Eric Cerny - Manager, IR Mike Jeffries - Chairman and CEO Jonathan Ramsden - EVP and CFO

Jeff Klinefelter - Piper Jaffray Janet Kloppenburg - JJK Research Edward Yruma - KeyBanc Brian Tunick - JPMorgan Christine Chen - Needham & Company Stacy Pak - SP Research Evren Kopelman - Wells Fargo Securities Michelle Tan - Goldman Sachs Richard Jaffe - Stifel Lorraine Hutchinson - Bank of America-Merrill Lynch Robert Samuels - Phoenix Partners Dorothy Lakner - Caris & Company John Morris - BMO Capital Jennifer Black - Jennifer Black & Associates Robin Murchison - SunTrust Marni Shapiro - The Retail Tracker Laura Champine - Cowen and Company Roxanne Meyer - UBS Dana Telsey - Telsey Advisory Group Amy Noblin - Weeden Howard Tubin - RBC Capital Markets Sam Panella - Raymond James Linda Tsai - MKM Partners

Good day, everyone, and welcome to the Abercrombie & Fitch second quarter earnings results conference call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny, please go ahead, sir.

Good morning and welcome to our second quarter earnings call. Earlier this morning, we released our second quarter sales and earnings, balance sheet, income statement, store opening and closing summary, and an updated financial history. Please feel free to reference these materials 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. This call is being recorded and the replay may be accessed through the internet at abercrombie.com under the Investors section. Before we begin, I'll remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Today's earnings call will be limited to one hour. We will begin the call with a few brief remarks from Mike, followed by a review of the financial performance for the quarter from Jonathan Ramsden. 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. As a reminder, the after-tax operating results of Ruehl for 2009 and prior periods are now included in discontinued operations and income statement and related comparisons to prior year therefore generally exclude Ruehl. Now I'll turn the call over to Mike.

Good morning, everyone. Thank you for joining us. We are pleased with the progress we're making as we pursue our strategy of leveraging the international appeal of our iconic brands to build a highly profitable, sustainable, global business. We achieved growth both domestically and internationally during the quarter. We are gaining traction and we are very excited about what we see ahead of us. In that context, I want to take a few minutes to recap how we see the state of our business today and to talk about our progress on some of the key initiatives we've discussed in the recent calls. Starting with our domestic business, we're pleased that all of the brands achieved positive comps for the quarter. We are particularly pleased with the performance of the flagship and tourist stores both on an absolute and a relative basis. Year-to-date, our U.S. tourist stores produced double-digit comps. And as you know, we operate these locations without many of the sale events and promotions that we've run in the rest of the chain. At the same time, we are also pleased that our non-tourist stores for all brands were in positive territory for the quarter. I want to make special mention of our Hollister Epic store in SoHo, which has posted very strong comps since it entered the comp base a few weeks ago. Next, we believe that our marketing and promotional activities for the quarter were effective and appropriately timed. We also believe that the promotions were effective in driving overall gross profit dollars. Substantially all of the promotions we ran during the quarter were planned in advance and were driven by our expectation that they would be effective in driving sales productivity and gross profit dollars. As we said at the beginning of the year, we are willing to tolerate some gross margin rate erosion in the near term to accomplish that. While it is too early to speak to back-to-school results, I can also tell you that I feel very good about the look and feel of our stores today. We have great product in both men's and women's. We are gaining traction with trends. And importantly, we have inventory behind these trends. The marketing in all of the brands is exciting and energetic, and we are engaging with our customer in ways that promote some of our key back-to-school items. We have an appropriate mix of fashion and basic items in the assortment, and we intentionally took a more aware-now approach to our back-to-school floor set. Most importantly, I feel that we are now properly organized in merchandizing, planning and design to deliver sustainable growth domestically and internationally. Having said that, the performance of a number of our domestic stores remains unsatisfactory. And to that end, we remain committed to restore closure plan, particularly for the A&F and kids brands. Jonathan will provide details on this in a few minutes. Moving to our international business, we're very happy with the performance of both our stores and direct-to-consumer business. Our U.K. Hollister stores continue to comp positively in aggregate for the quarter. The London flagship had double-digit comps for the quarter, and Milan and Ginza continued to perform well. We will be below our planned international Hollister openings for this year, but this does not reflect a lack of excellent opportunities for new stores. Importantly, we have already taken steps to add resources to ensure that we keep the pipeline full going forward. It is very important to our plans that we achieve an accelerated rate of openings in 2011. We continue to work on additional flagship opportunities for 2011 beyond those already announced, as well as a longer list of opportunities for 2012. From a sourcing standpoint, the costing benefits we obtained in the quarter significantly cushioned the impact of the AUR reduction. We anticipate a modest cost benefit in the second half of the year despite much higher raw material cost. We are prepared for the fall season to be a very competitive selling environment. I want to talk briefly about our direct-to-consumer business where we are very pleased with the growth we have achieved. We want to sustain that growth going forward and are taking steps to do that, including adding resources, upgrading and expanding our platforms and continuing to allocate more inventory to direct-to-consumer. We continue to be very focused on the key initiatives we laid out on previous earnings calls to drive improvements in our operating margin and return it toward historical levels. With that, I'll hand the call over to Jonathan.

