Good day, everyone. Welcome to the Abercrombie & Fitch Fourth Quarter Fiscal Year 2016 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 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. Joining me today are Arthur Martinez, Executive Chairman; Fran Horowitz, Chief Executive Officer; and Joanne Crevoiserat, Chief Operating Officer and Chief Financial Officer. Before we begin, I remind you that any forward-looking statements we may make today are subject to the safe harbor statement found in our SEC filings. In addition, we will be referring to certain adjusted non-GAAP financial measures during the call. Additional details and a reconciliation of GAAP to non-GAAP financial measures are included in the release issued earlier this morning. With that, I hand the call over to Arthur for some opening remarks.

Thanks, Brian, and good morning, everyone. And as always, thank you for being with us. Our results for the quarter fell short of our expectations in what was and continues to be a challenging environment. Overall, however, we continue to make solid progress on our strategic initiatives. Hollister, our largest brand, continues to perform and the Abercrombie brand renewal process continues. I'm confident we have the right people, the right talent and the right plan in place to drive future growth. To that end, last month, it was announced that Fran Horowitz was named Chief Executive Officer and Joanne Crevoiserat was named Chief Operating Officer while continuing in her role as Chief Financial Officer. Both Fran and Joanne are highly regarded leaders and talent developers and have made significant contributions to our efforts to position the company for future success. Fran's appointment as CEO reflects the confidence we have that she is the right person to lead the business forward. Having filled out her team with the addition of 2 great brand presidents who joined us last summer and a new chief marketing officer who joined us last month, this is the right time for Fran to formally take on the new responsibility of leading Abercrombie & Fitch. Following Fran's appointment as CEO, our office of the Chairman structure is no longer needed. I look forward to continuing to work with Fran, Joanne and the rest of the team at A&F in my role as Executive Chairman. Now Fran will provide perspective around our current performance and our strategic initiatives.

Thank you, Arthur, and good morning, everyone. First of all, it is an honor to lead the company's effort to revise the A&F brand and reignite growth across our business. I am confident in our strategic direction and in our ability to execute on our plan to create more customer-centric brands with clear identities that resonate with consumers and to generate sustainable growth and profit for our shareholders. As Arthur mentioned, our results for the quarter reflect an environment that was and remains challenging and highly promotional. In spite of that environment, Hollister achieved positive comp sales during the quarter and international markets improved measurably from last quarter. But we did not make as much progress at A&F as we wanted, we have made important changes under the new brand President's leadership to enhance the performance of the brand. We continue to listen to our customers as we refine and promote our brand positioning, and we are confident in the team and the plan for the brand's revitalization. Overall, we have made significant progress on our strategic initiatives across both brands that have proven to increase customer engagement and provide a better customer experience. This includes the development of new store prototypes and loyalty programs, as well as the continued rollout of our omnichannel capabilities. Starting into the fourth quarter performance by brand. Hollister continued to perform despite the strong headwinds in the markets. Calling out a few key items of note, in Hollister guys, we saw continued strength in categories where we've added innovation and stretch. We have strong performance in denims, key item knit tops and outerwear, partially offset by underperformance in fleece bottoms. On the Hollister growth side, cozy fabrics and trend details on top fashion and innovation denim performed well. Our emerging Internet category highlighted by…

