Good day, and welcome to the Abercrombie & Fitch First Quarter Earnings Results Conference Call. Today's conference is being recorded. [Operator Instructions] And at this time, I would like to turn the conference over to Mr. Eric Cerny. Mr. Cerny, please go ahead, sir.

Thank you. Good morning, and welcome to our first quarter earnings call. Earlier today, we released our first quarter sales and earnings, income statement, balance sheet, 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 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 are speaking to you today from Paris, where we are excited to open our Abercrombie & Fitch flagship on des Champs-Élysées tomorrow at 10 a.m. Joining me today on the call are Jonathan Ramsden, Brian Logan, and Rocky Robins. We will begin the call with the review of the financial performance for the quarter from Jonathan and Brian. After Our prepared comments, we'll be available to take your questions for as long as time permits. Now to Jonathan. Jonathan E. Ramsden: Good morning, everyone, and good afternoon to those of you here in Paris. Thank you for joining us today. Mike is not able to be with us today since he is working on the final preparations for our flagship opening here in Paris tomorrow morning. We do expect him to join our earnings call in August. I want to start with an overall comments on the first quarter, after which Brian will provide some additional color. As Mike said in our press release this morning, we are pleased with our results for the quarter, which exceeded our internal objectives, and gives us strong start to achieving our goals for the year. With regard to the top line, for the first quarter, the company's net sales increased to 22% to approximately $837 million. Total domestic sales, including direct-to-consumer, were up 13%, while total international sales were up 64%. Overall, DC sales including shipping and handling were up 32%. Comparable store sales were up 10% for the quarter, with Europe the strongest region. Our gross margin rate for the quarter was 65%, representing a 230 basis points improvement from last year's gross margin rate of 62.7%. AUR was approximately flat for the quarter, with a benefiting gross margin being driven primarily by a lower average unit cost, favorable international mix, including foreign currency impacts and other gross margin items, such as a freight benefit. Our operating income for the quarter was $38.7 million versus a loss of $18.7 million a year ago. Operating margin increased 730 basis points, of which 230 basis point was due to gross margin, and 500 basis points was due to expense leverage. A summary of our operating expenses for the quarter is on Page 5 of the investor presentation. MG&A for the quarter was $107.7 million, up 11% versus last year's expense of $96.6 million. The increase was due to increases in comp and benefits, marketing and other expense. MG&A in the quarter included equity and incentive comp of $14.4 million versus $10.4 million last year. Stores in distribution expense of approximately $399 million for the quarter included store occupancy costs of approximately $167 million. All other stores and distribution expense represented 27.7% of sales, somewhat better than projected at the beginning of the quarter. As indicated at the beginning of the quarter, these expenses also included approximately $4 million of additional depreciation related to our DC consolidation. Turning to the balance sheet. We ended the quarter with total inventory of cost up 13% versus a year ago or up 7%, excluding in-transit. We ended the quarter with approximately $742 million in cash and cash equivalents, compared to approximately $591 million last year. During the quarter, we repurchased approximately 429,000 shares at an average cost of $59.40, bringing our total repurchases over the last 3 quarters to approximately 2 million shares at an average cost of $50.55. Turning to the outlook for the second quarter and referencing Page 9 of the investor presentation, we are targeting mid-single digit same-store sales growth for the quarter, and expect this to be augmented by continued strong growth from non-comp stores and DTC. We continue to expect the gross margin rate for the spring season as a whole, comprising the first and second quarters to be approximately flat to slightly up compared to last year, meaning that the second quarter gross margin rate will be down. We expect significantly less expense leverage in Q2 than in the first quarter. Store occupancy costs for the second quarter are expected to be in the mid-$170 million. All other stores and distribution mission costs are expected to modestly delever compared to last year, including the effect of preopening costs, DTC investments and additional depreciation due to the DC consolidation. MG&A for the second quarter is expected to increase by a mid-teen percentage, with the primary components of the increase being incentive and equity compensation and marketing costs, including a timing shift. We expect the MG&A growth rate to moderate significantly in the second half of the year. Looking out to the full year, our plans for store opening and closures are in line with our prior guidance. We continue to anticipate opening 5 international A&F flagship locations, as well as up to 40 international Hollister stores, primarily in the latter part of the year. We continue to expect to close approximately 50 U.S. stores during the fiscal year. Fiscal 2011 total capital expenditures are now expected to be approximately $350 million. I would now like to turn the call over to Brian to provide some further details on our sales performance. In addition, Brian is going to take a few minutes to walk through the section in our investor presentation on accounting per share based compensation. As many of you are aware, we are requesting approval of a new long-term incentive plan at our Annual Shareholder Meeting next month. Approval of that plan will significantly mitigate the likelihood that we will be required to adopt liability