Thanks, Mike, and good morning, everyone. As Eric mentioned, I'll be making reference to our investor presentation on a number of occasions during these comments. The second quarter of the company's net sales increased 17% to $745.8 million and comp store sales increased 5% and direct-to-consumer business up 50% from the quarter and new international stores made significant contributions to our sales growth. International sales in total were $133 million up 85% for the quarter. A number of key sales metrics are included on page five of the investor presentation. Our gross margin rate for the quarter 65.1% down 150 basis points; the erosion of gross margin was primarily due to a 15% decrease in AUR for the quarter, which was partially offset with a reduction in average unit cost. A summary of our operating expenses is included on page seven of the investor presentation. As a percentage of sales and excluding an impairment charge of $2.2 million, stores and distribution expense for the quarter decreased to 48.6% of sales from 52.1% last year. Store occupancy cost for the quarter, excluding the impairment charge was slightly below $160 million. For the third quarter, we anticipate store occupancy costs to be around $168 million. All other stores and distribution expense were approximately $203 million or 27.2% of sales for the quarter. For the third quarter we anticipate all other stores and distribution as a percentage of sales to be close to the 25.2% of sales they represented in the third quarter of 2009. MG&A for the quarter was $95.2 million up 10% from $86.7 million in the second quarter last year. MG&A for the quarter included total equity incentive comp of $11.6 million as compared to $7.3 million last year. Also included in the MG&A is a $1.5 million net benefit of legal settlements offset by an adjustment to the SERB accrual. For the third quarter, we expect MG&A to be in mid-teens percentage driven by higher equity and incentive comp, high-end net legal expenses and additional marketing investments. Operating margin for the quarter was 4%, excluding the impairment charge, and represented a 260 basis point improvement over last year. The tax rate for the quarter was 27.2%, benefited from the resolution of certain state and federal items during the quarter. On a full-year basis, we expect the effective tax rate to be around 37%; however, the rate remains quite sensitive to the domestic international profit mix. Net income for the quarter was $19.5 million or $0.22 per diluted share including a $0.02 loss per diluted share relating to the impairment charge. Turing to 2010 store openings, page nine of the investor presentation recaps our confirmed flagship openings. We also remain on track to open our first international Gilly store in London in the fourth quarter. Page 10 of the investor presentation summarizes our expected cumulative international store openings through the end of 2010. With regard to Hollister international stores we are now expecting approximately 20 openings per year down from our prior estimate of 25. This reflects a low than expected conversion rate, in some cases due to landlords being unable to deliver agreed space. As Mike said earlier, we are working hard to ensure that we have sufficient deals in the pipeline to meet our future objectives for international Hollister openings, and have added resources to fulfill that objective, including our expected 2010 Hollister openings of three stores in Spain. Domestic merely expect to open three A&F stores, including our first store in Puerto Rico, three kids stores, three Hollister stores, two Gilly stores and five outlet stores. We will also open one A&F store in Canada. Coming back to store closures, over the past few months, we have reviewed our underperforming stores with a particular focus on leases expiring in the next couple of year. Based on that review, we expect to close a total of approximately 60 domestic stores over the course of 2010 predominantly at the end of the year. Most of these closes will be by way of natural lease expirations and in the A&F and kids brands. In addition, we have a number of stores where we expect to complete buyouts otherwise close earlier than the lease expiration date. In addition to 2010 closures, we currently expect approximately 50 additional stores to close during 2011, predominantly by way of natural lease expirations but including a small number of early closures. The total number of closure could increase if we are able to negotiate additional buyouts on underperforming stores with later lease expirations. The impairment charge of $2.2 million taken in the quarter relates to stores only expected to close earlier than their natural lease expirations, most of which we included in prior impairment charges. We anticipate incurring some additional charges for store closures related to lease buyouts, de-branding costs and other items, and will disclose these charges as they are incurred. Inventory at the end of the second quarter was up 47% in costs compared to a year ago. Composition of this increase in dollar terms is shown on page 12 of the investor presentation and comprises $25 million for higher spring carryover, $25 million for higher on-hand basic inventory, $61 million for higher on-hand fall inventory, and $44 million for higher inventory in transit. And particularly given the way and our trend of the business, we are comfortable with our higher spring carryover. With regard to fall and basic inventory, the increase incurs a significant change in the timing of receipts compared to last year. We believe this is necessary to correct for the fact that we were significantly under-inventoried and below presentation standards coming into the full season last year. For the full season as a whole, we have bought to mid-single digit comp in addition to which we have added inventory to support high growth rates in DTC and in our international business. We expect inventory levels to remain significantly elevated on a year-over-year basis at the end of the third quarter before moderating at the end of the year. We now expect total CapEx for 2010 to be approximately $200 million, including $160 million related to new stores, store refreshes and remodels, and approximately $40 million related to IT, DC and other home office projects. The reduction in CapEx is a result of lower store openings, combined with achieving CapEx reductions on committed projects. This concludes our prepared comment section of the call. We are now available to take your questions.

