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Abercrombie & Fitch (ANF)

Q3 2006 Earnings Call

November 14, 2006 4:30 pm ET

Executives:

Tom Lennox, CC

Mike Jeffries, Chairman, CEO

Mike Kramer, CFO

Mike Nuzzo, VP Finance

Brian Logan, Controller

Analysts:

Dana Cohen, Banc of America Securities

Lauren Levitan, Cowen & Company

Barbara Wyckoff, Buckingham Research

Jeff Kleinfelter, Piper Jaffray

John Morris, Wachovia Securities

Jennifer Black, Jennifer Black & Associates

Lorraine Maikis, Merrill Lynch

Stacy Pak, Prudential Equity

Paul Lejeuz, Credit Suisse

Christine Chen, Pacific Growth Equities

Janet Kloppenberg, JJK Research

Jeff Black, Lehman Brothers

Randall Koenig, Bear Stearns

Rob Wilson, Tiburon Research

Marne Shapiro, Retail Tracker

Dana Telsey, Telsey Advisory Group

Mitch Kummetz, Robert W. Baird

Brian Tunick, J.P. Morgan

Crystal Kallik, D.A. Davidson

Kimberly Greenberger, Citigroup

Josh Schwartz, Flatbush Watermill

Robin Murchison, SunTrust Robinson Humphrey

Operator

Please stand by. Good day and welcome to the Abercrombie & Fitch Third Quarter Earnings Results Conference Call. Today’s conference is being recorded. If you have a question at any time during today’s conference you may signal us by pressing * and 1 on your touchtone phone. We will open the call to take your questions at the end of the presentation. Now, at this time I’d like to turn the conference over to Mr. Tom Lennox, please go ahead sir.

Tom Lennox, CC

Good afternoon and welcome to our third quarter conference call. After the market closed, we released the third quarter sales and earnings release, balance sheet, income statement, and an updated financial history. If you haven’t seen these materials, they are available on our website.

This call is being taped and can be replayed by dialing 888-203-1112. You will need to reference the conference ID# 3554646. You may also access the replay through the Internet at abercrombie.com.

With me today are Mike Jeffries, Chairman and Chief Executive Officer; Mike Kramer, Chief Financial Officer; Mike Nuzzo, VP of Finance; and Brian Logan, the Company’s Controller.

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 that we can speak with as many callers as possible.

Before we begin, I remind you that any forward-looking statements we may make today are subject to the Safe Harbor statements found in our earnings release and SEC filings.

Now to Mike Kramer.

Mike Kramer, CFO

Good afternoon. Before I get into quantitative details of the quarter I would like to start with an overview. First, we are really pleased with our performance this quarter. We were able to leverage operating expense while continuing to invest in our business. Additionally, we were extremely pleased with our top line performance. Our transactions per store growth of 12% compared to the third quarter of last year helped offset 3% decline in average transaction value, which was driven by a product mix shift from denim to tops. This transaction growth on top of last year’s stellar performance is extremely encouraging as we enter the Christmas season.

Now to the results. Net sales for the third quarter were $863.4 million, increasing 22% over last year’s third quarter sales of $704.9 million. Comparable store sales increased 5% versus a 25% increase for the third quarter of fiscal 2005.

Third quarter comps by brand were as follows: in the adult business, Abercrombie & Fitch, comparable store sales increased 1%, transactions per average store increased 13%. In the kids business, Abercrombie, comparable store sales increased 8%, transactions per average store increase 11%. Hollister comparable store sales increased 8%, transactions per average store increased 8%. RUEHL comparable store sales increased 20%, transactions per average store increased 61%. By region, comps were strongest in the Midwest and weakest in the West. All regions were positive.

The third quarter gross profit rate was 65.8%, 20 basis points lower than last year’s rate of 66%. The decrease in gross profit rate was primarily due to a higher markdown rate versus last year.

We ended the third quarter with inventories down 7% per gross square foot at a cost versus last year. During the fourth quarter we will accelerate deliveries of spring merchandize to ensure we are well positioned for post Christmas business. Given this strategy, we anticipate ending the fourth quarter with inventory flat to slightly positive on a per foot basis at cost compared to last year.

Stores and distribution expense as a percentage of sales decreased 20 basis points to 35.7% versus 35.9% last year. The decrease in rate versus last year resulted primarily from the company’s ability to leverage store payroll, partially offset by increased store maintenance expenses associated with store investment projects.

Our goal continues to be to leverage stores and distribution expense on a modest comp store sales increase, but at the same time we continue to strategically invest in our stores. For example, in the third quarter we invested additional maintenance dollars in A&F stores in the continuing effort to recreate the Fifth Avenue flagship’s shopping experience. This initiative will continue in the fourth quarter.

In addition, starting in the fourth quarter, we plan to increase salary levels in several store management categories with the goal of improving our ability to recruit and retain a strong store management team.

For the third quarter, marketing, general and administrative expenses decreased 260 basis points as a percentage of sales to 11.3% from 13.9% last year. The decrease in rate is primarily attributed to decreased home office and marketing expenses as a percentage of sales. In the third quarter of fiscal 2005, the company recorded a nonrecurring charge of $13.5 million related to an executive severance agreement.

We continue to invest in our home office infrastructure and do not expect to leverage MG&A expense for the fourth quarter of fiscal 2006. For the third quarter, operating income increased 41% to $162.8 million, compared to $115.9 million last year. Net income for the quarter increased 43% to $102 million versus $71.6 million last year.

Third quarter net income per diluted share was $1.11 versus $0.79, representing an increase of 41% versus last year. We ended the quarter with 358 Abercrombie & Fitch stores, 171 Abercrombie stores, 372 Hollister stores, and 11 RUEHL stores.

For fiscal 2006, we now plan to open 8 new Abercrombie & Fitch stores, 19 new Abercrombie stores, 70 new Hollister stores, and 7 new RUEHL stores for a total of 104 stores. We plan to end the year with 361 Abercrombie & Fitch stores, 177 Abercrombie stores, 393 Hollister stores, and 15 RUEHL stores for a total of 946 stores. Total square footage is expected to grow by approximately 11% for fiscal 2006.

For fiscal 2006, we expect planned capital expenditures will be between $410 million and $420 million. Approximately $260 million of this amount is allocated to new store construction, remodels, conversions, and improvements to existing stores with the remainder related to home office, IT, and distribution center investments.