accounting, which were to be required, could result in some potentially significant volatility in our quarterly charges for compensation expense. Now to Brian. Brian P. Logan: Thanks, Jonathan, and good morning to everyone. As reported, first quarter net sales increased 22% to $836.7 million, and comp store sales increased 10%. By brand, Abercrombie & Fitch comp store sales increased 8%. abercrombie kids comp store sales increased 11%, and Hollister comp store sales increased 11%. Across all brands for the quarter, both the Male and Female businesses comp sales were approximately in line with the total company trend. For a merchandise classification standpoint across all brands, for the quarter, stronger performing categories included male woven shirts, knit tops and fleece and female sweaters, wovens and knit tops. During the quarter, we opened 2 new Hollister stores in Germany. We ended the quarter with a total of 1,071 stores, which includes 316 Abercrombie & Fitch, 181 abercrombie kids, 502 Hollister and 18 Gilly Hicks in the U.S., and 9 Abercrombie & Fitch, 4 abercrombie kids, 40 Hollister, and 1 Gilly Hicks internationally. As Jonathan mentioned, I also want to take a few minutes to walk through the section in our investor presentation, dealing with accounting per share based compensation. The information I will cover is included as an appendix in our investor presentation. This information is also in our definitive proxy, which became effective on Monday evening. But we are reaching out to many of our shareholders over the following weeks, leading up to our 2011 Annual Shareholder Meeting on June 16, and thought it appropriate to highlight issues associated with the company's long-term incentive plan, especially with the potential for liability accounting, and the steps we would like to take to mitigate that possibility. With regard to the long-term incentive plan, currently, we grant equity awards to our associates and non-associate directors from 2 shareholder approved equity compensation plans, the 2005 long-term incentive plan, and the 2007 long-term incentive plan. As of April 30, 2011, approximately 2.1 million shares remain available for grants under new awards. But due to the plans in that share accounting formula, the number of shares available for issuance can fluctuate, depending upon among other things, new awards granted, award forfeitures and cancellations, and changes in the intrinsic value of stock appreciation rights due to the stock price fluctuation. In the event that the shares available is measured at each quarter end, whenever going to a deficit position on a net basis in either plan, meaning there would be not sufficient funds available to settle all outstanding awards and shares of common stock, we would be required to designate some portion of the outstanding awards to be settled in cash in order to eliminate the deficit. Under this scenario, those awards designated to be settled in cash would lose the accounting treatment provided by equity classification, and would require liability classification. The classification of stock-based compensation is either equity or liability, effects whether the measurements of an award's fair value is fixed on a grant date or whether it is remeasured each reporting period until the award is settled. As you know, fair value is an estimate of the awards value to the holder upon exercise or vesting, and is the cost the company recognizes for granting the award. We estimate fair value for stock options as stock appreciation rights using the Black-Scholes option pricing model, which includes inputs from market price and exercise price, and requires us to estimate remaining expected term of the award, and the expected stock price volatility over the expected remaining term, among other things. In the case of restrictive stock units, we calculate the fair value using market price adjusted for anticipated dividend payments over the awards' remaining vesting period. For equity classified awards, fair value is determined and fixed on the day of the grant, and is expensed over the awards' vesting period. For liability classified awards, the fair value is determined on the date of grant as well, and remeasured each reporting date thereafter until the award is settled, and is also expensed over the awards' vesting period with a current period adjustment to earnings to reflect changes and fair value for the portion of the vesting period already served. If the award is fully vested, changes in the fair value will be recognized fully in current period earnings until the award is settled. Because of this remeasurement feature, liability classified awards have the potential to create significant earnings volatility, and could have an adverse impact on our financial position, results of operation and cash flows from operations. Hypothetically speaking, as illustrated on Page 16 of the investor presentation, if awards with 1 million gross underlying shares were to be reclassified as liability and the fair value measurement of those awards were to increase by $10 per share, with 40% of the vesting period having been served, the company would incur an incremental charge of $4 million in the current period, and an additional charge of $6 million over the remaining vesting period of the awards. A more detailed example for the accounting treatment for awards that are reclassified from equity to liability can be found in the Financial Accounting Standards Boards, Accounting Standards Codification 718-20-55-123 through 133. In order to significantly mitigate the potential for liability accounting, we will be asking our shareholders to authorize an additional 3 million shares under the amended and restated 2007 LTIP [Long-term Incentive Plan] at our 2011 Shareholder Meeting, with the goal of having sufficient shares available to allow us to continue to grant equity awards to our associates and to avoid liability accounting. This concludes our prepared comments section of the call. We are now available to take your questions. Thank you.

