Operator: Good day, and welcome to the Abercrombie & Fitch Fourth Quarter 2012 Earnings Results Conference Call. Today's call is being recorded. We will open the call to take your questions at the end of the presentation. We ask that you limit yourself to one question during the question-and-answer session.
At this time, I would like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.
Brian Logan - VP, IR and Controller: Good morning, and welcome to our fourth quarter earnings call. Earlier today, we released our fourth quarter sales and earnings, income statement, balance sheet, store opening and closing summary, and an updated financial history. Please feel free to reference these materials available on our website.
Also available on our website is an Investor Presentation which we will be referring to in our comments during this call. Today's earnings is being recorded and the replay may be accessed through the Internet at abercrombie.com under the Investors section. The call is scheduled for one hour.
Joining me today are Mike Jeffries and Jonathan Ramsden.
Before we begin, I'll remind you that any forward-looking statements we may make today are subject to the Safe Harbor statements found in our SEC filings.
In addition, in our press release this morning, we announced that the Company has converted to the cost method of accounting for inventory. We will discuss the background to and impact of this change later in the prepared remarks. In general, our comments for the fourth quarter and full year 2012 are based on the retail method of accounting to be consistent with the basis on which we gave our guidance coming into the quarter.
Also, as a reminder, the fiscal 2012 retailer calendar includes a 53rd week and therefore, fourth quarter and full year comparable sales are compared to the respective 14-week and 53-week periods ended February 4, 2012.
Finally, effective with the fourth quarter results, we are moving to reporting our primary comparable sales metric inclusive of direct to consumer sales. We believe this change is appropriate now that we have a more established comparable sales base for our international direct to consumer operations. For comparison purposes, we're also continuing to provide comp store sales excluding direct to consumer.
We will now begin the call with a few remarks from Mike, followed by a review of the financial performance for the quarter from Jonathan and me. After our prepared comments we will be available to take your questions for as long as time permits.
With that, I will turn the call over to Mike.
Michael S. Jeffries - Chairman and CEO: Good morning, everyone. We are very pleased with our results for the fourth quarter. Our sales were in line with our guidance coming into the quarter and our earnings exceeded expectations due to a very strong gross margin performance along with continued tight expense control. Excluding impairment charges, our adjusted diluted earnings per share for the year was $3.22 under the retail method. Total sales for the quarter were up 11%. Total comparable sales including direct to consumer sales were down 1% with the U.S. flat and international down 3%.
Despite a challenging U.S. retail environment over the holiday period, our core U.S. chain store plus U.S. DTC comparable metric remained positive as reflected in the chart in our Investor Presentation. Our international comparable sales represented a further sequential improvement in the trend with growth remaining very strong in direct-to-consumer. This trend improvement was most notable in Hollister where we had positive comp store sales in Scandinavia, Belgium, Spain, Hong Kong, and China.
Importantly, we saw a significant sequential improvement in our sales trend in the U.K. despite that economy dipping back into negative growth. Overall, international sales represented one-third of our business for the quarter. If international business in U.S. stores is included, the figure is closer to 40%. While international comparable sales have been negative for the past several quarters, we are encouraged by the improving trend and by the diversification benefits of our increasingly global presence.
Turning to gross margin, our strong performance for the quarter reflected a significant year-over-year benefit from lower product cost but also a moderated promotional stance during the high-volume holiday shopping periods and the effect of generally lower levels of clearance inventory. We also saw a good sell-through in key categories such as outerwear and jeans.
On a full year basis, we achieved overall sales growth of 8% and had a third successive year of healthy year-over-year growth in sales and adjusted earnings per share.
We also generated strong free cash flow for the year and ended the year with our balance sheet in great shape after having returned about $380 million to shareholders during the year through share repurchases and dividends.
Beyond the numbers I'm extremely optimistic that we are well-positioned to make continued significant progress over the next few years. Our brands remain incredibly strong and resonate on a global level. On the front line of our business, our stores organization does a world-class job of presenting those brands to the world and running stores like no one else and we are well-positioned to reap the benefits from all the investments we have made in systems over the past couple of years, including the new merchandise planning system, the conversion to cost method for inventory and our DTC investments.
Speaking of DTC, our business this year achieved total sales of $700 million versus $290 million just three years ago. We now have an international DTC business doing around $230 million in volume at very high margins and growing rapidly. We've made great progress on DTC but still see major opportunity ahead of us.
Most importantly, our strengths as a Company are underpinned by an extremely talented team of associates and our ability as a team to focus on achieving our goals. But while all that is unquestionably true, it is also true that our profitability is not where it needs to be.
We have made progress in our operating margins over the past couple of years, but they are still well below historical levels, and that is despite the benefit of our highly profitable international business. So, this clearly represents a major opportunity for the Company and we believe this opportunity lies in two specific areas.
First, revisiting our operating model and identifying processes and investments we make in our business that may have had a return at one point in time but no longer do today. These are complex issues to address. They involve cross-functional impacts and they involve reexamining things that have become a core part of how we do business.
