At this time, I would like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.
Good morning, and welcome to our fourth quarter earnings call. Earlier this morning, we released our fourth 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, 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 investor section. The call is scheduled for one hour. Joining me today are Arthur Martinez, Executive Chairman, Jonathan Ramsden, Chief Operating Officer, and Joanne Crevoiserat, Chief Financial Officer. Also joining me today are Christos Angelides, President of A&F and abercrombie kids, and Fran Horowitz, President of Hollister, who will be available to answer questions.
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. After our prepared comments this morning, we will be available to take your questions for as long as time permits. With that, I hand the call over to Arthur for some opening remarks.
Thank you, Brian, and good morning, everyone, and thank you for joining us today. I'd like to make a few brief introductory remarks this morning. First, it is clear that our company has gone and is going through a period of significant transition as we respond to major changes and challenges in the macro environment. In 2014, we reconstituted the board of directors with seven new directors, all with significant retail experience. We initiated a transformational change to a brand-driven organization, recruited two highly skilled brand presidents to lead that transformation. Of course, Mike Jeffries departed at the end of the year. While our efforts may take some time to show meaningful results, the board of directors and management are fully aligned in being confident that we are taking the right steps to enable our brands to deliver their full potential. Strategically, what are we doing?
First, evolving our merchandise assortment, particularly our in-store customer experience. Rationalizing our store fleet while reinvesting in stores that should remain open. We're investing in our successful DTC and omnichannel initiatives, and we are continuing to reduce expenses and making productivity a way of life for this company. Organizationally, we are completing our transition to a fully branded model. We are ensuring that the right teams are in place beneath our brand presidents to lead these brands, and we are increasing both accountability and opportunity throughout our organization. While our team is fully aware of the challenges we face, there is optimism across the organization that we are on the right track. Let me say a couple of things about 2015. As you all well know, it remains a challenging consumer and competitive environment, and we expect the first half of the year to be challenging.
This includes continued logo headwinds for the first two quarters and a major currency headwind throughout the year. We are implementing many changes that we believe will be significant in driving the business forward. As we don't yet have total visibility as to the timing or magnitude of the impact of these initiatives, we won't be providing specific sales or EPS guidance at this point. We do expect to resume doing so when we have greater visibility. I'd like to hand it over to Jonathan Ramsden, but we look forward to taking your questions later in the call.
Thanks, Arthur, and good morning, everyone. I want to start by echoing Arthur's comments about strategic and organizational changes we're making at A&F. The challenges in the current environment make these all the more important, and we believe we are taking the right steps. A critical objective is to arrest the comp declines in both our U.S. and international stores, and many of our initiatives are targeted at that objective. These include, first, evolutions in our merchandise assortments. Second, continuing the successful rollout of new Hollister store formats. In 2014, we rolled out the new store formats to about 50 U.S. stores and four U.K. stores, and we are pleased with the results. Third, improving our in-store customer experience, which will be supported by a new store management incentive plan, giving our store and district managers a greater stake in the performance of their stores.
Fourth, continuing to grow our U.S. outlet business. U.S. outlet store comparable sales were up around 20% for the quarter, and we are pleased with the performance of our new stores and the margins they are achieving. Fifth, closing underperforming stores. Excluding Gilly Hicks, we closed 51 U.S. stores in 2014, bringing our cumulative closures since 2010 to around 275 stores. We expect to maintain this rate of closures and have nearly 70% of our U.S. leases expiring over the next three years. Last, adjusting international pricing. As you know, we began a Hollister price test in the U.K. during the fourth quarter, where we reticketed most of the assortment lower. Based on the test results, which were margin dollar accretive, and our most recent competitive benchmarking, we plan to roll out lower pricing across all European Hollister stores in the coming months.
Investing in DTC and omnichannel is another critical component of our plans. We now have ship from store in 375 U.S. stores and order in store in 650 U.S. stores, and we'll continue the rollout in 2015. We are also working on adding omnichannel capabilities in Europe. We are pleased with our DTC localization efforts in Asia. Hollister DTC sales in China were up 250% for the quarter, also reflecting growing brand awareness driven by our store openings. Selective international expansion remains an important part of our plans. In the past year, we have opened 4 stores in China, including a flagship store in Shanghai and our first A&F mall-based store in Chengdu, 2 Hollister stores in Japan, our second Hollister store in the UAE, and our first A&F store in Kuwait. For 2015, we will continue opening in high-quality locations in these markets.
We also continue to pursue other opportunities to increase our brand reach. During the quarter, we entered a fragrance license agreement with Inter Parfums to create new perfumes and fragrance products. Inter Parfums will distribute these fragrances internationally in specialty retailers, high-end department stores, and duty-free shops, and in the U.S. in duty-free shops. While we already have a successful fragrance business, we believe that we can leverage this into a much larger global opportunity. Turning to our profit improvement initiative, cumulative savings have now reached approximately a quarter of a billion dollars, a portion of which we have reinvested in initiatives such as DTC, omnichannel, and marketing. Process and expense efficiency will be an ongoing part of our plans. Finally, our move to a branded organizational model is now complete with remaining customer and product-facing functions having moved to a branded model in the past couple of months.
