Good day, and welcome to the Abercrombie & Fitch Third Quarter Fiscal Year 2015 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.

Good morning, and welcome to our third quarter earnings call. Earlier this morning, we released our third 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 a replay may be accessed through the Internet at abercrombie.com under the Investors section. The call is scheduled for 1 hour. Joining me today are Arthur Martinez, Executive Chairman; Jonathan Ramsden, Chief Operating Officer; Joanne Crevoiserat, Chief Financial Officer; Fran Horowitz, Brand President of Hollister; and Christos Angelides, Brand President of A&F and abercrombie kids. After our prepared remarks, we will be available to take your questions for as long as time permits. Before we begin, I remind you that any forward-looking statements we may make today are subject to the safe harbor statements found in our SEC filings. With that, I hand the call over to Arthur for some opening remarks.

Thank you, Brian, and good morning, everyone, and again, thank you for being with us this morning. Our third quarter sales and adjusted operating income exceeded expectations coming into the quarter. A number of key metrics turned positive during the quarter, including comparable sales for our Hollister brand and across both our international businesses. This provides the strongest validation yet that our initiatives are taking hold and we are on the right course. In addition, we delivered substantial improvement in our gross margin rate, which resulted in meaningful adjusted operating income growth over last year on a constant-currency basis. While there was a benefit from a lower tax rate, the majority of our earnings improvement came from quality growth, resulting from improvements in our sales performance and efficiencies throughout our business. We recognize that we still have much to achieve, particularly on our journey to improve the performance of the Abercrombie brand and more generally to drive more robust traffic to our stores and our website. While conversion has been strong, traffic has been challenging. We remain intensely focused on continuing to execute against our strategic initiatives to deliver a compelling customer-focused shopping experience and assortments based on clearly defined brand positions. We are pleased with our progress but remain cautious as we move into the fourth quarter, given the mixed signals that are coming from the sector. Regardless, we are confident that the work we are doing will continue to provide the foundation for long-term growth and profitability. Now let me hand it over to Jonathan to provide an update on our strategic initiatives.

Thanks, Arthur, and good morning, everyone. As Arthur mentioned, our results for the quarter validate that we are on track with our ongoing efforts to turn around our business. Many key indicators turned positive during the quarter, and we delivered meaningful adjusted EBIT growth on a constant-currency basis for the second consecutive quarter. Of particular note, our European business comped positively for the first time since 2011, with most of our individual stores comping positively. And while the ever-important holiday season is still ahead of us, we are confident that our strategies will support continued progress. With regard to our strategic initiatives, I am just going to give a brief update on a few items today, since we expect to provide a more comprehensive update at the end of the year, along with our outlook for 2016. Beginning with customer centricity. We continue to be very pleased with the strong performance of our remodeled Hollister stores. We now have 13 remodeled stores and the group continues to post strong results relative to the control group. In addition, we opened our first 2 new A&F prototype stores during the quarter, and we will read the results carefully as we look to expand this concept to more stores. On the digital side, we are very pleased with the results from the investments we have made in mobile, which now accounts for approximately 60% of all online traffic and is posting double-digit increases in conversion year-over-year. We now have close to 3 million cumulative downloads of our mobile apps. And in our ongoing efforts to support the shift to mobile, we recently released upgraded iOS and Android apps which are getting strong user ratings. In addition, our omnichannel investments are delivering strong returns, with order-in-store contributing significantly to our e-com growth. We look…

Thanks, Jonathan, and good morning, everyone. After recapping our third quarter results, I'll provide an update on our outlook for the fourth quarter. In the third quarter, as both Arthur and Jonathan mentioned earlier, continued improvement in the comp sales trend, coupled with a higher gross margin rate, resulted in significant growth in adjusted operating income over last year on a constant-currency basis. Net sales for the quarter were $879 million, approximately flat to last year on an FX-neutral basis. Changes in foreign currency exchange rates adversely impacted sales by approximately 4 percentage points or $33 million. Total comp sales were down 1% for the quarter. On a sequential basis, comp sales trends improved broadly from the second quarter, particularly in Hollister and internationally, where they turned positive for the quarter. As shown on Page 5 of our investor presentation, by brand, comp sales were down 5% for Abercrombie and up 3% for Hollister. By category, we continued to see significant comp sales trend improvement in the tops business, particularly within female tops, where comps were strongly positive. And while overall male business lagged female, we saw continued strength in jeans in both genders during the quarter with positive comps across all brands. By geography, comp sales were down 3% in the U.S. and up 1% in international markets. We continued to see considerable improvement in international markets with comps turned positive for the quarter in Europe, driven by conversion with strong customer response to our assortment and pricing adjustment. Across brands, the direct-to-consumer and omnichannel business for the quarter accounted for approximately 21% of total sales, with growth over last year in both our U.S. and international businesses on a constant-currency basis. Excluded from our results for the quarter were net pretax charges of $10 million compared to $20…