With regard to this initiative, we have established a cross-functional team led by two senior leaders and supported by a team of other senior associates, with the mandate to perform a detailed review of opportunities to simplify processes, to eliminate low-value added components of our model, to increase efficiencies, and to lower expense. This initiative is a major corporate priority and we believe there is a very significant opportunity.
We are engaging an outside consulting firm to support us on this project and we expect to have completed the diagnostic phase of the project by the end of the first quarter and be in a position to better quantify the opportunity at that point.
The second initiative relates to average unit retail. We have launched another cross-functional team to identify ways to increase our AUR, particularly in our U.S. stores and U.S. DTC. This team is also being led by dedicated senior level leader. Making progress on AUR will help our gross margins and also contribute to expense leverage.
Overall, if we could make meaningful progress on these initiatives, we believe that is a realistic goal to drive our operating margin back to at least the low teens over the next few years. However, no benefit from either of these two initiatives is assumed in our outlook for 2013.
Beyond these initiatives, our focus remains on the strategic initiatives we outlined back in August of last year with regard to merchandising, inventory productivity, insight and intelligence, customer engagement, optimizing expense and AUC, and U.S. store closures.
We believe our merchandising strategies are already paying off and what you've commented that you've seen in our assortments. This includes increased vendor collaboration to leverage the expertise of our supply chain partners during the product development cycle.
With regard to insight and intelligence, we are now engaged in our first global market research study. Our goal is to better understand our customers' perceptions of us as well as our key competitors. Geographically, the scope includes North America, Western Europe, and Asia.
Regarding customer engagement, more than 1.5 million new customers have joined our club programs since their launch in the third quarter, which is in addition to the 3.5 million previously existing customer contacts that we brought into the club who are also eligible to receive member benefits.
Our overall CRM file now contains over 10 million contacts. From a social media perspective, we have also now exceeded the 10 million fan milestone on Facebook for Hollister and for the second year in a row Hollister was a top five non-paid trending topic on Twitter during Black Friday.
Through continued focus on our key strategic initiatives including the two cross-functional initiatives I discussed a moment ago, we are confident that we can drive significant and sustainable improvements in our performance.
Coming back to 2013, while we anticipate a slow first quarter due to a number of top line pressures, we anticipate another year of earnings growth in line with our long-term goal of annual EPS growth of 15% or slightly better.
With that, I'll hand the call over to Jonathan, but I'll be available to take your questions later.
Jonathan E. Ramsden - EVP and CFO: Thanks Mike, and good morning, everyone. Brian will talk in more detail about the retail to cost conversion in a few minutes, but I'd like to say that we are very pleased to be making this change. We believe the cost method better aligns with our focus on realized selling margin. It is already giving us much better visibility and drill down capability into our merchandise plans.
The conversion resulted in an increase in diluted EPS for 2011 and a reduction for 2012 which is primarily future markdowns taken on very high carryover inventory at the end of 2011. In general, on a forward-looking basis, we do not expect the change to be significant to reported EPS. Brian will go into more detail on this in a moment.
Moving on to the numbers, to reiterate what Mike just said, we are very pleased with our results for the quarter. The Company's net sales increased 11% to $1.469 billion. Total sales U.S. sales including DTC increased 1%, and international sales including DTC were up 34%.
Total DTC sales, including shipping and handling, were up 26%. Including direct-to-customer, comp sales were down 1% to last year, comprising comp store sales down 4% and comp DTC sales, up 17%. Within the quarter, comparable sales were stronger in November and January.
Gross margin for the quarter under the retail method improved 920 basis points year-over-year, reflecting a significant year-over-year benefit from lower product cost and much lower carryover fall inventory. In addition, gross margin benefitted from a moderated promotional stance during the high-volume holiday shopping periods and the effect of generally lower levels of clearance inventory.
On an adjusted non-GAAP basis, operating expense as a percent of sales for the quarter was approximately 180 basis points higher than last year, driven primarily by the deleveraging effect of negative comp store sales, higher direct-to-customer expense, and higher MG&A expense, including incentive and other compensation expense.
Operating income for the quarter on the retail method and on an adjusted non-GAAP basis was $281 million versus $149 million a year ago, and operating margin increased 790 basis points to 19.1%.
Our GAAP results for the quarter included an impairment charge of approximately $7 million related to 17 stores. All of these stores are domestic stores and excluding one Gilly Hicks store opened four years ago or more.
Diluted earnings per share for the quarter under the retail method on an adjusted non-GAAP basis were $2.21 versus a $1.12 for the prior year and represented our strongest fourth quarter performance since 2007.
Turning to the balance sheet, we ended the quarter with total inventory under the retail method down 36% versus a year ago and the inventory under the cost method down 37%. Under both methods, we had a significant benefit from lower fall carryover inventory and lower inventory in transit, as well as a significant year-over-year AUC benefit.
We ended the quarter with approximately $646 million in cash and cash equivalents. Including our undrawn credit and term loan facilities, this equated to total pro forma liquidity of $1.146 billion as of February 2, 2013.
Yesterday, we elected to draw down the full $150 million from the term loan and this cash will therefore be available to supplement our operating cash flow and funding our 2013 capital allocation priorities. For 2012 as a whole, we generated approximately $345 million of free cash flow which was net of capital expenditures of $340 million. We repurchased 7.5 million shares during the year at an average cost under $43, including 1.2 million shares purchased during the fourth quarter. We ended the quarter with 78.4 million shares outstanding.
With regard to our expectations for fiscal 2013, we are projecting full year diluted EPS of approximately $3.35 to $3.45. This would represent another year of healthy earnings growth against the restated cost method adjusted EPS of $2.90 for 2012. This projection includes an assumption of approximately flat overall comp sales including direct-to-consumer, with slightly negative comp store sales. It assumes gross margin rate improvement compared to fiscal 2012 gross margin rate of 62.4% under the cost method, somewhat offset by expense deleverage due to negative comp store sales and higher DTC expense. The projection also assumes a full year tax rate approximately in line with prior year and full year diluted weighted average share count of approximately 81.3 million shares which does not include the effect of any potential share repurchases during the year.
With regard to the first quarter of fiscal 2013, we are anticipating some significant headwinds on the top line due to much lower levels of full carryover inventory compared to last year on top a difficult macroeconomic environment. However, we anticipate a significant improvement in the gross margin rate.
Based on the above we are projecting a slight loss per diluted share for the quarter versus a restated loss of $0.25 per diluted share for the first quarter of last year. This projection assumes high single-digit negative comparable sales for the quarter. We expect comparable sales to improve significantly in the second quarter as the first quarter headwinds that I mentioned a moment ago diminish and we pick up tailwinds as we anniversary inventory flow issues that adversely affected us last year – during the second quarter of last year.
With regard to real estate plans for the year, we expect to open ANF flagship locations in Seoul and Shanghai as well as approximately 20 international Hollister stores. These link with our first Hollister store in the Middle East as a result of a now fully executed joint venture agreement with Majid Al Futtaim Fashion. Our first (indiscernible) will be in Dubai, but we anticipate expansion to Abu Dhabi, Kuwait, and Qatar in the next couple of years.
In addition, during 2013, we will open our first stores in the Southern Hemisphere in Australia and into Japan with Hollister. We expect capital expenditures of around $200 million for the year with estimated preopening costs of around $30 million for the year.
During fiscal 2012, we closed 47 stores and expect to close approximately 40 to 50 U.S. stores in 2013, primarily through natural lease expirations at the end of the year.
Our capital allocation philosophy remains to be highly disciplined in allocating capital to where it will derive the greatest return on a risk-adjusted basis. After allocating capital to new stores and other internal projects to drive superior returns, we continue to expect to return excess cash to shareholders.
The chart on Page 16 of the investor presentation illustrates our capital allocation for the past several years. Finally, I would like to echo Mike's comments about our optimism coming into 2013. There will certainly be challenges during the year, particularly in the first quarter, but we're going to be highly focused on the two initiatives Mike talked about and expect that these will lead to sustainable and meaningful improvements in our operating margin and return on invested capital. We will talk more about this on our next earnings call.
Before handing the call over to Brian, I would like to take a moment to welcome a new member of our finance team. Sanjay Singh has recently joined from Procter & Gamble, where he was most recently the Finance Director of the Global Beauty Care. In his over 20 years with P&G, Sanjay spent much of his time in Asia, including roles based in China, Japan and Korea. Among other responsibilities, Sanjay will be overseeing our long-term financial and strategic planning process and many of you will likely meet hem in that context.
With that, I'm going to hand over to Brian to provide some more details on the retail to cost conversion and to add some more color on our results for the quarter and fiscal year.
Brian Logan - VP, IR and Controller: Thanks Jonathan. I will start by taking a few minutes to discuss the retail to cost conversion. In addition to my comments, please refer to the change in method of accounting for inventory Q&A included as an appendix in our investor presentation. During the fourth quarter, we changed our method of accounting for inventory from the retail method to the weighted average cost method.
This was enabled by a systems conversion project that has been underway for some time but which was completed during the quarter. Under the former retail method, a cost to retail relationship was established at the item level based upon weighted average cost and initial retail selling price. When the retail selling price of an item was permanently reduced, the Company reduced the value of its inventory and recorded a charge to cost of goods sold so as to maintain the already established cost to retail relationship.
For example, if a permanent markdown was taken to reduce the retail selling price of an item by 10%, the book value of inventory on hand would also be reduced by 10%, with a corresponding charge to cost of goods sold.
In addition, the value of inventory on hand at the end of our reporting period was reduced and charged to cost of goods sold by recording a valuation reserve that represented future anticipated permanent reductions in retail selling price.
Under the cost method, the Company does not reduce the value of its inventory or recognize any impact of permanent reductions to the retail selling price and cost of goods sold unless the Company expects to sell the merchandise below original cost, in which case the inventory will be reduced to the expected selling price.
Using the same example I gave a moment ago under the cost method, inventory book value would not be reduced and it would be no charge to cost of goods sold unless the reduction in selling price drop below cost and then inventory value would only be reduced to the new selling price.