(Operator Instructions) And for our first question we go to Jeff Klinefelter with Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Just wanted to maybe dig a little bit further into the inventory. There are concerns out there that denim trends have become very soft across multiple channels of distribution. I know that you guys have been sharper or more aggressive with some of your pricing in that category. Obviously it's working with the comp trends. Could you address within that inventory, or would you want to go more specific in terms of how much is denim actually, and what your expectations for denim pricing would be heading through the balance of the back-to-school and fall season?

I guess we broke out that analysis, the component of basic as part of the increase. I don't think we are going to certain break that out any further. But I think what we're seeing clearly overall is that we're comfortable with the position we're in, and I think that's on a general level as well as in specific categories. Jeff Klinefelter - Piper Jaffray: In terms of pricing going forward, Jonathan, into the back-to-school season and particularly on Denim, what are expectations?

Well, I think as Mike said earlier Jeff, we're prepared for an aggressive promotional environment. We have the inventory to support that, and I think we're going to see how that plays out a little bit over the course of the season.

And we go next to Janet Kloppenburg with JJK Research. Janet Kloppenburg - JJK Research: Mike, on the last call you talked a little bit about concerns about rising cotton prices and other sourcing pressures that were coming out of the Far East, notably China. I wondered if you could talk about the outlook for price increases in the spring season. I think you made reference to the fact that you'll have some actual price and cost advantages here in the second half of the year. But what the outlook is for first half of next year? And also, if you could update us on the outlook for new A&F flagship openings beyond the Madrid store.

First, what our anticipation is for our average unit cost. To back up for the fall season, we think we'll be lower than last year slightly, but the cost benefit is less in fall than it was in the spring season. We're anticipating that our spring average unit cost should be flat to last year. Made of two components, the rise in curtain prices will moderate, but we see increasing labor costs. So it's still a difficult environment out there for sourcing, but we think that we will be able to hold a seize to last year's levels, which is not an easy task but we think we're going to be there. The flagship openings, we did state that we still have an opportunity to open more 2011 stores, and we do. And we're very close to being able to announce that. There are quite a few in the pipeline for 2012 in very exciting cities with very exciting sales and profit opportunities. But I can't say more than that today, but we're working hard at it. Janet Kloppenburg - JJK Research: Jonathan, one question on the inventory is, is there any way to delineate how many more markets your DC channel is servicing this year versus last, and how much of the inventory increase would account for that?

I mean DTC is available pretty much to everybody. We have specific sites as we go into each country, but in general, DTC is available to pretty much anybody. But clearly, we have a very high rate of growth in DTC, and that's been supported by a much higher level of inventory than we've carried in the past. And we certainly think that's one of factors in driving that DTC growth. Janet Kloppenburg - JJK Research: Is there any way to distinguish how much of the inventory increase is attributable to that?

We do allocate inventory specifically to DTC. I think at this point we haven't traditionally broken that out. It might be something we'll look at doing going forward.

And we go next to Edward Yruma with KeyBanc. Edward Yruma - KeyBanc: I was wondering if you guys could talk a little about the stores that you plan on closing for 2010 and maybe give us some color behind their current performance metrics.

Sure, Ed, happy to do that. We said that about 60 stores. A few of those have already closed in the first half of the year, but most of them will be at the end of the year. Most of them are natural lease expirations, but we do have some buyouts we anticipate, as well as some kick-outs and other early closures, which are the ones that drive the impairment charge. Roughly speaking, those stores are averaging about $1 million of volume each. And that particular group of stores has roughly flat EBITDA on a full roll basis, on an annualized basis. That excludes other costs outside of the full roll, and obviously that it doesn't pick up any transfer of business for DTC or other brands or other stores. So we think the overall effect of closing them will be positive to EBITDA because of that. For 2011, the number is a little less solid at this point just because it's further away. But as we said, we have about 50 stores that at this point we would expect to close. And we have a number of stores beyond both of those populations that we would be very interested in closing if we were able to agree economically acceptable buyouts with the landlords. So that sort of remains on the docket, and it's something we're going to continue to work through.