Thank you, Joanne, and good morning, everyone. I would first like to thank the Hollister team both on campus and in our stores around the world for their continued dedication, effort and optimism. We are encouraged by continued improvement in our results. As Joanne noted, we achieved continued sequential comp improvement and a return to positive comp in the third quarter. By geography, we delivered positive comps in each of our key volume regions of the U.S., Europe and China. In the U.S., we are particularly pleased that our comp sales were largely driven by higher AUR, as we continue to reduce our reliance on promotional frequency and depth and continue to benefit from lower levels of clearance inventory. In Europe, we returned to positive comps overall with positive comps in nearly every country. Consistent with last quarter, we continue to see strong conversion driven by our improved assortment and updated pricing architecture. In China, we continue to see comp sales growth. By category, our performance is driven by continued sequential improvement in our assortments for both genders with the largest improvement coming from our girls' tops business. We saw particular strength in our knit business and achieved positive comps across all girls' tops category. Our girls' denim business remained solid as well. On the guys' side, we achieved modest sequential comp improvement from the second quarter. Our denim and other long bottoms businesses remain strong, complemented by a strong sweater and fleece business. Across all categories, we are seeing the benefits of improvements we've implemented around the design, assortment and buying process. With our back-to-school floorset, the customer responded to the steps we took to deliver a more thoughtful on-brand and balanced assortment. This was evidenced by strong conversion and higher regular price sell-through and resulted in substantial gross…

Thank you, Fran, and good morning, everyone. Although comp sales declined in the third quarter versus last year, we did deliver continued sequential comp improvement in the Abercrombie brands. The sequential improvement in the adult business was driven by women's. And in the kids business, it was driven by boys. A&F men's underperformed, where we need to do more work to further evolve the assortments and concentrate on newly designed exciting products. Geographically, we achieved sequential improvement across all 3 regions of the U.S., Europe and Asia. Throughout the quarter, we also made progress on reducing our overall discount to ticket across all channels, while still ensuring it remained competitive in a pretty highly promotional environment. As a result, our margin dollar improvement outpaced the sales improvement for the quarter. During the quarter, we continued to make progress on our strategic initiatives, including increasing our focus on the customer experience. We now have opened a small number of new prototype stores during the quarter that offer improved lighting, an open shopping experience and a format that allows our store associates to engage with more of our customers. We also continue to enhance our store operating model with programs designed to increase the depth of our associates' product knowledge and support high levels of autonomy and decision-making within the stores. These initiatives provide further opportunities for the field associates to engage with customers and make decisions that derive from that engagement. Regarding brand reach, we have expanded our wholesale partnerships through launching a small collection of both adult and kids products with Next in the U.K. in early August. Results have been promising. In addition, we executed the rollout of extended sizes for younger ages in our kids business. The entire online assortment and half of the kids’ in-store assortment is now available in sizes for children aged 3 to 6. We're encouraged by the results, and we will expand this as we move through the fourth quarter. We also featured a select assortment of kids’ products on the adult website during the quarter. Results have been positive in both new customer acquisitions and average transaction values. We're also continuing the expansion of kids stores within the adult space and have opened 13 new locations since early October. Finally, I'm pleased to welcome Kristina Szasz as our Head Designer for women's. She brings nearly 20 years of industry experience to the brand, most recently as design director for denim at Karl Lagerfeld and Tommy Hilfiger at PVH in Europe. We are already seeing the impact of her passion, energy and enthusiasm within the teams. Indeed, I've been impressed by the attitude and response of all members of the team while we go through this repositioning phase. In closing, while progress has been slower than we had hoped, we believe that the actions we are taking will drive continued sequential sales improvement in the fourth quarter. With that, I'll turn the call over to Brian.

