I'd like to turn the conference over to Mr. Eric Cerny. Mr.
Cerny, please go ahead.
Thank you. Good morning and welcome to our Q4 earnings call. Earlier this morning, we released our Q4 sales and earnings, income statement, balance sheet, store opening and closing summary and financial history. Please feel free to reference these materials available on our website. Also available on our website is an investor presentation, which we will be referring to in our comments during this call.
This call is being recorded and the replay may be accessed through the intranet@abercurmy dotcom under the Investors section. Before we begin, I remind you that any forward looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Today's earnings call will be limited to 1 hour. We will begin the call with a brief a few brief remarks remarks from Mike followed by a review of the financial performance for the quarter from Jonathan Ramsden. After our prepared comments, we will be available to take your questions for as long as time permits.
Please limit yourself to one question so that we can speak with as many callers as possible. As a reminder, the after tax operating results of rule for 2,009 and prior periods are now included in discontinued operations and income statement and related comparisons to prior year, therefore, generally exclude rule. Before I turn the call over to Mike, I would like to remind everyone that we will be hosting an Investor Day on Tuesday, April 5, at our campus in New Albany, Ohio. The day will begin with registration at 9 o'clock and conclude by 2:30 p. M.
You can find more information regarding the day as well as registration details by viewing our Investor Relations website. We look forward to your visit and hope that many of you will be able to attend. Now to Mike.
Good morning, everyone. Thank you for joining us today. 2010 was a year in which we exceeded our objectives in terms of sales, operating income and earnings per share.
We did this while continuing to invest for the future
and to build our organization 2010, we achieved domestic same store sales growth of 7% and total domestic growth of 10%, including direct to consumer. This was driven in part by a more aggressive promotional stance, but more important, as those of you who visit our stores know, by a compelling assortment and by stores that looked great. It is also worth noting that our domestic business continued to get stronger throughout the year. Our international business was up 79% for the year. We were off our initial goal of 30 international Hollister openings for the year, but the very strong volume of the stores we did open compensated for this.
Across Europe, our business is extremely strong. Our U. K. Hollister stores comped well above the overall company rate in 2010. Our 4 German Hollister stores are running at more than double their initial projected volumes and the 3 Spanish stores are more than 50% higher.
Meanwhile, we've 50% higher. Meanwhile, we have continued to gain momentum in Italy with our 3 stores now running close to the UK in average store volume. Just over 2 years after we opened our 1st Hollister store in Europe, we now have a business that is annualizing at over $300,000,000 Turning to A and F, while Tokyo has trended lower, our 3 major international flagship stores in London, Milan and Tokyo are now annualizing well above the CAD200 1,000,000 we talked about a year ago. In direct to consumer, we had total growth of 41% for the year, with strong growth in both our our domestic and international business. We added significant resources to our direct to consumer group during the year, improved the shopability of our sites and continued to add new country specific sites.
And the Gilly Hicks made very solid progress, posting comps of close to 40% for the year and initiating a new 5,000 square foot foot certainly challenges ahead, we feel very confident in the momentum of our business and the global power of our iconic brands. Turning to 2011, I want to take a moment to talk about our roadmap objectives. Starting with gross margin, there is no doubt that sourcing costs are the biggest headwind we face. When we last spoke in November, I mentioned that we were seeing increased costs with the late spring season receipts. That pressure has has all 2011 season.
In response to this,
we do expect to increase our tickets
and our gross margin rate will also benefit from the continued growth of our international business. However, there is significant uncertainty about how these different effects will balance out in terms of their impact on our overall gross margin beyond the spring season. One thing we will continue to do is to take a long term approach. Among other things, that means that we will not sacrifice quality to achieve cost reductions. Turning to our other roadmap objectives.
We have spoken in the past about a mid single digit same store sales objective for 20 11 2012. We continue to believe this is realistic. We are looking to We are looking to
accelerate the pace of
international Hollister opens to approximately 30 to 40 this year. These will include our 1st Hollister stores in Mainland China and Hong Kong. We will open a total of 6 A and F flagships this year, a combination of our full flagship stores and the smaller Tier 1 flagship format we have used in Copenhagen. In addition to our previously announced Paris and Madrid openings, these openings will include Dusseldorf, In total, we are projecting annualized volume of around $200,000,000 for these 6 flagship openings. We continue to target high growth rates for our direct to consumer business, which in 2011 will continue to benefit from multiple investments we are making in this business, as well as from our growing international presence.
We are also looking to sustain the strong growth we have seen in Gilly Hicks. Finally, on expenses, we continue to challenge all areas of our business to find efficiencies, while at the same time, we continue to invest in our long term growth. With that, I'll hand the call over to Jonathan, but we'll be available to answer your questions at the end of these comments. Jonathan?