For our next question we go to Brian Tunick with JPMorgan. Brian Tunick - JPMorgan: Just some color, I don't know if you said anything about international margins on your commentary. The dollar clearly has been volatile the last six months. So how does currency impact how you think about planning, either new countries or profitability of the international segment? And then how should we think how currency will impact the gross margins in the back half?

Let me tell you those components Brian. I guess in terms of international margins, the Hollister U.K. stores continue to be north of 30% on a full roll basis for the second quarter, as they were in the first quarter. So we're very happy with that. I think for the rest of the stores it's sort of too early really aggregating those, but clearly we are very happy with the performance of the other Hollister stores we have in Europe as well as the international flagships, which remain roughly around that $200 million aggregate volume between the three international locations we spoke to at the beginning of the year. Currency impact for the quarter on sales was under 1% year-over-year, so pretty modest. It's something we continue to look at closely. We've spent a lot of time taking our Board through all of the components of FX risk. We talked a little bit about that in the past. We did some hedgings; we stress-test our deals looking at the currency load over a five-year period, which all of the currencies today is still above. So we've spent a lot of time thinking about that and how we can mitigate the risk. But clearly, perhaps the single most important factor in that is the high operating margins we start with for each of the stores, which gives us some cushion against any currency exposure. Going forward, increasing the diversification around local presence will also be an important part of that, so that we're diversified on a currency basis. And then there are other things that we can do over time, including continuing to evolve our hedging strategy. Brian Tunick - JPMorgan: And how about the impact on gross margins in the back half?

We're not anticipating a significant hit on gross margin from currency.

We'll go next to Christine Chen with Needham & Company. Christine Chen - Needham & Company: I'm wondering, your e-Com business is doing so well. Have you been able to use that to test product, and is that something that you can react quickly enough of certain things that you have on the internet only, like the Epic product you're selling, and maybe getting it into different locations? And then when you talked about all concepts comping positives, is Gilly Hicks included in that?

Well, I'm delighted that you ask about Gilly, because Gilly is doing very, very well. And the existing stores are doing very well. We also opened a new 5,000 square foot store in Roseville a few weeks ago that is doing very well, half the square-footage of the first prototypes. We are very, very pleased with Gilly and the answer to that is that Gilly is comping positively. I'm not going to give you an order of magnitude but. And I think you can see that in the stores. The direct-to-consumer business, we have been experimenting with that; we have been testing categories of direct-to-consumer. And the direct-to-consumer results are proving to be pretty predictive of what happens in store. We're fascinated with the potential of direct-to-consumer; are in fact, expanding our assortments. We have a major goal for that business and what you're describing is very definitely a part of where we're taking it.

We go next to Stacy Pak with SP Research. Stacy Pak - SP Research: Jonathan, can you answer whether the gross margin benefited from the valuation or shrink reserve in the quarter, and if so how much? Secondly, Mike, you mentioned you sourced into it for current quarters, are you sourcing it to these promotions going forward? Is this what we should expect from the domestic business this year, how promotional you've been? And can you kind of address how does the promotion set with your idea of branded integrity? Again, I'm really talking domestic.

The contribution to gross margin was pretty flat last year for the quarter. Put it about a tenth difference. Stacy Pak - SP Research: And how about the valuation reserve?

That's included. That's rolled into that expense for the quarter. Stacy Pak - SP Research: So it was all flat in terms of any benefit from reserve?

Yes, pretty much. You take the actual expense we booked and then you've got the opening and closing reserve amount and that brings you to a net expense for the quarter. And that expense was basically flat as a contribution to the gross margin rate versus last year.

Let me address the second part of your question. Clearly, we are in a promotional environment domestically. We would anticipate that Hollister is going to continue for the foreseeable future to be pretty promotional. We would anticipate A&F and Kids to bring of as the environment improves. Now, I think the third part of your question, how do promotions fit in with the brand integrity domestically, is an important one. And I think that can be answered by looking at our stores. Our stores do not look as if they're on fire sale. They don't look as if they're on sale. There's a case level, a quality standard of our presentation and merchandise that speaks to the brands, and I think that is a very, very important statement. A lot of what we should be talking about today honestly, guys can be answered by you going into the stores and seeing what's going on. How do we look? What kind of excitement level is in the stores? Are we living to our standards of being the aspirational brands? From a merchandise point of view, presentation, merchandise quality, presentation on trend, marketing, and I believe the answer to that question is a resounding yes.