Thanks, Christos. This now concludes our prepared comments. We will be happy to take your questions. Thank you.

[Operator Instructions] Our first question today will come from Matthew Boss with JPMorgan.

So a question for you. As we break down the operating expenses, you pulled out about $400 million from the base the past 2 years. So as we think about the return to positive comps here, what's the best way to think about potential acceleration of OpEx, any potential buckets of reinvestment to drive the business and the top line go-forward?

Hi, Matt. This is Joanne. In terms of OpEx, we are dedicating -- dedicated to continuing to find efficiency and productivity improvements in the company. We are -- we do believe we have continued opportunities to drive efficiency. The outlook that we provided for Q4, the big drivers of flat dollars on flat sales outlook on and comp sales line are really investments in DTC, offset with some continued benefits from FX rates. Within and underneath that, there are some investments we continue to make in marketing and, as I said, in DTC. And we have found savings to offset those. So we'll continue to look for productivity improvements as we move forward, but we don't -- I won't -- we don't typically comment on those until we -- they are more certain. But we have an effort here in continuous profit improvement that will be ongoing and deliver benefits, we believe, into next year and beyond.

Great. And I just had a quick housekeeping follow-up. As we break down the fourth quarter gross margin guide, what would be the puts and takes in terms of AUR, AUC and FX? And then just larger picture, what kind of promotional backdrop do you have embedded into the forecast?

Yes, you've hit on the 3 moving parts in fourth quarter margin outlook. We are lapping the decreases that began last year in AUC. So we don't see that as a benefit in Q4, as we've seen for the previous 3 quarters this year. And as it relates to FX, although FX, at our current estimates, will be abating somewhat in the fourth quarter, we also had benefits from hedging last year that we won't be anniversarying to the same degree. So all-in, we expect the FX headwinds to continue to be pretty consistent to what we have seen for the balance -- earlier this year. In terms of AUR, I think we're -- our outlook includes a realistic expectation for AUR growth, given what is shaping up to be a potentially challenging and promotional fourth quarter.

Next is John Morris with BMO Capital Markets.

I think my first question is picking up on the commentary about -- I think this is for Christos, the commentary about giving higher levels of autonomy and decision-making in the stores, which I think is interesting. Can you give us a little bit more color on that where you're going so far in terms of the autonomy extending to product, product positioning and/or in-store markdowns or anything along those lines? And could you be considering extending some of that autonomy to the Hollister division as well, if not already? And then my quick follow-up is the plan for marketing changes next year, given kind of the improvements that you're seeing, what are you thinking about in terms of marketing for next year? Could you be putting even a little bit more spend behind that in terms of the marketing positioning, et cetera?

So it's Christos. So in terms of high level of autonomy, it primarily revolves around the store associates' ability to move product placements in the store. So putting product in positions that we know customers find favorable, best-sellers nearer the front of the store, for example, or items that we feel are going to sell very strong in accessible locations. But it also allows associates to change their staffing model, up or down, manage queues and manage the fit rooms. And perhaps more importantly, it means that the associates are motivated to engage with customers. The impacts that are happening in Abercrombie are primarily the same in Hollister as well.

Great. And on the marketing?

John, it's Fran. Yes, so we had -- we initiated the same at Hollister, obviously, at the beginning of this year. We spoke about putting the customer at the center of everything that we do, and our store initiatives really support that. In addition, we had talked earlier about even an incentive plan that we've instituted that has been successful for the associates to really help them understand what is important in their business and the KPIs that drive their business. So for both brands, it's been a successful initiative.

John, on the last piece, it's too early to comment on specific marketing expenditure plans -- or marketing plans more generally for 2016. We're continuing to work through this brand-positioning project. We expect to conclude that in the relatively near future, and we do think that's going to be a very important component of driving engagement and traffic back into the stores. But it's too early to say exactly how we will communicate that positioning, but that will be an important part of our plans going forward.

Neely Tamminga, Piper Jaffray, has her next question.

So a couple of questions here from us on the holidays. So we've noticed in your -- right in front of the cash wrap at Abercrombie you've been bringing in holiday, it looks like a little bit earlier this year versus last year. Can you speak to some of the plans there? Are you feeling like you actually have enough inventory for holiday based on what we're seeing? And then Fran, from -- very specifically on denim, we've noticed that you guys have kind of migrated from $25 denim up to BOGO 50%, which kind of seems to take the out-the-door pricing up higher. Will we see this potentially go back down to $25 around Black Friday or any sort of Black Friday plans you could offer for us it would be helpful as we navigate it?

Hi, Neely. I'll take the first part. Across the business, we did set a little bit earlier for Christmas this year across both brands. That's just part of the normal cycle of reviewing floorset dates, so you would have seen that in the stores. With regard to the second part of your question, yes, we feel we have appropriate levels of inventory coming into the fourth quarter. I'll let Fran take that denim question.

On the denim piece for Q3, we did navigate between $25 jeans and BOGO jeans as part of our strategy, which we will continue to do throughout the quarter for Q4.

And I think on the last part, we never give forward-looking commentary on our promotional plans.

Our next question will come from Betty Chen, Mizuho Securities.

I was wondering if you can talk a little bit about what are some of the opportunities for both brands going to holiday season. I know, Fran, you cited some nice improvement in many of the product categories: knit, denim remain strong. Are there some other opportunities that you feel like are pretty significant call-outs year-over-year? And same thing at the adult A&F brand, Christos. Can we potentially see the men's business start to evolve with the fourth quarter? Or is that more 2016? And any sort of big call-outs for women's opportunity would be helpful too.

Betty, it's Fran. As far as Hollister is concerned, yes, we certainly have seen some very significant improvement, particularly in our girls' tops area consecutively last few quarters as well as having a strong denim business, as you mentioned. As we go into Q4, we believe we will continue to see improvements.

In terms of Abercrombie, Betty, I think our Christmas gifting is going to be very important as we go into Christmas and also our sleep collection, seeing very good initial signs from that area. In terms of the men's in the fourth quarter, I think we'll see an improvement, but actually the significant change, I expect, will come in 2016. You may recall we've appointed Aaron Levine as the new men's design lead, and his collection will start to come in, in the new year. I've been very impressed with some of the first ideas I've seen.

And then can I just follow up in terms of weather? Some of the retailers have called out sort of weather being uncooperative so far in the season. How do you feel about your positioning in some of the thicker-weighted items like sweaters and outerwear? I know inventory was clean coming into the quarter, but just curious on some of the cold-weather items.

Yes, it's very disappointing isn't it, when weather doesn't cooperate. It's really annoying. So -- well, we're managing -- every week, weather-dependent, there are issues. And it's our job to manage those issues. It's not something that we talk about on a day-to-day basis, to be honest with you. Our job is to manage all of those conditions. So yes, we have outerwear, we've got sweaters. In some areas, it's light; in some areas, it's heavy. But we'll have proposals to get through those.

Our next question will come from Simeon Siegel with Nomura Securities.

This is Gene Vladimirov on for Simeon. Can you give us any color on what drove the positive comp internationally? And any divergence you may have seen in the trends between Europe and China? And then maybe how you think about the opportunities there going forward?

Sure, Simeon. I would say it was a broad-based sequential improvement across the international business across brands and across channels that we saw, stores and e-com. We gave a couple of data points earlier on. So I think if you break it down a little further, we saw strong conversion improvement was the biggest driver of it, which we view very positively as a reaction to the product and pricing, particularly in Europe. But it was fairly broad-based. I mean, there were some countries that were outliers, but overall the improvement was broad-based from the prior quarter.

And then a quick follow-up. Just wondering if we can get some color on the wholesale business, like how big do you see that getting over time and how broad a distribution you would like to see there?

Yes, it's early days for us on wholesale. We've got these 2 relationships in place today with Next and ASOS, predominantly in the U.K., although ASOS does serve an international customer outside the U.K. as well. As we said in the prepared remarks, we're pleased with the progress we've made. We're going to get a nice contribution from that business this year, but I think it's too early for us to say at this point how significantly that could ramp up over time, but we're certainly happy with what we've seen so far.

Our next question will come from Kimberly Greenberger with Morgan Stanley.

I want to dive a little bit into the average unit cost savings. It sounded like you expect the AUC savings to diminish, I guess, after the fourth quarter. And I'm wondering about any potential savings in cotton in 2016. And then just a clarification for Joanne. I think payables rose about $106 million year-over-year, but your inventory fell $16 million, so we were just wondering what the cause of the divergence is?

So on AUC savings, Kimberly, we have been working to reduce AUC really with product reengineering and have seen the benefit of that for about the past 4 quarters. We began seeing the benefits in the fourth quarter last year. Cotton certainly is an element of that, but also product reengineering. As we move into Q4 this year, our outlook takes into account that we're going to be lapping those savings. So we don't expect to see the same AUC savings that we've experienced year-to-date as we come back around. As we move toward, certainly, raw material prices are a function of the equation in AUC moving forward. We're also looking at investing back into the product in certain cases, and we'll do that on a case-by-case basis, where we believe we can get paid forward in terms of AUR growth. In terms of payables, we did make an adjustment in our terms. We've offered some supply chain financing for suppliers to take advantage of and also adjusted our payables terms. In addition, we mentioned the in-transit increase year-over-year related to the floorset shift and that also factored into our payables balance being up this year.

Next is Janet Kloppenburg, JJK Research.

Just a couple of questions. You had said that you felt that your fourth quarter assortments or your holiday assortments would -- were really where we should see some major change. You were encouraged about the improvement there. So I'm wondering if you could talk to any improvement you might have seen when those assortments hit the stores in October or maybe give us some idea of how comps trended during the quarter? And on the gross margin guidance, you are up against a pretty significantly easier comparison in the fourth quarter than you were on the third quarter. And I know the AUC obstacle, but I'm wondering if that just reflects the fact that there's a lot of inventory on hand at your competitors? And you're worried about promotional activity? Or if your promotional plans may be different? If you could help us with understanding that, that would help a lot. And also, Joanne, if you could give us an idea on your outlook for gross margin for the year now, how should that come out?

Hi, Janet. Good morning, I'll take the first part one, and then Joanne will take the other part. So in terms of improvements in the assortment, we typically don't comment on the cadence within a particular quarter. I think we're continuing to make improvements and refinements to the product, and we have a level of confidence that we're going to continue to see a return from that, but we can't really comment more specifically than that.

Yes, in terms of margin guidance, I think I spoke to earlier the moving parts that are impacting our guidance. I think the fourth quarter margin rates reflect and our outlook reflects, as I said, lapping the AUC increases from a year ago. We do continue to expect FX headwinds. And to your point, we expect that the fourth quarter will be challenging, given some of the commentary we've heard in the sector, some of the inventory levels across the sector. We do feel good about our inventory position, as Jonathan mentioned earlier going into the quarter, but we know the fourth quarter as always is a very competitive quarter and that is what our outlook reflects.

But FX will be less pressured in the third quarter. Is that correct, Joanne?

No, we do see the -- based on what we know today, obviously, and what we can see today in terms of currency exchange rates, we do see it abating somewhat as we start to lap the beginning of the big declines from a year ago, Janet, but we do have hedging benefits that we're up against from last year that we won't be able to anniversary to the same degree. So all-in, the FX headwinds we see are -- as pretty consistent is what we've seen for the balance of the year.

Next is Susan Anderson with FBR.

I'm wondering if you could talk about the logo business, maybe the performance that you're seeing in the U.S. and international now that you brought it back. And was there any impact at all since you are now cycling the exit last year but yet you brought it back?

What was the second part of the question? I'll just -- I'll kick it off. I don't -- we didn't bring logo back. We brought it down to a level that we thought was appropriate in our assortments. And what we have said is logo will continue to have a place in our assortments. And we did see improvement across the tops business, in general, particularly in female tops. Logo was a part of that, but the improvement that we saw was very broad-based. And on a go-forward basis, we're reviewing and evaluating the logo business as we would any other part of our business. I will turn it over to Fran for any -- or Christos.

Sure, just to echo what Joanne said: logo is a piece of our business. We are currently figuring out to what degree it is important. But the customer has voted continuously that they do want logo both in the U.S. and internationally. As we move forward, we will figure out the appropriate levels, but it will be a part of our business.

Susan, just quickly from an Abercrombie point of view, I think it's very encouraging that customers are happy to buy product that have got the logo of both brands on the front of them. I think that's a very positive message.

Great, that's good news. And just one follow-up on the weather question. So is that kind of what's adding your cautiousness around fourth quarter? Or is it more just the promotional environment out there? And then maybe if you could just give a little bit more color on how your trends are quarter-to-date, if it's been impacted by weather? But it seems like from your comp guidance, you still feel pretty good about the sequential improvement.

Yes, I wouldn't say that our outlook is specifically related to weather. We believe that it is realistic. Our outlook for fourth quarter is fairly consistent with where we were in August when we provided an outlook for the back half. We have a lot more data points at this point, including both our performance in the third quarter as well as what we're hearing from competitors. And at this point, we don't see any reason to be any more bullish on Q4.

Marni Shapiro, with The Retail Tracker, has her next question.

And Fran, I'm so excited about the Geotag at Snapchat. It's my favorite mode of communication. So it's so efficient.

I'm glad you're enjoying it.

I have a question about what I'm seeing online and in stores. I spend a lot of time online and a lot of time in stores, and it's very easy to navigate online and find what's new and see what's new. And sometimes, you arrive in the stores, both at Abercrombie and at Hollister, and it's not so easy to find the merchandise. And it's not saying that it's specifically online-only goods. And I'm curious, is this selling out too quickly in the stores? Is there a way to better connect those dots? Or are these things that haven't hit the stores yet or will never -- actually will never hit the stores?

Marni, I'm not sure what you're referring to in terms of -- are you saying it's difficult to locate online-only goods in stores? Is that what you...

No, no, no. These aren't -- this isn't merchandise that is online only. So it's -- if you shop like a customer and I go online and I look for things and I'll create lists to go into stores to look for as a customer would. It's been very difficult at your stores over the last couple of months to find these things. And I'm curious, are they not in these stores? Are they sold out? Is it the way the stores are merchandised? I guess the point is, is there a better way to close the loop? If mobile traffic is up so strong, we know she's shopping at home online, isn't the dream to get her into the stores to buy it? But she has to be able to find it.

So Marni, I think, overall, there's no generic -- I mean, without knowing the specific stores you've gone into, it's hard to comment on exactly what you've seen, but there's no generic reason why you should be seeing less availability in store than online of current merchandise. Obviously, we do now have pretty good omnichannel capabilities. So if you're looking for a particular item that's not in store, we do have order-in-store enabled in pretty much all of our U.S. stores at this point. But maybe we could follow up with you offline about the specific stores you went to and understand that point a little better because we -- I don't think we're clear on why you would be seeing that.

Right, maybe it is something to follow up online. To me, it becomes a bit of a disappointment when you come into the stores as a customer and you can't manage to find everything you're looking for. So if I could just flip to one other quick question then, if you wouldn't mind. The little kids in the Abercrombie stores, is this helping to drive traffic as well as sales?

It is, although it is mixed across several stores that we have. But in general terms, it is helping to bring into the stores a new customer. I think they're lapsed customers and, in general terms, it is helping to drive the sales, yes.

Our next question will come from Brian Tunick with Royal Bank of Canada.

I guess 2 questions. One on the international price adjustments. Have they been rolled out now to all the countries? And were you guys pleased with the four-wall margins or dollars you got from the sales improvement? Did that help offset the AUR declines on the international side? And then the second question, I think on the balance sheet, did we see you guys bought back some stock here in the quarter? And just sort of remind us what your philosophy is there on minimum cash and so what are you thinking about for the balance sheet and inventory as we end the year?