We are confident that the aggregate effect of all of these changes will enable us to improve our performance as we go forward. I'm now going to hand over to Joanne to go through our results for the fourth quarter and outlook for 2015.
Thanks, Jonathan. Good morning, everyone. I'll start with a brief recap of our fourth quarter results and then talk about our outlook for 2015. For the quarter, net sales were $1,120,000,000, down 14% from last year. Changes in foreign currency exchange rates versus a year ago accounted for approximately 270 basis points of the sales decline. Including direct-to-consumer, total comp sales were down 10%, somewhat below expectations. By region, comp sales were down 6% in the U.S. and down 17% in international markets. By channel, store comp sales were down 13%, which represents a slight sequential improvement over the third quarter. However, direct-to-consumer comp sales were up 1%, a considerable deceleration from the prior quarter, primarily driven by the European business, where site traffic was down and shipping and other promotions drove less of a benefit than in prior quarters.
Within the stores channel, continued weak traffic was the primary contributor to the sales trend, particularly in Europe. By brand, comp sales were down 9% for Abercrombie & Fitch, down 6% for abercrombie kids, and down 11% for Hollister, which continues to be weighed disproportionately by European comp sales. By gender, comp sales for male outperformed female. Within male, weakness in tops, particularly fleece and graphic tees, more than offset positive trends in bottoms and outerwear. Within female, positive trends in jeans, dresses, and outerwear were more than offset by weaknesses in tops. Reduced logo business continued to weigh heavily on our results, contributing approximately 12 percentage points to our down 10 comps for the quarter, with non-logo business comping up slightly. The gross profit rate for the quarter was 60.9%, 190 basis points higher than last year.
Benefits from lower average unit costs were partially offset by net negative effects from foreign currency exchange rates. On a constant currency basis, average unit retail was up slightly year-over-year. Excluding pre-tax charges of $40 million this year and $44 million last year, adjusted non-GAAP operating expense for the quarter was $556 million, down $65 million or 10% from last year, which was on top of a $71 million reduction last year. I'd like to take a moment to review the excluded pre-tax charges for the quarter, which are detailed on page five of our investor presentation. These include $17 million of store-related asset impairment charges, which includes the A&F Seoul flagship store and our two stores in Australia. The performance of our Australian stores has been disappointing, even after allowing for the seasonality challenge of operating in the Southern Hemisphere.
We, therefore, decided during the quarter to activate the provision in our leases, which enables us to make a country exit and close those stores around the end of fiscal 2016. As a result of this decision, we also incurred lease termination charges of just over $2 million during the quarter. During the quarter, we also decided to put the company's aircraft on the market, and this triggered an impairment write-down of $11 million to the estimated net sales value. We also incurred $5 million in transition costs related to the former CEO's separation agreement and the current CEO selection process. Finally, we incurred $2 million in charges related to the impairment of Gilly Hicks assets as we decided during the quarter that we would wind down that business in 2015.
Excluding charges, overall expense savings were significantly greater than anticipated coming into the quarter due to continued tight expense management and the realization of expense savings on lower sales. On an adjusted non-GAAP basis, stores and distribution expense for the quarter was $442 million, down $63 million from last year, and benefited from the effects of FX. The decreased expense was driven primarily by savings in store payroll and other controllable store expenses, which was partially offset by higher direct-to-consumer expense. On an adjusted non-GAAP basis, marketing, general, and administrative expense for the quarter was $114 million, down $1 million from last year. A decrease in compensation-related expense was partially offset by an increase in marketing expense. On an adjusted non-GAAP basis, operating income for the quarter was $132 million compared to $155 million last year, and operating margin was 11.8%, roughly flat to last year.
The tax rate for the quarter, excluding the effect of charges, was 36.5% versus 31.4% last year, reflecting a lower proportion of earnings being generated from international operations this quarter. For the quarter, the company reported adjusted non-GAAP net income per diluted share of $1.15, compared to adjusted non-GAAP net income per diluted share of $1.34 last year. Turning to the balance sheet, we ended the quarter with $530 million in cash and cash equivalents and gross borrowings outstanding of $299 million for a net cash balance of $231 million. We also ended the quarter with total inventory at cost down 13% to last year. Moving forward, we continue to expect improvement in inventory productivity and turnover. Details of our store openings for the quarter are included on page 11 of the investor presentation.