And we go next to Evren Kopelman with Wells Fargo Securities. Evren Kopelman - Wells Fargo Securities: Two quick questions, what is on the inventory, the spring carryover, the $25 million, was that higher than your plan? If so, can you give us any color in terms of how much? And then the second question is on the closures. You said for the 2010 closures, that 50 stores had a flat EBITDA on a four wall basis, can you give us the same metric for the 2011 closures, the 50 stores where they are in a four wall basis?

On the spring carryover, it was slightly ahead of where we expected but not a level that makes us uncomfortable. So overall, we are very comfortable with that, and particularly for the reasons that we talked about earlier on. For 2011 class of stores, I don't have the number right in front of me, but that's something we will include in the call as that number firmed up going forward.

And we'll go next to Michelle Tan of Goldman Sachs. Michelle Tan - Goldman Sachs: I was wondering if you could give us any color following up on kind of the plans for fall about where you see the AUR going through the balance of the year? You're starting to anniversary some of the promotional activity from last year, but obviously the plan is to drive sales. I'm just curious kind of degree of magnitude we should be thinking about for AUR?

I think overall with regard to the fall, we'll continue to get a cost benefit year-over-year although it will be less than in the spring. The AUR comparison also becomes more favorable particularly in the fourth quarter for a combination of those reasons, the gross margin, pressure is a little greater in Q3 than in Q4 given how they intersect. Well though the markdown was over the end of the third quarter, going to have a significant effect on that. But I think the overall call is that we have prepared and planned for an aggressive promotional environment and are ready to deal with that. That's how things end up playing out for the season. Michelle Tan - Goldman Sachs: And Jonathan, would you expect the pressure in the third quarter to be more than second quarter in terms of gross margins?

We don't say no at this point. I don't think we're saying specifically either way in terms of where the gross margin rate is going for the season. I think there are still some fairly significant variables in play, particularly on this promotional environment. So this point we're not saying that it's going to be erosion, or that it's going to be erosion in a greater or lesser rate than in prior quarters.

We go next to Richard Jaffe with Stifel. Richard Jaffe - Stifel: Could you talk about Hollister internationally, where you mentioned Spain, and talk about the lessons you've learned, more urban settings in London versus some of the more suburban type settings. And how you see Hollister unfolding as an international business?

Let me grab that Richard. The Hollister business in the U.K. is excellent; that's dealing where we could describe it. It's excellent in the London suburbs; it's excellent in virtually everywhere it is regardless of suburban London. It tends to be stronger in the London immediate suburbs, but it is hugely powerful outside of London as well. We have a store in Cardiff that's absolutely extraordinary. A child must be walking around with our stuff there. The business is strong, incredibly strong in Germany, Frankfurt, and in Rome. We think that Hollister is playing and has the potential to play everywhere at very, very satisfying returns from a volume and a profit perspective. We will be pushing Hollister for mall growth throughout Europe and elsewhere. We are very comfortable and confident of this concept and its ability to play in a mall environment. And to play in a mall environment where the name is virtually unknown before it appears, it has that appeal to grow based upon the experience and the merchandise that we offer. Richard Jaffe - Stifel: And of the inventory build up, would you say it's disproportionately weighted to Hollister, given its growth?

No. Jonathan?

Not significantly, Richard. If you look year-over-year we'll set up more flagships this year than we had a year ago in A&F. So to some extent it follows store count. But there is no material difference between Hollister and the other brands.

We go next to Lorraine Hutchinson with Bank of America-Merrill Lynch. Lorraine Hutchinson - Bank of America-Merrill Lynch: For the international Hollister business, it sounds like the decrease in store expectations was mostly timing. I was just hoping you could share some of your learnings on the different real estate markets and the international markets that you are entering, and then also any steps that you can take to ensure that you really do accelerate the pace of those openings in 2011 and beyond?

Good question. Jonathan?

Yes I think that you're right. Some of it was timing. There were a couple of stores that has pushed out into the spring and a couple that have fallen through. I think the main conclusion we've drawn from it is that our traditional conversion rates in the U.S. are going to be somewhat lower internationally, particularly as we get into new countries and as we learn those markets. So the main conclusion is that we have to have more opportunities in the top of the funnel to drop through our required number of completed deals for each year. So that's what we are working very hard to effect and to make sure we have enough deals in the pipeline to get to where we want to be in 2011 in terms of signed and completed deals.

And we have strengthened our real estate organization so that we are capable of doing that. We've added two very high level people in our organization. We are giving that part of the business lots of resources.

