In Europe, we saw an acceleration in comp growth driven by the UK and Germany where business was very strong throughout the quarter. In Asia, comps were positive driven by strong performance in China.
Across brands, the direct to consumer and omnichannel business for the quarter grew to approximately 28% of total sales compared to 27% of total sales last year with growth in both U. S. And international markets. Recapping the rest of our results for the quarter on an adjusted non GAAP basis, which excludes items detailed on Page 5 of our investor presentation, gross margin was 60.7%, 100 basis points higher than last year on a constant currency basis. The gross margin growth exceeded our expectations coming into the quarter and was driven by higher average unit retail in the U.
S. As improved assortments drove higher full price selling and a reduction in promotional activity. Stores and distribution expense decreased $11,000,000 from last year due to benefits from foreign currency as well as expense reduction efforts, partially offset by direct to consumer expense. Marketing, general and administrative expense increased $11,000,000 from last year primarily due to higher compensation related expense including severance charges. And as Jonathan mentioned, we delivered operating income growth the quarter on an FX neutral basis.
Adjusted operating income was $121,000,000 up 8% from last year on a constant currency basis. The negative impact from FX on operating income for the quarter was approximately $20,000,000 The effective tax rate for the quarter was 36%. Net income per diluted share was $1.08 compared to $1.15 last year and included the negative year over year impact from FX of approximately $0.23 Recapping our full year results, net sales were $3,519,000,000 compared to $3,744,000,000 last year and included adverse effects from FX of approximately $153,000,000 In addition, full year adjusted operating income was $136,000,000 up 6% versus last year on a constant currency basis. The year over year adverse effect from FX on operating income was approximately $63,000,000 The negative impact from FX was primarily driven by the weakening euro as well as the British pound and Canadian dollar as reflected on Page 9 of the investor presentation. Turning to the balance sheet.
We ended the quarter with $589,000,000 in in cash and cash equivalents and gross borrowings outstanding of $293,000,000 compared to $521,000,000 in cash and cash equivalents and $299,000,000 in borrowing last year. We also ended the quarter with total inventory down 5% compared to last year, reflecting our ongoing discipline in this area. Details of our store openings for the quarter are included on Page 13 of the investor presentation. At the end of the quarter, we operated 7 54 stores in the U. S.
And 178 stores in Canada, Europe, Asia and the Middle East. With regard to our outlook for fiscal 20 16, we expect flat to slightly positive comparable sales, continued headwinds from foreign currency with expected adverse effects on sales of approximately $50,000,000 We expect this along with the temporary closure of Hollister stores for remodel to have a disproportionate adverse impact on the Q2. Our gross margin rate approximately flat to last year's adjusted non GAAP rate of 61.9 percent, but up on a constant currency basis, with average unit costs expected to be up modestly in the first half and down in the second half of the year. Slight leverage in operating expense relative to last year's adjusted non GAAP rate of 58.3%, but with some deleverage in the second quarter related to timing of marketing and other strategic investments. We expect operating income growth over last year on adjusted non GAAP basis more than offsetting the expected $30,000,000 adverse impact from FX.
And as a reminder, the effect from foreign currency is determined by applying fiscal 20 16 forecasted rates to fiscal 2015 results and is net of the year over year impact from hedging. We expect an effective tax rate in the mid to upper 30s and a weighted average diluted share count of approximately 68,000,000 shares, excluding the effect of potential share buybacks. Excluded from our full year outlook, our potential charges such as those related to impairments, store closing and our strategic initiatives. We are targeting capital expenditures in the range of $150,000,000 to $175,000,000 for the full year, which include approximately $70,000,000 for new stores and store updates and continued significant investment of approximately $70,000,000 in direct to consumer, omnichannel and IT to support growth and profit improvement initiatives. In 2016, we expect to complete 60 Hollister store interior remodels through the course of the year, with the majority to be completed by the end of the second quarter.
We also plan to open approximately 15 full price stores, including 10 in international markets, primarily China and 5 in the U. S. And we plan to open approximately 10 new outlet stores, primarily in the U. S. In addition, we anticipate closing approximately 60 stores in the U.
S. During 20 16 through natural lease expirations. I'll now hand it over to Fran to provide more color around brand performance and strategic initiatives. Fran? Thank you, Joanne, and good morning, everyone.