At the end of the year, we operated 799 stores in the U.S. and 170 stores in Canada, Europe, Asia, Australia, and the Middle East. Moving to 2015, we are providing an outlook on elements of our performance for the year. As we get greater visibility to the timing and impact of our strategic initiatives, we expect to resume providing comp sales and EPS guidance. As Arthur noted earlier, foreign currency exchange rates are expected to be a significant headwind to our results in 2015. Recasting adjusted 2014 results using current exchange rates would have reduced sales by approximately $135 million and operating income by approximately $60 million, net of a benefit from inventory hedges currently in place. In addition, we expect a negative impact from reduced logo sales to modestly abate in the first half of the year and then neutralize in the second half.
We expect gross margin rate to be flat to slightly up for 2015, driven by AUC reductions, offset by adverse currency effects. With regard to operating expense, we expect the benefit from FX and expected savings from the profit improvement initiative to be offset by the restoration of normal incentive compensation accruals and increased investment in DTC and omnichannel. Excluded from our operating expense outlook are potential impairment and store closing charges and other potential business transformation and restructuring charges. We expect the tax rate to be in the mid-40s, which reflects erosion in European earnings, including the effect of changes in foreign currency. In addition, we are projecting weighted average share count of approximately 70 million shares, excluding the effect of potential share buybacks.
Turning to capital allocation for 2015, our philosophy remains to be highly disciplined in allocating capital to where it will derive the greatest return on a risk-adjusted basis. We are targeting capital expenditures of around $150 million for the year, which are prioritized towards new stores and store updates, as well as DTC and IT investments to support our growth initiatives. In 2015, we expect to roll out the new Hollister storefront to about 50 additional stores in the U.S. and about 20 additional stores in Europe. In addition, we plan to expand our omnichannel capabilities and are close to completion on the conversion of one of our distribution centers here in New Albany to be a dedicated direct-to-consumer facility.
With regard to real estate plans for the year, we plan to open 15 full-price stores in key international growth markets of China, Japan, and the Middle East, and four full-price stores in North America. We also plan to open 11 new outlet stores in the U.S. In addition, we currently expect to close approximately 60 stores in the U.S. during 2015 through natural lease expirations. With that, I'll hand it back over to Arthur.
Thank you, Joanne. I'd like to say a final word on the selection process for a new CEO. First, to tell you that the process for this selection continues at pace, and there is full board engagement in the process. We are confident that we will identify and select the right candidate, and as we've previously disclosed, we are considering both internal and external candidates. The overall process is moving at an acceptable pace, but it's important to note that these things take time, and it's more important for us that we get the right person than to move quickly. The board has a very high level of confidence in the existing leadership team within the company during this period of time. Thank you, and we are now available to take your questions.
Thank you very much. For the members of the telephone audience, if you would like to ask a question today, you can do so by pressing *1 on your telephone keypad. If you are using a speakerphone, please ensure that your mute function is off so we can receive your signal. We ask that questioners limit themselves to one question at a time. Once again, that is star one for a question today. One moment as we assemble our roster. Our first question today comes from Lindsay Drucker Mann, Goldman Sachs.
Hey, everyone.
Morning, Lindsay.
I have a question about international. John, it's good to hear that the initial tests that you've done about lower prices in Hollister U.K. are dollar margin accretive. I actually was curious if we sort of normalize for when your hedges roll off, how should we think about the percentage margin profile of that division? We've always talked about it as being a much higher margin division. I think it's 10 points ahead of the U.S. this year. If the strategy works to take price points lower, what will the margin profile be, especially when we normalize for the move in currency?
Well, let me bracket, Lindsay, the currency piece first and just be clear what we're saying. The AUR reductions drove sufficient incremental units in local currency to make the overall impact of that gross margin dollar accretive. We have said previously that the AUR reductions, setting aside currency for a second, we would expect to at least offset by AUC reductions. I think that's what we've said in prior calls. With regard to currency, we haven't been specific with regard to the ongoing margin effect, but I think you have a pretty good sense of what our gross margins are in Europe, and you can apply that rate change effect to the cost of goods component, since, as you know, that cost of goods component is denominated in dollars.
If we were to normalize for spot rates of currency today, you talked about the $60 million drag on 2015. What is that? How much more is there left to do if spot rates hold, in 2016? Just a quick follow-up.
Sure.
Are there any additional restructuring savings that we should be looking forward to just to help continue to right-size the cost base? Thanks.
On the first part, Lindsay, netted in the $60 million impact, in 2015, is a $15 million hedging benefit. If rates stayed where they are today, rolling into 2016, we'd have a further $15 million impact when we'd exhausted our current hedges. I think the second part of your question was about continuing restructuring actions generally or specific to offsetting the currency impact.
Do you have more cost savings to announce, to offset some of the margin pressures, or just generally, are there more cost savings we can look forward to?
Well, I think as Arthur put it earlier on in the prepared remarks, we regard ongoing process efficiency and expense reduction as being a way of life going forward. We're never going to sit here and say, "We're done.