For our next question we go to Robert Samuels with Phoenix Partners. Robert Samuels - Phoenix Partners: Just following up on the previous question Mike, given the lower price points, are you beginning at all to see a different type of customer shopping in your stores, particularly the adult stores?

I am thinking about that question Robert, and I would say, no. We still attract our target customer in terms of age and aspiration. I think we might be getting some more of these customers back. But clearly, we are populating the stores and doing more business, I would not say it's a different customer. I am reflecting on this, but I think it's probably getting more of our target customers back

We go next to Dorothy Lakner with Caris & Company. Dorothy Lakner - Caris & Company: I wonder if you could, just going back to the store closings, is there anything common amongst those in terms of geographical distribution? Any more color you can lend to that or what type of mall where you're not seeing what you want to see? And than secondly, just wondering how the response has been to the return of the quarterly to A&F?

Let me take the first point. The malls in which those stores are in are predominantly see-malls. The concentration of stores we are closing this year relative to the total population is partly a function of the fact that these were the malls that at the end of the A&F chain expansion were the malls we were going into roughly ten years ago. And they were frankly in most cases, never particularly good stores. And if you look how they've performed over the last few years, they've sort of consistently under-performed the other metrics of the chain, and in most cases gradually got relatively worse than the chain. So we feel as well as the economics opposing these stores also helps us get overall brand positioning. And as Mike spoke to earlier, if you look at the higher end of the A&F chain and the tourist stores, things have been going extremely well. They have been relatively outperforming, particularly going through the promotions there which I think has just added more impetus to heart of these lower-end stores.

And then for 2011, just to tag on to that, should we assume most of those closings will occur at the end of the year as well?

Primarily, yes.

Okay, I'll respond to the quarterly. I think the excitement in our marketing for back-to-school has to do with the key themes for each brand. And the theme as you know for A&F was Screen Test which was built around the quarterly, but the quarterly was a part of it; we used this in multiple ways, in-store, website, social media. Even you heard on the in-store sound system, building that theme, Screen Test. And I think it is lot of fun, has created a lot of excitement, and the quarterly is clearly a part of that; it's getting back to our roots. But we also had a theme for Hollister, catch the perfect, which I think has been a lot of fun, successful, targeted to that customer. And I majored in Gilly Hicks. So these marketing themes I think are the head note of what we've done from a marketing point of view for back-to-school. And I think it speaks to the power of these brands and having a theme and putting everybody together in the same direction. Just an incredible team and they've performed. Dorothy Lakner - Caris & Company: Would you also say just a much more integrated marketing program than you have had in the past, is that fair, with the Facebook and the email marketing?

Dorothy, you just said it better than I did.

We go next to John Morris with BMO Capital. John Morris - BMO Capital: Jonathan, quick question on inventory, we've asked in a lot of different way. But unless I missed it, presumably it's up also due to pricing and the mix. So I'm wondering can you give it to us in terms of how much it's up, in term so units? And then also, the lower tax rate we saw in the quarter, little clarification on the tax rate adjustment that you're referring to in the release and what we would expect going forward and for the year on the tax rate?

Well, just on the first one, John. With AUR being lower the number of units, the fact is that inventory is somewhat greater than the percentage increase in inventory of cost. I can't give you a precise number, but that's direct from the case. On the tax rate, we're saying approximately in an effective rate of 37% for the full year. I think we've previously said mid thirties. So it's going to be at the higher end of that range. And what happened during the quarter was that we had some provision to return adjustments as a result of tax years being closed out. And we also resolved some pending tax matters that essentially mean at this point we have no FIN 48 liabilities left on the book. So it's essentially there's some fairly significant pending items that are now been resolved and relative to what we had accrued for them, we got a benefit in the quarter which rolls through into that overall effective rate projections set for the year. As we said on the call, the rate is still quite sensitive to the domestic international profit mix, so we could still move around a little bit if that mix moves. But at this point, that's what we would expect. John Morris - BMO Capital: And theoretically, would Q3 and Q4 tax rates be about the same or would one of the quarters be more affected than the others?

I guess what we do in the quarter to GAAP is streamline the overall rate for the year, but then if you have discrete period items you have to book those in the quarter in which they occur. The things that happened in the past quarter were of that nature. So all other things being equal, we would expect the rate to be even for the balance of the year to get us to that overall effective rate. But there are discrete period items, then they can impact the reported rate in a particular quarter.

We go next to Jennifer Black with Jennifer Black & Associates. Jennifer Black - Jennifer Black & Associates: I wonder Mike if you could talk about where you are as far as rightsizing Gilly Hicks. What do you see as the number of stores when you look out domestically and internationally? And then I wondered if you could talk about what's been working, what are you the most excited about in reference to Gilly Hicks, and do you see further opportunities in new categories?