[Operator Instructions] We'll take our first question from Michelle Tan with Goldman Sachs.

I was wondering if you could talk a little bit more about the AUC [Average Unit Cost] being down in the quarter. It's obviously pretty unusual versus what we've heard from some of your peers, and I was curious if your strategies that are driving that, that can help you mitigate some magnitude of the cost pressures going forward, or is it really more a question of the timing of your inventory buys relative to yourselves? Jonathan E. Ramsden: Michelle, yes, I think it's really primarily a question of the timing. We've been saying, I think, going back several months that we expected good costing in the first quarter, and significant or meaningful year-over-year unit cost reductions. And then as we got into the second quarter, that was when we were starting to see the significant cost escalations half way through the second quarter. So I think it's a function of when we locked in this pricing, which was on average probably 6 months or so ago when we were able to get better costing. And then obviously, since then, the cotton prices have escalated, and that's certainly going to impact us as we get through the second quarter and beyond. But the point at which we locked in the first quarter, that was much less of an issue than it is today.

And we'll take our next question from Paul Lejuez with Nomura securities.

John, just on the $50 million increase for the CapEx for the year, just I'm wondering if that's higher cost on planned projects, or are there some new projects in there? And also just wondering if you guys have done any analysis around the closed stores in the U.S. Have you seen any evidence that in nearby stores, you might be outperforming the rest of the chain on a comp basis, maybe help by sales transfers? Jonathan E. Ramsden: Paul, I guess on the first part of the question, no, none of it is attributable to overruns on existing projects. One piece of the increase is currency relative to the budgeted rate, which have taken up the foreign currency-denominated component of that CapEx fairly significantly since even February. Then there was some timing shifts at some of the flagship stores and a firming up of our plans for the Hollister stores, and I guess somewhat increasing expectation as to the number of those stores that we would actually open during the year. So I think they're the primary factors. On the second question about closed stores, it's something we're continuing to look at. We have never modeled in any significant benefit from transfer business from the closed stores. Those stores are typically now been closed for the quarter. We do have some data. I think it's still fairly preliminary. I don't think we have ever expected on the signs of the stage we indicated, it's not going to be a very significant effect, but we will be pick up some modest transfers of businesses as those stores closed. And it varies, store by store, depending on the proximity of other stores among other things.

Our next question comes from Evren Kopelman with Wells Fargo.

In the second quarter, for the gross margins, you talked about that you're taking pricing in the third quarter, not yet in Q2, and it's going to be hurting the gross margin. Could you possibly take pricing earlier internationally in the second quarter? Can that kind of decision still be made, or is it too late? Jonathan E. Ramsden: Evren, theoretically, we can make that decision pretty late in the game because ultimately, we can even re-ticket into DC, if we would ever decide to do that. I think at this stage, it's highly unlikely that we're going to change our plan to make this effective going into the -- essentially, the beginning of the third quarter. So it's a theoretical possibility, but I think at this point, we're locked in from an organizational standpoint to doing it around that timing, and for several reasons that we talked about in the past. We think that is a natural point in this cycle to do it, and are trying to do it at the beginning of the back-to-school season, for example, would be -- would potentially create some problems in terms of, say, merchandise still being in the stores as with attempting to re-ticket to higher tickets.

The next question comes from Janet Kloppenburg with JJK Research.

I wanted to just ask just a little bit more about the gross margin for the second quarter. Jonathan, wouldn't the influence of the European stores, which I think are generating a higher gross margin, help influence positively the gross margin result as that occurred in the first quarter, or perhaps there's something about the Domestic business margins that you're worried about? If you could talk about those in tandem, please. Jonathan E. Ramsden: Yes, I think in terms of the international mix components Janet, that will continue to be a benefit and hopefully, a growing benefit over time as international increases as a proportion of the mix. We got a bit of benefit from the dollar being weaker over the quarter than we'd anticipated at the beginning of the quarter. The dollar's subsequently strengthened a little bit, but that international mix effect affect in general should continue. I think with regards to domestic, what we're seeing is really just the issue we've talked about in the past, which is that the costing increases are coming to effect fairly meaningfully in the second quarter, and we don't expect that we will, as we just discussed, reacted from a ticketing standpoint until the third quarter. So that, I think that's pretty consistent with what we've been saying over the last few months and couple of earnings calls.

Our next question comes from a Adrienne Tennant with Janney Capital Management.

Jonathan, my question is did the prior MG&A guidance, it was a $1 increase for 2011 of mid-single digit, is that a change? Or I know that excluded the liability accounting charge. It looks like the first and second quarter will be sort of the net mid-teen-ish range, double digit. How should we think about that? Is that a change in that particular line item guidance? And then it does seem like the components of the guidance that you gave us for 2Q continue to represent, I think, what you had said, which is potentially for operating margins to be flattish to last 2Q. I think you characterized it a different way last time, and that all seems to be still the case. Is that fair to say? Jonathan E. Ramsden: Yes, just taking the second part, first, Adrienne. It is still realistic and quite possible that our operating margin may be down in the second quarter because of the interaction of those 2 effects, the gross margin erosion and much less expense leverage in the second quarter than we're getting in Q1. And there were some very specific reasons for that, which we can talk about. We see the expense leverage component of that coming back quite nicely in the back part of the year, and part of the reason for that is the MG&A cadence within the year. We still anticipate for the full year that we will be pretty close to that mid-single digit increase in MG&A, which was what we've guided to in February. Equity comp is going to be somewhat higher because of the higher stock price when we granted our 2011 awards, and incentive comp is running a little bit ahead through, at least, the first quarter based on an above budget performance. But overall for the year, everything else being equal, we would still expect to be close to a mid -- upper mid-single digit increase in MG&A on a full year basis. And at that, just going back to the deleverage point in Q2, so we'll get a greater leverage benefit out of MG&A in the third and fourth quarters than we expect to get in Q2 because of that increase.