Thanks so much.
Our next question comes from Susan Anderson, FBR Capital Markets.
Good morning. Thanks for taking my question. It sounds like the logo business in the fourth quarter, the impact improved -12%. Should we expect about the same in the first half? Could you update us on what % this business is now versus last year? Thanks.
Hi, Susan. This is Joanne. The logo impact contributed 12 points to our -10 comp, which was consistent actually with the third quarter. To your question in terms of penetration to the total business, historically, this business has been in the mid to high 20s, in terms of penetration to the total business. We've brought that down now to the low to mid-teens. We think that's about the right level. As we move into 2015, we do expect at these levels to have some headwind in the first half of the year, but somewhat abated from where we were in Q3 and Q4. As we get to the back half of 2015, we think that will neutralize.
If I could just interject, Susan, for a second. It's Christos. It's one thing talking about the quantity of logo, but what's very important and something that Fran and I focused on here is the quality of the logo. Actually, we feel that's more important than getting the relative quantity correct. That's something we're very focused on. I just wanted to kind of make that point. In addition, every part of our business is as important as logo. It's important we get that point across to you as well. Dresses are very important. Denim is very important. The time and effort we'll be spending on logo, we will equally be spending that time and effort on other parts of the assortment.
Next, we'll take a question from Tom Filandro, Susquehanna International Group.
Hey, thanks. I want to say welcome to Arthur, Christos, and Fran. We do look forward to your collective impact alongside the rest of the team. Actually, my question is both for Christos and Fran. When can we see a definitive impact on the product and the customer experience? Maybe you guys, could you tell us what we should be looking for that sort of marks your respective stamps on the brands? Thank you.
I think the first introductions of new product will happen in back to school and moving into Labor Day. That's the first time you can walk into a store or go onto DTC and see some real difference in the product. From an Abercrombie perspective, our priorities are very much focused around design and the product content, and we're making sure that that content reflects trends. If I can give you an example, we're focusing on the very best prints, the latest prints, whether that's lenticular or sublimated. We're looking at sweater dresses, the '70s trend. That's product content. We're also making sure that the variety and the styling is different. In Abercrombie, we've never offered zips in jeans before.
Jeans have only been available in button fly. You'll now be able to purchase zips. We're specifically making sure that products in Abercrombie are original, iconic, new, and new is a very important word here, and also aspirational. You'll see the introduction of hand-painted prints, for example. We're going to make sure that we tap into Abercrombie's heritage, and particularly focus on attention to detail. Products that hopefully take your breath away. What I do have to make it clear, though, is that in the assortment for back to school and Labor Day, I'm sure we've made mistakes as well as successes, and we're quite open about that. We don't know what those mistakes are, and we don't know what the successes are either. Either way, we will react quickly to rectify either the mistakes or the areas where we've been successful.
Hey, Thomas. Thanks for the welcome. It's Fran. Just to sort of echo or reiterate a little bit from the Hollister perspective, the teams are working extremely hard on evolving our product. We have tremendous opportunity here at the Hollister brand. Both in logo and non-logo merchandise. We're looking to strike a balance in our assortments between fashion, logo, core, must-haves. We are also looking to put together a global assortment here that appeals to our customer around the world. Lots of work in progress here. The teams are really working extremely hard. They're very energized and very excited about what we're doing.
We'll move to our next question. Randal Konik with Jefferies.
Thanks a lot. I just want to go over just a couple of things. Just on the international side. I think when you spoke about how you're getting out of Australia, are there other areas of the world internationally where you have lease terms where you can get out of, I guess, onerous terms or leases, et cetera? Can you kind of go over what the picture looks like there? Then-
Yeah, thanks, Randy. Sorry.
Just following up on, I'm just trying to get a sense of answering the question on where the four-wall international margins should sit if we're going to lower pricing. How much lower are we going to potentially lower pricing internationally? Just think so we can get a sense of how that four-wall margin would look would be very helpful. Lastly, when you gave your CapEx guidance for 2015 of $150 million, and you gave us the breakdown of what the CapEx was for 2014 in terms of $88 million related to IT, home office, et cetera. Longer term, where should that CapEx number kind of sit would be very helpful. Thank you.
Okay. Let me take the first couple of parts of that, Randy, then maybe Joanne will pick up the last part. Starting with real estate. As we went through Europe and now as we've gone through Asia, wherever we've been able to, we've negotiated those country exit options into our leases. Particularly with a market like Australia, which we always knew was a test, we wanted to make sure that if the test didn't perform, we had the ability to exit fairly quickly, which is what we've done. I think that's consistent with a long pattern of us being disciplined about knowing when it's time to exit a particular brand or store or operation. Turning to Australia specifically, it was a test. We always knew it would be challenging because of the Southern Hemisphere component.