I talked about how excited we are about Gilly. I think what's happening with Gilly is that we are getting improvements with the product, the pricing, and we're targeting the customer very well. You know, who she is; she is the Hollister and the Girl. So we are on track in terms of the customer. We are getting on track in terms of the two categories that are new to us, bras and underwear. On these, we're learning an awful lot about those categories, and they are performing very well. We see options for Gilly. We're going to test it in London. We are going to be testing it in the new 4700 gross square foot concept. It's roughly half of the old concept. We opened that concept in Roseville and Sacramento a few months ago, and we are very, very pleased with the results in terms of the productivity we're getting there versus the store that's twice as big. And as a matter of fact, I haven't been able to get to that store, but I understand that Amy Noblin visited the store. I guess she's on the call. Maybe she could tell us what she thought of it. Amy, are you out there? Okay, and I haven't talked to her about this and she wasn't expecting it. But we are very excited about the potential of the categories for us an underwear, and it is yet to be determined. We're experimenting how we are going to be distributing those. And we are not closing any doors, but we're thrilled with the brand, Gilly Hicks, and its potential. Jennifer Black - Jennifer Black & Associates: Do you have a vision as far as the number of stores when you look out or what you'd like to see?

Sure, but it's going to depend on international versus the domestic. Clearly, we have the kind of domestic potential that we've seen in Hollister. It's less than Hollister, but it's a high number, in hundreds. But most intriguing, let's just put it this way, if there is place for a Gilly every place that there is a Hollister and given the Hollister international rollout, that's quite a business.

We'll go next to Robin Murchison - SunTrust Robin Murchison - SunTrust: Couple of quick ones here. You're signaling 60 stores closing this year, 50 next year, so 110 stores. Does this represent the majority of the store rationalization program? And then secondly, your tax rate presumably in 2011 would be lower given the elimination of domestic stores and then the rebalancing of domestic-international profit mix. Would that be accurate?

Robin, just on the first point, as we said earlier, there are an additional group of stores which we will be interested in buying out of and we'll continue to look at the possibilities of doing that. I think with regard to sort of natural lease closures beyond 2011, other than the stores that are significantly under water that we will be interested in buying out, we haven't focused a lot of time on the other stores that are more kind of marginal to sort of okay stores. So we will review those as they come up. It's probably too early to say. But if you look at the overall population who reach here, we've I think consistently said that the population is coming out in the next couple of years, i.e., this year, next year, a little bit in '12. We've disproportionately included the underperforming stores. So I would guess we would say that by the end of 2012, at least we would be substantially through that rationalization. On your second point on tax rate, I think directionally that's correct. We'll give some more color on that towards the end of the year.

For our next question, we go to Marni Shapiro with The Retail Tracker. Marni Shapiro - The Retail Tracker: Congratulations, and the stores look really great. I had a question that was sort of a bigger picture question about the stores. You said EBITDA was flat. Are you closing some of these stores to what I call snob appeal? But as there are fewer Abercrombie kids stores, the brand becomes almost more coveted. And how does that work into your process when you think about Hollister? Should Hollister have that same kind of snob appeal, and can you still capture the sales from Abercrombie and move it direct online?

Let me take the first one, Marni. Yes, in aggregate, approximately flat, which means there is a few stores in there that were generating some modest positive EBITDA, although frankly not very much in the individual case. When we look at it store-by-store, we look at the trend of a store of a time relative to the chain. One of the stores are nearby that might pick up some of that business. I don't think we'd attribute any of it sort of purely to snob appeal. But if the store is in a mall that we think is deteriorating, even if it might be making a little bit of modest EBITDA, we've been inclined as we said sometime to be aggressive in going after those stores. I'm not sure I fully understood the second part of the question. Marni Shapiro - The Retail Tracker: I guess my feeling is as you close some of the Abercrombie and kids stores, which I think is actually a good thing for that brand, because it's higher-end brand. I don't think it needs to be everywhere. But I don't think Hollister is necessarily placed the same way that Abercrombie and kids does. So how do you look at that? If the store is making money, but the mall is not great, Abercrombie doesn't belong there, because it's a better brand. How do you think that that terms Hollister?

I think we completely agree with what you are saying. I think the A&F brand in particular will be a healthier chain with a smaller footprint. We don't necessarily believe that about Hollister. We think the current footprint in terms of aggregate, store count, it's probably not too far off from where should be. So we'll have a few Hollister openings, a few Hollister closings. We don't at least at this point anticipate a significant change in store count for Hollister.

