Good day, and welcome to the Abercrombie & Fitch fourth quarter earnings results conference call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny, please go ahead.

Thank you, 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, reconciliation of GAAP to non-GAAP financial measures 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. This call is being recorded, and the replay may be accessed through the Internet at abercrombie.com under the Investors section. Before we begin, I remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Today's earnings call will be limited to one hour. Joining me today on the call are Mike Jeffries and Jonathan Ramsden. We'll begin the call with a few brief remarks from Mike, followed by a review of the financial performance for the quarter from Jonathan. After our prepared comments, we will be available to take your questions for as long as time permits. Now I'll turn the call over to Mike.

Good morning, everyone. Thank you for joining us today. The fourth quarter results we announced today were below our expectations. The difficult macroeconomic environment we saw in the third quarter continued into the fourth quarter and was exacerbated by all-time high cotton costs, unusually warm weather, both in the U.S. and in Europe, and a highly aggressive promotional environment. In this environment, we were unable to sustain higher AURs and therefore, unable to offset the increases in AUC we saw both from cotton cost increases and an elevated mix we built into our fall and winter assortment. These effects put pressure on our selling margin beyond what we anticipated at the beginning of the quarter, and resulted additional markdowns on higher carryover inventory. These effects were most significant in fleece, sweaters and outerwear. As we look to 2012, and particularly the back half of the year, we are seeing a significant reversal in that AUC trend. In addition, while our results for the fourth quarter fell below our expectations overall, there are a number of indicators that give us confidence that we are on the right track strategically. The first point is the biggest takeaway today. The overall economics of our business in Europe remain very strong. Our top line in Europe grew 85% for the quarter. Hollister Europe, which now represents approximately 2/3 of our store business in Europe, continued to comp positively despite a very difficult environment and despite some cannibalization of existing stores by new store openings. Those new stores performed in-line with expectations and ahead of original approved volumes. And overall, four-wall margins in Europe remained above 30%. Second, our DTC business was very strong for the quarter. This was the case, both for the U.S. and for our international DTC business, which showed strong sequential…

Thanks, Mike, and good morning, everyone. I'll start with a quick recap of our results in the quarter and fiscal year. For the fourth quarter, the company's net sales increased 16% to $1.329 billion, while comp store sales were flat, with men's and women's comps similar. Total U.S. sales including DTC were up 4%, while total international sales for the quarter including DTC were up 62%, and total DTC sales were up 41%. Sales for fiscal 2011 increased 20% to $4.158 billion, while comp store sales increased 5% for the year. Total U.S. sales were up 10% for the year, while total international sales were up 63%, and total DTC sales were up 36%. Foreign currency changes were not significant to our results for the quarter. Our gross margin rate for the quarter was 56.1%, down 750 basis points from last year. This reflected significant erosion in our U.S. chain store gross margins, primarily driven by an approximately 20% increase in average unit cost, including a significant mix component. Overall, AUR was up mid-single digits for the quarter, with AUR slightly down in U.S. chain stores. The gross margin rate for the quarter was adversely impacted by about 200 basis points as a result of markdowns on higher carryover inventory. On an adjusted non-GAAP basis, operating income for the quarter was $149.3 million. This excludes pretax charges of $125 million which are detailed on Page 5 of our investor presentation, and which I will review in more detail in a moment. The tax rate for the quarter was 33.5% on an adjusted basis and 33.9% for the full year on the same basis. Adjusted non-GAAP diluted EPS for the quarter was $1.12, down 19% versus last year. Adjusted non-GAAP diluted EPS for the year was $2.31, up 13% versus last…

[Operator Instructions] Our first question will come from Randy Konik with Jefferies.

So if we back out the near term for a second, I think you made some really good points around the long-term story here. If you think about the April 5 Analyst Meeting and we thought about the $7 billion roughly of revenue targets over the long term. You talked about the Hollister stores or some of the Abercrombie stores and the volumes are annualizing above that, that pro forma or that run rate you kind of targeted at the Analyst Meeting. So do you still feel about 9 months later, still feel very good about that $7 billion target? If anything has changed around that, both from a top line or margin standpoint, what would it be?

Randy, fundamentally, we still feel good about it. The updated roadmap we reviewed with the board yesterday came in at in a little lower than that, but that was almost entirely attributable to more U.S. store closures, which is accretive to the bottom line. So in terms of the international components of that and the direct-to-consumer components, they're absolutely on track.

Our next question comes from Janet Kloppenburg with JJK Research.

Jonathan and Mike, I'm looking at Page 8 of the packet you've provided us today, where we see the U.S. margin down about 350 basis points. What I'm wondering about, if you could help us understand how that looked through the first 9 months of the year and how much erosion there was in the fourth quarter? And just the magnitude of the improvement you expect in the U.S. business in fiscal '12.

I'll let Jonathan answer that question. I think Page 8 is a very interesting page. And maybe the international stores is more interesting than the U.S., but let's let Jonathan answer that.

Well, it is, and shows the value of that growth strategy, Michael. But I think we have a lot of U.S. stores closing as we go forward, so I'm just wondering how we should be thinking about the margin in the U.S. business?

Sure, Janet. Yes, I mean in terms of the U.S. stores, the effect of the fourth quarter, as we said in the prepared comments, was more pronounced than you see for the full year. But a lot of that was that we weren't able to get the AURs up as we thought we would in the fourth quarter to offset some of that mix effect in AUC. And then we got this big markdown reserve effect at the end of the quarter, which particularly impacts those U.S. stores. We've talked about planning for flat same-store sales going forward. We've talked about having average unit costs be down for the year, next year. We're being conservative on AUR. So we're not expecting a dramatic improvement in U.S. store margins, but we would expect some in 2012. And then we expect international and direct to continue delivering very high incremental margins per this chart.

And we think those are conservative assumptions, flat AUR and flat sales.

Does that answer your question, Janet?

I think. I'm just wondering about the store closings in the United States because you gave us that -- your 250 top stores in the U.S. had much higher margins than the store -- than the entire store base. So as we close more stores, I just thought there may be a natural lift that we should be thinking about in the U.S.?

Yes. We'll continue to get it. We said $0.10 to $0.15 from the closures and other charges we took in Q4. And then we'll continue as we close more stores in future years to get a few cents per year as we close those stores. That excludes the transfer and it also excludes our belief that by closing more of these lower-tier underperforming stores, we'll be able to lift up the entire brand, particularly A&F. And there's an intangible, unquantifiable benefit of that, that isn't baked into that analysis at this point.

And should we be thinking that the international margins could move higher in fiscal '12?

I think we'll be very pleased to continue getting the margins we're getting currently.

And next, we'll hear from Lorraine Hutchinson with Bank of America.

Was just looking for a little bit more clarity on your inventory trends as the year progresses, seeing inventory, excluding in-transit, up 41% when you're looking for a flat comp this year. I guess, can you just talk a little bit about how you expect AUC to trend as the year goes by? And then what your expectations are for AURs going forward?

Yes. Lorraine, I mean, first of all, we did have more inventory at the end of the quarter than we planned and that's also reflected in that 4 carryover comment we made earlier on. If you look at it though, most of the rest is spring and basic. And part of that is just timing of receipts including partly the in-transit component but even at the base. Clearly, while we're projecting flat same-store sales, our overall sales are going to be, obviously, well above that. We see inventory being up by a more moderated amount -- by a moderated level at the end of Q1, and then much more moderated at the end of Q2. So partly, it's just timing as we work through the season. In terms of the AUC trend, I think we've long said that the first quarter was a very tough comparison. As you recall, last year, AUCs were significantly down for us in Q1. So we're lapping that. And Q1 is really the last quarter where we get the full impact of that cotton spike. Q2, it starts to even out more and it's really then with the back-to-school receipts and balance of the full season receipt, that we really see that significant year-over-year decline in AUC.

I think that term significant is very important.

And next, we'll hear from Evren Kopelman with Wells Fargo.

I just wanted to quickly ask about, maybe, what are your thoughts on the promotional strategy going forward in the U.S.? I know in Q3 you thought it was a little bit too heavy and Q4 fell short of your expectations. So how are you thinking about that going forward?

We are in highly promotional environment in the U.S. We would hope that, that would abate. But we have to almost play it month by month, week by week. That's our strategy.

And next, we'll hear from Michelle Tan with Goldman Sachs.

So 2 quick questions on expenses. So one, it looks like in the detail you gave preopening expense was $59 million in 2010 (sic) [ 2011 ], I think you guys have talked about $100 million number for 2012. Is that still the right number and are the components comparable to the $59 million that you did for 2011? And then secondly, on your expectation for not leveraging expenses in Q1 but then seeing leverage for the full year, is the difference because of the timing of how expenses flow in through the year or is there a difference in kind of how you're thinking about the sales cadence between the first half and the second half?

I guess on the first part, Michelle, the store preopening cost of $59 million for '11, that includes rent, which we called out in the past, plus other preopening costs for new store openings. We talked about $100 million in the middle of last year. And we said at that time, we were working to get that done. That number has come down pretty significantly relative to that $100 million. It will be north of the $60 million but probably more in the $70 million range for 2012. Obviously, that's still a function of store openings in '13, which start to impact late in '12, but that would be our best estimate at this point. And it's come down partly because of the impact of timing, it's partly because we moved out a couple of those flagships. But also because we've been, as we said back in the middle of last year, we were going to work very hard to get that number down. And we've been successful in doing that. The number we're at in 2012 would likely be the peak based on the ongoing store opening plans that Mike spoke to a moment ago. We would expect in dollar terms that to remain relatively stable after that. And therefore, we would get leverage benefit from it going forward. In terms of the Q1 OpEx not getting any leverage in Q1 versus the balance sheet, yes, there's a few different factors going into that in terms of the timings of some investments we're making in the first half of the year. We continue to have DC depreciation, for example, in the first half of the year. And then the back half of the year, we not only have that, but we also have the benefit of the consolidation having occurred and the reduction in cost per unit we get from that. So that's one example. There are some investments we're making that are skewed more to the front of the year in the DTC area. And we've got more of the benefit of those from a sales standpoint later in the year, and then there are some other things of that nature.

And next, we'll hear from Liz Dunn with Macquarie.

Just one point of clarification on the future store openings. It looked like the impairment had significant number of Hollister stores and it doesn't seem like in the past, Hollister has been a big portion of the store closures. Will it be a big portion of the store closures going forward? And then, what's your posture on promotions internationally going forward?

I guess on the first part, we have had some Hollister impairments in the past. But the closures have and will continue to skew more towards A&F and kids than Hollister.

Let me answer the second part of the question, international promotions. First, I'd like to circle back, in answer to the first question about promotions, promotions are not our priority. Our priority here is to continue to focus on high-quality, trend-right merchandise and differentiated store experience. I keep saying that. Promotions are a way of life in the U.S. We do not promote internationally. We had clearance events in the end of season clearance events in Hollister and a few flagships. We have decided, go forward, that it's probably right to have an end of season clearance in Hollister, which would be the end of the spring season and the end of the fall season, but only as clearance and not to do them in flagships. But there is no promotional strategy for this business internationally.

And next, we'll hear from Stacy Pak with Barclays Capital.

So a couple questions. Jonathan, I was hoping maybe you could quantify the reduction you're expecting in AUC sequentially in Q1 from Q4, understanding it's not down year-over-year. And then how much should be down in the second half? And then the other thing, Jonathan, can you tell us the 2 or 3 things that are under your control that Abercrombie can do to get the domestic operating margin up to a mid- or high-single digit go forward? And then for you, Mike, given the number of domestic stores that there are, what is the vision for the domestic business? And when you think about international growth, how are you balancing direct versus flag? I mean, does direct ultimately take over? How are you kind of thinking about that longer term?

Jonathan?

Stacy, starting with the AUC. The Q4 and Q1 AUC on a like-for-like basis, it's similar. There's less of a mix effect in Q1, because a lot of mix effect in Q4 was that we have a winter product which skewed somewhat upwards. But the overall like-for-like AUC component in Q1 year-over-year is comparable. Second quarter, that's the case up until we start to get back-to-school receipts in and then we start to see it turn the opposite way and we'll have significant year-over-year declines. We haven't been specific on that, but certainly into the double digits beyond that point.

Let me respond to your question about vision for the A&F chain. I have to respond to that as where we're going worldwide. Clearly, flagship stores, clearly profitable. We'll continue to grow them at the rate of 3 to 5 per year. The direct business is doing very well and it will continue to grow at a very big rate. We've established for the total business a goal of $1 billion in direct and A&F is a good part of that. U.S. stores, obviously, a smaller base in better malls, play to the quality level of the A&F business around the world. That's the vision for the brand and the stores. And I think it's very consistent in terms of quality, taste, aspiration.

I guess on the last bit, Stacy, about international direct versus flagship. I guess we don't look at them as being mutually exclusive in anyway. I think they support each other. And as we plant the flag, as we've seen, and we spoke about it in the fourth quarter, our direct business was very strong in Europe and that was across brands. So the increasing store rollout, I think, supports the awareness and familiarity and supports to the direct business. And that's certainly what we've been seeing. And I think a key point in there is that we've long said that we're not going to get over stored, and Mike alluded to that again internationally. So we'll have a more optimal balance between stores and direct internationally than we have here at this point.

And next, we'll hear from Christine Chen with Needham & Company.

I was wondering, again, I wanted to focus on the store productivity in the U.S. I think you had given metrics in the past that store productivity domestically could be 90% or greater of '07. I assume in this environment that's off the table. But I guess, how are you thinking of it from a productivity perspective since you are benefiting from the lift from the store closures?

Christine, well, we've said we're modeling based on flat likes for 2012. So clearly, that won't take us to that 85% to 90% of productivity that we've talked about in the past. We're hopeful that we could do better than that, but that's what we're assuming at this point based on the current trend. It's a slightly better trend in the domestic business than international. But it still wouldn't get us, based on what we're currently modeling, to that range we've talked about in the past.

Next, we'll hear from Dana Telsey with Telsey Advisory Group.

Can you talk a little bit about CapEx and how you're seeing it break down by bucket in terms of the spend? And then, Mike, as you think about the product, how do you see the product evolving and, whether it's for guys or girls, pricing going forward? Do you see it changing either for back-to-school and pricing versus margin?

Dana, I'll take the CapEx piece. I guess, the drivers of that are obviously store count, also store opening timings including openings in '13, which have an impact at the end of '12. We also had some CapEx, cash expenditures that rolled over from '11 into '12 in terms of when the cash went out the door and rolled into that CapEx line. A couple of other significant things there, we continue to have some CapEx as we complete the DC consolidation. And then we have some fairly significant IT-related investments in the DTC and DC area including a new order management system, which there was a press release out a couple of weeks ago on that, that we have in going in for DTC this year. We have a new planning system we're putting in place over the course of the year. Various other investments in DTC. So that is up fairly significantly on a year-to-year basis. And then the rest of it is really just the store count and cadence from a timing standpoint.

To go to the second and third question, Dana, I see the product evolving very nicely. I think you can see that in the stores as of last weekend, what we stand for in each brand. The pricing is an issue that we look out on an ongoing basis. We believe we got a little bit high in Abercrombie & Fitch, particularly in flagship and the differential between Hollister and A&F is probably too great. So we see some price -- retail price reductions happening in the Abercrombie & Fitch brand. Effect on margin, we think we are going to be able to manage that on an ongoing basis as we're benefited from AUC reduction.

And Adrienne Tennant is next.

Mike, I had a question. I was in the Fifth Avenue store yesterday and the color palette is probably the best that I've seen across the team landscape, very bright and very compelling. But my question was that I'm not seeing that in the non-flagship stores. And as you said, you just sort of landed it last weekend. So is there an intended delay into the regular U.S. chain or is there something going on there? And then, Jonathan, can you just give us the initial price point internationally for Q3 and Q4 so we can sort of understand extracting the markdowns. The AUR was up about 15% Q3 internationally, up 5% in the fourth quarter. Just trying to figure out how much of that is due to the promotional activity at the end of the fall season?

Let me answer your first question. I believe that the chain stores do reflect the flagship stores in terms of bright color. Take a look again and keep looking as the season progresses.

Adrienne, on the second point, I'm not sure, the numbers you were quoting, I'm not sure where you're getting those from specifically. But if you look at our tickets, they were up pretty significantly in the international stores starting from early September onwards. They were fully in, again, sort of well into double digits, in terms of the actual tickets. The sale events we ran in January did moderate that to some degree, particularly in Hollister. But that was only January, so it was only 1 month out of the season significantly. In terms of looking forward, we talked about the ticket moderation in the spring particularly in A&F.

And next, we'll hear from Kimberly Greenberger with Morgan Stanley.

I was wondering, Jonathan, if you could address the flexibility in your expense base? And is there an appetite or an ability to cut back on various SG&A expenses if your comps remain flat or perhaps turn negative? And then I was just wondering if you could clarify something, I think, you mentioned in your prepared remarks, did you say you took impairment charges on European stores? And why would that be?

The answer is no on that one, Kimberly. We didn't make any -- take any impairment charge on the European stores. I mean, none of them are even, I think, I could safely say remotely close to that. There that was one Canadian we refer to.

One Canadian.

In terms of the flexibility in the expense base, I think the first point in there is, we're committed to investing in the areas of the business that we think are the growth opportunities and particularly DTC, particularly protecting the flagships and not taking quality out of those and not investing for the future there. When you come back to the U.S. store base, we try to operate everything at a very consistent standard and with a very consistent model. And that does place some restrictions on our ability to take cost out of that, but we continue to look at it. There are some changes we've implemented for '12 that will reduce the expense base and there are other projects that we're working through. But we have to protect the brand overall, so there are limits to what we can do in terms of taking cost out of stores that are underperforming. So that ultimately goes back to the strategy being to close those stores rather than to operate them at a lower standard than the balance of the chain.

And next, we'll hear from Anna Andreeva with Friedman, Billings, Ramsey.

I had a couple of questions. So just looking at the gross margin guidance for the year. You're guiding gross margins to be up significantly and I understand the AUC part of it. But I guess, what's giving you the confidence that we could recoup this much gross margin in the back half, especially if the environment continues to be pretty promotional out there? That's my first question.

Okay. Yes. I mean I think the drivers of the margin improvement are AUC being down on the full year basis; and international mix, which inevitably pulls the margin up. The international gross margin is well above the company-wide gross margin. So they're the 2 biggest drivers. We don't have significant, really, any AUR benefit baked into improving that gross margin on a like-to-like basis.

And next, we'll hear from Erika Maschmeyer with Baird.

Could you talk about just some of the factors that you saw in Q4, what parts of the disappointment you think were self-inflicted from an inventory or merchandising perspective? And kind of how much you thought was from the external environment be it, whether promotions for your competition?

Let me tackle that one. I think it was -- our difficulties were really, primarily, due to the extremely difficult environment. And you've just addressed them. The promotional activity in the U.S., very warm weather, macro concerns in Europe. I think we can always do better from an assortment point of view. But I don't really believe we missed a lot of business because of that. I think the headline for the quarter is the environment.

Next, we'll hear from Barbara Wyckoff with CLSA.

Can you first talk about the kids business? I'm intrigued you're adding kids to London market and then a couple of German stores. And then secondly, could you comment on the A&F Singapore store 1 month in?

Okay. Kids and Singapore. The kids business is a business that we are excited about growing. We think the growth is going to come in flagship locations. As you know, Barbara, we have done extraordinarily well in kids in Milan. We've opened well in Düsseldorf. We think the growth of the kids business is a flagship concept. So we're excited about being open in London in a very cool location. Singapore opening was very strong. I think the thing that we learned from Singapore is that we can operate well in different climate zones. That will help us go forward in how we're looking at the Southern Hemisphere.

Next, we'll hear from Jeff Black with Citigroup.

Yes. I guess one of our concerns has always been what happens to one of these flagships if we run into trouble. And it sounds like we have that in Japan. I think we heard you might be closing that store, Jonathan. What goes on in the dynamics behind that? I mean, can you find tenants that come in and rent at favorable rates? How long do you have to carry these stores before you close them? I know it's a Japan problem specifically, but if you could just address that with that store, that'd be helpful.

Okay. Jeff, just to be clear, we're talking about the Fukuoka store, not the Ginza store. There are no plans to close the Ginza store.

And let me back up there, Jeff. We never should have gone into Fukuoka. That was a mistake in the first place. So we're not talking about closing the Ginza store. I'm sorry.

And in Fukuoka, yes, I mean, they are unique spaces, so we're trying to sublet it. It may take a while, but we're working on that. But it's obviously a more complicated situation than when you're trying to get out of our mall-based space. But we are working hard at it.

And next, we'll hear from Robin Murchison with SunTrust.

Let me piggyback off of Jeff's question because I, too, had a question relative to that. Is there any thinking of shifting the size, the average size of your stores, either flagships or international stores?

I mean, certainly not the mall-based stores. And the flagship stores, they already do vary quite a bit. We have several tiers for the flagship stores in terms of the square footage. And when we open up in smaller markets we tend to go with a smaller selling square foot footprint. So they do vary quite a bit. And going forward, it'll be a mixture of some of the bigger footprints and some of the smaller footprints.

And the only store size adjustment we've made has been in the Gilly chain to go to a smaller format, which has been very successful. But that's the only difference.

Next we'll hear from Paul Lejuez with Nomura.

Couple of questions. Wondering if you took mix out of the equation, what the AUC and AUR would have been in 4Q, if you are able to do that. Second, you guys gave the inventory breakdown by piece, the fall inventory, in-transit and spring. Wondering what the percentage changes were versus last year? And then last, you guys gave the $10 million average on the international Hollister store, it's tough to get precisely to the new store productivity numbers, so just wondering how that $10 million has changed from when you started opening those stores to this past year's class?

I guess on the AUC piece, Paul, I mean, we haven't broken out the component of that plus 20 that was mix. I think in terms of the AUR, what we're saying is we didn't really get paid for that elevated mix and that was really a big factor in both the selling margin during the quarter and then the markdown reserve at the end of the quarter. But the mix component was a reasonably significant component, that plus 20 overall AUC increase.

And I have to give you a little more color on the mix. We did make pretty big bets on cold weather gear here, fur-lined garments. And we weren't helped by the weather in that regard. But that really did drive up mix from an AUC and an AUR perspective. We clearly didn't get paid for it.

I'm just trying to go back to the second part of the question which was...

Each of those buckets?

Sorry, Paul, say that again. I missed it.

The percent change and the pieces of the inventory increase. You gave the dollar increase for fall, for in-transit and spring and basic. And I'm just wondering what the percentage change was in those categories?

Well, the fall has a much higher percentage. That was a pretty high percentage even after a significant markdown reserve. So there is more fall carryover inventory. Spring is a more modest percentage, certainly still decent sized in percentage terms. But again, that's more driven by the timing of receipts than by any other significant factor. And then on the $10 million average volume, I guess, I really don't know how to answer to that. We'd said $12 million at one point. But I think we always said that some of those early stores were going to be the real powerhouses, like a White City and a Centro Oberhausen. The $10 million we're at today, we feel very good about it and it's very consistent with our long-term goal of a little over $8 million once we're fully built out in Europe. But as we've said, the stores we're opening, are opening ahead of their approved volumes and their approved volumes are what's tied to that $8 million objective.

And next, we'll hear from Jennifer Black with Jennifer Black & Associates.

I wondered if you could talk a little bit about Gilly Hicks, and I think you have 3 international stores, and how the openings went. And then I also wondered if you could talk about accessories as a category and discuss where you are in offering that women's mega fragrance?

Okay. Gilly Hicks first. We continue to be very excited about Gilly Hicks. We had very strong comps during the year and fourth quarter. As you say, we opened 2 stores in the fourth quarter in Europe, 1 in the U.K., 1 in Germany. We're seeing very strong performance from these stores. And additionally, in Gilly Hicks, which is very interesting, very strong DTC growth. We're very encouraged about Gilly Hicks. The second part of your question, accessories. I think as you know, accessories, for us, is a more limited category than for many others in that we don't sell costume jewelry and shoes and chokes. But the categories we're in, we're seeing very strong growth at this point as a company. Fragrance, we introduced a new fragrance for Christmas, and it has been very successful. Perfume No. 1, with the little blue bow. It has not taken off as fierce, but we see we're going to see strong growth there. So not mega, but we're making progress in fragrance.

Next, we'll go to Jeff Klinefelter with Piper Jaffray.

A couple of questions for you. Jonathan, just on the flagship business model. I think, Jonathan and Mike, there a lot of questions out there clearly about the viability of that model, the profitability of that model. Could you just share a little bit more on a long-term basis how -- when you go in and pro forma one of these new flagships, what sort of pattern of comp you bake into that pro forma? What sort of level of profitability you assume? And then what your variance of experience has been? I think that transparency will be really helpful for people on the call. And then, Mike, just following up on domestic. It seems like we're in a bit of a Catch-22 here in that it's a promotional environment. And I think some feel like you're even setting the tempo to some extent within a certain portion of specialty retail. What does it take to actually, gradually climb out of this cycle in your opinion?

Okay. Jeff, I'll take the first piece. I mean, I think, you have to go back to that chart on Page 8 of the investor presentation. If you look at our overall business in Europe, which is essentially where we have the flagships at this point, it's extremely strong. We think there probably is some transfer between A&F and Hollister. But if you look at it in aggregate terms, it's growing fast, very high margin, a very healthy business when you add it all together. And those flagship stores are all operating at very high margins even though, in the case of London and Milan, they've comped down quite a bit over the last 6 months or so. So the four-walls are still very strong there. There may be some transfer with Hollister, there may be some transfer with DTC. But if we look at that overall European business, it's extremely strong in a very difficult environment.

And there's some transfer flagship to flagship. So those are the 3 elements.

And then if you look at the comp trend for those stores, what we see with London and Milan is they opened well above their planned volumes and then comped very strongly. London had a brief period where it comped negatively in '08, '09 and then it came back again. Milan had consistently comped very strongly until the third quarter of this year. So even though it's comped negative since then, it's still well above its original approved volume. And I think, we'll see what happens going forward with those stores. We're hopeful that the trend will stabilize.

And I think the answer to your second question, Jeff, is that our focus needs to be, as it has been, on high-quality, trend-right merchandise, great store experience. And if we continue to concentrate on those things, then we'll pull out of this promotional merry-go-round at some point. I believe that. I just can't tell you when that's going to be. But our focus, being on the former rather than the latter, is going to take us there.

Our next question comes from Brian Tunick with JPMorgan.

A couple of questions. I guess, Jonathan, can you maybe help us understand the DTC margins a little more here for the full year basis. Was the decline for the full year based on, really, the Q4 and the clearance events? Can you talk about the inventory plans, where are you thinking we're going to end spring or as we move to the second half, as AUC comes down? And then maybe, Mike, your comment that the top 200 U.S. stores have European margins. Can you maybe talk about the bottom part of the chain, sort of what is that delta of what's happening in the store basis?

Okay. Brian, on the DTC margin point, the erosion from '11 to '10, first of all most of that business is still U.S. business, so the same margin impacts that you see in the U.S. stores were felt in direct. We also made some fairly significant investment in '11 that impacted the margin. We began to invest in certain marketing channels that we hadn't in the past and other things. So that's really primarily what drove that. But overall, we're very comfortable with the margin in that range of 46% for the full year. Inventory plans, I think, as we said a moment ago, it'll be moderated level of increase at the end of Q1 and then more significantly moderated at the end of the spring season, much more aligned with the sales trend at the end of the spring season.

The top 250 compared to international store margins. I think you're asking, Brian, what does the bottom look like. And those are probably pretty flattish. But we've identified a number of those foreclosures to be more productive as a company.

And next, we'll hear from Marni Shapiro with The Retail Tracker.

From your mouth to God's ear, this promotional environment goes away. That's all I could say.

Someday, Marni, someday.

Someday, someday and then cashmere sweaters will be back to $200 the way they should be.

Okay.

So can you just talk a little bit about -- a couple of quick questions. First of all, inventory-wise, did you see a similar trend across the chains globally where fashion sold and you're really sitting with what I'm seeing, flannels and fur-lined sweatshirts and hoodies? And if that's the case globally is this what you see -- is this your carryover globally or are there other pockets? And then as I think about your inventory going into 2012, are there any areas that you've distorted differently? I know most of 2011 you focused on trying to distort some of the fashion a little bit more, so can you talk about that thought process going into 2012?

Okay. First part of the question, Marni. We had warm weather everywhere. So fur-lined hoodies and trimmed hoodies didn't meet our expectations anywhere. The second part of the question, pockets of inventory in 2012, where we're distorting. Yes, we are. But I don't think I can share that with you. And I think the best thing to do is to walk into the stores and see what stands we're taking. Yes, for spring, it's clearly not fur.

And that's all the time we have today for questions. That does conclude the conference. Thank you for your participation.

Thank you.