I think even above and beyond that, it was more challenging than we expected. We decided to exit that market in the last couple of months. With regard to four-wall international margins, I'll bifurcate that between Europe and Asia. Europe, if you look at 2014, our EBITDA margins were still around 30%. Notwithstanding the comp declines we've seen for several years, still a very healthy cash generative business. We are going to take some impact from that in 2015, and the $60 million of EBIT impact that Joanne referred to is primarily coming within Europe, so you can model that into thinking about the margin rate for Europe. Asia EBITDA margins are currently a little bit lower, but I think we said consistently over time that we expected more of a build there.
In both markets, it's important to bear in mind that on top of the store performance, our new store openings drive the e-commerce business very significantly. If you add in the e-com business, that European four-wall EBITDA margin will do the same in Asia. Those margins look relatively more attractive.
Randy, just to follow up on your question regarding the components of our CapEx for 2015. The number for DTC and omnichannel is slightly lower just based on the fact that we had most of the cost of the distribution center here in New Albany in 2014. There'll be some of that cost that'll carry forward into 2015. The DTC and the IT spend, omnichannel spend is very consistent in those categories alone year-over-year, and combined with the remaining distribution center expense, it's about 40% of our CapEx budget for the year. We continue to prioritize a high percentage of our CapEx spend on that initiative specifically. As you look at new stores, we have about the same spend in new stores with a focus on the growth markets in Asia that Jonathan mentioned earlier.
Also included in our new store build and CapEx are the 11 outlet stores in the U.S. that we announced. There is a higher penetration of CapEx spend in remodels and store conversion and testing. We are investing in our existing store base as well, evidenced by the performance we've seen in the Hollister store format that we are rolling out. We're also testing new formats for improved customer experience. There's a little bit, very small piece of capital for those tests as well. Moving forward on our CapEx budget, I think our position has always been to invest in those projects that generate the highest risk-adjusted return. We maintain a high hurdle for that and have been consistent in our application of that in the projects in which we invest.
I think we continue to see CapEx spend in the range that we have this year, in the $150 million-$200 million range. We're not thinking differently about that moving forward.
Randal, I just want to come back to the first part of your question. We have very few, setting aside Australia, which we exited or are exiting. We also have the Seoul flagship, which we impaired this quarter. Other than those stores, we have very few, literally a handful or less of international stores that are even close to being negative from a cash flow standpoint.
We'll move on to our next question. Next is Simeon Siegel, Nomura Securities.
Thanks. Good morning. Can you talk about segment margins? Let's leave the international side for a second. You referenced the online investments and the DTC margins compressed, but the U.S. four-wall's been showing nice expansion over the past two quarters. I guess how much of the online compression was FX related? How much of the U.S. improvement was outlet versus profit savings? More broadly, how should we think about those segment margins playing out over the next year and beyond? Then just a quick clarification on the commentary behind the cost savings versus the increased investment. Does that suggest flat OPEX dollars for next year? Thanks.
Simeon, I'll take the first part. With regard to DTC margins for the quarter, clearly they did come in somewhat below what we'd been referencing earlier in the year. There was an FX impact in there. I think it was 100 to 120 basis points of DTC margin for the fourth quarter. Other than that, our sales in Europe in the December timeframe were somewhat below what we'd projected, and that was obviously a critical period of time from an overall DTC business standpoint for the quarter. We think that our shipping and some of our promotional messaging was not as effective as it could have been during that timeframe, and that caused our DTC volume to come in somewhat below what we'd expected. We're obviously going to work to better that when we lap that next year.
There are also continuing investments which account for some erosion, including our configuration to be operative in Asia from an e-com standpoint. We've also continued to invest in online marketing to drive the business on a long-term basis. That was the DTC part of the equation. I think part of the question was on the U.S. four-wall.
Yeah. On the U.S. four-wall business, much of that was driven by our profit improvement initiative. We definitely leveraged expense better year-over-year, but we also were able, particularly in the fourth quarter, to stabilize AUR in the U.S., and our AUC efforts helped drive some margin improvement. We continue to see those opportunities as we move forward.
At this time, we'll move on to our next question, Kimberly Greenberger, Morgan Stanley.
I wanted to ask about e-commerce. Can you comment, was e-commerce still positive in Europe? You mentioned there was a large deceleration. Then Arthur, I think you discussed investments you're making in e-commerce, including Europe. Do you think that the investments are sort of just necessary to maintain progress on that platform going forward? Or is there something about the investments that you think could actually cause an inflection in the sales trend there? Thanks.
Let me take the first part, Kimberly. International DTC comps were down 5% for the quarter, as reflected in the press release. Asia performed relatively well, Europe was down somewhat more than that, down 5%. I think as well as some of the headwinds I just referenced, we obviously have a significant impact of the logo business in the DTC channel. To some degree, that skews more significantly internationally. That was certainly weighing on the DTC comp in the fourth quarter.
Kimberly, with respect to your question about the investments in e-com, they are mutually synergistic with our store efforts, we can't really do one today without doing the other. There's no question that our position in e-com is an admirable one in terms of the percentage of our business we do today in e-commerce. To rest on that particular position is to invite falling behind a competitive set who are moving very quickly in this area. We will continue to invest in the people and resources necessary to maintain our leading position in e-com, both domestically and internationally.
Our next question will come from Marni Shapiro, The Retail Tracker.
Hey, guys. I guess a couple of quick questions. You talked about the pricing in Europe and the changes there as you have opened stores in China and continue to. Can you talk about the pricing strategy there? What's the premium there, or are you going to roll out the same lower pricing strategy there? Can you also just touch on, as product begins to improve and you put some muscle behind that improved product in the back, let's assume back half of the year, will you start to increase marketing to support this, or are you going to keep kind of a tight hold on the marketing spend for the full year?
Hey, Marni, it's Fran.
Hey, Fran.
First, as far as the pricing goes, we are approaching pricing from a global perspective. As we're moving to bring our pricing closer to our U.S. pricing, that will happen excuse me, across the world. As we move towards back-to-school, you will see that in most of our assortments. As far as the assortment goes, yes, as we get the muscle behind it as the year progresses, we will make those determinations about marketing as time goes on and we see the customer's acceptance to what we're doing.
Next, we'll move on to Oliver Chen with Cowen and Company.
Hey, guys. Thanks. Regarding the evolution of product and what we're looking for, what are your thoughts on women's tops and what kind of detail it may take to evolve that category? I had a question about, as we look for the changes, what's happening with the SKU breadth. Some of the stores we check look like there's quite a wide variety. I'm just curious about where you're feeling about good, better, best, and we've noticed some of the fashion product on markdown as well. Lastly, this is also a product question and brand question, can you just update us on the differentiation amongst the banners and where your head is with what progress you're making there? Thank you.
It's Christos. In terms of tops, every category is being treated exactly the same way, and we're giving a lot of attention to each category and its relevance to trends. I don't want to be specific, Oliver, about the exact changes we're making other than to say that we're spending a lot of time on attention to detail, fabric, wash, and fit, making sure they're trend relevant. Each trend-relevant garment, though, will be supported by core classics that the company is known for. It's important that we price those competitively in the market. That's kind of an overall view of how we're working. In terms of the SKU breadth. Sorry, Oliver, do you mean you feel you've seen a widening of the breadth?
The breadth has widened. We've also seen product which we thought was good fashion, like on markdown. I'm just curious about the hit rate, especially as you innovate and take on more fashion risk. Also, how you're feeling about the state of the breadth, or if what we're observing now is indicative of what's going to happen later.
Okay. Firstly, I can tell you that there are lots of new product opportunities. In some categories, there will be a widening of the breadth to allow for more choice. In terms of fashion, you're right. The risk does go up, but the positive returns and the success if you get it right, That's what we're focused on. Part of our collection is in the fashion business, which means we need to take risks. The most important thing we need to do is have courage to back the winners we feel are going to be successful. If we do that, we will succeed. The third part of the question, I missed that, actually.
Brand differentiation.
Yeah. I'll jump in. Hi, Oliver. On the brand differentiation question, I think our move to a branded organization is one of the best things that we could have done for the corporation. The teams have been sitting in their seats for less than about six months now, as we see them working every day towards their focus on the brand, the differentiation becomes clearer and clearer for them. The products, in time as well, will move towards that place. We're very excited about being branded. It's going to work in our favor.
Next is Paul Lejuez with Wells Fargo.
Hey, it's Tracy Cogan filling in for Paul. I wanted to ask about traffic versus ticket internationally. What's been the biggest component of that comp decline, and how has it trended this year? I just wanted to follow up on something somebody asked about operating expenses. Were you saying that you expect operating expenses to be flattish next year? I guess maybe if you could give a little more detail there. Thanks.
I think on the traffic part of the question, Tracy, the consistent biggest driver of the comp declines in our international stores has been traffic.
On the operating expense lines, yes, we expect it to be flat. We expect the benefits we're seeing from the profit improvement initiative and expense savings to be offset with investments in normalizing our compensation accruals next year, primarily. Investments in DTC and omnichannel initiatives. We're investing in our growth areas, which will offset our profit improvement initiative and other productivity savings.
The only comment to add to that, Tracy, is that since we haven't guided to comp, obviously comp is a significant factor in expense. Where that ends up will drive a component of expense year-over-year.
At this time, we would like to remind our audience, if you'd like to ask a question today, star one on your telephone keypad. Next, we'll hear from Dana Telsey Advisory Group.
Good morning, everyone.
Good morning.