Thanks, Fran, and good morning, everyone. As Fran mentioned, we have a laser focus on driving progress on our strategic initiatives as we continue to tightly manage the business in a difficult environment. We remain committed to being as efficient as possible with our resources to drive both bottom line improvements and fund top line growth initiatives in the future. I'll be taking you through the details of our fourth quarter and full year results and will also provide our outlook for fiscal 2017. Starting with the fourth quarter. Net sales were $1 billion, down 7% from last year with foreign currency adversely impacting sales by approximately $16 million or approximately 150 basis points. Comp sales were down 5% for the quarter, representing a slight improvement from last quarter. Traffic continued to be a headwind but conversion trends overall remain positive. As shown on Page 6 of the investor presentation, by brand, comp sales for the quarter were down 13% for Abercrombie and up 1% for Hollister. By geography, comp sales for the quarter were down 6% in the U.S. and down 4% in international markets. We saw meaningful comp sales improvement from last quarter broadly across international markets in both brands, with the strongest improvement in Europe. However, flagship and tourist stores, although slightly improved from last quarter, continue to be a significant contributor to Abercrombie's negative comp sales performance. Despite these challenges, flagship and tourist stores remain profitable in the aggregate and serve as an important gateway to the brands for our customers. We continue to take aggressive actions through investments in the store experience, in product and in our talents to improve their overall performance. The direct-to-consumer business delivered another quarter of growth across both the U.S. and International markets, fueled by our investments in mobile, omnichannel…

Thanks, Joanne. While we are not happy with our results, we are pleased with the progress we continue to make against our key strategic initiatives. Hollister, our largest brand, is stabilized and continues to perform. Despite the headwinds in Q4, our performance of Hollister demonstrates the potential for our brand, when brand voice, products and brand experience are aligned are attuned to our customers. A&F revitalization continues with many of the lessons learned from Hollister being applied. We've made significant organizational changes, improved operating efficiency and investment in stores and leadership talent to position us for future growth. We remain committed to being efficient with our resources to drive both bottom line improvement and fund top line growth initiatives. In 2017, I am confident we will build on the progress we've made over the past year, growing our Hollister brand as we continue to execute on our plan to revitalize the Abercrombie brand. Now, I will hand it back to Brian.

Thanks, Fran. That concludes our prepared remarks. At this time, will be happy to take your questions. [Operator Instructions] Thank you.

[Operator Instructions] We'll first go to Stephen Albert with Bank of America Merrill Lynch.

I just wanted -- first question was on the clarifying the comp guidance for the year. You're calling for comparable store sales to improve. Does that mean positive or just less negative?

Stephen, thanks for the question. We do expect improvement. We haven't provided specific points in terms of improvement to point you to. We expect the first half to remain challenging particularly in the first quarter as we work through the carryover assortment issues, and we deal with traffic headwinds that we have seen and as others have reported in the industry. But we do expect to build momentum in the back half of the year as our strategic initiatives gain traction. Hollister continues to perform. We expect to continue that momentum and expect to build improvement in A&F as our strategic initiatives gain traction through the year.

Okay. And just a quick follow-up on the CapEx guide for the year. You're calling for a cut but it's coming from omnichannel and DTC investments by more than 2/3. Just curious the rational around that with the customer continuing to shift more towards online?

Yes, we've been very successful in capturing that business and we have invested in that space very successfully and are very pleased with the returns we're seeing. Our penetration to the total business in Q4 was 31%. I think, it's an evidence that we are putting our money behind the right things. Where we have invested historically, has been more in the foundational and building of those capabilities, which is -- requires a little bit more capital. Our focus is to continue to invest behind those priorities. We're now in more of a rollout phase on those, so the specific priorities in 2017 -- I’m sorry, are to continue to roll out our loyalty program to international markets and roll it out globally. And also to extend our omni capabilities particularly to the EU. And what you see in terms of the investment is a reflection of the difference in building versus rolling.

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

I was wondering if you can maybe give us an update on the dual A&F and A&F kids’ stores. I guess I haven't heard you guys talk about the combination for a while and just how they're testing, and if that's going to be a format that you will continue to roll out?

Yes, this is Joanne. I'll jump in on that, we have in some locations added the A&F kids product to our adult A&F stores. We do that opportunistically where we had an opportunity to showcase the kids product either in a location or a mall, where we don't have a presence for kids and where we have an opportunity to improve the productivity of the adults store. We have many stories in A&F, frankly, that are larger than we would like, and we're -- we have added the kids product to those locations to drive productivity in the box. We have seen a nice return on those investments in terms of driving productivity and margin in those boxes. It is not a strategic decision. It is an opportunistic decision that allows us to extend the kids brand.