Our next question comes from Kimberly Greenberger with Morgan Stanley. Kimberly C. Greenberger: Jonathan, I'm hoping you could dig a little bit into the gross margin. At this point in time, you spot probably most of the products for the third and fourth quarter, if you can help us understand just the magnitude of the cost increases that you're seeing there? And if there's anyway to help us understand the magnitude of the benefit from the mix shift to international here in Q1, just so that we can have a benchmark as we work our way through the rest of the year. That would be helpful. Jonathan E. Ramsden: Sure, Kimberly, I guess on the first part, we've said going back to February, and I think probably even earlier, that we were talking about double-digit increases for the full season, and that remains our expectation. We haven't been more specific on that. We are getting closer and closer to it being fully baked to this point, but we're still not entirely done with locking in for the full season, but it's certainly double digits. The second part of your question in terms of mix shift, we have, I think, traditionally broken them out in a great level of detail, and one of the general topics we're looking as of the moment is to think about how we talk about the Domestic and International business going forward since there are clearly different dynamics in each. And even when it comes to something like AUR, we report an overall combined AUR change, which as we look it, becomes somewhat less meaningful over time, because it's the mix of so many different things. So I think that's something we're going to look to try and do going forward to give more color on the -- as well as sales on the gross margin, and potentially other line items for international versus domestic. I think one thing, one way you can look at it is to look at the premiums that we're charging internationally relative to what we're charging domestically. And clearly, the AUR's further helped by the fact that we don't have any promotions internationally relative to the Domestic business. And then the costing is basically the same, but there is some additional freight costs for the European and Asian business relative to the Domestic business. So I'm not sure that slightly answers your question, pretty sure it doesn't, actually. But I hope it gives you some general direction, and we will look at how we can break that out more clearly for people going forward.

Our next question comes from John Morris from Bank of Montréal. John D. Morris: Jonathan, can you quantify for us the degree of the freight benefit and the currency benefit, those 2 pieces, and a follow-up on pricing with respect to the Domestic business. Have you taken up initials at all domestically? And if so, to what degree would you characterize it as one of testing, if you have taken it up versus something that's been a little bit more broad based on the domestic initials? Jonathan E. Ramsden: John, let me let Brian comment on the first part, and then I'll come back to the second part of the question. Brian P. Logan: The first part of the question with the foreign currency benefits, we did receive roughly about a $9 million benefit on the top line on sales. Obviously, we do have expenses that are in denominated in foreign currency as well, so which would offset that benefit on the bottom line. In addition, we do some hedging to protect some of the inventory since that's denominated in US dollars. So the net effect on the bottom line was probably about $0.01 or $0.02 benefit to EPS. As far as freight is concerned, we did have some freight benefits, primarily due to shift in the mode of the transportation using more boat than air than we had in the prior year. I don't know if we have given the magnitude of that benefit, but we do expect a little bit of that to continue into the second quarter as well. Jonathan E. Ramsden: On the second part of the question, John, we're constantly looking at tickets and adjusting them. We haven't done anything for the wholesale across the board and typically, the places where we adjust are the ones where we have a high confidence level that we can pass it on. So I'm not sure that's telling us anything, all that helpful, as to what the reaction is going to be when we do a more broad-based increase in tickets. Although even then, we're clearly going to target it at areas where we think there is a greater opportunity. But I don't think sitting here today, we can say that we have any clear insights as to what the reaction will be when we do a more broad-based ticket increase going into the fall.

Our next question comes from Stacy Pak, Barclays Capital. Stacy W. Pak: So I guess my question, I'm hoping, Jonathan, you can address 2 things. But the Domestic business broadly, sales per square foot in margins, and how are you feeling about the Domestic business? How do you think the quality is? Where are you going here domestically? I mean, internationally, it's terribly exciting, but domestic is still such a big part of the business. So I wanted to get an understanding of, I don't know, if you can share some of the metrics you saw this quarter on the Domestic business that we can't see from the financials, or you want to just more talk about it qualitatively? And then I'd also like to address the inventory levels, which are more controlled, but I'm wondering what that means about promotions and the ability to drive as strong comps going forward. Jonathan E. Ramsden: Okay. I guess starting with the Domestic business in general, the Domestic business comped very closely to the overall company comp rate. So we were very comfortable with that, and we thought we're seeing that as a good result. And then if you add on the direct business domestically, our overall Domestic business was up 13% for the quarter. So we think that's a very healthy rate of growth of the Domestic business, and clearly indicates that we continue to have momentum in that business. So I think the answer to your question is we feel good about the Domestic business, and we're clearly looking to continue to maintain that momentum. We've talked at the Investor Day about our goal of be able to get to 90% of 2007 productivity, and I think we continue to believe that that's a very realistic objective for the growth, require us to sustain healthy comps going forward. In terms of the margin, the impact of the Domestic business to the overall margin improvement for the quarter was very significant. Domestic 4-Wall Margins came up more strongly than they did for the full year of 2010, and that we also regard as a very healthy development. Clearly, the gross margin played a role in that. Coming back to your point on inventory. Yes, we probably, of anything, are a little lower than we'd like to be at this point in time. I think when you refer to inventories being better controlled, I'm not sure we really look at it in those terms. We look at what inventory levels we plan for that we think are appropriate for the business, and we thought that the levels we had in the fall were very appropriate. So I didn't think it's a question of control, but we are a little lighter on inventory today relative to the sales trend than we've been. And yes, we'd probably be more comfortable if we had a little more inventory coming into the second quarter. And that's probably one of the reasons why we're talking about a mid-single-digit comp for the second quarter, which will be somewhat below what we comped in the first quarter.

