Abercrombie & Fitch Co. (ANF) Q2 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Abercrombie & Fitch Second Quarter 2014 Earnings Results Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Brian Logan. Mr. Logan, please go ahead, sir.

Good morning, and welcome to our second quarter earnings call. Earlier this morning, we released our second 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, which are 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 maybe accessed through the Internet at abercrombie.com under the Investors section. The call is scheduled for 1 hour. Joining me today are Mike Jefferies, Chief Executive Officer; Jonathan Ramsden, Chief Operating Officer; and Joanne Crevoiserat, Chief Financial Officer. 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. After our prepared comments this morning, we will be available to take your questions for as long as time permits. With that, I hand the call over to Mike for some opening remarks.

Thank you, Brian, and good morning, everyone. I will comment on the numbers in a moment. But I want to start by saying the most significant development over the past quarter has been the great progress we believe we have made in evolving the fashion component of our assortment. Many of you have seen and commented on this with regard to our Back-to-School floor set, and we could not be more excited about it within the company. Sales for the second quarter were somewhat below our plan, but we have seen modest improvements since we set Back-to-School in mid-July. Importantly, we've been able to achieve this improvement despite adverse likes in our logo business. As we work to strategically reduce that element of our assortment, we are confident that the evolution of our assortment will drive further improvements in sales as we go forward. While we continue to operate in a challenging environment, we're pleased that we were able to exceed both our earnings expectations coming into the quarter and prior year's earnings, as we continue to manage expenses tightly and exceeded expectations on our profit improvement initiative. We're also pleased that for the second quarter in a row, our A&F brand comp-ed close to flat, and we continue to see sequential comp sales improvements in our U.S. stores, overall. From a merchandise standpoint, we performed well during the quarter in jeans, dresses and skirts. Chase represented approximately 20% of the female assortment in the quarter, and we expect to roughly double that figure for spring 2015. And while Chase currently represents a much smaller percentage of the male assortment, we will be looking to significantly expand its use there as well. Meanwhile, we continue to make good progress on AUC, with like-for-like AUCs suspected to be down for the balance of the year and through 2015. To complement our evolving assortment, we continue to focus on increasing brand engagement through enhanced marketing initiatives and campaigns and are making great progress that many of you have also noticed. For Back-to-School, our marketing initiatives have been focused on developing digital, editorial content around our newest product and key trends. Being on track with our core merchandising and marketing initiatives is critical to our efforts to stabilize and improve productivity levels in both our U.S. and international stores. And while some of these initiatives will take time to fully pay off, we remain confident we're on the right track. Turning to our international performance. We continue to be pleased by our expansion efforts in Asia. During the quarter, we opened our 8th Hollister store in China. And on Saturday, we will open our first mall-based A&F store in Chengdu. In Japan, we opened our third Hollister store during the quarter at LaLaport Tokyo Bay, and we remain very pleased with the volumes and profitability of our Hollister stores in both China and Japan. We look forward to accelerating our store openings in both markets in 2015. We also continue to be excited about the Middle East, where we plan additional openings in Dubai and Abu Dhabi this year. In Europe, comps remain challenging. The general economic situation in Europe remains difficult and, if anything, weakened during the quarter. But we believe that our company wide merchandising initiatives, as well as pricing, marketing and other initiatives within key markets in Europe can help us stabilize productivity. In Canada, we've now comp-ed positively for the fourth time in the last 5 quarters. Among other factors, we believe that the adjustments we made to pricing in 2012 have contributed to the sustained improvement we have seen since then. As you know, aggressively growing our DTC business is a key component of our long-term strategy. We launched a redesigned Hollister website for Back-to-School, which included increased mobile optimization. In addition, we are focused on expanding our international infrastructure to support future growth there, on which Jonathan will go into more detail in a moment. Turning to our organizational structure. We continue to make good progress in our evolution to a branded organizational model, and look forward to welcoming Christos Angelides to the company in October. Our search for the Hollister brand president is still ongoing, but we remain confident we will find the right person to lead that brand as well. I will conclude these opening comments by stating clearly that we remain highly focused on returning to growth and believe we are absolutely taking the right steps to accomplish that, especially in the evolution of our assortments. Now over to Jonathan.

Thanks, Mike, and good morning, everyone. We're very pleased to have Joanne Crevoiserat join us for the first earnings call this morning. Joanne has been spending much of her first few months with the company in the merchandise planning and inventory management areas and is now transitioning to take over day-to-day CFO responsibilities. Joanne is going to walk through our financial results for the quarter. Then I will provide an update on the long=range plan initiatives and our outlook for the remainder of the year. Over to Joanne.

Thanks, Jonathan, and good morning, everyone. It's great to be here with you on my first earnings call as the company's CFO, and I look forward to meeting many of you over the coming months. As you have seen in this morning's press release, net sales for the quarter were $891 million, down 6% to last year. Including direct-to-consumer, total comparable sales were down 7%. U.S. comparable sales were down 5%, while total international comparable sales were down 9%. By brand, comp sales, including direct-to-consumer, were down 1% for Abercrombie & Fitch; down 6% for abercrombie kids and down 10% for Hollister. Comps by gender were approximately in line. Within the quarter comparable sales were weakest in June. Changes in foreign currency exchange rates versus a year ago benefited sales by approximately $13 million. The gross profit rate for the quarter was 62.1%, 180 basis points lower than last year, reflecting an increase in promotional activity, including shipping promotions in the direct-to-consumer business. However, promotional activity was somewhat lower than we anticipated coming into the quarter, leading to modestly higher gross profit rate than planned. Stores and distribution expense for the quarter was $426 million or 47.9% of sales, down from $472 million or 49.9% of sales last year. The decreased expense was driven primarily by savings in store payroll, which was offset partially by higher direct-to-consumer expense. Marketing, general and administrative expenses for the quarter was $111 million, a 6% decrease compared to $118 million last year. The decline in MG&A expense was primarily due to a decrease in compensation expense, partially offset by an increase in marketing expense. Excluding pretax charges of $2 million, which are detailed on Page 4 of our Investor Presentation, adjusted non-GAAP operating expense for the quarter was $535 million, down $51 million from last year, representing 190 basis points of leverage. Savings were greater than anticipated coming into the quarter due to continued tight expense management and realization of incremental benefits from the profit improvement initiative, on which Jonathan will provide more detail in a moment. Other operating income was $4 million for the quarter, flat to last year and included insurance recoveries of $3 million. On an adjusted non-GAAP basis, operating income for the quarter was $22 million, approximately flat to last year. The effective tax rate for the quarter, excluding the effect of charges was 29.2%, reflecting the application of the estimated full year tax rate to the year-to-date results. For the quarter, the company reported adjusted non-GAAP net income per diluted share of $0.19, which was ahead of our expectations coming into the quarter. Turning to the balance sheet. We ended the quarter with $311 million in cash and cash equivalents; and borrowings of $188 million. During the quarter, we repurchased approximately 1.5 million shares at an aggregate cost of $60 million. This brings our total year-to-date repurchases to approximately 5.3 million shares. Subsequent to quarter end, we completed the refinancing of our credit facilities. The new credit facilities consist of a $400 million asset-based revolving credit facility and a $300 million Term Loan B facility. A portion of the proceeds from the Term Loan B facility were used to repay outstanding borrowings of $188 million and pay fees and expenses associated with the transaction. The balance of the proceeds will be used for working capital and general corporate purposes, including the potential share repurchases. As of the end of the quarter, we had approximately 11 million shares remaining available for repurchase under our previously announced stock repurchase authorization. We ended the quarter with total inventory at cost down 13% versus last year. We expect inventory costs on a year-over-year basis to continue to be down double digits at the end of the third quarter. At the end of the quarter, we operated 836 stores in the U.S. and 161 stores in Canada, Europe, Asia, Australia and the Middle East. With that, I will hand it back over to Jonathan.

Thanks, Joanne. As mentioned, I'm going to give an update on some of our long-range planned strategic initiatives and will then provide an update on our outlook for the remainder of the year. As a reminder, our objective for our long-range plan is to achieve a significant increase in return on invested capital through a combination of disciplined and focused capital allocation and operating margin improvements. As Mike mentioned, aggressively growing our DTC business is a key component of this strategy. We continue to expect another year of strong growth in 2014, particularly in our international business, with the segment margin remaining in the mid-30s on a full year basis. We're on track with the conversion of one of our distribution centers here in New Albany to be a dedicated direct-to-consumer facility, which will support processing speed, throughput and service. We're also on track to launch localized sites and in-country fulfillment in China next month, as well as regional fulfillment from Hong Kong for other Asian countries, giving us local or regional fulfillment coverage of all of our major markets in North America, Europe and Asia. In addition, we expect to open a Hollister store on Tmall in China later this quarter, launch a localized website in Japan later this year and launch in-country e-commerce fulfillment in Japan next year. With regard to omnichannel, order-in-store is on track to be completed for all U.S. stores during the third quarter. In addition, we are proceeding with our ship-from-store pilots with the rollout planned for approximately half of the U.S. fleet early in the fourth quarter. We expect to have reserve-in-store and in-store pickup activated during 2015. Importantly, the combination of our technology and international fulfillment investments puts us in a strong position to roll out omnichannel capabilities as they increase in relevance in our international markets. Near term, we see the U.K. as being our highest-priority market. Turning to our corporate improvement initiative, while some of the lull in expected expenses to date have come from continued tight expense management, we are also exceeding our goals for savings from the profit improvement initiative. As a result, we now expect gross savings from the initiative to exceed $200 million versus the prior projection of at least $175 million, of which $30 million was recognized in 2013. In addition, we expect to realize some additional savings beyond 2014 that are not included in this figure. As we have previously stated, these savings will be partially offset by approximately $30 million increase in marketing expenditures in 2014. We continue to expect total capital expenditures in 2014 to be approximately $210 million to $220 million, with the priority remaining on DTC and IT investments to support growth initiatives. During 2014, we now anticipate opening a total of 14 full-price international stores, including 8 Hollister stores and 5 A&F stores. We also have plan to open 8 to 10 international and U.S. outlet stores during the year. As we think about capital allocation for 2015 and beyond, we expect to increase our allocations of new stores, particularly in Asia, but will continue to invest in support of our growing e-commerce footprint. In addition, we remain pleased with the results of the Hollister store from the model, and we are working on a storefront remodel for A&F, which we expect to be in testing later in the third quarter. We expect to allocate capital to accelerate the rollout of these new storefronts in 2015. In broad terms, we continue to expect that CapEx will remain at approximately $200 million annually. U.S. store closures remain a key part of our strategy to position our brand appropriately in the U.S., achieve an optimal balance between our bricks-and-mortar and online presence and improve average store productivity. We now expect to close approximately 60 stores in the U.S. during 2014 through natural lease expirations. We expect to close a similar number of stores in each of the next couple of years and expect to retain significant flexibility thereafter. Moving on to our earnings outlook for the rest of 2014. We continue to expect fully diluted earnings per share in the range of $2.15 to $2.35. The guidance is based on the assumption of full year total comparable sales will be down by a mid-single digit percent. The guidance continues to assume a gross margin rate for the full year that is down slightly compared to fiscal 2013. We continue to expect average unit retail pressure and lower shipping and handling revenues to offset average unit cost improvement and benefit from the company's profit improvement initiative. We expect gross margin rate improvement in the back half of the year, as we begin to benefit from lower AUCs and go up against more favorable AUR comparisons. On a sequential basis, we expect a lower year-over-year decline in operating expense in the back half of the year, as we begin to anniversary savings realized last year. The guidance includes an increase in interest expense associated with the refinancing of our credit facilities and includes a full year effective tax rate of mid-30s, which remains sensitive to the mix between international and domestic income. The guidance also assumes a weighted average share count of approximately 73.6 million shares, which does not include the impact of any additional share repurchases over the remainder of the year. The guidance does not include charges related to the Gilly Hicks restructuring, the company's profit improvement initiative, certain corporate governance matters and other potential impairment and store closure charges. This concludes our prepared comments, and we will now be happy to take your questions. Thank you.

[Operator Instructions] We'll first go to Randy Konik with Jefferies.

I guess a question for Mike. Can you give us some -- I guess expand upon some color around the stuff you're -- I guess, the improvement you're seeing in the non-logo business? And give us a little perspective on when the like-for-likes, I guess, ease in that logo business? And any color of what -- how far down you want to take the logo business? And then I guess that's domestically, and then internationally, just give us a little bit more, I guess color, if you could, on different country-by-country performance within the quarter.

Okay. We're really [Technical Difficulty]

[Operator Instructions] Okay, gentlemen, you've rejoined the call.

Randy, did you hear Mike's answer to that question? We're not sure when the call got dropped.

No, I think it was just -- I think everybody got dropped right, when you first started speaking.

Okay, here we go again. Yes. We're thrilled with the rate at which we're selling fashion. I think everyone has seen that in our assortments, and it is working. We are up against big logo likes. We are looking to decrease that aggressively. For the fall season, we're saying that we're going to be halving the amount of business we did last year. In the spring season, we're looking to take the North American logo business to practically nothing, but protect logo in international stores. More color around the country-by-country performance; I think this is a really interesting question in total. And the first comment is that Europe remains really challenged. And this contributes to a big percentage of Hollister's total comp lag to A&F because of the size of the Hollister business in Europe relative to A&F. This is a really important statement, guys. And responding to country-by-country performance, the worst country is Italy and the best country is Poland, which doesn't do us much good.

Is there any color on the U.K.?

U.K. remains tough, slight improvement in U.K.

And next, we'll go to Brian Tunick with JPMorgan.

This is Kate Fitzsimons on for Brian. I was wondering if you could speak to the improvement that you were seeing thus far during the Back-to-School season. Is it across all brands, as well as any color on the international and U.S. businesses? And then also, just you're in the early stages of implementing the lower AUR strategy at Hollister. Just if you could share any early learnings from that, that would be great.

We're seeing improvement in fashion selling in all brands. The North American business is clearly better than international business on a likes basis because of the difficulties in Europe, which I just mentioned. The logo business is larger in Hollister, and that becomes a little more difficult to overcome than it has in A&F, although, we're overcoming that in both brands.

I think we need a set of clothes that -- sorry, go ahead, go ahead.

No, just in terms of the lower AUR strategy?

I think, we're still working into elements of that. What we've actually said is that we anticipate overall AURs to be up again, slightly more favorable compares in the back half for the year. But in general, we are taking AURs down and Hollister selectively, and continue to test into that.

And that's primarily an international strategy.

And next we'll go to Kimberly Greenberger with Morgan Stanley.

Mike, I wanted to just ask you about the Hollister business. It sounds like that negative 10 [ph] comp, is being weighed on, particularly by the international comps. Do you happen to have the Hollister brand U.S. numbers that you might be willing to share with us?

Have a Hollister -- hold on. I'm sorry, I don't understand; do I have the Hollister?

The Hollister web comp. So I think that's [indiscernible] the global comp, including your comp.

Yes, you're right. You're right.

Yes, I think what we can tell you, Kimberly, is the gap in North America was closer than the overall gap between the brands, because the gap, to Mike's point earlier, was wider in Europe. So the North America Hollister and A&F comps were closer together than the total comp.

Exactly. And to go back to what I said, a big percentage, and that's the lion percentage of the difference, is due to Europe. I'd also say, if we just look at the total Hollister lag behind A&F, the lion's share is due to the European -- size of the European Hollister business. Second, the logo headwind skews toward Hollister. And third, I think there's still a little bit of a difference, and I think that while Hollister's done a good job in evolving its assortment, it is still slightly behind A&F. But that's a small difference.

Now we have question from Paul Lejuez with Wells Fargo.

Just looking at your increased DTC revenues, it doesn't seem to be driving incremental operating profit. So just wondering if that's more of a result of having to be a bit more promotional online or is it a function of shipping revenue pressure? And if it's shipping, can you talk about how big that piece is of the DTC revenue line?

Paul, a couple of pieces on that. First of all, we do expect on a full year basis that we will see incremental operating profit from DTC. So the effect you're seeing in the first half of the year, where operating profit dollars are kind of flat on sales up, we do see on a full year basis that converting into being incremental operating profit dollars with the segment margin remaining in the mid-30s. To your point, a big part of the pressure is around the shipping and handling revenue and expense, partly as we've begun to offer shipping promotions in Asia and internationally generally. When we do those, the shipping expense there is greater, particularly for Asia. One of the -- the bit of good news on that is that as we enable fulfillment within Asia, our shipping expense, when we run those free shipping promotions with a threshold, will be much lower than it is today. So the -- part of the effect is just the shipping handling revenue coming down, as we've continued to use shipping and handling promotions and being competitive on that. But also because of the skew of our business to international, and the rapid growth in Asia, when we run those promotions, there's greater shipping expense, which as I just said, will alleviate as we enable the regional fulfillment.

Any color on the size of that, that line, that shipping revenue line?

I don't think we've broken out the figure specifically, but it is the biggest driver of the lack of flow through to the bottom line in terms of the sales improvement that you're seeing in the segment.

And our next question will come from Janet Kloppenburg with JJK Research.

Just a couple of quick questions. Mike, if you could talk a little bit about the impact that the logo decline might be having on comp, so we can understand what kind of traction you're getting in the fashion business that might help; and also, some visibility on how long this impact may impact the comps, perhaps hiding the improvement that you're seeing in the fashion business. And I also was wondering if you could talk about your perspective on pricing in Europe, given the success that you had in Canada with lowering pricing. And, Jonathan, if prices are to come down, if you have offsets to that to maintain a healthy margin in Europe?

The first part of the question, Janet, I think I can say this, is that we are making up the logo decline in the business in terms of comps, which says that we're doing better in the rest of the business, which we are and that's fashion-related. There is wonderful traction in fashion, partially due to our Chase strategy. Chase is working wonderfully well for us. How long the impact of logo will last? Clearly, through this year into first quarter of next year but, as I just said, we would say, North America we’d want to be out of the logo business essentially by next spring. It will remain a factor in the rest of the world. I would say that by this time next year, we'll really be over the major dollars. I think the question on our perspective on pricing in Europe is really a good one, given the success in Canada. We are testing pricing in Europe, a pretty extensive testing, as we talk now. We think there's opportunity there. And we think we have the ability to work on pricing, given where we are in AUC, but that's a really good question, Janet.

Comment on the fashion comps results, Michael?

On I beg your pardon?

Can you comment on the performance of the fashion tops for the Back-to-School? I thought they look terrific, but you didn't highlight them when you called out the categories of strength?

Fashion tops are performing very well. The top category in total is negative because of the logo impact, but we're delighted with fashion tops.

[Operator Instructions] We'll take our next question coming from Stephanie Wissink with Piper Jaffray.

If I could ask one clarification question. Jonathan, I think you mentioned that you're raising the costs take-out guidance essentially to $200 million versus $175 million previously. Could you just talk about what area of the expense structure you're finding that incremental savings? And then, Mike, I wonder -- was wondering if you could just talk about some of the early feedback on the incremental marketing spends, some of the initiatives, particularly the more social media-based initiatives around the Hollister brand. If you could talk a little bit about some of the success there, that would be great.

Okay. So just on the first part, the primary driver of the increased savings is coming out of the stores, store payroll and other variable expenses within the stores. That's certainly the biggest component of it.

In terms of marketing, Steph, it's still early days, but we're seeing benefits, particularly in terms of improving brand sentiment and brand engagement. I think as everyone knows, these efforts take time to realize the full benefits in traffic and sales. But we're pretty delighted with where we are there now.

And now we will take a question from Dana Telsey with Telsey Advisory Group.

Mike, can you give any comments on denim, how denim is doing, what's happening with price points of denim? And then on the performance on men's and women's, anything you're seeing that's any significant improvement from last quarter? It certainly seems like fashion is coming on. And just lastly, given the beat you had this quarter and the cost savings running ahead, is there something offsetting it that prevented you from raising full year guidance? Is it the margin picture and the pricing environment?

We're happy with how denim has performed. As we said, comp sales were up, but gross profit was up too. We're able to drive the business through expanded assortment, I think compelling price points and engaging store and DTC presentations that were supported by lifestyle marketing. Your second question, we're seeing performance on men's, women's an improvement. I'm trying to think of what the statistics would say. We're seeing North America, an improvement in both.

Yes, and I can jump in here. Men's and women's comps were relatively in line. As Mike mentioned earlier, we are seeing a lot of traction in our Chase, which represents a 20%-ish -- 20% of our women's assortment. It is lower in men's overall, but we expect that to be increasing as well. So men's and women's are in line in terms of performance. And we expect that those Chase components continue to ramp for us, they continue to improve in both. In terms of offsetting improvement in margin, as it relates to guidance, we do expect the back-half guidance in -- or the back-half margin to be an improvement, driven by the AUC inroads we're making, as well as profit improvement initiative efforts that will have some impact on margin in the back half. And we do also see AUR pressure abating somewhat, as we move into the back half, as we see inventory in the segment normalizing.

Now we'll go to Matt McClintock with Barclays.

Jonathan, you actually talked a lot about some exciting omnichannel initiatives that you're rolling out back half of this year going to next year. I was wondering, as you think about some of these initiatives, ship from store, reserve in store, et cetera, it seems like that the focus is the United States. How do you think about using those initiatives in international markets?

Yes, Matt, I think that's a great question. I think the state of omnichannel varies a lot as you go around the world, but it's generally not as far along as it is here in the U.S. So U.K. is probably relatively far along within Europe. In Asia, omnichannel is still relatively undeveloped. But I think the key point is we -- through a combination of us building the technology to rollout omnichannel in the U.S., that same technology would be applicable internationally. And then, by virtue of moving to regional fulfillment now in Asia in addition to Europe, the combination of those 2 things put us in a very strong position to roll out omnichannel as it becomes relevant in key markets going forward. So we foresee the U.K. as a priority. We're looking at the rest of Europe. We will continue to monitor Asia, but I think the important point is that we'll be ready to roll out omnichannel as it becomes significant in each of those markets.

Next will go to Christian Buss with Crédit Suisse.

I was wondering if you could talk a little bit about how you're thinking about the European business developing over the next 6 months. What are you doing to try and stabilize that business? And how much control do you really have? What the end point is for productivity for the flagship locations there?

Yes, I think, as we talked about a little bit about in the prepared comments, Christian, there are market-by-market -- first of all, the broader initiatives we're undertaking with regard to the assortment, in particular we believe will benefit the European business, as well as the international business. But also, within specific markets in Europe, there are local pricing, marketing, other initiatives. And then going back to the prior question, omnichannel could become a part of the equation going forward in certain markets. So there are a combination of the global initiatives we're undertaking, particularly around the assortment and then market-specific initiatives, which we will be increasing over the next 6 to 12 months.

Now we'll go to John Morris with BMO Capital Markets.

It's Janine Stichter on for John Morris. I was just wondering just given what you're saying about the European business, if you could comment a little bit on some of the tourist locations within the U.S. and whether or not they're an overall drag to the total company comp?

We generally haven't broken that out. I think we can dig that out and see if there's some color we can give around that. So why don't we go on to the next question and we'll see if we can dig out something else on that.

We'll go to Anna Andreeva with Oppenheimer.

A follow-up on the gross margin. You guided down slightly for the year. Should we expect gross margin to be up in the third quarter and fourth quarter? Or is that improvement to be more fourth quarter weighted? And just to follow up on the buyback, it looks like you guys bought back a little bit less than in the first quarter. Maybe talk about the appetite from the board towards completing the remainder of the buyback in '14.

Yes, we do expect gross margin to be down and -- to be improved in the back half. Again, based on our AUC efforts, those do become bigger in the fourth quarter than the third, but it's relative; we do see improvement in both, as well as our profit improvement initiatives that have margin implications kicking into the back half. So slightly skewed to fourth, but I think the bigger issue in that equation is really the relief we expect on the AUR pressures we've been seeing, as the inventories in the segment normalize through the fall season. In terms of buybacks, we have said that we -- and have authorization to continue to buy back shares of stock. We make those decisions. Our practice is to make those decisions on a quarter-by-quarter basis. And really it's contingent on the stock price and managing to our liquidity target of $350 million.

I'll just go back on Anna's last question. So we typically don't give a lot of color on the U.S. tourist stores, but what we can say is that they performed somewhat below the U.S. chain stores, but better than the international stores for the quarter and that was relatively consistent with the first quarter.

Now we'll go to Jennifer Black with Jennifer Black and Associates.

Mike, you probably can guess what I'm going to ask. With your streamlined work, with less logos, it seems like accessories, you could really do a lot and I know...

Of course, and, Jennifer, I have to congratulate you because you've been on the push for less logo for a while. So you're or a forecaster there. Thank you. We are engaged in developing the accessory business. I think going to a branded organization is really helping us as we develop these accessories because being more brand-focused by category, I'm feeling that we're going to make progress. So I hope to report something to you in the future about accessories.

Do you think we'll see something in the next quarter? Are we looking 6 months?

I really think it's going to be spring that you're going to start to see more exciting brand-right accessories.

Next we'll go to Thomas Filandro with SIG.

I was hoping you guys could offer some insight into these online exclusives, the collaborations, the license product? And in relation to that, can you give us some sense that you're seeing any change in the profile of the shopper either at Hollister or Abercrombie? And my final one is what's the style differentiation now between the brands and how much longer do you have before you get to where you want to be on that target of style differentiation?

Okay. First question, Tom, we currently have partnerships in footwear, accessories and apparel and they've all been successful. We have a long list of additional collaborations in the work, which we're going to be introducing in the coming months. We know that the customer does value these relationships, and we believe they can improve our brand positioning, while driving incremental sales and margin. We're early days here, but we're happy with where we're going. Style differentiation, we've changed the profile of the customer both brands. I think that we see that we are aging the A&F customer, which is exactly what we're trying to do. I think if you look at the Abercrombie and Hollister websites, look at them today, I think you can see a real difference in terms of the customer that we're targeting. More sophisticated, a little older in A&F, clearly young in Hollister, but the difference I think is pretty apparent, when you turn on the DTC and our websites. I think the differentiation is an ongoing thing. I believe we're going to get there pretty quickly. I can't say that it's February 2, 2016, but we're on a track that we're comfortable with.

Now we'll go to Betty Chen with Mizuho Securities.

I was wondering, Mike, if you can talk a little bit more about plans to expand the Chase program? It sounds like that's been a key factor in the [indiscernible] And in terms of doubling that for next year, is that mainly coming from women's or men's, and which category? Any additional color would be very helpful.

Yes, the Chase strategy is really working for us and we're embedding it in our business practice. And simply stated; it is an integral part of our business. And we're doing a lot of things that we need to do to make sure that we can support Chase moving forward and grow it. In the female business, we talked about doubling the amount of Chase. We'll be leveraging specific strategies like fabric-platforming to help us get there, as well as collaborating with our vendors and reserving the open-to-buy to make sure it happens. The numbers we quoted were specific to female. As I mentioned, it's not as big a piece of the male assortment today, but we expect that to continue to grow as well, so on both sides of the aisle.

And, Joanne, could you leverage that across all types of products or more so in certain buckets than others?

I'd answer that. It really is across the assortment, but more intense in what we call real fashion categories. Fashion tops is a huge percentage.

And now we'll go to Barbara Wyckoff with CLSA.

What's happening with the kids business? Can you talk about the sales and margins there, thoughts on consolidating some locations into the adult store? And then, just the second question, what percentage of the Back-to-School assortment was pre-tested in A&F and Hollister?

Okay, kids business. The girls business has been tougher than the boys business. I think we're just getting on our feet in terms of an assortment there that is clearly differentiated from the adult assortment, and I'm happy with where we're going. We're opening a kids store by the way in London on Saturday, which I have to say is about the cutest store in the world. If you're in London, you've got to stop to see this thing. But I think, looking at that store, you can see where we're taking the kids business. Clearly have a personality, has more personality of its own. We are testing carve-outs in the kids business.

Yes, and I can jump in on that carve-out test. We're -- in an effort to drive productivity in our boxes, we've -- we're testing about 10 stores, where we've put kids into the adult stores. And I would say, during the test, we're watching to make sure we get the expected increase in productivity within the store.

Third, okay. Percentage of Back-to-School assortment, I can't give you an exact percentage. We look at testing in 2 ways: One, electronically; two, in-store test. That increase is increasing. I've said we're going to be 100%. It's not possible to be 100%, but it's a very high percentage.

Now we'll go to Simeon Siegel with Nomura Securities.

This is Gene Vladimirov on for Simeon. I was wondering if you could talk a little bit about your thoughts about the promotional environment out there. I believe you mentioned promo activity is a bit lower than you expected. So I was wondering if you expect that to continue and how your strategy may have changed going into the back half of the year.

I think, Gene, we're assuming that the environment will remain promotional. I think there are some indications that it may become less so. And certainly, as we look to the back half of the year, inventory levels are probably going to be more rational and normalized than they were a year ago, which should help to see some year-over-year relief. But generally speaking, we would expect the environment will remain fairly promotional.

And next we'll go to Jennifer Davis at Buckingham Research Group.

Most of my questions have been answered. But I was wondering if you could just talk a little bit about, I guess, what percent of the assortment is logo right now, so that we can just kind of get an idea around that? And then, just some color on the impact of the cost savings on the second quarter. And if you could remind us how much they were in the first quarter? Hello, is that anyone there?

One moment, while we re-establish the line again. [Technical Difficulty]

Okay, please go ahead.

Jennifer, I think you were just starting your question, so if you could go back to the top on that, we would appreciate it.

Ms. Davis, please go ahead with your question.

Why don't we go to the next question, operator.

Ms. Davis, I'm sorry, was that you? Go ahead.

Can you hear me?

Yes, yes.

Yes.

Okay. Sorry I'll put her on the line.

Sorry about that, I somehow got disconnected. I was just wondering if you could give us a little bit of color on the amount of savings you realized in the second quarter and also remind us the first quarter. And then, what percent of the assortment right now is logo, just to give us an idea around that, please?

Yes, I guess on the first part, I think you can see on the face of the statements the magnitude of the savings from -- in Q2, which was a little over $50 million total expense reduction for the year versus last year. And obviously, you have the comparable number from the Q1 reported figures. I think, as we've said, we've taken out the overall expectation from profit improvement initiative in terms of savings from $175 million to at least $200 million. That benefit, on a full year basis, is less in the back half the year, particularly in the fourth quarter as we start to lap the realization of benefits, when we launched many of these initiatives in the latter part of 2013.