And next will go to Tiffany Kanaga with Deutsche Bank.

Would you discuss what you're seeing for quarter-to-date trends by brand and geography. And I know you touched on flagship and tourism traffic, but would you talk about your expectations for a time line for potential improvement and provide an update as to how you're thinking about your flagship real estate portfolio?

Hi, Tiffany, it's Fran. Q4 did -- was a challenging quarter for our segment of the business. We did see some headwinds from a traffic perspective. Some of that has continued into the first quarter but much beyond that, we don't normally comment on our current in-quarter business. Regarding the flagships, they are a really important gateway for the brand. They remain profitable in the aggregate, and we are aggressively have steps to improve their performance. As you know, last year, we closed 2 of them, as well as negotiated some lease reductions. We are working diligently on our assortments, on our customer experience and finally, towards the back half of the year, we'll be rolling out in international loyalty programs to help our customer engagement in those stores.

Yes, I'll just jump in quickly, Tiffany. We are investing behind those improvements in the customer experience in those markets. We've added and made changes to make the shopping experience in those flagship locations easier and more convenient for customers. We're focused on improving conversion of the traffic that we do have. And as Fran said, working towards the end of the year to roll out a loyalty program to engage more local customers.

I have 1 follow-up question. Would you dig into which categories you're finding fat to cut on the SG&A line? And in what inning you believe you're in, in terms of identifying and achieving expense reduction?

Will, I guess, I could characterize it as a very long game because we have been on this path for quite a while in terms of finding expense savings, and we had a lot of success over the years in terms of finding efficiencies in our model. In terms of where we're finding efficiencies, I characterized our process or our program as an energetic, disciplined approach to cost management, and we have a lot of energy behind finding efficiencies in the organization. Last year, we rolled out a continuous profit improvement program, and we have tremendous contributions across the company. Just to give you sort of an idea of how pervasive it is, I think there were almost 900 individual ideas that were implemented in 2016 to help drive these changes. So the cost savings are coming very broadly across our organization and we're pleased with our progress but we're clearly not done.

And I just want to underscore, it is a critical initiative on by both Joanne and myself and it's an ongoing process working with each and every cross-functional team member and leadership team member to make sure that we are finding all of our opportunities. That is a continuous ongoing process.

Next will go to Matthew Boss with JPMorgan.

This is Steve Zaccone for Matt today. We were curious looking over the next 1 or 2 years, what do you view as the target margin profile for this business once the top line stabilizes? Is it best to think about gross margin as flat on a go-forward basis? And does that also flat operating margin?

Yes, we have not provided a longer-term operating margin metrics. However, the way we think about the business is certainly very sensitive to top line growth. We are investing in the things that we think are most important to drive that top line growth, including and probably our biggest priority is engaging our customers in new and different ways. So as we think about how that impacts the total business in terms of overall margin performance, we expect to continue to deliver better product, continue to manage inventory well. We have had a very disciplined approach to inventory management. And as we see more customer acceptance of our products, we continue to manage our inventories well and improve our processes behind how we buy and the depth of our buys and the breadth of our assortment. We expect to see improvement in AUC, to see improvement in AUR from having to discount less, which are the benefits we see from improving those processes. And I think we've touched on our operating model is one we're we expect to continue to drive efficiency. So we expect the operating margin to improve over time and it's not applied to just one line on the P&L.

Next will go to Simeon Siegel with Instinet.

This is Gene Vladimirov on for Simeon. So with the DTC business up nicely driving a higher distribution expense, I'm just wondering as we move through 2017 and presumably the channel -- the trends in the channel continue, what sort of actions can you take to mitigate the impacts of the potentially growing expense?

Yes, the DTC channel is actually a very profitable channel for us. It does have a high degree of variable expense with it. Our efforts are focused on making sure we're delivering the right customer experience and the right interactions with our customer to make sure we can capture the market share that frankly is moving very quickly in that direction. We're adding capabilities around the world. As we scale, we scale our fixed cost investments in that space. So we feel good about that. And our actions are to manage our brick-and-mortar expense, if you will, and our store occupancy and store productivity in conjunction with that, which is why we play such a high importance on having the flexibility with our leases that we do.

Got it. That's great. And then one quick follow-up, could you give us any color on when the 53rd week will add?

Yes, the 53rd week we think is probably $40 million in sales and maybe about $0.02 to our EPS for the year.

Now we go to Betty Chen with Mizuho Securities.

I was wondering, Fran, if you can talk a little bit more about swim and Gilly Hicks, any more color you can give us on whether you think that's been driving some incremental sales? Any quantification there? And then also what you think that longer-term opportunity could be? Secondly, was wondering in terms of the leases, I think, Joanne you mentioned about half of the U.S. leases have some kind of action available soon. Can you just walk us through kind of what's the philosophy as you evaluate those opportunities? Is it rent reduction of a certain level? Is it renewal terms? What are you looking for? And then also what do you think eventually should be the right store size for the 2 brands?

Hey, Betty, it's Fran. I'll take the first part of this question. So Gilly Hicks and swim specifically, as you know, Hollister has really continued to perform. In this brand particularly, both of these extensions and opportunities were results of customer request and our response to really listening and understanding what our consumer is looking for. We've had a nice response to both categories, both swim, as well as Gilly. We see an opportunity to continue to drive those businesses throughout this year. We launched Gilly through both our website and all of our stores around the world and swim as well. You're also going to see an increased swim presence in the Abercrombie brand because we believe that swim really does drive traffic to our stores.

And I'll pick up the lease conversation. I think you hit on many of the decisions that we have available to us. We evaluate the opportunities on a store-by-store basis. We do look at the economics of each location, understanding both current traffic trends and future. We have, I would say, tremendous partnerships with our landlords. Fran and I have spent a lot of time working and talking with our landlords as we move our strategies forward. We do work with them for rent reductions on renewals. In some cases, we also have the opportunity to remodel or resize our stores, which is an important aspect of driving store productivity in the future. Or we make decisions to close stores, and we haven't been shy about that. In terms of stores, how many stores we're going to have as we move into the future or what we see in the future? That's really still unfolding and depends a lot on customer preferences and how we see these traffic patterns unfold, where they choose to shop and how we expect to continue to capture that market share. We do believe stores are a very important part of the story. Customers like to interact both with our brick-and-mortar stores and online. Our omnichannel initiatives really underscore that point. We've seen a tremendous response from customers on those omnichannel initiatives where they'll buy online and come to our stores and interact with us in-store.

Joanne, if I could follow-up real quick on that. As those leases coming due, can you give us a sense how that split on A, B or any C mall locations? And then when you do close a store, do you see any sort of recapture either online or at nearby store location?

Yes, in terms of what's coming to by mall grade, is really I wouldn't say there is a preponderance of one side or the other. I would tell you by brand, we're in Abercrombie in more A's and B's. We're not in a lot of C malls and actually the same with Hollister. In terms of sales recapture, it depends on the proximity of another store as to whether we recapture. But overall, we don't recapture a lot of the brick-and-mortars sales. We do see a little bit of recapture to the online business. But that is something we are focused on and trying to improve particularly with our expanded CRM capabilities in terms of driving a stronger engagement with our customers, and in locations where we need to close from an economic perspective, we're focused on trying to retain that customer through our relationship online and through our CRM capabilities.

Our next question comes from Janet Kloppenburg from JJK Research.

I was wondering, Joanne, if you could talk a little bit about your AUC benefit. Do you see that for the whole year? And do you think that the impact of that will be muted in the first half given the promotional environment that Fran is referring to? And Fran, on the comp front, you sound like you expect Hollister to be better this year but I'm unsure of the signals you're trying to give us on the first half. Has is started out more challenging than expected and maybe we should not expect an improvement -- sequential improvement versus the fourth quarter at Hollister? Maybe if you could help us define that? And just lastly, on this new marketing initiative at A&F that you're working with the creative agency. When will we see that? And how will you test that to make sure that it will resonate better than the prior campaigns?

So I'll start ticking through this, Janet. On the AUC benefits, we do expect to see AUC benefits throughout the year. A lot of changes that we put in place include process changes that help us unlock some cost savings in our sourcing and supply chain, including improving the depth of our buys and reducing our SKU count. In terms of first half versus back half, we do expect AUR pressure, both from FX during the year sort of offsetting the AUC benefits we expect. But also see expect pressure in the first quarter related to persistent traffic headwinds that we're seeing and increasingly and promotional environment where we're positioned to compete. I'll pick up the comp conversation. The comp cadence, we expect improvement through the year. We have said that we expect the first half to remain challenging, partly from some of the issues that I just mentioned. We need to work through some carryover issues in Abercrombie that Fran talked about. We're working very quickly to address those issues in the assortment, and we're dealing with traffic headwinds in the first half. However, Hollister has been performing. It's proven sustainable. We have a number of things in that business that are gaining traction, including the swim and Gilly Hicks business. So we expect that to continue perform during the year. And Abercrombie, with the many changes we're making there, we expect to see improvement as we move through into the back half of the year.

On the marketing piece, so I want to clarify. It was not quite the impact that we had anticipated but it really was the beginning of our conversations with that consumer. So it's essentially a sharpening of our focus as we move forward, and we believe that the addition of Will, who had joined us about a month ago, as well as this creative agency, will help us understand how to sharpen that focus. But we've had some positive signs as well through this program, and we're going to continue down this path.

[Operator Instructions] Will next go to Brian Tunick with Royal Bank of Canada.

This is Kate Fitzsimons on for Bryan. I guess I just wanted to dig into the sequential improvement that you saw in international traffic in the quarter. What did you see is driving that? And any particular markets that you would call out? And then secondly, if you could provide any update on what you're seeing in terms of U.S. and International four-walls in the quarter there?

Hi, Kate, it's Joanne. I'll take that one. We did see improvement in the international business. In the third quarter, I think we mentioned that it was unseasonably warm and one of the biggest points of difference in -- between the 2 quarters was the performance of our seasonal business. So I expect that some of the traffic improvement is related to do just more seasonal temperatures as we move through the quarter. We did see that improvement broadly across our International markets. So it wasn't just in one specific spot. And the biggest improvement was through Europe, which was really nice to see. In terms of U.S. versus International four-wall, our International four-wall margins continue to be strong and higher than our domestic four-wall margins. In both regions we're continuing to focus on driving the things that will keep those moving in the right direction, including rolling out all of our omnichannel capabilities. I would add that we've been pleased with our ability to drive improvement in growth in our digital business. Our digital business internationally in terms of penetration, only lags our U.S. business slightly and has been growing nicely as well.

I just want to underscore, Kate, too as far as the International flagship, Joanne mentioned that the assortments were seasonally more appropriate. The team is also working on specialized assortments for those locations in addition to shoring up our talent and our customer experience to help our customer experience in those stores. And that's an ongoing process, we've seen stronger customer engagement as well.

Our next question comes from John Morris with BMO Capital Markets.

It's Trevor Lamb on for John Morris. So given your commentary about a pressured AUR, do you guys expect to see any other drivers of comp improvement, whether it be units per transaction or conversion?

Yes, our focus has been and continues to be on driving conversion. We have an opportunity to make more of the traffic that's out there in our stores. We're doing that on a number of fronts, all of our investments are focused on improving that experience and making it easier for the customer to transact with us. When we talk about our OpEx investments, we're talking about investing in the store to help our associates better engage with customers to drive improvement in conversion. So most of the improvement we're looking for would be in conversion. The AUR pressure really stems from FX. We continue to expect to step away from promotional activity as we see more acceptance from our customers of our product assortments. And as we do that, that should be part of an offset to the AUR pressure.

Trevor, throughout 2016, it's been exciting to see the conversion improvement in Hollister. What it has shown us is that we get the product, the voice and the experience correct for our consumer. They really respond. And as we are applying those learnings to Abercrombie, we expect to see the improvement in conversion as well through '17.

And I want to add, Trevor, that we're not accepting the traffic trends as they are. We are investing behind points of engagement with our customer, both our marketing message, as well as our CRM capabilities to try and move the needle on that as well.

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

Regarding the denim assortment, it looked attractive to us. So what happened with the basic versus novelty? And are there learnings for how you want to navigate that store or the assortment and timing for how that may be edited? And as you do focus your marketing message in terms of sharpening your marketing message, what are -- what do you think will happen to traffic? Or what should happen to traffic? Or what's the interplay between traffic opportunity versus sharpening marketing just because we do see it as this radical journey but a good one in terms of building authenticity in the A&F banner?

So the first question regarding the denim, we have seen a significant shift out of our basic inventory from our consumer into our novelty due to the ability of our pretty flexible supply chain. We've been able to shift our assortment, and we've seen success to your point on all of the destroyed -- [ph] Denim has been very good. All of the innovation that we put into the denim from the stretch perspective has also been very strong. So we are moving very quickly to make sure that our assortments reflect all of those changes. Second question was marketing, sorry. As regarding to marketing piece...

Yes, I can jump in. The sharpening of the message, we think is an opportunity for us to start the conversation with our customers, particularly in A&F. We haven't historically done a lot of -- spent a lot of-- or invest a lot of money in marketing and it's a great opportunity for us to start that conversation. We expect over time that, that will have an impact on traffic. We talked about the fourth quarter not delivering the impact that we wanted but it is the beginning and was the beginning of a longer conversation that we expect to have with our customers.

So I just think from a traffic specific perspective, we obviously can't control the traffic but we can control all the other things involved in our business, such as how we speak to, when and to our consumer. We've had tremendous success for the digital front speaking to our consumer. For fun little fact, we have the takeover on Snapchat for National Pizza Day and had 6 million views from our consumer. So we're pretty in tuned to speaking with our consumers where they are, and we will continue to do that and drive the traffic through our omni capabilities.

Will let us go to Anna Andreeva with Oppenheimer.

Two quick one. First, a follow-up on gross margins. As we think about the pressure here in 1Q, should it be similar magnitude as in the fourth quarter? Inventories looked tightly manage. How do we think about inventories ending 1Q and as we go through the year? And then secondly, this Q cut at A&F, what's the magnitude of that and when does it start? Any specific categories you guys are tweaking down?

You want to start?

Yes, I want to pick up the first part of this. The gross margin pressure in Q1, as I mentioned earlier, we expect AUC benefit in Q1 and that will flow through the year, offset by FX pressure so that's a real pressure point on our gross margin and AUR. The other pressure in Q1, however, is persistent traffic headwinds in a competitive environment, and we expect to compete in that environment further pressuring AUR. In terms of the SKU count -- inventory ending Q1. So we do feel good about our inventory position coming out of Q4. The AUR pressure in Q1 is really related to the competitive environment. We're keeping an eye on what our customers are expecting. We're keeping an eye on what are the competitors are doing to make sure that we can compete. We expect inventory ending Q1 and during the year to -- we expect to improving the inventory productivity, which would have us managing inventory below our sales.

Also Anna, for this SKU reductions, we have a little bit of a tail coming out of the fourth quarter but we have a -- we will see sequential improvement as far as the focus on our assortment goes throughout 2017.

And I'll jump in here and thank everyone for all your questions. Before we conclude though, Fran would like to make some closing remarks.

Thanks, Brian. So 2017, I am confident we will build on the progress we've made over the past year, growing our Hollister brand as we continue to execute on our plan to revitalize the Abercrombie brand. I want to thank you all for your time this morning and we look forward to updating you on our progress next quarter.

And that does conclude today's conference. We thank everyone for their participation.