Hi, how are you? As you talked about productivity as a way of life, what should we be looking for to show the pace of improvement as you go through 2015 and towards 2016? Jonathan, as you think about the continued expense reduction efforts, where are the expense reductions going to be coming from now? Do they have the opportunity to be a similar magnitude of what you've achieved in the past? Thank you.
Dana, I think we haven't been specific, typically, on a forward-looking basis. I don't think we're ready to give specific numbers today as to what we think the incremental opportunity is. I think it's a continuous process going forward, where we're going to look to be more efficient in how we operate as a company. I also don't think at this point we can point to specific areas. There are things that we're looking at. I think you could just count on it being an ongoing area of focus, part of the company's way of life, as Arthur referenced earlier on. Just to recap, we have hit a quarter of a billion of cumulative savings that we've accomplished a huge amount, I think, over the past 18 months.
I think people across the company have done an outstanding job of implementing changes to our model that have enabled us to achieve those savings.
Our next question will come from Richard Jaffe with Stifel.
Thanks very much. A follow-on question about expenses and then a quick question on the fragrance business. As the expenses continue to contract and the business continues to contract, how much further do you want to go, or do you think you need to go to right-size the expense structure for the business as you see it today, or as you see it in the near future, in terms of dollars or percent sales? Then in terms of fragrance, the distribution and the payment schedule for Abercrombie & Fitch.
Richard, just on the first part, I think as we just said, we really can't give specifics as to quantitate how much further we're going to go. I think the important point is there is always opportunity to be more efficient, and we're going to continue working on a constant basis to find those opportunities and to take cost out of the business and to be more efficient. We can't say more than that at this point about specifically where that's going to take us. I'm not sure I understood the second part of your question, Richard. Can you maybe just elaborate on that?
How do you get paid by allowing your name to be used in a fragrance that will be distributed in other channels?
Well, we get a license fee from our partner as they sell our product.
Next, we'll take a question from Dorothy Lakner, Topeka Capital Markets.
Thanks, and good morning, everyone. I wondered if you could elaborate a little bit about the outlet opportunity as you continue to build that business, and just talk a little bit about what the mix of that business is. That would be great. Thank you.
Yeah. Hey, Dorothy. We did open a number of outlets during 2014, as we referenced in the prepared remarks, we're pleased with the performance of those stores. They're in some of the newer, highly productive outlet malls. Even within those malls, we're pleased with our performance relative to the mall. I think we're taking a balanced approach to outlet expansion. We want to make sure we maintain an appropriate mix and balance between our full-price chain stores and our outlet stores. We're pleased with how that's unfolded over the past year, and we expect to continue expansion in outlet in 2015, particularly in the U.S.
Our next question will come from Betty Chen, Mizuho Securities.
Thank you. Good morning. I'm sorry if I missed it earlier, it sounds like the new Hollister store format is doing well. Clearly, we're planning to roll that out to more stores in 2015. Can you just quantify what was the difference in the performance of those stores versus the rest of the chain? My second question was regarding the customer experience or in-store experience. What are some changes that we should be looking for at the store level? If you can give us some examples of whether that includes retraining of the staff, et cetera. Thanks.
I could jump in on the performance of the Hollister storefronts. We've consistently seen the storefronts drive incremental traffic over the control stores. We're seeing double-digit improvements in traffic and mid to high single-digit improvement on the sales line, which gives us confidence to commit more capital to that effort in 2015.
In store.
The in-store.
For the in-store shopping experience, Betty, we have clearly many opportunities to make our experience both easier, more friendly. We are currently considering all options. We're out talking to our stores, trying to understand what the customers are looking for. Specifically, yes, we are looking to retrain our selling associates, and that is a work in progress.
If I can just give you some specifics, Betty, in Abercrombie on store experience. We are playing around with different variations. We're changing the content of the music. We're looking at different music levels. We are looking at the navigation experience as you go through the store. We're looking at the darkness. We're looking at whether fit rooms should be locked or unlocked. We're looking at the way we lay the product out, whether it should be hanging or flat folded. We're leaving no stone unturned. We'll never find the exact experience that we think is right. It's going to be an evolving process that we'll just get better and better at.
Mark Altschwager, Robert W. Baird & Co. is next.
Good morning, thanks for taking the question. Can you update us on your thoughts on the wholesale opportunity for each brand and any takeaways from the test so far? Then separately, can you talk a bit more about the store manager incentive plan you referenced earlier? What are the key metrics that the managers will be focused on, and how are those different from the prior plan? Thank you.
Mark, it's Christos. I'll pick up the wholesale opportunity. It's very early days. Clearly, the company has two very strong brands that resonate with consumers. At some point, we want to see if we can leverage the strength of those brands. Wholesaling will be one of those opportunities. We have a few things we're looking at. It's not our priority, but it's definitely something we're focused on increasing.
On the second part of the question, historically, our store managers were not incentivized on the performance of the stores. We are implementing a sales-based incentive plan for our store managers going forward.