First of all, I am very excited about the potential of both the Abercrombie and Hollister brands, and I look forward to working with the team in both organizations. Both brands made important progress during 2015. This was the result of the hard work and dedication of each of our teams and their enthusiastic focus on delivering for our customers. As you've heard from Arthur and Jonathan, our comps show that our customers have responded well to the work we have done to evolve our offerings and improve their shopping experience. My goal for 2016 is to build on the success of Hollister and accelerate our recovery at Abercrombie, which has moved slower than we would have liked.
We believe our continued progress will be fueled among other things by the launch of new brand positioning for both Abercrombie and Hollister. In an intensive effort over the past 6 months, we have mapped out the core beliefs and convictions that drive each brand and the DNA of the brand that supports those beliefs and convictions. We are now working on the communication strategies surrounding these brand positioning and expect that to roll out over the course of this year. Moving back to a review of our 2015 performance, we were encouraged by a return to positive comp growth in the 4th quarter and that inventory was well managed. For Hollister comp sales were up 4% for the quarter continuing to trend sequential quarterly comp sales improvement.
By geography, Hollister again delivered positive comp sales in each of our key volume regions of the U. S, Europe and China. In the U. S, we were able to drive positive comps while also generating higher AUR as we continue to reduce our promotional depth and frequency. In Europe, comps were particularly strong over the Black Friday weekend and in China, we continue to see solid growth particularly online.
By category, Hollister continued to see the greatest strength in the girls' tops business driven by ongoing strength in layering and shirtings. Girls' accessories and dresses also performed well, while sweaters were weak. On the guide side, we achieved sequential comp improvement from the Q3 driven by strength in our overall tops business. In addition, denim and sweatpants remained strong, while outerwear, graphic keys and pants were weak. Be.
Hollister's improvements reflected our rededication to our customer. We simplified the in store shopping experience with changes in crop lighting, scent and sound. We implemented new store manager training and incentive programs and empowered the teams with improved tools and autonomy to drive greater accountability and customer engagement at the store level. We set a simplified global pricing and promotional model that appropriately positions the brand versus key regional competitors. We developed and tested a fully redesigned store prototype and plan to roll out the new design to about 60 additional Hollister stores for this year with additional stores under consideration.
We launched new mobile apps to improve our digital experience. We worked with our key social media partners to drive innovative customer engagement, which included Hollister becoming the 1st retailer to operate sponsored geo filter with Snapchat and being ranked number 1 retailer in Instagram as published in Adweek. We piloted our Club Cali loyalty program in several markets across the country, which has proved to be successful in driving higher customer identification, retention and sales. As a result, a U. S.
Rollout planned for 2016. We were also thrilled to continue our efforts to raise awareness around anti bullying with Hollister's partnership with Equi Smith during the year. In addition, we implemented significant changes to core processes for the Hollister brand and improve the overall quality, content and aesthetic of our assortment. And we built a global assortment that strikes balance between fashion ovens, quality, value and strengthen our teams with senior level hires across multiple functions. The Abercrombie brand also delivered sequential comp improvement for the Q4, which included positive comps in A&F Women's and International.
By geography, Abercrombie continued to generate comp improvement across each of North America, Europe and Asia, which included positive comps in Canada, the UK and China. By category, we saw strength in our A and F women's business, which turned positive for the quarter and was driven by the top business. Female dresses, accessories and sleepwear categories also performed well, while outerwear and bottoms underperformed. In A and F Male, tops continued to underperform, but we were encouraged by the sequential improvement from Q3. Bottoms also continued to be a better performer, while outerwear was weak.
Similar to Hollister, Abercrombie also took several steps to improve the customer experience such as rolling out new incentive and training programs, making changes to the store experience. On the digital side, we enhanced our customer experience with greater focus on lifestyle marketing, on Sacred Product Presentations, seamless shopping and app development. With regard to evolving the assortment, we augmented the Abercrombie teams with key hires, including new design leads for each of men's and women's. We are excited by the work they're doing with the teams and look forward to delivering their new products over the course of the year. In addition, we executed the rollout of extended sizes for younger ages in our kids business.
