Abercrombie & Fitch Conference Call Highlights

Abercrombie & Fitch Co. (NYSE: ANF) reported its third quarter highlights on Wednesday. Shares of the company are up 3 percent.

Below are some key highlights from its conference call.

• It is very clear that the young apparel sector in which we operate is going through a period of disruption and turmoil.
• In response to that, we are making significant changes across many aspects of how we operate as a company.

Operational Changes:

• First, shifting to a branded organization;
• Second, making major changes in our assortments, including faster speed to market and lower AUC;
• Third, changing how we engage with our customer;
• Fourth, introducing new store designs;
• Fifth, aggressively investing in DTC and omnichannel;
• Sixth, closing domestic stores;
• Seventh, taking well in excess of $200 million of expense out of our model.
Performance Metrics:
• Lower than expected sales were compounded by a lower merchandise margin, as our AUR came down in a very promotional environment, and by a strengthening U.S. dollar.
• Continued excellent progress on expense reduction mitigated but was not able to fully offset lower than projected gross margin dollars resulting in a significant miss to our projected EPS.
• Within the numbers however there were some positives.
• While comps in tops were very negative, bottoms comped positively for the quarter with denim continuing to do well.
• And our dress business remained very strong.
• Comps were negative across almost all international markets but were positive in China and improved from the second quarter.
• In China the quarter also marked the opening of our first mall-based A&F store in Chengdu, which is performing strongly and encourages us to believe in the growth potential of both brands in China.
• And beyond the nearly 60 stores already converted we plan to convert many more stores during 2015.
• To date the original 10 test stores continue to comp around 10 percentage points ahead of their control group.
• And expanding the rollout to a much larger group of stores should enable us to see an overall comp benefit in 2015.
• We also remain pleased with key metrics we are seeing from our marketing initiatives.
• Across both brands fan growth in platforms such as Instagram, Facebook and Twitter is up over 25% year-over-year.
• And total social engagement during the quarter was more than four times greater than last year.
• In addition according to our social listening tool, Crimson Hexagon, net brand sentiment is up close to 30% for A&F and up close to 40% for Hollister since the beginning of the year.
• Going forward we believe our greatest opportunity remains in improving top of funnel metrics, specifically brand consideration.
• While it may take time for our marketing efforts to fully translate to the bottom line, we believe we're getting great traction.
• In addition we recently began a Hollister price test in 11 Northern U.K. stores, where we have reticketed most of the assortment lower with these price reductions to be offset by greater percentage reductions in AUC.
• We will get a good read on this test during the fourth quarter.
• We remain pleased with the results of the new Hollister store fronts and expect an accelerated rollout in both the U.S. and Europe in 2015.
• Our outlet business is also performing well. U.S. outlet stores comparable sales were up approximately 10% for the quarter and our new MFO outlet stores are performing well. Regarding store closures.
• We still expect to close approximately 60 stores during 2014, bringing our cumulative U.S. closures to around 280 stores, excluding Gilly Hicks.

Financial Metrics:

• Net sales for the quarter were $911 million, down 12% to last year.
• Including direct-to-consumer total comparable sales were down 10%.
• Sales during the quarter were below expectations with comp sales in September and October being significantly weaker than August.
• U.S. comp sales were down 7%, while total international comp sales were down 15%.
• By channel store comp sales were down 14%, while direct-to-consumer comp sales were up 8%.
• The direct-to-consumer channel continued to outperform stores, posting positive gains in all brands and all markets.
• Within the store's channel, continued weak traffic was the primary contributor to the lower sales trend, particularly in Europe.
• But average transaction value was also down, driven by lower average unit retail.

Guidance:

• We now expect full-year non-GAAP adjusted diluted earnings per share in the range of $1.50 to $1.65.
• The guidance is based on the assumption that fourth quarter comparable sales will be down by a mid-to-high single-digit percentage.
• The guidance assumes a gross margin rate for the fourth quarter that is higher than last year, but lower than the year-to-date rate.
• On a sequential basis, fourth quarter expense savings will be lower as we anniversary $25 million in savings realized from the profit improvement initiative last year.
• In addition, there were significant savings realized in the third quarter, largely related to compensation will which will not repeat in the fourth quarter.
• The guidance assumes a full-year effective tax rate in the upper 30%s, which now reflects a lower proportion of earnings being generated from international operations than previously expected.
• The guidance assumes a full year weighted average share count of approximately 73.1 million shares.
• The guidance does not include charges related to the Gilly Hicks restructuring.
• The company's profit improvement initiative, certain corporate governance matters, or other potential impairments and store closure charges.
• Looking to 2015, our single highest priority is improving the comparable sales trend of our business.