Our next question comes from the Lorraine Hutchison with Bank of America Merrill Lynch.

As you think about inventory going into the second quarter, how are you planning units versus dollars? And also can you chase into some of the product that you need for the second quarter? Jonathan E. Ramsden: It's getting pretty late to chase into anything for the second quarter. We generally -- I'm not being specific about units going forward, or really sort of more broadly inventory levels at this point, and certainly not for the fall season. But to your underlying question, in general, we're certainly interested in having capacity to chase and to get into things that we feel we're very confident about, and we are looking for ways that we can preserve more of ability to chase going forward than we perhaps had the last couple of quarters.

Our next question comes from Dana Telsey with Telsey Advisory Group.

As you think about getting back to the 90% of productivity levels in the U.S. stores, and in the store closures, any thoughts on additional store closures and timing on that? And lastly, Hollister, the store openings are at the upper end of the guided range, better locations, better deals, what are you seeing? Jonathan E. Ramsden: On the openings, you're talking about Hollister international?

Yes. Jonathan E. Ramsden: Okay. So just taking that part first, I think we came into the year with talking about 30 to 40 openings, and I think we're increasingly confident that we're going to be at the upper end of that range as we've solidified plans for the year. It is going to skew heavily to the third and fourth quarters, and that's one of the factors that's driving the preopening costs up in the second quarter. So I think as the year's gone on or even as the last 3 months have gone by, we've grown in confidence in our ability to get close to the upper end of that range for the Hollister stores. In terms of Domestic store closures, we still anticipate approximately 50 this year. We haven't talked specifically beyond that, but it is something that is very much on the radar screen as to how aggressive we want to be, and we continue to review the economics of the low-end stores. But one of the things we clearly saw this quarter was that some of those lower-end chain stores that had declined quite significantly came back quite strongly in terms of margins as well as in productivity. But having said all of that, our mindset remains to be more on the aggressive end of the spectrum, and we would certainly expect that to be healthy numbers at closures in 2012, 2013 and beyond.

Our next question comes from Jeff Klinefelter with Piper Jaffray. Jeffrey P. Klinefelter: I wanted to look at 2 things. One, first, just to clarify the Domestic comments that you made, Jonathan. In terms of the closures that happened at the end of last year, can you give us sense for what sort of contribution the closures had to -- what sort of an impact it had on the operating margins, domestic operating margins in Q1, just to get a sense for how that's moving through the income statement? And then the other question would be on Europe. You mentioned, I think, in your prepared comments that Europe was the strongest comp contributor as a region. Just how many comp store sales, remind us, are actually in the base now from Europe. And any differences across those markets because we've been hearing mixed results, the U.K. being a little light of expectations, given the increase in the VAT tax? Jonathan E. Ramsden: Okay. Just going back to the Domestic closures, we haven't been specific about the margin impact of that. But as you know, we talked in the past about those stores, the 65 or so we closed, averaging about $1 million of volume, and roughly breaking even. Or having flat EBITDA across those stores, so using those kind of metrics, I think you can get a sense of the margin impact. And Brian, I think is going to add some color on that in a second. Coming to the Europe comp stores, Europe did comp above the company rate. And in terms of the number of stores, we have in the comp base, I think Brian is also digging that out. So we'll give you that in a second. But clearly, it's a more and more meaningful number now in the U.K. in particular, and we have stores in Italy and Germany also now comping. Within the overall comp rate, Japan not surprisingly, given everything that happened during the quarter, had fairly significant negative comps. So in terms of looking at international as a whole, that brought down the overall international comp rate somewhat. And then just one other factor on comps that we touched on, the A&F store in Fifth Avenue was closed due to a fire during the quarter. So combined effect of that is a -- probably not 1 to 1.5 off the A&F comp rate for the quarter between them. So I think Brian may have some of this other pieces that you were looking for, Jeff. Brian P. Logan: Yes, Jeff, of the slightly more than 30 stores that we have, chain stores that we have in Europe, there were 15 in the comp sales base for the first quarter.

And our next question comes from Barbara Wyckoff with CLSA.

