Abercrombie & Fitch Co. (ANF) Q4 2015 Earnings Report, Transcript and Summary

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

Thank you. Good morning, and welcome to our fourth quarter earnings call. Earlier this morning, we released our fourth quarter sales and earnings, income statement, balance sheet, store opening and closing summary and an updated financial history. Please feel free to reference these materials, 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. Joining me today are Arthur Martinez, Executive Chairman; Jonathan Ramsden, Chief Operating Officer; Joanne Crevoiserat, Chief Financial Officer; and Fran Horowitz, President and Chief Merchandising Officer. After our prepared remarks, we will be available to take your questions for as long as time permits. [Operator Instructions] 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. With that, I hand the call over to Arthur for some opening remarks.

Thank you, Brian, and good morning, everyone. Thanks for being with us today. Our steady improvement throughout the year culminated in a return to positive comp sales in the fourth quarter, our first since Q3 of 2012. That, coupled with higher average unit retails, drove higher gross margin and resulted in a meaningful improvement in adjusted operating income in constant currency for the quarter. Inventory continues to be well managed and we generated strong free cash flow for the year. These results, achieved against the backdrop of a very challenging environment, underscores the significant progress we made across all of our strategic initiatives throughout the year and continue to validate that we are on the right course. During the year, we continued to lay the foundation for future growth and profitability. We completed our transition to a branded structure and strengthened our teams and core processes. We measurably improved our customers' experience, both in-store and online. We also took important steps in our evolution toward a better balanced and trend-right assortment. This progress is the direct result of the hard work of our teams, and I thank them for their efforts. While we accomplished a lot, we are far from done. There is still much more work to do to maintain our momentum and realize the full potential of our brands, particularly in our efforts to clearly define and convey our brand positioning. While we have seen strong conversion gains through 2015, these refined brand positionings will be important in driving traffic. As we look ahead to 2016, we expect market conditions to remain challenging, but we believe our ongoing focus on delivering customer-centric shopping experiences and compelling assortments based on clearly defined brand positions will lead to continued improvements. Our ongoing investment in direct-to-consumer and omnichannel and the continued execution of our aggressive store closure program will also support our progress. Now let me hand it over to Jonathan to provide additional comments regarding our strategic initiatives.

Thanks, Arthur, and good morning, everyone. As Arthur mentioned, we were pleased to deliver solid results in the fourth quarter in what remains a difficult environment. Our comp sales metric turned positive during the quarter for the first time since 2012, and we delivered meaningful adjusted EBIT growth on a constant currency basis for the third consecutive quarter. Of particular note and as reflected in the charts on Pages 6 and 7 of our investor presentation, we achieved sequential quarterly comp sales trend improvement across all brands and geographies throughout the year. Our improved results reflects strong progress across our 6 strategic areas of focus, which as you know, include: being customer-centric, developing compelling and differentiated assortments, defining clear positionings for our brands, optimizing our brand reach and channel performance, continuing to improve efficiency and reduce expense and ensuring we are organized to win. Customer centricity means putting the customer at the center of everything we do. During 2015, we made numerous changes to make the shopping experience for our customer easier, faster and more engaging. In our stores, these changes included giving more autonomy to our store management teams so they can be more responsive to their customers. They also included changes to the in-store experience, such as improved lighting and shorter lines. In addition, we rolled out a new Hollister prototype store, which is performing very well, with traffic and sales up double digits relative to the control group. We will continue this rollout in 2016. On the digital side, we continued to enhance our mobile capabilities with improved site design and upgraded apps. Mobile now accounts for over 60% of all online traffic and nearly 40% of direct-to-consumer revenue, and continues to experience double-digit increases in year-over-year conversion rates. And our omnichannel investments continued to enhance our ability to serve our customers in a seamless manner. Important milestones in the year included expanding ship-from-store to another 290 stores in the U.S. and activating click-and-collect and online returns to store in the U.K. In 2016, we will continue to invest in digital to improve the customer experience, including the rollout of omnichannel capabilities outside the U.S. During 2015, we rolled out a number of new tools to enable us to track how our customer is responding to changes in our store experience and merchandise assortment. It is early days for us with these tools but in the meantime, the strong conversion gains we saw across channels and geographies validate that many of our customer-focused initiatives are gaining traction. Our efforts to enhance and optimize our brand reach also saw some notable milestones in 2015. We opened 6 new stores in China, including 3 mall-based A&F stores. Combined with strong e-commerce business, Greater China is now our fourth largest market by sales volume. We opened our first 3 franchised stores in Mexico and grew our wholesale business with ASOS and NEXT to $10 million in revenue. In addition, we launched Fierce in Sephora stores and in select duty-free shops through our partnership with Inter Parfums. Meanwhile, we continued to rightsize our U.S. store fleet with 55 closures during the year, bringing our cumulative closures to approximately 340 stores or about 1/3 of the fleet over the past 6 years. Importantly, we do not view these closures as a defensive move but as a proactive one to ensure that we are properly positioned to respond to the dramatic changes in how our customer chooses to shop. In a similar vein, we opened 9 new outlet stores and converted 8 stores to MFO merchandise during the year. Our strategy in outlet will continue to be measured, responding to customer demand in this channel, while ensuring an appropriate balance between full price and outlet stores. We continued to build our organization by hiring talented and experienced new leaders across many areas of the company, while promoting members of our existing team to new positions of leadership. We continued to enhance internal accountability and coupled that with spending more time communicating to and hearing back from our associates. Hand-in-hand with our efforts on continuous profit improvement, we made excellent progress on sustainability during the year through numerous initiatives in our stores and at our home office campus. In addition, we were pleased to expand our partnership with World Vision's Gifts in Kind program to donate merchandise to developing countries and launched a new partnership with Blue Jeans Go Green to recycle worn denim into home insulation. Overall, our progress in 2015 is the result of a hard work and dedication of our talented associates across the organization. I would like to take this opportunity to thank them all for those efforts. With that, I will hand it over to Joanne to go over our fourth quarter results.

Thanks, Jonathan, and good morning, everyone. As Jonathan mentioned, and also evident in our financial results, the fourth quarter reflected continued improvement on many fronts as our strategic efforts continue to gain traction. Recapping results for the quarter, starting with sales. Net sales for the quarter were $1,113,000,000, up 2% to last year on a constant currency basis. Foreign currency was a continued headwind during the quarter and adversely impacted sales by approximately 3 percentage points or $29 million. Total comp sales were up 1% for the quarter, reflecting continued sequential comp improvement by both brand and geography. As shown on Page 6 of the investor presentation, by brand, comp sales for the quarter were down 2% for Abercrombie and up 4% for Hollister. By category, we continue to see strength in our female tops business, where comps remain solidly positive. And while overall male business lagged female, the male comp trend continues to move in the right direction particularly in tops. For the quarter, dresses, accessories and sleepwear also performed well, while cold weather categories of outerwear and sweaters underperformed. By geography, comp sales for the quarter were down 1% in the U.S. and up 6% in international markets. We continue to see considerable improvement in international markets. In Europe, we saw an acceleration in comp growth, driven by the U.K. and Germany, where business was very strong throughout the quarter. In Asia, comps were positive, driven by strong performance in China. Across brands, the direct-to-consumer and omnichannel business for the quarter grew to approximately 28% of total sales compared to 27% of total sales last year with growth in both U.S. and international markets. Recapping the rest of our results for the quarter on an adjusted non-GAAP basis, which excludes items detailed on Page 5 of our investor presentation. Gross margin was 60.7%, 100 basis points higher than last year on a constant currency basis. The gross margin growth exceeded our expectations coming into the quarter and was driven by higher average unit retail in the U.S., as improved assortments drove higher full-price selling and a reduction in promotional activity. Stores and distribution expense decreased $11 million from last year due to benefits from foreign currency as well as expense reduction efforts, partially offset by direct-to-consumer expense. Marketing, general and administrative expense increased $11 million from last year, primarily due to higher compensation-related expense, including severance charges. And as Jonathan mentioned, we delivered operating income growth for the quarter on an FX-neutral basis. Adjusted operating income was $121 million, up 8% from last year on a constant currency basis. The negative impact from FX on operating income for the quarter was approximately $20 million. The effective tax rate for the quarter was 36%. Net income per diluted share was $1.08 compared to $1.15 last year and included the negative year-over-year impact from FX of approximately $0.23. Recapping our full year results, net sales were $3,519,000,000 compared to $3,744,000,000 last year and included adverse effects from FX of approximately $153 million. In addition, full year adjusted operating income was $136 million, up 6% versus last year on a constant currency basis. The year-over-year adverse effect from FX on operating income was approximately $63 million. The negative impact from FX was primary driven by the weakening euro as well as the British pound and Canadian dollar as reflected on Page 9 of the investor presentation. Turning to the balance sheet. We ended the quarter with $589 million in cash and cash equivalents and gross borrowings outstanding of $293 million compared to $521 million in cash and cash equivalents and $299 million in borrowing last year. We also ended the quarter with total inventory down 5% compared to last year, reflecting our ongoing discipline in this area. Details of our store openings for the quarter are included on Page 13 of the investor presentation. At the end of the quarter, we operated 754 stores in the U.S. and 178 stores in Canada, Europe, Asia and the Middle East. With regard to our outlook for fiscal 2016, we expect flat to slightly positive comparable sales; continued headwinds from foreign currency with expected adverse effects on sales of approximately $50 million. We expect this, along with the temporary closure of Hollister stores for remodel, to have a disproportionate adverse impact on the second quarter. Our gross margin rate approximately flat to last year's adjusted non-GAAP rate of 61.9%, but up on a constant currency basis, with average unit costs expected to be up modestly in the first half and down in the second half of the year. Slight leverage in operating expense relative to last year's adjusted non-GAAP rate of 58.3%, but with some deleverage in the second quarter related to timing of marketing and other strategic investments. We expect operating income growth over last year on adjusted non-GAAP basis more than offsetting the expected $30 million adverse impact from FX. And as a reminder, the effect from foreign currency is determined by applying fiscal 2016 forecasted rates to fiscal 2015 results and is net of the year-over-year impact from hedging. We expect an effective tax rate in the mid- to upper 30s and a weighted average diluted share count of approximately 68 million shares, excluding the effect of potential share buybacks. Excluded from our full year outlook are potential charges, such as of those related to impairment, store closing and our strategic initiatives. We are targeting capital expenditures in the range of $150 million to $175 million for the full year, which include approximately $70 million for new stores and store updates and continued significant investment of approximately $70 million in direct-to-consumer, omnichannel and IT to support growth and profit-improvement initiatives. In 2016, we expect to complete approximately 60 Hollister store interior remodels through the course of the year with the majority to be completed by the end of the second quarter. We also plan to open approximately 15 full-price stores, including 10 in international markets, primarily China, and 5 in the U.S. And we plan to open approximately 10 new outlet stores primarily in the U.S. In addition, we anticipate closing approximately 60 stores in the U.S. during 2016 through natural lease expirations. I'll now hand it over to Fran to provide more color around brand performance and strategic initiatives. Fran?

Thank you, Joanne, and good morning, everyone. First of all, I am very excited about the potential of both the Abercrombie and Hollister brands, and I look forward to working with the teams in both organizations. Both brands made important progress during 2015. This was the result of the hard work and dedication of each of our teams and their enthusiastic focus on delivering for our customers. As you've heard from Arthur and Jonathan, our comps show that our customers have responded well to the work we have done to evolve our offerings and improve their shopping experience. My goal for 2016 is to build on the success of Hollister and accelerate our recovery at Abercrombie, which has moved slower than we would have liked. We believe our continued progress will be fueled, among other things, by the launch of new brand positionings for both Abercrombie and Hollister. In an intensive effort over the past 6 months, we have mapped out the core beliefs and convictions that drive each brand and the DNA of the brands that supports those beliefs and convictions. We are now working on the communication strategies surrounding these brand positionings and expect that to roll out over the course of this year. Moving back to a review of our 2015 performance. We were encouraged by our return to positive comp growth in the fourth quarter and that inventory was well managed. Our Hollister comp sales were up 4% for the quarter, continuing a trend of sequential quarterly comp sales improvement. By geography, Hollister again delivered positive comps sales in each of our key volume regions of the U.S., Europe and China. In the U.S., we were able to drive positive comps, while also generating higher AUR as we continue to reduce our promotional depth and frequency. In Europe, comps were particularly strong over the Black Friday weekend, and in China, we continue to see solid growth, particularly online. By category, Hollister continued to see the greatest strength in the girls' tops business, driven by ongoing strength in layering and shirting. Girls' accessories and dresses also performed well, while sweaters were weak. On the guys' side, we achieved sequential comp improvement from the third quarter, driven by strength in our overall tops business. In addition, denim and sweatpants remained strong while outerwear, graphic tees and pants were weak. Hollister's improvements reflected a rededication to our customer. We simplified the in-store shopping experience with changes in props, lighting, scents and sound. We implemented new store manager training and incentive programs and empowered the team with improved tools and autonomy to drive greater accountability and customer engagement at the store level. We set a simplified global pricing and promotional model that appropriately positions the brand versus key regional competitors. We developed and tested a fully redesigned store prototype and plan to roll out the new design to about 60 additional Hollister stores for this year, with additional stores under consideration. We launched new mobile apps to improve our digital experience. We worked with our key social media partners to drive innovative customer engagement, which included Hollister becoming the first retailer to offer a sponsored geofilter with Snapchat and being ranked #1 retailer on Instagram as published in Adweek. We piloted our Club Cali loyalty program in several markets across the country, which has proved to be successful in driving higher customer identification, retention and sales. As a result, a U.S. rollout is planned for 2016. We are also thrilled to continue our efforts to raise awareness around anti-bullying with Hollister's partnership with Echosmith during the year. In addition, we implemented significant changes to core processes with the Hollister brand and improved the overall quality, content and aesthetic of our assortments. And we built a global assortment that strikes a balance between fashion relevance, quality, value and strengthened our teams with senior-level hires across multiple functions. The Abercrombie brand also delivered sequential comp improvement for the fourth quarter, which [indiscernible] with positive comps in A&F women and international. By geography, Abercrombie continued to generate comp improvement across each of North America, Europe and Asia, which included positive comps in Canada, the U.K. and China. By category, we saw strength in our A&F women's business, which turned positive for the quarter and was driven by the tops business. Female dresses, accessories and sleepwear categories also performed well, while outerwear and bottoms underperformed. In A&F male, tops continued to underperform but we are encouraged by the sequential improvements from third quarter. Bottoms also continued to be a better performer, while outerwear was weak. Similar to Hollister, Abercrombie also took several steps to improve the customer experience, such as rolling out new incentive and training programs and making changes to the store experience. On the digital side, we enhanced our customers' experience with greater focus on lifestyle marketing, on-figure product presentation, seamless shopping and app development. With regard to evolving the assortment, we augmented the Abercrombie teams with key hires, including new design leads for each of men's and women's. We are excited by the work they're doing with the teams and look forward to delivering their new products over the course of the year. In addition, we executed the rollout of extended sizes for younger ages in our kids business. Our entire online assortment and half of our in-store assortment is now available in sizes for children aged 3 to 6. We also have 35 stores where we have a combined kids merchandise in the A&F adults store. Results have been positive in both new customer acquisitions and average transaction value. During 2016, we will continue building the leadership talent for both brands with the appointment of brand presidents. The brand presidents will each have the privilege of leading an iconic brand and working every day with a talented group of people. I would like to thank all of our teams for their energy, enthusiasm and eagerness and for their dedication to moving our brands forward in the coming year. And with that, I will turn it back to Brian.

Thanks, Fran. With this, we will be happy to take your questions. [Operator Instructions] Thank you.

[Operator Instructions] We'll take our first question from Anna Andreeva with Oppenheimer.

[indiscernible] I think, Joanne you mentioned the bulk of remodel activity at Hollister expected in 2Q. And maybe you guys could talk about what are you seeing across the businesses quarter to-date. Some of your competitors have called out better weather so far in February.

Yes, in terms of sales cadence across the quarters, we won't comment on our current quarter business, it's not our practice to do that. Related to our outlook, the top line sales will be affected, I think, I mentioned by FX, not impacting comp, but the top line will be impacted by FX. We see FX throughout the year -- headwinds throughout the year, with the biggest headwind in second quarter, and Q1 and Q3 about even and much less of a headwind in Q4. So from a top line perspective, that's the FX impact. On a comp perspective, we do expect to remodel and reopen most of the Hollister remodels in the second quarter for Back-to-School and that will put -- they'll be closed for a period of time during the remodel, and that will put a little bit of pressure on the comp and the top line sales in Q2.

Let's go to Randy Konik with Jefferies.

I guess a question for Jonathan. Can we just kind of think about the -- what's the margin recapture opportunity from your perspective? Before all margins of international are higher than the U.S. but obviously, all the margins across the globe have come down. If we can kind of back out the FX impact potentially on that, just trying to get a sense of where the margin recapture story could go, recognizing people try to look at your company relative to others in the space and where their margins are. So just curious there. And then just one for Fran, if possible. Now you're President of the business and looking across both brands, can you just give us some perspective on some of the processes at Hollister that you implemented, that you didn't see at Abercrombie division, that you're potentially implementing? And how you see the differences that need to be in these 2 business, or no differences, as it relates to pricing architecture, logo penetration and product focus?

Randy, let me start with a little bit of context on future margin opportunity. And first of all, I think to the point in your question, it's really important to back out FX in terms of getting a real look at what happened in '15 and what we're projecting to happen in '16. We are projecting in '16 to have gross margin rate enhancement on a constant currency basis, and that's an opportunity we think will continue to exist going forward. It's likely to be an important part of our overall margin recovery story. And we also think on an FX-neutral basis, again, we can get some expense leverage in 2016. And that we can continue to do that going forward, particularly if we can maintain momentum on the comp line. So I think sitting here today, we're not in a position to give a longer-term outlook. But we do believe we'll continue to make progress on those 2 key levers of our margin rate structure in 2016, and we believe there's certainly further opportunity beyond that.

Randy, let's see, where should we start? As far as each brand is concerned, they will be positioned a bit differently as we move forward. As I mentioned, we're currently working on defining what those brand positions are, and we look forward to sharing that as the year unfolds. From a process perspective, yes, there are some processes that we implemented in Hollister that we'll be applying to the Abercrombie brand. As far as the pricing architecture goes, it will be in lockstep with how we define each of the brands.

Next, we'll go to Lorraine Hutchinson with Bank of America Merrill Lynch.

Joanne, could you talk about the key factors that will offset the $30 million of FX pressure on EBIT? Are there a lot more costs to cut at this point? And sort of how do you expect to get that operating expense leverage in 2016?

From an operating expense perspective, we do expect leverage -- partially we've had a lot of success in our past, driven by profit improvement initiatives. As you know, $250 million of expense came out of our base. We have continued with our continuous profit improvement initiative, finding and implementing efficiency ideas and expense savings ideas that allow us to invest back into the business. The big puts and takes on OpEx in 2016 include FX -- some FX benefit, also include an expectation for continuous profit improvement and expense efficiencies. But also, we're looking at investing back into the business in key areas to drive our growth, like DTC and marketing, to support the brand positioning.

And next, we'll go to Dorothy Lakner with Topeka Capital Markets.

Just wondered if you could share with us what backgrounds you found in the new design leadership in A&F. What you were looking for there? And also, what you would be looking for in new brand presidents. And if you could, share a bit about how you're thinking about brand positioning.

Okay, to start, regarding the brand presidents, we're looking for leadership -- retail leadership with a pretty broad experience in both merchandising, stores and bottom line accountability. Regarding our new talent and leadership, I guess particularly you're asking in Abercrombie, we were looking for leaders who could appreciate sort of the heritage of the brand as well as bring us a new modern take on it. And I believe that is where they're headed. And as far the brand positioning goes, we're actually not ready to share that at this point, but we will as the year unfolds.

Next, we'll go to Adrienne Yih with Wolfe Research.

This is actually Cody on for Adrienne this morning. Can I just -- can you guys just discuss the inventory position that you guys have for Q1 and the first half of this year? And just remind us of what the impact in timing, if any impact, from the port delays last year were on 1Q and 2Q?

So we have managed inventory very well throughout 2015 and have shown inventory reductions every quarter through 2015. We expect to continue to show discipline in managing inventory. I expect inventory to be down as we manage through 2016 and showing improvement in overall inventory turn. The impact of the port delays last year, we actually had less of an impact, I think, than some of our peers. And our teams did a very nice job managing around that, so that there's not a big timing difference year-over-year.

Next, we'll go to Matthew Boss with JPMorgan.

So as -- if we walk through the capital allocation priorities for 2016 and beyond, I think that would be really helpful. I guess, any investments that we need to consider to support the return to positive comps. And then just the best way to think about any potential capital investments versus just thinking about a return to share repurchase over time.

Yes, Matt, our -- this is Joanne. Our capital allocation philosophy hasn't changed. And as you know, our first priority is to invest back into the business on investments that have the highest risk-adjusted return. We maintain a very disciplined approach around that. I think our CapEx outlook for 2016 at $150 million to $175 million, we are positioning our capital to work for us, both in store expansion and new stores as well as supporting ongoing remodels and some of the investments that we see providing a return. So the Hollister remodel would be an example with that, and we plan to roll that out to 60 stores in 2016. Additionally, we are stepping up our funding in -- behind the DTC effort. We continue to see that as a growth area for our business and had success with the investments we've made to-date and continue to put our capital behind DTC, omnichannel and IT. As it relates to the balance of our capital allocation philosophy, we still anticipate returning, as a second priority, cash back to shareholders through dividend and share repurchases. And that is a conversation and those are actions that we evaluate quarterly based on the share price valuation and liquidity. And it's also the subject of discussion every quarter at our board meetings.

Next, we'll go to Betty Chen with Mizuho Securities.

I was wondering if you can talk a little bit about the bottoms business at both Hollister and A&F? I think in the past, you cited denim to be a very strong category for you. Any changes in the fourth quarter? Any new silhouette or washes that might get you excited about denim or other bottoms in 2016? And then, when should we expect the men's business would show some improvement in Q4 to kind of -- how should we expect that business to kind of progress in the year?

Sure. Betty, it's Fran. Start off with the bottoms business, we were pleased actually in both brands for the year with our denim business. We've also seen the bottoms business diversify into things, such as the fleece business and joggers and that continues. Stretch was a whole new category for us in our denim for the year, and that certainly continues as we move forward. As far as the men's business is concerned, we were happy to see that progress, obviously, from third quarter to fourth quarter. And our goal and our intent is to continue to see improvement over the course of the year.

And in terms of the new design leads, Fran, when should we expect to see their influences hit the stores?

It's a gradual evolution, Betty. Aaron has been here a little bit longer than Kristina in the women's business. So you'll start to see that probably in the back half of the second quarter. But over the course of the year, you'll see it evolving.

Our next question comes from Neely Tamminga with Piper Jaffray.

This is actually Kayla Wesser for Neely. I was just wondering if you guys could talk a little bit more about international pricing, initial pricing in the U.K. at both brands. It looks like maybe you guys have taken up the initial pricing. Is that accurate? And why is that?

No, no, Kayla, that's not correct. We were pricing about a year ago, and that was in effect for pretty much all of 2015. So you might be seeing individual items where you're seeing a difference. But broadly, the ticket strategy of Hollister has been relatively consistent over the past year. And there's been a bit of an evolution in A&F but I'd say, not dramatic over the course of '15.

I'd just underscore that. We started the pricing strategy for Hollister in the first half of the year with certain categories, so by the time we got Back-to-School, it was a complete repositioning, which has been very successful for us.

And now we'll go to Simeon Siegel with Nomura Securities.

So given the movement at Hollister, can you speak to the profitability of both concepts? I mean, how does -- how did the Hollister EBIT rates compare to Abercrombie? And maybe any color on where both are versus their historical peaks.

Yes, we typically don't, Simeon, give a lot on color on that. I think our four-wall margins in Europe still remain significantly above the U.S., which going back to Randy Konik's question a little bit earlier, we think there's certainly opportunity in the U.S. to get those margins are up. There's a bit of a difference domestically than internationally between the 2 brands, which we historically haven't got into a lot of color on. But international margins have come down over time, partly because of the impact of taking prices down that we spoke to a second ago. But as Fran said, we saw a nice response to that in terms of top line company, which has led us to conclude that, that was certainly the right move to make. But those international margins still remain very healthy. We have a very high proportion of our stores, which operate very healthy four-wall EBITDA margins, so January's still a very healthy fleet. And the new stores are opened in China and the Middle East are continuing to do very well in terms of profitability. The U.S., as you know, from when we used to report it a couple of years back has had structurally lower four-wall margins for some time but we do believe there's opportunities to improve those margins going forward.

Okay. And then sorry if I missed it, but did -- have you said what percent of Q4 sales are generally generated by outerwear?

I don't know that we've ever been that specific.

Next, we'll go to Oliver Chen with Cowen and Company.

It sounds like you've become a lot more customer-centric and focused. I'm just curious about the comment on the tools to measure how customers may be responding to change. Do you have a hypothesis about what you're looking for here? And any early examples of how that may impact? And on the autonomy with the store management teams, could you just give us color for the nature of the freedom they're given to help drive comps and margins? And just on omnichannel, omnichannel sounds like a really nice percentage of mix. Where are you -- are you feeling like there's a new chapter in terms of that aiding you in driving traffic to the store?

So let me start with a couple of those, Oliver. So in terms of the tools we have, we have a number of new tools we've rolled out. I don't think we're really looking for anything in terms of what the outcome of those tools is. What we're looking for is to get a good read on how are customers reacting when they come into the store. Are they having a sort of positive shopping experience? Are they feeling positive about the brand when they leave the store? And obviously, the same applies online. So it's some customer satisfaction measures. It's some overall brand sentiment measures that we're now just going to be a -- in a much more robust position to track going forward. Since we've rolled out some of those tools relatively recently, we don't have a long enough data period yet to start reporting on them. But they're important to us internally, so that we can get a clear sense of how our customer is reacting and give us evidence that we're making progress in improving customer experience, customer satisfaction and brand sentiment over time. In terms of the examples of autonomy at the store level, I think we've talked about that a little bit in prior earnings calls. We've given greater autonomy to store managers to move placements within the store, if they see something that's doing particularly well in their local store, is an example of the types they may have influence on today that was less the case in the past. So that would just be one example. And then in terms of omnichannel, could you just maybe recap your question there on that piece?

I'm just curious as you become -- what is the message for becoming more customer-centric online in terms of what you may need to do next? And also, will this -- will you enable this to be, like, a material driver of helping drive traffic into your stores, kind of leveraging the whole ecosystem? Is there personalization ahead in mobile?

Yes. Well, first of all, I think it's important to note that our DTC and omnichannel business is already a very high percentage. We're up to 28% in the fourth quarter, so we're already highly penetrated there. It's also a major area of focus for us from an investment standpoint. A lot of our CapEx dollars over the past couple of years have been going towards omnichannel and IT investments, mobile investments, that really make the customer experience when they're online or on their phone very positive, and over time, more and more seamless with the in-store experience. So we do believe that's a critical component of our long-term strategy. We're going to continue to invest in it. But specifically, what we're going to do going forward, we're not ready to talk about today, other than the ones we've already spoken to. But as we said in the prepared remarks, we will be rolling out omnichannel capabilities beyond the U.S. increasingly. But overall, I would just underscore that is a critical area of focus for us, and we think we've come a long way and been very successful here. But we have a big opportunity ahead of us to keep that going.

Next, we'll go to Lindsay Drucker Mann with Goldman Sachs.

I wanted to follow up on the Hollister remodels. And just, could you confirm, I think that as of the last quarter, you said that you had 15 remodels between the U.S. and Europe. How many did you end the year with? And as you talk about the 60 for next year, what's the balance in U.S. and Europe? How do we think about the CapEx that you said is going to be going to brick-and-mortar? How much of that is towards remodels versus the store openings? And any difference in terms of -- you talked about the nice double-digit improvement in sales and traffic versus the control group for you remodeled stores. Is that about the same in U.S. versus Europe? Just any additional color there would be great.

Yes, I would say, broadly speaking, your numbers are right. We had a little more than a dozen -- we have a little more than a dozen stores that we've fully remodeled interior -- on the interior. We have seen strong returns from those, double digit as you mentioned; traffic lifts versus the control group; as well as sales lifts. And we're seeing that consistently. And it does give us confidence to continue the rollout. And the rollout for 2016, it is 60 stores. I think that's a testament. The CapEx split, I don't have the dollar numbers specifically. But we do plan to open 15 new stores and 10 outlet stores, so that's the portion that will be brick-and-mortar, if you will, and the balance will be going to remodels.

Is there any news on an Abercrombie store prototype?

Fran?

Yes, we are in the beginning process of that. We will -- we're looking forward to rolling one out by the end of this year.

Next, we'll go to Brian Tunick with RBC Capital Markets.

Sounds like you're evolving towards being a global brand, more so from just a retailer. So curious, what do you think the ultimate size of your store base should look like? And how big could Amazon and NEXT and ASOS be over time? How many franchise locations can you have? What is your fragrance license impact look like? When does that start to hit the P&L? Just sort of what does the business look like bigger picture a couple of years from now as you evolve towards that global brand? And then the second question, just shorter term, just on some of the AUC comments. We're trying to understand what's happening out there. Other retailers calling out the cotton improvement in the first half and it doesn't sound like you guys are going to see that.

Okay, Brian, I think we're going to divide those up. So I'll start with the first couple...

[indiscernible] of them.

In terms of store closures, we've been closing 50, 60 a year for several years. We closed over 1/3 of the fleet, as we alluded to in the prepared comments. We broadly see in the U.S. that trajectory continuing with a fairly healthy amount of closures in the next few years. I don't think we've ever been ready to say there is a final store count number, because it's clearly going to depend on other factors, including our ability to drive improvements in productivity over time. That would lead us to keep some stores open. Internationally, we've had a couple stores we've closed. But generally speaking, as we alluded to earlier, the profitability profile of the international fleet is very strong and we expect to be continuing to add stores internationally, albeit at a somewhat slower pace than where we were 2 or 3 years ago, and focused on a couple of a couple of core markets, like China and the Middle East. In terms of some of the other revenue streams, your question gets at our evolution from selling exclusively through our own channels to bringing in some other channels, such as wholesale. It's very early days for us. We really only got going on that about 18 months ago. We talked about the NEXT and ASOS business being $10 million in '15, which is fairly modest in absolute terms, but we do think there's a lot of potential there. It's something we're looking at very closely strategically. We're testing our way into it, both from a franchising and a wholesaling standpoint. And also, with a licensing arrangement within Inter Parfums and we do think it's a significant area of opportunity for us going forward. We're just not ready today to quantify how significant that can be.

I think I'll hand over to Fran on AUC, please?

Yes, Brian, as we mentioned, we will have a little bit of a different story in the first half and the second half of the year regarding AUC. In the first half of the year, we are reinvesting in the product. We will be benefiting from some of those macro opportunities, but since we're reinvesting in the quality, as we have not lapped that as we have in the second half, we'll see a slight increase. And as we get into the second half of the year, where we did reinvest in the product, we do have some macro opportunities on certainly like-for-like product to have an AUC reduction. So we'll have an overall slight reduction in the second half of the year.

Our next question comes from Janet Kloppenburg with JJK Research.

I had a couple of questions. First, Fran, I understand what you're saying about the comps for the second quarter because of Hollister. But I was wondering if you could talk a little bit about why your comp guidance, it appears so conservative in light of the momentum that you've built in the third and the fourth quarter? Hello?

Yes, we're here.

We're here.

Okay. And secondly, Fran, I wondered if you could talk about the categories that you thought could be the greatest opportunity for both Hollister and Abercrombie this year as we look forward. And when we might see some of those brand repositioning initiatives that you talked about earlier?

Janet, it's Joanne. I'll jump on our overall comp guidance for the year. We believe our comp guidance is realistic. And certainly, given the conditions in the market, we don't feel any need to be more bullish at this point.

Okay. And is there something going on in terms of inventory or discipline there that might hold back comps?

No, we continue to feel very good about our inventory management and if anything, expect that our inventory management to continue to improve as we roll out more improved processes across the chain. So inventory is certainly not a constraint. It's been well managed and we expect to continue to be well managed as we move forward.

Okay, to start off with, which question?

Categories.

The categories. We expect to see, Janet, in the women's business, both women's and girls' business, the continuation of our momentum in tops. And our goal is obviously, to get that momentum going in the men's and the guys' business, so that's our focus for the first half of the year. Regarding our brand positioning, I think we talked about a little bit but we have really established our core beliefs and convictions, and we are working on an internal communication of that over the next several months, and I think, you'll see that in the back half of the year. It certainly is not going to be a light switch that we have out there. But it's going to be an evolution in how we approach our customer.

And our next question will come from Kimberly Greenberger with Morgan Stanley.

Fran, I appreciate that you're not ready to share in this forum the sort of aesthetic or the brand tenets that you expect will ultimately embody both of your brands. But I'm wondering what aspects of the prior brand position in both Abercrombie and Hollister did your customer research show were no longer resonating and -- to guide the new brand position. And then just one clarification for Joanne. Joanne, it looks like you had about a $42 million increase in accounts payable, with inventory down $24 million. Maybe you could just talk about why inventory is going one direction and the accounts payable is going the other?

Okay, Kimberly, I'll start. At this point, we're really not ready to share, due to competitive reasons, sort of what did and did not resonate with our customer. But we do have some customer research that we've done around the world to help us solidify where both brands are going. They clearly will both have some heritage associated with them. And they'll also have a new modern take.

And Kimberly, regarding the question around AP and inventory, the accounts payable balance reflects actions that we did take this year to extend terms with our suppliers. We also made available to them a supply chain financing platform, and that's primarily what unlocked the AP increase.

Okay, and Joanne, when do you lap that change near [ph] term?

I believe we rolled it out late second quarter in 2015. So it began in late second quarter, I think, fully implemented by third quarter.

Now we'll go to John Morris of BMO Capital.

A couple of quick ones. Asked a lot about the new format program at Hollister. I'm wondering, Jonathan, if you can tell us what the potential is longer term? Is it -- are most of those Hollister stores or all of them remaining candidates for the remodel? And then on the closings that you guys have achieved so far, really nice work on that. Can you update us longer term, are you the bulk of the way through that program? Or do you see more opportunity ahead? And if so, how much? How many leases coming up, et cetera. And then just finally, on the autonomy that you're giving at the store level to some of the managers, is that essentially happening, that kind of autonomy that you're giving out there, at both the divisions, both Abercrombie and Hollister? And is it pretty much across the -- both fleets?

I'm going to let Joanne take the first part, and then I'll come back.

Yes, regarding the Hollister remodels, all stores in the fleet, all Hollister stores in the fleet are candidates for remodels. We'd like to see this roll out broadly across the chain. There are definitely considerations, including lease terms and lease renegotiations that we're taking into account as well as the expected return we're going to get in every location. So we're reviewing each remodel decision on a case-by-case basis with a goal of rolling it out broadly across the fleet.

On the second part, John, about store closures. Yes, we continue to look at that on an annual basis. As we said a couple of minutes ago, we've been closing 50, 60 a year for several years. We've closed over 1/3 of the fleet. We're not ready today to say what that ultimate store count number is. But to part of what you said in your question, we do have a lot of flexibility. We have a high proportion of our leases coming up for renewal in the next 2 or 3 years. So we have significant room for maneuver there. And importantly, I think as we said in the prepared remarks, we think what we've done on store closures has been not a defensive move but a very proactive move to reflect the reality that our -- of how our customers increasingly shopping over time. And again, with 28% of the business in the fourth quarter coming through DTC and omnichannel, part of the corollary of that is reducing our store footprint over time. And then you had bit on -- yes, Fran?

Yes, John, to answer your question on the store autonomy in both brands. Yes, that is something that paralleled last year between both brands to roll out to our store management. I'm sure you remember in the recent past, we focused more on the way our stores were presented rather than on the brand -- on the business driving piece of it. So they've been given tools to understand and read their businesses. I've had an opportunity over the past year to visit many of our stores, and it's certainly a work in progress. And we've made a lot of progress on it, and that will continue as we move forward.

Our next question comes from Susan Anderson with FBR.

I was wondering if maybe you could give some color on the sales retention rate that you guys have seen from the closed stores in the U.S. Have you seen a lot of those sales moving to other stores or online? And then just a follow-up on the gross margin guidance for the year. So expect it to be up a bit when you exclude FX. I guess is there anything changing from fourth quarter, which seemed like a pretty good performance in terms of the puts and takes there?

Susan, this is Joanne. On the retention rate from closed stores, it really varies depending on the markets in which we close. We don't see typically a lot of transfer to other stores, mainly due to the fact that they're not necessarily close to other stores, so that has a bearing on it. We do see some migration post-closing online but it's minimal. I think what we're seeing more is the move to online has been happening and continues to happen. And as we close these stores from an EBIT perspective, we're driving productivity overall in the fleet. Related to the gross margin guidance for 2016, there are a lot of puts and takes on gross margin in 2016. Although the AUC is up modestly in the first half, it's down in the second half. We expect it to be down for the year slightly. On the AUR front, a lot of puts and takes there. So FX is a headwind on AUR, but we expect continued AUR benefit, both from inventory management activity as well as better selling at reg price and our ability to step away from promotional activity during the year. So a number of puts and takes on gross margin that drive the guidance back to flat.

Next, we'll go to Paul Lejuez with Citigroup.

Can you talk a little bit more about the outlet channel. Just remind us how many stores you have. Can you maybe share the performance of those stores versus your mall fleet? And then second, just wondering if in any of your regions or concepts, if there were any traffic bright spots. Is there any place where traffic was actually up at the store level?

On the outlet question, Paul, we typically don't break out the comp performance of outlets. I think the important point there is we're evolving to MFO. We convert -- we opened a number of new MFO stores for A&F this year. We're converting -- we converted another number. That -- the significant impact of that is to drive the gross margins on the profitability up in those stores. It's a little bit hard read the comp, frankly, because you're converting from one model to a somewhat different model. And we historically haven't broken that out. Overall outlet is a -- it's a fairly meaningful piece of our business now. We have around 60 stores in total. And as I said, we don't break out the comp performance of the outlet stores. In terms of traffic bright spots by the region, I think that's something we typically haven't broken out. Overall I'd say across the business, the theme of the year was that traffic was more challenging whereas conversion was pretty strong across channels and geographies.

And how about as you look forward when you -- anything about your comp guidance, is that expected to be -- what's the interplay between traffic and conversion or maybe transaction versus ticket?

Overall, we don't break down our comp expectations at that level. But overall, I think, given the current environment, we expect to continue to drive strong conversion, and many of our efforts are focused there. We also have -- are working on brand positionings to better communicate our brand story and try and move that traffic number. Traffic has been a headwind, I think, in the industry so we have a realistic expectation around traffic. We expect continued improvement and continued strength in conversion, and as we mentioned earlier, driving AUR up slightly, modestly based on our ability to step away from promotional activity and with the customers' response to our product offerings.

And we'll take our last question from Dana Telsey with Telsey Advisory Group. Okay, moving on, we'll take our last question from Omar Saad with Evercore ISI.

I guess, my one question, I'd like to get some more detail and information on the wholesale. I know it's a tiny business but you mentioned in your prepared remarks, I think $10 million, mostly ASOS, and I think you said NEXT. But you also mentioned the fragrance, going into Sephora. Like, help me understand how your thinking has evolved around the idea of wholesale, which is obviously, something historically the company has not been involved in. And are there further opportunities, in the U.S. especially, to think about the wholesale channel as an opportunity for the brands.

Yes, we said, Omar, it was $10 million of wholesale revenue, which is -- with NEXT and ASOS specifically. That didn't include the licensing or franchising, which are separate initiatives we spoke to. It's early days for us. We've been establishing our sort of technical capabilities to execute on wholesale and learning with these first 2 partners we've had in place. But as we said earlier on, we do regard this is as being a potentially significant area of opportunity for us going forward, as we do with regard to franchising and licensing. Fairly early days but we think, over time, those 3 could all be pretty significant.

And that does conclude our conference for today. Thank you to all for your participation.