So even though while people have
waited in line for a while, by the time they get to the front of the line, they're still super excited, if not even more excited to get into the store, their eyes light up, you can hear them kind of squeal with excitement. Every single associate, whatever they're wearing is what the customer wants to buy. As far as fragrance goes, it sells right off the tables.
We're not doing anything different over there. No matter where we go and what country we're opening up in a store, it's still Abercrombie and Fitch.
It's been really fun to see all the excitement about the brand. You can walk around Milan and see every guy in Abercrombie and
Fitch fleece.
Our lifeguards are so hot. Great looking, cool, confident guys. People will wait in line for hours just to take their photo with the lifeguards that are standing on the porch.
People just want to take home a piece of Abercrombie and Fitch. Dresses are flying out the doors. Any of the men's fashion knits are really exciting to our customers. Since we've opened, you can see so many more people wearing Abercrombie and Fitch. Landing at the airport, walking around in the major shopping areas, walking around in Chibuya.
There's more and more Abercrombie and Fitch, and these people want our product.
Our models
have incredible energy. 1 morning before we opened, just before the 5 minute meeting, the models were downstairs and our shirtless greeters are doing press ups and hanging from the stairs, doing pull ups and using every piece of floor space to kind of show off their muscles. And our camera girl comes out and she starts dancing and then they all start dancing with her and it's just incredible to watch and the energy and the passion that they have for the brand.
Well, I think that says it all. So you had a nice day. Good morning and welcome to Abercrombie and Fitch. What we are going to be talking about today is the future of our company. What the future looks like?
Why we are both excited about it and confident in our ability to execute, and how we are going to do that. On the what, in a few minutes, Jonathan is going to walk through the potential we see for each of our proven growth vehicles over the next few years. Our strategic objective is to leverage the global power of our iconic brands to build a highly profitable, sustainable global business. We are very confident that these growth vehicles afford us that opportunity. After talking about what we think the future looks like, we shall talk about why we are confident we can get there.
We shall talk about our rigorous processes for ensuring we have the right merchandise in our stores. We shall talk about how we run those stores in a way that protects the integrity of our brands on a global basis. Our real estate and international coordination teams will walk you through our process for planning our entry into new countries and identifying and securing real estate. And among other things, we shall also talk about all of the efforts we are putting into connecting with and leveraging our relationships with our customers. The consistent themes you will see in each of these presentations are: 1st, we have a rigorous and proven process in each case.
2nd, we are extremely disciplined and controlled. 3rd, we have outstanding leadership in each of these areas made up of seasoned professionals who have a deep understanding of our brands and cultures. On that note, I want to take a moment to talk about our cultures and values. We truly believe our cultural differentiates us from our competitors and is a critical asset as we manage through both the opportunities and challenges of our continued growth. Internally, we have a statement of our culture and values that is a constant guide and reference point in everything we do, and I want to share that with you.
1, we hire nice, smart, optimistic people who put the goals of the brands ahead of the individuals. 2, we care obsessively about the future of our brands. 3, this is not a hierarchical organization. We leave our titles at the door every morning. 4, we are not bureaucratic.
We communicate directly face to face. We don't allow cover your ass memos. 5, we don't tolerate internal politics. 6, we are obsessively honest. If we screw up, we admit it and move on.
7, we avoid the term I. This is a culture of we. I is used exclusively to admit to screw ups. I say it most days. We are positive and supportive, not competitive with one another.
We are made better by our different points of view. We strongly stand up, but we proactively listen to each other, respect each other and then quickly determine consensus. 10, we are humble. There is always another team waiting in the wings to do it better than we do. And I'd like to pause on that point.
You'll see today that we are very excited about the future, but we are not complacent and we do not take anything for granted. In fact, we constantly worry and that pushes us to keep challenging ourselves on everything we are doing. Finally, number 11, in short, we are a team. No one is indispensable. This is a DFZ, a diva free zone.
We accomplish miracles only as a team, and we really do care about one another. We've been able to assemble a team of talented associates, many of whom you will meet today as a direct result of our culture. We are humbled by the opportunities ahead of us. We are respectful and grateful of where we have been. We embrace our heritage and it is truly a part of who we are.
We are gathered in a cafe today officially known as Wexner Commons. We are grateful for the start we were given years ago. You will be hearing from some members of our leadership team in the sessions later in the morning, and they will also be here for the Q and A session later. I would like to take a second to introduce the members of this team who are with us today. Please stand up Leslie Harrow, Jonathan Ramsden, David Kupps, Ron Gronkowski, Becky Lee, David Lano, Rocky Robbins, John Singleton, Larry Honig and Amy Zeyer.
This team reflects our values and is the reason we will be able to execute our plans for the future. We are also very happy to have with us today some of our Board members, Craig Stapleton, our Lead Independent Director Lauren Brisky and Jack Kessler. With that, I'm going to hand over to Eric and I will join you later in the day for the question and answer session.
Thank you, Mike, and welcome to everyone. We're very glad to have you guys here. And if you're joining us on the webcast, thank you for joining us. If you had some weather problems with your travel this morning, we're glad you could join us at least on the webcast. We're very excited to have you guys out here today.
It's been a long time coming since we've had one of these days. So we're very excited that it's finally here. A few housekeeping details before I turn it over to Jonathan. Restrooms are located over here to your right. If you need to, feel free to just jump up and go.
We're going to be in here all day. So if you're here in person, we're going to be here all day. Complimentary coffee, juices, drinks, all around there. They're on us today. And feel free to help yourself all throughout the day.
Before I turn it over to Jonathan, well, you guys have in your folder a detailed agenda, and we'll be going through different panel presentations. And again, feel free to pop up if you need to and get some coffee during those. But before I turn it over to Jonathan, as far as the Safe Harbor goes, any forward looking statements we make today, of course, are covered by the Safe Harbor found in our SEC filings. So with that, I'm going to turn it over to Jonathan.
Good morning, everyone, and welcome again to A and F. Actually, I've been thinking, I've actually decided I'm going to focus most of my comments this morning on our Q2 stores and distribution expense. Just kidding. I know that's close to everyone's hearts. Actually, as Mike said, I want to spend the next few minutes talking about what we think A and F is going to look like over the next few years and the opportunity we see in each of the growth vehicles we have.
As a starting point, this slide recaps the composition of our business in 2010 between our U. S. Stores, international stores and DTC. Over the next several years, we see a number of key growth drivers, which are listed on this slide, and we are going to go through these 1 by 1. So let's start with our A and F International flagship strategy.
Today, as you know, we have 8 we have 5 A and F International flagships. By the end of this year, we will have 10 with openings in Paris, Madrid, Brussels, Dusseldorf and Singapore. We are now expecting Dublin to move to 2012. We expect that those flagships will represent aggregate annualized volume of around $450,000,000 Moving forward, we anticipate that we will have close to 20 A and F flagships by the end of 2012. And in addition, we have a longer list of identified flagship locations through the next few years.
These locations as well as our existing locations and 2011 confirmed locations are reflected on this slide. Where we can, we will include kids' stores as part of these flagships as well as look to add kids' stores in existing flagship locations. The future locations include 2 2012 flagship openings we are confirming today. 1st, in Hamburg, in the Alta Post building, one of the most famous buildings in Germany, where we expect to open in the first half of twenty twelve. 2nd, in Hong Kong, in the equally iconic PETA building, we've been working on Hong Kong for a long time and this is a big milestone for us.
The store should open in the middle of next year and will help to pave our way into China. Based on existing confirmed and target flagship locations, we see the global annualized volume opportunity from these flagships at around $1,250,000,000 These numbers and the numbers throughout the presentation are expressed in current dollars, and all of this excludes the Southern Hemisphere and Rest of the World opportunity that I'll come back to in a few minutes. Moving on to Hollister, we had 38 international stores at the end of 2010. This included 29 European stores in 4 countries. We expect up to or around 40 international openings in 2011, of which around 30 or more will be in Europe.
Beyond that, we expect at least a similar number in 2012 and see the long term potential for the Hollister Europe store count in the high 100s with representation in the countries shown on this slide. Our existing Hollister European stores at the end of 2010 already represented annualized volumes of over $300,000,000 and we see the total volume potential in the range of $1,500,000,000 over the next few years. We may also open a small number of Epic stores in Europe, which are not included in these figures. We feel very good about our growth prospects in Europe for Hollister. Our global real estate and international coordination teams will walk through the process of executing against these plans in a few minutes as well as talk our longer term about our longer term planning process.
I'll also come back to Hollister Growth beyond Europe in a few minutes. In direct to consumer, there are many initiatives we are working on to drive this business and increase the share of our business mix it represents, recognizing that it is very profitable growth. These initiatives include the redesign of our sites, of which this is an example. The redesigned sites use a single platform for all brands, new left side navigation and featured categories. Billy May will talk more about this later on this morning.
We have had for some time an internal goal of achieving $1,000,000,000 in DTC sales in the next few years, and we believe that is achievable based on the initiatives we have in the pipeline and the growing international awareness of our brands. While not a growth vehicle in terms of square footage, we do also expect to continue to make progress on improving the productivity of our U. S. Stores. This will include continued same store sales increases as well as the effect of future store closures.
We have previously talked about an objective of getting back to 85% of 2,007 productivity by 2012. We are now updating and upgrading that objective to achieve 90% or greater of 2,007 productivity by 2012 and to get back to 100% over time. We think that is going to be both necessary due to sourcing cost pressures and achievable, but will potentially come at a lower gross margin rate, a point I will come back to in a few minutes. I should also stress that this is a forward looking objective rather than a comment on current business. We remain comfortable with our mid single digit comp guidance for the Q1.
The volumes we have just talked about are based on specific plans and proven economics. In addition, we also have some other potentially very significant growth drivers beyond that, but are not yet ready to put specific volume figures on these opportunities. As previously confirmed, we will open our 1st Hollister chain stores in Mainland China and Hong Kong this year. Looking beyond that, we are working hard on other countries in Asia. Frankly, it's too early for us to put specific numbers on the Hollister opportunity in Asia.
However, we don't see why the success we have seen in Europe should not continue into Asia, but we will have a clearer view on that as we begin to open stores, and we will update that in future presentations. In the consolidated numbers we will present in a moment, we are including only a very conservative assumption for Hollister in Asia. The sales volumes we have talked about also exclude the Southern Hemisphere as well as other potential growth areas such as the Middle East. We already know our brands have strong acceptance in Latin America and Australia. The challenge for our company owned store model is dealing with the seasonality issue.
That will require investment in planning systems, in IT and in distribution arrangements. We have a detailed plan for all of that, but we expect it will likely be 2014 before we are ready to open stores in the Southern Hemisphere. We also remain very excited about the long term opportunity for Gilly Hicks, but we also think it is still a little too early to talk specifics about that opportunity. So there will be more to come on that as we go forward. As we think about the opportunity, we are modeling it based on volume relative to Hollister and testing against that.
Taking into account our specific plans for A and F Flagships, Hollister Europe, DTC and U. S. Store productivity and with conservative assumptions for the other growth drivers, we see a global sales opportunity of $7,500,000,000 or higher by 2015, and we see a roughly equal split between the U. S. And international at that point.
In terms of operating income, this chart shows our 4 wall margins for U. S. And international stores in 2010. As you can see, our international stores were nicely above our target 30% threshold. Our U.
S. Four wall margins were above 30% a few years ago, but are now around 20%. And if you exclude the flagship and tourist stores, the average for the balance of the chain is somewhat below that. So we see very significant operating income potential both from sustaining our highly profitable international rollout and from improving our U. S.
Store productivity. DTC growth is also very accretive on a marginal basis, although we will certainly need to make investments to achieve our $1,000,000,000 goal. Last, we need to keep our non four wall expenses tightly controlled, and we believe our centralized company owned store model gives us the ability to drive significant leverage. So what does that mean for the bottom line? As you all know, our stated goal has been to achieve an operating margin of 15% or better by 2012.
That was originally based on the expectation that our gross margin would return to around 67% by that point. More recently, we have said that we no longer regard that element of our roadmap plan as realistic, but that we see opportunity to do better on 1 or more of the other roadmap objectives. At this point, based on the costing we are seeing for the fall season of this year, we think even holding our gross margin rate in 2011 is now unlikely. Beyond that, we don't know. Internally, we are recasting our objective in terms of gross margin dollars rather than a gross margin rate, recognizing there are several different paths to achieving that objective.
Consistent with that, we are also going to recast our objective for 2012 in EPS terms. To be clear, we are not saying that a 15% operating margin in 2012 is off the table, but that our internal focus is moving to an EPS goal rather than a margin goal. So we are officially restating our 2012 objective today as being to achieve $4.75 in earnings per share. Beyond 2012, we expect strong growth in the following years based on the outlook we have laid out today. As usual, this objective comes with the caveat that equity compensation is hard to project and dependent in large part on factors beyond our control, including the stock price, but also our ability to get a new long term incentive plan approved.
We will, however, continue to call out the effect of incentive compensation changes quarter by quarter. So that is how we see the future today. We know that not everything will play out exactly as planned, but we do feel confident in the proven economics of our international ANF expansion, in our Hollister European rollout, in our ability to drive strong DTC growth and to improve domestic productivity. And we think Asia and Gilly Hicks in particular have very significant potential beyond that. And what we now want to do is to have some of our teams come up and talk about how we are executing against this.
Thank you.
Thank you, Jonathan. So as you can see on your itinerary, the next thing will be begin at 10:15 and this is where we're going to break out into different groups. First up will be product. You'll hear from concept design, you'll hear from a merchant, you'll hear from our merchandise planning and how they work. We're going to take a short break.
If everybody could be back in their seat by 10 after 10, the program will begin at 10:15. If I can go get go ahead and get everyone to take your seats, please. And again, if you're in the back of the room, feel free to move forward. We did have a flight canceled earlier in the morning. So there's plenty of room up in the front.
All right. If everybody can please take your seat. And just so you know, our hour long session at the end of the day will be a great opportunity. Jonathan, Mike, as well as Leslie and Rocky will be joining us for an hour. It's going to be a very conversational tone Q and A session and we can definitely go through some of your modeling questions.
I noticed some people had some after Jonathan's comments. Feel free to save those and we can definitely ask them later on in the afternoon. All right. I'm going to turn it over to our product, and we're going to learn a little bit from concept design all the way to how it makes it into the store and a little bit about our merchandise planning.
Meredith Ladinys. You can't hear me? Can you hear me now? Okay. I'm Meredith Lajinis, and I'm the Group Vice President of Concept Design.
I started with Abercrombie about 12 years ago, and I actually started in merchandising. And then about 6 years ago, I moved over to head up the female side of conceptual design.
I'm Jillian Gallner. I've been with the company about 10 years, all in merchandising. I'm the Vice President of Merchandising. I oversee male and female graphic tees.
Hey, guys. My name is Andrew Navarro. I'm the Senior Vice President of Merchandise Planning. I've been with the company for almost 15 years now, and I'm still trying to be more like Jillian, so we've coordinated these pink shirts today. So I hope you like it.
So I wanted to talk to you guys a little bit about what is conceptual design. Not a lot of people are familiar with that part of the process. So basically, it is trend forecasting. So my team and I are responsible for predicting the next big clothing item, the next big trend. So that's not really an easy thing to do.
We don't have a crystal ball, so it would be much easier if we did. The way we go about doing that is really just immersing ourselves in trend research. So I'm based here in Columbus, but I have team members who work in satellite offices in some really key cities around the globe, whose job is to be constantly on the hunt for the next big idea. So my team does that through lots of different ways. We shop retail just to see what's going on everywhere from young juniors brands all the way up through high end and designer level, just to see what's in the stores.
We also look towards runway and we're very in tune with what's happening on the runways, what the buzz is in the industry, what people are excited about. We're also flipping through magazines and constantly online. We're reading trend papers and editorial and just constantly absorbing whatever there is whatever talk is going on online like what the buzz is what what people are saying on blogs. We're also just noticing what's going on on the street. A lot of trends sometimes can come from what young kids are wearing on the street.
So we're constantly seeing like what's actually on the guys and girls and talking with them and seeing what they're excited about and just what's next on the street. We do We do a lot more things other than those things. That's just kind of a snapshot of how we garner all of our trend information. From there, we have to figure out out of all that information we've collected, how do we find out what's right for A and F? So my team and I like to refer to sort of the filter that we use is really the A and F prism.
So we ask ourselves out of all these trends that we've now gathered from all these different markets across the globe, Are those trends young? Are they casual? And are they sexy? And if the answer is yes to all three of those things, then we figure it's something that we should probably be talking about interpreting in an A and F handwriting. So from there, the way that we kind of communicate with the merchants and designers and planners is to take all of that trend information and really put it in an order of priorities.
We really try to speak to just the biggest of big ideas. We try not to sweat the small stuff because there's so much trend information out there that you can really get overwhelmed. So we really just try to take the trends that are casual and youthful and sexy and really put them in an order of priority for the teams here in Columbus. So we really focus on just what are the big ideas. What are the things that we can really sink our teeth into as a company and see ourselves making big statements of in the stores and see on all of our models in the stores.
So that's a little bit about how we do our job. The other piece I want to talk about was how connected my team is with the team here. I'm here as I said and my team is in satellite offices, but we're so connected with the groups here with merchandising and design and planning so that my team doesn't necessarily just bring the initial idea and then just leave it alone and walk away. We're very, very involved with the groups here throughout the entire process. So we're very in tune with what's selling in the stores right now, what design is working on, how they've taken the ideas that my team has given them and how they're developing those ideas into product.
We're working with the merchants on what their line assortment is. We're working with planning on how deep are we buying these big ideas that we've directed everybody to go after. And we really follow through. We feel a huge sense of accountability and responsibility for directing everyone and then making sure that that works on the tail end. So that's a little bit about what concept design does and my job.
And Jillian is going to talk to you a little bit about merchandising.
Okay. So the merchant role at Abercrombie is to deliver the right product at the right time at the right cost. We take the product from flat sketch to finished product in stores and then we analyze and react to those to the sales. We're unlike a lot of other retailers in the sense that we don't have a production team that we hand it off to at a certain point. The merchants really see the product from start to finish.
So the right product, that's where it all starts. That's what Meredith was just talking about. It all starts with an idea, what we refer to as a big idea. What is the big what are the big business drivers of the season? Merchants work with concept and design.
We're out shopping. We're trying to identify what those big ideas are. From there, we work with design as they sketch and create the line, assorting the product within our category. We're looking at every detail, the fabric, the trims, the thread colors, no detail too small. Is it soft enough?
How does it look? How does it feel? How does it fit? We're always asking ourselves, is it young? Is it casual?
Is it sexy? On the male side of the business, does he look masculine and rugged and hot? On the female side, does she look girly and cute and pretty? These are the questions we're always asking ourselves to make sure that we get the right product in the stores. While we're doing all that product development, we're negotiating all the costing and all the
details with the factories. We're challenging our vendor partners on quicker time
lines, We're challenging our vendor partners on quicker timelines, sharper costing, and of course, maintaining the best quality. We're also simultaneously working with our planning team. We're working on the inventory buys and the sales. We're working on the price points and the promotional strategies for the season. And before we leap, we always try to learn.
So that might mean chasing a test order or trying to get something into our flagship or Tier 1 stores sooner than the rest of chain or trying to get some samples here that we can show our focus groups to get some feedback on. Then the product sets in stores, and we're reading the sales, and we're reacting to the business. What's selling, what isn't? We're looking at the department level, the style level, down to the color, size level. We're constantly reacting to the business, trying to minimize the bad and maximize the good.
We have extremely talented creative problem solving solvers here who shake and bake, never say never, we make the impossible possible here. The last thing I wanted to talk about is how merchants are set up by specific product category at Abercrombie. So knit tops, denim, fleece bottoms. This organization allows us to be category killers. We are expected to know everything about our product category, to own that piece of the business and really drive it as hard as we can.
So as you just heard, as merchants, we have our hands in every aspect of the business, from concept to assortment to production to sales and analysis to applying those results. We do it all as a team. Andrew is going to talk about the planning role in that.
Yes. As Julia pointed out, the merchants are involved in many aspects of the business. And one of the, I think, most vital roles in this company is that planner merchant and concept partnership that we share. And part of understanding as we're driving the business and learning about the business is understanding, the different store groups that we have as our business is evolving, which we define as promo stores and non promo stores. And looking at that part of the business, we understand that these are different businesses from both a promotional and assortment standpoint.
And although our assortment is in the majority of our stores, it's understanding that visibility about how the same item in the same category can sell very differently in each of these store groups and how
we're able to react to that.
To define the promo stores a little bit further really consists of our domestic store base, where we run promotions, whether it be global store promotions or category specific promotions. And to have that visibility really allows us to focus on continuing to drive
this domestic store business,
and continue to gain the market share that we're after. The other to define the other store grouping, the non promo stores, is really a combination of both our domestic and international store base where we do not run promotions, and that store really primarily consists of regular price merchandise. Our rigorous planning system and process of being able to forecast AUR and sales in these different store groups, both internationally and domestically, is huge, how we can do it on a buy item basis, and it really allows us great precision and efficiencies with our inventory. And speaking to the international AUR, we have a very disciplined process of how we determine our international pricing. It starts off by looking at what are some of the successful brands in the market that we're going into, how are they priced comparably to similar items that we are, Also looking at other brands that we may not necessarily directly compete with, but they sell luxury goods and how are they priced accordingly?
So taking all of this data and how do we come up with a strategy that best fits the market that we're going into and the profitability goals that we're out to achieve? The next topic I want to talk about was what is a planner's role at ANF? It's about maximizing opportunity and minimizing risk. And I think one of the things that really separates us from our competition is how we're set up from a cross branded standpoint within our organization, which Jillian had touched on before. And I think it's not just the merchant piece, but it's a lot of different facets of the business that were separated that same way as a full team.
So we've got planners that are set up from a cross branded standpoint, design, merchants and other areas within the business as well. But it really allows us great efficiencies to the business from maximizing trends for all of our brands, whether it's male woven shirts or it's female fleece tops, we go after the trends of the business that are right for our brands. And by having these teams really working together really allows us to focus on differentiating the product. That is really the responsibility
that we talk about on
a day in, day out basis. Having focused category strategies so we can really maximize the opportunity as we're learning about the business and cost efficiencies as we're working together as a team and talking about the same trends. Those individual teams can really focus on a lot of these efficiencies that allow us to move forward. And to piggyback on what both Meredith and Jillian talked about as far as big ideas, it really is the backbone to this company. And it's how we take big ideas, turn them into big statements and turn them into big volume.
And it's really kind of a 3 step process as we go through it. 1st, it's identifying the trends, whether it be conceptual designs from everything that Meredith discussed, to the merchants out there on shopping trips and really having our nose to the ground in regards to what's the incoming trend, what's outgoing and how do we really position ourselves accordingly to leverage where we want to be. The other thing is really learning. How do we learn about these big ideas so we can make sure they turn into big volume? So whether it's through we do lots of testing, focus groups and our Tier 1 and flagship trends, our non promo store base, which is a huge advantage to us because it allows us to put more forward fashion or incoming fashion into these stores and really learn for the total company.
So it really allows us to leverage all of our stores to drive the whole chain. And thirdly, how do we react to this business? How do we go after this and make it big volume? And that's really where the planner really manages that process with the merchants, with the concept, all as a team pulling together for that. And we call them our playbook strategies, which is really putting the big ideas in the beginning of the season, putting strategies together that allows us to maximize opportunity and minimize risk, having receipts closer into the trend so we can react closer and leverage ourselves that way.
It's allowing us to be very nimble with our inventory from a dollar standpoint and making sure that we have it in the right categories at the right time. In closing, what I wanted to
talk about is how is all
of this possible. And Mike mentioned it when he talked about it in the beginning of the morning and Meredith and Jillian as well, but it's about teamwork. And we just have an amazing team environment here that everybody has one mission by brand with all the brands within one organization. And we really are interconnected all of our roles to the processes as we make team decisions, which is huge. We have a saying around here that goes, every day is a new day, which really allows us to make sure that we're open minded.
As we walk in these doors every day, what is new? We might have some new information. We have all these tools out there that allows us to learn more about what's going on with a business and being right. And it really is in our DNA that we are very humble people, and we react and adapt to changes together as a team, which is huge. So thank you guys for joining us today, allowing us to share a little insight of what we do, and we hope you guys enjoy your day.
Thank you.
Thank you guys very much. So now it's your turn. If you guys have any questions that you'd like to ask, feel free to raise your hand and I'll come to you with a microphone. I'll get us started off with 1, if that works for you guys and I promise. I'll turn it over to you.
You mentioned international pricing, Andrew, and you mentioned our process in which we go into countries and determine what we want to sell at what different price points. What about from a selling perspective? As we've gone into new countries, have you guys seen any one category that does more or less than others? Have you noticed any selling internationally versus in our U. S.
Stores?
We do. And we also have a separate team as well that is really analyzing that business and feeds us information. And like I mentioned before, as far as our process of turning big ideas into big statements and a big volume is seeing some of those incoming trends that we might see from an international basis that we can really take to the chain. So it's really becoming a business that's very dissected and learning different components that allows us to take these ideas to the chain.
Going back to your international merchandising strategy. One of the things I noticed when I'm in Europe or when I see tourists in the U. S. Is that your brand outside the U. S.
Spans a much broader demographic, whether it's from 15 to 60. And in the U. S. You're kind of more seen as a younger brand. So can you talk about that a little bit and how you differentiate over there?
We stay focused on who our target customer is no matter what country we're in. So no change to that.
We kill the mic. No. I've got a question also about international pricing. You mentioned that you go into a market and look at your competition, but those markets are so fragmented, you could make your price points anywhere you want to. So when you when you look at competitors, who specifically are you looking at or what type of competitor are you pricing against?
Well, I think, certainly, you can jump in here as well. But I think looking at who our customers work, we're
comparing to who is our competition, because you're right, it can be very fragmented. But what are
those specific brands that Because you're right, it can be very fragmented, but what are those specific brands that are similar demographic and similar price points as far as what we're looking at and making our decisions based on that. But we have to be very focused on what it is, and it's a huge discipline process that we go into.
Just so I can be clear, are you planning do you look at promo stores and non promo stores as 2 different categories? Is that what you're indicating that you want to have different merchandise at different times in those two stores so that there's not products that are full priced in 1 and discounted at the other?
No, it's really I mean, the premise of our assortment is we're going after the same assortment for all stores. It's just a matter of seeing how different categories can react from a selling standpoint, international and our non promo stores versus our promo stores because there are differences to that versus looking at everything under one umbrella of as we plan on a buy item basis, everything is one umbrella. You might have international stores that's driving the majority of that, the non promo stores versus what the promo stores contribution to this. So it's understanding those two elements and how that rolls to a bottoms up.
And that goes in line with what we've said in the past that as we look at our store closures for the U. S. Store base, the stores that are outperforming in the U. S. Store base are primarily those tourist driven, obviously the flagship of the tourist driven and it stands to the fact that we don't necessarily need to keep those underperforming stores going with the markdowns and the promotions in those stores.
So that's something we've been speaking about pretty quickly.
What type of research do you do as you go into say Asia where the population is smaller but not just shorter of the size differently? And how do you plan and allocate for that type of environment as you open those new stores?
We don't make any adjustments to the actual product specs, but we of course would allocate sizes and colors as necessary by store group.
The question was do you research before you go in.
Yes we do. And of course as you get early selling you start to be able to predict that a little bit better.
Thanks. You guys have a different merchant merchant organization or it's differently organized than some other companies because you have multiple brands but you've got one organization. So help me understand how you go about differentiating once you get those ideas and trends and so forth, how you differentiate between the brands?
It's a really good question. We are we firmly believe that trends transcend age and even trends transcend gender. So we get big ideas and we see how we can interpret them in each brand's handwriting because of how we're organized by category. It's very easy for that head merchant head designer head planner who have their eyes on the whole on all of the brands. Who have their eyes on the whole on all of the brands to be able to make sure that each assortment is differentiated and feels like the brand that it's going in without losing sight of what the trend is what the big idea is.
All right. We have time for one more.
Hi. I was wondering if you could talk a little bit about your lead time so that when you say you made a mistake and every day is a new day, how easy is it to make up for that mistake? How quickly can you react? And also if you could talk a little bit about your testing process, we're hearing that flare leg jeans are starting to sell at different brands. And what does that mean to you?
How do you measure what it means to you going forward? Thanks.
Well to answer your question from how do we react to the business it's obviously different by category. So that's really what the part that goes into the pre season process within each category since there are different lead times that we're set up that as we whether it's test or whether it's in season selling or Tier 1 flagship all those elements that we're able to react with having enough receipts on the back end that we can either make that bigger or minimize the risk accordingly. But there's no like one set we can react within 2 months. I think that's the pressure that we put on ourselves as a company to allow us to be that nimble so we don't have to take a huge market on liability.
Do you want to
answer that?
And then
as far as testing, we're testing almost every week of the year across many different product categories, which include individual tests and total company assortment tests. We're reading those tests to see what's good, what's bad, what's really good, and we're reacting off of them.
Question was about specific percentage of test and we haven't disclosed that particular component, but they are constantly testing, chasing and reacting. So Meredith, Julian, thank you guys for your time. We're going to transition to the next group, Managing Our Stores. All right. Thank you.
And just like the last session, we'll hear from our stores team and then we'll open up to Q and A following that before we move into the 3rd session.
Hi. I'm Amy Zaire. I am Senior Vice President of Stores. I've been with the company for 19 years, all within the store organization.
Hi. I'm Larry Honig. I joined the team about 2.5 years ago. Previously, I was a partner at McKinsey and then had various jobs at the C level with various retailers.
Hi, I'm Dionne Reilly. I'm the Storz HR Group Vice President. So I lead the HR team in Storz. And I joined Aber about 4 years ago. And prior to that, I worked for PepsiCo.
And prior to that, I worked in aerospace for United Technologies Corporation.
This slide just tells us a little bit about both sides of stores and stores operation, just basically how it's divided down, looking at stores representing the brand. And really, our biggest goal is brand consistency worldwide. And that is not different by any of our jobs. This next picture is a picture of our lines. I'm sure many of you have seen our lines.
We like lines a lot. But the lines really represent a beginning and an end for us. And it really starts first with recruiting. As we go into a new country, we start recruiting anywhere from a number of weeks to a number of months out depending on the volume of the store. And really, that's the heart and soul of the brand and our stores looking at do we have the right team, or putting the right team in place to create the in store experience that really makes A and F stand apart.
And like everything we do at A and F, as you can see on this slide, standard process and audit is sort of our mantra day in and day out and including recruiting. We have a very rigorous process around recruiting. We don't just send people out on the street and see what happens. We actually end up recruiting quite a few people for every store and only a select amount of people make it. And those numbers can be anywhere, can range in we probably recruit 200 to 2000 people depending on the volume of the store.
This is our beautiful Copenhagen store, and Amy and I were there when we opened it November 4, and what you see is a model here interacting with customers. I know all of you have been in our stores and have seen models yourselves. And what my role is in store operations is to work with Amy. We have a rigorous set of standards that we use to determine how many models there will be in any given store on any given day and in fact at different times during the day. Everything we do is done on the basis of the number of units that we expect to sell during the day and the number of units that we will process the night before or during the day in that store.
So when you come into our store, the number of models that you see, the number of cashiers you see, the number of managers that you see is based on a set of algorithms all based on the number of units in their store. Here's one tool that we use called My Hours. It is used in every store. It's accessible by the managers. So the managers will call up this tool toward the end of a business day.
This tool takes into account what the sales have been during that day and what the shipment is going to be received either that night or the next day. And then the tool calculates for the manager, in an ideal world, how many of which different types of persons would be in the store working and what would their number of hours be in total. Now the manager obviously has scheduled this out in advance of that and may or may not have the flexibility to change at the last minute, but the tool ensures that the manager understands on a daily basis what the most optimal way would be to run the store.
I think Amy started out talking about lines and the fact that we love lines. But I want to specifically speak to international, which is once we've decided to open a new store internationally or go into a new country, the HR time line starts 12 to 14 months out. We have a pre entry and entry and a post entry process. And she spoke to the standard processes and audits. Everything we have is a rigorous set of processes that helps us to execute efficiently and flawlessly so that we can add value to the company.
Our HR team does not want to be the team that takes away value from the company. We specifically speak to the pre entry process. Once we've made the decision to move into a country, we collaborate with other teams on campus, including legal, IT, tax, compensation and benefits, to ensure that we understand all the rules and the regulations of operating in the country. Our job is to ensure that we keep our core processes intact so we don't have to change our business strategy. So we take our core processes and then we look at those against what is required in a country to ensure that we can develop processes and standards and measures for every country and every store that we have internationally.
But also when our line starts, we have to look at which experts we need to send to represent and grow the brand internationally. So everything from selecting the right person from the Abercrombie team to open the store for us, to ensure that we have cultural training, where necessary we have language training, These are all managed by the store's HR team. Once we enter the country, Amy spoke earlier to recruiting. We support the recruiting teams in country with the right tools and resources to ensure that we are bringing on the right people to start building our brand internationally.
This is a picture of one of our management teams. And our management teams really make it all happen. This is an international store in Italy. But really, what I want to talk about is we talked about the brand consistency worldwide. And I think there's 2 really key points to making sure we achieve this brand consistency when it comes to our managers and really help our managers help that out.
The first one is all of our managers are grown from within. Every assistant manager, store manager, district manager, regional manager, director of stores and myself, all started in stores either in the MIT, the Manager and Training Program or in a lot of cases as a part time employee in college and came on board as a manager after they graduated. And I think that really they know the brand from the ground up. They know the expectations. So it is very consistent and it's very clear.
The second key point is the use of our expats or I like to call them experts, because really not expats in the true sense of the word. They don't have a big country club package or anything. But they really go and they it's 1 or 2 managers that have done it before and done it very successful. And we're able to put them in a new location, a new country, and they can they know the standards, they know the expectations, they know the process and they know how to audit it. So they really go in for a different amount of time depending on the store, and they can train, manage and train that local team to get them up and running and to really teach them the brand.
This is our store in Madrid. Amy and I like to go to a new store in opening when we open a new country. So we were there when this store opened on September 30. This is at the Xanadu Mall, and this is the management team of the store. And what we do from a store operations standpoint is, on a daily basis, we communicate with the store, what we call the program.
And the program really tells the store what needs to take place in that store that day. Now for many days, we don't need to tell them what needs to take place because they do it every day. But on a regular basis, there may be promotions that are going to take place. We have to communicate to the store how those will be implemented in the store, at what time, on what items, in what method, what that will mean for the rest of the inventory, whether inventory needs to be moved back to the back of the house or brought forward for that particular promotion. So all of these managers are used to receiving from us, on a regular basis throughout the day, communications on the program.
And I talked about a pre entry, entry and post entry. And Amy talked about our strategy, which is we promote from within. We feel that this is a way to ensure that we are keeping our culture. It is what makes us unique in the retail space, along with our quality and innovation. I think when we talk to it though, my group is really responsible for talent management.
In much the same way that in the U. S, every director of stores or every vice president or senior vice president of stores starts as a manager in training, it's the responsibility of my team in working with Amy's team to ensure that we have strong robust training and development programs and also a very, very rigorous, thorough
and I
would say top notch succession planning program. So to talk a little bit about the training, when you come into ANF as a manager in training, every single associate, regardless of where you sit in the universe, has to go through our 10 to 12 week program. It gives them an overview of everything they will need to know in order to run the business and to run it effectively. It's not just the technical aspects of the business, but we also talk about what it means to be a leader at A and F, what it means to operate a diva free zone, what it means to be collaborative, what it means to be optimistic. This is all part of what we train our individuals on.
We use and leverage technology because we have a very, very large workforce both here and in the rest of the world. So technology is our main driver. And my team works with the store management and store ops teams to ensure that we have, albeit, sexy technology that our employees can love, whether it's a podcast or it's a really great video, whatever it takes to appeal to them in terms of how they can learn, we do it that way. But once you graduate from the MIT program, we also have programs for assistant managers. And it's at this time that we start talking about who are our high potentials, who's going to be the next Amy Zaire or the next SVP of stores.
And we use very, varied tools for assessments that help us to figure out who's going to be the talent that we need to retain. We are aware that we have a large staff, on average about 80,000 people a month. So not everybody is going to be an SVP, but at the same time, we want to find the 200 to 500 people who are going to make us great in the future. So in addition to the assessments, we also have development programs for them where we have specific leadership and technical program training that we give to them. We also create career paths.
It's why people come to us. You can come to us out of college, and in 10 years, you can be a director or a VP. That is really not
very common in our industry.
So we have a lot of folks who've grown up here who are young, in So in So in addition to that, we also make sure that we meet with our leaders 2 to 3 times a year to go through that talent, make sure we know what the next steps are as well as communicate to them how valuable they are to the organization. This allows us to promote only from within. And it's promoting within that helps us to keep who we are as a core company and to retain the tribal knowledge that makes us great.
Going to get by without a photo of our shirtless greeter in front of the store. But I think it's a good ending to what we were talking about. We talked a lot about standard process and audit. And even this guy at the front of the store in a flagship, there is standard for him. There is a process around what he is doing and managers check that process every half an hour on the floor down to how many photos are being taken with him and to see if it's on track.
And that's a follow-up as well with all of the audits. So everything we do, even on the brand side, the store experience has a standard process and audit to it.
And in the store as well, we do what Amy does with shirtless breeders. We have a standard and a process and audit for what you're seeing. This is Copenhagen also, and we have what we love to see, a customer holding up an item. And we know that one of 3 things is going to happen to that item, and we track those things in terms of the amount of time and we study this. So that customer, one of the things she may do is drop that item back on the stack.
The other thing she may do is take that item back to a fitting room and decide whether or not it's for her. She may leave it in the fitting room with the fitting room attendant. She may also, as most likely the case, purchase the item and go out of our store very happy with what she's bought. But in any case, now we have inside the store, we have to deal with what she did to that stack of merchandise and what about that item that's no longer for sale. So we have a process that determines how long it will take her to get through the store and what's the likelihood we're going to have to get an item back out to the store and then who's going to take it back out.
And when they get back out to that stack, the stack is likely to be messed up, and we want that stack to look the same as it did when she approached it. So someone has to refold the item or bring it out from the back and then remake the stack to look like it did when this customer walked up there. All of that is subject, as Amy alluded to, in terms of our models, that's subject to a rigorous process, time based standards, all of it comes down to number of units so that we can control what happens in the store from a financial standpoint. And I think that's the end of our formal presentation, a summary slide that Amy started off with in terms of what we do.
Excellent. Thank you. I'll get us started with 1, and I think it's a great compliment to you guys and the team that you run. But I think from everybody, when they go overseas or even when they visit a mall store here in the U. S, they always ask, where do you find the kids?
No matter where we're going, where do you find the kids? So if you want to talk about where we do some of our recruiting, maybe some of the numbers, that'd be great. Any questions?
Yes. We when we go into a new city or anywhere to open a new store, we have a team, the manager and assistants and usually a city recruiter or a recruiter in the area that help scope out the areas that we want to be. Usually, honestly, it starts with finding some great kids on the street and we or somebody knows the city and we know where the hotspots are. From there, we basically break down a timeline and hit those different spots every day through the recruiting process. From universities, we do a lot of recruiting on all of the university campuses.
We scout out the best universities in the city when we first get to a city. We go to hot spots in the city. We take a lot of advice from young kids on the streets of where to go. And then we really start going after our goals. Like I said earlier, we on a really high volume situation, we will recruit and interview anywhere from 2000 to 4000 people to find a staff of 500 to 800.
Thank you.
Can you guys talk about in Europe some of the challenges around kind of labor hours, maybe less flexibility than the U. S. Compared to what we understand and how you deal with that. How much more fixed are your payroll expenses in Europe compared to the U. S?
I'd be happy to take the first part of that. Yes. I think there are challenges for us anywhere we go whether it's California or New York because we do have a different staffing model. I think it's unusual to have a company that has 80,000 people on payroll in any given month. So going abroad was just one additional challenge that we looked a little bit to creativity for and some hard work.
The contracts, I think, when we initially went in, was sort of a stumbling block because we'd never dealt with them before. But the reality is there's no harder than adhering to New York City laws that change every single month for us. No more difficulty. And as I referred to before we use technology as a driver. So our IT team has allowed us to build systems that are flexible enough for us to make changes as we go through.
And in terms of scheduling, Larry's team is on top of how many hours we can use to ensure that we don't go over the number of dollars we're going to spend in the store. I think we manage that extra very, very well. So it's no more challenging in California, quite honestly, than it is in Copenhagen.
Thank you. We saw some new productivity goals up on the screen earlier for the domestic stores. How are you incentivizing the managers domestically to try to get the sales per square foot higher?
No incentives of any kind on our managers' own productivity. We have no standards. We want the managers in the store to run the store so that it looks beautiful all the time. It's a happy, friendly, inviting, warm, quality atmosphere, and that's what the 3 of us get paid to ensure happens.
And just to add that we do hire we hire hard and manage easy, which essentially means that we look for that right person who fits our culture, who will drive the business no matter what. They create the in store experience that the customers expect. And we do have that kind of staffing in our stores.
All right. Thank you guys very much.
I'm David Lano. I'm the Senior Vice President of Global Real Estate and Expansion. I've been with the company since I had a full head of hair and abs like a Hollister lifeguard. I've been here forever. I was in the Storrs organization with Amy for 16 years, and I had the amazing opportunity to move over to real estate 3 years ago.
My name is Chris Anderson. I'm the newbie to the organization, 8 months thereabouts. Came from the world of strategy development from both in operations as well as the private equity side, mergers, acquisitions, that kind of thing. Great to be here.
I'm Jay Lessard. I'm a Senior Manager in the Real Estate Group. I've been here for 2.5 years now. Prior to that, I worked at an investment bank in New York and also in Boston. Okay.
We are the people that have the, I think, the most fun at being able to go out there and decide how this company is going or where this company is going to go and how we're going to expand. What we do is we look at each market and we decide how we identify, a, how we put stores in, flagship or chain and b, how we how big each of those markets are. So each of us are going to talk about I'm going to talk about market identification and branding. Chris is going to talk about preparing the organization. And Jay is going to talk about actually executing the plan and going into the market entry.
This whole process takes about 24 to 36 months to prepare from the time we start to the time we open our first store. So what I'll start with is really the market identification. Just to remind everyone, I know Mike has said it several times and Jonathan, is A and F internationally will be a flagship high street brand. It will be positioned similar to the way we've positioned ourselves in New York, similar to the way we've positioned ourselves in Tokyo, in London and in Paris, which is we are casual luxury and we will position ourselves near the luxury. We will not be sitting on a high street near other high street brands.
So A and F being the high street or the flagship location, then we have Hollister which is going to be chain. Jonathan mentioned earlier there will be a few Hollister Epic stores throughout the world, but we're focusing really Hollister on a mall based brand. So, what we do is we look at several things. When we first start, we look at the overall retail landscape of each country, how the productivity is of certain brands that are there, how many stores they have. We also look at our the GDP per country to see what is the spend power, what is the purchasing power based on the population of the country.
We look at our direct to consumer business. The direct to consumer business is a great way for us to pinpoint, hey, we're hot in this country. We need to get there as soon as possible. So that's first of how we identify the countries. Then what we do is we actually schedule trips to the country.
And our team breaks up into groups and we'll go into a country, we call it a blitz, a little sensitive in Germany if you call it a blitz, but we go in and we actually visit every single high street location in every single city as well as every mall. And I think that's very important because in order to understand or in order to identify how big the brand is going to be within that country, we need to understand what's right for Hollister and A and F. We will not, as other brands have, sell out and just go to locations. Small story with Mike Jeffries. We were in Madrid.
They were taking us to the highest volume mall in all of Spain. We walked in. The tile is cracked. The windows are broken. The awnings are dirty.
The mall hadn't been remodeled or touched or cleaned probably in 15 years. And Mike said, I don't care what the productivity is in this center. This is not brand appropriate for us. And that's how we've identified ourselves in Europe. We are only going to the best centers and to the brand right locations.
So as the team travels throughout each of the countries, we rank each of the centers. And in the beginning, when we really didn't have anything to rank, now we have the U. K. And now we have parts of Italy and parts of Germany, is we really based it on the U. S.
And said this would be an A mall in the U. S, this would be a B mall and this would be a C mall. And then that would help us identify how many locations we really believe we could be in. Obviously, starting hopefully with the A malls first, we looked at all of the co tenants in the mall and being the fact that you're in other countries where they do not have the typical co tenants we have in the U. S, then we have to decide who are our co tenants within each of those countries?
Who are we comparing ourselves on our pricing strategy? Who are the customers that we're going to take from these other tenants? So we look at that and we are very, I think, demanding on who our co tenants are within the in the mall. So that's how we come up with brand right locations. Then what we do is we are challenged with physical plants.
We as in the U. S, every mall not every mall, but most malls are built with very deep spaces or very wide spaces. So our box, what we call our prototype, fits pretty easy within the U. S. In Europe and in Asia, these locations or these the physical plant is a little different.
So given the fact that we are setting our stores into 2 tiers in Hollister, so that we have 2 floor sets, not 150 different floor sets. It's our responsibility to try to be able to get the location that is going to have the exact same layout as any store here in the U. S. So sometimes that's a challenge. But for the most part, we've been able to secure those locations.
I think what else is important is really being able to decide within a city, especially in some of these countries that are not as mall developed, is go look at the mall and then go look at the high street and decide where are we going to be in 10 years. Because what's happening internationally right now especially in Europe well and Asia are the mindset of what a mall was years ago is very different than what the mindset of what a mall is today. And that is the high street was the location that everybody went and shopped that everybody spent their day. They went to lunch. They walked the high street.
Now it's very different. With some of the success that the U. K. Has had as well as the success that Germany has had and what they're doing with these new shopping centers and making them really more places to go and spend the day. These other countries have really opened up to that and developers are coming in and they're building more and more exciting places to shop for these customers.
So when we go and we decide is this a high street location for a Hollister or is this going to be a mall location, we have to bear in mind what's happening in the future for that city and where the new developments are. So we have to stay in tune to that. Nine times out of 10, we go to the mall. The mall is the place of the future. That's where we see the young kids in Europe, and that's where we'll put our brands.
In some of these cities, the malls or the developers may not be going there or they may not be going there for a long time. So we have to decide is it a high street location for us. We'll have a small number of high street locations, brand right high street locations, but Hollister really is going to be a mall based throughout the world. So once we do that, we contact the landlords of these centers and Jay is going to talk a little bit about that. But most importantly and what you guys want to hear about is financially, does it make sense or does it change the model?
So Chris is going to talk to that.
So we will not be entering markets in a licensing or franchising structure. And to leverage the organization Columbus the best we can, we have an international steering committee led by members of the executive management team as well as leaders of other departments in the organization. And that organization drives the total A and F to be prepared for when a store will open in a new market. That is a big part of the 24 to 36 months. It's expensive, right?
We spend a lot of money to do that. The store ops group talked about the PATs, the expats, ITs, legal entities, all those things have to be created and prepared for us. All those costs are incorporated into our what we're referring to as our sorry about that into our country entry model. And that those dollars in and themselves have return expectations. Then we go to what we call the country specific store model, if you will.
In each country, we face different wage rates, which states different costs of for construction, different occupancy costs. So what A and F will not move off of is how the store operates. Store ops again said that beautifully. And we will not go off our demand for a strong return. And Jonathan talked about the 30% 4 wall contribution.
We will stick with that. We have cash flow requirements that are equally as attractive, cost of capital I mean, sorry, IRs that are equally attractive. So we challenge just as Jay I'm sorry, David challenges Jay and his colleagues to think about how the brand appropriate locations can best provide growth for the company, I challenge the group, maybe another screen, if you will, of what locations are capable of providing the financial return that A and F is demanding. And with that, I'll turn it to Jay and let him talk about how he identifies locations.
As these guys discussed, as we go into markets, we obviously identify the opportunities that we want to go after. The next part of that equation is actually securing these locations so we can actually open a store. And the key to doing that is really building partnerships and relationships with the different investors, the landlords and different agents in the different markets that we go into. And the idea is to really to get these partners to understand the value proposition of securing a Hollister or an NF location within their portfolio. And as you find in the United States and elsewhere, there
is active investors
and there is some passive investors. And we really need to get all those types of different investors to understand what the value is of bringing a Hollister into your mall. I mean, we really do have the ability to define markets by deciding that we want to go into your shopping center. And that comes down to the exclusivity nature of how we position our brand. We're not going to be in every shopping center, as David mentioned, in Spain, and we're going to be very exclusive on where we go.
And for a landlord, that's very attractive. And financially, it's very attractive to them to work to try to find us that location because what that's going to do, it's going to drive rents around them at a higher level because they know that they're going to have the Hollister in town or they're going to have the Abercrombie and Fitch. They're going to get the higher footfall into this center. And quite frankly, it's going to beat the competition down the street. So building these partnerships, getting these partners to understand the brand and finding these opportunities is whole part of the equation.
And after we are able to secure these locations, it's obviously trying to construct the deals and leveraging what we've gotten the landlords to understand to try to drive the best economics going forward. So once we get these opportunities, we really need to do our due diligence in this space and we have to understand what is the volume that we're going to do in this location. So we talk to the landlords, find out what are people doing within the center. And we also talk to our contacts at different retailers. What are you doing in the center and how does this rank to other centers that you may be in?
And that allows us to do analysis to understand that, well, based on what we know over here and what we know over here, we think we can do this. The other thing is look at the catchment also compared to what we know. Is it our customer? Is it brand appropriate? How does this compare to other things that we're looking at internationally and also in the United States?
What is the rental history? We'll talk to agents. What has the rent been and what do you perceive as the trends for the rents in the future? How is the market evolving in these different locations? It may be a great center today, but what if there's a new center being built down the street?
What if there's a new position on a high street location? What if this is going to be the hot street in the future where they've already signed up some key brands here? Are we positioning ourselves correctly? So that's all part of this due diligence going into deciding on the opportunity that we have. And then we need to negotiate the financial terms, which some are monetary financial terms and some are non monetary financial terms and again drive the best deal we can.
Some of the financial terms are obviously the rent, the maintenance, the percentage rent that you may have in some locations, but also part of our job is to protect the brand and to limit the liability going forward. Do we have a kick out in the space? We're going to have co tenancy requirements. There's going to be standards that the mall has to meet, so we ensure that our brand is positioned correctly today and into the future as well. Again, we're going into these markets, not looking at this as a 5 year investment, a 10 year investment, but we're really trying to build long term relationships and decisions in the markets that we go into.
And then obviously, you got to secure the location, negotiate with the landlord, go through the ROA process, build the model, put the different inputs into it, and then you just got to drive the deal home, make sure you can secure the vacant possession in the lease signature. And again, the key here is the brand. And we're constantly driving the brand, brand, brand to really get the landlords and our partners to believe what we believe is the importance of having our brand in your location and why and that's pretty much how we can get the best terms possible.
Excellent. Thank you, guys. I'll turn it over to questions. Anyone for our long term planning and real estate team?
Hi. Can you talk a little bit about when leases come up for expiration, what are you seeing in terms of renewal rates on those leases and also contribution, landlords versus yourself, in terms of remodel dollars? Thank you.
Domestically, I really don't want to speak to that because if I give out any secrets, then I don't get any of that any longer. So I don't want to speak to that. As far as contribution dollars, I will talk about domestically and internationally because of the power of our brands, especially internationally, Jay mentioned
a lot of
the things that we fight for. What we have experienced and what we hope to continue to experience is with the huge successes of the German entry, the Spanish entry, the Italian entry, the English or the UK entry, that once these landlords, it's like collecting chess pieces. Once they get the 1st Hollister, then everybody wants 1. So there is a convention in France every year. It's like the ICSC here in Vegas and it's Mappic.
In the 1st year, it was us walking around in flip flops and people staring at us and didn't have any idea who we were. Today, it's like going and we're like the Beatles. I mean, there are people are chasing us down. Amy Zaire's team has been able to have greeters for us. And it's truly something that is infectious and exciting.
And if you haven't been to Europe and soon Asia to see the excitement of these brands, it's just something I can't speak to. So to answer your question, I get very excited, emotional about it. But to answer your question is these landlords internationally are now giving us a lot more than we ever had planned to get. So that's very exciting.
Hi. I have two questions for you. First, just wondering if you could share the average tenure of your leases in each of your major markets. And also how large have you had to ramp up your team to support what's going to be a big growth year for you not only this year but next year for flagships?
I'll speak to that, I guess. The average lease is on a flagship. Obviously, we've tried to go for a longer lease because of securing that location and a lot of the investment we make into those locations. The average mall lease is no different than the U. S, which is about 10 years.
Asia, it is different. When we go in and ask for leases that are 10 years, they've never heard of the concept. In China, 3 years is very typical. We've been able to get longer leases, but with kick outs. And I think Jane mentioned the importance of entering these countries is securing a kick out and a country exit, which we hope to never have to use, but it does protect us down the road.
I think that oh, and how big is the department? There were 3, now there's 6. No, it has doubled in size and we continue to get more and more help. Chris' team existed of 1 person a couple of years ago. Now there's 4 in his area.
We've hired several real estate attorneys because they have a lot of leases they're working on. We have several deal makers and project managers. So an area that was, I would say, slowing down 3 or 4 years ago that was working on renewals is now thriving and growing and working very fast.
Could you comment about your negotiation with your landlords and your decision to opt for tenant allowance versus a lower rent and how you try and balance those out? And then if you could talk about corporate expense as you enter these new markets and give us a sense of the cost of entering a new country?
Well, I'll speak to the allowance if I can. I won't talk about everything, but I'll speak to the allowance. He can talk to the other part. On the tenant allowance, I think early in the game, I think we were protecting CapEx. But ultimately, it wasn't ever a question of I'll take all tenant allowance for a higher rent.
I think we try to do both and have worked very hard to be able to do both. I think again, ultimately, we look at an occupancy cost. And if that occupancy cost is higher than a certain hurdle, we pass on the deal. So very, very few deals have been done with a tenant allowance being given to build the store, but we've settled for a higher rent. So that really that doesn't happen at all now.
And if it had happened, it was I actually can't think of it. So we go for the best rent and the tenant allowance and we are then able to get that in Europe. So the brand speaks for itself.
Excellent. Thank you. We'll save a little bit of the pre opening conversation for the later Q and A session. We have time for one more. Now this is a hot topic for the organization right now.
So one more and then we'll go to our break.
Thanks, David. I was just wondering if you could talk about the entire process and how you've watched that change or how you as a team have evolved it? And maybe using Copenhagen as an example where you delayed that opening for various reasons, came back and opened it under a slightly different format. You're learning a lot as you go into all these new markets. So how was your process evolving so that you can adapt to each one of these new countries?
Speed with diligence, I guess, is the way I would put it.
Rigor, I'm
not going to say they didn't have rigor a year or 2 years ago, but we will model it to depth, so we know what our expectations are in all situations.
I think Andrew Navarro said it well when he said every day we come in and say every day is a different day And what is it that we need to do? I think with Copenhagen is a perfect example. That deal was done a long time ago and we didn't understand the market in general. We didn't understand the pay rate. So we were able to go to Mike and Jonathan and show them a new model, how we were running the store differently, which brought the payroll down in the store.
And that therefore made the deal more attractive and meet our hurdle rate. So that is when we started introducing the Tier 1 flagships. And so yes, that has helped us. I would like to think that we're much further ahead than where we were 3 years ago at Copenhagen.
Excellent. Thank you guys very much. We'll take a quick break, 15 minutes. If we can all get back to our seats at 11:30, that'd be great. Thank you.
I can go ahead and get everyone to take your seats, please. We'll begin here in 2 minutes. If you can
go ahead
and take your seats, please. Excellent. Thank you. So our crash course on Abercrombie will continue. We have 4 sessions here before we break for lunch, and they'll be in the same format.
You'll hear a little bit of a presentation, and then we'll open the floor to Q and A. So the next group that's up is A and F Cares Corporate Citizenship.
Good morning. My name is Shane Barry. I'm the Vice President for Brand Protection and Sustainability. I've been with the company for somewhere between 5 6 years now.
Good morning. My name is Todd Corley, Senior Vice President of Diversity and Inclusion for Abercrombie and Fitch. I've been on board for about 6 years.
My name is Rocky Robbins. I'm the company's General Counsel and Corporate Secretary. I've been here for about 2 years now, long enough to get accustomed to wearing Abercrombie gear instead of suits with 2 exceptions. One is, I acquired a killer collection of Hermes ties over the years that is now boxed up, but I can't part with it. And the other is that I've not yet been able to make the transition from my tennis shoes to the flip flops.
We wrestled with whether or not we wanted to do this with our shirts on or off, but I think for your benefit, we decided to do it with our shirts on. We are going to talk to you about corporate citizenship today, and I'm going to start by giving you just a general overview of how we're treating corporate citizenship. And then I'll also kind of launch into one of our pillars, and the pillars will make sense in the next slide when we get to in a second. But I think it's important to at least start from the perspective of our CEO. Many of you may recognize the quote as having been relative to an article a couple of years ago, almost a couple of years ago now, alleging that Abercrombie and Fitch was one of the least transparent companies in the world.
And of course, we took offense to that knowing that we were already doing a lot of great things and we have been doing a lot of great things for a long time, but perhaps we weren't just doing a very effective job of communicating it. And so while we felt like we were doing all the right things and doing them for right reasons, we wanted to achieve that level of transparency that the outside stakeholders were seeking. And so that born from that was A and F Cares. And I've put up a shot on the next slide is just kind of the landing page for the A and F Cares area. You can reach the A and F Cares area of our website through a hyperlink at the bottom of every single landing page.
So whether you go to abercrombie.com or hollisterco.com, you'll see the A and F Cares tab down at the bottom. And like I mentioned before, we were already doing a lot of these things as represented by the 4 pillars at the top. You'll see the 4 pillars, which represent the different areas of the business that we believe are serviced most by NF Cares. We were already doing things independently, but we wanted to have one place from where we could communicate those things, a vehicle by which we communicated those things. And so you'll see each of those 4 pillars at the top.
I'm going to talk to you a little bit about and the A and F Cares site will continue to grow, so we encourage you to check back there. It will be the place where we put our upcoming first Corporate and Social Responsibility CSR report. And we'll talk a little bit about the CSR report in relation to our sustainability initiatives in just a second. And so we'll move on to the next slide. You saw the 4 at the top.
I have responsibility programmatically for sustainability and human rights. We treat sustainability and human rights. We're trying to at least treat them as one topic header going forward, both as our environmental and our social initiatives. We look at it in the traditional kind of cliched industrial sense that people plan at profit. And we our human rights programs have been established for a very long time, our environmental programs for less time.
And we believe that both of those programs, as we affect them globally, as we expand, will continue to drive additional profits. So that's where we go to people, planet profit. We're also going to talk Todd is going to talk to you about our diversity and inclusion and the great, great things we're doing there. And then Rocky will talk to you about corporate governance. But A and F Cares is the one umbrella backdrop by which we're communicating all things relative to corporate citizenship, governance and whatnot.
I did make real quick mention down there at the bottom in keeping with our historical and traditional policy of not tooting our own horn, I'm not going into great detail about the amount of monies we've dedicated from a philanthropic standpoint. Many of you are probably already familiar with the endeavors we have ongoing long term engagements with the James Cancer Hospital as well as Children's Nationwide Children's Hospital. And we're doing a bunch of other things as well. If you want to go to A and F Cares and take a look at it, I encourage you to do so. We are engaged globally on an array of different issues philanthropically, but I didn't want to spend too much time talking about it today.
What I did want to hit real quick before I pass it over because I'm already down to just about a minute of my own time left, is the sustainability area. And inside the company, we're treating sustainability really as it relates to environmental, but it does relate to our established human rights programs. We've been doing human rights auditing for about 10 years now, actually over 10 years, and it's a very in keeping with our stores group earlier talking about the standard process audit standpoint and the policy that we use with regards to that, we have a very robust and established auditing program that we use in order to ensure that all of our product manufacturers and suppliers adhere to International Labor Organization standards as an absolute minimum in addition to any local laws or regulations regarding the treatment of the workers globally. And those are very well established programs. We've focused the majority of our time on all of our human rights programs really on our high risk factories, the ones that may have violations that violate our policy.
Our code of conduct is also established on ANF Cares. And the one thing I did want to hit before I passed on is our evolving and our developing sustainability as it relates to environmental programs. We've had some significant wins over the last year as it relates to sustainability. Our home office development facilities program have been very busy in that area for quite some time, being nominated for a Sweco Emerald Award last year, having an Energy Star rating out in our distribution centers. But we're also looking how we can expand and grow that on a broader sense.
And through programs like changing over to clean diesel vehicles for all of our fleet cars, which through Amy's errors, sponsorship and advocacy, we've been able to do within our store base. And other programs like that, our goal is on raising our CDP score as a way of external validation and proving what we're doing. You'll notice that we didn't get a great CDP score last year. That was our 1st year reporting. It's because we reported at the very last minute.
And we hope that each year you'll be able to notice that CDP score, the Carbon Disclosure Project score continuing to go up. And the last mention again was is that hopefully by this summer, you'll see on that A and F Care site through our working with the Board level of Corporate Social Responsibility Committee, which Rocky will talk more about later, the development of and the publication of our 1st corporate social responsibility report.
Thank you. I'll just share with you very briefly a little bit about our diversity and inclusion initiative. And what I'll say here is a starting point, and you've heard some of this earlier by my colleagues, culture matters to us a great deal. It is essentially a bedrock of what we look to maintain. And I say that to say that our diversity and inclusion strategy in my mind, and I think if you look at the organization, is designed to keep an eye on, 1, the cultural values that Mike talked about, what those statements are.
But then also it's designed to keep an eye out on the behaviors that we want to see come from that. Those behaviors, I would say, are the collaborative spirit. Andrew talked about that in his session around teamwork. So when we think about diversity and inclusion here at Abercrombie, what matters to us is making sure that the values and the culture that keep us focused on those things are done. We have a strategy that's in front of you, measurement accountability, leadership commitment, education awareness, employee engagement, policy integration and communication.
Those six things for us help us drive any conversation around diversity and inclusion that has to happen. So if we change a policy, for example, a few years back, we looked at our Secret Shot program and what we laid over top of it was requiring the company that feeds us testers to make sure that those testers were at least 30% people of color. So from our perspective, it gave us a chance to audit the shopping experiences from people from different backgrounds. That matters to us because we think about the values, the individual differences being valued and recognized is again yet important to us. So when we think about our diversity initiative, it's grounded in those 6 things to make sure that we standardize it, that we audit it and that there's a process for it, SPA, which you heard earlier talked about.
In my next slide, in my last slide, when we think about our results over the life of this initiative, what we're really proud about are these facts and, of course, a lot more, but for the sake of time, I'll share these with you. When our initiative started some years ago, when you look at the store population, the inter store population that was racially and ethnically diverse was less than 10% on about 800 stores. Now when you look at our population on a lot more stores than that, our population that's racially and ethnically diverse is 54%. So when we think about the growth of people in the stores, we think about it from the context of how diverse they now look, And we think about our initiative and focusing on keeping people to think about individual differences and how you interact with them. When you think about the big ideas that you heard earlier, that doesn't happen unless there's a collaborative spirit among teams.
So we focus on that a great deal. We have seen our number of models in store. The percentage of people of color quadruple since our new initiative started. The gender mix at and above the vice president level here for females is 40%. And externally, the AHRC, which is the body that looks at the GLBT community, rates us as 100% when they think about how we respond to issues around substance orientation.
And finally, I'll pass over to Rocky. As we go abroad, we also now think about how do we talk about diversity outside of the U. S. So we're sponsoring European Diversity Awards in London this year. So I'll pass it over to Rocky.
Thank you.
Well, I said I've been with the company for a couple of years. I started my career out in Manhattan. I clerked for a judge in the Southern District and then worked at Davis Polk for a few years as a corporate and securities lawyer, and working on, I was thinking back on some retailer deals including Warneco, Authentic Fitness, GNC, 1, and The Limited. And in those days, the lawyers really weren't sort of allowed in the room with the investors. I think the theory was what you don't know can't hurt you.
So first of all, I'm just happy to be allowed in
the room today with you
all. But second, I think that it is sort of an indication of our message, which is in the last 20 years or so, the world from a corporate governance standpoint has evolved a
lot. And from a
security standpoint with Reg FD and Sarbanes Oxley and now most recently Dodd Frank, and that's our message too. We've been evolving and all three of our messages really are about evolution and transparency. And our message on corporate governance is that it is something we take very seriously. For at least the past several years during my tenure, during the tenure of my predecessor and colleague, David Cups, the tenure of our Lead Independent Director, Craig Stapleton, who is here with us today. We have made a very conscious and concerted effort to reach out to our investors, to hear from them, to engage with them, to understand what they want.
We had sort of a laundry list of corporate governance items that we've been looking at over the past couple of years. And we've taken seriously the comments we've gotten. There have been instances where we've had to agree to disagree and that will continue. But we believe we've made substantial progress, both substantively and from a transparency standpoint and some of those are listed up there. Majority voting, we adopted a couple of years ago, what's typically perceived as the gold standard of majority voting, stockholder approved by law amendment.
We've adopted stock ownership guidelines. As Shane said, part of our corporate governance efforts have been to be more proactive and transparent on the corporate social responsibility side and that included raising it to a Board level committee. And we implemented a lead independent director position last year. And then finally, we responded to a shareholder proposal that quite honestly, philosophically, we disagreed with and that was on de staggering the Board. But what we said was, we'll put our best case forward, we'll listen to our shareholders, and then we'll respond accordingly.
Our shareholders overwhelmingly said they believe the company should de stagger its Board. And we literally came out the same day with an 8 ks saying that we'd put a proposal up on this year's annual meeting, a company sponsored proposal to do that. And that's exactly what we've done. We've also added some new blood to the Board. As you see, 4 of our 9 directors have been added in the last 2 years.
And so that brings us to the last item, which is our reincorporation proposal. And my wife likes to say that comedy equals tragedy plus time. And so now that a little time has passed and some water has passed under the bridge, we can laugh at ourselves a little bit on the reincorporation proposal. But it was, from our perspective, a substantive corporate governance reform. It was really our attempt to address in a wholesale manner the remaining corporate governance issues that we had identified in our conversations with our shareholders over the past couple of years, issues like super majority provisions, a dual class structure, sort of anachronistic dual class structure to our capital stock, inability of shareholders to call special meetings, inability of shareholders to act by written consent and a poison pill.
And we wrap that all up into a wholesale proposal to move back to Ohio. Substantively, we like Ohio. It's our home. We walk in y'all here. You see it's not such a bad place.
We don't bite, and neither does the corporate law. But what we think happened is that a proposal that was intended as a corporate governance reform, perhaps because of the sort of coincidental timing of the J. Crew deal, perhaps because of some journalism that we would most charitably describe as not as careful as it could have been, not as fulsome as it could have been, not as informed as it could have been. Our corporate governance reform was really turned into a takeover play. And we can take some perverse sort of humor in the fact that half the folks seem to think that we were steering the company to a particular buyer and the other folks seem to think we were steering the company away from all potential buyers.
And as I said, what we're really trying to do is address in a wholesale manner the remaining corporate governance items that we had identified in conversations with shareholders and other sort of stakeholder activists. And where we are today on the reincorporation proposal is that we intend to continue to engage with our shareholders to discuss it and to see if there are particular items that would make a difference for shareholders so that it goes from being something that is not as favorably received or as mischaracterized to something that would be a real positive. And if we can do that, we do believe there's substantive benefit in being in Ohio. It's intangible, but we really like about it is sort of the codified stability of Ohio's corporate law. But that's the tail at this point, not the dog.
And if that doesn't come about, we're perfectly happy staying in Delaware. We like Delaware. We like the Delaware judges and the Delaware courts. And we'll continue to engage with our shareholders and address perhaps not in quite the same wholesale format, but continue to address corporate governance going forward. And that's again, that's our message.
I mean, we have evolved and we are looking forward to continuing to engage with all of our stockholders and investors and other stakeholders.
Excellent. Thank you. I'd like to turn it over to the floor if we have any questions on the topics. I'll start it off. Shane, you had actually mentioned a few things we're doing here on campus.
Can you be a little bit more specific as far as our sustainability efforts and things we've done over the last couple of years here?
Most of them are grassroots driven by our facilities team. Some examples of things beyond the vehicle program that I mentioned earlier is we've had energy consultants come through and give us ideas on ways to reduce our energy consumption here on campus. We've recently signed on with a new company that runs our cafe operations here. They only source locally grown sustainable produce, things of that nature. And so we're looking for opportunities to weave in recycling programs, other things that we're doing here on the campus and trying to engage our internal stakeholders and to make it an ingrained part of the way that we think about not only what we do here in the campus, but everything we do globally.
Excellent. Thank you. Biz?
In years gone by like 7 years ago or something, oftentimes something would come up that was viewed as inappropriate or insensitive and there wasn't really a response. It was sort of like whatever Abercrombie or at least that's from our perspective what it seemed as though it seemed like was happening. And now recently something's come up that some people were not comfortable with. How has the response differed and how do you sort of react to a group saying we don't like this product direction or we think this is inappropriate? Yes.
Absolutely.
Thanks for the question. If I can jump in. I think we all know the issue that we're speaking about. It was never our mission, our objective to offend anyone in that nature. And as in the Abercrombie way, we're very quiet at the way we did it, but we actually did pull the product from the stores and we actually aren't setting the additional ones.
But at the same time, it was only one item of a multitude of SKUs that we had out there and it was intended for the older kids' customers. So again, as we started out this program, we are not much out there speaking about the great things that we're doing. We do need to get better about that, but it was never our intention to offend anyone. It was only intended for the older kids' customer, but we have pulled that product. All right, any other questions?
On that note, thank you. All right. Next hot button topic in your crash course of A and F, sourcing and global procurement. We're very fortunate to have 2 people in Diane Chang's organization. Unfortunately, she couldn't be here with us.
You see her information in the folder. She has been with the company for quite some time. She is an EVP of sourcing. She is actually traveling in Asia working with a number of our vendors and Wayne Milano who also sees oversees our sourcing in the Hong Kong office. So we have Justin Flowers and Brian Ferguson.
I'll let them give a little background. Thanks, Eric.
Can you guys everyone can hear me? Okay. My name is Justin Flowers. I've been with A and F for almost 11 years. I started in the merchandising world and unlike some others that were up here earlier today moved into the sourcing organization.
Good morning. My name is Brian Ferguson. Just like Justin, I started in merchandising about 12 years ago And I'm the Group Vice President of Global Procurement.
And so today,
I'm going
to start talking about sourcing our sourcing strategy, which is probably a hot topic on a couple of your minds. So today, I'm going to go through a quick hindsight of 2010, where we were, what our vendor base was like. Then I'm going to touch briefly on the challenges we're facing out there in the world and then look forward to the future like Mike said, 2011 and beyond. What are we doing and where are we going? So in 2010, we had 32 vendors that secured about 70% of our FOB spend.
That's our 32 top tier vendors. 9 of them have been with us for less than 5 years, but the majority over 70% have been with us for 5 years or longer. And it's these key long term partnerships that are going to help us weather through the challenges we're facing today and beyond into the future as we'll talk about shortly. I do want to mention before we move on from this slide that if they don't fall within the top 32, it doesn't mean they're not important. Every vendor we have here at A and F is critical to our expansion plans to everything we're talking about today and every vendor is critical within the sourcing strategy.
As a snapshot of our countries of origin and geographic sourcing regions, about 80% of what we've procured from an apparel standpoint has come from these countries listed up here. Now I included up here, but not limited to are also Guatemala, Peru, the Philippines and Bangladesh. Now we separate out China into 2 regions because we do strategically source within China based on the strengths and weaknesses of those regions and based on the strengths and weaknesses for product category mix. And that's an important note because as Jillian was talking about earlier, it's about delivering the right product at the right time at the right cost. And we work the sourcing team in conjunction teamwork with the merchants and the planners to develop a sourcing strategy.
That sourcing strategy is forged from the ground up based on that product category. So we are becoming a best at category killer from a sourcing strategic standpoint just as we are from a product focus standpoint to kind of carry through that theme and the teamwork that we're doing across the company. Now let's talk about the sourcing landscape. So I'm sure I'm not this is not new news to anybody in this room. Raw materials, freight, labor, energy, all have been on the rise and continue to rise to a degree or not or some more than others.
And the significant demand from China and other emerging countries are placing undue supply and demand pressures on the entire world. So what does this mean for us. What does this mean for A and F. How are we poised to deal with these challenges. And like Mike said there are challenges but there are also opportunities.
And that's how we look at them. We look at these as opportunities of what we can do to get over those hurdles. So first and foremost we have key long term vendor partnerships like I mentioned previously. They're going to help us weather through those challenges and those opportunities. We're best at category focused category killer if you will by products classification and are also our key vendors also have the financial strength to invest within the manufacturing sector.
So we've aligned ourselves with strategic partners that they themselves are investing in their own future and we're supporting that so we can grow with them and support the international expansion that Jonathan and Mike were talking about earlier. And so 2011 and beyond, what does the future hold in store for us? 1st and foremost, I want to clarify or not clarify, but I want to hit on the point that quality is and always will be our number one priority. And Mike said it best, and we've been saying it all day from the Q4 earnings call, one thing we'll continue to do is take a long term approach. Among other things, that means we will not sacrifice quality to achieve cost reductions.
This is in our DNA. It's within the DNA of everybody within the A and F family. Further to that, we're looking at organic growth within our existing supply chain. So like I said, our key vendors are investing in themselves. They're looking to the future.
They want to grow with their core customers and we want to grow with them to support that exorbitant amount of growth that Jonathan talked about earlier and where we're going internationally with our store builds. We're using them rather than going to seeking a lot of new additional resources. And that's not to say that we wouldn't bring on new vendors, but we have a proven process and a proven strategy that works right now with our existing vendors. As you saw, many of them have been with us for 5 years or longer. So we're staying within that group because they know us.
They know us inside and out. It's almost like your wife or your partner, your boyfriend or your girlfriend, they can almost finish our sentences for us. And that's important in working with A and F. And finally, we're focusing on mastering best practices in product development, gaining and maintaining flexibility and production efficiency because a lot of cost is not just within the product, but surrounding the process itself. Thank you.
Right. Well, Global Procurement at Abercrombie and Fitch handles quite a few different tasks. One of the big ones is global expense management strategy. We're involved in every dollar that the company spends, operating expense, capital expense. I have a great team of people who work day and night with all the business leaders of this company on how to get the best quality, the best product, the best timing, at the best possible price.
We as a team, we approve all expenditures in the company above $500,000 which ensures that nobody is spending money that we don't know about. The team consolidates and leverages our spend. That's one of the key priorities so that we can take all departments, leverage all of our spend together, get the best price and the best quality from our supplier base. As a company, we have very significant and aggressive operating expense savings goals on a quarterly, seasonal, yearly basis. So my team helps every individual department map out our plan to achieve those goals, to not only achieve them, but to exceed them, and to offer just other creative tools that that department might not have.
The Global Procurement Group brings experience with contracts, with bidding, with auctioning, with using the market to our benefit to find the resources that will give us, again, the best quality at the best cost. Contract negotiation management is a huge issue for us. We do business with a lot of companies all over the world. It's getting more and more complex. So the Global Procurement Group, again, works with the business leaders to find the best contracts for Abercrombie that protect our interests, that give us the great product that we deserve, whether that's a service, whether it's a good, whether it's building a store, contract negotiation management are keys.
Capital projects, so my team works very closely with David's real estate team and with Abid Kharazi's construction team on every single new store that we open. Just like the merchants and conceptual designers, we work from flat sketch to final product. So flat sketch comes from real estate and it goes through the store design team, comes over to my team to source all the goods and services to do all the budgeting, estimating and bidding. And then we work with the construction team to build the store, the store operations group to open the store, and then the maintenance group to maintain the store on a year over year basis. Specifically to real estate, we participate with David and Chris on all the new entry processes.
So 24 months, 36 months out, we have specific stress tests that we look at about what is the stress not only expense of going into a new country, but what's the stress on the organization? How do countries get prioritized? What's first? What's last? Where do we want to deploy our resources?
We work with real estate on emerging market research. So it's a big wide world out there. There's a lot of people who have a lot of information that we really need. So Global Procurement goes out and tries to help line up those resources as needed for real estate. Flagship stores, a huge priority.
You saw the slide from David and Chris, a lot of volume there. So we have a very robust process, real estate, store design, store destruction, global store construction, global procurement to make sure every single step of a new flagship happens flawlessly. And then chain stores, we're opening a ton of Hollister Mall stores and chain stores worldwide. There has to be a very specific process out there in global procurement and real estate and in construction to make that happen on a very specific schedule. So opening stores is our number one priority.
We never open a store that's not perfect. A whole lot of work goes into making sure that happens. And then capital expenditure approval, we spend a lot of money building these new stores, whether it's a flagship or a chain store. Myself and other people in the organization, we sign off on every single dollar that we spend. So not $1 gets spent on a general contractor, on a material supplier, on any other subcontractor without our approval, which is a great benefit to the organization.
Some fun facts about Global Procurement. Over the last 2 years, Hollister, we reduced the CapEx by 33%. We supply over 130 decorative furniture and fixture items for every new store across 7 countries, 20 plus suppliers. So driving down costs has been a priority. Using my merchandising experience, it's been a very fun experience as well.
Flagship stores, we've significantly reduced CapEx on our flagship store projects. The competitive bidding nature of what we're doing these days has really driven down costs on our flagships. It's refined all of our processes, all of our supply chain, whether it's our millwork suppliers, our construction companies, our back of house suppliers are all competitively bidding on every single flagship dollar that we spend. Gilly Hicks, obviously, a great avenue for growth. We're driving down costs every day.
We've gotten 50% on the over 100 items that we supply, decorative items, furniture items, chandeliers, things of that nature. Like Shane says, my team is heavily involved in sustainability, energy and technology. There's a lot of money to be saved with things like LED lighting, newest equipment in HVAC, store construction processes like recycling construction materials. So every day we're trying to reduce costs worldwide. And then again, competitive bidding, every dollar that we spend gets competitively bid.
That really drives down the cost, drives up the quality and that's what we're all about. On the horizon, my team's job in global procurement, we want to provide the resources for global expansion. So there needs to be a robust infrastructure, robust processes and rigorous hindsight of everything we do to make sure we can support the expansion of our brands. We want to improve the quality year over year and reduce cost year over year. And the infrastructure in Europe, Asia and beyond is extremely complex.
So we're building the global procurement team to be able to be the experts in every single country that we open in, to be category killers in every single store that we build. Our teams are streamlined so that they focus on Hollister, they focus on Gilead, they focus on A and F flagships. And by doing that, just like the merchandising teams, we can make sure that every store gets opened, every deal gets signed, they're the best deals and they're the best stores. I think that's it.
Excellent. Thank you, guys. So I'll open the floor for questions regarding sourcing and global procurement. And I guess in keeping with the theme for the day, obviously, it's very long term mentality that we have here. The last we spoke about sourcing cost increases in the back half of the year were a double digit cost increase.
Mike mentioned that on the earnings call. Today is not the day to update any of that, but we'll be happy to field any other questions you might have regarding sourcing or global procurement.
I felt bad. Can you tell us how many people you have on the ground in China and India and places like that that are overseeing your quality and are in the factories all the time? And on a long term question, with this sourcing bubble that we have right now, in your mind, do you think we're still on the way up in this bubble at the peak or are we starting to see it come down a little bit?
Great question. And it's not that it's an off limit topic by any means, but we just wanted to keep with the theme. Justin is the expert. Sure.
So the first part, we utilize our key agent and vendor partners as well as our Hong Kong offer office to support our QA efforts globally around the world. So we don't have an office in China and office in India but more a centralized roving group that works in conjunction with our agents and vendor partners. And we still rely on them to be our eyes and ears. Like I said the long term partnerships are the key because they know us the best. They know what our expectations are.
They know what we're looking for. We do intensive onboarding here on campus where we bring our vendors here. We ask them to come regularly annually if not by annually to calibrate their eyes and ears as well as using our Hong Kong office to calibrate those eyes and ears as well. And so the second part I think it's still very early. We are cautiously optimistic for 2012 and what it could bring.
But we're going to keep our eyes and ears peeled as well as yours to see what's happening out there over the next 9 months.
Two questions. You said your major vendors are investing, I presume in technology to be long term and partner with you. Could you give us some specifics about what kind of investments they're making and what that can do to reduce their costs and therefore your costs? And second question, the feedback we get is that wages in the kind of vendors you're dealing with are going up 10% to 15% in China. And is that an accurate number in terms of the PPU you deal with?
And what kind of wage increases are you seeing in the other sourcing countries?
Well, I think in regards to the investments, an example of investments would be in whether a vendor is looking to move offshore or to other regions. So they may be going and actually setting up factories in additional countries that we're already in, but maybe not with that vendor or agent. Additional investments could be in machinery like you were saying, the hardware within the factory to upgrade and have a more efficient operation themselves. So that's just a couple examples of what they're doing. The labor is sporadic and tough to pinpoint an exact amount.
Yes. Like I said, energy, labor, freight, raw materials, all on the rise. Again, with the reinvestments that these vendors are making becoming more efficient and or looking at other opportunities outside of China is really what the industry is doing.
Thank you. Thanks a lot.
So we had heard the term
a little while ago about us being in a sourcing bubble. Are we in a bubble or is this is it a new reality we have to deal with for a while.
I think there is definitely a change that has happened and a shift and it's a shift that will probably maintain for a long time if not permanently. Every everyone from from start to finish from the cotton farmer to the ultimate retailer is looking at their processes and procedures like we are and saying what worked what didn't. How do we adapt to this changing world. Because we know what we know now, we know we know maybe 9 months from now.
Thanks. You talked about the CapEx reductions for both the Hollister and flagship openings. Can you talk about where you are now with those reductions in terms of return on investment or maybe a payback period that you can share with us and kind of going forward? What's the you've talked about that Jonathan did the threshold for 4 wall margins, but what's the maybe threshold for a return on investment?
Well, I think David and Jonathan would be happy with some of the savings that we've returned to them because it makes that contribution look even better than it was a few years ago. As far as very specifics, return on investment, I don't want to get into the exact details right now. But the good work that we've done on Hollister, in my mind, allows us to open more stores. The good work that we're doing on flagships frees up money to open more stores, to upgrade our products, to continue to update our service upgrade our services and to expand into more markets.
You mentioned that all your 32 major vendors are pretty entrenched, been working with you for years. Are you doing to keep them honest on pricing by bidding them against other competitors? And how are you making sure that you have best practices on tightest lead times with those vendors?
That's a good question. We continue to benchmark ourselves. Like you said I don't like to use the word bidding but there is healthy competition among our vendor base and it's open competition. We're clear in our communication and our expectations with our vendors. And we do benchmark them periodically if not seasonally to understand where they where they fall relative to one another to make sure to ensure that we are maintaining a competitive edge both for them and for us.
All right. Thank you guys very much. Thank you. Take a quick break. Stacy, we will take a 2 minutes and transition to the next topic.
Thank you.
What is love?
All right, if we can get you to take your seats. You guys are in for a treat, especially if you're sticking around for the distribution center tour at the end of the day, the optional distribution center tour. These are the guys that will show you around. And I think you will realize when you look at their presentations and their slides what kind of a treat you're in for.
That's what everybody says. I have control now. First time. My name is John Singleton. I'm Senior Vice President of Supply Chain.
I got here three and a half years ago. I've been in some vertical apparel and also some manufacturing and also some wholesale and hard lines. And I have 22 years in the Air Force as well, retired. And I didn't realize at the time how much I was going to have to use that to battle to get goods into some of the countries we're going into right now. But it's good experience.
I'm Larry Grishow, Vice President of Supply Chain. I've been with Abercrombie for a little over 3 years. My background is I'm an accountant by training and have been in various finance and operational roles prior to Abercrombie. My teams are responsible for supply chain finance, project management, engineering and materials handling maintenance. And as Eric mentioned, in addition to John's background in the Air Force, he is also going to be your man of light when we get to the distribution center this afternoon.
I don't know, but we didn't practice that. So today, you have the obligatory three points we're going to go through. We're going to talk a bit about the evolution of the supply chain pipeline. Over the last several years, as we saw this expansion coming, we started looking at our processes and saying, how are we going to move 50,000 purchase orders and keep track of them and be able to deliver that store set the way we've been talking about it before where it's the same set around the globe. And I'll walk through some of the pipeline changes that we've made over that timeframe.
We'll also talk about the recently announced consolidation of the U. S. Distribution centers. And finally, we'll talk a bit about the international distribution network and where we're at today, where we see ourselves going. The underlying piece of all this really and what we've been trying to put in place because of the complexity of this moving of these goods in various places is putting in structures, processes and procedures using the SPA to decrease the complexity for all this using automation and the idea of management by exception, so that we don't have to actively manage 50,000 purchase orders, we can manage the ones that aren't following the rules, if you like.
So when we first started in this, we several years ago, in order to enable us to get into the international space, we installed a new ERP system. And as part of the process of the ERP system, it became very important that we put disciplines around the purchase order. The purchase order integrity piece of the ERP system was where we had the opportunity to make sure that we communicated with the business. The very important details that allow you to track these things through like price, HTS number or harmonized tariff number to make sure you can clear customs around the globe. The quantity, the mode, all these the dates probably the most important thing.
What date do we expect this product to be where it's got to be? And we had to build tables around those to make sure we tendered freight in time to make store set in time. And so the PO integrity was key. In addition to that PO integrity, it gave us the ability to pass that information through standard messaging to all of our vendors around the globe and actually create an advanced ship notice, which is an electronic packing list that is almost 100% active right now. All of our vendors are putting a license plate on every 1 of 5,000,000 cartons that are going to flow through our supply chain this year.
And the PO Integrity is absolutely key to that. Next piece of the pipeline we were working on was once you get that information, we have to be able to see it. And traditionally, we had to be able to see it come through Columbus, Ohio. Today, we have to see it come through Columbus, Ohio and the Netherlands in about a month and a half, Hong Kong as well. So how do we again manage to be able to see all of these different moves in a way that not only gives the visibility to it into our factories and to our steamship lines and to our forwarders and our customs brokers and our team here in the home office who are deciding what's available to set and what's available to set here and out of the Netherlands and in Hong Kong.
So that visibility was key. The challenge with visibility is there's still way too many things to try to manage. How do you manage 50,000 things? And the key piece of the global visibility system is that you can put milestones into it. It's computing in the cloud, but it's milestone based that says, did we make these hurdles or not?
And rather than thinking about did 5,000 things make the hurdle, what we look at is, which fifty things didn't make the hurdle? Let's manage those and let's communicate those. Let's see if we can expedite them. Let's see if we can get them moved. An example would be like earlier this past year when the volcanoes decided to ruin our day in Iceland.
We had a certain section of product of trying to fly into Europe that we couldn't get in. We'd like to have the same store set, but unfortunately we were being held back. The ability to use this tool to sort down and say these are the items that are in danger and being able to communicate that back to the business didn't get us exactly what we wanted, but at least we didn't run around in circles trying to figure out how what was available, what was going to be missed. Okay. We also needed to implement a reliable ocean air program.
We've put in place negotiations with all the steam ship lines that we're currently using. We also continue to have our air program, but the ocean program is vital in an age of this volatility of fuel rates. Obviously, air rates are very sensitive to increases in fuel expenses. Ocean rates are sensitive, but they're nowhere near as sensitive. But you have to have a reliable program.
You also have to recognize what's been going on over the last 2 years in transportation where they've had a lot of the airlines, cargo airlines have gone out of business, they've had capacity constraints, they've had literally containers that have been lost in the system because during the downturn, they were no longer at the ports. So we negotiated with these guys on a very aggressive way. I've got some great people in our transportation organization. And what we've been able to do since 2007, I think in 2007, we brought 800 ocean containers in. And this year, we're going to bring like 4,500 ocean containers in, a huge swing that affects gross margin and many other things.
Smart packing and loading. Using that data from the better purchase order and the ability to know what we're going to sell in many cases, we've been able to speed up processes by knowing what's in the container. It's enabled us to actually talk about this DC consolidation because we can use that knowledge as an extension of the distribution center. We see the product coming, we know when it's going to be here, we know what's inside the containers, we can allocate those goods and then bring them through the DC rather than have them staged and sitting there waiting for instruction. It's a huge piece of the process.
And then finally, taking all that data and leveraging it is a huge opportunity for us. So among the things that we do in our organization is we also do the three way match and all these issues. So whether they be freight bills or brokerage bills or the bills for the finished goods, we write what we've reconciled well over $1,000,000,000 in expenses through our organization. And in the past, we've had individuals in different groups who've had to audit those things, chase down the paperwork and make sure everything was available. Using all of this data now that's in this cloud computing, we're able to do the three way match again by exception.
We can say we have the invoice, we have the cargo receipt, we have the EDI or the electronic packing list. If those three pieces are together, we can go ahead and pay the bill. We can pay the bill through another cloud computing system that allows not only the bill to be paid and our vendors to see when they're going to be paid, but if they like, they can take an early discount, which again helps us with our cash flow and helps them with theirs. The key to that is I think 20% of our vendor base 100% of our vendor base is on that program and 20% of our vendor base are actually taking those early discounts. So it's been a very powerful tool and probably as powerful, we have less people operating in the world of 50,000 purchase orders than we had operating in the world of 10,000 purchase orders.
So good doing this.
In the U. S, we operate a centralized distribution network, which is common when you're dealing with short life cycle, high SKU count, lightweight product. And we have 2 distribution centers here on campus that serve all of our North American stores as well as our global direct to consumer business. And in 2010, we identified an opportunity to leverage a lot of those changes that John talked about upstream in our supply chain to unlock value downstream in the form of our DC consolidation strategy. John had mentioned the packs.
What those are is intelligently packing our product together by our by store grouping and how we expect to allocate and distribute that product by store grouping, loading those containers in a way that we expect to utilize and need the product. So loaded in the front of the container is the product we expect to need and work first. And then the advanced ship notices that John spoke to as well. I would like to point out with this bullet point, Justin had mentioned our long standing tight relationships with our vendor base and those relationships were critical to getting these programs in place quickly, efficiently and effectively. Then once we have able to establish that really tight upstream process, we're able to utilize that data and that information in the form of material handling investment.
And you'll get to see that if you stay for the tour later today. We're investing in things like unit sorters or receiving sorter, high bay narrow aisle racking with turret trucks. This is a sexy part of our business, right? And in utilizing those to those investments, and we'll talk like I said specifically about how we utilize that advanced ship notice and how it drives through the distribution center to automate our processes. To improve our space utilization, Once we are complete with this, we will have as much inventory storage capacity in a single building that we currently have in 2 buildings here today to improve our productivity, drive cost savings in the neighborhood of 15% to 20% on a direct operating cost per unit basis within our U.
S. Distribution center and facilitate the sale of DC2. When we are complete with the consolidation strategy over the next couple of years here, I wanted to point out that the evolution doesn't stop there. The innovation continues. We recently were able to get approval, from U.
S. Customs to establish our U. S. Distribution center as a foreign trade zone, and what that will do is streamline our trade processes and allow us to reduce our trade cost. With that, we'll start talking about the international network.
Internationally, in the European Union, it lends itself to the same centralized distribution model that we've been successful with in the United States. Jillian, earlier, during the merchandising discussion, talked about getting the right product at the right time at the right cost to our customers. But once our merchandising team selects that right product, our supply chain team really kicks in and focuses on getting that product at the right time and at the right cost to our stores around the globe and in our case, same product at the same time. So the investments that John spoke about earlier in the automation are critical to making that happen. As we entered into Europe initially when we opened up a store in the U.
K, we serviced that store out of the U. S. Then it was critical to identify a, even though we're using utilizing a centralized model, a scalable solution that allow us that allows us to grow along with the store growth and the unit growth, but also helps mitigate the risk. There was a very astute question earlier about labor in the EU and how do you manage through the long term deployment contracts. One of the ways that we've done it is we've engaged with a 3rd party logistics provider with significant experience, in retail, in fashion retail, in particular, in Europe.
Initially, in 2,009, we were sharing a facility that they were operating on our behalf with us and another customer. We quickly, as the store count grew, in 2010, grew to take over the entire facility. And then we have plans later this year to move into a new facility close by that's roughly 2.5x the square footage or square meters in Europe that will also allow for investment in some of the same types of material handling equipment that we are investing here domestically to grow our throughput capacity tenfold. So as we grow into Europe, we're going to continue to leverage that partnership. We have tight operational controls over that partnership.
You've heard a lot today from all the different groups about Abercrombie's approach to total quality management, utilizing our SPA methodology. We have standards. We have a process wrapped around those standards, and we have audits in place to make sure the process is working the way it needs to work. Then finally, you're going to hear after us Billy speak to our direct to consumer growth strategy globally, and we are helping to enable that strategy in Europe in particular. Later on this year, we will also be fulfilling orders direct to consumer orders out of our Netherlands distribution center.
And John is going to talk about Asia.
There's Asia. The red star represents or our distribution center is going to be in Hong Kong. Again, in Asia, we've also continued on that scaled approach. So rather than investing deep, we're not Walmart, we're not going to go plant $1,000,000 facilities in some place, we're going in, in a scaled way. When we first opened our store in Ginza, the opportunity really with a one store high skew, high turnover environment, we didn't have the it didn't make a lot of sense for us to put a distribution center right in that part of the world because we didn't know exactly what was going to sell there at any given time.
So we've been fulfilling that out of the Netherlands. The Netherlands distribution center is a free trade zone. And so we're bringing goods into the Netherlands DC. If they stay in Europe, we pay duty when they leave. If they leave Europe and come into Japan, for example, then we've paid a duty into Japan and not into Europe.
As we are now expanding more in Asia, we've hit that threshold, that breakeven point that says we need to put in a distribution point in Hong Kong. We chose Hong Kong primarily because it's a free trade zone itself, and it allows us the flexibility to move the goods around. Larry talked a bit about that central DC model that was is what we've always used in the U. S. And it lends itself nicely to the European business.
The challenge in Asia, obviously, with no common market, you end up having borders to cross, you have customs to go through, you have valuation issues. It's the battle I was talking about, about getting goods in. So getting goods into Hong Kong and out of Hong Kong is very easy. Getting goods into most of the other countries in Asia and then getting them out is a real problem. So what we're doing is we're pivoting from Hong Kong.
We're going to support those stores from Hong Kong for now. And as we build density, we will be looking for that breakeven point about when does it make sense for us to be DC in China or DC in Japan or wherever else. So that's our international distribution network in Asia, and I think the key to it is flexible and nimble, and we continue to try to do that.
Excellent. Thank you. Do we have any questions from the floor?
Hi. I think you talked about the number of containers going from 800 to 4,500. But could you tell us what your air versus ocean percentage has gone from and to? And is there additional opportunity to improve on that?
It has been dramatic. It's we back when fuel was cheap and we were primarily U. S. Business and again we were reacting to many things in sales, I believe we were upwards of 60% air when I arrived. I think we are targeting something like 15%, maybe 20% Air this year, maybe less.
But we're chasing it. Again, I think the great part of this is, there's a lot of great reasons to use Air. When you find something that's a hit, you can get it there fast. When you feel like you may have missed something, you can get it there fast. But we're also taking a very measured view, it's tough to make the money back out of air.
There's over a dollar a unit differential air versus ocean. So I think we're taking a very serious stab at that.
And just to add on to that, I think another salient point is, one, the numbers John mentioned are our targets coming into the U. S. Initially, with not enough volume in the lanes coming into Europe, we weren't able to take advantage of an Ocean program. But this year, in particular, as the store count and the unit count has grown, we are able to take advantage of those programs. So we put in an Ocean program late last year and it's been very successful and continues to grow as volume grows.
Yes. The interesting thing to me about that, the whole process is there's well over 100,000,000 units flowing and well over 5,000,000 cartons. And in the past, they all flowed in one direction. Now they're flowing to the U. S.
And they're also flowing to the Netherlands. And in Asia, we've got another whole problem of for us and this is where you partner with the people that know the business in that sector of the world. We're now flowing goods into Hong Kong. We normally take things out of Hong Kong. We're now moving things from India to Hong Kong to make sure we've got them in the stores.
So it's a fascinating complex thing that we're managing by exception. Have I mentioned that?
You have it.
Excellent. All right. Thank you, guys. Appreciate it. All right.
I'm going to turn it over to Billy. He does realize he's in front of lunch, standing between you and lunch. So, but I'll just turn it over to him. He's the newest addition to our team here and it's going to be fantastic what he can do for us.
So, good afternoon. So far today, you've heard from most of our management team, all of whom have presented in pairs or in threes. And you get me standing between you and lunch, get comfortable. So I am Billy May. And as the slide says, I'm the Vice President of basically non store marketing in our direct to consumer business.
So interactive cross channel marketing and e commerce. I've been here a little over 4 months. Previously, I was Global Vice President at Adidas Group, where I ran global e commerce for them. So what does interactive cross channel and our direct to consumer business actually mean? For the most part, as I alluded to, it's all the non store consumer touch points.
So it can be taking our interactive business and bringing it into the store from a cross channel perspective. It's our e commerce business and our direct to consumer. It's relationship marketing, which most people would call CRM, but has a different connotation within our organization. It's interactive marketing, email, search, most of online. It's social, like Facebook.
It's mobile, which is an emerging opportunity for us. And it's basically customer driven technology to ensure that we have a business point of view in the areas where we're making investments. The picture I have up here is our back to school campaign last year around screen test, where we activated it across multiple touch points, including in the store, where we leverage our models as well as our taglines in the store, across our direct to consumer business, through interactive marketing and obviously with social and Facebook. So when we open up a flagship store as we're doing in Paris, we'll leverage multiple touch points to communicate to our consumers and our brand advocates when we're opening that we have 101 models out front of the store and to make it a much larger happening than I think that we've ever done before. So our consumers are presenting us with a very distinct paradox for an organization such as ours.
We build experiential store based experiences, but today's consumers are always connected. They're always on and they're much savvier. They have more access to information than we do in many respects. And they shop and engage with brands through multiple touch points. It's less about, I buy through a channel.
It's I invest in a brand and that brand makes up their personality. They're exerting more and more control over those messages through user generated content. That could be posting on Facebook and social. That could be via mobile. That could be through blogging.
And as a result, they are no longer motivated by a singular touch point. So an opportunity for us is obviously to better connect with them outside the store and in their social context. They are also extremely value aware today. So going back to the savvy component and they have what I call a high BS radar. So they are very attuned to when they are being marketed to and how they are being marketed to.
So those traditional marketing methods, which could be broadcast media, which could be advertising, are less and less influential on that traditional purchase funnel. So with that context and building into it, where kind of have we been in recapping 2010? Currently, we've got 4 brands and 24 websites that we manage on a global basis, many of which are translated into local language. And when we identify an area and we identify an opportunity and we identify a market that we'd like to penetrate, we go through a rigorous prioritization process and we will launch a storefront in that market to coincide when we open up a new store. Last year, we served over 100,000,000 unique visitors across all the sites, both domestically and internationally.
As we've alluded to in the press, we had $350,000,000 plus in direct to consumer revenue, and we have a high average order value for those customers. It's about 2x our in store average order value. Socially, which we launched and pursued with great rigor last year, we basically set up shop last year and at the end of the year, we had 8,000,000 plus fans across all of our brand sites on Facebook. About onethree of those are active on a weekly basis, whether reading, posting or interacting. It's a very high interaction rate.
And we have a very high international fan base. So 50% of those fans are international, denoting the power and strength of our brands. And then from an email and a database perspective, we've got over 3,000,000 opt ins across all of our brands. This includes branding e mails, promotional e mails, market expansion e mails. And we are moving into more innovative areas such as personalization, segmentation and then moving into mobile and social integration.
So a great platform that we've come a long way on in a very short period of time, but we believe that the opportunity is significantly higher going forward. So how do we connect with our consumer? Where are we going? And Jonathan alluded to our direct to consumer challenge. And we have an ambition to build $1,000,000,000 direct to consumer business.
And we'll do that by leveraging our multichannel operation. We'll do that by better connecting with the consumer and we'll build that by creating a robust technology platform. Secondarily, we have an ambition to build a stronger global online platform, and this is really important that I want to express upon you. It's the global piece, because we believe that there is an opportunity in the market that's not being served by brands across markets on a global basis. Yes, there are brands that are global and they're managed at a local level, but we have an opportunity to really expand our market presence and better connect with consumers on a global basis through a singular brand and technology platform.
Thirdly, we want to create a seamless experience across all those channels. We want to connect the store and the consumer with our digital assets and where we're making investments. So we're not investing in marketing and then we're making separate investments in direct to consumer. We're making singular investments that leverage that customer interaction. And lastly is, we absolutely have to leverage technology to strengthen that customer relationship.
Very, very important and we're going to do that internally by utilizing many of the toolkits that we've already developed and launched in our stores and amplifying those for online. So I alluded to relationship marketing a little bit earlier and how we connect with our customer. And most people I talk with basically say launch a loyalty program if you really want to connect with your customer. And our position is slightly different because I've never understood why retailers spend an inordinate amount of money researching, doing consumer research, researching a market, building a great storefront and then they're just ordinary. And as a result, they have to rely on loyalty programs.
For A and F, the opposite situation because we believe that our experiences are exclusive and they're exciting, they're aspirational, they're very unexpected and most of all, they're cool. So launching a loyalty would be kind of me too ish. It'd be very commercial. It'd be very expected. So where we're going and what we're building is, is we're building a cross channel capability that we believe will drive engagement, insight and personalization and afford us an opportunity to create a much more robust relationship with those consumers over time.
I can't reveal any specifics. We're not at that point yet. But I can tell you that it's something that we believe is very exciting and it's something that we believe can further differentiate our offering against the competition. So how do we get there and the time frame to get there? The first phase is what I'll call the migration process, and this is well underway.
The first component is, is we have to develop the long term road map and build the organization around that. So we have a path forward for how we're going to achieve that ambition. The second one is improving technology, replatforming and redesigning and integrating. So we launched redesigns for our A and F and A and F Kids businesses. We'll launch one soon for our Hollister business.
We also have upgraded our infrastructure. And as our supply chain team mentioned earlier, we will open a distribution center in the Netherlands to better serve our European consumers and our international customers there. And lastly, developing those marketing capabilities, including the customer database and personalization. One of the opportunities that A and F has that our competitors haven't was, we didn't invest significant amounts of money in a catalog operation or a loyalty program. So we're not encumbered by significant legacy systems.
And instead, we can really build something unique and robust. The second phase is what we call acceleration, which is truly increasing our global presence, leveraging those technology investments, beginning to monetize that customer database piece, creating those breakthrough customer insights and testing but scaling new business models, which include multi and cross channel as well as mobile and unique mobile capabilities that we've got in the pipeline currently. The last phase is really around differentiating our offering, fully leveraging that multichannel capability, leveraging our stores, leveraging online, leveraging mobile. Further driving expansion globally and moving into new markets, as Jonathan alluded to much earlier in the process, we are the direct to consumer business in online is very much a signal for our organization for where we are identifying growth opportunities for us. And lastly, creating innovative go to market solutions.
Again, very customer driven. We don't want to launch something for kind of me too it is or for competitive reasons. We want to launch something that we believe is brand right and that connects with the consumer and that we believe is in A and F's handwriting and that's very important. So we follow the same rigorous process, the same prioritization process that we do across our stores and in the rest of the organization. And so when we build something, we build it for the long term.
So what's the success criteria for getting us from where we've been to where we want to be? 1st and foremost is create the unexpected. This is a fundamental tenant for us as a brand and it's where we have to go as a company going forward, especially from an interactive and a cross channel standpoint. We have to reinforce that emotional connection between the brand and the customer and bring that customer experience to life in an interactive way. But most importantly, we have to be prepared for the next generation and anticipate change.
And this is something that we, quite frankly, are playing a bit of catch up on. But again, we believe that we can move very, very quickly in this area. We have to simplify to the maximum. If there's one thing that's important
and lastly, excel in execution. This is a fundamental tenant for us as a company and from a direct to consumer and interactive perspective that's how we'll succeed. Now I've been in retail for the most part my entire life. I'm a 4th generation retailer and my father ran our family business for 50 years and he lived by the maxim that good, better, best was never let it rest until your good is better and your better is best. This is really important because for the most part at A and F we believe in the same tenants.
Now our competitors are listening and our competitors are moving quickly. But by the same token at A and F, we don't just do it, we do it best and we believe that we're on the path forward. Thank you.
Thank you. Any general questions for Billy?
This may be a little specific, but I'm curious, you're talking about an integrated technology platform. How much have you thought about I'm sure you've thought about it, but how are you going to use point of sale data from the best of my understanding that technology is not integrated. My guess is it's tough for you to do it with what you have now. And I'm just trying to think about how you're going to learn about your customer. I think that's probably a pretty relevant thing.
So just wanted to hear your thoughts.
That's a good question. So I'll repeat it just in case those online didn't hear. The question was about our in store point of sale. We talked about multi channel, cross channel and connecting the consumer. And we definitely have put that on our radar screen.
We do believe that there are ways to better connect with the consumer at point of sale. By the same token, we're very sensitive to our in store operating model. And so the question is, is how can we leverage those investments without migrating down the purchase path? So there are investments and capabilities that we have in the store that we're not fully utilizing today. Let's take for instance the signature pad.
There's a way where we can better leverage that to communicate and interact with the consumer during the transaction process, let's say. So, we can learn, we can get opt in, and we can drive that relationship further. By the same token, we have an opportunity to better connect with the consumer in the store without utilizing our technology. So mobile is a great way to do that and we believe that that's an area where again we are focusing effort going forward.
Excellent. All right. Thank you, Billy. A few logistical details for the rest of the afternoon. So right now, we're going to break for lunch.
We're very fortunate to have a number of the presenters, some of our leadership team and other members here that are going to join you at the tables for lunch. They have the reserves tag at the tables in the back. But so feel free, play nice, but feel free to sit with them and learn as much as you can. We're very thankful that you guys were able to be here, presenters and leadership. Lunch details.
We will need to be back in our chairs in 45 minutes, 43 minutes actually, if we can do that. And that's where we're going to start our Q and A. So throughout lunch, if you want to think about some questions you'd like to ask, Mike, Jonathan, Leslie and Rocky, they'll be available for an hour, if you're thinking about your questions. Lunch details. Again, everything is on us for today.
Please feel free to make yourself at home. The trays are located over here to your right, my left. And feel free to check out the stations for lunch and help yourself and have a seat.
All right. Before we kick off our Q and A session, we'd like to show you guys a video from the London opening of Gilly Hicks. So please have a seat. I'll show you a video clip of the London opening of Gilly Hicks. All right.
While everyone takes the stage here, quick run through on the logistics for the afternoon. We're going to do a question and answer session here. And following that, we will do the distribution center tour. The buses will be leaving at 2:45, some for the airport, some to the one to the distribution center for the tour. So it will be very tight exit.
I'll keep an eye on the clock, but this is going to be very conversational. I expect to be sweating not because of the questions you guys are asking, but the amount of running around I'm going to do to field all the questions. But it is very conversational in tone. I'll turn it over to Mike. Do you have any opening minutes?
I'd like to ask the question. That's how many pair of down undies did we toss off the double ducker bus? I think it was in the 1,000, but everyone had a good time. We're open for questions.
There you go. We'll open the floor. Rocky?
Rocky, we lost you. Come on. Come on.
Thank you. You updated your productivity target for the domestic stores to 90% of your 2,007 levels. How much of that is closing the underproductive stores? And how much is internal productivity initiatives? And I guess if you could go into what those are and how you expect to improve that?
Thanks, Ryan. Well, most of it is coming from same store sales growth in existing stores rather than store closures. The store closures have an impact, but it's much less significant than the growth from the stores that we're keeping open. What was the second part of the question?
What are your strategies to drive?
Strategies to drive same store sales was the second part of the question?
Well, I think you could probably go back to the fall of last year to answer part of that question. We obviously had a strong performance. And I think the most important aspect of that was we had great product, the stores look great, and that was a critical component of that. The promotions certainly played a part as well, but I think it starts from the fact that we had the right merchandise in stores. And then I think beyond that we have got the marketing dimension going back to some of the things that Billy talked about in his presentation earlier on.
I guess, Jonathan, the tax rate and share count for your earnings target for next year and then also the 4 wall margins, the international, the U. S, sort of what's the difference to get us to the corporate operating margins?
The tax rate we are assuming is a mid-30s rate. We should get a little bit of benefit over time from the growing international mix component, at least until the point when we start to repatriate earnings. Share count, we are basically assuming flat with the current level. We are so we have said that one of our guideposts for share buybacks is to at least offset equity plan issuances. For the purposes of that model, we haven't assumed more share buybacks than that.
Mike?
Mike? Ask me about the X-ray, and I said ask Jonathan. Go ahead.
Mike, I have a question for you. It is about the footprint, the brand appropriate footprint for each of the brands domestically. And then secondly as you look at the assortment for Abercrombie what do you think is missing maybe accessories. And is that in the plan kind of go forward because now that you're managing your inventory very well, there is some excess square footage that could be more productive possibly.
Okay.
First part of the question, I'm not sure that I understand in terms of the footprint.
So store size.
Okay. We have a store size for
Number sorry, number of stores.
Number of stores. Well, I think Jonathan could address that, and then I'll go to the other categories.
I mean beyond the 50 that we said we're going to close at the end of 2011, Adrian, we haven't been more specific. We do anticipate there will be continued closures in each of the classes that come up of lease expirations, but we haven't been more specific on that at this point. And frankly, until we get a little closer to being able to make those decisions, it's a little bit premature to be more specific than that.
And in conversation about other categories, we are pushing the accessory categories that we think are appropriate to our brands, which is a more limited list than most people would throw out there. We are not going to go into the shoe business because I've never figured out, and this has been over lots of years, how you make a lot of money in shoes over time. I think it's a very chancy proposition. We have chosen not to go into the jewelry business because most of the jewelry business that's being done is not of a high quality level. There are a lot of units being sold, but we can't figure out how to make it work for the quality level we go after in any of the brands.
Having said that, winter wear, totes, belts, those things that are appropriate to our brands, we're going after. They're probably not the most obvious categories in terms of what other people are doing.
Thanks, Jonathan. Two questions. One is the difference between that 20% 4 wall margin in the U. S. And the 35% internationally.
How much of that 15 point difference is gross margin versus leverage on expenses from the higher productivity? The second question is how do the DTC margins compare to that 20 35, the 4 wall numbers?
Everyone, on the first part of the question, the gross margin internationally is certainly higher than domestic, both because of the premium pricing and because we don't have essentially any promotional activity. Frankly, we haven't been more specific on that. On the second part of the question, our direct to consumer, the margin on a marginal dollar of sales in direct to consumer would be north of that international rate, probably broadly closer to 50%, excluding the incremental investments we need to make to drive that business over time.
May I ask for a question for Leslie who has been with us 20 years?
You can read all about that later.
He's been me in line for 20 years. How do you think he is going to do that? So we must have a Leslie question. Okay. She can
Otherwise, she's got some great stories she'll share about the first time she met Mike. She's one of the few people here that actually predates Mike.
By a number of years. No, not true.
So
Leslie, I'd like to hear about the story about how you met Mike. And then Mike, if you could talk a little bit about Gilly Hicks and you now are opened in Europe. I guess, is the experience of the brand in Europe different from here? And ultimately, should Gilly Hicks be more like the American version, the European version or some other version that we haven't seen yet?
Okay. I think that's a very good question. But the answer is, Gilly Hicks in London is exactly like Gilly Hicks in the U. S. What it has the new footprint, which is approximately 4,900, which is the same as the new California store, which I have to say is the right square footage.
But from a customer's perspective, you can't tell the difference between the London store and the U. S. Stores. From category perspective, we're selling the categories in Europe much in London much the same as we do in the U. S, which is true of our total business, all the brands.
We tend to sell the same things in the same strength in all of our stores, be they flagship chain. It's a remarkable thing, but it makes operating our business easier.
Do you want me to talk about when I first met Mike?
We've got to share the story.
All right. I can reminisce. No, you have to stay because you asked for the question.
I didn't ask for
the question.
So 19 years ago, I think it was March, I'm not sure if it was March, 1992, we're in a meeting and in comes the new guy to run the business. And he walks in with a pair of khaki corduroy pants, white oxford and loafers, kind of wild blonde hair. I never said this to him. I thought, this guy is quite attractive.
I never told him. But anyways,
he walks into the office with a lot of spirit and a lot of energy. And at the time, we had one brand, Abercrombie and Fitch, 30 stores, making no money. We had a third of our store designated to items that just simply didn't sell. We had books, gardening, cooking, anything like that. We had, leather animals, croquet sets, real boars head brushes, not anything that you could imagine that didn't sell we had in that part of the store.
The female part of the business was 20%. I specifically remember when Mike came in, outfit that he thought, now what are we going to do with this? It was a long skirt with whales on it that had a matching whale up here in the female side of the business. The men's side of the floor was very gentlemanly. It was very English.
It was very proper. We had pinpoints, ties, Oxford shirts. So with that being said, we went to our 1st annual meeting. At the time, we were part of the limited, and it was kind of like a pep rally. And we were all wearing our cargo shorts and plaid shirts and all 15, 20 of us in the whole company were cheering and I will never forget the image of Mike in my mind with his arms up in the air saying, we will be a world known fun spirited brand.
And every one of us, the 15, 20, yes, we're going to do it, we're going to do it. And everybody else in the audience, thousands of people were thinking, now is this really going to happen? 19 years ago, so we've spent the last 19 years getting the team together to have that vision of that Mike said in that meeting come true. And that's my first memory.
Thank you, Leslie. I hadn't heard that story.
Leslie, now that you're talking, maybe you can talk to us a little bit about how your job, the planning and allocation rule has changed now that the business has gone more global, perhaps how your some IT or technology tools have helped that job? And if you could talk to us about some of the productivity gains that have been won through better planning and allocation? And for Mike and Jonathan, you've clearly outlined your goals for productivity in the domestic market. I was wondering if you could help us understand how we should be thinking about the 4 wall margins given the higher sourcing costs, given the promotional activity in the business, should we be looking for the margins to improve? Can they get back to historical levels or approach those?
Thanks.
Let me start with the planning system. We've been working over the year and a half to two years on getting our planning system to be able to handle the international growth. One of the things, as everyone knows, is in some of the stores were promotional and some stores were not, which changes that average unit retail of sales. And we have the premiums of the international businesses, which also changes the average unit retail. With that being said, those designated groups of stores need to be thought of to be able to get the unit buys correct.
That is one issue. And the other issue is the margin is very different of being non promotional and having premiums. So like I said, we've worked the last year and a half to 2 years. We feel like we have figured this out. We will be using our new planning system for the fall system for the fall 2011 we are using our new planning system for the fall 2011 season for the first time.
We are grouping Andrew Navarro talked about a little bit in his presentation. We are grouping the result of our plans looking at promotional and non promotional stores to understand the business and we feel that's necessary. The allocation system, we have a system in place. We are constantly challenging ourselves in the allocation side because it has become much more complex with additional distribution centers. Now that we're opening the 3rd distribution center, it will become more complex.
We feel that we know how we need to allocate that inventory to those distribution centers, but there's always room for improvement there and we are still working on that.
Jonathan, do you want to address the 4 walls?
Yes. Absolutely. On the second part of the question, Janet, we absolutely believe that domestic stores are going to make a meaningful contribution to that improvement that's going to get us to our goals over time. For all the reasons I talked about earlier in terms of bringing that back to a rate, that's complicated by the different moving parts from a cost of goods standpoint and tickets and so on. But we absolutely believe that the domestic stores will make a significant contribution towards getting us to our goal both in 2012 and then beyond that in dollar terms.
I think my question is for Jonathan on
this one
on I think you're now talking about 10 additional flagships in 2012. And thinking about those, how should we be thinking about? Is there anything any consideration we should have in terms of the timing and the impact on the pre opening expense already coming in 2011, I would assume on some of those and into 2012. So qualitatively talk a little bit about that.
I think that touches on a really good point, John, because we put the 4.75 out there because we have given the 2012 goal and we didn't just want to not give an update on how we saw 2012. But I think one of the key points of the presentation this morning is that 475 is just a checkpoint on the way to a much bigger opportunity we see over time. And the pre opening rent is certainly one of the things as we have talked about in the past that can create some volatility quarter to quarter in terms of the margin and what flows through to the bottom line. So clearly, if we have a lot of flagships opening at the back end of the year, that's going to create a significant amount of pre opening rent during that year, but then we'll start to leverage that investment in the following year.
Let me just throw in something that I should have said to Adrian about the accessory business because we count fragrance and personal care as part of the accessory business. That's an That's an enormously powerful business for us as most of you know, and it's totally brand related. We do business based upon the strength of the brands buying what's in the bottle. And I think most of you know that Fierce, our men's fragrance, was the number one selling men's fragrance in the U. S.
Last year, which is really an interesting statement in terms of the power of these brands.
John, I am not sure I fully answered your question either. So I think the point is that in 12, there is a significant chunk of unproductive pre opening rent that becomes productive the following year that's baked into that 4.75 Well, flagships typically we're paying booking rent expense even if we're not paying it typically up to about a year from the opening of a flagship. So for Hamburg and Hong Kong that we spoke about this morning, we will be starting to book pre opening rent for those in the back half of this year, if not a little bit in the second quarter.
For those that missed that question online, it was about the timing of the pre opening rent. Next question?
Hi. You've talked some about the non four wall expenses of becoming an international company, whether it's investments in systems or DCs or real estate people. But I think those investments are part of why most companies do this through franchising. So if you can talk in a little more detail about what are those investments in terms of dollars and what exactly are they and why is it worth it to take those expenses on?
Well, let me start the response, and Jonathan can tell you more specifics about the dollars. We control every aspect of these brands. And the point of our business is that as we talked about a few minutes ago, the experience, the product is the same from city to city. So it's the experience in the store that we work very hard at, and I think the store group probably told you about that. The merchandise is the same.
We sell and experience, and we have to control it. If you franchise, you turn it over to somebody else. If you franchise it, you also turn a percentage of the profits over to somebody else. But our first priority is controlling these brands. The brands are everything to us, and we're obsessive about controlling the brand, brands around the world.
Now in terms of the cost, Jonathan might respond to that. Yes.
I mean, I think the second part of the question is almost sort of moot for all those reasons. But I mean, we do strongly believe that once we put that infrastructure in place, there's a huge leverage benefit. It takes a little longer. There's more upfront investment. But once we've done that, we have something we can take to scale as we're now doing with Hollister in a very efficient and very accretive way.
And if we wanted to lay another brand out in the same way, we now have all the infrastructure in place and we can capture an even higher proportion of that incremental profit to the bottom line.
You guys put a sales target out there for 2015. I'm just wondering what sort of CapEx range should we expect between now and then that kind of gets us to that $7,500,000,000 in sales? And I guess the second part of that is when you guys all sit around the table and talk about any particular flagship opening or Hollister rollout, what sort of return on capital threshold are you guys talking about as you sit around the table? Thanks.
Just to answer the second part first, a single critical metric is that 30% or greater 4 wall margin with all of the on an EBIT basis with the depreciation, all of the other cost structure baked in. Typically and given the CapEx we're investing in those stores, for Hollister store that means a very strong rate of return and a very short payback period. For a flagship, it can be a little longer. So we do look at all those other metrics, but the single most important metric for us is the 30% 4 wall contribution. And if it hits that threshold, then other than in very unusual circumstances, all the other metrics line up very well.
And the first part of the question again was?
CapEx range.
Yes. I think it's too early for us to be specific on that. As Brian Ferguson spoke to in the global procurement presentation, we are increasingly getting more for our CapEx dollars as we open more chain stores internationally in particular, but also getting more efficient with the flagship CapEx dollars. And we hope to keep bringing that down so that for every dollar of volume we are adding the effective rate of CapEx we are investing becomes progressively lower over time.
Hey, so you are on Fifth Avenue, you are in London, you're on the Ginza Strip, Champs Elysees in May, definitely the marquee locations with very, very high rent. And I'm just wondering as you have those already in place and you're upping the total guidance for the number of stores, whether at the end of the day, the CapEx and the pre opening and all this stuff that people are curious about is going to end up being pretty close to what it's been.
Can you elaborate a little bit? I'm not sure. Well,
in other words, 1 Paris store, I don't know, my gut tells me that's probably worth 3 other European ones. Based on the pre opening, based on I mean, CapEx maybe it'd be similar because materials are what they are, but there seems to be a lot of focus on, wow, they're going from 5 to 10 to 20. What does this mean for pre opening and the timing and the CapEx and all this stuff? And you step back and there's some ridiculous rent in certain places of this world which you are now in. And so that's something that from the past as you move away from and as you go forward maybe it's not going to be that much of an inflection point in either your pre opening or your CapEx.
Well, there are certainly some flagships that are going to have higher rent than others. And an example of one that certainly has a higher rent would be Hong Kong. So we're going to start picking up that pre opening rent shortly. So it's going to be a combination. Some of the flagships actually have very relatively low rents, some of them have much higher rent factors.
But I think the essential doubling year over year of the flagship count is going to increase pre opening costs certainly this year to some extent and certainly more significantly in 2012 particularly with the additional Hollister's coming into play. We haven't been that specific. As we've done in the past, we'll likely be more specific on preopening.
I guess on the longer term gross margin opportunity, I guess domestically, Mike, about the promotion, I guess, the last year or 2, you probably had to react to the environment. Can you just talk about what you've learned and how you maybe changed the promotional tack between Hollister and Abercrombie?
Why don't we let Leslie answer that?
I think if you Jonathan kind of said it, when you look at fall 'ten, we did very well, and we really think it was the product and the stores looked amazing. We did promotional strategies in Fall 10 more aggressively than we really had in the past. Is that me?
We learned
a lot about those strategies, the promotional strategies that we did. Going forward, we're much more targeted with those strategies. We are much more open to being more aggressive in Hollister than the A and F brand. We will continue to do that. We have tested quite a bit over the last year on where we should be promotionally.
We've tried some new things. As we speak we're testing 4 or 5 additional things. And we will continue to run the business appropriately to whatever the environment says we need to be promotionally.
Good. You're surprised.
Great, didn't she?
Thanks. Of the 20 flagships that you talked about this morning, can you tell us roughly are the majority or how many are the bigger flagships? How many will be the Copenhagen style flagship? And then looking out even further, how many of the larger flagships do you sort of see globally as the really big stores that you're going to
want to open longer term?
David, why don't you respond to that?
I'll turn
that over
to Dave.
Ed. Edlain will respond to this.
Yes. I think that what we look at is we look at what the market can bear who our co tenants are the rent and obviously the volume we believe we can do. The idea I think you're speaking to the Tier 1 flagship that we did in Copenhagen. We are doing 1 in Madrid that is opening this year. And then as we roll out as we continue the next few years, we will look at what the volume can bear as far as full flagship or Tier 1.
Source store size obviously affects your CapEx build out as well as your payroll model filling the store. And those are those can be highly sensitive to the actual profit margin that we need to hit. So if we could go for a smaller store size that has helped us be able to do more and more flagships in cities we may not be able to have done because of the volume. Does that answer your question?
Directionally, I think.
Thank you, David.
Thank you. In as much as you're handling the e commerce business out of the same DCs as you're shipping to the stores, I assume it's all on the same inventory platform. And can you talk a little bit about the integration possibilities of e commerce and retail and for pickup at the store for starters?
John Singleton here. There he is.
John?
Group participation here.
Sam, I can't hear very well, but I think the question was, since we are having them in the same place, are we going to have inventory that's fungible? Is that kind of the question?
It was about the different platforms, if I'm not mistaken, correct? The platform for our DTC, Is it integrated with the stores, the same platform DTC as well as stores?
The DTC business we're turning on in the Netherlands will indeed have the same system running both the warehouse and the direct to consumer And our intention is to turn that on in the U. S. As well over the next year and a half or so, so that the inventory would be it will be still dedicated to keep the stores safe, but it will also be available for when we make a decision, it will be able to move back and forth across both. Thank
you.
There's a mic right behind you, sorry.
Can you pick up and return at the store or will you be able to?
If Billy has his way, well, it's certainly being discussed about what other options we've got as far as being able to tie in the DTC business with the retail business?
Yes.
Yes. So I mean, we've got some multichannel integration today. So you can return in store, obviously, and we've had that for a while. When you talk about buying online, shipping to the store for pickup, there are obviously operational implications, which we would have to work through
as a
company. There's also what's appropriate for our target audience, whether they buy it want to buy it online and pick it up in the store. But in terms of enabling that, we will be well served to do so. The question is whether operationally we want to execute against that. Building on what John was talking about from an inventory perspective, it's very important that when we allocate, we want to allocate where we're going to get the best return and where we've got the best opportunity to sell that product.
So by having a centralized model, we're able to allocate where the sales are actually greatest. So we see that as a distinct advantage within our business model.
Thank you. Evan?
What does our customer want? And are we crafting our strategies to our target customer? Our target customer is very clearly defined and perhaps some of the things we do to engage her or him would be different if we were selling to 55 year old women with peculiar shoe sizes.
Okay. The question is, as you're becoming more international, how are you thinking about currency exchange, rate management? And then do you buy everything currently in U. S. Dollars?
We currently source everything in U. S. Dollars. All of our sourcing cost is fixed in USD. We do do some hedging between our Swiss company, which acquires all of the inventory for Europe and then resells it to the local countries in their local currency.
So we hedge a portion of those inventory sales between the Swiss company and the local operations. I think going forward greater geographical diversification gives us some natural hedging, but we don't do any other form of hedging at this point.
Mike, how are you feeling about the product lately both for girls and for guys? We've noticed more fashion in the product. That's the first part. And then the second part, as the second half of the year comes upon us and the price increases begin to take hold, what are you thinking about pricing of basics or the fashion items in the second half
of the year?
The first part of the question, I respond with an answer about where we are in the process because running a fashion business, as you heard this morning, is from our point of view about the process. Where are we on that curve? Where are we in terms of identifying trend, testing and then responding? And I think we've made huge progress as a company in terms of each of those things. I think we're doing well there.
I think our inventories currently reflect that. I think this is an important point beyond merchandising because we have a merchant head to this business and that's really a reflection of what you saw this morning that Jonathan presented, and that is how are you sure before you pull the trigger? From a merchandise perspective, it is find the trend, test and then go in a big way. And that's exactly what was described this morning in terms of where we're going, the places that we're going and that Jonathan has said this is what's going to happen are tested. We've tested the flagship concept.
We've tested the Hollister International concept, and that's what went into that number. So it's, from our point of view, an important conversation beyond what do the inventories look like. I think the inventories look good because we are on that track and running a fashion business like that is different from a really great season and then you fall off the face of the earth if you don't the process. 2nd part of the question, pricing for fall, I'll turn it over to Leslie.
We don't have significant second quarter ticket increases. It really begins in Q3. We will have some mix differences for Q2 and that will take the average unit retail up. But the real ticketing increases will happen for Q3. We feel that we have the pricing power internationally.
I think as we've proven to be able to do that. We are not sure about the U. S. That is something that we will watch. We watch this business daily, weekly and we'll watch to see what happens in that And we'll react to whatever we need to see how it's received.
Hi. Are there any structural management or office changes or additions as you go to or as you move to 50 percent international?
Structure in terms of reorganizing a different organization for international?
Overseas offices to facilitate it.
Well, the first part of that answer is because we run a business that we pride ourselves on making sure that we look the same in every location around the world, it makes that answer easier. We run an organization from Columbus, Ohio. Now there are some regional things that we have to do, and Jonathan can address that or maybe Ron can address that in terms of HR, specific country issues that we have to face. Ron, would you like to address that?
Ron Rumkowski is on our leadership team.
Overseas, we've built a bit of an infrastructure of people in HR, payroll, finance, maintenance, IT. And at this stage of the game, we're still learning about what it is that we're going to need in the future. We're at some point, we're probably going to as we get really intensify in certain of the regions, we'll probably pull some of the areas together and do put together a different kind of an organization. Right now, each of these functional areas are purely extensions of the functional area here in Columbus. At some point, we might do some reorganization, but I don't think we're going to lose that idea that we're still going to be managed from Columbus, Ohio.
So do not expect a President of International Exactly. Southeast Asia or something like that. Those are support functions which are country specific.
We'd be more looking to try to make things more efficient overseas and not really change the idea that we'll be managed from Columbus.
I had a couple of questions about the goals for the Hollister business internationally. I assume in your sales numbers that you gave us today that well, I'm wondering, do you expect average productivity to decline as you add more stores as you fill in markets? And secondly, I think you're running almost exclusively a full price business in Europe right now. And I'm wondering, as you add more stores and obviously more inventory comes into play, if you anticipate that you'll have some promotions, maybe some semi annual sales or what should we be thinking about in terms of promotions in Europe and in London? Thanks.
So this is a good question for Jonathan to start and Leslie to finish. Jenna, on
the first point, in the $1,500,000,000 we articulated for Hollister on the 185 stores, that would imply an average volume that is significantly below what we've been running to date. So we think that is builds in some adjustment for the fact that the average store may not continue to run at the current level. But on the other hand, we still got a lot of penetration to go in places like Germany and Italy, where our average stores are currently running at a very healthy level. We don't regard that $1,500,000,000 as being frankly an aggressive number. I think a little bit to the second part of your question before Leslie comes in, are talking about 185 stores for Hollister in Europe compared to 500 in the U.
S. So our relative store count for regions that are broadly similar in economic terms will be a lot lower in Europe, which will certainly help maintain that exclusivity and I think protect price in Europe. You made important point. We're not going to populate the world the way we did the U. S.
What stores?
The second part of the question, currently in our A and F flagships, we do not have red lines or promotions. In Hollister, which is the chain environment that David Leno talked about, we do not have promotions, but we do have red lines. And we plan on keeping that strategy the same. We do not see in our near future why we should be promotional in those areas. We just clear through the red lines and that's how we're planning to proceed.
We hope near future or far away future? Yes.
Quick question on the cash again.
I guess if you get to your sort of target for 2012, you're going to be sitting with well over $1,000,000,000 of cash in your balance sheet and understanding offsetting some dilution from options. But beyond that, I guess what sort of cash cushion do you guys need to feel comfortable about running the business?
Before Jonathan answers that question, Jack Kessler can talk about how cash phobic we are or I am. Okay, now go to Jonathan.
Kevin, I guess it goes back to those 2 guardrails we talked about in the past. The point that I was making on what we've assumed for the EPS goal for next year was not that's what it's going to be, but that's what's baked into the into that EPS number for modeling purposes. What we have said is that the guardrail is to at least offset equity plan issuances. On the other hand, we always want to maintain a net cash cushion at the trough of the cycle of at least $350,000,000 So between those two, we are typically going to continue to do quarterly plans that we will lock into in advance, which will have a base level of stock that we will buy back and then will trigger into more purchases if we hit certain price thresholds during that quarter. But at any given point in time, we would never want to go below that $350,000,000 of net cash.
It might be popular, but Jonathan and I only have one hard fast rule, and that's never run out of cash.
Yes, I'd like to get back to the brand issue, controlling the brand. And I understand entirely the need to control the brand, control the brand experience, especially as you expand internationally. Question is, if you obsess about the brand, you can stifle innovation. And how do you balance encouraging innovation because retail is about newness, how do you have innovation and control?
I don't I
didn't hear the
first part. Why if we're obsessive about controlling the brand, are we stifling innovation? I don't think so. I think we are constantly, constantly innovating here. I think this is our culture.
I have to say, we did inherit a business that Leslie described and worked our way through that very different environment and the environment has changed dramatically over the last 20 years. And I think what this team has proven is that they if the team is creative and innovative and has constantly risen to that challenge, every day is a new day, we have a new environment, we have new methods of new ways we have to engage with our customer. And I think we are very creative about those ways. And I don't think it has anything to do with being obsessive about the brands. It probably does, but how do we do it and maintain the brand integrity which drives everything else in the business.
And it does talk to how we do it, and we might do it in a way that's different from other people because we know that protecting those brands is the primary goal, but we can and do, do that.
Two totally unrelated questions, but curious as you go international, what your factory store strategy might be? Will it be similar to your current strategy in the U. S? And then you've been seemingly more exclusive about the promotions doing it through email and Facebook rather than having signs sometimes in the stores, wondering what's more effective the Facebook or the email outreach? Thanks.
The first question is about whether we will source differently for our international stores. Factory stores. Factory stores. Factory stores.
Outlet stores. So the question is what's our strategy for outlet stores?
I don't know. You want to take that?
I don't know how much detail we should get into there because it is a very big topic in the company, how we get rid of But we
are testing 4 or 5 different ideas.
Yes. I don't know that we could get into more detail than we are testing different ideas. Again, the goal to protect the brands, we have to be creative about how we do it, and I think that the tests that are in place are a creative solution to that. It really addresses the last question. And the second part of the question?
What's more effective, reaching to your customers through Facebook or e mail?
Lastly?
Well, I think Billy kind of talked about it. I think we have to do it all. I think that's where he and she are looking. That's where they're going. And it constantly evolves.
Whatever it is today, I'm sure won't be tomorrow. But I think we really do have to hit all the levers that Billy talked about in his presentation and do stores, do social, do the web. It's everything.
And so I'll build on what Leslie said. So the answer is it depends. It depends on the type of promotion or the how time based the promotion is. If you think of Facebook being, let's say, top of funnel, where consumers are very engaged with the brand. They're not necessarily in a commercial mindset.
Email is a very kind of direct communication, which may be more time sensitive and building off that. So from an effectiveness standpoint, the answer is it really depends, but they work together. And when we've done exclusive promotions, let's say, on Facebook, they're generally not as effective as when we build a more holistic strategy around the consumer.
Mike, to go back to product and brand identity, you've got a strong commitment to the brands or Hollister and Abercrombie and
that's to
be respected and very important. But over time, we've seen dramatic shifts in the way people want to dress and you saw it 20 years ago when pants embroidered with whale seemed silly. But there no. And and I don't doubt it, but perhaps 35 years ago, those were very desirable. And I can remember Miami Vice and trying to dress like Tubbs and Crockett, and yet that fashion has gone.
Others here did too. I'm not alone.
Stan, let's have a show of hands. Miami Vice aspirational. Okay.
It's an easy example. Saturday night fever, a different example. I didn't participate, but was very popular during its time. There will be changes. And and how do you for obviously, we can't anticipate them.
We don't know what's next. But imagining something like that making a big shift in the way men and women want to look, how do you see the brand identity making that transition?
I think the answer is we are focused on a customer, and the customer is aspirational,
not
in any way, edgy, is a great guy and girl who think well of themselves and their friends and there's a quality to their lives and the way they look at life. They're engaged in quality and good taste. After that, there is an orientation to casual, which is very American and is a huge ongoing trend. The casual apparel business is where the profitability has been in apparel for decades and from my point of view will continue because it is a very American thing. Within these parameters, we can we look at fashion and ways of dressing come and go, but those parameters are pretty set, quality, good taste level, casual, and that directs you to classic, which is the most commonly appreciated casual dressing by the customers I've described.
The question is how many of those customers exist and is our point of view that it is a big, big percentage of the U. S. And it's becoming a big percentage of the world. So I'm very comfortable that the track we're on is sustainable and that within those parameters, we can continue to be fashionable at the time.
Hello. We've seen in the flagship stores and actually online talking about flagship only products, you can get it online and click a certain button for that. Where does that go in terms of going forward in terms of percentages? Or is that going to continue to increase as you roll out the flagships? I guess the other question I have is that you're going to areas where the sizings are naturally different between Southern and Northern Europe and Asia and wherever you want to pick it.
How do you plan on handling that in terms of the assortments and how you shift your sizes?
Meg, would you repeat the first part of the question?
The first question is you have and you go online, there's a section that has flagship only product. And if I go to a New York City flagship, I'm going to see stuff I'm not going to see on Long Island. How do you plan on rolling that out? And how does that become a part of the mix as you increase the flagships?
Well, the answer to that question is that the flagship assortment is the same, flagship to flagship. The flagship is in fact a chain. We merchandise to that store as a chain. We sign off on Fifth Avenue and those floor sets are duplicated in every flagship. And we will continue to do that.
So the amount of inventory that's flagship only won't change as we open additional stores, that doesn't have anything to do with it. It's just from that Fifth Avenue store.
Right. And the second part of the question was regional difficulties or the differences. The first part of that question is that we do tend to sell the same things in pretty serious same amounts. And it took us a while to figure that out. As a matter of fact, Leslie and I can tell you a story that I just one of the stupidest ideas I ever had, and I've had a bunch of them, was a Sun Belt assortment in the U.
S. Because, obviously, we've got to merchandise differently in Florida from Ohio. So we this was how many years ago?
Probably 15.
So we engaged this whole company in this nonsense of different assortments for the Sun Belt, and guess what? Didn't work. We didn't need to do it. And that has been learning for us around the world. Now when we start to talk about Southern Hemisphere, we're talking about another matter.
And Jonathan related to that this morning when he said that is a whole different kettle of fish when you're operating in 2 different temperate zones. And we're not tackling that yet. On our agenda, we will start to address that in 2014. We know we have a lot of Brazilian business and a lot of Australian business in this country, but operating in 2 different climate zones is something we're going to have to address as a whole separate proposition. After that, we don't have to before that, we don't have to do it.
Excellent. All right. I've been instructed to keep everyone on a tight travel schedule. So unfortunately, that's going to run out of time for questions. Thank you, guys.
Thank you very much. Very quick logistical items. The buses will be departing at 2:45. Bus number 12 will go straight to the airport. Bus number 3 will go over to the distribution center.
So we're going to be walking out the Courtyard out to the front entry the way we came in this morning. Thank you.