So Brian, on the international price adjustments, we did roll that out broadly with the back-to-school floorset, so the end of Q2, it impacted all of Q3. We are pleased with the customer response to those adjustments, both the pricing adjustments and our assortments. As we mentioned in our comments, we saw benefit in conversion and return to positive comps in our international business. So we believe that those were well received by the customer. We also mentioned that AUR on a constant-currency basis essentially flat in our international markets in the third quarter, which with higher full-price selling and mix of business offsetting those price declines. So we are happy with the four-wall margin. Obviously, with the flat AUR, we were pleased with the margin performance in the international markets overall. As it relates to the balance sheet, we did repurchase shares. Our capital allocation strategies have not changed. We -- our first priority is to invest in our business and projects that provide the highest risk-adjusted return. And then beyond that, return excess cash to shareholders through dividend and share repurchase. We make our share repurchase decisions on a quarterly basis based on our liquidity, outlook and as well as valuation in the market. So we did repurchase shares in the third quarter. As it relates to forward view, our cash targets are -- we believe, having about $300 million to $350 million in cash on the balance sheet provides the cushion that we need to operate our business. And then from an inventory perspective, we continue to expect inventories to be down as we move through the fourth quarter.

And if I could just throw in one more. On the store closing side, obviously, Hollister looks like it's stabilizing here. Has your perspective at all changed on what the right size of the Hollister fleet should be or how many stores come up for Hollister renewals in the next 2 or 3 years?

Brian, we still have a very high percentage of our leases up for renewal the next 2 to 3 years, so we have a lot of flexibility. I would say, at this point, our view has not changed. We've indicated 60 closures across brands this year or something in that order of magnitude and likely continuing at that pace for the next couple of years. But obviously, we continue to review that as we move forward and it's a store-by-store decision, ultimately, based on the projected economics of each individual store. But at this point, I would say no significant change in our outlook there.

[Operator Instructions] Next we'll hear from Richard Jaffe with Stifel.

And I guess a couple of general questions. The fashion trends that you see working particularly on the women's side, could you provide a little bit more color on what's working? And then just a follow-on, if you could spend a minute on the outlet opportunity?

From a Hollister perspective, Richard, we've actually had nice reaction to all tops categories, that's inclusive of knits, wovens and sweaters as well as fleece. So we've had a pretty consistent reaction over the past 2 quarters and nice comp increases in those categories, as we mentioned in the last call and further today positive comps for the first time in a very long time and 2 consecutive quarters of that. So the customer is responding very nicely to product that we're putting out there.

From an Abercrombie point of view, Richard, I'd rather not call out specific fashion trends actually from a competitive sensitivity point of view other than to say that primarily it's driven in the tops area in the same respect as Hollister.

And there, Richard, just on the outlet side, I would say, overall, we're taking a balanced approach to outlets. We're certainly pleased with the performance we're seeing in the converted MFO and the new MFO outlet stores. We do anticipate more conversions and openings in 2016. But obviously, we are also mindful of the balance between our outlet stores and our full-price stores. So that will continue to be something to which we'll pay close attention.

And our next question will come from Paul Lejuez with Citi.

On the improvement in international, just curious if that was driven more by better sales to local customers or has there been an increase in tourist shopping and spending in some of those locations? And then just secondly, curious about your initial thoughts on CapEx for next year?

Paul, on the international improvement, yes, most of our business internationally is local, particularly in the mall-based stores. We obviously have some flagship stores in more tourist-based locations. But tourist business in our international business is a relatively small slice of the business overall. So predominantly that improvement has been driven by the local customer. I'll hand it over to Joanne for the CapEx question.

We are currently evaluating our CapEx budgets and we'll -- I don't have a lot -- I can't report a lot today. But we are in the process of evaluating CapEx budgets in light of a lot of the projects that we have initiated this year, evaluating the performance, and that -- those will all be included in the outlook that we provide at the end of the year.

Jonathan, just a follow-up, can you share the performance of the flagships versus the mall stores internationally?

Yes, we typically don't get into that level of detail. I would say in terms of the overall impact of the comp of the flagship and tourist stores, it wasn't a material impact relative to the overall trend of the business.

Omar Saad with Evercore ISI has a question.

This is actually Westcott Rochette on for Omar. Can you speak to your online business? I think you said it was up both international and in the U.S. I know you called out China, but can you speak -- give a little bit more color about the growth in the online? I think that that's been under a little bit of pressure and seems like it's turned.