Our entire online assortment and half of our in store assortment is now available in sizes for children aged 3 to 6. We also have 35 stores where we have a combined kids merchandise in the A and F adult store. Results have been positive in both new customer acquisition and average transaction value. During 2016, we will continue building the leadership talent for both brands with the appointment of brand president. The brand presidents will each have the privilege of leading an iconic brand and working every day with a talented
group of
people. I would like to thank all of our teams for their energy, enthusiasm and eagerness and for their dedication to moving our brands forward in the coming year. And with that, I will turn it back to Brian.
Thanks, Fran. We will be happy to take your questions. As a reminder, please limit yourself to one question, so we can speak to as many of you as possible. Thank you. Thank you,
Thank you, sir. We'll take our first question from Anna Andreeva with
expect by quarter. I think Joanne you mentioned the bulk of remodel activity at Hollister expected in 2Q. And maybe you guys could talk about what are you seeing across the business this quarter to date? Some of your competitors have called out better weather so far in February.
In terms of sales cadence across the quarters, we won't comment on our current quarter business. It's not our practice to do that. Related to our outlook, the top line sales will be affected, I think I mentioned, by FX not impacting comp, but the top line will be impacted by FX. We see FX throughout the year headwinds throughout the year with the biggest headwind in the 2nd quarter and Q1 and Q3 about even and much less of a headwind in Q4. So from a top line perspective, that's the FX impact.
On a comp perspective, we do expect to remodel and reopen most of the Hollister remodels in the second quarter for back to school and that will put they'll be closed for a period of time during the remodel and that'll put a little bit of pressure on the comp and the top line sales in Q2.
Thanks, guys. Very helpful.
Next we'll go to Randy Konik with Jefferies.
Yes, thanks a lot. I guess a question for Jonathan. Can we just kind of think about the what's the margin recapture opportunity from your perspective? The 4 wall margins of international are higher than the U. S, but obviously all the margins across the globe have come down.
If we kind of back out the FX impact potentially on that, just trying to get a sense of where the margin recapture story could go? I mean, recognizing people try to look at your company relative to others in the space and where their margins are. So just curious there. And then just one for Fran, if possible. Now you're President of the business and looking across both brands, can you just give us some perspective on some of the processes at Hollister that you implemented that you didn't see at Abercrombie division that you're potentially implementing?
And how you see the differences that need to be in the 2 businesses or no differences as it relates to pricing architecture, logo penetration and product focus?
Randy, so let me start with a little bit of context on future margin opportunity. And first of all, I think to the point in your question, it's really important to back out FX in terms of getting a real look at what happened in 'fifteen and what we're projecting to happen in 'sixteen. We are projecting in 'sixteen to have gross margin rate enhancement on a constant currency basis. And that's an opportunity we think will continue to exist going forward. It's likely to be an important part of our overall margin recovery story.
And we also think on an FX neutral basis, again, we can get some expense leverage in 2016 and that we can continue to do that going forward, particularly if we can maintain momentum on the comp line. So I think sitting here today
As I mentioned, we're currently working on defining what those brand positions are and we look forward to sharing that as the year unfolds. From a process perspective, yes, there are some processes that we implemented in Hollister that we'll be applying to the Abercrombie brand. As far as the pricing architecture goes, it will be in lockstep with how we define each of the brands.
Next question.
Next we'll go to Lorraine Hutchinson with Bank of America Merrill Lynch.
Thank you. Good morning. Joanne, could you talk about the key factors that will offset the $30,000,000 of pressure on EBIT, are there a lot more cost to cut at this point and sort of how do you expect to get that operating expense leverage in 2016?
From an operating expense perspective, we do expect leverage partially. We've had a lot of success in our past driven by profit improvement initiative. As you know, dollars 250,000,000 of expense came out of our base. We have continued with our continuous profit improvement initiative, finding and implementing efficiency ideas and expense savings ideas that allow us to invest back into the business. The big puts and takes on OpEx in 2016, expectation for continuous profit improvement and expense efficiencies, but also we're looking at investing back into the business in key areas to drive our growth like DTC and marketing to support the brand positioning.
Thank you.
And next
we'll go to Dorothy Lachner with Topeka Capital Markets.
What backgrounds you found in the new leadership in A and F, what you were looking for there and also what you would be looking for in new brand presidents and if you could share a bit about how you're thinking about brand positioning?
Okay. To start off with regarding the brand presidents, we're looking for leadership, retail leadership with a pretty broad experience and I guess a new modern take on it. And I believe that that is where they're headed. As far as the brand positioning goes, we're actually not ready to share that at this point, but we will as the year unfolds.
Next we'll go to Adrienne Yih with Wolfe Research.
Hi, good morning. This is actually Cody on for Adrian this morning. Thanks for taking my question. Can I just can you guys just discuss the inventory position that you guys have for Q1 and the first half of this year? And just remind us of what the impact and timing, if any impact from the port delays last year were on 1Q and 2Q?
Thank you.
We have managed inventory very well throughout 20 15 and have shown inventory reductions every quarter through 2015. We expect to continue to show discipline in managing inventory. I expect inventory to be down as we manage through 2016 and showing improvement in overall inventory turn. The impact of the port delays last year, we actually had less of an impact, I think, than some of our peers. Our teams did a very nice job managing around that so that there's not a big timing difference year over year.
Next, we'll go to Matthew Boss with JPMorgan.
Hey, good morning. Congrats on a great quarter.
Thank you.
So if we walk through the capital allocation priorities for 2016 and beyond, I think that'd be really helpful. I guess, any investments that we need to consider to support the return to positive comps? And then just the best way to think about any potential capital investments versus just thinking about a return to share repurchase over time?
Yes, Matt. This is Joanne. Our capital allocation philosophy hasn't changed. And as you know, our first priority is to invest back into the business on investments that have the highest risk adjusted return. We maintain a very disciplined approach around that.
I think our CapEx outlook for 20 16 at $150,000,000 to $175,000,000 We are positioning our capital to work for us both in store expansion and new stores as well as supporting ongoing remodels and some of the investments that we see providing a return. So the Hollister remodel would be an example of that, and we plan to roll that out to 60 stores in 2016. Additionally, we are stepping up our funding in behind the DTC effort. We continue to see that as a growth area for our business and had success with the investments we've made to date and continue to put our capital behind DTC, omnichannel and IT. As it relates to the balance of our capital allocation philosophy, we still anticipate returning as a second priority cash back to shareholders through dividend and share repurchases, and that is a conversation and those are actions that we evaluate quarterly based on share price, valuation and liquidity, and it's also the subject of discussion every quarter at our Board meetings.
Great. Good luck.
Thank you.
Next, we'll go to Betty Chen with Mizuho Securities.
Good morning, everyone. Congrats on the nice progress. I was wondering if you can talk a little bit about the bottoms business at both Hollister and A and F. I think in the past you cited denim to be a very strong category for you. Any changes in the Q4?
Any new or washes that might get you excited about denim or other bottoms in 2016? And then when should we expect the men's business, which showed some improvement in Q4 to kind of how should we expect that business to kind of progress in the year?
Thanks. Sure. Hey, Betty, it's Fran. To start off with the bottoms business, we were pleased actually in both brands for the year with our denim business. We've also seen the bottoms business diversify into things such as the fleece business and joggers and that continues.
Stretch was a whole new category for us in our denim for the year and that certainly continues as we move forward. As far as the men's business is concerned, we were happy to see that progress obviously from Q3 to Q4. And our goal and our intent is to continue to see improvement over the course of the year.
And in terms of the new design link plan, when should we expect to see their influences hit the stores?
It's a gradual evolution, Betty.
Erin has been
here a little bit longer than Christina in the women's business, so you'll start to see that probably in the back half of the second quarter. But over the course of the year, you'll see it evolving.
Our next question comes from neelyta Tamingo with Piper Jaffray.
This is actually Kayla Wesser on for Nealey.
I was just wondering if
you guys could talk a little bit more about international pricing, initial pricing in U. K. At both brands. It looks like maybe you guys have taken up the initial pricing. Is that accurate?
And why is that?
No, Taylor, that's not correct. We were pricing about a year ago, and that was in effect for pretty much all of 2015. So you might be seeing individual items where you're seeing a difference, but broadly the ticket strategy for Hollister has been relatively consistent over the past year and there's been a bit of an evolution in A and F, but I'd say not dramatic over the course of 'fifteen.
Just underscore that we started the pricing strategy for Hollister in the first half of the year with certain categories. So by the time we got back to school, it was a complete repositioning, which has been very successful for us. Thanks.
And now we'll go to Simeon Siegel with Nomura Securities.
Thanks. Good morning and congrats on the improvement. So given the improvement at Hollister, can you speak to the profitability of both concepts? I mean, how does the Hollister EBIT rates compare to Abercrombie? And maybe any color on where both are versus their historical peak?
Thanks.
Yes. We typically don't, Simeon, give a lot of color on that. I think our full wall margins in Europe still remain significantly above the U. S, which going back to Randy Connick's question a little bit earlier, we think there's certainly opportunity in the U. S.
To get those margins up. There's a bit of a difference domestically and internationally between the two brands, which we historically haven't got into a lot of color on. But international margins have come down over time, partly because of the impact of taking pricing down that we spoke to a second ago. But as Fran said, we saw a nice response to that in terms of the top line, which has led us to conclude that that was certainly the right move to make. But those international margins still remain very healthy.
We have a very high proportion of our stores, which operate a very healthy full world EBITDA margins. So generally, still a very healthy fleet and the new stores we're opening in China and the Middle East are continuing to do very well in terms of profitability. The U. S. As you know from when we used to report it a couple of years back has had structurally lower fall oil margins for some time, but we do believe there's opportunity to improve those margins going forward.
Okay.
And then sorry if I missed it, but have you said what percent of Q4 sales are generally generated by outerwear?
I don't think we've ever been in that specific. All right.
Thanks a lot guys. Good luck for the year.
Thank you.
Next, we'll go to Oliver Chen with Cowen and Company.
Hi. Thank you. It sounds like you've become a lot more customer centric and focused. I'm just curious about the comment on the tools to measure how customers may be responding to change. Do you have a hypothesis about what you're looking for here and any early examples of how that may impact?
And on the autonomy with store management teams, could you just give us color for the nature of the freedom they're given to help drive comps and margins? And just on omni channel, omni channel sounds like a really nice percentage of mix. Where are you are you feeling like there's a new chapter in terms of that aiding you and driving traffic to the store? Thank you.
So let me start with a couple of those, Oliver. So in terms of the tools we have, we have a number of new tools we've rolled out. I don't think we're really looking for anything in terms of what the outcome of those tools is. What we're looking for is to get a good read on how our customers reacting when they come into the store. Are they having a positive shopping experience?
Are they feeling positive about the brand when they leave the store? And obviously, the same applies online. So it's some customer satisfaction measures, it's some overall brand sentiment measures that we're now just going to be in a much more robust position to track going forward. Since we've rolled out some of those tools relatively recently, we don't have a long enough data period yet start reporting on them. But they're important to us internally so that we can get a clear sense of how our customer is reacting and give us evidence that we're making progress in improving customer experience, customer satisfaction and brand sentiment over time.
At store level, I think we've talked about that a little bit in prior earnings calls. We've given greater autonomy to store managers to move placements within the store. They see something that's doing particularly well in that local store as an example of the types of thing they have influence on today that was less the case in the past. So that would just be one example. And then in terms of omni channel, could you just maybe recap your question there on that piece?
I'm just curious as you become what is the message for becoming more customer centric online in terms of what you may need to do next? And also, will this will you enable us to be like a material driver of helping drive traffic into your stores, kind of leveraging the whole ecosystem? Is there personalization ahead, mobile?
Yes. Well, first of all, I think it's important to note that our DTC and omnichannel business is already a very high percentage. We were up to 28% in the Q4. So we're already very highly penetrated there. It's also a major area of focus for us from an investment standpoint.
A lot of our CapEx dollars over the past couple of years have been going towards omni channel of IT investments, mobile investments that really make that customer experience when they're online or on their phone very positive and over time more and more seamless with the in store experience. So we do believe that's a critical component of our long term strategy. We're going to continue to invest in it. Specifically, we're going to do going forward. We're not ready to talk about today other than the ones we've already spoken to.
But as we said in the prepared remarks, we will be rolling out omni channel capabilities beyond the U. S. Increasingly. But overall, I would just underscore that this is a critical area of focus for us and we think we've come a long way and been very successful here, but we have a big opportunity ahead of us to keep that going.
Next, we'll go to Lindsay Drucker Mann with Goldman Sachs.
Thanks. Good morning, everyone. I wanted to follow-up on the Hollister remodels and just could you confirm, I think that as of the last quarter, you said that you had 15 remodels between the U. S. And Europe.
How many did you end the year with? And as you talk about the 60 for next year, what's the balance in U. S. And Europe? How do we think about the CapEx that you said is going to be going to brick and mortar?
How much of that is towards remodels versus the store openings? And any difference in terms of you talked about the nice double digit improvement in sales and traffic versus the control group for your remodeled stores. Is that about the same in U. S. Versus Europe?
Just any additional color there would be great. Thank you.
Yes. I would say, broadly speaking, your numbers are right. We had a little more than a dozen we have a little more than a dozen stores that we've fully remodeled interior on the interior. We have seen strong returns from those double digit, as you mentioned, traffic likes lifts versus the control group as well as sales lifts, and we're seeing that consistently. And it does give us confidence to continue the rollout.
And the rollout for 2016, it is 60 stores. I think that's a testament. The CapEx split, I don't have the dollar numbers specifically, but we do plan to open 15 new stores and 10 outlet stores. So that's the portion that will be brick and mortar, if you will, and then and the balance will be going to remodels.
Is there any news on an Abercrombie store prototype?
Grant?
Yes, we are in the beginning process of that. We will probably we're looking forward to rolling one out by the end of this year.
Great. Thanks, guys.
Next, we'll go to Brian Tunic with RBC Capital Markets.
Thanks and congrats on the progress as well. It sounds like you're evolving towards being a global brand more so from just a retailer. So curious, what do you think the ultimate size of your store base should look like? And how big could Amazon and Nxt and ASOS be over time? How many franchise locations can you have?
What is your fragrance license impact look like? When does that start to hit the P and L? Just sort of what does the business look like bigger picture a couple of years from now as you evolve towards that global brand? And then the second question, just shorter term, just on some of the AUC comments. We're trying to understand what's happening out there, other retailers calling out the cotton improvement in the first half, and it doesn't sound like you guys are going to see that.
Thanks very much.
Okay, Brian. I think we're going to divide those up. So I'll start with the first couple. No, 8 of them. In terms of store closures, we've been closing 50, 60 a year for several years.
We close over a third of the fleet. As we alluded to in the prepared comments, we broadly see the U. S. That trajectory continuing with a fairly healthy amount of closures in the next few years. I don't think we've ever been ready to say there is a final store count number because it's clearly going to depend on other factors, including our ability to drive improvements in productivity over time that would lead us to keep some stores open.
Internationally, we've had a couple of stores we've closed. But generally speaking, as we alluded to earlier, the profitability profile of the international fleet is very strong and we expect to be continuing to add stores internationally, albeit at a somewhat slower pace than where we were 2 or 3 years ago and focused on a couple of core markets like China and the Middle East. In terms of some of the other revenue streams that your question gets at and our evolution from selling exclusively through our own channels to bringing in some other channels such as wholesale, it's very early days for us. We really only got going on that about 18 months ago. We talked about the NEX and ASOS business being $10,000,000 to $15,000,000 which is fairly modest in absolute terms.
But we do think there's a lot of potential there. It's something we're looking at very closely strategically. We're testing our way into it, both from a franchising and a wholesaling standpoint with the licensing arrangement within into Parfums. And we do think it's a significant area of opportunity for us going forward. We're just not ready today to quantify how significant that can be.
I think I'm going to hand it to Fran on the AUC, please.
Yes. Hi, Brian. As we mentioned, we will have a little bit of a different story in the first half and the second half of the year regarding AUC. In the first half of the year, we are reinvesting in the product. We will be benefiting from some those macro opportunities.
But since we're reinvesting in the quality, as we have not lapped that as we have in the second half, we'll see a slight increase. And as we get into the second half of the year, where we did reinvest in the product, we do have some macro opportunities on certainly like for like product to have an AUC reduction. So we'll have an overall slight reduction in the second half of the year.
Super. Thank you. Good luck.
Our next question comes from Janet Kloppenburg with JJK Research.
Good morning, everyone. Congratulations on a nice quarter. I had a couple of questions. First, Fran, I understand what you're saying about the comps for the Q2, for the Hollister. But I was wondering if you could talk a little bit about, why your comp guidance, it appears so conservative in light of the momentum that you've built in the 3rd Q4.
Hello?
Yes, we're here.
Okay. And secondly, Fran, I wondered if you could talk about the categories that you thought could be the greatest opportunity for both Hollister and Abercrombie this year as we look forward and when we might see some of those brand repositioning initiatives that you talked about earlier? Thank you.
Hi, Janet. It's Joanne. I'll jump in on our overall comp guidance for the year. We believe our comp guidance is realistic. And certainly given the conditions in the market, we don't feel any need to be more bullish at this point.
Okay. And is there something going on in terms of inventory or discipline there that might hold back comps?
No, we continue to feel very good about our inventory management. And if anything, expect that our inventory management not a not a constraint. It's been well managed, and we expect it to continue to be well managed as we move forward.
Okay. To start off with which question?
Categories.
The categories. We expect to see Janet in the women's business, both women's and girls business, a continuation of our momentum in tops. And our goal is obviously to get that momentum going in the men's and the guys business. So that's our focus for the first half of the year. Regarding our brand positioning, I think we talked about it a little bit, but we have really established our core beliefs and convictions and we are working on an internal communication of that over the next several months.
And I think you'll see that in the back half of the year. It certainly is not going to be a light switch that we have out there, but it's going to an evolution in how we approach our customer.
And our next question will come from Kimberly Greenberger with Morgan Stanley.
Great. Thank you. Good morning. Fran, I appreciate that you're not ready to share in this forum the sort of aesthetic or the brand tenants, that you expect will ultimately embody both of your brands. But I'm wondering what aspects of the prior brand position in both Abercrombie and Hollister did your customer research show we're no longer resonating?
And the guide, the new brand position. And then just one clarification for Joanne. Joanne, it looked like you had about a $42,000,000 increase in accounts payable with inventory down $24,000,000 Maybe you could just talk about why inventory is going one direction and accounts payable payable going the other? Thanks so much.
Okay, Kimberly, I'll start. At this point, we're really not ready to share due to competitive reasons, sort of what did and did not resonate with our customer. But we do have some customer research that we've done around the world to help us solidify where both brands are going. They clearly will both have some heritage associated with them, and they will also have a new modern take.
And Kimberly, regarding the question around AP and inventory, the accounts payable balance reflects actions that we did take this year to extend terms with our suppliers. We also made available to them a supply chain financing platform, and that's primarily what unlocked the AP increase.
And, Joanne, when do you lap that change in term?
I believe we rolled it out late Q2 in 2015. So it began in late Q2, I think, fully implemented by Q3.
Thanks so much.
Now we'll go to Jon Morris with BMO Capital.
Thanks. My congratulations on the nice progress. And then on the closings that you guys have achieved so far, really nice work on that. Can you update us longer term? Are you the bulk of the way through that program?
Or do you see more opportunity ahead? And if so, how much? How many leases coming up, etcetera? And then just finally, on the autonomy that you're giving at the store level to some of the managers, is that essentially happening, that kind of autonomy that you're giving out there at both divisions, both Abercrombie and Hollister? And is it pretty much across the both fleets?
Thanks.
I'll let Joanne take the first part and then I'll come back.
Yes. Regarding the Hollister remodels, all stores in the fleet all Hollister stores in the fleet are candidates for remodels. We'd like to see this rollout broadly across the chain. There are definitely considerations, including lease terms and lease renegotiations that we're taking into account, as well as the expected return we're going to get in every location. So we're reviewing each remodel decision on a case by case basis with a goal of rolling it out broadly across the fleet.
On the second part, John, about store closures, yes, we continue to look at that on an annual basis. As we said a couple of minutes ago, we've been closing 50, 60 a year for several years. We've closed over a third of the fleet. We're not ready today to say what that ultimate store count number is. But to part of what you said in your question, we do have a lot of flexibility.
We have high proportion of our leases coming up for renewal in the next 2 or 3 years. So we have significant room for maneuver there. And importantly, I think as we said in the prepared remarks, we think what we've done on store closures has been not a defensive move, but a very proactive move to reflect the reality of how our customers are increasingly shopping over time. And again, with 28% of our business in the Q4 coming through DTC and omni channel, part of the corollary of that is reducing our store footprint over time. Then you had a bit on
Yes, and then John just to answer your question on the store autonomy in both brands, yes, that is something that we paralleled last year between both brands to roll out to our store management. I'm sure you remember in the recent past, we focused more on the way our stores are presented rather than on the brand on the business driving piece of it. So they've been given tools to understand and read their businesses. I've had an opportunity over the past year to visit many of our stores, and it's certainly a work in progress and we've made a lot of progress on it, and that will continue as we move forward.
Great, thanks.
Our next question comes from Susan Anderson with FBR.
Hi, good morning and congrats on the progress made this quarter. I was wondering if maybe you could give some color on the sales retention rate that you guys have seen from the closed stores in the U. S? Have you seen a lot of those sales moving to other stores or online? And then just a follow-up on the gross margin guidance for the year, so expected to be up a bit when you exclude FX.
I guess is there anything changing from Q4, which seemed like a pretty good performance in terms of the puts and takes there? Thanks.
Susan, this is Joanne. On the retention rate from closed stores, it really varies depending on the markets in which we close. We don't see typically a lot of transfer to other stores, mainly due to the fact that they're not necessarily close to other stores. So that has a bearing on it. We do see some migration post closing online, but it's minimal.
I think what we're seeing more is the move to online has been happening and continues to happen. And as we close these stores from an EBIT perspective, we're driving productivity overall in the fleet. Related to gross margin guidance for 2016, there are a lot of puts and takes on gross margin in 2016. Although the AUC is up modestly in the first half, it's down in the second half. We expect it to be down for the year slightly.
On the AUR front, a lot of puts and takes there. So FX is a headwind on AUR, but we expect continued AUR benefit, both from inventory management activity as well as better selling at reg price and our ability to step away from promotional activity during the year. So a number of puts and takes on gross margin that drive the guidance back to flat.
Great. Got it. That's very helpful. Good luck next quarter.
Next we'll go to Paul Lejuez with Citigroup.
Hey, thanks guys. Can you maybe talk a little bit more about the outlet channel? Just remind us how many stores you have? Can you maybe share the performance of those stores versus your mall fleet? And then second, just wondering if in any of your regions or concepts, if there were any traffic bright spots?
Is there any place where traffic is actually up at the store level?
On the outlet question, Paul, we typically don't break out the comp performance of outlets. I think the important point there is we're evolving to MFO. We convert we opened a number of new MFO stores for ANF this year. We're converting we converted another number. That the significant impact of that is to drive the gross margin and the profitability up in those stores.
It's a little bit hard to read the comp, frankly, because you're converting from one model to a somewhat different model, and we historically haven't broken that out. Overall outlet is a fairly meaningful piece of our business. And as I said, we don't break out the comp performance though of the outlet stores. In terms of traffic bright spots by the region, I think that's something we typically haven't broken out overall. I'd say across the business, the theme of the year was that traffic was more challenging whereas conversion was pretty strong across channels and geographies.
And how about as you look forward, when you think about your comp guidance, is that expected to be What's the interplay between traffic and conversion or maybe transaction versus ticket? Thanks.
Overall, we don't break down our comp expectations at that level. But overall, I think given the current environment, we expect to continue to drive strong conversion and many of our efforts are focused there. We also have are working on brand positioning to better communicate our brand story and try and move that traffic number. Traffic has been a headwind, I think, in the industry. So we have a realistic expectation around traffic.
We expect continued improvement and continued strength in conversion. And as we mentioned earlier, driving AUR up slightly modestly based on our ability to step away from promotional activity and with the customers' response to our product offerings.
And we'll take our last question from Dana Telsey with Telsey Advisory Group. Dana, your line is open. Okay, Moving on, we'll take our last question from Omar Saad with Evercore ISI.
Thank you. Nice quarter. I guess my one question, I'd like to get some more detail and information on the wholesale. I know it's a tiny business, but you mentioned it in your prepared remarks, I think $10,000,000 mostly ASOS and I think you said next. But you also mentioned the fragrance going into for like help me understand how your thinking has evolved around the idea of wholesale, which is obviously something historically the company has not been involved in and are there further opportunities in the U.
S. Especially to think about the wholesale channel as an opportunity for the brands? Thanks.
Yes. We said, Omar, it was $10,000,000 of wholesale revenue, which is with NEX and ASOS specifically. That didn't include the licensing or franchising, which are separate initiatives we spoke to. It's early days for us. We've been establishing our sort of technical capabilities to execute on wholesale and learning with these first two partners we've had in place.
But as we said earlier on, we do regard this as being a potentially significant area of opportunity for us going forward as we do with regard to franchising and licensing. Fairly early days, but we think over time those 3 could all be pretty significant.