Back to the inventory, got a lot of stores opening in fourth quarters. Some of them could be blockbusters. The question is, what are you doing to ensure an adequate flow of merchandise into the international stores, so you don't have to strip the Domestic stores in this fourth quarter and into spring 2011 or 2012? Do you have new systems to fine tune the projections, or how were you really looking at that? Jonathan E. Ramsden: Barbara, that's a great question. I think the answer is that as we open more and more flagships -- first of all, backing up to Hollister, we have a pretty good sense of what a Hollister store is going to do now based on our experience today. Clearly, when we opened a new country like China, there's going to be some fairly significant uncertainty. But just because of the scale of a single Hollister store, the magnitude of the additional inventory you might buy to protect to any given volume figure is relatively modest, and we're only opening a small number of stores in China, for example, later in the year. Within Europe, all of the inventory comes from TNT in the Netherlands, the Hollister also for A&F for that for that matter. So our ability to move inventory or reallocate to different stores remains until pretty late in the process. For new flagships, the process of coming up with a projected volume is certainly more challenging than it is for mall-based stores. We think as time goes on, we're getting a better sense of how we can model that, and we try to be conservative in terms of the economics on which we sign up to do the deal. But we do sometimes and certainly are doing for the fall, buying inventory to a higher volume figure, then our proved volume levels, so that we can protect to a higher volume. And then that ultimately feeds into the question of then of how we deal with that inventory if it ends up becoming excess, and we'll talk more about our strategy on that, I think, as we go through the next few quarters. So I think that the short answer is, we don't know for certain, particularly, when you open up in a brand-new market. But we think we're getting better at it and to your point, we absolutely want to make sure we have inventory to support those stores when they open.

Our next question comes from Randy Konik with Jefferies. Randal J. Konik: A quick question on the Hollister's 40 store openings, if you think about it over the next couple of years, are you guys have some -- do you have some sort of pattern on what countries on how you're targeting the different countries? I mean are you going after Germany, U.K. first, or how should we think about the actual pattern of openings across the globe? And then I think you said something on China, when are you opening stores in China again? Jonathan E. Ramsden: Let me tell you the first part first, Randy. We talked at the Investor Presentation about targeting a store count for Hollister Europe in the high 100s. I think our chart showed 185. We have a very specific plan by country, down to the mall level for the most part of the location level for those stores. What our process has been to date has been to open up a few stores in a new country, improve the economics and then push beyond that. I think in Europe at this point, our confidence level is pretty high based on what we've seen on the countries that are on the plan. So it's primarily, at this point, driven by finding the right real estate in each mall, in each country, and completing the process to be up and running on a country-by-country basis. As you know from making a decision to enter a country to actually opening the doors on our first store, there are quite a few things we need to do, and that process can take a couple of years as we set up our HR systems and IT systems and so on. So therefore, with the principal factors, we have a pretty high confidence level that the countries on our list, we're going to do good business in when we open, and that there are the real estate opportunities there to support it. In terms of overall count, Germany, U.K. will certainly be pretty high of the list in terms of the number of stores, or at the top of the list in terms of the number of stores we're going to open. But France, Spain, Italy will also end up being pretty significant, and then there will be a fairly long list of countries, where we'll have several stores based on how we get to that overall 185. On the second part of the question, the China opening date, have we given that Eric, specifically, for the malls?

It will be in fourth quarter of this year, and we haven't given a specific mall this year. We'll update as we work our way through the year.

Our next question comes from Betty Chen with Wedbush Securities. Betty Y. Chen: I was wondering, Jonathan, if you can talk a little bit more, I mean, given the strength we've seen now in the Domestic business, how should we think about the price increases in the back half domestically, and also related to that, the AUR opportunity or merchandise margin opportunities? And I was also thinking about the FX benefit that you mentioned for the first quarter, how should we think about FX for the second quarter, if you can help us with that? And then just lastly, the inventory comment that you made about being a little bit light going to Q2. Is that more specifically for the Domestic market, or do you feel like that way for the international stores as well? Jonathan E. Ramsden: Yes, Betty, I'm going to have Brian comment on the FX for the second quarter, and then I'll come back to the other points. So do you have that, Brian? Brian P. Logan: I don't have the specifics on it. But clearly, with the rates where they are at today versus where they were last year during the quarter, obviously, we can't predict what the rates will do for the remainder of the second quarter. But as they stand today, we do -- would expect to receive a benefit as well. Keep in mind, we do, do some hedging, as I mentioned. So some of that benefit is offset by some of the hedging that we do. Jonathan E. Ramsden: Betty, on the question about AURs and the opportunity there domestically in the fall, I think the truth is, and Mike was very clear about this on the last earnings call, we just don't know until we do that, what the impact of those ticket increases is going to be. We're clearly looking at what's happening to others and studying that. But I think at this point, there's a significant uncertainty around that, and we're going to have to be prepared to react to that as we go forward. So I don't think we've seen anything yet. As we said earlier, it gives us a strong indication either way on that, how that's going to be suggested by the consumer. On the point about inventory, we're probably a little lighter in general than we would like to be. And I wouldn't want to overplay that, but that effect is pretty much the same, both domestically and internationally. We had a very strong performance internationally, and the first quarter exceeded our sales projections, some of those projections we've taken up a little. So given when we lock in our inventory plans, puts a little bit of pressure on that. But again, I wouldn't want to overstate the significance of that.

