Good day, and welcome to the Abercrombie & Fitch Third Quarter 2012 Earnings Results Conference 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 third quarter earnings call. Earlier today, we released our third quarter sales and earnings, income statement, balance sheet, store opening and closing summary and updated financial history. Please feel free to reference these materials available on our website. Also available on our website is an investor presentation, which we will be referring to in our comments during this call. This call is being recorded, and replay may be accessed through the Internet at abercrombie.com under the Investors section. Before we begin, I remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Today's earnings call is scheduled for 1 hour. Joining me today on the call are Mike Jeffries and Jonathan Ramsden. We will begin the call with a few remarks from Mike, followed by a review of the financial performance for the quarter from Jonathan and me. After our prepared comments, we will be available to take your questions for as long as time permits. And now to Mike.

Good morning, everyone. The third quarter results we are reporting today include total sales up 9% and diluted earnings per share up 53% versus a year ago. Our operating margin for the quarter increased to 9.6% from 7.4% a year ago. These significantly improved financial results reflect progress on several fronts over the past quarter. Starting with sales. We saw a sequential trend improvement in same-store sales in both the U.S. and international businesses. U.S. same-store sales increased 2%, with chain stores up 6% and flagship and tourist stores down 12%. Looking at our U.S. chain stores plus U.S. direct-to-consumer, comparable sales were up 7%, on top of growth of 16% in the comparable period last year. As reflected in the chart in our Investor Presentation, this means we have -- now have had positive growth on this key metric for each of the past 11 quarters. Our overall international business grew 37% for the quarter, and we saw sequential comparable store sales improvement in all markets other than the U.K., where comps were similar to the second quarter. Elsewhere in Europe, bright spots included positive comps in Scandinavia and flat comps in Belgium and Spain. We are encouraged by our trend in Asia, where our first Hong Kong Hollister store has been comping positively since it lapped the initial opening period. In addition, we expect to comp positively in China when the first 3 stores move into the comp phase. And we have opened well in our first store in South Korea. International direct-to-consumer sales grew strongly, up 31% versus a year ago, with Europe particularly strong. New stores opened during the quarter have performed well. Coming back to the U.K., our comp trends there have remained challenged, down high 20s for the quarter, consistent with the second quarter.…

Thanks, Mike, and good morning, everyone. I'll start with a short summary of our results for the quarter and outlook for the full year and then Brian will go into some additional details. For the quarter, the company's net sales increased 9% to $1.17 billion. Total U.S. sales, including DTC, were approximately flat. International sales, including DTC, were up 37%. And total DTC sales, including shipping and handling, were up 20%. Comp store sales were down 3% to last year. Comp sales were up 2% in U.S. stores and were down 18% in international stores. Foreign currency changes for the quarter affected sales growth adversely by approximately 70 basis points versus a year ago. Gross margin for the quarter improved 240 basis points year-over-year, reflecting a significant tailwind from lower product cost, as well as an ongoing international mix benefit, partially offset by a slight reduction in average unit retail and the adverse FX effect I just referenced. Overall operating expense as a percent of sales for the quarter was approximately flat to last year, driven by the better-than-anticipated sales trend. Third quarter MG&A included $5 million of marketing costs related to the new CRM and club programs, as well as the Hong Kong flagship opening. The latter primarily oriented towards using the opening to promote brand awareness in Mainland China. Operating income for the quarter was $112 million versus $80 million a year ago and operating margin increased 220 basis points. The tax rate for the quarter was 35.5%, better than expected due to a greater contribution of profits from our international business. Diluted earnings per share for the quarter were $0.87 versus $0.57 for the prior year and represented the highest third quarter earnings per share since 2007. Turning to the balance sheet, we ended the quarter with…

Thanks, Jonathan. As reported, third quarter comp store sales were down 3%. By brand, comp store sales were down 4% for Abercrombie & Fitch; 3% for abercrombie kids; and 1% for Hollister. Across the brands, male performed slightly better than female. The gross margin rate for the second quarter was 62.5%, 240 basis points better than last year's third quarter gross profit rate. Average unit retail was down by a low-single digit. Average unit retail was down slightly in U.S. chain stores, up slightly in international Hollister chain stores and down double digits in both the U.S. and international flagship and tourist stores as we anniversary the double-digit increase from a year ago. The summary of our third quarter operating expense can be found on the slide on Page 6 of the Investor Presentation. Stores and distribution expense for the quarter was $496.9 million or 42.5% as a percentage of net sales. Store occupancy costs were approximately $189 million, and all other stores and distribution expense represented 26.3% of net sales, approximately flat to last year's percentage of net sales. Stores and distribution expense benefited from lower store preopening costs. In addition, prior year stores and distribution expense included approximately $4 million of accelerated depreciation associated with our DC consolidation. MG&A for the quarter was $123.4 million versus $107.8 million last year. The increase in MG&A for the quarter was due to increases in marketing, IT, incentive compensation-related expenses and other expenses. The tax rate for the quarter was 35.5% compared to 35.8% in the prior year. Details of international store openings for the quarter are included on the slide on Page 10 of the Investor Presentation. At the end of the quarter, we operated 295 Abercrombie & Fitch stores, 160 abercrombie kids stores, 587 Hollister stores and 25 Gilly Hicks stores. This concludes our prepared comments. We are now available to take your questions. Thank you.

[Operator Instructions] Our first question today will come from Anna Andreeva, FBR Capital Markets.

I was hoping you could comment a little bit more on international. Obviously, international has been volatile. What do you think is driving the improvement there? You just called out starting to lap easier comparisons, but do you think improvement is more product related, lower AUR related, maybe you can just comment on that. And curious also what drove that slight AUR improvement at Hollister during the quarter?

I'll start with product. I think that international stores benefited, as did U.S. stores, from flowing new product. That was really our problem in the second quarter when we were in the defensive posture and did not flow product appropriately. So I think that played a key role. Lapping some of the comparisons played a key role. And AUR improvement was -- we were up against some promotional business that we did not anniversary, our AURs were higher.

And at this time, we'll take our next question from Paul Lejuez with Nomura.

Maybe I missed it, but usually, you put some segment profitability info in the slides. Can you maybe talk about how that looked U.S. versus international versus direct?

Sure, Paul. It is, as you know, on Page 7 of the presentation, what it shows is U.S. store margins moved up from 19.3% to 22.9%. International was slightly down. That's the deleveraging effect of that negative comp, but still north of 30%. And direct-to-consumer was at 44%, so very consistent with our expectation we've given in the past, of that remaining in the mid-40s going forward.

Our next question will come from Barbara Wyckoff with CLSA.

Can you update us on the progress in Hong Kong and China? And then you talked about a strong opening in Seoul, presume that's a Hollister store, because A&F was supposed to be a flagship for next year, but is that on hold now?

Okay. Hold on, Barbara, and I'll tell you everything you'd like to know.

It is a Hollister in Seoul, though, I'll just chip in, that we've just opened in the IFC Mall, which you may be familiar with.

Yes. So the headline here is that we're optimistic about Asia and because of things that I mentioned, more optimistic than we were 3 months ago. The Pedder Street flagship, as you know, opened and is off to a very good start. Festival Walk in Kowloon has remained strong even after opening Hysan and Pedder Street, and it remains one of the highest performing Hollister stores and is comping positively. Hysan Place opened and is one of the highest performing Hollister stores, which is similar to Festival Walk. The 3 Chinese stores are gaining momentum and we expect all of 3 to comp positively. We believe that the new flagship in Shanghai, as well as the Hong Kong flagship, will be important to develop brand awareness in China. Singapore, we're doing decent volume. We're optimistic about Singapore. Japan, nothing new to report. We're doing good volume, but profitability isn't good. We are looking hard at Japan to enter with the Hollister brand. South Korea, our first store in the IFC Mall is excellent. So we're very excited about Asia right now.

And on your question about a flagship, Barbara, yes, we're still planning a Seoul flagship in the back half of 2013, A&F.

Next we'll move on to Janet Kloppenburg, JJK Research.

Mike, I wondered if you could talk about the mid-October flow of product, which I think marked a significant improvement in the fashion direction of the assortment. And maybe if you could talk a little bit about the reaction to that and what you liked or what you could improve on, that would help a lot. Also, I think that there's been some upgrades to the store environment, if you could talk about to what extent, in the chain, that has occurred and how much more we might have to look forward to, I'd love to learn more about that. And also, Jonathan, I was interested in the comment about doing an expense review for the spring season. And I'm wondering if you think there's an opportunity to bring greater efficiencies to the business.

I think, Janet, that our merchandise initiatives are taking hold. And let me just review those. One, we're working to become faster and we're doing that with conservative plans, shorter lead times and more dollars open to chase, which we have said is 60 to 105 days. I think that's affecting the fashion content of our inventory. We're also working hard to be different by brand. We've invested more in brand-specific design talent. And just in terms of fashion component, we're reacting quickly to runway and street. And I think all those things are impacting our fashion assortments. And as I said last time, I think we'll see more of that. We delivered mid-October. We also had some fashion delivery, November, week 2. You'll see more December week 1. And that kind of rhythm is something that I think is very exciting about the business. And I think we're seeing that in the business. In terms of particular fashion, that I'm excited about that's working now, obviously women's sweaters. But we'll see more flow, more newness on a monthly basis than we have in the past and that's what this is about.

Janet, on the expense part of the question, I can't give you any more specifics now. We've taken out a lot of cost from the model over the last few years and as we've discussed in the past, our corporate infrastructure here for the home office is lower in terms of headcount than it was 4 years ago. But having said that, we still believe there is some additional opportunity and we're going to be looking very hard at that, we already are. And the question is what is the ROI of each of the component of our expense model and where may there be opportunities to find efficiencies. So that is something we'll be looking at between now and February on top of what we've already done and we would expect to give some more specifics in the next call.

In regard to the environment, we upgrade the environments constantly with new stores and existing stores. We're not announcing anything dramatic there. It's just ongoing improvement. Thanks, Janet.

Our next question will come from Marni Shapiro, The Retail Tracker.

I'm very excited with some of those things I'm seeing so if you could touch on 2 quick things: Marketing plans and spend versus last year for the fourth quarter. And, Mike, if you could just touch again on sort of dovetailing on what Janet was saying, you mentioned that you'll start to pay attention to the runway, which I'll take that as current fashion and what we're seeing in the store like the [indiscernible] and the lace. And I guess when you look back at the missteps or the things that you were missing over the last several months, is this what really comes out as most important that your customer really likes the fashion and this is what you need to be chasing? And this is all part of the speed to market will all be around this fashion?

Okay. You want to start with marketing plans, Jonathan?

Sure. In terms of the marketing expense, it will still be up or be up again in Q4, Marni, but not by as much as it was up in Q3. The Q3 increase did include some kind of one-time items related to the launch of the club programs and then a big effort we make around the Hong Kong opening, but it will still be up, to some degree, in Q4, probably all I can tell you on that.

Well, let's talk about what I just said about speed to market. I think -- I want to be clear, we've always paid attention to runway and street. We're spending more time reacting to it more quickly than we ever have. But that's a natural evolution. I think to look at this business, it's really important for me to restate that what happened to us, particularly in the second quarter, was that we were -- in first and second quarter, we were on the defense, because we had too much inventory and we weren't flowing newness. So that's the biggest change. We are doing the things that I've been talking about in terms of merchandise initiatives but those are evolutionary. I think we're flowing faster and better than we ever have but that's an evolutionary process.

And at this time we'll take a question from Steph Wissink, Piper Jaffray.

Just have a couple of questions. Jonathan, if you could talk about your guidance for the mid-single digit decline in comp in the fourth quarter, does that reflect anything for the hurricane, for Hurricane Sandy, and any other detail in the building blocks of that comp? And then, Mike, just one for you, you've got some nice leverage at the store level on the S&D expense. Is there any opportunity for further reengineering of the store-level cost that you're working on outside of the merchandising initiative?

Steph, on the first, yes, the effect of Sandy is baked into that down single-digit comp guidance. Purely due to effect of store closures, including the fact that C4 [ph] will be closed certainly through the balance of the quarter, we think the overall sales impact is probably around $10 million just directly from closures and possibly there'll be a little bit more from the side effects of Sandy. So that is baked into the guidance.

And you asked me to respond to the store expense line. We are looking at it very hard. We think there is opportunity. We believe that there's probably more opportunity in international payroll expense than domestic, but we see opportunities in both places. And let me make a quick note about Hurricane Sandy, because it's obviously affected all of our business. But I really want to state that our absolute first priority has been and will be the safety and well-being of our associates. And I'd like to take a minute to take this minute to publicly acknowledge all of our associates who have volunteered to assist those who have been affected. The support has been remarkable and is a testament to the character of our team.

At this time, we'll take a question from Lorraine Hutchinson, Bank of America.

Mike, you're guiding to a deceleration in the comp in the fourth quarter. Is that primarily international or domestic? And can you talk about if that's an AUR deceleration or what the factors are behind that guidance?

Jonathan?

Sure, let me comment on that, Lorraine. I mean, first of all, obviously, it's not a dramatic difference to where we were in Q3. And our projection methodology, as you know, has been to use the trailing 3 months projection as we've gone through the last few quarters to project for the following quarters, so the difference between the down 3 we reported and the down mid-single digits is not very significant, Sandy is a piece of that. But we don't regard it all, overall, as being a major difference from where we were in Q3.

Dana Telsey with Telsey Advisory Group is next.