We reaffirmed our previously issued guidance in today’s press release for the second half of fiscal 2006, of net income per diluted share is to be in the range of $3.25 to $3.30, including a charge of approximately $0.02 attributable to FAS 123R. The low end of the second half of fiscal 2006 guidance reflects a flat comp for the fourth quarter. Based upon this guidance we expect net income per diluted share for the year to be in the range of $4.59 to $4.64 including approximately $0.10 attributable to FAS 123R.

As many of you know, we look at our time horizon well beyond the next quarter, and for that matter beyond fiscal 2007. Thus, continuing to invest in our brand is a critical focus for us. The flagship format has inspired us to reach a new level of communicating the brand through the in-store experience. But during development of the flagship format, we realized that we had an opportunity to enhance the look and the feel of our existing stores by using some of the flagship’s elements for the rest of the fleet.

Over the past year we have invested approximately $50 million in our stores with updated store fronts and hand sliding, the trims, new signage, and upgraded sound systems. We believe these enhancements act like a new motion picture that creates and sustains the emotional shopping experience. We will continue to add flagship elements and generally refresh our store fleet through the rest of this year and into 2007.

As for our Fifth Avenue flagship, we have had an incredible first year. While its premier location undoubtedly has played a part in its success, not every retailer survived, much less generate strong profits on Fifth Avenue. This says a lot about the Abercrombie & Fitch brand and our place as a unique destination for customers from all over the world.

At the Home Office, we are in the middle of a complete overhaul of our IT strategy. Simply put, we are shifting a large part of our IT investment from existing system maintenance to new platforms for growth, efficient access to data, and innovation.

A couple of key areas that w are focused on from an IT respective are: supply chain improvements where we will implement systems to make better sourcing decisions, plan merchandized flows more effectively, and replenish stores efficiently and more accurately. Our goal is to have a supply chain that ensures the right product at the right time for our customers. And store systems, where we will provide store managers the technology to help the visual presentation and floor filling process easier to direct and implement. Our commitment to investing in our organization to support and enhance the positioning of our company is why we believe we can continue to generate strong financial results in the future.

Now to Mike.

Mike Jeffries, Chairman, CEO

Good afternoon. Obviously, I’m pleased with our accomplishments for the third quarter. We performed well from a financial standpoint while enhancing the long-term positioning of our brands. And our guidance for the fourth quarter speaks to our optimism for the balance of this year.

Our track record is strong and our opportunities going forward are exceptional. We will continue to leverage our expertise, invest in our growth potential, and as a result we expect to continue to deliver strong returns to our shareholders. Let’s talk about the business by opening it up for questions. Please limit yourself to one question so that we can speak to as many of you as possible. After everyone has had a chance, we will be happy to take followup questions. Thank you.

Question-and-Answer Session

Operator

Thank you gentlemen. If anyone in our telephone audience again would like to ask a question simply press the * key followed by the digit 1. We’ll hear first from Dana Cohen with Banc of America.

Dana Cohen, Banc of America Securities

Hey guys congrats. I was wondering if you could just talk a little bit more about the incremental spend in SG&A and then MG&A. It sounds like there is some maintenance from the Fifth Avenue store in terms of rolling it out. I was wondering if you could go into a little more detail about where the spending is coming and is this a sort of a four-quarter strategy that we should think will sort of go in for the next three quarters.

Mike Kramer, CFO

Well there are three areas of increased focus in terms of our MG&A spending, and I’ll go through those. One of those which we’ve articulated I think pretty clearly but at a 15,000 foot level is our IT strategy. We’re investing significantly in our IT infrastructure both in Home Office and in the stores. The other one as we’ve said is the rollout of the flagship experience to the rest of the chain. The $50 million that we’re spending; even though there is a portion of this that is CapEx, there is a portion of this that is expense. The third one is really our Concept Five, which we’ve not really publicly talked about, but we are investing significantly more this year than we were last year with regards to Concept Five. So, those are the three big categories in terms of our strategy.

Mike Jeffries, Chairman, CEO

I think her question was also to breakdown the in-store maintenance a little more and how long it would continue, Mike.

Mike Kramer, CFO

I think that we’re going to continue this through 2007. I will tell you that the breakdown of that for the third quarter we actually spent about $3 million in expenses, but in terms of CapEx we spent $6 million on the refresh, $4 million on louvres, and $5 million for complete remodels. That’s a total of $15 million that we spent in CapEx for the third quarter. We anticipate spending around $21 million in the fourth quarter for those same elements, and roughly about $4 million of that will be expense.

Mike Jeffries, Chairman, CEO

And then I think she was asking how much would go into spring and next year of expense, that’s how I heard the question.

Mike Kramer, CFO

Yeah, I think that this is going to continue into spring. In terms of the CapEx portion, we’ll be roughly completed. There will be roughly about $10 million with regards to the adult fleece. Keep in mind that we have other brands that we’re consistently taking a look from a potential refresh perspective.

Operator

We’ll take our next question from Lauren Levitan with Cowen & Company.

Lauren Levitan, Cowen & Company

Hi, thanks good afternoon. Mike, in the past you’ve told us about how the web has given you some insights into future business opportunities. I’m wondering if you could update us on how your web business is performing. I know you had held back some of the inventory there to avoid polluting the channel, but I’m curious how that’s progressing and what kind of growth opportunities you see in all the brands, not just in the adult business?

Mike Jeffries, Chairman, CEO

I think that’s a good question. Our web business is up about 50% year-to-date and continues to track at that. We’re getting much more sophisticated information about where that business is coming from -- international, domestic, by brand, and clearance. We did cut way back on the clearance element and I think it has helped the total business and it’s helped the positioning of the brands. The most interesting thing about it is the international business which is growing at a rate faster than the total business. It’s giving us a lot of insight about the potential of the international business by brand. We are tracking it by country, we are tracking country purchases in the stores, and I am just very honestly and hugely overwhelmed by the potential of these brands in international markets. Clearly, we opened in Canada with a huge success, which I was not expecting, and I believe that the international rollout will follow in a very deliberate way, but there’s huge potential for us. I think that’s the biggest lesson to be gained from the web business right now.

Mike Kramer, CFO

Let me add to that real quickly for an explanation point on Mike’s comment. We opened up in Canada to some amazing results and yet in the last quarter our Canada web sales were up 150%. So, I think that speaks to our brand presentation up there as well.

Operator

We’ll take our next question from Barbara Wyckoff with Buckingham Research.

Barbara Wyckoff, Buckingham Research

Hi everyone, can you hear me.

Mike Jeffries, Chairman, CEO

Hi Barbara, yes we can. How are you?

Barbara Wyckoff, Buckingham Research

I’m good. I’m curious about the strength in the Midwest, it seems like it has been so weak for so long, did you do anything different to kind of reenergize this area and then also I guess the same question for the west?