The percentage of the assortment, which is logo, I can't give you, but I believe if you go into the stores and look, you have to look pretty hard to find it.

And next we'll go to Susan Anderson with FBR Capital Markets.

I was wondering if you could talk about the inventory. It looks very clean, which is good, but is it at all holding back the comp, or do you feel like you have enough ability at Chase? And then also, on the social media campaign, it looks like you guys are doing a better job. Do you guys feel like you're getting a better return on that versus historically?

I'll pick up the inventory question. We are happy with where we are in terms of inventory levels. We don't think the inventory is holding back our comps. As we've talked about on this call, the Chase strategy is working. It gives us much more agility in our assortment and allows us to get into the things that are working. So we feel good about the content, as well as the level of our inventory.

Sure. And on the second part of the question, I think we've continued to dial up those investments. We think we have seen a benefit in terms of brand engagement and brand sentiment. I think, as Mike alluded to in the prepared comments, we would expect there will need to be a sustained period of investment to drive the full benefit from these new marketing efforts that are underway.

Now we'll go to Richard Jaffe with Stifel.

Just a follow-on question. The current penetration or percent that you described as a logo business in 2Q, and what you think it will be in 3Q; let's say the rate of change you anticipate as a percent of total?

The rate of change, Richard, it's about -- we're looking at halving that business in 2Q and 3Q.

Wow, okay. And just a follow-up. Sorry?

A big number, sure.

Yes. No, it's exciting. And the store count, do you see that the store editing an ongoing process? Obviously, it's been very effective the last couple of years. Can you anticipate it going into 2016 and 2017?

Yes, absolutely, Richard. I think we said in the prepared remarks, as well as 60 closures this year, we would anticipate a similar run rate for the next 2 years. Although, we have significant flexibility around that since we have a very high number of lease expirations up between now and the end of 2016. And then either way, we plan to keep significant flexibility beyond that. So as of today, we would anticipate roughly another 60 or so closures in each of 2015 and 2016 beyond the 60 closures this year.

We'll take our next question that'll come from Liz Dunn with Macquarie.

I had a question on the expense savings. I guess could you just refresh our -- refresh us on how much is coming from COGS? How much is stores and distribution? And how much is marketing and G&A? As I look at it, it looks like the bulk is towards the stores and distribution. And as I look at marketing and G&A over the last kind of 6 or 7 years, it's up 25%, which is more than twice what sales are up. So is there more opportunity on marketing and G&A?

Yes, so on the piece that's going into COGS is relatively modest. I think, we'd indicated at the beginning of the year, probably in the order of $10 million on a full year basis. That number's move around a little bit since then. So the great majority of the $200-million-plus number is in expense and the great majority of that is in the stores and distribution line with a lesser component in MG&A. We have said we anticipate some additional savings beyond the $200 million in 2015, but I think it's a little too early to be too specific on that.

As you've invested in marketing, have you found offsets in sort of some of your more traditional marketing efforts?

Yes, we have. Yes, and there is some reduction of offsetting components in marketing.

And we'll take our final question from John Kernan with Cowen and Company.

Just a quick question relating to your DTC business. It looks like, on our numbers, it could be as big as 25% of your total business by the end of the year. As you close more stores in 2015 and '16, how big do you think DTC can get and expect? It already seems like it's higher than any of your competitors. And then, in terms of the fulfillment centers in all of the major Asian markets, do you expect any incremental expenses associated with the rollout of those?

Yes, so on the first question, I think back in our Investor Day last November, we referenced DTC getting to 25% of the business over time. I think we then said, earlier in this year, that we thought that number was likely conservative, and we see it continuing to go higher. I don't think we're in a position where we can say a specific percentage. I think there's a lot of factors that will flow into that, but we certainly believe very strongly that DTC is going to be a growing part of our business over the next few years, and we're investing behind that as a very high priority. In terms of the fulfillment centers, no, most of that is really behind us in terms of the investment we've made to set that up. And, in fact, as I alluded to in an earlier question, that fact that we now have the fulfillment capability within Asia lowers our shipping and handling expense, which we think is a positive in terms of what that can help us do with the business going forward. But we don't anticipate significant incremental expense as a result of setting up those fulfillment capabilities.

What I'd like to add is that the really thrilling part of DTC is the international growth.

And that concludes today's question-and-answer session. I'd like to turn it back over to our speakers for any additional remarks.

I think that's it. Thank you.

Okay. Then that will conclude today's conference. We thank everyone again for their participation.

Thank you.