We go next to Laura Champine with Cowen and Company. Laura Champine - Cowen and Company: I listened to your comments on product costs and AUR, and it sounds as if we should see gross margin at least flattened by Q4. But in Q3, I just wanted to confirm that you don't feel like the inventory build will impact your gross margin there and then also test my assumption that your gross margins might start flattening out even in Q3.

I think, Laura, what we're saying on the inventory is that we have the inventory we think we need to drive the business. I think with regard to gross margin there is probably really nothing much to add what we said earlier, which is some further costing benefits are less than in the spring, and AUR comparison gets easier in the forth quarter in particular. I mean those two things are putting more pressure on Q3 gross margin than Q4. But at this point, we're not directionally saying where we think that leaves us in terms of gross margin rate. The other thing that comes to play in Q4 is we have more international stores opening with higher gross margins, which from a mix standpoint helps with the rate as well in Q4.

I'd like to make one final point. For those of you who have followed us over the years, I think you've known that inventory has never been a problem for us.

And we go next to Roxanne Meyer with UBS. Roxanne Meyer - UBS: I just wanted to follow up on your earlier comments with regard to the promotional strategy going forward. I know you said Hollister will continue to be more promotional in that A&F and Kids will taper off as the environment improves. I guess I just wonder what is the reality that A&F could stay promotional for at least the next six months or more, just given that the environment doesn't seem to be showing any signs of improvement? What are your expectations there? And you've done some very successful work with bounce-backs and gift cards. Are those going to be more permanent part of your promotional strategy going forward?

I don't think we should comment on that truthfully. I think we said we are prepared for a highly promotional environment. I think the takeaway is we're getting more efficient with how we are promoting. And we are learning more about it. I wouldn't want to talk specifically about what we are going to do for the next six months.

And we go next to Dana Telsey with the Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: The stores do look much better. The traffic has picked up which is so nice to see. As you think long term about the business, Mike, you've talked about potentially a 15% operating margin target. As you see what's changing now, the complexion of getting there or how you get there by brand and also just by product category, anything you are analyzing at it that seems different to how you would have thought about it?

I think that's a really good question, and that number is very at much top of our heads. It's 15-plus, because our best times, there was a two in front of it. I think the question is how are we thinking about it. And it's really the same way we have been thinking about it for quite a while, how do we achieve this; one, improving domestic productivity, which includes reviewing underperforming stores that we continue to do. Achieve accretive international growth that we continue to focus on, return gross margin to historical levels. We continue to push for that and we think that overtime we will get there or are going to be there some changed about that. Maintain tight expense controls, which we continue to do. Achieve the Gilly Hicks roadmap goals, which we believe we are doing, and direct-to-consumer growth. These are all that levers for this 15% number. And I believe that we don't want to talk specifically about each of those objectives, but I think we're thinking the same way about them that we were six months ago.

We go next to Amy Noblin with Weeden. Amy Noblin - Weeden: My questions have actually been answered at this point, but while we're on, Michael, answer your question regarding the new Gilly Hicks format. We actually though it looked great. I thought it was much more shopable without the long ally and the well additive broad segments. So I think the best way to summarize it is that is was a more ultimate shopping experience. But certainly it looked a lot better. So glad to hear it's doing well, congrats and good luck for the second half.

Thank you. And that wasn't for her, just for everybody. Amy Noblin - Weeden: No it wasn't.

As for our next question we go to Howard Tubin with RBC Capital Markets. Howard Tubin - RBC Capital Markets: Just maybe one more question on marketing line, maybe for the second half of the year excluding price-related promotions, can you give us an idea of what you have planned on the marketing front for fall?

No. I'm sorry we really can't. We will unveil them as the time dictates. This is pretty confidential, but thanks for the question.

We go next to Sam Panella with Raymond James Sam Panella - Raymond James: New tops has been a weak category for you, Mike, can you just address what you're doing to impact this category?

Sure, we're working very hard at it. We're working very hard at all female. I can tell you that female is clearly starting to trend. There are categories that are trending very well. I really don't want to get into specifics of, say that there are parts of the knit business that are starting to trend very well. Again, I think you can see what those categories are by looking at our stores today, looking at the major statements that we're making. And I can say to you that the statements we are making are the places where we're getting traction in the business. But there has been clear progress there.

And for our final question, we go to Linda Tsai with MKM Partners. Linda Tsai - MKM Partners: Following up on the last question, as you're planning for spring '11 in terms of the product, what are some of the merchandising changes we might expect to see, and what categories are you going to invest in more heavily and where might you pair back?

I think that's a great question, but one that I really would rather not answer if any one other than someone in the company at this point. But keep watching. And again, go into the stores today and you can get a very strong feeling about how we are operating the business.

Thank you, everyone, for joining us to today. This will conclude our second quarter earnings call. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation.