Abercrombie & Fitch Co Class A ANF
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/24/2013

Operator: Good day, and welcome to the Abercrombie & Fitch First Quarter 2013 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 first quarter earnings call. Earlier today, we released our first 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 call 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, due to the 53rd week in fiscal 2012 retail year, first quarter comparable sales are compared to the 13-week period ended May 05, 2012. Also, as a reminder, the Company changed its method of accounting for inventory to the cost method effective February 02, 2013. As a result, prior year figures have been restated to reflect the change in accounting method.

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. Our results for the first quarter reflect a $0.16 improvement in earnings per share versus last year, including better-than-expected gross margin rate improvement and tight expense management. The first quarter proved to be more difficult than expected on the top line due to more significant inventory shortage issues than anticipated, which were added to by external pressures.

However, as we moved through the quarter, our inventory position progressively improved and our comp sales trends improved accordingly. With the inventory headwinds largely behind us, we expect to see continued sequential improvement in the second quarter.

For the quarter as a whole, we believe inventory accounted for approximately 10% of the comp sales decline due to both lower levels of fall carryover and delays in spring deliveries. Beyond that, it is clear that the environment in Europe became more difficult again and first quarter weather issues had been well documented in both the U.S. and Europe.

With that said, we're taking a modestly more cautious top line view for the remainder of this year. Going forward, we continue to see significant upside, particularly from our cross-functional initiatives.

As you know, one of our initiatives is focused on profit improvement through a detailed review of our existing operational processes. The initiative is being led internally, but supported by an outside consulting firm and is divided into seven work streams covering general non-merchandise expense, marketing, supply chain, merchandise planning and allocation, home office, store operations and real estate and construction.

We've completed the diagnostic phase for most of the work streams. In the case of general non-merchandise expense and marketing work streams which represent approximately 30% of the total addressable spend, we've identified an annual savings opportunity of $35 to $55 million. We're now moving on to the implementation phase for these two work streams and expect this to take approximately six months to 12 months to complete, with any benefit recognized this year likely to be modest.

With regard to the supply chain, home office, and store operations work streams, we've completed the diagnostic phase but still need to validate the process-driven savings opportunities through testing and further analysis. We expect to complete this phase by the end of the second quarter and we'll be able to better quantify the potential savings opportunity at that time. However, we expect these to be substantial. For the remaining work streams, we are still in the diagnostic phase but have made excellent progress. We will provide an update in our next earnings call.

Next, under our cross-functional AUR optimization initiative, we've identified a number of specific opportunities to-date that we anticipate will yield a meaningful gross margin benefit on an annualized basis. We expect to implement these opportunities by the back half of the year and would expect to begin realizing some benefit within the year. Again, this initiative is ongoing and we expect the benefits to grow as we work through other identified areas of opportunity.

As said on our last earnings call, these initiatives are complex and require a high level of cross-functional engagement and analysis. It will also take some time to fully realize the benefits. However, we are very pleased with the progress we've made to-date and continue to regard these initiatives as areas of major opportunity for the Company.

Beyond these two strategic initiatives, we are also working on a comprehensive update of our long-term strategic plans, taking into account all of the initiatives I mentioned a moment ago, and revisiting growth and margin opportunities by channel. A key component of this is our first global market research study that was completed during the quarter.

We are excited and energized by all of these initiatives and look forward to sharing more details as we move through the year.

As Jonathan will discuss in a moment, we're taking our overall guidance down for the year but we remain very confident that our strategic initiatives will lead to a significant and sustainable improvement in our financial results.

In tackling these opportunities, we are extremely fortunate to have an incredibly talented group of associates, a very strong team-based culture, and an outstanding group of partners in our supply chain network and beyond. I'm extremely proud of this team and want to take this opportunity to thank them for their hard work and dedication, and for their commitment to our values.

With that, I will hand the call over to Jonathan, but I'll be available to take your questions later in the call.

Jonathan E. Ramsden - EVP and CFO: Thanks Mike, and good morning, everyone. For the quarter, the Company's net sales were down 9% to $839 million. Total U.S. sales including DTC were down 17%. International sales including DTC were up 10% and total DTC sales including shipping and handling were down 10%. Including direct-to-consumer, comp sales were down 15% with U.S. down 14% and international down 16%.

First quarter sales came in below expectations while we anticipated top line headwinds from low inventory levels particularly fall carryover. Sales were also impacted by delays in spring deliveries through the quarter. In addition, the macro environment in Europe became more difficult again and weather was cooler than expected in both the U.S. and Europe and in particular, compared to last year.

Despite those challenges, we were pleased to be able to sustain strong positive comps in the number of markets, most notably China. In addition, new store openings during the quarter performed well. Gross margin for the quarter improved 720 basis points year-over-year, better-than-expected, reflecting a significant mix benefit associated with selling a higher proportion of current season inventory and a continued tailwind from lower product costs. So while sales were down 9%, gross profit was up 2%. Operating expense for the quarter was $567 million, down from $570 million last year.

Overall, expenses for the quarter came in significantly below projection as we flexed down expense in reaction to the lower sales trend in areas such as store payroll, repairs and maintenance, travel and other expense, as well as having lower incentive compensation expense. With regard to equity incentive compensation, we are pleased to have made changes to our plans this year which will further enhance the alignment of these plans with shareholder interests and best practices. First, we have moved to an annual cash incentive compensation plan versus the biannual plan we've had in the past. Second, we have significantly increased the performance-based component of our annual equity awards, with all eligible associates at the VP level and above now having an element of their equity awards tied to the achievement of EPS goals.

Moving on, the operating loss for the quarter was $14 million versus an operating loss of $29 million a year ago. Operating margin improved 140 basis points as gross margin expansion more than offset expense deleverage. This was particularly the case for the direct-to-consumer operating segment where operating margin increased close of 1,200 basis points including the effect of a significant merchandise mix benefit.

While our international store operating margin was adversely affected by expense deleverage, we expect to achieve around 30% operating margin on a full-year basis.

The tax rate for the quarter was a benefit of 53.7% including a net gain resulting primarily from the settlement of certain state tax audits. On a full-year basis, we now expect the tax rate of around 33% to 34%.

For the quarter, the Company reported a $0.09 loss per basic and diluted share versus a $0.25 loss per basic and diluted share last year.

Turning to the balance sheet, we ended the quarter with total inventory down 23% versus a year ago with inventory units down slightly less. As a reminder, we had excess inventory a year ago and on a two-year basis inventory is still up modestly.

We ended the quarter with approximately $556 million in cash and cash equivalents and borrowings under our term loan of approximately $146 million. During the quarter, we repurchased approximately 350,000 shares at an average cost of under $47.

With regard to our expectations for fiscal 2013, we are taking a modestly more cautious topline review for the remainder of the year and are now projecting full year diluted EPS in the range of $3.15 to $3.25. This projection includes an assumption of slightly negative overall comp sales, including direct-to-consumer for the balance of the year.

With regard to the second quarter of fiscal 2013, we expect diluted earnings per share in the range of $0.28 to $0.33. Guidance for all periods does not include the effect any additional share repurchases, benefits from our process efficiency and AUR initiatives or the impact of potential impairment and store closure charges. Also due to calendar shift from the 53rd week in fiscal 2012, the comparable prior year 13-week period ended August 4, 2012 included approximately $40 million in additional sales versus the reported 13-week period ended the July 28, 2012, which provides a benefit to year-over-year sales and earnings.

We continue to expect capital expenditures of around $200 million for the year with estimated preopening costs of around $30 million.

With regard to real estate plans for the year, we continue to expect to open A&F flagship locations in Seoul and Shanghai, as well as approximately 20 international Hollister chain stores. In addition, we will open a small number of international outlet stores. We continue to expect to close approximately 40 to 50 stores in the U.S. in 2013 through natural lease expirations at the end of the year.

Finally, I would like to echo Mike's comments about our optimism regarding our cross-functional initiatives and that we expect that these will lead to sustainable and meaningful improvements in our operating margin and return on invested capital. We will continue to talk more about this on our next earnings call.

With that, I'll hand over Brian to provide some more details on our results for the quarter.

Brian Logan - VP, IR and Controller: Thanks Jonathan. As reported, first quarter comp sales were down 15% with comparable store sales decreasing 17% and comparable direct-to-consumer sales decreasing 6%. By brand, comp sales including direct-to-consumer were down 13% for Abercrombie & Fitch, down 5% for abercrombie kids, and down 18% for Hollister. Within the quarter, comparable sales were weakest in February and March. Across the brand, male performed better than female.

Changes in foreign currency exchange rates versus a year ago adversely affected sales by approximately $5 million. The effect of the calendar shift due to the 53rd week in fiscal 2012 was not significant to sales. The gross profit rate for the first quarter was 65.9%, 720 basis points better than last year's first quarter gross profit rate, reflecting a significant mix benefit associated with selling a higher proportion of current season merchandise and a significant tailwind from lower product costs.

Stores and distribution expense for the quarter was $449 million, or 53.5% of sales, compared to $456 million, or 49.5% of sales last year.

Expense savings in store payroll, repairs and maintenance, and other stores and distribution expense were more than offset by the deleverage effect of negative comparable sales.

MG&A for the quarter was $119 million versus $117 million last year. Increases in IT-related expense and outside services were partially offset by decreases in incentive compensation and other compensation-related expense. Details of international Hollister store openings for the quarter are included on Page 10 of the investor presentation.

At the end of the quarter, we operated 283 Abercrombie & Fitch stores, 149 abercrombie kids stores, 593 Hollister stores, and 28 Gilly Hicks stores.

This concludes our prepared comments. We are now available to take your questions. Thank you.

