Good day, and welcome to the Abercrombie & Fitch Second Quarter Fiscal Year 2015 Earnings Call. Today's conference 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 second quarter earnings call. Earlier this morning, we released our second quarter sales and earnings, income statement, the balance sheet, store opening and closing summary and an updated financial history. Please feel free to reference these materials, which are 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 Arthur Martinez, Executive Chairman; Jonathan Ramsden, Chief Operating Officer; Joanne Crevoiserat, Chief Financial Officer; Fran Horowitz, Brand President of Hollister; and Christos Angelides, Brand President of A&F and abercrombie kids. After our prepared remarks, we will be available to take your questions for as long as time permits. Before I begin, I remind you that any forward-looking statements we may make today are subject to the safe harbor statements found in our SEC filings. With that, I hand the call over to Arthur for some opening remarks.

Thank you, Brian, and good morning, everyone, and thank you for being with us this morning. In our last earnings call, we indicated that we expected meaningful sequential improvement in comp sales performance accompanied by stabilized gross margins and continued expense reductions. The results we are announcing this morning exceeded those expectations. Our comp sales trend improvements reflect an intense focus on the customer experience, driven by a newly energized and empowered stores organization as well as investments in direct-to-consumer and omnichannel capabilities. While these results encourage us that we're on the right track, we recognize that we still have much to achieve, and so we continue to take important steps to improve near-term performance and lay the foundation for long-term growth and profitability. Our brand design and merchandising teams have been reinvigorated by a number of newly recruited executives with excellent backgrounds relevant to our needs. You may have seen our recent announcements regarding some of these additions for the A&F brand. We are also maintaining an intense focus on productivity improvements to build on the progress we have made in reducing expenses over the past several quarters. Both Hollister and abercrombie kids showed very good progress in the most recent quarter, and we believe that these improving trends are sustainable. For the Abercrombie & Fitch brand, our initiatives are well underway, and we expect improvement in our performance. Turnarounds, however, are never linear, and we are not naive about the challenges we face but are determined to return to prosperity and growth. And we are confident that we are taking the right steps to achieve that. An important part of our longer-term planning and thinking is the establishment of very clear brand positioning that will guide all elements of our business. That work is also under way, and we'll have much more to say about that as we go forward. In the meantime, we are encouraged by many indicators that we are on the right track in restoring the business to health. Now let me hand it over to Jonathan to provide a more in-depth update on our strategic initiatives.

Thanks, Arthur, and good morning, everyone. As Arthur said, our results for the quarter were ahead of our expectations coming into the quarter and reflect continued sequential improvement. While that is the case, many of our strategies are still in their early stages, and we see significant upside as we continued to execute against these strategies. As a reminder, our core strategies include: first, putting the customer at the center of everything we do; second, defining a clear positioning for our brands rooted in the clear sense of brand and corporate purpose; and third, delivering a compelling and differentiated assortment; fourth, leveraging the global reach of our brands and optimizing our performance in each channel; fifth, continuing to improve our efficiency and reduce expense; and last, ensuring we are organized to succeed. Many of the specific actions against these initiatives are consistent with what we have laid out in prior calls, but I want to mention a few highlights for the quarter. First, our 5 fully remodeled Hollister stores, which feature a newly redesigned interior prototype with an open floor plan, new fixtures, lighter paint colors and brighter lighting are performing well. These 5 stores are up strongly versus the control group, and the customer reaction to the new format has been very positive. We will convert another 8 stores this year and anticipate a more extensive rollout next year. In addition, approximately 100 Hollister stores have now been converted to the new store front and are generating a mid- to high single-digit lift in sales. Second, turning to digital. We launched our first A&F Android mobile app during the second quarter, and we'll launch a redesigned iOS mobile app in the fourth quarter. For Hollister we launched redesigned iOS and Android apps for the Club Cali integration in the third quarter. Mobile remains a major area of focus for us, now accounting for over 50% of our online traffic and with conversion growing strong. With regard to omnichannel, we are currently piloting reserve-in-store in 6 states and expect to roll out order-in-store and click-and-collect to the U.K. going forward. In addition, we expect to roll out various enhancements that will enable web-like search capabilities for order-in-store and increased SKU availability and fulfillment efficiencies to ship-from-store. Third, with regard to [indiscernible], despite the current macroeconomic uncertainty, our performance in China for the quarter was strong, with double-digit comp sales in Hollister for the second consecutive quarter, including positive comps in all 8 stores in the comp base and 300% growth in the DTC business. We opened our second A&F and 10th and 11th Hollister mall-based in China during the quarter. We are pleased with our performance in China to date, but we'll carefully monitor the competitive and consumer landscape as we plan future growth. We're also pleased with our performance in the Middle East where we now have 2 A&F stores in Kuwait and 3 Hollister stores in the UAE. Turning to outlets. Our MFO stores continue to perform well and to produce healthy margins. And we now expect to have approximately 13 new or converted stores with MFO merchandise by the end of the year, primarily in A&F. Fourth, this past quarter marked the launch of Fierce fragrant products with Inter Parfums in over 300 Sephora stores in France and online. Initial sales are encouraging, and we plan to add selected duty free and specialty stores in the third quarter. Fifth, the quarter reflected continued strong expense management, marking the eighth successive quarter in which we have reduced year-over-year operating expense on an adjusted non-GAAP basis with cumulative savings to date significantly exceeding our initial expectations. Finally, we continued to strengthen both brand teams during the quarter with deployments at the VP level and higher across design, planning, merchandising, e-commerce and marketing. Our results for the quarter reflect positive progress, and we look forward to building on that progress in the coming quarter. With that, I will hand it over to Joanne to review the second quarter results.

Thanks, Jonathan, and good morning, everyone. I will start with a brief recap of our second quarter results and then provide an update on our outlook for the rest of 2015. As Arthur mentioned, meaningful improvements in our comp sales trend, coupled with tight expense management, resulted in operating income exceeding our initial expectations coming into the quarter. For the quarter, net sales were $818 million, down 8% to last year. Changes in foreign currency exchange rates versus a year ago accounted for approximately 5 percentage points or $45 million of the sales decline. Total comp sales were down 4% for the quarter. On a sequential basis, comp sales trends improved broadly from first quarter, particularly in Hollister and internationally. As referenced on Pages 5 and 6 of the investor presentation, comp sales were down 7% for Abercrombie and down 1% for Hollister. By geography, comp sales were down 4% in both the U.S. and international market. International market showed strong sequential improvement with positive comps in Asia and Canada and sequential improvement in Europe, including in the U.K., Germany and France. These results were driven by strong conversion as customers responded positively to pricing adjustment and new product deliveries in these markets. Across brands, the direct-to-consumer and omnichannel business grew to approximately 21% of total sales versus approximately 19% last year, with growth in both our U.S. and international businesses. By category, we continued to see strength in jeans and dresses during the quarter and also saw sequential improvement in the tops business. While reduced logo contributed to the comp sales decline for the quarter, it was somewhat less than expected. Moving forward, we expect that logo will no longer be a headwind, and we will view and manage logo just like any other part of our assortment. Excluded from our results for the quarter was a pretax net charge of $15 million compared to $2 million last year, which are detailed on Page 4 of our investor presentation. For the quarter, this primarily included $16 million of legal settlement charges. Excluding certain items, the adjusted non-GAAP gross profit rate for the quarter was 62%, 110 basis points higher than last year on a constant-currency basis, primarily driven by lower average unit cost. Average unit retail in our U.S. business continued to stabilize, while our international AUR declined due to pricing adjustment and lower foreign currency exchange rates. On an adjusted non-GAAP basis, stores and distribution expense decreased $37 million from last year as a result of benefits from FX as well as further expense-reduction efforts and the realization of expense savings on lower sales. On an adjusted non-GAAP basis, marketing, general and administrative expense for the quarter decreased $6 million, primarily due to expense-reduction efforts during the quarter. Excluding certain items, adjusted non-GAAP operating income was above last year on a constant-currency basis. The tax rate remains highly sensitive to earnings mix by jurisdiction, particularly at lower levels of profitability, which was the case for the second quarter. For the quarter, the company reported adjusted non-GAAP net income per diluted share of $0.12 compared to $0.19 last year. Results for the quarter included the adverse effects from FX of approximately $0.18. Turning to the balance sheet. We ended the quarter with $408 million in cash and cash equivalents and gross borrowings outstanding of $298 million compared to $311 million in cash and cash equivalents and $188 million in borrowings last year. We also ended the quarter with total inventory down 13% versus last year. Details of our store openings for the quarter are included on Page 8 of the investor presentation. At the end of the quarter, we operated 783 stores in the U.S. and 171 stores in Canada, Europe, Asia and the Middle East. With regard to our outlook for the back half of 2015, we expect continued headwind from foreign currency exchange rates; further comparable sales trend improvement skewed toward the fourth quarter; gross margin rate to be approximately flat compared to last year but up on a constant-currency basis; operating expense dollars to be approximately flat compared to last year after absorbing the effect of restoration of incentive compensation provisions, which will skew toward the third quarter, but excluding FX from changes in comp sales; and a weighted average diluted share count of approximately 70 million shares, excluding the effect of potential share buyback. In addition, we expect an elevated tax rate on a full year basis, which remains highly sensitive to earnings mix. Over time, we expect the tax rate will return to the mid- to upper 30s. Excluded from our outlook for the rest of the year are potential charges related to impairment and store closings and other potential charges related to our strategic initiatives. We also continue to target capital expenditures for the full year of approximately $150 million. With regard to real estate plans for the full year, we plan to open 15 full-price stores in the key international growth markets of China, Japan, and the Middle East and 6 full-price stores in North America. We also plan to open 10 new outlet stores in the U.S. In addition, we continue to expect to close approximately 60 stores in the U.S. during 2015 through natural lease expirations. I'm now going to hand it over to Fran and Christos, who will provide some more color around performance and strategic initiatives occurring within their brands. Fran? Fran Horowitz-Bonadies: Thank you, Joanne, and good morning, everyone. Before I get started, I would like to thank the global Hollister team for their hard work over the past quarter. We continue to make significant positive changes to our brand, and the customer is noticing. As Joanne mentioned, we achieved continued sequential comp improvement in the second quarter, delivering a down 1% comp compared to a down 7% in the first quarter. We were able to achieve this performance while continuing to reduce our reliance on promotions across all channels. We continue to drive increased selling and ticket throughout the quarter, driven by improvement in the assortment with each product update. In the U.S., we comped roughly flat, driven by improvement in both the girls and guys businesses with tops leading the way for each gender. In Europe, we saw sequential comp improvement in each country. As we indicated last quarter, we completed the rollout of the updated international pricing architecture of new product set in June and July. The updated pricing, along with improved product offering, drove strong conversion. In Asia, our China business continued to comp positively, and we are pleased with the new store openings in the quarter. During the quarter, we continued to make meaningful progress on our key strategic initiatives. As we hone our brand and our customer messaging, we continue to drive strong engagement on Instagram and other social media platforms, where our customer expects to be able to engage. We partnered with Instagram on a new carousel advertising unit, resulting in our strongest engagement ever and a shift in brand affinity. On Snapchat, we were the first global retailer to develop a custom filter on Hollister. We continue to be early adopter of new platforms. For example, Hollister is amongst the most followed brands on We Heart It, a social platform targeting teenage girls. With clarity in our message and strong digital engagement, we continue to evolve our customer experience and deliver on-brand, on-trend product. During the quarter, we also made solid progress improving our in-store experience. We continue to update our store operations model to prioritize the allocation store payroll toward customer-facing and selling activities. We've also taken steps to increase the autonomy that our store managers have to set and present items that their local customers desire most. These efforts will continue to evolve over the next 12 months and are enhancing the shopping experience for our customers. We remodeled 5 U.S. stores during the quarter, which included a fully redesigned and re-fixtured interior. These test stores are up strongly versus their control stores, and we continue to receive positive customer feedback through exit interviews. Based on the initial positive test reads, we expect to remodel 5 additional U.S. and 3 Europe stores later this year. In the U.S., we reduced our promotional activity and simplified our promotional pricing to improve clarity in quality and value. We shortened the length and depth of our clearance messaging as we drove inventory to a more appropriate level. As we moved to the merchandise assortment, we were excited to see continued traction in our tops assortment while maintaining a strong body fitness. On the girls side, we were increasingly excited about our new product. We drove a solid knit top business and complemented the assortment with on-trend, pattern and color in dresses, rompers and soft shorts. On the guys side, we delivered significant sequential comp improvement from the first quarter driven by the top category. And in bottoms, we had a challenging quarter in shorts but made up for it in long bottoms. Stepping back in category performance, I'm most excited about the confidence they're gaining as a team to deliver bigger fashion items in the Hollister handwriting. Finally, we continue to make progress around people, structure and process. We made several additional senior-level hires in the quarter. We have seen the benefit of the perspective and passion brought by our recent additions who complement the strong team we already had in place. We're energized by our improvement and look forward to carrying the momentum into the back half of the year. And I'll now hand over to Christos.

Thank you, Fran. As Joanne mentioned, the Abercrombie brand's 7% comparable sales decline reflected sequential improvement from the first quarter, which included strong performance in kids, modest improvement in the women's business but no notable progress in the men's business as yet. While we expected more improvement, we did have some wins for the quarter, primarily in jeans and dresses. And while still down year-over-year, we are encouraged by some of the improvements we've seen in women's tops business. By region, comp trends improved in both North America despite a less promotional stance and an increase in full-price [indiscernible]. Internationally, we have seen improvement in the U.K., Germany and Asia. To support our progress moving forward, we have also made a number of key senior-level hires. The new brand leadership is executing against the strategic initiatives of the brand. We continue to make changes to improve the customer experience across all channels. As mentioned during last quarter's call, we've improved sightlines throughout the store by removing various props and fixtures. We've also made changes to the level of scent volume, music and the lighting in our stores. We've also improved our digital shopping experience, emphasizing convenience through on-figure product shops, expanded fit information, and lifestyle and editorial content highlights for the product. Our store associates are critical in ensuring that our customers have a positive shopping experience. And on that front, we've rolled out a number of enhancements to our store operating model. These new programs are designed to increase product knowledge and give our associates the means to drive their business by providing them with greater levels of autonomy to make changes based on the specific needs of their customer base. The program's also increased the frequency of communication and the scope of customer insights compiled by our field associates. As important as the improvement of the brand experience is the evolution of our assortment, and we're encouraged by the progress we're seeing in women's tops, particularly in international markets. We're particularly pleased with the progress of abercrombie kids, where we've created a fun and youthful assortment, and we will be extending our size offering in the kids brand to ages through -- from ages 3 through to 7 to supplement the current size range. We've also had a successful kids trial on the adult website, and we'll be expanding kids into an additional 13 adult stores. There has been a significant amount of change within the brand. While our results fell short of our expectations, we are [Audio Gap] making the necessary adjustments to drive improvements in the business, and we believe we have the team in place to do that. With that, I'll turn the call back over to Arthur.

Thank you, Christos. As you've heard today, and I and our board believe, we have an extraordinary executive team that is making excellent progress improving near-term performance and establishing more distinct, defined positioning for our brands to help us drive competitive advantage and realize the full potential of our company. With regard to a CEO decision, the board remains deeply engaged in this process, and a new CEO will be appointed in due time. Far better to make the right choice than a hasty choice. This concludes our prepared comments, and we'll now be happy to take your questions. Thank you.

[Operator Instructions] Our first question today will come from Matthew Boss of JPMorgan.

So on the top line, I guess, are you comfortable with your out-the-door prices today across the concepts? Any changes still underway globally for us to think about? And what, if any, headwinds do you foresee preventing a return to positive comps overall next year?

Maybe on the pricing, we'll bifurcate that between Hollister and A&F. Fran, do you want to start with Hollister? Fran Horowitz-Bonadies: Sure. We have rolled out the pricing. I think we're very comfortable with were we currently are, both domestically and internationally. And we don't see any other changes at this point.

In Abercrombie, Matthew, we continue to make adjustments to the pricing, actually both down and up. We see opportunities at both elements of the pricing spectrum.

And on your last part, Matt, obviously, we're not being specific about the rate of progress, but we're clearly saying that we do expect to continue to -- making progress in improving the trend of the business.

Great. And then, just a follow up on margins. What's the best way to rank your margin recapture opportunity if we think by concept over the next, call it, 2 to 3 years? And with that, just the best way to think about operating expense leverage, if you are able to stabilize the sales beyond this year?

Well, I just have a couple of opening comments on margins. First of all, we've had this significant FX headwind on gross margin rate this year. It's going to be a little less in the back half of the year if spot rates hold where they are today, although obviously, there's a lot of water to go under the bridge on that. But we would hope that, that is less of a headwind, certainly in 2016 and may potentially turn the other way. Then, I think, with regard to AUC, we've made pretty progress on a full year basis. We do have to balance, as we said on the last call, investing appropriately in the product, as we're confident that's going to give us a return from an AUR standpoint.

As it relates to expense leverage, Matt, I think, we continue to see opportunities to take expense out of the business. Certainly, we've had a lot of success over the last 18 months to 2 years, but we continue to believe that our continuous profit improvement approach and engaging the entire organization in making productivity part of everything we do will continue to yield results for us. We also believe that as we return the stores to productivity -- higher productivity, continue to optimize the fleet, that will also help deliver margin -- I'm sorry, expense leverage.

Next, we'll hear from Brian Tunick, Royal Bank of Canada.

I guess, Christos, first. On the A&F brand, I guess, lots of changes in terms of the product and positioning, but wondering, it seems like you're trying to age up the customer when we come into the stores and see the marketing. Can you maybe speak to any research you've done addressing maybe the older young adult customer's perception of the A&F brand in particular and maybe willingness to engage there? And then maybe the second question on the margin line. Can you maybe talk about the profitability by segment? We're just thinking about the AUR declines at Hollister internationally. How does that impact those segment margins? And what should we think about that going forward?

Okay, Brian, so in terms of -- you referenced aging of the customer. Actually, that's not a deliberate plan of ours to age up the customer. We're actually thinking less about age and more about style and attitude. So any changes you may see in store are really a result of the way that customers are taking us to that direction. So just to emphasize, we're not deliberately trying to age the customer. That may be a function of those that shop with us. In terms of...

In terms of margins and profitability by segment, we don't report the profitability by segment. But what we have said, and I think our results show, the investments we're making in price internationally, we did test. And we saw that we had a return in margin dollars. And the results were in line with our expectations as we more fully rolled out the pricing adjustments. So we believe that -- and we have seen that it has helped stabilize the comp trend and improved gross margin dollars. We also have, as seen by our gross margin absolute reported performance, AUC has been an offset to that broadly, and we're able to report margin rates roughly in line year-over-year.

And I'll just add, Brian, that I think, on the prior call, we gave some stats about the overall profitability of the European store fleet, in particular. And those stats remain very healthy even with the AUR reductions that we've taken.

Next, we'll hear from Neely Tamminga, Piper Jaffray.

I just have a housekeeping question, and then a question for Fran. Housekeeping, Joanne, on the Q3 comp indication -- or the comp indication for more positive momentum in Q4 versus Q3, is that solely because of FX? Or is there something going on in the current business that's given you any pause. Any sort of contextualization there would be helpful. And then secondly, for you, Fran, in terms of leadership team. We know that Christos has made it really clear who his leadership team is. I don't know if we've actually seen a similar announcement solely out of you, necessarily. Where are you on your team overall? And how do you feel about -- you're doing a great job. But I mean, are all the holes filled?

On the Q3 comp indication, I mean, I think the first -- on the first part, I think Q2 was slightly better than our expectations. And we believe that it's more fourth quarter weighted, really, due to the progress we're seeing in our assortments and the incremental improvement we're making into holiday. Fran Horowitz-Bonadies: Neely, it's Fran. Regarding your question on the leadership team, we at Hollister, have added leadership to the team over the past couple of quarters. We have a few positions that we're still looking to fill and have complemented what already was a strong team here. So moving forward on that front.

And next, we'll move to Simeon Siegel, Nomura Securities.

This is Gene Vladimirov on for Simeon. It looks like you guys had a sizable inventory reduction for the Q. Just wondering if you're expecting that trend to continue through the year, and then maybe if you could give us some color on the current composition. And then just the quick reminder on the current split of logo versus non-logo product, what it looks like and whether we should expect that to change going forward?

So on inventory reduction, we did expect the large reduction, and we continue to believe we have opportunity to improve productivity on our inventory. So we expect going forward that we, both through better management of the buy and the inventory management process end to end, should see continued improvement in inventory productivity. On the logo, we did make a structural change in the logo position in our assortment about a year ago. We have basically lapped those structural changes as we move into the back half of the year. I would say we're comfortable with where the logo is in our assortment in terms of the absolute level. And as I mentioned, we intend to manage that as we would any other aspect of our assortment moving forward.

Oliver Chen with Cowen and Company is next.

Congratulations on the solid improvement here. We were just curious about, as we look forward and model the positive impact from the remodeled stores and the storefronts, what's the timing from which we should think about the materiality of driving the comp? Also, what's the context from which you're seeing improvement on the remodels? Is it traffic and conversion? Just curious about the context of how the benefit is manifesting.

Yes. Oliver, so on the last part of the question, it's a combination of both. We've seen traffic and conversion both up in those converted stores. In terms of the impact of the remodels, we have a relatively small number today, and that will remain the case through the end of this year. So the overall impact on the comp is, therefore, pretty much de minimis at this point. It's an open question at this point as to how many stores are we are going to convert in 2016. That's something we're going to be looking at very hard over the next couple of months as we think about our capital allocation plans, as we continue to track the performance of the stores. We have remodeled, but we're certainly very encouraged by what we're seeing so far. And we certainly do expect there to be an increased rollout in 2016, but precise number's still to be confirmed.

And just a quick follow-up. On the store checks, we've noticed a little bit more markdowns on men's versus women's at both concepts. We're curious about how you felt about where you were in the innings of those assortments. It's really good that you're pretty happy with women's. Fran Horowitz-Bonadies: I'll go first. From a Hollister perspective, we made improvement actually in both men's and women's over the quarter, a little bit more in women's. As I mentioned earlier, we did positive comp in tops for women's for the first quarter in quite some time. But men's made some very significant improvements as well, and we see that continuing.

In Abercrombie, we definitely haven't seen the same improvements in male as we have in female. And I would put that down to the need for us to offer more newness and variety across styles, fits, fabrics and washes.

Our next question will come from Paul Alexander, BB&T Capital Markets.

Just a follow-up on the logo discussion. It sounds like you're not taking the logo down anymore. What's your philosophy around logo? Do you see the logo trend -- the decline in the logo trend stabilizing? Or do you just feel like you have such a sizable logo business that you no longer want to take it down? How do you -- and how do you think about your approach to logo versus the competition? Fran Horowitz-Bonadies: Paul, it's Fran. Regarding logo for Hollister, we are seeing nice customer acceptance to our logo product. It is something that we focused when we first got here in putting sort of quality and value back into our logo. It's seeking a piece of the business. It's sort of going to be part of a balanced assortment that we will offer to the customer going forward. So it's seeking its own level, and that's what the customers' currently telling us. And regarding the competition, we don't normally comment on what's happening with the competition.

In Abercrombie, Paul, we don't actually set a level for logo. It will be what customers want it to be. Fortunately, there is good traction and customers appear to like the new logo product we're developing. So we'll just run with that and see where it takes us.

Next is Thomas Filandro with SIG.

Nice job on the progress. I was hoping to ask the question on the field organization. I was hoping you could help us better understand the initiatives to empower the field organization. What exactly is occurring across both brands? And have you seen any impact on the business in terms of maybe shopper conversion, UPTs? And then for -- how should we think about payroll as a percent of sales with some of these new empowerment initiatives?

Tom, it's Jonathan. So let me give you a couple of cross-branded comments about what we've done with the stores. First of all, as we mentioned, I think, a couple of quarters ago, we put in place an incentive scheme at the store level related to store sales performance with a couple other levers in there. We've also given the store associate, the store managers, in particular, greater autonomy to make changes within the stores. If they see something selling well, they can move it within the store. There have some latitude around moving fixtures. We're also supporting them with some additional training in how they interact with customers and directing them to spend more of the hours that are within the store on customer-facing activities rather than back-office-type activities. I think all of those are examples of things we're doing across both brands. Christos, Fran, anything else to add, brand specific? Fran Horowitz-Bonadies: Specifically, for Hollister, keeping the customer at the center of everything that we do is the mantra that we have put out there, a bit different than where we were in the past, Thomas. We are seeing conversion internationally as well domestically, which leads us to believe that the customer is being serviced in a way that we are charging the field with.

And then I think on the second part of your question, Tom, about the payrolls and percentage of sales. We're still looking to be very efficient on that. We're reallocating that payroll more than looking to increase it. And the incentive scheme is, obviously, tied to results. So if we're delivering a strong incentive through that, then we're getting a good top line performance that will more than pay for that.

Betty Chen with Mizuho Securities is next. And hearing no response, we will move on. We have Marni Shapiro with The Retail Tracker.

The stores really look a lot better. It's exciting to be there. I just had 2 quick questions. One is, I know this is going to sound silly, but the sales associates seem much happier and a lot less stressed in all of your stores. So I'm wondering if that's just a function of better sales? Or have you actually changed the way you're incenting them and the way you're working with them, other than allowing them more autonomy in the stores? And then if you could just give me a quick update. I've already seen the extended kids assortment in the Abercrombie stores, a bunch of them that I've been in. But you said you're expanding into 13. How many have the kid stores today -- the extended sizes today?

Go ahead.

Okay. So in terms of -- I have to say, just on the sales associates. I actually think one of the reasons they might appear happy was that they've got control over their own store and they're more autonomous. It makes a big difference. It means they can have an impact on their own sales, and they can see if they react in a certain way and they get a positive result. I'm sure that motivates them. In terms of kids, we have, I think, it's 29.

26.

26 in total, including the 13.

That includes the 13? And so there's been no change in the way you're incenting the associates -- for today, as far pay structure.

Well, yes. As I've mentioned a minute ago, Marni, we have an incentive scheme in place for the stores, which is for the managers. And clearly, they're motivated to drive the sales in the store. And I would fully echo Christos' point that I think people value the empowerment and like to be held accountable as long as they're given the ability to impact the outcome, which is what they're now getting.

Congratulations because I have to tell you, it's been a really big change in your stores. And it seems the customer is responding. I'm watching adults actually spend more time in your stores. It's amazing.

Our next question will come from Janet Kloppenburg with JJK Research.

For Joanne, on the expense side, including G&A, you're down about 8% year-over-year for the first half of the year. I'm wondering if you could talk to us directionally about what we should look for in the second half. Could it be the same level of expense reduction or something greater? And for Fran and Christos, on a category follow-up. Fran, can you talk about your denim performance? Because we are seeing a resurgence in denim demand throughout the industry. And Christos, I think, the knit category has been challenging for the A&F brand. Perhaps, you could talk to us about what you see there and if you're making any progress.

Thanks, Janet. I'll start with the G&A. In our outlook we've provided for the back half of the year, we expect expense dollars, excluding managing expense with changes in comp sales, we expect the expense dollars to be roughly flat with last year. And that's made up of a couple of, I think, big puts and takes. The FX, we expect to continue to be a benefit to operating expense in the back half of the year, but that is offset with normalized incentive provisions -- incentive comp provisions, which in the beginning of the year we did talk about our expense performance through the year. The restoration of our incentive comp accrual versus 0 last year hits the back half of the year more heavily than, certainly, the front half of the year, offsetting some of that FX benefit. We also expect to invest in marketing and DTC, also offsetting -- roughly offsetting the benefit we expect to see in FX. Now having said that, we have had success in driving expense reductions and we're continuing to focus on it, although those are changes that we report when they're certain. So we wouldn't want to get ahead of ourselves in that.

But just so my interpretation's correct, there's some flexibility there.

We expect to continue to focus on driving down operating expense, yes, as we have in the past quarters. Fran Horowitz-Bonadies: Regarding your question on denim, Janet, we were pleased with our performance in the second quarter for Hollister denim, both girls and guys. We have had a strong denim business over the past 12 to 18 months. I think, we spoke about that in the last call. And when we recap Q3, we'll bring those results as well.

And then, Janet, in terms of your call-out on mix being challenging, you're correct. It has been very challenging, particularly in male. And I put the reasons down to the fact we haven't moved the collection on enough. And what we'll be doing there will be bringing in more variety in terms of price points and -- as well as design.

And next, we'll hear from Anna Andreeva with Oppenheimer.

Congratulations on seeing sequential improvement. I guess, my question is, if we can talk about the degree of improvement you're seeing at Hollister versus A&F and the disconnect there. Just curious, do you think it's the Hollister brand that is healthier than A&F? Do you think it has to do with a lower ticket or overall better product execution? Just curious on your thoughts there. And keeping in mind, like you said, turnarounds are never linear and you do have a new team at A&F. Just how do we think about the timing of improvement at A&F brand going forward?

Yes, thanks, Anna. I'll kick off on this. So I think the -- first of all, I think, it would be unusual to expect that the brands would move in lockstep with each other. We have, by the way, seen good progress in kids, which has been similar to what we've seen in Hollister. So I didn't think we would never expect that the recovery curves of the 2 brands would take precisely the same path over time. There is probably some additional baggage that A&F carries related to the historical issues. And then, I think Christos alluded to where the brand is starting to get some traction and where progress has been slower from a product standpoint, which is also clearly going to be a component of the transition over time. So inherently, I don't think we think it's surprising. We did hope to make a little more progress on A&F. We made a little more progress than we expected on the other 2 brands. And that -- we wouldn't expect that to move lockstep going forward either. Anything to add?

No. I think, just in terms of the new leadership team, Anna, there'll be continuous improvement. From the moment they walked through the door, they started to make a difference. And that will just continue all the way through the rest of this year and into next year.

Okay. That's helpful. And just a follow-up on gross margins. Your gross margins have come in, I think, more or less on line so far in the first half. And you're tweaking down gross margin guidance for the year to flat from, I think, flat to up slightly, previously. Just what's driving that thought process? And how should we think about the AUC opportunity within them?

Yes, so roughly, gross margin guidance was roughly in line with basically how we performed in the second quarter, roughly flat to last year but up significantly on a constant-currency basis. We still expect foreign currency to be a headwind in gross margin. AUC has driven our gross margin performance year-to-date. We continue to expect AUC to be down as we move through the third quarter, but not down as far and it's stabilizing as we sort of wrap the improvements we made in AUC last year. So we start to anniversary some of those AUC improvements. We're encouraged by the AUR stabilization that we've seen, which is also an element of our gross margin performance and our outlook, as well as the success we've had and the traction we've seen at selling goods at ticket price and stepping away from promotional activity. We also believe that our inventory management has left us in a good place in terms of managing AUR as we move through the back half.

Our next question will come from Kimberly Greenberger, Morgan Stanley.

My question's for Christos on the Abercrombie brand. It looks like there was a tremendous amount of progress in the international comp from Q1 to Q2 but not really in the Abercrombie brand comp from Q1 to Q2. I'm wondering if the international results are actually not getting better. And we're wondering that, particularly because, I think, Abercrombie stores are in many of the tourist destinations that we're hearing others talk about very much a surging tourist business in their international markets, particularly Europe. So I'm just trying to reconcile the seemingly conflicting results coming out of that business.

Kimberly, let me make a couple of comments on that. I think, first of all, it's important to keep in mind that the A&F stores' international component of our business is a relatively small segment. It's much smaller, for example, than the Hollister stores business internationally. We did see a bit of progress though in the stores business internationally. The DTC business was down in Q2 relative to where to had been in Q1 for A&F internationally. So that's part of what you're seeing, reflects both the store and DTC comp plus the brand cut. But I think, overall, as we said, that the progress was a little slower than in A&F in total than we did expect. But we did see -- if you're focusing on stores specifically, we did see some modest progress in the A&F international stores. I think, to one of the points you may have alluded to, there is perhaps a greater tourist impact in those stores than there is for Hollister, where it's predominantly a mall-based customer. Whereas in our European flagship stores, particularly London, for example, there's a significant tourist component in there. But again, I think it's important to caveat all of that with the observation that A&F international stores are a relatively small piece of our overall business.

Next, we'll take a question from Dana Telsey, Telsey Advisory Group. And hearing no response, we will move to Susan Anderson with FBR.

This is Andy Schmidt on for Susan. Our question is on the gross margin for the back half. Your outlook is for a flat rate in the back half. And it sounds like the third quarter opportunity is more AUC-driven, in the fourth quarter maybe AUR-driven, just given improving momentum. How should we think about the cadence in the third and the fourth quarter in the back half? And then additionally, if you guys could comment on the second quarter traffic by brand, that will be helpful.

We haven't provided specific guidance on the Q3-Q4 split. We do expect, as you mentioned, I think accurately, the AUC to be a bigger driver in Q3. In terms of traffic by brand, we have seen improvements, continued stabilization in North America. I think, that's fairly consistent, and improvements in Europe, I think. I don't have the brands specifics, but it's been fairly broad based on the store side of the business.

Our next question will come from Rick Patel with Stephens.

Can you provide more color on omnichannel? I'm curious about how receptive your customers have been to your new capabilities. And why do you think it's been a greater benefit from a comp or margin perspective? And then perhaps a little bit more detail on the opportunity for omnichannel in Europe.

Well, we, Rick, we've been investing significantly in omnichannel. We think it's a very important thing for us to be investing in, particularly given how our customer shops. We are less far along internationally than we are in the U.S. We referenced in our prepared comments that we're just starting to roll out some of the omnichannel capabilities, particularly in the U.K. and then we will look to roll that out further in Europe going forward. But in the U.S. now, we have order-in-store and ship-from-store pretty well rolled out. We're progressively seeing more of a lift coming from those, and we think it's an important part of being customer-centric in how we provide a seamless experience to the customer. So I think U.S., definitely more progress to come. Europe, still relatively early days, but also an important initiative there.

Our next question will come from Omar Saad with Evercore ISI.

Christos, I wanted to ask you about the A&F positioning [ph]. It sounds like you're still going through the process of trying to leverage your analysis of the brand and research of how to position it in the marketplace. But any sort of updates, information that you've gleaned or insights you've gleaned about where the brand has its areas of resonance with different types of customers, and perhaps maybe segmentation and market positioning relative to the marketplace landscape, would be really helpful as we think about how that turnaround progress [indiscernible] quarters.

Yes. So Omar, as you know, we will have more detail on this later in the year. But currently, I'll just call out some indications of where we feel the brand is positioned. And I think, first and foremost, it's important that we recognize it's an American brand, and that's something that's very important in the way that we put this business together. Secondly, it's an iconic American brand, as designated by the moose. And thirdly, it has a lot of heritage. It was founded in 1892. So it's 3 components of things we're thinking about every day when we put the collection together. More than that, probably a little bit early for me to give you more details, Omar.

And as you continue down this road, Christos, how do you think about the role of marketing, advertising, leveraging some of those elements? What is the role...

Well, clearly they play very -- yes, they play a very important role, and everything has to be synced up simultaneously and at the same time. So when we have more color on exactly where we think the position will be, we'll align all of those components together. What we do feel is that the positioning is evolving. kids are playing a very important role in that positioning, so we do find that when we link kids into -- on the website to adults or kids in the store, then we are reaching new customers. So it's our job to make sure we satisfy the existing customer base with our brand positioning but also be in a position where we can attract new customers. So that's part of the thought process as well.

And our next question will come from Lorraine Hutchinson with Bank of America.

Joanne, how big was the incentive comp reversal in the third quarter? And then, secondly, just following up on Neely's question, the fourth quarter optimism around big sequential pickup in the comp, is that primarily driven by the expectation for higher AUR that's product driven?

I'm sorry. I missed the second part of that question. The incentive comp reversal, I think we spoke about it in the beginning of the year, was in the neighborhood of $20 million, affecting the back half of the year. I think, the reversal was in the third quarter. So we're up against that activity from last year.

The second part, I think I'll take a crack at it, Lorraine, was about, again, coming back to the sequential -- the pace of improvement in the back half of the year and the differential in Q4. I think, as Joanne said earlier, Q2 we've made a little more progress than we expected. So we think about it -- as we think about how we planned out the year. And as we've learned from some of the things that have occurred as we've gone through the past couple of quarters, things that we can react to going forward, we feel we have a stronger opportunity to make progress in the fourth quarter.

Our next question will come from Lindsay Drucker Mann with Goldman Sachs.

This is Edward McLaughlin on for Lindsay. You touched on it before, but could you go into a little bit more detail about what you expect to be the drivers of improvement in U.S. margins going forward and how that might shift over the next 2 to 6 quarters being the breakdown in markdown improvement or AUC reductions or just leveraging fixed expenses? And then if there's any other detail you could also provide on international margin?

So for the U.S. business, on the gross margin line, we have had success driving gross margin through AUC. We believe, going forward, our margin success will be driven by better inventory management, higher acceptance of the product by the customer, certainly higher sales at red price and better management of promotional activity will be a bigger driver in the U.S. business. And as it relates to operating margins, continued rationalization of our fleet in the U.S. market will also contribute. And again, we continue to focus on expense reductions and making productivity a way of life and driving more efficiency in the business. On international markets, we are focused on stabilizing the business through comp sales trend stabilization. We made investments in price. We have seen some returns on those investments in the second quarter. And we continue to evaluate and drive more productivity. And as we do in those boxes, we expect to stabilize those margins, which are already elevated versus our U.S. margin.

And we'll move to our next question, Dorothy Lakner with Topeka Capital Markets.

Just a quick question going back to the kids business. You spoke about adding, I think, 3 through 7 years. Just wondering what the timing is on that. And is it throughout the fleet, including the stores that are within the adult stores?

So 3 to 7 years will be available in all kids stores by Christmas, and it'll be available in a limited fashion online by that period of time as well. As we go through 2016, then we'll expand that out quite significantly. We carried out tests recently, and it proved successful, and that's why we're expanding that assortment out further.

Okay, terrific. And the stores within A&F?

The stores within A&F will also carry the 3 to 7 years age group.

And next, we'll hear from Mark Altschwager with Robert W. Baird.

Could you just update us on your chase incentives? Have been a lot of changes to the business and the assortment. Is it still a component of the expected comp improvement in Q4? Just how do you see your speed-to-market capabilities evolving with the holiday season and into spring? Fran Horowitz-Bonadies: Yes. So Mark, it's Fran. Over the past several years, and I think we've spoken about it a couple of times, we've really worked hard on evolving our pipeline and our speed to market. We're continuing to focus on that. The teams are able and ready on chase capability. They hold a significant part of their open divide to make sure that they can react to the business. They've also been empowered to make quicker decisions. So we are pleased with where we are on our chase initiative.

And next, we'll go to Dana Telsey, Telsey Advisory Group.

On the Abercrombie & Fitch brand, the jeans and dresses were certainly wins. What other categories are being worked on that we should look forward to as we move to the back half of the year? Then, I have to tell you on the store experience, the Hollister stores do look very good in our mall visits. Anything else we should be noticing with the new formats of Hollister or in Abercrombie with the shutters now removed as we get towards holiday?

So in terms of products you should be looking out for, certainly sweaters, both on male and female. And I think I'd call out Christmas-specific product, things like lounge wear or motif product, anything that's got a relationship to Christmas giving. And that'll be a very important component for Abercrombie. Fran Horowitz-Bonadies: Dana, for Hollister as well. I think you're going to continue to see what you've been seeing, which is continued improvement with these product updates. And as we get into the holiday, we will also be focused on the holiday experience within Hollister and the gift-giving opportunity.

Just picking up on the store experience, just -- we're going to continue to make improvements. As we make adjustments to the stores, whether that be lighting or sound levels, we learn something from that, and then we'll adjust it again. So I would expect that process will just continue. There isn't a stop-point moment.

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