Thank you, Mike, and good morning, everyone. I'll start with a quick recap of our results for the quarter fiscal year and then go on to make some comments about 2011. For the Q4, the company's net sales increased 23 percent to $1,150,000,000 while comp store sales increased 13%. Our gross margin rate for the quarter was 63.6 percent, approximately percent, approximately in line with last year's gross margin rate of 63.5%. Our operating income for the quarter was $144,700,000 This included pretax charges of $48,400,000 associated with store related impairment charges and $4,000,000 associated with closure of 56 domestic stores during the quarter.
A summary of our operating expenses can be found on Page 8 in the investor presentation. MG and A expense for the quarter was 100 and $6,400,000 up 15% versus last year's expense of $92,400,000 MG and A for the quarter included equity and incentive comp of $17,800,000 versus $10,400,000 last year. MG and A for the quarter also included approximately $5,500,000 of charges not anticipated at the beginning of the quarter related to an increase in legal reserves, a write off on the trade in of our fractional aircraft ownership to reduce our costs going forward and some software write offs. Stores and distribution expense of approximately $485,000,000 for the quarter included the $52,400,000 of impairment and store closure charges referred to a moment ago. Excluding those charges, store occupancy costs were approximately $168,000,000 All other stores and distribution costs represented 23.1% of sales, modestly below the 23.6% of sales they represented last year and included approximately $4,000,000 of additional depreciation related to our DC consolidation, which I will come back to in a moment.
For the year as a whole, excluding the net effect of impairment charges and store closure charges, we achieved approximately 320 basis points of operating margin improvement, which was ahead of our roadmap objective for the year. Growth in the 4 wall contribution of international stores was the greatest driver of this improvement with DTC and domestic store productivity also making significant contributions. These contributions were partially offset by growth in non 4 wall expenses, including MG and A, store management and support and DC costs. The impact of Gilly Hicks was not significant to the year over year change in margin. Turning to the balance sheet.
We ended the quarter with total inventory of cost up 24% versus a year ago or up 22% excluding in transit. Inventory days on hand at the end of the quarter were comparable with the low points over the past 5 years. Looking forward, we expect inventory on hand excluding in transit to be flat in dollar terms at the end of the spring season. We ended the year with $826,000,000 in cash, an equivalent compared to $670,000,000 of the comparable point last year. During the quarter, we repurchased approximately 913,000 shares at an aggregate cost of of approximately $47,000,000 bringing our total $47,000,000 bringing our total repurchases for the year to a little under 1,600,000 shares.
Going forward, we expect to continue share buybacks within the parameters outlined on our last earnings call. Turning to 2011, our focus is to continue making progress on our key roadmap objectives. Domestically, as Mike said, our our objective is to maintain the mid single digit comp improvement we achieved in 2010, including for the Q1. In addition, we continue to expect approximately 50 store closures at the end of 20 11. Internationally, we expect to accelerate our rate of store openings for both AMF and Hollister, and this should continue to drive significant operating margin improvement.
We expect DTC to continue to make a meaningful contribution to our overall margin improvement. We are also planning for continued strong growth from Gilly Hicks, although we expect the operating margin effect from Gilly Hicks will have minimal impact on our overall operating margin through 2012. Last, we continue to focus on maintaining tight control of expenses, including our non on maintaining tight control of expenses, including our non four wall expenses. This includes keeping our home office headcount flattish and continuing to identify opportunities to gain greater cost efficiency, such as with our DC consolidation. So more specific guidance on 2011 is included on Page 1516 of our investor presentation.
Within the year, as we have indicated in the past, we do not expect our rate of margin improvement to be linear and in particular due to timing factors, we expect the Q2 to be challenging. Overall, as we look to our roadmap goal of a 15% operating margin in 2012, we do not believe it is realistic to expect that our gross margin will return to its peak level of around 67% by that point. However, if we are able to hold our gross margin approximately flat in 20 11 and make some progress in 2012, we believe the overall operating margin goal remains achievable. As Mike said earlier, however, our visibility on gross margin beyond the spring season is limited at this point. I want to make a few comments about our plans to consolidate our DC facilities here in New Albany.
As many of you are aware, we currently operate 2 DCs, one serving A and F, kids and our global DTC business for all brands and the other serving Hollister and Gilly Hicks. Going forward, we plan to consolidate into a single DC, which should in turn facilitate a sale of our second DC and result in reduced distribution costs upon completion by mid-twenty 12. We expect to incur approximately $26,000,000 in CapEx associated with the consolidation, of which approximately $19,000,000 will be incurred in 2011. From an accounting standpoint, the consolidation is expected to result in accelerated depreciation of the existing DC2 building and equipment of $28,000,000 or slightly higher, of which $4,000,000 was recognized in the 4th quarter and approximately $4,000,000 per quarter is expected to be recognized in 2011. During our Investor Day in April, we will offer a tour and detailed presentation on these plans.
In total, fiscal 20 11 total capital expenditures are expected to be approximately $300,000,000 predominantly related to new stores, store refreshes and remodels. This concludes our prepared comments section of the call. We are now available to take your questions. Please limit yourself to one question so that we can speak with as many callers as possible. After everyone has had a chance, we will be happy to take follow-up questions.
Thank you. The question and answer session will be conducted electronically. Your first question comes from Michelle Tan with Goldman Sachs. Great. Thanks.
Mike, I was wondering if
you could give us a little bit more color on how you're thinking about taking up ticket. Is it across the board or varied by geography? What's the magnitude? And if the consumer accepts it, what are the implications for second half IMU?
Well, I think, Michel, that's the question of the day. We know we have to pass cost increases. The question is how much. And you're right in terms of where. Clearly, we have more opportunity to pass the increases on in our international business than our domestic business.
So the answer is we know we are going to be increasing ticket prices. We have to. We're increasing ticket prices. We have to. We're comfortable that we can pass some of these increases on to the customer.
We're not comfortable with how much.
Your next question comes from Evelyn Koppelman with Wells Fargo Securities.
Great. Thank you. Good morning. As a follow-up to that question, can you talk a little bit about how you're planning inventory units for the second half? Obviously, it's hard to know the demand elasticity.
But as you think about the units for the U. S. Versus international business, do you have an opportunity to move units or is it once it's in a country, it's there?
Good morning, everyone. I guess in terms of the overall question I don't think we really want to get into that for the full season. We've given guidance on inventory dollars at the end of the spring season, but I don't think we want to get into any more specifics on that beyond that. To your question about whether we can move inventory units back and forth between the U. S.
And Europe, it's easier to move them from the U. S. To Europe. There are some tax limitations on our ability to bring
them back from Europe to the U. S.
Your next question comes from Jeff Klinefelter with Piper Jaffray.
Yes, thank you. Just a clarification, first of all, Jonathan and Michael and team, congratulations on a nice recovery this year domestically and the international stores look great. Wanted to maybe clarify, Jonathan, the Hollister stores, any sense out of that 30 to 40, how many of those would be Asia versus Europe? And then also those flagship Abercrombie's Tier 1 versus traditional, any sense for number? I just wanted to clarify that.
And then in terms of the 4 wall trends out of international, it's pretty encouraging the profitability. Is there any other detail you can give us in terms of how those are measuring up versus domestic?
Yes. I mean, on the 30 to 40, Jeff, they do skew very heavily towards Europe. So that they're predominantly Europe. And as we said, they're predominantly in the back half of the year, which is one of the factors that's impacting the Q2 because of some of the preopening charges that are hitting that quarter. In terms of the 6 A and F, as we said on the call, in aggregate, we're projecting annualized volume of around $200,000,000 for those 6 stores in total.
They are typically sort of Dusseldorf, Singapore and Paris will be more in that sort of larger flagship category. Brussels, Dublin will be probably more in the sort of Copenhagen Fukuoka mold, but obviously all those things are on a continuum. So it's difficult to be too precise. So that might be broadly how you could think about them. And then I think the third part of your question was 4 wall profitability.
As you know, our core metric when we sign up for a new store is that we want to hit that 30% 4 wall margin at least. So if we're doing significantly better than the volumes we projected in those stores, that is taking those 4 wall margins higher than that. So I think that gives you some indication of what we're seeing. And that's why international growth was the most significant driver of our margin improvement year over year.
Your next question is from Janet Kloppenburg with JJK Research.
Good morning, everyone, and congratulations on a great quarter year.
Thank you.
Michael, I was wondering if you could talk a little bit about perhaps some opportunity for IMU benefit in the back half of twenty eleven through shallower promotions. Product is getting stronger across the board and I'm wondering if you're seeing an opportunity with the economy improving for perhaps promotions to be less deep or less broad than they were in this past season. And Jonathan, just a quick question on the $1.38 that was reported exclusive of impairment charges. Was that legal charge of $0.04 per share included in that $1.38 or excluded? Thanks so much.
Let me answer the first part of the question, Janet. I would hope that we will be able to have promotions that are less deep and fewer of them. We're hoping that our markdown dollars are more efficient. And I would say we absolutely would like to go there. Beyond that, I can't be more specific.
Okay. Thanks.
Janet, good morning. To the second part of your question, the only thing that is added back in the $1.38 is the impairment charge and then the store exit charges were around $4,000,000 So the $5,500,000 that I referred to in MG and A is not added back in that number nor is the DC depreciation of $4,000,000 which is included in that $1.38
Thanks so much.
Thank you.
Your next question will come from Stacy Pack with Barclays Capital.
Hi, guys. Thanks.
Stacy, I have to say first, you were right about the 4th quarter margin rate.
So question, I guess, one follow-up question on the pricing. Mike, are you thinking that you will actually raise prices domestically versus have less markdowns? Tax increase? Did you take prices up there? And are you seeing any impact from that?
And then Jonathan, I was hoping you could clarify Q2 a little bit. I mean you alluded to higher pre openings from the later store openings in the year. But I would think also your gross margin would be better in Q2 given the rising costs in the back half. So can you just clarify what you're seeing in Q2 a little bit?
I'm going to let Jonathan handle all those answers.
Okay. Let me can handle all those answers.
Okay. Let me start with Q2 then. What we're calling out and we spoke to this I think several times in the past is that as we continue to progress with our operating margin, it's not necessarily going to be even by quarter. And I think the point of the comment we're making was simply that the Q2 within the year is the one where we're making where that impact is the most significant. And that's primarily because we have heavy skew towards our store openings later in the year.
So we have big pre opening rent, other pre opening costs starting to come into play in Q2 that before we start to get the volume benefit from those and that starts to turn around in the back half of the year as the volume comes on stream. With regard to gross margin, we haven't been specific about how that's going to break up by quarter. We do expect approximately flattish for the season as a whole. The costs are certainly escalating in the Q2. And the question of when we take our tickets up and start to see that benefit
could create a timing, a little bit of a timing disconnect, which
may also impact the which may also impact the Q2 relative to the other quarters in the year.
And the VAT tax?
We made a number of ticket adjustments in the UK in particular, and that's one of the factors that's been taken into account in what we've done there and we'll continue to do.
And no negative reaction, I assume?
I mean, our UK results have obviously been very strong. We haven't called that out other than what we've spoken to for 20 10 as a whole, but we're obviously very happy with our UK business.
Your
next Your next
question is from Randy Konik with Jefferies.
I guess Jonathan or Mike, just want to focus on domestic store base here, obviously all the store closures. Do you think that after the 50 closures in 2011 were done? And is there any type of color you can give us on how bad these stores are from or below the average store are from a sales productivity per foot margin basis just so we can get a sense of how much these stores have been weighing on the product profitability of the company? And as these stores are closed, do we get closer and closer to that 75% of peak productivity you're focused on for the domestic market? Thanks.
Can we just confirm it's really you, Randy?
Oh, it's me. It's me this time. Thanks.
I guess with regard to closures, we do expect that we'll continue to be closures post 2011. We haven't given specific numbers on that, but as we go through the year and get closer to thinking about 2012, I think we will start to talk more specifically about this. But as we spoke to you in the past, there was a fairly significant number of stores around 200 or so that were in negative territory. We've dealt with a decent chunk of those. Some of those have got a little bit better.
But some of those explorations fall out beyond the 20 ten-twenty 11 timeframe. So we do expect that we'll be continuing closures. I don't think we're ready yet to put a specific number on what that will be in 20122013, but I think we'll do that relatively soon. In terms of how bad, I mean, they we spoke about the class of 2010 closures averaging about $1,000,000 of volume. The 2011, we'll give more specifics on that going forward, but it's probably not going to be dramatically different to that.
And then the primary driver of the negative contribution is just that absolute low level of volume as opposed to occupancy. But we'll start to give a little more color on that going forward. I think in the overall scheme of things, as we've said in the past, the impact of closures relative to domestic store productivity increases for existing stores is much less. So the primary driver of getting back to that 85% or a little better is going to be the same store sales of stores we have opened, not the ones we're closing.
If I may, is there any type of target you think you can get to from a long term operating margin standpoint that you're now targeting for the domestic business versus the prior peak of around 20%. Is there anything we can kind of look at there?
We're working very hard at the moment on our long term plan. First of all, we're rolling forward our 3 year plan to add in 2013 and then we're working on our long term plan out beyond that. And I think we'll start to give more color on that probably to some extent at the Investor Day in April and as we go through the year and as we get clearer visibility and more comfort with where those plans are going to take us.
All right, fair enough. Thanks, guys.
Thank you.
Thank you.
Your next question will come from Christina Chen with Needham and Company.
Thank
Congrats on a good quarter.