Transcript Call Date 05/24/2013

Operator: Kimberly Greenberger, Morgan Stanley.

Jay Sole - Morgan Stanley: This is Jay Sole on for Kimberly. Just a question, first of all, just trying to understand the connection between the lower inventory, the comp at Hollister, and the gross margin. It sounds like – was it really a factor, you mean to say lower fall clearance inventory or fall carryover, does that mean lower clearance inventory and really you need that clearance inventory to drive the comp at Hollister which is why the comp at Hollister was low and that's why gross margin was high? Is that an accurate statement?

Jonathan E. Ramsden - EVP and CFO: (Truly yeah.)

Michael S. Jeffries - Chairman and CEO: Yes, that's right on.

Jay Sole - Morgan Stanley: So, now does that imply for 2Q when you're talking about the guidance of $0.28 to $0.33, are you saying you'll have more clearance inventory at Hollister and so we should expect the comp to be better and gross margin to be lower versus 1Q?

Jonathan E. Ramsden - EVP and CFO: Well, Jay, it's probably a function of what we were lapping in Q1, because if you recall, at the end of 2011 we had a very significant fall carryover that we then turned through in Q1 of '12, so when we were lapping that this year we had a much less of that fall carryover inventory. Going into Q2, the situation is a little more normalized although we did have some excess inventory of the equivalent point last year. But we think that's a much less significant effect in Q2 than it was in Q1.

Operator: Betty Chen, Wedbush Securities.

Betty Chen - Wedbush Securities: I was wondering Michael or maybe Jonathan you could give us a little bit more clarity regarding the top line assumption. It sounds like in the first quarter April was the strongest and you clearly saw sequential improvement. I would imagine with weather getting better in May that has continued. So, I was curious whatever the thinking behind comps being slightly down Q2 through Q4, is that really related to inventory or Europe or any color you can give us will be really helpful.

Jonathan E. Ramsden - EVP and CFO: I think going back to Mike's comments in the script, we referenced that 10 percentage points of the negative 15% comp was attributable to inventory. Coming into the quarter we projected, as you recall, so down high-single-digit comps which was primarily driven by that lower pool inventory. And then as we went through the quarter, the spring inventory issues added to that. So, believe, as we said, that those inventory headwinds are substantially behind us. So, that element of the comp goes away. And then we're certainly seeing our DTC business pick up again nicely. So, that's a big factor. And then as we look to the second quarter that was a more favorable compare than the first quarter as well.

Operator: Adrienne Tennant, Janney Capital Markets.

Adrienne Tennant - Janney Capital Markets: So, my question is on the fashion items. They very look on trend. And so I was wondering, obviously, there was a spring delivery issue what caused that. Do you deem that you have enough of that fashion component and then for back-to-school is that remedied, are there any other categories that will be coming in for back-to-school?

Michael S. Jeffries - Chairman and CEO: I'd like to just talk some more about spring inventory. We experienced some unanticipated delays in spring due to a couple of factors, one of which was a function of our transitioning to faster reaction times. As a result, it took a little bit longer than anticipated to flow in some of our spring deliveries. Also, in hindsight, I believe that the first quarter spring inventory plan was somewhat low, and this resulted in many items which did not have the necessary depth to drive the business, and I think many of you saw that in the stores. We feel we're in better inventory position going into second quarter that we have more depth behind key items. I believe that that's going to get even better for back-to-school and believe it or not superb by Christmas. Thanks Adrienne.

Operator: Lorraine Hutchinson, Bank of America Merrill Lynch.

Lorraine Hutchinson - Bank of America Merrill Lynch: I wanted to follow up on the cost cutting program that you have out there. You talked about 30% of the spend resulting in $35 million to $55 million. Was that the area where you saw the most low-hanging fruit or could we see the other 70% of the spend resulting in a similar magnitude of savings?

Jonathan E. Ramsden - EVP and CFO: I think by definition, we're not ready – what, we said we're not ready to be precise about that. If you look at the first bucket, it is by its nature more discrete items that could be tackled without having significant cross-functional effects. When you look at the other work streams, I think there were two observations. One is, they are more complex because they are cross-functional and entail potentially more significant changes in processes. So, they are harder to get at in terms of the opportunity. It could be proportionate to what we've seen so far. It could be more or it could be less. So I think it depends on the analysis and further insight that we said we need to work through including some testing.

Operator: Paul Lejuez, Wells Fargo.

Paul Lejuez - Wells Fargo: Can you talk a little bit about AUR in the first quarter U.S. versus international; how you see that trending as you look throughout the year? And just a follow-up on Lorraine's question, is there any number that you have in your head guys as you invest all this time doing the work from an expense perspective? Is there a number that you're striving towards that we should be thinking about in terms of eventual savings from this program? Because if you applied that 30% and look to the $35 million to $55 million range and you could achieve a similar savings in the rest of the 70% of the bucket, so we're talking about what seems like above $100 million opportunity. So I'm just wondering if that's a number that you guys have in your head if you could share that with us.

Jonathan E. Ramsden - EVP and CFO: Paul, this is Jonathan. We certainly do have an idea of the range where we could end up. I think as we said we're not comfortable putting a specific number out there at this point because we still have to work through a lot of this analysis and testing which we expect to have done over most of the remaining work streams through the balance of this quarter. So I think we'll be much more comfortable the end of this quarter putting some more specifics around those work streams. And then there'll be a couple of work streams that may take a little longer to work through. So, we do internally have a point of view of where this is headed, and as we said, we do believe it's a substantial opportunity. With regard to AUR, overall, AUR was flattish for the quarter with slight variation between the different channels.

Operator: John Morris, BMO.

Janine Stichter - BMO Capital Markets: It's actually (Janine Stichter) on for John Morris. Also, with regards to your AUR optimization, I was just wondering how you are thinking about pricing, particularly internationally? I know you had felt that after you took prices down internationally you might have left some money on the table. So, how are you thinking that just considering the macro backdrop that you mentioned got a little bit tougher in 1Q?

Michael S. Jeffries - Chairman and CEO: We believe there are still some opportunities to take tickets up modestly in certain markets and categories. But we'll be very judicious and it will be driven to a large degree by benchmarking that we do on a market-by-market basis. The AUR optimization we see as AUR optimization and we believe the majority of the opportunities will come in the way of being smarter and more targeted with promotions and the clearance price points.

Operator: Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research: I was wondering if you could talk a little bit about the trends in April. Did they improve in both the United States and Europe and if your top line guidance, which I think is what drove the reduction in the annual EPS guidance, if you're less optimistic about a tone in the European business? And Jonathan if you could elaborate on the operating margin decline in Europe to help me better understand what happened there and then why you expect it to get better?

Jonathan E. Ramsden - EVP and CFO: So, on the last piece, Janet, it's partly a function of just the weighting of the different quarters. So, what we're saying is that the international margin we achieved in the first quarter is consistent with the full year rate of close to 30%. Europe would be typically running ahead of the overall international segment, because that margin is pulled down to some degree by Japan and Canada. So that's what we're saying is that's consistent with the full year rate of around 30%. With regard to the trend in April, yeah, we did see sequential improvement both in the U.S. and internationally.

Operator: Barbara Wyckoff, CLSA.

Barbara Wyckoff - CLSA: Mike, the women's business seems to have been weak for a while. Can you talk about opportunities and challenges in the mix outside of the sort of not having enough of the key items? And then just a second quick question, when was that Sanlitun store opened in Beijing?

Michael S. Jeffries - Chairman and CEO: The second part was…

Jonathan E. Ramsden - EVP and CFO: Which store Barbara?

Barbara Wyckoff - CLSA: Sanlitun in Beijing.

Jonathan E. Ramsden - EVP and CFO: Sanlitun Village?

Barbara Wyckoff - CLSA: Yes.

Michael S. Jeffries - Chairman and CEO: I'll take both of those. The primary weakness is and has been in this quarter in female tops. It's primarily in there and we see that as somewhat weather-related. Our woven female tops business has been excellent. The shirt business has been excellent. The weakness has been in knits. We are concentrating on that knit business very hard. We think there is a lot of upside potential in the category. So we will be more aggressive with the knit categories as we work our way in the back-to-school in Christmas. I'm happy you talked about China. That store opens June 29th. But this might be the most – China might be the most important element of the quarter and here is why. Our comp store sales in China were up approximately 40%, even in a difficult inventory environment, which continues to give us optimism about Asia. In addition, our fourth Hollister store in China in Tianjin is performing well. And we believe the future Shanghai flagship will be important to the development of the brand awareness in China. Second, Hong Kong remains strong. Festival Walk and Hysan are two of our most productive and profitable Hollister stores and Pedder Street is doing well. Third, we're excited about the rest of our opportunities in Asia, including opening our first Hollister store in Japan.

Operator: Tom Filandro, Susquehanna Financial Group.

Thomas Filandro - Susquehanna Financial Group: Jonathan, when you make the term cross-functional, can you kind of talk – give us some examples that exactly what that might mean? And I was wondering too on those expense savings buckets. Is there initially some systems and/or personnel cost that will be associated with them? And Mike, I just want to be clear to understand the spring inventory. Was that purely a planning issue or was it an issue as you've moved to this more of chase strategy with vendor partners?

Jonathan E. Ramsden - EVP and CFO: Tom, just on the first, one simple example, how we operate the stores is a significant function of how we plan and allocate merchandise, so that would be an obvious simple example of what we're talking about by cross-functional and even how our supply chain operates in terms of how we flow merchandising into the store. So, that's the type of thing that we're talking about in broad terms.

Michael S. Jeffries - Chairman and CEO: The second part of your question, Tom, is that I believe that both were – the spring lightness of inventory were plan oriented in terms of problem. I think the plan was too low and then I think the flow strategy, the chase strategy was probably – we could have done better at working our way into that. I think it might have been just (early) moment in terms of how we were getting that up and going.

Jonathan E. Ramsden - EVP and CFO: Tom, on the last piece, are you asking about one-time type costs, is that the nature of the question?

Thomas Filandro - Susquehanna Financial Group: Yeah, not one-time. I'd just like to – when you talk about these expense buckets, does that mean you maybe have incremental expenses related to them initially where you've got a personnel or systems to support the longer-term drive-down of those expenses?

Jonathan E. Ramsden - EVP and CFO: I got you. No, I don't think broadly we are anticipating that. I think though there will be some incremental expense to implement some of these initiatives, but it will be modest, very modest relative to the overall savings we're going to be realizing.

Operator: Matt McClintock, Barclays.

Matthew McClintock - Barclays Capital: I was just wondering if we could focus on the outlets. You talked about maybe opening some more outlets internationally and just wanted to get your updated thoughts on how your strategy for, for maybe clearing excess goods internationally has evolved over the last several years and into this decision, and then ultimately trying to understand maybe how that could signal maybe profitability improvements in the European and Asian markets?

Jonathan E. Ramsden - EVP and CFO: We're looking at the store we've opened. We've got two of them currently in the U.K., both doing well. We're looking at them primarily as test stores. We wanted to test the potential for outlets in Europe now that we've been in the region for several years. So I think it's very early days yet. The overall outlet strategy including how we're going to clear within Europe will be part of this long-term strategic review that Mike talked about earlier in the prepared remarks that we're anticipating completing in the next couple of months.

Operator: Dorothy Lakner, Topeka Capital Markets.

Dorothy Lakner - Topeka Capital Markets: I wondered if you could just provide us with breakdown on the gross margin in the quarter just between higher levels of in-season product, and then AUC tailwind, just if you could break that down. And then, going forward, related to that, do we still have some tailwind on AUC in this quarter or not?

Jonathan E. Ramsden - EVP and CFO: Sure. The lion's share of the gross margin rate improvement was driven by the mix effect between spring and fall with the average unit cost component for the Q1 being a relatively smaller component. We expect to continue to getting a modest somewhat smaller AUC benefit in Q2.

Operator: Brian Tunick, JPMorgan.

Brian Tunick - JPMorgan: Just wondering, I guess, in the U.S. store segment, it looked like margins were up in Q1 despite the 15% comp decline. So I guess we were wondering as the gross margin gains are expected to now normalize, what kind of full year margin are you expecting for the U.S. stores? I guess, similar to your comment that you made around the 30% you're expecting for the international, and all the store closing you guys have gone through the last couple of years beginning to turn the inventory faster now to drive productivity, how do you bucket the one or two biggest top and bottom line drivers on the U.S. store segment?

Jonathan E. Ramsden - EVP and CFO: Brian, so on the first part, we haven't given a specific data point on your long-term objective for U.S. stores. We said we want to get it back well up into the 20s and move it back towards that 30% historic margin with various factors that we've spoken about in the past being part of that including store closures as you alluded to. This year we'll certainly be close to that 20% mark hopefully a little bit better than that on a full year basis. And then your second question was, could you just recap that?

Brian Tunick - JPMorgan: (You) answered that one. I was going to ask about how in the U.S. if you could break out comp any delta between tourist and promotional stores? Was there any big difference there? And then the third one was going to be on the buyback. We were surprised you guys didn't buy back more stock in the first quarter. I'm just wondering if there's any reason from a timing perspective from that.

Jonathan E. Ramsden - EVP and CFO: Well, I'll tell you the second part, Brian. We typically come into each quarter we put a 10b5-1 plan which has various trigger prices. We put one in for our window close, the market moved up pretty significantly, and that was one of the factors that contributed to us buying less stock than we have in prior quarters. But our overall share repurchase philosophy is consistent with what we've said in the past, and we do expect to continue to be repurchasing stock. The promo versus non-promo; promo versus tourist in the U.S., they were pretty close for the quarter.

Operator: Oliver Chen, Citigroup.

Oliver Chen - Citigroup: Regarding the expectation, really anticipation of the comps improving, is that going to be more units or AUR driven if you could help those dimensionalize that. Then also this past quarter just to be clear, when you say there was more spring products, so does that mean merchandise margins were up on a year-over-year basis? So if you could clarify that I'd appreciate it.

Jonathan E. Ramsden - EVP and CFO: I'm not sure I fully understood the question, Oliver, but yeah, certainly spring merchandise margins or spring class products were up year-over-year. And what was the first part of the question again?

Oliver Chen - Citigroup: Just how we should think about the comps, the forecast for comps…

Jonathan E. Ramsden - EVP and CFO: Yeah, we typically don't give that out on a forward-looking basis.

Oliver Chen - Citigroup: But do you feel like there's equal opportunities for units and AUR and as you…

Jonathan E. Ramsden - EVP and CFO: We typically don't break that out on a forward-looking basis.

Oliver Chen - Citigroup: But the improvement and execution on the inventory side should give you access to more units, is that the right way to think about it?

Jonathan E. Ramsden - EVP and CFO: I think as Mike said earlier, we feel pretty good about our current inventory position and we think we are going to be in a very good position by back-to-school. But most of those inventory headwinds we had behind us, we feel we are pretty close to having the right levels of inventory today and that means that our normal flow cycle should work as we were planning for them to do.

Operator: Randy Konik, Jefferies.

Randy Konik - Jefferies & Co: So, just a quick one. Just back on the inventory, because we've seen in the past the inventory either be very, very high or very, very low here. So just very simply what can we take and give the market confidence that that inventory will be in a good place for the balance of the year and into 2014? And then next, I know we've talked a lot about the potential expense savings. It sounds like the 2014 calendar type event for the numbers. Just regarding I guess cash flow then, would you think about the CapEx guidance you gave for this year being about I think $200 million; is that something like what we should be thinking about from an ongoing perspective that the CapEx of the business being more closer to this type of number over the next few years coupled with these new SG&A kind of expense cuts being sustainable over a multi-year period? And then lastly, does the guidance that you gave on the conference call, does that incorporate FX headwinds or anything like that?

Jonathan E. Ramsden - EVP and CFO: Randy, I'll take the couple of those to start off with. The CapEx will in part be a function of this long-term strategic review we're doing, and that's going to inform us in term of the strategy on store openings and different channels going forward. So, I think at this point, it's a little premature to be projecting a specific run rate. Although, we would certainly expect $200 million that we're going to be at this year to be a starting point, but I think it's too early to say beyond that what the – like the ongoing run rate is going to be. The benefit of the expense saves; absolutely, we view that as being primarily a 2014 event, with possibly some modest benefit flowing in the back-end of this year, but primarily 2014. Question about incorporating FX headwinds, our projection is generally based on the current spot rate. So, the new projection that lies behind our guidance would reflect the prevailing rates today, and to the extent those rates move materially, then that would impact the guidance going forward. I think you had one other question about inventory levels going forward. We plan the levels of inventory that we think are appropriate to the sales trajectory of the business and if we're disciplined about doing that then we would expect those inventory levels to remain consistent with where we've been the past couple of quarters in terms of types of turns we're seeing. And we have, as you know, also said that our objective is to continue to get some efficiency out of inventory going forward.

Operator: Edward Yruma, KeyBanc.

Edward Yruma - KeyBanc Capital Markets Inc.: You highlighted the move to cost accounting. I believe it was last quarter you were talking about some of the systems that enabled that. I guess, have there been any learnings either in terms of visibility into selling margin, or things that you can do differently going forward as a result of some of these systems upgrades?

Jonathan E. Ramsden - EVP and CFO: Ed, I think we've alluded to that in the past in terms of the better day-to-day visibility gives us in terms of reading the business, the margin we're making by channel, by class of inventory which the old retail system tends to obscure these units went through their life. So, I think particularly when we look at the impact of clearance selling, how we would optimize gross margin relative to sales, it's much more helpful to have cost basis information in the old retail method information. So that would be one high level of example. And if you look at this quarter, clearly, we did very well on the gross margin rate despite the negative comp. And if you look at where we made our gross margin between spring and fall; that gives us some very interesting insight as to how we're going to be able to drive the bottom line going forward.

Michael S. Jeffries - Chairman and CEO: I do have to add though that it is a new system and we're working our way into it.

Operator: (Blair Pearson), Robert W. Baird.

Blair Pearson - Robert W. Baird: One more quickly on inventory. Can you just describe maybe how you plan summer back-to-school inventory relative to spring, and also, the composition of inventory at quarter end given it ended down 23% year-over-year and if the inventory deliveries are now on track and issues with kind of changing to the faster response system (are fixed)?

Michael S. Jeffries - Chairman and CEO: Let me respond to that. I think they are. I think that we're doing clearly better in moving to faster reaction time. I think looking at spring inventory levels, I think the spring inventory is still a bit late. However, last year at this time and this is an important, we were significantly over-inventory which resulted in a lack of newness for second quarter that adversely affected us as we worked the inventory down during the quarter.

Operator: Jennifer Black, Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates: I was curious to know if you could talk about accessories as a category. You're really excited about accessories. And some of your big wins. And also, could you mention Gilly Hicks and then lastly, how do you feel about the overall fashion trends through the balance of the year? Do you think there is enough newness and I'm just talking overall to draw your consumer into the stores?