Mike Jeffries, Chairman, CEO

The answer is no because we really run a chain and pretty much so the same things every place. The business in the west is weaker than any other part of the country, weaker than Northern California. I don’t think we’re alone there, but we’re looking at that very carefully. I’ve spent time in Southern California, we’ve done focus groups out there, and we’re throwing everything we can into figuring out that weakness. I wish I could tell you that I knew the reason for it. If any of you do, I’d appreciate your insight.

Operator

We’ll hear next from Jeff Kleinfelter with Piper Jaffray.

Jeff Kleinfelter, Piper Jaffray

Congratulations as well on a great quarter guys. In terms of the markdown activity I guess in the third quarter, can you elaborate a little bit more on that; I mean is that kind of anticipated given the flow of comps throughout the quarter, was there a particular category that you wanted to make sure you were out of before the holidays, any kind of context around that?

Mike Jeffries, Chairman, CEO

No, they weren’t abnormally high. I think they were pretty low the year before. I will tell you that we are committed to just marking down on a weekly basis and not holding anything at all. We’re running a little higher as a percentage in our fashion knit categories because we’re churning those categories, pushing in newness on a weekly basis and taking markdowns where they don’t happen or where they sell through. I’m not concerned about it. I think we’re running a very fluid business and I think we’re very clean going into the fourth quarter.

Operator

We’ll take our next question from John Morris with Wachovia Securities.

John Morris, Wachovia Securities

Thanks, congratulations guys. I guess a question for Mike Kramer on the cost cutting initiatives going forward. I guess if you had to sort of look at your crystal ball, I know you’re talking about some of the initiatives that are coming in currently that are adding in terms of leering of cost from an investment standpoint, in terms of other areas where you might actually be able to trim back, can you just elaborate on that? And Mike if you can give us any sense of the opportunity for holiday from a merchandizing standpoint, where you see the holiday for the fourth quarter this year?

Mike Kramer, CFO

I don’t really refer to this as really cost cutting initiatives. I look at this as investment initiatives to make us more scalable in the future and basically redirecting a lot of the expenses. But, in terms of the detail, there is a significant amount of manual processes that have gone on here where we’re going to implement a lot of technology to help us become more scalable, and also by just sheer movement from people to machines to actually reduce some of the errors or some of the communication errors that go on. But we’re really excited about a lot of our investments that are going on. I haven’t really detailed this out other than to talk about our sourcing in terms of allocation, our store level staff in terms of our back office to floor systems and reports, also with regards to visual presentation in our store. These are some significant areas that I think we can become more scalable through our continued investment in IT.

Mike Jeffries, Chairman, CEO

And I want to add to that. This is no secret to everybody, I’ve spent a huge amount of time in our stores recently virtually every weekend for the last six months, excluding a couple, and I’ve been focused very much on store systems. I also don’t think it’s a secret to the fact that I enter every store by the back door. I’m fascinated with our stock room procedures, I’m very fascinated with how merchandize arrives from the back door and gets to the floor to the cash register. We have implemented a lot of systems in these stores recently to operate more efficiently on a store level, and I think we’re making great progress there, and I think we see it in our store fill. We’re working on IT initiatives to make them even better, but this is a great thrust by me and the company and I think it’s going to pay off now and in the future. In terms of merchandize for Christmas, I think there’s no secret to the fact that we think that the fleece business is going to be pretty good, and I hope that we overwhelm you with that.

Operator

Next, from Jennifer Black & Associates we’ll hear from Jennifer Black.

Jennifer Black, Jennifer Black & Associates

Hi, Mike and Mike, congratulations. I have a few questions, one, if you could talk about whether you have considered or will consider any kind of a loyalty program for Abercrombie? Two, if you could talk about your accessory businesses in all four formats and if you have any line extensions?

Mike Jeffries, Chairman, CEO

I’m sorry, could you repeat that? I’m sorry Jennifer.

Jennifer Black, Jennifer Black & Associates

Okay, do you want me to repeat the first question?

Mike Jeffries, Chairman, CEO

From the top.

Jennifer Black, Jennifer Black & Associates

Okay, would you consider having a loyalty program for Abercrombie? That’s the first question so why don’t I just start there.

Mike Jeffries, Chairman, CEO

In the adult business?

Jennifer Black, Jennifer Black & Associates

Yes.

Mike Jeffries, Chairman, CEO

The answer is no because I believe that a loyalty program in effect is a promotional device, and I don’t think it is wise or necessary in any of our brands. We had a loyalty program in the Hollister brand that we’ve stopped. We found that it didn’t really drive the business at all and I thought it was a stealthy kind of a promotional vehicle. So, have we though about it? Yeah, but I’m not interested at this point.

Jennifer Black, Jennifer Black & Associates

Okay, that’s what I thought you’d say. I’m just checking, the second question is about the accessory business, if you could just tell us a little about the accessory business in all four of your formats?

Mike Jeffries, Chairman, CEO

Women’s or men’s?

Jennifer Black, Jennifer Black & Associates

Both.

Mike Jeffries, Chairman, CEO

Okay, the accessory business offers us a huge, huge, huge potential, and I’m just a jerk that I’ve not been able to build more volume in the past, but I’m really on that track now. We’re tracking major buckets in the women’s accessory business. Our business is comping just beautifully. Our winter wear business is excellent, our coat business is excellent, and I don’t want to go into all the buckets, but by looking at the business in terms of major segments I think we’re making major progress in that business. The men’s business is also healthy. The men’s underwear business is excellent. I think we’re routinizing the boxer business in terms of more systematically going after that business. I would believe that our accessory business, masculine and feminine, first feminine will grow at a faster rate than masculine, but it will grow at a much better rate than our total business. So, it’s smart of you to have identified that opportunity. Major dollars are in store for us in accessory.

Operator

Next we’ll hear from Lorraine Maikis with Merrill Lynch.

Lorraine Maikis, Merrill Lynch

Thank you good evening. Just a quick followup on the technology spending, how much of the expense piece of this or the CapEx will go away next year?

Mike Kramer, CFO

As far as 2007, I would say none of it. Our IT spending for 2007 will actually increase by 10% over this year. Again, we were behind in terms of our IT investment spending and we’ve been very honest about that. I think that we have made great strides through year-to-date but we’re going to continue to invest through 2007, and I think that by the end of 2007 we’ll be caught up in terms of really where we want to be. But again, we’re going to be continually looking for how we continue to enhance the business through systems, through innovation and that way. So, as far as 2008, we’ll see based on what actually transpires in 2007. But again, we’re very committed to our IT technology investments.