Our next question comes from Jennifer Black with Jennifer Black & Associates.

This is Carla White for Jennifer Black. Can you about how you feel you're positioned for the all important back-to-school selling season, concerning the sourcing pressures being faced in the back half of the year? Jonathan E. Ramsden: It's obviously, as you say, it's -- that it's all important, but is extremely important, and we spent a lot of time working on the plans for back-to-school both from a marketing standpoint and inventory standpoint. And I think at this point, we feel good. We're obviously getting very close to it. So from a product standpoint, from a costing standpoint, that's all locked in. We are seeing those significant cost increases coming into play for back-to-school. So that's one of the factors that's impacting the second quarter margin. But overall, I think, we feel good coming into back-to-school.

The next question comes from Brian Tunick with JPMorgan.

I guess first question, Jonathan, maybe you can give us some more color on sort of lead times for the business. Talk about maybe what month or season you guys are working on. Cotton is now down, I think, like 25% since you took away that 15% EBIT margin goal, I think, at the Analyst Day. And just wondering if you think as cotton has come down, it helps AUCs as we move into next year. Could that help put that 15% EBIT margin target on the table? And then the second question is really on the competitive landscape. As you look at your 2 key competitors continuing to be increasingly promotional, do you guys look at that before the season? Do you react intra-season? And what impact that has on your margins, do you think? Jonathan E. Ramsden: Okay. I guess just overall, on the impact of cotton pricing, Brian, our 475 objective in 2012 was clearly based on a number of different components building up to that. And obviously, if cotton comes down, that's going to be a tailwind for us on that. But likely, some of the things will move in another direction, and we don't know what's going to happen with price increases. SO I think at any given point in time, there's lots of different moving parts. We still believe that 475 is a realistic objective for 2012, and certainly cotton coming down will help towards that. In terms of lead times, we're typically about 6 months out in terms of substantial elements of what we're locking into. And then I guess your last question -- I'm not sure I fully digested it. Do we look at competitors being promotional, and how do we respond to that?

Exactly. Jonathan E. Ramsden: Yes, well, we do. We are certainly mindful of what our competitors are doing. As we come into a quarter or a season, we have a very specific plan of the promotions in the Domestic business that we expect to execute, and we have some flexibly in that plan. But anything that involves in-store marketing, for example, we need to lock in at least several weeks in advance in terms of ordering the marketing, and getting into the stores, things that are electronic only, e-mail-type promotions we can clearly do on a much shorter lead time. But for the most part, we have a very specific plan now, certainly, through back-to-school that we expect to execute against. There are some abilities to adjust that as we go. Typically we don't adjust that based on specific promotions that our competitors are running. We adjust it more based on how we see our business trending relative to what our objectives are for the quarter. But the generally speaking, those intra-quarter adjustments are not all that significant.

Our next question comes from Dorothy Lakner with Caris & Company. Dorothy S. Lakner: Just, I guess, a housekeeping question. If you could give us a little bit more color on how the international Hollister openings breakout between third quarter or fourth quarter. Because obviously, for the flagships, it's fourth quarter except for the Paris opening. And then if you could give us a little bit more color on how Gilly Hicks is performing with respect to both sales and margin. Jonathan E. Ramsden: I know that. Brian, take Gilly in a second, and I'll deal with the first part. The split of the Hollister openings for the second half of the year skews slightly to the third quarter relative to the fourth. And again, that comes back to this preopening cost issue in the second quarter that we start to pick up meaningful preopening cost for those Hollister stores, as well as the flagship stores that are coming later in the year, so they skew. Between the third and fourth, they skew slightly to the third. Brian, can you pick up the Gilly piece? Brian P. Logan: Sure. On the Gilly piece, the comp store sales for Gilly for the quarter were just under 30%. So we had a nice increase in sales. In addition, the store that we opened in the U.K. is performing quite well. The margins are still quite low on Gilly. Primarily, we still don't have that base level of stores that we would need to achieve some of the timings of scale, and we don't have as many of the new smaller square-foot stores in that base. So hopefully, that gives you some color on Gilly. Jonathan E. Ramsden: But the margins did improve in Gilly year-over-year, I think, is an important point to add. Brian P. Logan: That's correct.

Our next question comes from Pamela Nagler Quintiliano with Oppenheimer.

So I just have a quick question. If you could clarify on the promotional cadence, last year, you had a lot of planned promotions that proved to be very successful, and just if you could talk through how you think about the promos navigate going forward? And I understand for competitive reasons, you can't give a lot of details, but maybe just frame that with your thoughts on the health of your Domestic consumer across the divisions? Jonathan E. Ramsden: Pam, as I said a couple of minutes ago, we have a very specific plan, and I think everyone's familiar with the fact that in our tourist stores and flagship stores domestically, we clearly are not promotional for the most part. There might be 1 or 2 promotions once in while that touch some of the tourist stores but generally, there are 3 of those promotions. So it's very much focused on the balance of the chain domestically, and we have a specific plan. We don't necessarily foresee that overall environment changing. It may get a little better. It may get a little bit worse from kind of aggressiveness of promotions that others are putting out there. So we have a plan, and as I said a couple of minutes ago, we do have the ability to adjust that. We always have the ability to pull a promotion should we decide to do so. But for the most part, we're locking in our plans, at least, a quarter or so in advance, and generally sticking to those plans as we go through the quarter.

Our next question comes from Christine Chen with Needham & Company.

I wanted to ask, it seems like through your e-mail promotions that more stores are being excluded from that promotional cadence, is that true? And then you've been testing Gilly Hicks in a handful of Abercrombie stores. How many stores of Gilly in Abercrombie locations? And do you see that as a potential expansion strategy for that particular brand? Jonathan E. Ramsden: Okay. The Gilly and to those tests, I don't have off the top of my head the specific number of stores, but we can probably get that. And I think our overall strategy on Gilly goes back to something Mike has said on many occasions about our belief that we are category killers, and that having established a position in the category, and quite confident that we could be effective in that category, then the question becomes what the most effective channel for that? And that is one of the things that we're experimenting with Gilly through the test in A&F through having the store in London clearly looking hard at direct, to look at all the different ways that we can leverage that category and drive profitable volume. So I think we'll try and pull that number of stores. We were running the test. In terms of the first part of the question about the number of stores excluded, we do have a defined group of stores that we exclude from pretty much all promotions. What you maybe seeing, when we run tests, we sometimes exclude a number of -- well, we typically exclude a number of chain stores from those tests, so that we can keep a control group to track what -- how that particular promotion performs relative to a control group of stores that didn't run the promotion. So you maybe seeing that on some of those e-mails, that we're listing all of the stores where we're not running the promotion including the control group stores for obvious reasons.

Our next question comes from Richard Jaffe with Stifel.

A quick question on sourcing for international stores versus Domestic. Is that a different channel that you're bringing goods from whatever the Far East, straight into the European market? Or is there really an identical path, and then it diverges at the last-minute? Could you just help me understand about the sourcing for the different channels? Jonathan E. Ramsden: Yes. I mean we source from the same vendors, the same factories, but we have separate POs [purchase orders] for merchandise that's going into TNT, in the Netherlands versus merchandise that's coming into the Domestic DC. And then we are now establishing our Hong Kong DC, and merchandise will go directly there to support the Asian stores. So it's all coming from the same place originally, and it's bought as part of an overall buy. But we break it off fairly early in the process to separate purchase orders, and then it flows to those 3 different DCs.

Our next question comes from Jeff Black with Citigroup.

So could you just remind us what AUR was by brand, Hollister and Abercrombie? And looking at Europe, on the Hollister stores, when you look at the productivity in the malls on these first 30 stores, what does the next 40 look? Are we heading into malls with similar levels of productivity? And I guess the question is at what point in Europe, specifically, do we really think we need to step a notch down in malls, just some b-malls, versus where you might be right now? Jonathan E. Ramsden: On AUR by brand, I think Brian can add some color on that, and then I'll come back to the second part. Brian P. Logan: Sure. Jeff, the AUR by brand for the adult and kids brand, the AUR was down, and the Hollister was up slightly, some of that had to just to do with the different cadence and promotions that we are running on a year-over-year basis. Jonathan E. Ramsden: On the other part of your question, Jeff, the stores we have open today in Europe are averaging -- we talked about in the past, ran about $12 million, actually, slightly higher today based on the -- where the U.S. dollar is. In terms of the $1.5 billion we talked about at the Investor Day has been the 2015 goal, on the 185 stores, that equates to an average of closer to $8 million. So we are clearly building into that, the expectation of what we're seeing today. In terms of average productivity, will come down over time. And we believe overall that, that $1.5 billion for 185 stores is therefore not by any means an aggressive assumption based on our store count but the answer, therefore, to your question is yes, we do anticipate that the average volume will come down. It wouldn't necessarily be linear. We're doing a very healthy volumes in Germany, for example. Spanish volumes, well ahead of our projections, are low in absolute terms, and then there are other countries, which we'll track closer to 1 or rather those reference points as we open into them. Brian P. Logan: And I'll also add to the AUR, as Jonathan mentioned earlier, that AUR metric is somewhat difficult to read just on the surface because of the international mix. But certainly, Hollister also did benefit from some of the international mix, and the foreign currency exchange rate year-over-year differences as well. Jonathan E. Ramsden: Just to amplify that point you made earlier, relative to what we thought at the beginning of the quarter, Hollister performed even better than we'd expected, whereas because of the Ginza and the Fifth Avenue closure, the A&F sales projections were off for those 2 stores, one of which clearly impacts the overall A&F international AUR.

I believe that is all the time we have available for questions today. Thank you for everyone participating in the call. We'll speak to you soon.

And that does conclude today's conference. Thank you for your participation.