Yes, it was up both domestically and internationally. Again, we don't typically sort of parse it out much more than that. And we talked in the prepared remarks about strong growth in China as we lap the -- as we -- even after we've lapped the localization there. As you probably recall, about a year ago, we went to a local fulfillment and local translated websites in China and for Asia as a whole and that gave us a very significant boost to the business, which has obviously also been augmented by the increased store presence growing brand awareness in the region. So overall, we saw growth across domestic and international, strong growth in China, and we typically don't parse it out much more than that.

And we'll take our next question from Anna Andreeva with Oppenheimer.

This is Janet Lynne on for Anna. We were hoping that you could speak to some of the changes going on at the A&F brand and any more detail on the prototype remodel. Also I know at A&F, there have been some ongoing adjustments to pricing. If you could speak about the progress of these initiatives and maybe an update on other ways the new leadership is affecting the business?

So in terms of the prototype, Janet, so we opened a couple of stores. They are more open in feel, slightly lighter in terms of the ambience. And we made adjustments to the way that we laid the product out. So far, the results are encouraging, but it's very early days. In terms of pricing: pricing really is an ongoing thing that we look at on a continual basis. There's no strategic shift in pricing other than we have to be very mindful of our brand position and we have to be competitive. And then in terms of the organizational structure and people. Quite a few hires obviously are now embedded in the business, and they're all making an impact on the improvements that hopefully we'll see in the brand next year.

Okay, great. And if I could just sneak in a follow-up. I know you said traffic has been a challenge. What do you think -- I guess, was traffic stronger at A&F versus Hollister? Or what were your trends versus the mall?

The only thing we're commenting on, obviously, that across U.S. retail in general mall traffic has been challenging. I don't think that's not any breaking news. And that's something we certainly experienced as well. And in general, the improvement we've seen in our business has been from conversion rather than traffic. So it's important for us going forward to start to drive more robust traffic as Arthur alluded to in the opening comments.

Our next question will come from Oliver Chen with Cowen and Company.

We just wanted to ask you regarding the balance of the assortment between some of the attractive price point essentials versus novelty. Like, how do you feel about the evolution of that? And also, regarding the apparel execution, I'm just curious about how the integration has been amongst the categories as you become more and more of an outfitting kind of whole-picture destination? Just wanted your thoughts there.

Well, like you say, the balance of the assortment is an evolution. It's a continual process, and it's something we change on a reactionary basis to our customers' need. Essentials is a very important part of the mix, but so is more improved and higher design-content product. So all I can say really, Oliver, is it's something that's a continuing process.

From a Hollister perspective, it's part of our good-better-best pricing strategy, and we are currently finding success both with our entry level with the must-haves as well as our fashion offerings. So it's been a nice balance between the 2.

Okay. And women's tops is really impressive that you've had good momentum there. What's next for that category? And is this early innings of this positive response that you're seeing?

We, too, are encouraged by the positive response, clearly. And as we discussed several times there, our conversion has been up significantly domestically and internationally, which signals that the customer likes what we are putting out there. And we'd like to believe that, that will continue.

We have time for one final question, and that question will come from Lorraine Hutchinson with Bank of America Merrill Lynch.

Joanne, just looking at where currency rates are today and also taking into account your hedging, what kind of pressure do you expect on both the top line and the gross margin for next year?

Yes, Lorraine, and some of that remains to be seen as we move through the quarter. But what we can see today from a top line perspective, we do see the FX pressure abating but still being a headwind. So abating from what we've seen in the prior few quarters. However, as you mentioned, the hedging benefits, we had larger hedging benefits last year in the fourth quarter as we were just stepping into these rate declines that we don't expect to anniversary. So on the margin line, we expect the FX headwinds to be very consistent with what we've seen for the prior quarters but on the top line abating somewhat.

In the fourth quarter.

In the fourth quarter, right.

And then as we move through next year, when do you expect that margin headwind to abate?

There's obviously a big dependency on the exchange rates. So based on -- however, we do have some hedging benefit that we experienced pretty much throughout the year this year that we'll be up against next year. So obviously, very much dependent on where the currency rates -- and how they move through the year, but we have a known headwind on the hedging benefits from this year going into next year.

And that does conclude our question-and-answer session. And that is all the time that we have for today's conference call. We thank you for your participation.

Okay. Good job, everybody.

Thank you.