Wondering if you could maybe talk about your thought process in leading in China and Hong with Hollister rather than Abercrombie? And I'm curious where in Hong Kong the Hollister store might be? Is it going to be a flagship? Is it a mall based store? If you could just
talk about that a little
I think we can. The first store in Hong Kong is Hollister Mall based store. It's in the Festival Walk Center. We probably would have liked to have led with an A and F flagship and we simply weren't able to make a deal quickly enough. We're working very hard on that, but we think that Hollister in Hong Kong and China will be a moral based business.
And do you worry about the counterfeiting of your brand over there?
Constantly. Go ahead, Christine.
I was
going to say, so what are you going to
do about it? I mean, I guess it's flattery, but
Well, we have a wonderful team in place and they've been working on the counterfeiting there for quite a few years. We're very aware of what it is, probably where it's going. In fact, we're told that having bricks and mortar in these countries will in fact improve that rather than take it the other way. We're hopeful, but fearful. Thanks for the question.
Your next question is from Paul Lejuez with Nomura.
Hey, Paul.
Good morning. Can you talk a little bit about the timing of the A and F flagships? When should we expect the 4 that you announced today? When should we expect those to open? And then you've spoken a little bit about the second quarter pressure from pre opening.
Can you maybe talk about when these stores either flagship or international Hollister locations, how long does it take? When do they become profitable to the P and L? Is it day 1? Can you maybe just talk about that timeline? Thanks.
I'll give you the opening and Jonathan can take you from there. Paris is May, Madrid is 3rd quarter, Dusseldorf, Brussels, Singapore and Dublin are all 4th quarter. There are actual dates on those. I'm not going to be more specific than the quarter.
Paul, on the second part of your question, we expect all of our stores to be profitable from the day the doors open. The issue is prior to that actual opening, we're typically paying and booking rent expense for 5 months or more for Hollister store and up to a year or more in some cases for an ANF flagship store. So we have that expense, even though we don't have any sales volume. And then we also as we get closer to the opening of a store, we have to start hiring managers. If it's a new international store, we have to have expats that go over typically from U.
S. To open the stores initially. They have to go through language training and they can be in country for several months prior to the opening of a store, particularly a flagship. So all of those costs sit there prior to opening. But the day we open, we fully expect all of our stores to be operating about 30% or margin 30% or better margin at that point.
Your next question comes from Betty Chen with Wedbush Securities. Thank you. Good morning and congratulations on a great quarter.
Thank you. I was wondering if you can speak a little bit more about the direct to consumer business. It grew by a significant amount in the Q4 and throughout 2010. I believe, Mike, you mentioned that you've been making multiple investments and also looking into more company specific sites. Can you talk a little bit more about the investments you might make in 2011?
And sort of what sort of progress that we can look from that channel throughout this year?
I'm going to turn that over to Jonathan. Good morning.
I think the question the reference was to country specific sites, maybe that rather than company specific sites.
And the
place of that model continues to be that once we open a store in a new country,
we open up a country specific DTC site as well.
So that obviously helps with specific DTC side as well. So that obviously helps with the opening of a store helps with awareness and
we typically see a lift in
volume on DTC once we have a store presence in a country. In terms of the incremental investments, I think we'd identified a year or so ago a lot of areas where we had the opportunity to invest and to drive the DTC business further. Many of those have not come into play yet. I don't think we want to talk too specifically about what they are in 2011. But we feel we made good progress, but one of the reasons we feel optimistic about the progress we can make in 2011 is and 2012 is that we know there are several things, potentially significant things that we've not yet activated, but we'll be doing over the coming months.
Just to mention one, we are redesigning our sites and you're going to see all of that coming live. But there are many other things that we're working on, which we think will be meaningful to the business.
Thank you.
Your next question is from Dana Telsey with Telsey Advisory Group.
Good morning. Hello, everyone. So two quick things. Number 1, on the product. As you see product trends, Mike, in terms of the newness that you're defining and how it's moving along, where are you in the progress towards newness both on men's and women's?
And what do you see happening going further? And then just one clarification on inventory. How do you see it trending in units and in dollars, whether it's for the Q1 or the first half? Thank you.
The answer to the first question, Dana, is that we're very much on track or getting on track in terms of looking to what's next looking for what's next that is appropriate for our business and then going through a rigorous testing process before we make major statements, which I think you can see in our stores is how we look today. So, I think that it's a very astute question because it is the process. And I think we're doing better and better at that in both women's and men's. And clearly, the women's business has in 4th quarter outperformed the men's business, which was still strong. So we're very pleased with that progress and process.
Hey, Dan, on the second part of your question, as we said on the comments a few minutes ago, we expect inventory dollars to be approximately flat at the end of the spring season. We typically manage inventory on a seasonal basis and focus less on the quarter end, which can be subject to some fairly significant timing effects. But as of this point, we would expect the Q1 to be up modestly versus last year, but to be back flat in dollar terms at the end of the Q2. But again, we think the end of season position is really the most significant piece to focus on.
Thank you.
Your next question is from Edward Yruma with KeyBanc.
Hi, Edward.
Hi, thanks very much for taking my question and congratulations on a phenomenal quarter. First, now that you've made some tweaks to the box size of Gilly Hicks, how do you feel about kind of its performance in the longer term rollout potential? And second, more housekeeping, how do we think about the potential accounting hit for the LTIP? Thank you.
On the LTIP, Ed, I mean, it's entirely a function of the number of shares we have available in our plans relative to the share obligations we have. Frankly, it's rather complex to explain. I'd probably take up the rest of the call if I try to do it in any level of detail. But essentially, it's a function of the stock price, the price gets to certain levels that requires a greater number of shares to settle outstanding awards and triggers additional awards. At a certain point, those obligations can could become greater than the remaining number of shares we have available in the plans.
So there is a reasonable likelihood that we will put up a long term incentive plan at this year's annual meeting. And if that goes through, that will obviously alleviate that problem, hopefully fairly significantly. The consequences of that issue not being alleviated and ultimately running out of shares would be that we would have to start to mark to market certain share awards, the expectation that they would need to be settled in cash. So it would create some quarter to quarter earnings volatility because we need to mark the awards to market each quarter based on the stock price. If we ever get into that scenario, we'll certainly give people the data to understand the impact of that quarter to quarter.
But obviously, we're hopeful that situation doesn't arise because we will be able to get a long term incentive plan approved that makes the issue moot.
I'll comment on the Gilly Hicks question. We feel very positive about the new size of the 5,000 square foot Gilly Hicks prototype and are very, very optimistic about the long term potential of this brand.
Your next question is from Eric Beder with Breen
Murray.
Good morning. Congratulations on a great quarter.
Thanks, Eric.
Your international this year was about 20%. What are you looking at for next year in terms of when do you think or do you believe that you could be over 50% of your sales internationally going forward?
Harry, we've said in the past that we expect it to be around 30% in 2012. I think that's another one of those pieces of data that as we give a more longer term outlook at the Investor Day, we'll give an updated view on that. But as of today, that probably remains pretty close to what we expect for 2012. Where it goes beyond 2012, I think we'll give more color on as we go forward. We certainly expect and strongly believe that there is a huge growth opportunity internationally and we don't see that dwindling or losing steam anytime soon.
Your next question is from Robin Murchison with Sun
Thanks and good morning everyone. Previously in terms of AUR you've indicated and congratulations by the way on the significant improvement in the Q4. But so going forward, I think you've indicated that we should continue to expect sequential improvement. Wanted to get an update on that? And then also if you could just update us on the U.
K. Distribution center? Thank you.
I don't think we've said more than we anticipate the AUR being positive for spring. And I think that's all we can say at this moment about that.
Clearly positive in the fall as well in overall terms. Right. Clearly. On the UK DC, we have a Netherlands DC, Robin, which services our European business. So that arrangement has been in place for, I guess, about 2 years now.
We had a 5 year original deal with TNT, which is our 3rd party distribution function in the Netherlands. So, we don't have anything significant in the UK at this point. And that distribution center in the Netherlands is servicing today all of our European business as well as the 2 Japanese stores. Certainly, on the agenda is the possibility that we'll have an Asian distribution center, probably a similar outsourced arrangement sometime fairly soon.
Your next question is from Lorraine Hutchinson with Bank of America.
You mentioned Tokyo sales trending down. Can you just talk about why you think that is and then implications for the overall business in Japan?
Yes, let me take a stab at that.
We're not
completely sure. It's Ginza is doing a healthy volume, but it's not what we anticipated. I have to emphasize that it is a very healthy volume, but we did not make our opening goal, which was very aggressive. We're not completely sure, but we're continuing to work through the dynamics of that business. We're actually very cautious on Japan now.
We do not have any more Japanese deals in pipeline and we'll take it slowly.
Your next question is from Laura Champine with Cowen and Company.
Good morning, guys. I'm wondering if you're looking at the potential for taking costs out in product, whether that means using less cotton or moving to other countries. I'm noticing, for example, your spring wovens
look a little lighter. I don't
know if that's a
question. We have not taken any weight
out of
that part of the question. We have not taken any weight out of that fabric. We look we continue to source as efficiently as we can in terms of new potential countries. We look to be as efficient as we can be in terms of cost. We're saying we're not taking any quality out of the product and we're really not, but there are some tricks to the product that we can do that will not take quality out of the product, but will cost a little less.
We have the opportunity to do that more in the Hollister brand actually than the Abercrombie and Fitch brand.
Your next question is from
Your next question is from Richard Jaffe with Stifel Nicolaus. Thanks very much. Mike, a philosophical question. As costs rise or are anticipated to rise in the second half, obviously, you can't do much about it other than trying your best to source effectively. How do you feel about sharing some of that cost increase with the consumer versus swallowing some of that cost increase in the form of depressed margin and hope to manage the business more efficiently?
How does it weigh in your mind?
Well, it weighs on our minds all the time. But I think the answer to the question Richard is that a portion of these cost increases have to be passed on because they are pretty steep. So we will be increasing our prices is the answer to the question. Order of magnitude, I cannot tell you at this moment.
Your next question is from Kimberly Greenberger with Morgan Stanley. Great. Good morning. Nice holiday season. Mike, I'm wondering if as you look into the second half of the year, how you're thinking about the trade off between the pricing architecture at Hollister versus A and F?
And are you expecting any slowdown in your comp momentum as you begin to raise price? Or do you just expect that the trade off between a higher AUR and perhaps slightly fewer units will be net neutral and you'll be able to maintain your momentum? Just how are you thinking about managing through this process?
I think the answer is that we're doing it on a we're doing it very carefully and taking a stance that is almost week by
week what's happening is we're raising
prices, what's that anybody really can. And I think what the point of this tension is that it has to be managed carefully and really on a week by week basis. And those businesses that can do that, I think will make their way through this. Those that can't, I think they're big problems.
Your next question is from Robert Samuels with Phoenix Partners.
Jonathan, can you just discuss briefly just your views on cash and your minimum cash cushion that you'd like to maintain? And you bought back a little bit more stock this quarter. Would you think about being more aggressive with your buyback going forward? Thanks.
Hey, Robert. Yes, I think we're basically going to operate within those 2 guardrails that we talked about on the last earnings call. At the lower end, we want to maintain all with a very healthy net cash cushion, which we've articulated as being around that €350,000,000 figure at the trough point of the cycle, which is clearly January is not a trough point in the cycle. On the other end of the spectrum, we want to at least be offsetting equity plan share issuances, so the overall share count stays flat. Where we end up between those two points, I think it's going to be a function of market conditions, how we're feeling about business in general.
But they would be the 2 guardrails, which I think hopefully gives people some sense of how to model that out for 2011.
Your next question is from Jeff Black with Citi.
Hey, thanks guys. I guess on the pricing front, it sounds like you're experimenting with taking some prices up, but do you have any clear evidence that you will in fact be able to raise price at the U. S. Divisions? And then, Jonathan, I know you said you don't want to talk about the second half, but regarding units, can we assume that units are down in the units, can we assume that units are down in the U.
S? I mean, obviously, your plan, obviously, there's a big print on international that's going to drive the overall picture higher, but just U. S. Specific, can we expect units to be down? Thanks.
Let me answer the first part of the question. And the only evidence we have is that we do have momentum in that business, in the U. S. Business. So that gives us comfort that we can do so.
Yes. On the
second part of the question, Jeff, I mean, part of the reason why we can't be too specific is that it's not fully baked for the full season and we're still working very hard on the full season on costing, on projecting out comps by quarter. So we're still working through that. I think overall, we've said we expect AURs to be up and that will certainly be a contributor to the comp improvement. And in terms of figuring out what it means in terms of units, obviously, the AUR component increase offsets some of the comp increase in terms of what it means for units. But I don't think at this point, we're ready to be more specific on that than that for the full season.
Your next question is from Arne Shapiro with The Retail Tracker.
Good morning, Arne.
Hey, guys. Congratulations.
I think I might have single handedly provided at least a point of your comp in the quarter.
Good. Is that all?
It could have been more.
I can only accept responsibility for a point. So I had a couple of questions. 1, I do want to follow-up on the pricing question. It seems to me in walking your stores, you have been playing around with the pricing for the last little while, but especially since spring has set. And I'm curious if you could talk a little bit about that.
And if you found any difference between historically, your Hollister pricing in kids have been very similar and I've noticed recently some of those have kind of played around. I've noticed you put items on the floor and I'll call it swim as an easy example that you've not taken the price down at all since last year and it's cold and already selling. So if you could just talk a little bit, I know everybody is very concerned about the pricing, but it seems to me you've already started playing with it and if you've seen any positive results that you this ability? And how is it playing out in Europe most importantly? Do you have more ability to raise pricing there?
