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08 Earnings ralph lauren donna abiti Call Transcript (Operator instructions)Welcome to the abercrombie fitch first quarter earnings conference call.At this time i'll turn the call over to your host mr.Brian logan. Welcome to our first quarter earnings call.Earlier this morning we released first quarter sales and earnings, balance sheet, income statement and updated financial history.If you haven't seen these materials they're available on our website.This call is being recorded and can be replayed by dialing 888 203 1112;You will need to reference the conference id 3028248. With me today are mike kramer, chief financial officer, mike nuzzo, vice president of finance and kristen blum, chief information officer.Today's earnings call will be limited to one hour.After our prepared comments we will be available to take your questions for as long as time permits.Please limit yourself to one question so we can speak with any many callers as possible. Before i 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.Now to mike kramer. Once again we are proud to report record sales and earnings marking 65 consecutive quarters of year over year earnings improvement.Our performance demonstrates our continued ability to effectively position our brands which gives us a competitive advantage and is critical to producing consistent and sustainable results. As you all know, the first quarter selling environment proved to be more challenging than many had anticipated.Tough macro economic conditions led by declines in home values, turmoil in the credit markets and a rise in food and fuel prices combined with weaker job and income growth resulted in the consumer confidence index dropping to its lowest level in five years. In addition the female fashion business industry wide was soft compared to last year, particularly fashion knit tops, our largest selling category.To top it off the two week shift in the easter calendar pulled the corresponding spring breaks into colder weather period negatively affecting march sales which were not fully recouped in april. Given this difficult selling environment we are pleased that we were able to produce solid sales results without resorting to promotions to drive top line growth.We believe we were able to produce these results because of our global brand recognition particularly with the abercrombie fitch brand.Excluding the anniversary of the grand opening period the abercrombie fitch london flagship and the abercrombie fitch and hollister canadian stores all produced positive comparable store sales during the quarter. More importantly us international tourist stores in locations such as new york, miami, orlando, las vegas and san francisco were extremely productive during the quarter which was a huge performance driver for the abercrombie fitch brand.The increase in tourist store sales during the quarter was led by the already amazingly productive 5th avenue flagship. The direct to consumer channel also remained strong posting a 44% increase in sales over last year, with the international direct to consumer business growing 78% over last year.As i alluded to we are benefiting from international tourists traveling to the us to take advantage of a weak us dollar.We were able to realize this benefit because of our global brand recognition. This is additional proof that there is global demand for our brand and it gives us further confidence that we can be successful with our international expansion initiatives.It also demonstrates the importance of owning a global brand during a difficult selling environment in the united states. In addition to solid top line performance we also posted a 6% increase in earnings per share despite a 3% drop in comparable store sales and the absorption of incremental expense associated with minimum wage increases and pre opening related to abercrombie fitch tokyo flagship during the quarter.We achieved this result through the strength of our gross margin and by strategically cutting operating costs.Initial markups continue to provide a huge benefit driven by savings and sourcing and logistics, london premium pricing and strategic price increases in select categories. In addition, our focus on inventory management enabled us to keep markdowns in check.Expense control was also a key driver of our bottom line performance.We were able to control variable costs throughout the organization including store payroll hours, home office travel and other store and home office expenses.We are particularly pleased that we achieved these results without compromising the long term positioning of our brands ralph lauren outlet or jeopardizing our growth initiatives.We continue to invest in stores, merchandise development and home office infrastructure. On the merchandise side our idc and sourcing teams have made great strides in product quality and the use of leading techniques in graphics, appliqu and fabric catch string.In stores, merchandise remained full price and we avoided resorting to promotions to drive top line growth.We also continue to refresh stores such as upgrading sound systems in the chain. Our store growth initiatives are moving forward as planned.Hollister, the primary domestic driver of new store growth in the near term still has opportunities in many high quality us malls.We continue to find that hollister stores open less than one year exceed our initial sales targets and produce a store contribution rate better than or equal to that of the existing chain. In addition, our first hollister flagship in new york is still scheduled for an early 2009 opening and will display new and exciting store experience elements.We also plan to open our first kids flagship of 5th avenue in new york in 2010.We believe that both flagships can further fortify the iconic image of these brands as we look to expand internationally. Gilly hicks, a brand that we believe can provide long term domestic growth now operates five stores.We continue to be pleased with the performance of gilly hicks and are building both brand recognition and the foundation for a strong everyday bra and underwear business.We are committed to developing this concept into the best in the intimates business as we have done with our other brands. Internationally we recently announced plans to open a second european abercrombie fitch flagship in copenhagen, denmark in 2009.We are also in the process of securing locations in italy, france, germany, spain and sweden.Our plan for a late 2009 opening of our first flagship in asia located in tokyo's ginsa district remains on schedule.In addition we are on track to open our first of four hollister mall based stores in the uk in october of this year. Looking ahead we see a continuation of the difficult selling environment.However, just as in the first quarter we view this as an opportunity to further separate our brand from the competition.In order to do so it is important that we remain true to our brands aspirational positioning by maintaining the highest quality product, a disciplined pricing approach and an exceptional in store experience. We must continue to improve operating ralph lauren uomo city polo efficiencies to maximize gross margin and reduce operating expenses to generate value for our shareholders.However, we must never lose focus of our brand positioning which is critical to our long term sustainability and global expansion initiatives. Before i turn it over to mike nuzzo i want to take this time to once again reiterate the fundamentals of our business and why we believe we are poised for continued momentum in our business model.One, growth ralph lauren bambini outlet initiatives, we have significant growth opportunities with our existing proven brands.This growth is in the form of higher productivity of existing categories plus introduction of new categories continued domestic growth and significant international growth. In addition, we have introduced two new brands in recent years that have great potential.Let me note though that our long term strategy of producing double digit eps growth does not necessarily rely on the latter happening. Two, brand protection, two sub cut categories under brand protection consistency and sustainability.Consistency, we will not sacrifice quality or promote our new product to buy sales on a short term basis.The second, sustainability, we focus on our core customer and maniacally offer the best experience in the mall.This is accomplished through our six senses approach and our continued investment to maintain our store standards. Number three, infrastructure, we are investing in it initiatives that will help us grow internationally and just as important on a leverage basis.These come in the form of a scalable system that will allow us to optimize as we grow in the future.We believe we are being very pragmatic with all of our infrastructure investments with the goal of maximizing return on investment. These three points separate us from every other specialty retailer.They represent the formula for a strong business model and one that we are very proud of.Now to mike nuzzo. As mike kramer indicated when you consider the factors impacting the first quarter of 2008 the relatively unfavorable easter break calendar, the economic down turn, the lack of a strong female fashion trend industry wide and our own investment initiatives to deliver earnings growth over last year is a significant accomplishment. Our fiscal 2008 first quarter net sales for the 13 weeks ended may 3, 2008, increased 8% to $800.2 million from $742.4 million for the 13 weeks ended May 5, 2007.First quarter direct to consumer net sales increased 44% to $62.5 million.Total comparable stores sales decreased 3%, transactions per store per week decreased 4% and average transaction value was flat to last year. Comps were strongest in tourist and international stores and weakest in the south and midwest regions.For the total company, male tops, female fleece tops and denim and fragrance in both genders performed well in the quarter.Female knit tops and knit pants underperformed as did woven shorts in both genders. First quarter gross profit rate was 66.8%, 120 basis points higher compared to last year.The change in rate is attributed to a higher initial markup rate and a lower shrink rate partially offset by a higher markdown rate versus last year.Our higher initial markup rate was driven by favorability from london premium pricing, sourcing benefits and select price increases in polo and denim departments.

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