Good day, and welcome to the Abercrombie & Fitch Fourth Quarter 2013 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.

Good morning, and welcome to our fourth quarter earnings call. Earlier today, we released our fourth 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. Today's earnings call is being recorded, and the replay may be accessed through the Internet at abercrombie.com under the Investors section. The call is scheduled for 1 hour. Joining me today are Mike Jefferies and Jonathan Ramsden. 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. In addition, due to the 53rd week in the fiscal 2012 retail year, fourth quarter comparable sales are compared to the 13-week period ended February 2, 2013. After our prepared comments this morning, we will be available to take your questions for as long as time permits. With that, I will hand it over to Mike for some opening remarks.

Good morning, everyone, and thanks for joining us. 2013 was a challenging year with sales and earnings falling well short of the objectives we set at the beginning of the year. After 3 years of positive growth in our combined U.S. chain store plus direct-to-consumer comparable sales metric, that metric turned negative in 2013 against the backdrop of a challenging retail environment, particularly in the teen space. The significant decline in store traffic that began in July continued through the holiday season and as yet has shown no sign of abating. Despite that difficult context, it is important that we return to positive growth, particularly in our core U.S. business. And the steps we are taking as we execute against our long-range strategic plan should put us in a position to achieve this goal. For the fourth quarter, we were pleased to see some sequential sales improvement, in that we were able to exceed our earnings guidance coming into the quarter. In addition, our direct-to-consumer business was particularly strong and represented nearly 25% of total sales for the quarter, up in all regions, with particularly strong growth in Asia. We are also pleased by the excellent results we are seeing in our new stores in China and Japan. We now have 7 Hollister stores in Mainland China, including our newest store at the IST Mall in Nanjing. Overall, our stores in China posted a 35% increase in comparable store sales for the year. We look forward to the opening of our Shanghai A&F flagship store in April, which will further support our growing brand awareness in Asia. We plan to open approximately 5 additional stores in China in 2014, including 2 mall-based A&F stores. In Japan, we opened our second Hollister store at LaLaport Shin Misato in Tokyo during the quarter. Similar to our first store in Yokohama, volume is annualizing at more than twice our initial plan and four-wall margins are well above our hurdle rates. These stores have been an important test for us, and we are reviewing our ability to accelerate our plans in Japan, given the success we have seen. During the quarter, we also opened our first store in the Middle East at the Mall of the Emirates in Dubai. This store is also exceeding our initial projected volume and is on track to be one of our top Hollister stores globally. We look forward to additional openings in the Middle East in 2014. While showing some modest improvement, comps across most countries in Europe remain significantly negative, with Scandinavia again being the exception. The general economic outlook in Europe remains uncertain with youth unemployment remaining stubbornly high in most of our core markets. Notwithstanding the sustained comp declines we have seen, our productivity in Europe remains well above the mall average. From a merchandise standpoint, we performed well in outerwear for the quarter, which comped up strongly across genders and brands. We continue to see high potential in this category. Our accessories, underwear and intimates businesses also did well for the quarter. And our denim business remains solid, comping positively on a cross-gender basis. In our last earnings call, we laid out 4 key priority areas. And I would like to take a few minutes to speak to each of those. First, continuing to improve fashion in our female business is a critical objective and ties very closely to our objective of driving productivity in our U.S. stores. We are taking aggressive steps to evolve our assortment and shorten lead times and increase style differentiation. Lowering our average unit cost will also help us to be more competitive on AURs in this part of the business. We are now testing close to 100% of our assortment, and we have new technology that enables us to test much earlier in the product development cycle. We are deploying new fabric platforming processes that are reducing lead times, particularly in Chase, which is now a significant component of our fashion business. And we will begin to include shorter lead time vendor-designed product in our assortments for the first time this quarter. Our second key priority is increasing brand engagement through enhanced marketing initiatives and campaigns. During the fourth quarter, we spent an incremental $5 million in marketing, which produced good results. For 2014, we are approaching this aggressively, including a significant increase in planned marketing expense. We will launch a global marketing campaign for Hollister this summer, featuring an evolved positioning, which we are very excited about. We are committing significant spend toward the campaign, which will be delivered through events, kiosks and social media. For A&F, we expect to launch a similar campaign aimed for Back-to-School. Both campaigns are leveraging our in-depth customer research, and we're also benefiting from the learnings of our additional marketing spend in the fourth quarter. This included an aggressive push to reach more fashion bloggers, which has generated more than 17 million impressions to date. We were a leader in social media, partnering with Facebook and Twitter, to unlock new customer targeting opportunities over the Black Friday and winter sale periods. We're also excited about the latest installment of our A&F rising stars campaign, which features 7 new faces across movies, television and music. To date, we have generated over 100 million media impressions related to this campaign, appearing on Access Hollywood, E!, Teen Vogue and other relevant media. In addition, our first A&F star Twitter chat with actor Diego Boneta was a trending topic on Twitter. Third, we've made excellent progress on the restructuring of our cost base, and Jonathan will give more details on this in a moment. As we move forward, we believe the next big area of opportunity lies in lowering our merchandise average unit cost. Our average unit cost will be down on a full year basis for 2014, weighted toward the back half of the year. And we see additional opportunity as we move forward, particularly for Hollister. Fourth, we continue to focus on ensuring we are properly organized to execute against our strategic plan. We are making progress on our search for our brand presidents. And next month, we will move to a vertical organization structure by brand for most of our categories in design, merchandising and planning. We believe these actions will support a number of key objectives, including increased brand differentiation and increased accountability. Beyond these 4 immediate priorities, we continue to focus on building on execution against our long-range plan initiatives. From a strategic standpoint, it is clear that we need to be thinking outside of the confines of our existing vertical specialty retail model. This includes looking at selling third-party brands through our channels and selling our branded merchandise through third-party channels. As you know, the partnership between Keds and Hollister was very successful last fall, and we are continuing that collaboration with new SKUs later this year. We have a long list of additional collaborations in the work across footwear, apparel and accessories, which we are excited to launch in the coming months. We know our target customer values these sorts of relationships, and we believe they can improve our brand positioning while driving incremental sales and margin. As we look forward to 2014 and beyond, there is much work ahead of us as we navigate a rapidly changing, difficult and uncertain environment. However, we are encouraged by the progress we are making as we continue to execute against our long-range plan objectives and are committed to achieving meaningful improvements in our business. Now let's go to Jonathan.

Thanks, Mike, and good morning, everyone. I'll start with a short recap for the quarter, and then talk about our outlook for 2014 and the key drivers of our longer-term financial objectives. For the quarter, the company's net sales were $1.299 billion, down 12% to last year, with approximately 6% of the decline attributable to the extra week in last year's fiscal quarter. Including DTC, total comp sales were down 8% with comp store sales down 16% and comp DTC sales up 24%. Total DTC sales, including shipping and handling, were up 18%. Total U.S. sales including DTC were down 13% with comp sales down 8%. Total international sales including DTC were down 9% and comp sales, also down 9%. Overall sales are better than expected, particularly during the holiday season. Within the quarter, comparable sales were weakest in January, reflecting in part significantly lower promotional activity compared to last year. The gross margin rate for the quarter was 440 basis points lower year-over-year, which was in line with expectations and reflected an increase in promotional activity during the high-volume holiday season, including shipping promotions in the direct-to-consumer business and an adverse effect from the calendar shift. On an adjusted non-GAAP basis, operating expense for the quarter was $621 million versus $692 million last year. This excludes pretax charges of $44 million, which are detailed on Page 4 of our Investor Presentation. Expenses for the quarter came in significantly below forecast, as we were able to accelerate savings from the profit improvement initiatives, which totaled approximately $25 million for the quarter. This was partially offset by additional marketing expense of approximately $5 million for the quarter. On an adjusted non-GAAP basis, operating income for the quarter was $155 million versus $252 million a year ago. Operating margin on an adjusted basis decreased 530 basis points, primarily resulting from gross margin erosion. The tax rate for the quarter, excluding effect of charges, was 31.4%, which reflects the benefit from higher proportion of earnings being generated from international operations than previously expected. For the quarter, the company reported adjusted non-GAAP EPS of $1.34 versus $2.01 last year. Relative to initial guidance for the quarter, results were better than expected due to higher sales and gross profit, greater expense savings and a lower tax rate, with each contributing approximately equally. Turning to the balance sheet. We ended the quarter with approximately $600 million in cash and cash equivalents and borrowings under the term loan of $135 million. We ended the quarter with total inventory at cost of 24% versus the low levels a year ago with in-transit significantly contributing to the increase. Excluding in-transit, inventory was up 16% and by a somewhat lesser amount on a unit basis. Also keep in mind that the increase this year is off a 37% decrease last year due to lower forward carryover inventory, the late spring receipts and less inventory in-transit. On a 2-year basis, inventory is down 22%. During the quarter, we closed 16 of our stand-alone Gilly Hicks stores and incurred charges of approximately $37 million related to the restructuring. We expect the remainder stores to be substantially closed by the end of the first quarter of fiscal 2014. Excluding charges associated with the restructuring, we incurred an operating loss of approximately $30 million related to Gilly Hicks for the fiscal year. We expect to incur approximately $10 million of additional charges associated with Gilly Hicks in 2014. And that excluding those charges, the brand will operate on a breakeven basis. Excluding Gilly Hicks, we closed 46 U.S. stores during the year, bringing total closures since 2010 to 220. Turning to 2014 and beyond, our financial objective remains to drive significant improvement on return on invested capital through a combination of disciplined capital allocation and operating margin improvement. Starting with capital allocation, we anticipate 2014 capital expenditures of around $200 million or slightly greater, which includes the effects of some timing shifts from 2013. As discussed at our Investor Day in November, our 2014 capital expenditures are prioritized towards DTC and IT investments to support growth initiatives. This includes major projects to reconfigure one of our distribution centers here in New Albany to be a dedicated direct-to-consumer facility. This will provide the additional infrastructure necessary to support unit volume growth from our expanding Web-exclusive assortments and also improve processing speed. CapEx related to new international store openings will be significantly lower than in recent years and prioritized towards key growth markets of Japan, China and the Middle East. We expect to open 16 full-priced international stores throughout the year, including the A&F flagship store in Shanghai and a small number of A&F mall-based stores. Overall, our ROI on 2014 CapEx is expected to comfortably exceed our 30% objective. As we announced earlier this morning, the board has approved a $150 million Accelerated Share Repurchase to be executed during the first quarter, pursuant to the existing open share repurchase authorization of 16.3 million shares. The Accelerated Share Repurchase reflects our confidence in our ability to achieve significantly improved performance and create sustainable value for our shareholders. We anticipate additional share repurchases over the course of the year, utilizing free cash flow generated from operations in addition to utilization of existing or additional credit facilities. With regard to the operating margin improvement, in our November Investor Day presentation, we identified 4 key drivers, being improvement in U.S. store productivity and AUR, growth in DTC penetration, profitable international growth and cost reduction. On cost reduction, we now expect gross savings from our profit improvement initiative to be at least $175 million, of which approximately $30 million was recognized in 2013 and an incremental $145 million will be recognized in 2014. We expect to realize some additional savings beyond 2014. The majority of these savings are included in operating expense with a smaller element included in gross margin. Over half of the savings being generated are expected to come from the store operations' work stream. Other areas of significant savings are store repairs and maintenance, store packaging and supplies, IT and corporate overhead. Partially offsetting these savings, we expect to increase 2014 marketing expenditures by approximately $30 million or greater as compared to 2013 with the expense skewed disproportionately towards the first half of the year. This is on top of the additional $5 million we spent in the fourth quarter of 2013. Going forward, as Mike alluded to, we believe there is potential to achieve meaningful savings in AUC beyond the modest reduction baked into our 2014 outlook, particularly with regard to Hollister. On DTC, we anticipate another year of strong growth in 2014, both in the U.S. and internationally with the segment margin remaining in the mid- to upper 30s. The investments we have made in the DTC business resulted in conversion rates being up significantly across all sites in 2013. And we plan to continue to invest in DTC, including increasing our assortment of Web-exclusive styles, completing the order management system upgrade to support omnichannel initiatives, advancing mobile capabilities and expanding international language and payment options. With regard to U.S. store productivity, alongside some of the initiatives Mike referenced, we continue to see store closures as a significant part of the equation. We currently expect to close 60 to 70 stores in the U.S. during 2014 through natural lease expirations. Significantly, our average remaining lease term for our U.S. chain stores has roughly halved in the past few years. And we have over 500 leases up for renewal between now and the end of 2016. This gives us significant flexibility to respond to changing retail dynamics in the U.S. Moving on to our earnings outlook for 2014. Based on an assumption of a high single-digit decline in comparable store sales and an approximate 20% increase in comparable direct-to-consumer sales, the company projects full year diluted earnings per share in the range of $2.15 to $2.35. The sales projection does not include any benefit the company may realize during the year from its long-range plan initiatives but also does not reflect further potential deterioration in underlying trends. The guidance assumes a gross margin rate for the full year that is flat to down slightly compared to fiscal 2013 with continuing AUR pressure and lower shipping and handling revenues relative to sales offsetting AUC improvement and a benefit from the company's profit improvement initiative. The above guidance does not include the remaining charges related to the restructuring of the Gilly Hicks brand, other impairment and store closure charges or charges related to the implementation of the profit improvement initiative. We anticipate a full year tax rate of approximately 35% and a weighted average share count of approximately 78 million shares, excluding the effect of share repurchases, including those pursuant to the announced Accelerated Share Repurchase. With that, I'm going to hand it over to Brian to provide some more details on our results for the quarter.

Thanks, Jonathan. As reported, the fourth quarter comp sales were down 8%. By brand, comp sales, including direct-to-consumer, were down 6% for Abercrombie & Fitch, down 8% for abercrombie kids and down 10% for Hollister. Across brands, female performance remained weaker than male. Changes in foreign currency exchange rates versus a year ago benefited sales by approximately $9 million. Also due to the extra week in the fiscal 2012 calendar, sales for the prior year comparable 13-week period ended February 2, 2013, had approximately $82 million less in sales versus the reported 14-week period ended February 2, 2013, which adversely affected fourth quarter year-over-year sales and earnings. The gross profit rate for the fourth quarter was 59.0%, 440 basis points lower than last year's fourth quarter gross margin rate, reflecting an increase in promotional activity. Stores and distribution expense for the quarter was $506 million, down from $570 million last year. The stores and distribution expense rate for the quarter was 38.9%, approximately flat to last year. Expense savings and store payroll for our management and support and other store and distribution expense, including accelerated savings resulting from profit improvement initiatives, were offset by the deleverage effect of negative comparable sales and higher direct-to-consumer expense. MG&A expense for the quarter was $119 million versus $122 million last year. MG&A expense for the quarter included $3 million of charges related to the profit improvement initiative. Excluding these charges, MG&A expense for the quarter was down $7 million, a decrease of 6% versus last year. Details of our international Hollister store openings for the quarter are included on the slide on Page 9 of the investor presentation. At the end of the quarter, we operated 843 stores in the U.S. and 163 stores in Canada, Europe, Asia and Australia. This concludes our prepared comments. We will now take your questions. Thank you.

[Operator Instructions] Our first question today will come from Stephanie Wissink, Piper Jaffray.

Mike and Jonathan, a question for you just on one of the strategies you outlined relative to U.S store productivity initiatives. I think, Mike, you mentioned that an improved AUR is core to that strategy. But Jonathan, you also mentioned in your gross margin guidance for 2014 that you would expect some AUR declines. So is this a reflection of 2014 being a transitional year along that improvement plan? Or is there something in your consumer insights that's lending to rethinking the merchandise pricing structure?

Yes. Let me respond to that, Steph. We have a number of initiatives to improve our AUR. And we've gone over those before, but I'll go through them again. Reducing markdowns and promotions through being more conservative with our upfront buys, evolving the testing of our assortment, reducing lead times to react more quickly to our tests, increased style differentiation and refining our presentation standards and improving our allocation accuracy. This is -- these are a few points. The list is really longer. But, and this is a very big but, we currently operate in a very challenging retail environment, and we really expect AURs to come down. It would be offset by some of these initiatives, but we do expect AURs to come down. We need to be competitive on price, particularly female fashion. And we'll aggressively look, as I said in my statement, to reduce AUC to give us that flexibility. This is a very important part of our strategy.

Next is Brian Tunick, JPMorgan.

My question is, I guess, on the vertical structure by brand. I think that's obviously new to all of us and to how you're thinking about it. I mean, going out announcing brand presidents, a lot of the things happening on the board level. Can you maybe talk about, Mike, sort of your sort of view of what kind of people you want to have running Hollister and Abercrombie as brand presidents and how you think the vertical structure is going to look a lot different than how you've typically run the company horizontally by product category?

I think that the people we're looking for -- and I have the say we found that there are some very well-qualified people who are interested in joining this company. But they need a general management background in addition to being product-oriented. The branding initiative will enable us to have more distinguished product, the product that's different from one brand to the next and also will enable us through new insight with these new people to look at the business a little differently. It is a different concept but one that I think is really appropriate for where the business is now. I don't think that we're going to lose category dominance by doing it. I think we'll still be category specialists. But a good question, Brian.

Our next question will come from Randy Konik with Jefferies.

I guess my question would be more for Jonathan. If you think about the 2014 outlook in terms of your visibility around that, how would you compare and contrast that to when you gave the 2013 outlook as it relates specifically to your visibility around the sales line, your visibility around the gross margin line and your visibility around the EPS line. Where do you feel most comfortable with that visibility -- those numbers that you gave this morning? And where do you feel less -- least comfortable?

Yes, Randy. I think if you look back at 2013, clearly what happened was there was a huge change in traffic in July that then went on for the rest of the year and, as Mike alluded to in his comments, has continued to date. So by the way, in the first quarter, we've not yet lapped that. So that is a change in the trajectory of the business that is attributable to a number of factors but none of which are necessarily fully explained why it was such an abrupt change that has obviously been widely reported across the industry. So I think the environment is uncertain. It's particularly uncertain, when get to Back-to-School in July and start to lap that decline, what will happen. So we've taken an approach we've taken in the past to projecting sales based on the recent trend. But I think to your point, there are certainly -- the range of outcomes is broader than what's necessarily embedded in the guidance outlook, and I think there is uncertainty out there still.

No, I guess, my question -- I guess, specifically, if you take the 3 buckets, the sales line, the gross margin line and the EPS line, do you feel most confident in the EPS number, given you have a cushion of share buyback, you have these cost cuts that are coming through? Do you feel pretty confident in the gross margin line because of you talked about AUC declines offset by AUR kind of declines, I guess? And then would you say that there's a least amount of visibility in the sales line, given the environment, but because of the gross margin visibility, you feel good about the EPS visibility? I guess, that's what I'm trying to get at.

Well, I think our gross margin, we have baked into that a modest AUC reduction, working hard to improve that. There is some benefit from the profit improvement initiative around $12 million, which is flowing into gross margin, which is locked in. And then there's a mix benefit from international growth store closures in the U.S. and so on. So baked into that guidance of flat to slightly down in gross margin is the assumption that AURs in our core U.S. business are down year-over-year. And we feel that's a reasonable assumption at this point in time. We're obviously going back to the point Mike spoke to a second ago, hopeful that the initiatives we have in place during the year will enable us to do better on AUR, but we need to see that before we start baking it in, into our outlook. We also have the marketing additional investments, of which is not baked into sales or margin outlook for the year. And on expenses, we feel very good, obviously about $175 million. There is a potential to do a little bit better than that as we go through the year. I think the biggest area of limited visibility is to your point on the sales line. So that we will see how the year plays out as we go. We feel, based on what we can see today, what we're projecting to is a reasonable assumption.

Our next question comes from Kimberly Greenberger, Morgan Stanley.

My question is on international. I'm looking at the full year international store comp, down 19%. That was certainly offset in part by strong growth in e-commerce. I haven't heard you talk about the potential to either slow international expansion or potentially to look at some store closures there. And if you could comment specifically on the e-commerce business, are you seeing the most robust growth in dollar volume in Europe and some of your older markets, maybe Europe and Canada? Or is the majority of the incremental revenue coming from new markets in Asia?

So Kimberly, maybe starting with the last piece. Our DTC growth is very strong, frankly, in all regions, particularly strong in Asia right now. So I think it's new markets in particular where we're seeing strong growth. But Europe is also strong and we were up solidly in the U.S. as well. And we foresee that continuing as part of what we're looking to for 2014. With regard to international expansion, we are opening fewer stores in 2014. We're prioritizing our CapEx towards e-com, towards some key IT investments we need to make and allocating less to new store openings. We're very excited about what we're seeing though in Japan and China and the opening the Middle East. So we are looking at our ability to move some of that up. With regards to store closures internationally, we don't have any of those planned. There's the Fukuoka outlet store that we've talked about in the past of wanting to close at some point. Beyond that, there are no other stores that currently we have any plans to close internationally, other than the Gilly Hicks stores in Europe.

But I think the point that the European stores, even with the decrease in sales, are operating at sales levels that are above the mall averages. They're very profitable stores.

Next, we'll hear from Janet Kloppenburg, JJK Research.

Mike, I was wondering if you could talk a little bit about your AUC objectives. I know that your quality disciplines have been the best in the industry. And I imagine that you'll continue to be very firm with respect to having some of the best quality in your space. So I wonder where the opportunity lay and how you thought you could achieve those goals.

I think that you're exactly right that our quality levels are the highest in the industry, and we plan on maintaining those levels. We think that the opportunity in AUC reduction is in the Hollister brand. And we think that we have an opportunity to reengineer some of that product and take some cost out of the product but to still maintain the quality level that is appropriate for that customer in that brand. Most of the cost initiatives will come from Hollister. But as we compare A&F to the rest of our competition and Hollister as we're looking at that brand and who the core customer is, we will be better quality than the competition, but there will be some reengineering of that product as we go forward.

Is that currently represented in the assortments, Mike? Or will we see that in the back half?

You'll see that in the back half.

Okay. So that hasn't [indiscernible]

No. And I would suggest, Janet, that you won't see anything.

Paul Lejuez, Wells Fargo, is the next.

Jonathan, for you. Just wondering when you think about your expect -- your guidance for '14, what are the expected charges that are not included in that guidance? And how much of those are cash? And also, are there any charges that you view as one-time that are, in fact, included in your guidance? And then just -- well, I'll stop there.

Paul, the only specific charge of any significance is the $10 million of remaining charges related to the Gilly Hicks closures specifically related to the European stores that we haven't closed yet. There's a bit of expense related to the profit improvement initiative, but it's relatively minus, so about $2 million. But that's all that is not included in the guidance.

Got you. And just a quick one for Mike. When you talk about selling third-party brands or selling through third parties, what sort of initiatives do have in mind? How extensive are we talking?

We are talking pretty extensive on third party in our existing channel. We're introducing a number of initiatives there as the year progresses. In terms of selling through a third party, this is something we're just starting to look at. It could be a very interesting opportunity. It's interesting in terms of volume potential there. In terms selling third party in our channels, there is a volume opportunity, but it is also a positioning device for us.

Next question comes from Adrienne Tennant, Janney Capital Markets.

Mike, another question on the AUR piece of it. So my question is, are you taking down initial ticket? And if so, in what categories? So I guess, I'm asking, is the initial pricing going to be lower and more competitive with accompanying lower percentage of discounting? Does that make any sense? And then Jonathan, for you. The inventory, I know there was kind of a mall traffic drop-off, and so it's hard to touch the inventory in the early half of the year. It still seems a little bit higher than kind of where the total sales is running. Can you give us any color on carryover versus go-forward product? And then when should we see -- like what's the inventory plan for the back half of the year? When should we see that kind of more in line with sales?

Adrienne, I would love to answer the first part of your question, but for competitive reasons, I really can't. I think the issue is that we're going after AUC, so we have opportunity.

Adrienne, on the inventory part, we expect inventory at the end of Q1 to be up but by a lesser amount than we were at the end of the year, and then we expect inventory to be down at the end of Q2 and for the remainder of the year. In terms of the composition of the carryover, both fall and spring inventory were up year-over-year. We're very comfortable with the fall inventory carryover levels. But they were really very low at the equivalent point last year and that affected our business in February, in particular, last year. So we're comfortable with where we are in inventory.

Is there any call out on Chinese New Year? Is there any -- did you take any receipts early because of the early...

Well, we had a bigger transit number. We did have a bigger transit number, significantly higher than a year ago that's baked into the overall inventory. As we said, if you excluded in-transit, inventory was up about 16%.

Our next question will come from Matt McClintock, Barclays.

I was wondering if we could talk a little bit about DTC. It sounds like a lot of the marketing investments that you're making would have a meaningful impact on your DTC. Is that kind of the channel that you're thinking about for the marketing investments? And then secondly, you discussed investing in your mobile capabilities going into 2014. Can you give us an understanding or just an overview of how your mobile capabilities have evolved over the last year and where you expect to get them?

Yes. Maybe just taking the first part, Matt. The marketing investments we're making, a lot of it will be delivered through digital and online. But we expect the benefit to be across channels, so we're not expecting the benefit to be limited to the DTC channel. In terms of the changes we're making online, I mean, some of the investments we alluded to in the prepared comments were an expanded assortment, search and navigation, experienced design, redesign of the Hollister website, personalization, additional international expansion, particularly focused on Asia, given the point we referenced a moment ago. And to your point on mobile, we're seeing a huge proportion of the traffic coming through mobile, so we're making enhancements to that experience, which we think could be meaningful. We're also investing in omnichannel. We're finding stores fully active now. We have an ordering store coming along, shipping store pilots. So there are a lot of things going on in that space. We're prioritizing CapEx towards that. We think strong growth in the U.S. and particularly strong growth in international, which is, I think, as we've discussed in the past, a particularly profitable channel, given the overall economics of that channel.

Anna Andreeva, Oppenheimer, is next.

I was hoping to follow up on international. Europe performance there improved a little bit from the holiday update. Just maybe talk about what you guys are seeing by region. I think you said Europe did get sequentially better. What kind of a performance in international are you guys embedding in the high single-digit comp decline for '14? And just given the four-walls have been coming down there, do you guys think that mid-20s is a sustainable level as we go through the year? And then just quickly, a number of retailers obviously have talked about difficult trends quarter-to-date so far in 1Q. You guys are guiding for comps down high singles for the year. Is that what you're running currently?

Okay. I guess, in terms of the comp trend internationally, Anna, we are projecting a sequential improvement in the comps in 2014. But to some degree, that's just reflecting what we're lapping. It's not necessarily an underlying improvement in the business. With regard to the four-walls, if you look at Hollister Europe specifically, it's still right around that 30% four-wall rate. We're still well above the mall productivity in the Europe as we referenced. Some of the profit improvement initiative benefit will accrue to the international business. Part of what's weighing on the overall international four-wall margin is we still have some very low profitability stores in Japan we talked about in the past. And Canada is operating below the 30% level. But if you look at Europe alone, it's still close to 30%, particularly if you look at Hollister. I think that I addressed several of your questions, but there may be one I missed.

For the first quarter performance, which I don't think Jonathan could address.

Yes. We don't typically comment on quarterly performance, as you know, Anna.

Next is Lindsay Drucker Mann, Goldman Sachs.

I just wanted to follow up on the international store margin. Just can you talk about the drivers of the ongoing margin decline on a four-wall basis in the fourth quarter? I know you addressed it too a little bit. But maybe a little bit more detail about whether it's on the merch margin side or if there's other -- if it's just a poor comp and visibility to that actually stabilizing.

Yes. It's predominantly the deleveraging effect of the negative comp. Although merch margins were down a little bit, we did take AURs down in the fourth quarter year-over-year in those international stores, so that contributed too. But the biggest drivers is the leveraging on the negative comp.

And is that disproportionate Hollister versus Abercrombie? Or are they both sort of moving in the same direction?

Both moving in the same direction.

Okay. And then as far as the profit improvement initiatives, can you talk about the areas where, from an execution standpoint, you're most mindful of ensuring that as you prosecute this large amount of cost savings in a short period, you're ensuring that there's really no impact to your top line comp trends, consumer perception or otherwise?

Yes. I think, Lindsay, I mean, you know obviously that we're both focused on in that regard is looking at what's happening in the stores, whether it's obviously direct-to-consumer interface that's potentially affected by some of these changes. So we have the makings of some of these changes already in the fourth quarter. We don't believe they adversely affected sales during the quarter, but we do need to watch that closely. But we feel confident about the $175 million.

I also have to comment that we only proceeded with the store initiatives after pretty extensive tests. And we saw that the top line wasn't really affected. Not in particular [ph] as we go forward.

Dana Telsey with Telsey Advisory Group has a question.

Mike, you talked a lot about the changes that you're making with product testing in the fabric platforming processes, with the improvement in lead times in chase product. When does this all take hold? And how do you see it impacting the gross margin?

It is already taking hold because as I said, we're in a place that we have considerable chase. I think that all of these things will impact volume and also gross margin. I would suspect that we should start seeing impact as the year proceeds through shorter lead times and testing. And I think testing is a very important part of this equation. So it's certainly going to affect gross margin and volume. And I can't give you a number.

I mean, Dana, I just have one other point, which is directly germane to your question. But in terms of AUC, I think down for the full year, and we're anticipating it to be down more in the back half of the year. It's skewed to the back half of the year. So I think that's an important point to make in terms of thinking about the gross margin cadence for the year.

And how do you see pricing in 2014, given the current environment?

As I said before, it's going to be very hard to sustain AUR increases.

Next question is Oliver Chen, Citi.

When we model our free cash flow out this year, how should we think about the net working capital items, if it will help cash or if it will be a cash use? And also regarding the products, Mike, and the opportunity for brand differentiation, what are the takeaways for where you see the most opportunity as you look to differentiate the banner, whether it be pricing or style or targeted audience?

Oliver, on the first one, we expect a benefit from net working capital for the year, including -- or mostly driven by a reduction in inventory. And that is, in part, driven by the expectation that our end-of-year inventory is going to be at lower average unit cost than it was in end of 2013 plus some other factors that are [indiscernible] into that, including generally trying to be more efficient in our use of inventory.

To answer the second part of your question, we think the branded structure is going to help the process of differentiation in terms of all of the factors you mentioned: customer, product, the positioning of each brand. And I believe it's an issue of product and marketing. We're working aggressively on both factors. This is a key focus area for us now. And I think we're making progress. I think the branded concept will only expedite that process. But you'll see real differentiation in these brands. But I think it's important to note that A&F and Hollister do have distinct equities, and they target a different customer.

Our next question will come from Paul Alexander, Bank of America Merrill Lynch.

I think last time we spoke to you guys, you were wrapping up a consultant-led qualitative study on brand perception. Are you ready to discuss the findings of that yet? Or is that still ongoing?

It is -- it has been complete. I don't think we'll reveal what those results were. I think that if you look at everything we're saying today, you can imagine what those results were in terms of how we're reacting for the business. We're taking these learnings seriously in all the aspects of the business that I've described today.

Next, we'll take a question from Marni Shapiro, The Retail Tracker.

So Mike, just 2 quick questions. If you could talk a little bit about, in the past, when you've had great fashion product, you've not had price resistance. And it sounds like you're talking about, with AUR coming down and focusing on AUC, that this has changed. And that even when you have good product, you're finding price resistance, so if you can talk a little bit about that. And then if you can just also touch base on the -- you talked about the differentiation between the products. Are you willing to give any insight as to how you view Hollister and Abercrombie looking different in, say, 6 months from now?

The first part of your question is I think we are in a different environment in terms of price resistance. Clearly, it's an old axiomatic statement that good fashion doesn't have a price attached to it. But today, it does. We sell good fashion well at higher prices, but it's still a very competitive environment. And we need to be very conscious of AURs to drive the business. In terms of where the 2 businesses are going, I don't think I'm prepared to describe to you exactly how they're going to look. But I think you'll be able to see real differences as we proceed in terms of look of product, look of advertising, look of marketing. And it's a pretty all-encompassing task that we are embarked upon to differentiate these brands.

We have a question from Barbara Wyckoff, CLSA.

A couple of questions. Can you talk about what percentage of the styles in the inventory now were pretested? And then secondly, can you talk about progress in China? How are the new stores doing versus the first wave of opening in at Hong Kong, Causeway Bay, [indiscernible], Nanjing are, I think, the most recent ones? And are you seeing the difference in sales, male versus female versus the U.S. and Europe? Also in international, how that Seoul flagship doing? And can you talk a little bit about the Japan Hollister? And lastly, can you clarify whether the Emirates store is operated by you or using a partner?

Emirates is a joint venture with our joint venture partner for the United Arab Emirates. So that answers the first question, Barbara. The Japan stores, as Mike said in the prepared comments, are doing very well, roughly doubling their initial plan. So we're very happy with how that's performing. China comped up 30-plus percent for the year. So we're very pleased with that. The absolute volumes in China are not as high as they were when we opened in Hong Kong, but I think that's not surprising. The progress we're making there is very positive. The other -- I think your first question was percentages of styles in inventory that were pretested.

Okay, I'll respond to that. As of today, I'd say it's about 50%. But each week, that will increase. We're setting a lot of newness this week and next week. And much of that has been tested. So as we move through the season, we're going to move to the 100% model.

I think actually, Barbara, just coming back. I think part of your question on China was the first versus [ph] the older stores. I think broadly the trend we're seeing in sort of China is consistent across the stores that are in the comp base and those that are not. What have we missed? Did that cover it, Barbara?

The Seoul flagship?

The Seoul flagship is somewhat below plan.

Omar Saad, ISI, is next.

Wanted to ask about outlets, the real estate strategy, obviously you've been closing a lot of stores in the U.S. You're going to close more in 2014. And if some of the planned openings have been in outlets, I think, you're up 20 or so now. How do you see the performance in those locations versus the more traditional regional mall, indoor malls? Is this a strategy that you think you could be much bigger in that channel as you continue to exit unprofitable or less profitable real estate locations in the more traditional malls?

Let me answer that. We're currently testing stores, outlet stores with made-for-outlet product. We've been in that business before, we've only used our outlets as clearance. So we have a roadmap for growing the outlet business, both in the U.S. and internationally, but we need to make sure the results are where we need to be as we roll this out. We have 2 test stores that have made-for-outlet merchandise today, a new store format, 1 is in Seattle, 1 is in Kent in the U.K. We're looking at these results very carefully. We're opening more test stores over the next couple of months. But we're looking at this as a real potential in terms of the business, but we have to be very sure about the results before we proceed.

Our final question today will come from John Morris, BMO Capital Markets.

So I think in the prepared remarks, you talked about guidance not including long-range planning initiatives. Just so we know, what's not included in there? What were you specifically referring to for that? And then also, you talked about the changes, I guess, the alterations with a new distribution center. Can you just tell us specifically what those are and the benefits that you expect to accrue from those changes?

Yes. So taking the first part, we have, coming out of the presentation we gave in November, we have about 150 specific initiatives, many of which we expect and hope to start seeing benefit from as we go through 2014. But we haven't baked any benefit from that into our outlook nor have we baked in, as we said earlier, any potential further deterioration in the underlying trend. So an example would be the marketing expense. So we baked in an incremental $30 million of planned marketing expense for the year, but we haven't assumed any benefit from that in terms of the top line or in terms of margin as we through the year. Turning to the DC, we're reconfiguring, as we said, 1 of our 2 distribution centers here in New Albany to be a dedicated direct-to-consumer facility. That's going to enable us to increase processing times. It's going to support omnichannel initiatives and other things that are important part of our e-com plans going forward. And it will also reduce cost over time.

And that does conclude our question-and-answer session for today. And that does conclude today's conference call. Thank you for your participation.