And how do you manage the markdowns on the backside of that in Europe?
There are a whole bunch of parts to this question. I think the first part of the question is answered the way I did was to say that we look at this on a week by week basis and that's how this has to be how the business has to be run today. I can't answer what has been successful, what hasn't. Clearly, we have an opportunity for increasing prices more in Europe than in the U. S.
Your next question is from Sam Panella with Raymond James.
Hey, good morning. Going back to the gross margin guidance and previously I think you've said that average unit cost would be about flat year over year in the first half. Any differences that you can call out between Q1 and Q2? And then in terms of the gross margin expectation to be up in the Q1, should we think about that similar to the magnitude that you're able to get in the Q4 or is there opportunity to do better than that? Thank you.
Yes. I think, Sam, I think we had previously said roughly flat for the spring season. I think what's coming to play more and more is those late later receipts in the season, we started to see the pressure that we're seeing throughout the fall season. And to the point earlier, the timing of when we are fully able to react from a ticket standpoint is, it may create a little bit of a disconnect in the second quarter. But implicit in us saying that we're expecting flat for the season and up in Q1 and therefore there could be a little bit of gross margin erosion in Q2.
I think beyond that, I'm not sure we can pass that any further at this point.
Your next question is from Adrienne Tennant with Janney Capital Markets.
Good morning, Mike and Jonathan, and congratulations on gaining back market share.
Thank you, Adrienne.
My question is on a little bit more color on the magnitude of the cost inflation. You said double digit. How far are you bought through at this current time? And I would expect that with cotton continuing to move up, should we expect to do 10% in Q3 ish and maybe more toward the 15% range in the 4th quarter? Any more color on that would be great.
And then I was sorry to hear about 5th Ave. Can you give us an update on that when it will be reopened if
it isn't already? Thank you.
Yes. Three parts to the question. Let me handle Fifth Avenue first. We are hoping to reopen next week. For those of you who didn't know, we had a fire in the store.
There is smoke and water damage, but we are working very hard to reopen next week. The other part of the question was the magnitude of the inflation. We can't really say that at this point. We're grappling with this. We have bought our back to school assortments.
We're still negotiating for Labor Day in Ireland.
Your next question is from Jennifer Black with Black and Associates.
Good morning. And let me add my congratulations as well.
Thank you, Jennifer.
I know the fragrance business is a big priority. And I wondered if you feel like you're making headway as far as coming up with a counterpart to Fierce on the female side? And then any comments you have on your accessories business would be great.
You know we've been working very hard on the female equivalent of Fierce. We have one that we will be introducing this Christmas and I hope it's going to be the equivalent of Fierce. If it is, then these calls will become a lot easier in
the future.
Your next question comes from Liz Dunn with FBR.
Great. And under the wire, just a clarification on the sales guidance in line with 20.10. I mean, is it just fair to say based on the visibility that you have to the first half or the first quarter that the Q1 should be stronger than the rest of the year? And then I did a store tour last week and really got some great feedback on your inventory management through the Q4. So first congratulations on that.
I think very few of us would have congratulated you on your inventory management heading into the allocation strategies? Because the district manager we spoke with was quite complementary on the inventory allocation that happened in the Q4 as her stores? Thanks. Let me just say the first bit, Liz. We're saying that we're targeting a
mid single
digit comp for the full year and including for the Q1, just to recap what we said earlier. I think one of the things we feel is that we've got a lot better at our ability to project and forecast our own business. And as we've discussed in the past, the strongest correlation we typically see is what we've with how we planned our own business as opposed to what's happening elsewhere in the market. So, obviously, there are always some external factors that impact what the business is trending. But we feel, as we said, that that mid single digit comp is achievable for the year, including for the Q1.
In the second part of the question was first half of Q1, expect Q1, I think I probably dealt with that. The allocation strategies, I'm not sure how much detail we can really go into on that. Obviously, it's a very complex area. So I'm not sure in the remaining couple of minutes we have, we can really do justice to it.
Your last question will come from Linda Tsai with MKM Partners.
Good morning. Thanks for taking my question. Could you just provide us with some intel on the customers that shop at the International Hollister and International Abercrombie's? How similar are they to the customers you see shopping at the domestic stores?
The answer is very similar, very similar targeted age income. I think A and F flagships have a broader customer in terms of age. And by broader, I mean they skew older. There are older customers shopping in those stores than tend to shop in the domestic A and F stores. But part of
that, it's a little bit
complicated because a lot of that bit complicated because a lot of that shopping is for other people. So they're buying for younger people. But in terms of actual purchases, the flagships skew a little bit older.
And that