Michael S. Jeffries - Chairman and CEO: Accessories first; we're very excited about accessories. And we have really just started there. In any categories that are brand new, we'll be rolling out more categories as we get into back-to-school, as we get into Christmas, we think there's major volume and profit opportunity here, and this is a category you've been talking to me about for a long time. So, expect to see more and more of them. Gilly Hicks, let me talk about Gilly for a second. I think what I have to say is that we remain excited about the potential of the brand and the broader intimate apparel category, and we're focused very much on how to best drive Gilly forward. The online business has been incredibly strong which isn't a surprise and our Gilly test in Hollister stores has worked well and will be expanded this summer, actually back-to-school. We have some legacy issues with U.S. stores square footage and we still need to figure that out. But overall, we remain very excited about the brand. I think your third question was about will there be enough fashion to bring people into the stores for the balance of the year, and I believe there will be. I think our fashion is looking better and better. We're turning it well. I don't want to talk about what I think that fashion is, but I think if you look in the stores now, we have really good fashion and I think we'll continue to deliver that.

Operator: Marni Shapiro, The Retail Tracker.

Marni Shapiro - The Retail Tracker: The promotions felt very (indiscernible) pulled back this quarter and I felt like the stores (felt) what I would call rightly promotional. And I was wondering if this is a function strictly of the lack of carryover inventory or the very good sell-throughs of fashion with the combination of both, and I guess how should I think about it ongoing, because this quarter, you didn't have one of your big spring blowout type of sales, and I'm just trying to (wrap) my hand around what that should be looking for the next couple of quarters.

Jonathan E. Ramsden - EVP and CFO: I mean, Marni, I think it's certainly an inventory of function to a meaningful degree. We had all that fall carryover again last year. That was a big factor. And then, not only do we not have that this year, but we're also running light on spring inventory, so I think that was certainly a factor in that promotional cadence. But I think as we've long said, our objective over time is to progressively become less promotional.

Operator: Stephanie Wissink, Piper Jaffray.

Stephanie Wissink - Piper Jaffray: Jonathan, if I could just ask one clarification question on the guidance, how should we think about the balance between gross margin improvement and the existing operating cost through the balance of the year. I think you had answered a question earlier regarding Q2 where the gross margin might be a bit softer, but how should we think about that just in general over the balance? And then, Mike, I'd really be interested to hear from you on the loyalty program in terms of numbers shipped and what you're seeing in terms of opportunities to potentially allocate marketing dollars differently maybe more efficiently?

Jonathan E. Ramsden - EVP and CFO: Just on the gross margin rate for the full year, Steph, we're anticipating a rate in the mid-60s. Q2 will probably be lower than the balance of the year. It will probably be the lowest quarter from a gross margin rate on a full year basis. And then I think your second question was about the loyalty program numbers and marketing strategy; a combination of those two. On the numbers, our CRM programs have continued to grow nicely over the course of the quarter, and we're seeing increased penetration of club members in our store transactions, which is one of the key measures we're looking at that through. So that's continued to move along nicely.

Michael S. Jeffries - Chairman and CEO: I'd like to make a comment about marketing. And that's – that I'd like to take this opportunity to give an official welcome to (Craig Brommers) who recently joined our team as Senior Vice President of Marketing coming from Calvin Klein.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: Mike, can you talk a little bit about this transition to the faster reaction times? How are you ingesting that internally? Does it differ by division or impact one brand more than another in terms of margins and inventory levels? And lastly, the initial thoughts on any updates to the long-term strategic plans? Are you thinking about store openings, is it countries that you enter, is it outlets versus regular stores? How do you think about it?

Michael S. Jeffries - Chairman and CEO: To answer the first part of your question, it really is the same across the brands. But let me give you a little more color on how we're looking at improving speed to market because it's made up of a number of factors which are uniform across the business. The first is shortening the development cycle, which we've done. The second is increasing vendor collaboration. The third is interesting that's increasing sourcing in the Americas or holding more open to buy for chase. And fifth, increasing the positioning of the core fabrics. I'll let Jonathan take the second part of the question.

Jonathan E. Ramsden - EVP and CFO: Dana, on the second part the strategic plan is, first of all, looking at where the world is going by market and by channel over the next few years and having an informed point of view of that. Secondly, taking into account what we are seeing in terms of the results from this customer research study and this look at the overall operating model from a profitability standpoint that will come out of the cross-functional initiative we've talked about and then pulling all those things together to go market-by-market channel-by-channel and look at where we think the greatest growth opportunities are, the greatest return on invested capital, and that certainly includes potentially opening more stores internationally, potentially outlets would be part of that. So we're looking at all the different channels available to us and where we think the greatest return will be in the context of where we think the world is going and where our brands should be positioned in that context.

Operator: Eric Beder, Brean Capital.

Eric Beder - Brean Capital: Could you talk a little bit about – two things, well, could you talk a little bit about the branded product and where is branded? We've seen a pushback in terms of the women's product for branded in terms of logo product. Where does that go longer term and is the logo product – where is the place in logo product in the mix? And secondly, you did the share buyback. What should we be thinking about in terms of share count for the rest of the year?

Michael S. Jeffries - Chairman and CEO: Let me respond to the first part of the question. Logo where, as we're defining that, that's kind of cross-chest logo, is still business for us. It is a declining business, and we are in fact pushing that number down as we build other categories to take its place.

Jonathan E. Ramsden - EVP and CFO: Eric, on the second part of that, our share repurchase philosophy is very consistent with what we said in the past. We want to always maintain a cash cushion of $350 million, the low trough point in the cycle. Beyond that, if we think the stock is attractively priced on a long-term basis, we would expect to be buyers, and we continue to evaluate the return from buying back our own stock versus the return on capital from other uses of capital, so that's essentially the same philosophy we've had for a pretty good period of time.

Operator: Omar Saad, ISI Group.

Omar Saad - ISI Group: Wanted to ask you about the global market research study you guys alluded to in the prepared remarks. What the genesis of that is, what you've learned or what you hope to learn from that study. And then I also had – wanted to get your thoughts as it relates to the cost savings analysis that you've been doing. Did you – incidentally, did you uncover any areas or did you found that maybe you were under-investing and need to kind of reallocate some cost to certain areas?

Jonathan E. Ramsden - EVP and CFO: Sure. On the market research study, Omar, we serve 20,000 consumers across the U.S., Canada, U.K., Germany, China, Hong Kong, Japan, and Korea. And the study looked at brand perceptions, category perceptions, key shopping behaviors, as well as consumer segmentations in classic brand funnel metrics for us for our brands relative to a defined set of competition in each market. So, we are getting all those results in now; we've been through in detail the results of the U.S. market and then we're going to be working through the other markets over the next couple of weeks. So, we're getting some great insights to that. It's not something we're planning to elaborate on publicly, frankly, in terms of those insights that we paid a decent amount of money for the study. But we are very interested by what we've learnt from this study so far and we think it's going to be a key component of shaping our plans for the next few years. In terms of your second question, I think that's certainly something that is a lens through which we've looked at the process improvement initiatives, are there areas where potentially we could spend more? We're open to that and that will particularly come in the area of some of these process changes. So we're not ruling out that as a possibility, but net of any incremental investments, we certainly anticipate there will be substantial savings as we work through these remaining work streams.

Operator: Jeff Black, Avondale Partners.

Jeff Black - Avondale Partners: Could you guys talk about the direct business which had been growing despite negative comps last year. How much of that is weakness in inventory, how much of that is Europe versus U.S. and did that business also respond favorably in April? Just more color around that would be helpful.

Jonathan E. Ramsden - EVP and CFO: Jeff, I think the direct business is very significantly driven by the fact that in the first quarter of 2012 we were using it clear through a lot of that fall carryover inventory. So, when we lap that this year that had a very significant effect on the overall year-over-year DTC comps. We expect to be back on track going forward with much healthier DTC comp rates and much healthier both in terms of the absolute number, but also in terms of the margin they are delivering which was still very good in Q1 given that we were lapping some very low margin volume from the year-ago period.

Michael S. Jeffries - Chairman and CEO: Yeah, I just have to reinforce that there's strong profit growth in DTC, even given that top line problem.

Jonathan E. Ramsden - EVP and CFO: And spring comps for Q1 on DTC were up nicely as well.

Operator: Liz Dunn, Macquarie.

Liz Dunn - Macquarie: My first question relates to some of your longer-term comments you've made in the past about returning to sort of a low-teens operating margin. As you start to get into this cost savings program as well as thinking about your AUR project, is it fair to say you have more confidence about your ability to achieve those targets and what timeframe would you be looking at?

Jonathan E. Ramsden - EVP and CFO: Hey, Liz, well, I think it's going to be combination of these various things we've talked about coming together. It's the two specific cross-functional initiatives which as we get further along and are able to more specifically quantify those that will obviously be a piece of the equation. Then there's the long-term strategic plan update which will be a significant component of it too. So, I think as all those things come together over the next few months, we'll have better visibility on where we see the business and margins going over the next three to five years.

Operator: John Kernan, Cowen and Company.

Jerry Gray - Cowen and Company: This is (Jerry Gray) on for John actually. I just have another question about the e-commerce business. I was wondering if you could give some color on what you think the potential growth opportunity is there in the long-term in terms of what type of mix you can get to.

Jonathan E. Ramsden - EVP and CFO: I think it's huge. It's a major priority; we've been investing in it. We've had very strong growth in Europe since we made some key investments there. We're still relatively modest in scale in Asia, but we think that's a huge opportunity and we think there's still huge upside in the U.S. as well. So, I think across all geographies, we think it's a major opportunity.

Michael S. Jeffries - Chairman and CEO: And the target seems to be a moving target, it gets better and better.

Operator: That does conclude our question-and-answer session, and that does conclude our conference call. Thank you very much for your participation.

Jonathan E. Ramsden - EVP and CFO: Thank you.

Michael S. Jeffries - Chairman and CEO: Thank you.