As a result of these differences in accounting for permanent markdowns in ending inventory, the conversion to the cost method had a number of impacts on the Company's financial statements, including increasing the value of inventory and creating timing differences in cost of goods sold.
For example, in the fourth quarter of fiscal 2011, EPS under the retail method was $0.30 less than it would have been under the cost method due to elevated levels of markdowns taken on very high carryover inventory levels under the retail method. Conversely, in fiscal 2012, we ended the year with much lower carryover inventory levels which require fewer markdowns and a lower markdown reserve than a year ago under the retail method. This resulted in EPS for the fourth quarter of fiscal 2012 under the retail method being $0.20 greater than under the cost method.
Had we had normalized carryover levels at the end of fiscal '11 we would not have seen such a significant divergence between a retail and cost method results in fiscal '11 and fiscal 2012. Additionally, operating income among our three operating segments, U.S. stores, international stores, and DTC, as well as our other category, was impacted by the conversion. Under the retail method, the other category included charges associated with permanent markdowns taken on merchandise held in the distribution centers. Under the cost method, the segment that ultimately sells the merchandise now bears the full cost of inventory markdowns. This effect is most significant for the DTC segment due to its role and clearing end of season inventory.
Refer to Page 12 of the investor presentation for an analysis of the segment level operating performance for fiscal years 2012 and 2011 under the cost method.
The Company believes the new methodology is preferable as it better aligns with the Company's operational focus on realized selling margin and improves the comparability of our financial results with those of its competitors. The change was effective as of February 2, 2013 and was applied retrospectively to fiscal 2011 and fiscal 2010. The Company has included in its release this morning a schedule of restated, consolidated statements of income for fiscal 2011 and fiscal 2010, along with restated quarterly consolidated statements of income beginning with the first quarter of fiscal 2011. In connection with this change, the Company's annual 10-K filing will be reported on the cost method with prior year figures restated accordingly. The Company determined that it would be impractical to restate fiscal years 2009 and prior.
Coming back to the quarter, as reported, fourth quarter comp sales were down 1%, with comp store sales down 4% and comp direct to customer sales up 17%. By brand, comp sales were flat for Abercrombie & Fitch, up 4% abercrombie kids and down 2% for Hollister. Across the brands, male performed better than female.
The gross profit rate for the fourth quarter under the retail method was 65.3%, 920 basis points better than last year's fourth quarter gross profit rate, reflecting a significant year-over-year benefit from lower product cost and the effective reduced markdowns in ending inventories from lower levels of clearance inventory.
The gross profit rate for the fourth quarter under the cost method was 63.4%, 390 basis points better than last year's restated fourth quarter gross profit rate, primarily driven by lower product costs. Stores and distribution expense for the quarter was $577 million or 39.3% as a percentage of net sales. Store and distribution expense for the quarter included charges for impairments of $7.4 million.
Excluding the effect of these charges, the stores and distribution expense rate for the quarter was 38.8% compared to 37.7% last year, excluding impairment, asset write-down, historic closure, and lease exit charges. The increase in storage and distribution expense rate was primarily the result of deleveraging negative comparable store sales and higher direct-to-consumer expense.
MG&A for the quarter was $122 million versus $112 million last year. Last year's fourth quarter included $10 million in charges related to legal settlements. The increase in MG&A expense was due to increases in incentive and other compensation related expenses, marketing, IT, and other expenses.
We reported other operating income of $13.7 million for the fourth quarter, which included income of $4.8 million related to business interruption insurance recoveries associated with Superstorm Sandy. Last year we reported other operating expense of $7.6 million for the fourth quarter which included a charge of $13.4 million related to the Company's holdings of auction rate securities.
The tax rate for the year was 35.4%.
Details of international Hollister store openings for the quarter are included on Page 20 of the Investor Presentation.
At the end of the quarter, we operated 285 Abercrombie & Fitch stores, 150 abercrombie kids stores, 589 Hollister stores and 27 Gilly Hicks stores.
This concludes our prepared comments. We are now available to take your questions. Thank you.
Operator: Betty Chen, Wedbush Securities.
Betty Chen - Wedbush Securities: I was wondering, Jonathan, if you can talk a little bit or Mike, about the guidance for Q1 comps of down high single-digit. I think you mentioned in your prepared remarks some impact maybe from macro conditions as well as the inventory flow. Is it also based upon some of the trends you're seeing now in February and also why we should expect that to increase significantly in the second quarter and that will be really helpful?
Michael S. Jeffries - Chairman and CEO: Let me take a stab at this. We have commented in the first quarter knowing that we have tailwinds, primarily from the lack of cold weather inventory that we had on hand last year. We are anticipating sales losses due to that through the middle of March. We were also very concerned about the macroeconomic situation coming into the first quarter. Second quarter we see that we won't have the same problem in terms of liquidating carryover merchandise. However, we also see that we will be in better position versus last year. If you'll remember we had a real problem with flowing newness into the store. We also think that the cannibalization effect is diminishing in Europe. So, first quarter is really going to be a margin opportunity. We believe that for the reasons I just mentioned, second quarter, we'll see resumption of healthier sales levels.
Operator: Randy Konik, Jefferies.