Mike Jeffries, Chairman, CEO

Yeah, just to add a note to what Jennifer asked in terms of accessories, which was the most obvious answer to the question; because we own such strong brands, the accessory business follows.

Operator

Next, we’ll hear from Stacy Pak with Prudential Equity Group.

Stacy Pak, Prudential Equity

Hi thanks. Mike Jeffries one for you and then one for Mike Kramer.

Mike Jeffries, Chairman, CEO

No congratulations?

Stacy Pak, Prudential Equity

Oh congratulations, sorry. On the fourth quarter, you said you feel good about fleece, can you comment also on your read on sweaters, on newness on the men’s side of the business, and also in denim, because my sense is the compare on denim gets easier in the fourth quarter relative to the third quarter, and Mike Jeffries this is all for you. Also, is RUEHL adequately differentiated from core and your view? Then Mike Kramer for you, you gave us the refresh spending, is the tech spending in the fourth quarter higher than it was in the third quarter? And, all the initiatives you mentioned in terms of investing for the future, when will begin to feel their impact, what’s the impact on the operating margin, and what’s the reduction in the lead time from the new design center? Thanks.

Mike Jeffries, Chairman, CEO

So let me address the questions first. Sweaters – I think the second layer business is more a fleece business today than a sweater business. In the masculine business, a young guy is honestly not very interested in wearing sweaters. We don’t have a generation that likes wool, so that business in the masculine business is at the younger levels, less than RUEHL, has gone to fleece. It’s even happened in RUEHL. I think guys look at sweaters as more candidly an old man business. On the female side of the business in sweaters, it is a more attractive alternative for women, there’s more fashion. Having said that, that business is being outpaced by fleece, but there’s an ongoing sweater business that’s bigger clearly in women’s than in men’s. Denim, you’re right, it’s a lesser percentage of the business in the fourth quarter. And the fourth question about RUEHL, I think we are filling buckets there. I think we now have our buckets full. It’s a good question, Stacy, because my initiative there is more differentiation in the brand now. We were too differentiated in the past. We’ve caught up and I think we need to be more differentiated and that is absolutely our focus, and I think you will see a lot of more of that as spring evolves.

Stacy Pak, Prudential Equity

The last one for you was the newness in mens.

Mike Jeffries, Chairman, CEO

Oh yeah, I think we look really good, really solid.

Mike Kramer, CFO

Stacy, with regards to your question on IT spend from the third quarter to the fourth quarter, it’s going to be roughly flat to a little lower.

Stacy Pak, Prudential Equity

In dollars or percent?

Mike Kramer, CFO

In dollars. Obviously, the fourth quarter is an important quarter for all of us and you don’t like to do as many changes during that quarter as you would normally, but it will be flat to a little bit lower. In terms of the impact, I believe these initiatives impact not only the bottom line but the top line. As Mike talked about, a lot of the reporting that’s going on in the stores I believe is really enhancing our ability to refill our stores quicker and thus enhance our sales. At Home Office, we’re already starting to see some impact in terms of the bottom line spending. The thing I want to caution you on is in terms of these investments in terms of the payoffs; you’re not going to see for a while because what we’re doing is I’m taking those investment saves and turning those into other investments throughout the organization. If you want to look at it bucket by bucket, you would see some bottom line savings but you would see some increases somewhere else. But again, some of these investments are long time past due, so we’re taking our wins and reinvesting them. Now, also keep in mind guys as we’ve indicated we have a new concept coming out here pretty quick, so there’s some significant investment there that you’re probably not seeing from a bottom line perspective because we’re seeing a lot of savings in some of the other line items. So, in terms of the design center and how it’s impacting lead time, I’m going to let Mike answer that.

Mike Jeffries, Chairman, CEO

I think it is impacting the business more qualitatively than quantitatively at this moment. I think it’s had a huge impact upon our ability to create more distinctive product. There is a time factor but candidly we have such a backlog in terms of the demand on that center that I’m not seeing a quantitative reaction yet in terms of timing; we will. I just want to go back to your sweater conversation, Stacy, because there is one more point. The only places we sell men’s sweaters is in our international locations. It’s very an international and not an American business at this point.

Operator

Next, we’ll hear from Paul Lejeuz with Credit Suisse.

Paul Lejeuz, Credit Suisse

Hey, thanks guys. Have you talked about a CapEx number for ’07, it sounds like you’ve got a lot going on, maybe you can give us some guidance for CapEx? And I guess related to that, how far are you through the store investment project, if there’s any way you can quantify how many you’ve got done, what it’s cost you on a per store basis and what we’ve got to look forward to going forward? And then just following up on your comment about the new concept, when should we expect to hear a bit more about that?

Mike Kramer, CFO

Okay, I don’t know if I’ll answer it in order, but I’ll try. With regards to the CapEx for 2007, we’re really not going to give you a number as of yet, but in terms of your question you kind of indicated that you’re talking about a lot of investments. Yes, we are talking about a lot of investments, but we’re going to be very prudent in terms of our capital spending. If you keep in mind the $410 million to $420 million that we’re talking about this year, roughly $100 million of that is related to the DC. We’re not going have to build a DC in 2007. So, hopefully that will give you some kind of clarity in terms of what we’re talking about. I only talked really about IT in terms of a 10% increase in investment spend. What were the other questions?

Paul Lejeuz, Credit Suisse

How far are you through the store investment project?

Mike Kramer, CFO

Roughly on the adults we have finished roughly 100 of the 358, I’ll let you do the math in terms of the dollars that we spent on a per-store basis.

Mike Jeffries, Chairman, CEO

One more comment about men’s sweaters. I’m the only person at this table who has a sweater on; I said it was an old man’s business.

Operator

Next, we’ll hear from Christine Chen with Pacific Growth Equities.

Christine Chen, Pacific Growth Equities

Hi everyone and congratulations on a nice quarter. I just wanted to have a couple of housekeeping questions answered. D&A and CapEx for the quarter, and then the tax rate was a little bit less than what I have modeled and I’m wondering if we should expect that same rate in the fourth quarter and in ’07? I have a question about RUEHL.

Mike Kramer, CFO

Well, with regards to the tax rate, it was a little bit lower than our guidance at 39% but it was marginally lower. But, I would anticipate our tax rate to be 39% in the fourth quarter. So, it was roughly 38.8% for the quarter, but we anticipate it being around 39% for the fourth quarter. CapEx was $117 million in the third quarter and our depreciation expense for the third quarter was $38 million.

Christine Chen, Pacific Growth Equities

And then with respect to RUEHL just a followup, are you happy with the price points of the product currently or do you anticipate changing that going forward as you adjust the merchandize?

Mike Jeffries, Chairman, CEO

No, I’m delighted with the price points. I’m delighted with RUEHL progress. I like the price points, I like the fact that they are casual, obviously we’re comping very well, productivity is growing. I think that what we’re talking about in terms of differentiating is more tweaking than fundamental.

Mike Kramer, CFO

And just to tack onto that, we’ve pointed out that RUEHL had a 61% increase in transaction, so that should give you some feeling that we’re really feeling good about our price point.

Mike Jeffries, Chairman, CEO

We’re positioned exactly where we need to be for growth in that brand.

Operator

Next from JJK Research we’ll hear from Janet Kloppenberg.

Janet Kloppenberg, JJK Research

Hi everybody congratulations, just a few questions. Mike Kramer, it looks to me like when you back out the nonrecurring MG&A last year that the MG&A ratio was down apples-to-apples, yet you said not to expect and leverage in the fourth quarter, I’m wondering why. I’m wondering if you made any share repurchases in the third quarter, we can’t see it on the balance sheet, but I’m wondering if perhaps you did and we’ll see it in the fourth quarter. And on the inventory slow side, I think you talked about maybe accelerating some flows, and I know everybody should be happy that comps are down 7% per square foot, but I of course want to make sure you maximize your comp opportunity in the fourth quarter, so maybe you could talk about the inventory flows for the fourth quarter this year versus last. For Mike Jeffries, I was wondering if you could talk a little bit about this transaction value switch with the tops and bottoms and if you think that mix shift will sort of even out as we go through the fourth quarter or really what you think will happen with the average transaction value as we go through the fourth quarter and the spring season. Thanks very much.

Mike Kramer, CFO

Janet, in answering your first question in terms of MG&A, if you exclude the nonrecurring severance that, it was still a leverage item.

Janet Kloppenberg, JJK Research

It was, wasn’t it Michael?

Mike Kramer, CFO

Yeah, it was very astute on your part. There is roughly also in the third quarter…again we’ll just highlight the larger one…but there were about $5 million to $6 million of other one-time charges last year. One of them was the Hurricane Katrina deductible, another one was there were charges related to a Japan separation which we talked about last year, and the other one was about a $2 million write off on some system related stuff. So, again, I think if you pull all that out you’ll see the fact that on an apples-to-apples to basis there was no leverage for the third quarter, and that’ again with the investments that we’re talking about, that’s why we indicated there will be no leverage in the fourth quarter.

Janet Kloppenberg, JJK Research

And where there any one-time charges in the fourth quarter last year Mike?

Mike Kramer, CFO

Not that I’m aware of quite frankly but nothing substantial. In terms of inventory and accelerating flow, Mike Jeffries has talked a little bit about in terms of the tops, but the negative 7 I don’t know why that would alarm you.

Janet Kloppenberg, JJK Research

No, it doesn’t alarm me. I just wondered if the inventory is where you want it to be right now, if it’s balanced.

Mike Jeffries, Chairman, CEO

The answer to the question is yes. The decreases that you’re seeing are coming out of the basic classification. One, obviously the jeans business is less than last year, and two, even some fashion basics like polos we are maintaining the flow of fashion and in fact increasing it, and that’s what Kramer was talking about in terms of expediting in spring. So, the inventory decreases are coming out of our basic categories. Kramer is that correct?

Mike Kramer, CFO

That’s definitely correctly. Keep in mind Janet this was the quarter last year where we showed 87% increase. So, we feel really good with where we’re at in terms of our inventory. We are not sacrificing newness or freshness to try and drive the optimization of inventory at all.

Mike Jeffries, Chairman, CEO

And I think you guys can see we flow newness here on a weekly basis, and I’ve been saying that to evaluate our business, and I know you know this Janet better than anybody, you can’t look at us at the beginning of each quarter and say that’s all there is because we change weekly, and that’s our mission – to flow newness every week and I think we’re doing that. In terms of your question about the transactions, we’ll continue to see an increase in transactions because for that shift from bottoms to tops, which will continue to happen through the fourth quarter. I suppose you asked if it would mitigate a bit in the fourth quarter. Yes, but the business is still being driven by tops, so you’d see that same kind of ratio happening in the fourth quarter.

Mike Kramer, CFO

With regards to your question on share repurchases, there were no share repurchases in the third quarter.

Operator

And again I would like to remind our audience, please initially limit yourself to one question. We’ll be happy to take followups if there is time. Next, we’ll hear from Jeff Black with Lehman Brothers.

Jeff Black, Lehman Brothers

Thanks, a question for Mike Jeffries, a quick one. As you look ahead to spring, what’s you assessment of what really drove erratic performance in the first quarter and more specifically in the second quarter at Hollister and the core, what are the lessons you learned from that experience and what do you think the opportunities are as we move into the first quarter and the second quarter next year? Thanks.

Mike Jeffries, Chairman, CEO

I’m not sure how erratic the performance was number one, but let’s discount that. I think that the secret of each of our brands is growing newness and we are committed to doing that and being on the front end of fashion curbs. And as we continue to do that better and better, our business just continues to grow. So, I don’t look at last year as any kind of a problem, but I think we have opportunity to go forward.

Mike Kramer, CFO

Yeah, unless you can clarify what you mean by being erratic, I mean that’s…

Mike Jeffries, Chairman, CEO

I don’t see erratic but if you’d like to talk to anybody about that later do so, but there’s no erratic performance in our business, we’re pretty consistent, and that is really the point of the business today. There’s huge consistency in the business as we go on forward.

Operator

We’ll take our next question from Randall Koenig with Bear Stearns.

Randall Koenig, Bear Stearns

Hey, great, thanks a lot. Two questions, one for Mike Kramer. You talked a little bit about the Canadian business. I guess the web sales were up 150%. Can you just talk a little bit about the flagship in New York and in the store in Ala Moana, Hawaii, what are you seeing in terms of those stores in terms of any metrics you can share with us that provides you with your confidence in international strategy, anything you’re seeing in terms of any international shoppers from say Europe or any other particular countries in those stores that you can share with us. Then secondly for Mike Jeffries, can you just talk a little bit about the success of the portfolio strategy you’ve had since you’ve implemented it in 1997 with the kids business. When you think about all these festive retailers going through portfolio strategies and you guys are already set up that way, what advantages do you think you have in managing your portfolio over other retailers? And then do you have any advantages in your real estate negotiations with the mall operators given your strong portfolio?

Mike Kramer, CFO

With regards to any metrics that we can provide with regards to Canada or Ala Moana to help you feel better about international expansion. I can reiterate the metric that we’ve set before and I think these are pretty substantial metrics. I mean Canada is continually performing at three times our domestic business in both of our brands which we’re very excited. That is continuing. Fifth Avenue, we’ve really not talked about sales. We have indicated that the four-wall profit is accretive to our adult brand, which I think is spectacular. We indicated that again in terms of our conversation in terms of profitability on Fifth Avenue, which a lot of retailers don’t do.

Mike Jeffries, Chairman, CEO

And we’ll talk about volume but I think you can visit the store and kind of get a feeling for what’s going on there at any time.

Mike Kramer, CFO

And we’ve said we have a high percentage of international at our Fifth Avenue store in Ala Moana and that gives us great excitement for going international. That’s really all I can say, but it’s just reiterating what we’ve said in the past.

Mike Jeffries, Chairman, CEO

To talk about a portfolio strategy, I believe that our strategy is different from most people with portfolio strategies in terms of the control we exert over our businesses and the consistency that we’re achieving because of it, and I think there’s a lot that goes into the strategy but I think it’s pretty much about control over the businesses.

Mike Kramer, CFO

You know, we recognize the fact that first of all from a real estate perspective we are a player out there as well as the dominance of all four of our brands and we recognize there is some power that comes behind that. All I can say that is we recognize that and we’re going to fully utilize that.

Operator

Our next question will come from Rob Wilson with Tiburon Research.

Rob Wilson, Tiburon Research

Yes thank you. Could you speak to your distribution center which I believe you’re going to open at the end of this month, is that right Mike Kramer?

Mike Kramer, CFO

That’s correct.

Rob Wilson, Tiburon Research

And also should we expect some de-leverage on stores and distribution expense related to that going forward? And my next question would be, did you start out the quarter with a higher level of markdowns than last year?

Mike Kramer, CFO

In terms of the distribution center, we anticipate that opening in the end of December, first part of January and it’s going to open in stages. Yes, there’s going to be some pressure with regards to the stores and distribution on that line item in terms of the DC, but keep in mind the stores and distribution line item is a significant line item and the DC represents a smaller portion of that, but there is going to be pressure with regards to that as we get up and going and fully utilize the DC. But we’re very excited about it.

Mike Jeffries, Chairman, CEO

We don’t track the end of third quarter because it’s not the end of the season as we would the end of the spring season, but I think they would actually be absolutely in line with last year.

Mike Kramer, CFO

Yeah, I don’t think there was any abnormality this year with regards to the seasonality if you will of markdowns other than what we’ve already talked about in terms of the movement from sales to clearance, but it wasn’t substantial.

Operator

Our next question will come from Marne Shapiro with the Retail Tracker.

Marne Shapiro, Retail Tracker

Hey guys congratulations. By the way on Southern California, my best guess is those kids have got way too much sun and they can’t think straight. I believe that’s true because if I was in Southern California I’d be buying all the stuff in Hollister that I could get my hands on. But I do have a couple of very quick questions. You talked about a bunch of different metrics, you didn’t mention any change to your PTs, I was curious if there was anything there. If you could just quickly follow up on the market on strategy, are you satisfied with this new markdown strategy and I guess what should we expect now a year end from you guys?

Mike Kramer, CFO

I’ll take the first part. On units per transaction, adult was up 7% for the quarter, kids was up 9% for the quarter, Hollister was up 7% for the quarter, and RUEHL was up 14% for the quarter; the total company is 7% for the quarter.

Mike Jeffries, Chairman, CEO

I don’t want to make too much if there isn’t really a new markdown strategy. We’re just clearing as we go along. I would not say that there’s a new strategy.

Mike Kramer, CFO

Again, the third quarter as Mike indicated before, I would say that the markdown rate last year was too low.

Mike Jeffries, Chairman, CEO

So, we’re not looking at that as an issue. We clear on an ongoing basis.

Operator

We’ll take our next question from Dana Telsey with Telsey Advisory Group.

Dana Telsey, Telsey Advisory Group

Hi, good afternoon, and congratulations. It seems like one of the focuses of this call has been systems, more so than we’ve heard on other calls. As you invest in the systems and the different aspect of systems, do you see it as an opportunity to drive the operating margins higher and does it differ by brand?

Mike Jeffries, Chairman, CEO

The answer to the first question is yes, absolutely.

Mike Kramer, CFO

I mean we believe that there’s going to be strong pay back in terms of the investment that we’re seeing in 2006 and 2007 without a doubt, but I want to say that I think that not only is the investment piece of the call, we’re trying to get across to the fact that we’re investing and still providing leverage, which I think is really what we’ve been speaking to, as well as the significant transaction growth that we saw this quarter. Those are the three key takeaways.

Mike Jeffries, Chairman, CEO

Is it different by brand? No, I think we have opportunity in every single one of the brands, Dana. That’s a good question.

Operator

Next, we’ll hear from Mitch Kummetz with Robert Baird.

Mitch Kummetz, Robert W. Baird

Thank you. Let me add my congratulations. Let me start with a couple of quick housekeeping questions and this will pertain to the third quarter. Could you tell us what you internet sales were and then also productivity by concept?

Mike Kramer, CFO

I’ll go with the productivity by concept on a rolling 12 basis. On a rolling 12 basis, adult was $448, kids $497, Hollister $553, RUEHL $344, total company $490. Let me reiterate that. And increase on adult was 12%, kids 27%, Hollister 24%, RUEHL 59%, for a total company of 19%. Another key takeaway that we want you to takeaway on this call, and one of the exciting things to point out there is kids at $497, which is absolutely spectacular. $41 million in terms of internet with shipping and handling.

Mitch Kummetz, Robert W. Baird

And then secondly in terms of the guidance for the back half, you were kind enough to mention that the low end of that back half guidance is productivity on a flat comp for the fourth quarter, should we assume that to get to the high end of the guidance you’re looking at something low single digits, is that something you’re willing to discuss?

Mike Kramer, CFO

I’m really willing to discuss that. I mean what I wanted to do is tie our EPS guidance to sales so that you can monitor as it goes on, but I really don’t want to indicate what the top end is related to.

Mitch Kummetz, Robert W. Baird

Okay, thank you, good luck.

Operator

Next, we’ll hear from Brian Tunick with JP Morgan.

Brian Tunick, J.P. Morgan

Thanks, hey guys. Okay, first for you on maybe Hollister. Can you talk about some of the older Hollister stores, I guess what three, two years old now, how are they still comping, and what are some of the best Hollister stores doing per foot right now?

Mike Jeffries, Chairman, CEO

Oh lord it’s huge, and they continue to comp like crazy. I don’t have a total, maybe we could look at screen for you, but you’ve been to Roosevelt Field Hollister, which continues to comp positively and we opened a store in Smith Haven, which I think is projecting at $14 million and Roosevelt Field is still comping positive. And I think the female productivity of Hollister Roosevelt Field is about $4000 a foot. I haven’t done a screen in terms of age of business, but they continue to comp very positively. And the productivity is no secret; the productivity is much higher in the female part of the business than the masculine part of the business. We’ve addressed this by expanding one additional room in the back of Hollister in a three-room concept, so in fact we have more room in the female brands than the masculine brands; however, we maintain the masculine face on the door. I think this will help relieve some of the pressure in the Hollister brand in terms of this female productivity. In fact, in both girls and Abercrombie and Hollister Beddies there is extreme pressure on the female side of the business in terms of dollars per foot, and we are looking for creative ways to alleviate a little of that pressure.

Mike Kramer, CFO

It’s very clear that the $553 that I indicated on Hollister is an average. There’s a huge distribution as Mike has pointed out, Roosevelt Fields, so that gives us much comfort that there is a lot of room for growth.

Mike Jeffries, Chairman, CEO

Absolutely, but good question Brian. I think you’ve been in those stores and you’ve seen what we’re talking about.

Operator

We’ll next hear from Crystal Kallik with D.A. Davidson.

Crystal Kallik, D.A. Davidson

Congratulations also everyone. Why don’t you talk a little about RUEHL, just how you’re approaching it now that you’re feeling very comfortable with the way that brand is positioned and the price point? I guess I wonder as an older customer, certainly as I’ll be on core Abercrombie & Fitch, and how do you think about marketing to this customer outside of the box, are you still feeling like it really is the store presentation? And then how do you address expansion in RUEHL? Is it time to start rolling it out more aggressively and then how do you scale the store economics, what’s the trigger point when you start to really leverage the investment behind RUEHL?

Mike Jeffries, Chairman, CEO

Well, there are a bunch of different questions there. We totally believe that we market within the four walls of the store and that’s what we continue to do to be able to build that business, and there is one exception and that is the leather goods part of the business, which we believe is an opportunity for helping the position, and we will be looking for the spring. There is a PR campaign and a very small handbag advertising campaign to position that portion of the business in a way that identifies us a status brand. It is only to develop that leather goods business which we have invested in as a company and we’ll continue to do so. But for the balance for the brand we don’t think we have to do anything different from what we’re doing in store. We are growing the store base, we are aggressively looking for locations as we speak, and I think Kramer can talk to our expectations of profitability.

Mike Kramer, CFO

Yeah, I think that we again are sticking with what we’ve previously guided to in terms of profitability towards the latter part of 2007 fiscal, but let me talk about that aggressive rollout because I don’t want you thinking that…we’re very excited about this brand and as Mike said we are aggressively looking. Again, it’s the quality of real estate that’s going to drive this, but we are very aggressive and very excited about this brand. Again, I’m very excited about the profitability aspects of this brand as well.

Mike Jeffries, Chairman, CEO

But let’s be clear about who the target customer is too; it is a 30-year-old. Each of our brands is very focused on age, and let’s just go over it again. Abercrombie 12, Hollister 16, A&F 20, and RUEHL 30, and I don’t even give age brackets anymore. A 30-year-old is not very old in America today, and beyond that I have to say I don’t think it’s in our DNA to really do business with mature people.

Mike Kramer, CFO

Let me reiterate. We believe that an optimum number of stores to really maximize our margin, which is a key driver in terms of profitability is 25 to 30 stores.

Crystal Kallik, D.A. Davidson

Thank you very much, it’s very helpful.

Operator

Our next question will come from Kimberly Greenberger with Citigroup.

Kimberly Greenberger, Citigroup

Great, thank you, good evening. Mike, I was hoping you could just hindsight the third quarter, talk about the merchandize performance, what were you most pleased with and where do you think you had opportunity that we can look forward to for next year? And secondarily for Mike Kramer, I’m not sure that I understand exactly what you mean about store system and I guess a system to get the back office to the floor…if you could help an IT dummy, thanks.

Mike Jeffries, Chairman, CEO

Okay, I think we clearly had an extraordinary top performance in the third quarter, and it was pretty consistent by brand. So, our performance was very strong across the brands in masculine and feminine fleece. Our performance was very strong in women’s fashion knits, shirtings, the graphics business was kind of flat, and the sweater business was flat in women’s and nonexistent in men’s because we’re not in the business. But that resulted in a pretty extraordinary tops business. Our bottoms business was not positive. Our denim business as we have said was negative but a very balanced business, and we constantly sell light medium dark washes, continue to sell destroy washes very well because it’s a nature of our business; that business was balanced, and I think we didn’t miss much business there. The knit bottoms business was very good in masculine and feminine. So, I would say we get very high marks for tops in the third quarter, and we think that that’s going to go forward.

Mike Kramer, CFO

With regards to the technology and the store systems, I mean with the volumes that we’re doing and particularly the productivity that we’re doing it’s imperative that we get the product from the back of the house to the front of the house even with the stack heights that we have. You know, any time you walk into our stores, whether it’s 10 in the morning, 2 o’clock in the afternoon or 7 o’clock at night, you will still have that same size and stack height integrity, because we do not want to lock sales, and it’s important. We’ve talked about our investment in what we call the impact program, and the impact program is really investing in a small staff that enables us to continually replenish the front of the store. We actually have reports that come off intermittently -- I won’t go into the details -- that shows what’s actually sold on the floor, so we can replenish it quickly.

Mike Jeffries, Chairman, CEO

Let me insert this because we’re learning a lot from our flagships. In Fifth Avenue we must replenish within 45 minutes of the time an item is sold or we will miss business, that’s our work. Turning inventory there, and what that’s teaching us in terms of systems for the chain is kind of fascinating.

Mike Kramer, CFO

Absolutely, and the learnings that we’re actually learning here is also helping us in terms of just even the back of the house, which hopefully we can become as efficient out there as anybody and thus maybe require less need for backup house, which is expensive real estate.

Operator

Next, we’ll take a question from Josh Schwartz with Flatbush Watermill.

Josh Schwartz, Flatbush Watermill

Hey guys, how are you?

Mike Jeffries, Chairman, CEO

We’re great, how are you?

Josh Schwartz, Flatbush Watermill

I’m well thanks. Mike Jeffries, I have a question here. I’ve been sitting here trying to figure out an ingenious way to ask you this on this call given the environment, but I’m just going to come out and ask you. I listened to you and I think I know the business well and arguably nearly everything is going as well as it ever has since I’ve known you and this business, and I know you have reasons for everything that goes on, so I just want to understand. When I look at the operating margin and I know you guys have been very clear here about the investments you’re making and you think you can drive higher margin over time, I mean that’s intent. But I guess I’m curious, I’m looking at the growth in the store and distribution expense and I see that we’re still running -- after multiple years of making this change in the operating strategy about investing in the stores -- we’re still growing at twice the rate of the square footage growth, and I go back and I think I’ve known you for a while. I understand we may have underinvested, but if we go back to say ’98 when sales per foot were even higher and we were running out of the limited DC when your distribution expenses were much higher…

Mike Jeffries, Chairman, CEO

I’m not sure in ’98.

Josh Schwartz, Flatbush Watermill

I guess here’s the question, the question is…

Mike Jeffries, Chairman, CEO

I think we’ve surpassed the highest year; we’re doing that now when A&F was by itself.

Josh Schwartz, Flatbush Watermill

So my real question is, why are store and distribution expenses still rising so fast even with the investments we’re making, I mean I’m just trying to understand your thinking.

Mike Kramer, CFO

Well, I attribute the majority of that to some of the under investment, and we know we’re seeing and hopefully you can recognize that, the pay back in terms of the top line.

Mike Jeffries, Chairman, CEO

Let me just come across here. We starved this business, absolutely starved this business, and there’s a change in philosophy about that statement in the future of the business, and I think we’re seeing increased productivity from it, and we’ll see more of that in the future, but we looked at a business that was totally undernourished; we’re in catchup mode.

Josh Schwartz, Flatbush Watermill

Can I ask you one followup?

Mike Jeffries, Chairman, CEO

But, I’m not going to talk…the question was asked are we going to see increased levels of productivity.

Josh Schwartz, Flatbush Watermill

You know, I’ll leave it for a different time.

Mike Jeffries, Chairman, CEO

That’s okay, what’s the real question.

Josh Schwartz, Flatbush Watermill

Well, it was related to that. My head says the reason we want to spend this money is so we have higher sales productivity than we otherwise would, and I understand we’re doing high sales per foot in New York that we want to change the adult brand to look that way. And I guess I’m just curious as you change it are you seeing any change in productivity or is it too soon?

Mike Jeffries, Chairman, CEO

Let’s get into some detail. Physically adjusting the store takes time, but I kind of look at it two ways. I think investments are about improved productivity in the future, which I think we’re going to get and take to the bottom line when I give you the model now, but it’s also sustaining brand. I think when you look at the Abercrombie & Fitch brand it has sustained a level of popularity and emotional appeal over a long period of time. This movie has changed. We look different from how we looked five years from now, and it talks to the sustainability of a young business. There have been very few young businesses that have sustained the performance over the period of time. We’ve shown consistency, sustainability, and future productivity increases, so that’s our look at it.

Mike Kramer, CFO

In 2007, you’re going to see operating margin expansion, but you’re going to see it with a significant amount of investment that’s offsetting this malnourishment that Mike has talked about, not to mention the fact that we were doing this without deteriorating our existing scores and fleet. We are spending money to maintain our stores at the high standards that we have, but keep in mind we spend very little in terms of marketing dollars, and that’s mostly billboard and that’s not very much. All of our marketing dollars is the in-store experience which falls in the stores and distribution line item.

Mike Jeffries, Chairman, CEO

I think, Josh, the point is where we are going, we have every belief that you’re going to see more in terms of expansion on the operating margin line because we’re focused on that, but dwell on this sustainability of the business.

Josh Schwartz, Flatbush Watermill

I understand, and by the way I believe what you say. If you believe something I have trust in you, so thank you.

Mike Kramer, CFO

Well, hopefully with the investment that’s going on right now, the increased investment because of the malnourishment, you’ll start seeing a higher operating margin expansion growth after we go through this.

Josh Schwartz, Flatbush Watermill

My real comment is I understand and I would just ask you, which I’m sure you’re doing this, but I’ll just throw it out there. There’s always a question because from the outside it looks like a big number but I do trust you and you’re an expert at this, so thanks.

Mike Jeffries, Chairman, CEO

We learn every day but I think go into the stores, I say that to all of you. What do we look like out there, what do we look like today versus a year versus two years ago, how do we compare to the folks in the mall? That’s kind of the ending statement.

Mike Kramer, CFO

Compare the sustainability that you’ll see in our brands with the other brands.

Mike Jeffries, Chairman, CEO

And consistency. So Josh, thank you. Have you found a girlfriend yet?

Operator

We’ll take our next question from Robin Murchison with SunTrust Robinson Humphrey

Robin Murchison, SunTrust Robinson Humphrey

Well, I’m not sure how to follow up on that. Okay I had two questions, just real quickly. RUEHL, at what point does that go, do you being web sales I presume 25-30 stores or when do you start looking at selling on the web for RUEHL?

Mike Jeffries, Chairman, CEO

Yeah, we have to get to about that level, that’s what we’re looking at, because it’s the inventory level that we need to sustain to margin out, but it’s about that level. That’s where we’re targeting.

Robin Murchison, SunTrust Robinson Humphrey

Okay and then lastly Jeff, would you just remind us when you began this clearing as you go along strategy, what is middle fourth quarter?

Mike Jeffries, Chairman, CEO

Oh no, we’ve been doing that for a long time. I think it’s just kind of taking more immediate action than we ever have. You could look at how we marked down very quickly now, and I think if there’s a difference we are just reacting a little faster. If you look in our current inventory we delivered cuff sleeved polos. They were a disaster and we marked them down the next week, and we never reacted that fast.

Robin Murchison, SunTrust Robinson Humphrey

Right now, in our local Hollister stores, local Abercrombie stores, and on the web, it looks like you have a plethora of knits, Ts, the tops that you’re trying to clear through, but I’m assuming given the inventory levels you’re fine with all that?

Mike Jeffries, Chairman, CEO

I’m fine and we do that on an ongoing basis. Again, we push that knit business, so as a percent of the business it is fine, we’re driving an awful lot of knit comp business.

Mike Kramer, CFO

Yeah, think about the velocity of that business.

Tom Lennox, CC

Okay, I think that wraps it up. Thank you everyone. I appreciate you calling in, thanks.

Operator

And that does conclude our conference. Again, thank you all for your participation. We hope you enjoy the rest of your day.

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Source: Abercrombie & Fitch Q3 2006 Earnings Call Transcript
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