Our next question will come from Anna Andreeva, Oppenheimer.
Hi. Thanks, guys. This is Lynn on for Anna. We were wondering if you could comment on some of the trends you're seeing quarter to date at the brands, if the ports have affected the product or inventory levels going into spring. If you could quantify that, if there is an impact, that would be great. Thanks.
Yeah, I'll take the first part because we generally don't comment on current quarter trends. I'll toss it over to Jonathan for the port update.
Yeah, on the port impact, I think our supply team again have done an outstanding job of managing through that. We don't believe it's had a material impact on our business or even a significant impact on our business.
Next, we'll move on to Janet Kloppenburg, JJK Research.
Good morning, everyone.
Morning.
Joanne, if you could clarify on the expense line, if we should be forecasting MD&A flat in dollars as well, in addition to the stores and distribution, that would help. For Fran and Christos, I was wondering, could you talk a little bit more about the tops business? I understand that the logo part of that business is down. Perhaps you could talk a little bit about any progress you're seeing in the fashion component of the top category. If you could help us understand this new very sharp pricing strategy on the basic keys in the stores, the must-haves and the essentials. If that strategy is resonating with the consumer. Thank you.
On the MD&A line, Janet, the way to think about that is we do have incremental expense modeled in 2015 related to incentive compensation normalized, having normalized accrual rates on incentive compensation. For the year, that's a little over $20 million as a company. A large portion of that will be in the MD&A line, as well as a slight increase in marketing spend as we dedicate more growth to digital marketing.
Hey, Janet, it's Fran. To answer your three-tiered question, let's start with the top piece. Just to reiterate kind of where we went before, each and every category that we currently have, we're looking at for opportunity. There is clearly a big opportunity in tops, and we need to strike a balance. Which brings me to your question on the must-haves. We are looking to do a good, better, best pricing. We'd like to give the consumer an opportunity to enter at an opening price point for us. We have had very good success to that so far. Fashion will always be a piece of our business. It's a matter of figuring out what percentage that needs to be.
Next, our question will come from Rakesh Patel with Stephens. Rakesh Patel, your line is open. Please go ahead.
Sorry about that. Can you hear me?
Yes, this is him.
Thanks. Good morning, everyone. Sorry if I missed this, can you provide more insight on the decline in Europe e-commerce sales? I am curious if there are specific countries where things went south or if it was related to certain product lines or if it was a marketing issue. Just some help there and any color on what you can do differently specific to that channel as we think about 2015.
Sure. I think what we said earlier was that, to begin with, the logo impact that we felt across the business certainly weighed on the e-com business in the fourth quarter and certainly the international component of that. We also said that we felt we left some business on the table in December in Europe, where our promotional and shipping messaging was probably not as compelling as it could have been, that's something we will work to rectify as we lap that in 2015.
As a reminder, to ask a question today, star one on your telephone keypad. We will next hear from Simeon Siegel, Nomura Asset Management.
Hello, thanks for taking my question. It's a bit unusual for the new CFO to report to the old CFO. I was wondering if you could explain the reason for that. Secondly, you were happy to buy back shares above $40, and I wonder why you didn't buy back any shares in the fourth quarter when they were much lower.
Well, Simeon, I'll speak to your first question. Jonathan is maybe the old CFO, but he's currently our Chief Operating Officer. The structure that we have has him responsible for a wide range of functions inside the company. That seems to be working very well. I'll turn the question on the buyback back to Jonathan.
Yeah. I think, Simeon, we've always said that we make decision on buybacks quarter by quarter, taking into account both liquidity and valuation. We don't comment on the specifics of that discussion, either in advance or typically after the fact. It is what it is as we go quarter by quarter through the year.
At this point, we will move to our next question, John Morris, BMO Capital Markets.
Thanks. Good morning, everyone. I think you had mentioned in prepared remarks, looking to change the incentive comp structure at the store level, I think among the managers, in order to get them more motivated, more invested in the business. If you could give us a little bit more color there, and also to the extent that you had tested that at all and what results you had seen from that prior to putting it in place, and is that pretty much going in across the board?
John, it really wasn't a change in the plan. We've introduced a plan really for the first time that on an ongoing basis will provide incentives for store management based on the performance of their store, primarily measured around the sales performance of the store. We're doing that on a quarter-by-quarter basis as we go through 2015, which gives us the opportunity to adjust it as we need to make sure it's being effective in achieving that objective. We think it's important that the store management has a stake in the performance of their store, and that's essentially what we've put in place.
John, I would only add that we didn't feel a test was necessary because there was a deep belief that engaging our store management teams in the results of their own units would produce positive energy and tangible results over time. We were all in on going forward with the whole company right away.
That does conclude our question and answer session, and that does conclude our conference call for today. We do thank you for your participation.
Thank you.
Thank you.