Randy Konik - Jefferies & Co: Jonathan, can you give us a little perspective on just what you saw on the international business during the quarter in terms of maybe traffic or regional perspective and just remind us, what were the compares we're going to face up against in international going forward? And then just lastly, any update on how you're thinking about from a planning – working on from a planning and allocation perspective with regards to the inventory? It is nice to see that the fall carryover is down and should we expect these carryover levels to continue to moderate as we go forward through the year and beyond?
Jonathan E. Ramsden - EVP and CFO: Sure. I mean, on the first point, we saw a sequential improvement in the trend everywhere pretty much in Europe. I didn't think there were any exceptions to that and we saw the two-year trend pick up a bit in the stores, and obviously we had a very strong direct-to-customer growth. So the overall comp for international as we said was down a little bit. In Europe, it was actually slightly better than that given the very strong direct-to-customer growth we saw in Europe. In terms of compares, we do get more of a tailwind coming into Q2. We did see a step-down in the international business from Q1 to Q2 of last year. So that's one of the tailwinds that will help us from a comp standpoint in Q2. In terms of inventory levels, we expect them to be down year-over-year at the end of Q1 and Q2 on a dollar basis. We haven't given guidance for the back half of the year at this point.
Operator: Barbara Wyckoff, CLSA.
Barbara Wyckoff - CLSA: Some of the U.S. stores that don't serve tourists doing now that the other (teen) retailers are sort of forging their own identity. And then, just as a follow-up, can you talk about the learnings in the stores in the various countries in Asia? And then lastly, as things have stabilized or starting to stabilize in Europe, are there any stores that you would not open today if you could make that decision again?
Michael S. Jeffries - Chairman and CEO: Would you repeat the first part of the question, Barbara? I'm a little…
Barbara Wyckoff - CLSA: Okay. The U.S. stores that don't serve tourists, how are they doing now that your prior direct competitors are sort of dancing to their own thing they forged their own identity and they're not copying you?
Michael S. Jeffries - Chairman and CEO: We call those the promotional stores which have no tourist business, and we're pleased with how they're doing. The trend clearly improved during the year. And I think you're right that we are all in kind of different zones. And those stores in the U.S. did better than the stores that were tourist-related which relates to the weakness in the international business versus the U.S. Jonathan; do you want to talk about the second part of the question?
Jonathan E. Ramsden - EVP and CFO: Sure. Yeah, Barbara, I think on the second point, we've always said there are probably one or two, maybe three, stores in Europe that if we had our time again we might not open. Frankly, one of the ones we've talked about in the past has had a dramatic improvement over the last few months. So, I think we wouldn't really include it in that category anymore today. So, there's probably one or two at this point that we would not have opened if we were doing it over again.
Operator: Janet Kloppenburg, JJK Research.
Janet Kloppenburg - JJK Research: A couple of questions, particularly on the guidance. I think what you're saying is that your clearance inventory is down significantly. So, you're forfeiting a lot of business because of that. Perhaps you could talk a little bit about full price selling trends and what you're seeing there and if there is encouragement – if there are encouraging signs there, both domestically and internationally? Also, in the third quarter you gave us a breakdown in the U.S. of the flagship comp versus the branch comp. I was wondering Jonathan if you could talk a little bit about that. And Michael, do you think the macroeconomic situation in the United States has worsened from the fourth quarter to the first quarter and is that also affecting comps here in the month of February? If you could talk a little bit about February trends that would help because we've been hearing that it's tough this month and I think there are a lot of reasons behind that, but I'd love to hear more.
Michael S. Jeffries - Chairman and CEO: We can't comment on current quarter business, we haven't and we won't. I will comment on regular price selling. I think we have lots of good news within regular price selling and I believe that we are taking advantage of the merchandise initiatives in terms of more current fashion. I think you're seeing that in our assortments and you will see it on an ongoing basis. The floor set that we did this week, I thought was new, different. The floor set we're going to do March week one is going to be more newness; March week three, more newness. So, I am encouraged by how new fashion is selling. Now, we can go from there to Jonathan.
Jonathan E. Ramsden - EVP and CFO: On the second part of the question, flagship tourist stores in the U.S. did come negatively better than the international rate and they did sequentially improve from Q3 to Q4.
Operator: Marni Shapiro, The Retail Tracker.
Marni Shapiro - The Retail Tracker: I was curious about, dovetailing on what Janet was asking about the new merchandise. It seems that the inventory you're bringing in of the new product is – you're not bringing in much of it and it's turning very quickly. So, as we move into margin later in the season, is the assumption that you'll increase the percentage, the buys behinds that fashion? Clearly the denim will remain a core part of your buy, but what I'm seeing is a lot of what you have in fashion that is selling. You're buying so few units that it's turning too quickly, and I'm curious how – as we march to the season, how that's going to change.
Michael S. Jeffries - Chairman and CEO: You are absolutely correct that we're turning it quickly. We planned on turning it quickly. We will increase the inventory levels through deeper buys as we proceed through the quarter. We'll be very happy with where we are from an inventory level perspective in the second quarter. That's one of the reasons for my optimism about second quarter becoming very much better than first quarter. But your question and your observation is a good one. That's really based on the good news which is we're turning through this new fashion very quickly.
Operator: Liz Dunn, Macquarie.
Liz Dunn - Macquarie: I guess, first just a clarification on the guidance. If you had not made this accounting change, would the rate of EPS growth be similar that you're forecasting through 2013? And then also, I was just wondering about your decision to drawdown on the debt; can we assume that that will be used for repurchases?
Jonathan E. Ramsden - EVP and CFO: Liz, on the first part, had we stayed on the retail method, we would have expected that the guidance would have been broadly comparable to what we're guiding to on the cost method. I think part of that is, the fact that Brian described in his comments of that benefit we had in the first quarter of 2012 from markdowns that were taken in the fourth quarter of 2011 on the high full carryover of inventory. So, broadly speaking, as we said with normalized inventory levels, we would expect that the results on the retail and cost method would not significantly diverge, the guidance would have been broadly similar, although it's obviously somewhat academic at this point and then it would depend on what assumptions we made about markdown reserves at the end of 2012. In terms of what seem to draw down on the debt, that was part of the arrangement for adjusting the facility. That will add to the capital we have available for repurchases or for other capital allocation priorities during the year.
Operator: Lorraine Maikis-Hutchinson, Bank of America Merrill Lynch.
Lorraine Maikis-Hutchinson - Bank of America Merrill Lynch: How are you thinking about the long-term store count in Asia and are there any lessons learned in Europe that you've applied to the rollout over there?
Jonathan E. Ramsden - EVP and CFO: Lorraine, that's a great question. It's something we have not yet, at this point, put a specific external goal on where we see store or volume going. It's something that we are focusing a lot on internally. We're going through a comprehensive review of our long-term strategic plan which we'll be working on over the next few months and as a part of that we are doing a very deep dive into Asia. Now, we have a basis there having opened quite a few stores. We're looking at the real estate opportunity, productivity levels, where we can be with the direct business relative to the stores, what marketing efforts we need to support the growth in different and it does vary by markets. So, we are in the midst diving into that as well as frankly beyond Asia other parts of the world such as the Middle East, the Southern Hemisphere. So, at this point, we are not ready or able to give a specific outlook for Asia, but we are getting close to being able to do that. I think in terms of lessons applied from Europe, clearly Europe has been a huge success for us. I don't think there were a lot of negative lessons we would take out of that. We'll certainly be conscious of the cannibalization point as we opened up in Asia. I don't think there are any other sort of significant learnings that we would apply. I think, Asia, having said all of that is very different to Europe and we need to be mindful of that as we enter into the region.
Michael S. Jeffries - Chairman and CEO: I think I'd like to add that we're continuing to gain optimism about Asia. Let's just go through the reasons. In China, we're comping positively at Raffles City in Shanghai and MixC in Shenzhen and we expect to comp positively at Galleria in Beijing, when it enters the comp phase. We recently opened our fourth Hollister store in China. We believe that the Shanghai flagship will be important to the development of the brand awareness in China. Hong Kong remains a really bright spot. Festival Walk remains strong, even after opening Hysan and Pedder Street and is comping positively. Festival Walk and Hysan are two of our highest performing Hollister stores in the world and in addition, Pedder Street is obviously doing major volume. We're enthusiastic about Korea. We opened our second Hollister store in Seoul a couple of weeks ago and we're excited about Japan with the introduction of the Hollister brand there. So, we think Asia's currently a major opportunity for us and we're off to a very good start.
Operator: Kimberly Greenberger, Morgan Stanley.
Kimberly Greenberger - Morgan Stanley: Mike, I'm wondering if you can share some of your strategic thinking behind this change in accounting methodology. It strikes me that it's not simply just a change in accounting methodology, but you're looking to drive different organizational behavior and I'm wondering if you can talk about anything you've seen so far, and what do you think the medium and long-term financial benefits of this sort of new way of thinking, new way of running the organization likely to be?
Michael S. Jeffries - Chairman and CEO: Let Jonathan have a stab at that.
Jonathan E. Ramsden - EVP and CFO: Well, let me just give a couple of high-level observations on that, Kimberly. I think historically on the retail method our focus was on IMU, and our systems were oriented towards IMU and to some degree as merchandise move through the cycle we lost visibility on the original historic cost of the merchandise, and therefore had limited visibility on the selling margin. So, given the evolution of our business model, given the complexity of our business model and the multiple different channels we operate in and the different economics of those channels; a very different story to where we were four or five years ago. Being able to focus on selling margin is extremely helpful in how we look at the business across channels and within channels, and the systems conversion we've gone through gives us much greater ability to drill down into the numbers and to understand what's rolling up into the overall plant as opposed to having to have done a lot of our stuff outside of the system the past couple of years while we've been working through this system conversion projects. So, high level; that's how I would characterize it.
Michael S. Jeffries - Chairman and CEO: I would reinforce that, Kimberly. It's a way for us to have a better detailed view of the business, which is a complicated business today. I'm thrilled with what I'm seeing in our sessions, and I think I have said this what we're uncovering in these sessions looking at the business this way; big opportunity.
Operator: Jeff Black, Avondale Partners.
Jeff Black - Avondale Partners: Yeah, just staying on that topic and hi guys. Mike, you mentioned you're looking at processes and investment that had a high return that you're not getting that return out of now. Can we talk about what are some examples of what that might hit? I mean, are you talking on the investment side about store concept that might not be generating the return you thought? Are you talking about product investments that aren't generating the return or categories and is that primarily domestic or does that also get to some of the international things you've been doing?
Michael S. Jeffries - Chairman and CEO: Jeff, I'd rather not talk about this now because we have, as I said a team looking at everything we're doing. We said and I'll say again, we hope to bring more color to this conversation at the end of the quarter. But speaking to anything now I think would be premature.
Operator: Brian Tunick, JPMorgan.
Brian Tunick - JPMorgan: I guess for maybe Mike you've made some comments that you guys are looking for AUR opportunities in the U.S. and just curious about your comments or thoughts about AURs on the international side of the business, what do you thing we're going to see over the next year or so from a price point perspective and maybe how that flow through to where you think international margins should come out? And maybe Jonathan, on the capital allocation side, can you remind us, sort of, what's your minimum cash balance view and how the partnership in the Middle East, maybe how the economics might work for you versus all the company-owned stores that you've opened before?
Michael S. Jeffries - Chairman and CEO: Let me go for the first part of the questions. The AURs will over the year increase in the international stores, and this is going to come through, honestly, ticketing a little higher in those stores. I think if we got too low it did not impact the sales, it probably impacted the sales negatively. So, we have upside in AUR in the international stores. We'll start to see the benefit end of second quarter, clearly in the fall. Before I turn it over to Jonathan, I'm going to be (indiscernible) on Saturday morning; if you're going to be around, Brian, or anybody. Jonathan?
Jonathan E. Ramsden - EVP and CFO: Brian, on the second part of the question, we've said in the past and it remains the case that we won't have at any given point in time, including at the trough of the cycle, cash on hand of $350 million. So that's our lower guardrail in terms of what's available to fund repurchases or other capital priorities at any given point in time. Turning to the economics in the Middle East, on a four-wall basis, we would view the model as being very similar to elsewhere in the world. Our partner there will be sharing in the capital investment and they'll also be taking a return related to the investment they are making in those stores.
Operator: Steph Wissink, Piper Jaffray.
Stephanie Wissink - Piper Jaffray: Mike, if you could just share with us a little bit about how you're using or plan to us the CRM database which is quite robust at this point to target your marketing or allocate your merchandise and even some of the things that you've mentioned around AURs; you could just share with us a little bit of your intentions there?
Michael S. Jeffries - Chairman and CEO: Jon?
Jonathan E. Ramsden - EVP and CFO: Sure. Steph, well, the good news at this point, we have a robust amount of data in the database; a lot of customer information. The next step is we've described in the past is to start leveraging that in terms of how we segment and ultimately personalize messaging to different groups of consumers. So, we're getting closer to be able to make that a reality. We've talked about it for a fairly long period of time as we built up the programs. But with the back office system developments and the number of customers we now have in the database, that's much closer to being a reality. The other things we're continuing to look at is the overall content of the clubs and the programs, how we increase the front-end engagement with the customers to make sure we keep the numbers growing in those clubs and they continue to be active participants in the club.
Operator: Dana Telsey, Telsey Advisory Group.
Dana Telsey - Telsey Advisory Group: Product flow improvement and speed to market certainly has been a factor in your improved performance. Where are you relative to the goal and does it differ by channel, does it differ by men's or women's, or does it differ by domestic and international?
Michael S. Jeffries - Chairman and CEO: Domestic and international would be the same. It is more important in female than in male. We are cautious about how much we're increasing our chase component of speed to market because, as I have said, there are some downsides to chase. But I think it's most apparent in the female portion of our business across brands.
Operator: John Kernan, Cowen.
John Kernan - Cowen: One, it looked like the – a little bit of a follow-up to Brian Tunick's question. It looked like the international four-wall margin was down about 600 basis points year-over-year. The domestic four-wall margin was up year-over-year for the full fiscal year. What is embedded in your guidance in terms of those two changes in the four-wall margin, both internationally and domestically in 2013?
Jonathan E. Ramsden - EVP and CFO: In terms of the international margins, I mean, we continue to expect that they are going to remain at 30% or greater which they were on both the retail and cost methods for 2012. We expect to continue to make some progress on the U.S. store margins and on DTC we would expect to remain now on the restated cost method in that kind of high 30s range in terms of an overall segment margin.
Operator: Lindsay Drucker Mann, Goldman Sachs.
Lindsay Drucker Mann - Goldman Sachs: Jonathan, I was hoping you could give some detail on what your AUCs – as it relates to gross margin, what your AUCs were in the period and also your AURs and then what your outlook is for AUC specifically in the first and second quarter and then just on the inventory point, maybe you could help us kind of understand how much money perhaps you left on the table by the inventory being so thin in the period. Any metrics you can give as far as what you're average inventory was during holiday versus the normal run rate or any other way for us to quantify the impact of that?
Jonathan E. Ramsden - EVP and CFO: I will try to get through as much as that as I can. AUC during the fourth quarter was down in the mid-teens range. That was something we had indicated I think coming into quarter broadly where we expected to be. That's broadly in line with where we are going to be for Q1. We would still expect AUC to be down year-over-year in Q2. The question about how many dollars left on the table due to thin inventory levels, that's a really tough question to answer. I think we are very happy with how margined out during the quarter. Clearly, we had a very substantial gross margin rate improvement on both the retail and the cost methods. I think we are happy with that. We are happy that we were able to be less promotional. So, I'm not sure if we were doing it all over again. We have chosen to approach it any differently quite frankly. Average inventory versus holiday or run rates I'm not sure that's something we can really get into frankly.
Operator: Erika Maschmeyer, Robert W. Baird.
Erika Maschmeyer - Robert W. Baird: Just wanted to follow up on your early gut on things on AUR and you expect to be able to increase that in the U.S. and then I know last year you had tried to get in a bit higher internationally. How do you think you will go about it differently this time? And then just one quick clarification. Does your Q1 comp guidance include DTC?
Michael S. Jeffries - Chairman and CEO: Instincts on AUR, again, I'd really not like to get into detail because we have wonderful team really investigating this. But we see that just low hanging fruit, new systems will enable us to be pricing better by segment, by tier. There is an opportunity, a made opportunity to how we are tiering fashion versus core by tier. There are lots of opportunities here. But again, let's save this conversation until this team comes up with its conclusions.
Jonathan E. Ramsden - EVP and CFO: Erika, yes, the Q1 guidance is total comparable sales.
Operator: Adrienne Tennant, Janney Capital Markets.
Adrienne Tennant - Janney Capital Markets: Mike, so the spring trends, it seems like you're spot on there. I was wondering what – you had said something about deeper buys entering the second quarter, and I was just wondering if you meant more choice count on breadth or deeper key items. And then secondarily, Jonathan, just so I understand this accounting change, it sounds like when markdowns are high, retail understates earnings; when they're lower, the retail method overstates the earnings. So, this year it would seem that the cost method would understate the earnings. And I'm just wondering, when do we sort of normalize that and get that back so that overall earnings power of the Company remains the same? So, sorry, if I'm not understanding that correctly.
Michael S. Jeffries - Chairman and CEO: Let me respond to the first part of the question. I think Marni got that exactly right. We need deeper buys, not more breadth and you'll see that in the second quarter. Jonathan?
Jonathan E. Ramsden - EVP and CFO: Adrienne, on the second point, in terms of normalizing going forward, as we said earlier, if we have normalized inventory levels at the beginning of a period and end of a period, there shouldn't be significant divisions between the retail and cost method. So, assuming at the end of 2013 our inventory levels are normal, then the EPS we would deliver under the cost method would not be significantly different to what we would have delivered under the retail method, is the short answer. I think we're anticipating they were going to be quite a few questions around this, and certainly we'll be happy to talk to people one-on-one as we work through today and I think next week in terms of follow-up calls. But that's probably the headline that's most helpful.
Operator: Anna Andreeva, FBR.
Anna Andreeva - FBR: Just, Jonathan, to double check, is there any impact from the change in accounting in the first quarter, just trying to understand if there is any of that headwind to get to your guidance for a slight loss? I am not sure if I missed this, but what were the four-wall returns internationally in the 4Q? I think you gave us the year on a cost basis, but what was it on the retail basis in the fourth quarter?
Jonathan E. Ramsden - EVP and CFO: On the cost method the international four-wall was 33.8% in Q4. We're checking the retail figure. Importantly, the methodology we've changed to now includes all third party sell off of excess merchandise in those margins. So, that's actually a slightly more conservative way of presenting those international margins, but we think it's comparable with the U.S. stores. If you look at Q1, if you go to the very end of our investor presentation and you look at the restated cost method data to 2012, you'll see that first of all overall our restated cost method basis EPS for 2012 Q1 was a loss of $0.25. If you look at Q1 by segment, you'll see for example that U.S. stores had a 7.9% four-wall margin in the first quarter of '12 which is obviously very low. And that reflected the fact that in the first quarter of last year we were selling a lot of fall carryover merchandise at significant markdowns. The AURs were not always all that low because a lot of it was outerwear for example, but the margin we were making on that carryover was extremely and therefore, when you restate Q1 on the cost method, the earnings per share goes down significantly from where it had been on the retail method. So, relative to that Q1 restated loss of $0.25, we are anticipating significant year-over-year progress in EPS to come up with that slight loss in Q1 of 2013. On the retail method in Q4 of last year the international margin would have been in the range of 33% to 34% – sorry, 37%, sorry, I read out the wrong number there – versus the 34% that we're reporting on a restated cost method basis.
Operator: That does conclude our question-and-answer session. I will now turn the call back over to our hosts for any closing or additional remarks.
Michael S. Jeffries - Chairman and CEO: Thank you, everyone.
Operator: That does conclude today's conference call. Thank you for your participation.