Can you talk a little bit about price? Do you see pricing changes, any more to go, both international and the U.S.? And when you talk about product, Mike, any updates, men's versus women's, in terms of what you're seeing? And just lastly, the sign-ups for the club members is impressive. Is there greater -- are using greater sales from those members than just the regular customer?

Okay. The first part of the question was pricing changes. No, I think our AUR is pretty static. We had decreases in international because we were comping increases, but we would anticipate our AURs rising, but not during this quarter.

On the second part of the question, Dana, yes, we are starting to see some positive metrics in terms of how club members behave relative to the general customers and we're definitely encouraged by that. We have 750,000 members through the third quarter. We anticipate that number continuing to grow through the Christmas season. And I think if you recall, we've always said we hoped to be up in a meaningful scale by the end of the year and we think we're nicely on track to be there.

Our men's business continues to perform better than women's. I think the key factor in the women's business is women's top business and we're starting to see some traction there. I mentioned sweaters but also knits are doing well. So I think that's a big inflection point in the business. If we can get female tops really, really steaming, we'll be in good shape.

Jennifer Black with Jennifer Black & Associates has our next question.

In talking about the female side of the business, it looks like you've -- it looks like there are less logos than on the guys side of the business. And I'm kind of curious to know how you feel about the logo-ing in the U.S. versus overseas? And do you see a big difference to reactions, both female and male? And then my other question is if you can give us an update on Gilly Hicks and what your long-term goals are there. And do you envision a rollout at some point?

Okay. Logos are a part of our business domestically and internationally. It is a business that I think, Jennifer, we try to contain. We turn logos extraordinarily well and -- but we don't want to look like a logo store internationally or domestically. But the answer is we sell logos well both places, but our mission is to restrict that as a percent of our inventory in terms of size -- just the size of logo and total as a percent of our inventory. Gilly Hicks, we're very pleased with openings of Gillys in Europe and we see that as a growth potential for the business but we're not talking about rollout yet. And I have a third answer to your question, which I thought you were going to ask, Jennifer, which you always do. And that's accessories. And my answer to you for accessories, which you've asked me about for the last 5 years, I've had a problem with many accessory candidates categories because of the quality of the business. I think we now see an accessory business that can be a reflection of the quality of each of the brands. So we're rather excited about the accessory opportunity.

And at this time, we'll move on to Jeff Black with Avondale Partners.

Great. A couple of questions. So, Jonathan, on inventory, what drove the difference between the plan for flat and where we ended up with at down 20? I know comps were better, but did we also do anything to attack receipts for holiday, for example? And any color on where the inventory levels are in the U.S. versus international? And then just a closer for Mike, you talked about pricing and the thinking that might improve the AURs and the international. So is your thinking that you don't have to, again, attack AURs like you did in the U.S. given the Europe recession and that we have some stability on pricing there going forward?

Jeff, on the first part, we have said flat, we came in, excluding in-transit, down 10. Typically, when we guide on inventory, we are excluding the in-transit piece, because that is -- those are little harder to project out where that's going to be at the end of any given quarter. So the real delta from what we guided to is that 10 percentage points. And most of that was driven by the fact that sales clearly came in well above what we projected at the beginning of the quarter. AUR was slightly lower than what we projected and those 2 effects really account for it. There really wasn't any significant receipt change during the quarter relative to our expectations.

Let me answer your last question, which I think is a good one. And the answer is, unequivocally, we are not lowering prices in our non-promo or the European stores. We don't have to. It's -- the pricing looks pretty. The result is very inelastic. And that's a major part of our profitability, which we feel very good about going forward.

Just on your other question, Jeff, about international versus domestic inventory. We have tended to probably err on the side of slightly under-allocating inventory to international. We don't have to make that call until 5 or 6 weeks out from when it reaches the DC. In addition, we do have the ability, particularly from the U.S. to the Netherlands, where our European DC is based, to send merchandise that way. It's a little harder to bring it back although we can also do that under certain circumstances. So we probably have more flexibility than you may be thinking. It not as if we just make that determination months out and then it just sits there. We can adjust it as we go forward.

But I think the major point here is that we think we have been under-inventorying Europe. We have extended that slightly and we're getting paid for it.

And we'll take our next question, Randy Konik with Jefferies.

So I have a couple of questions here. The competitive environment, now that your inventories are in line and I think the other team retailers are as well, just can we get some comments on what you think about the competitive environment from a pricing standpoint. Second question, I guess, Jonathan, can we just get what the international comp was during the Q3 last year and then just remind everybody what the upcoming comparisons are for the international comp over the coming 3 quarters? And then lastly, when I analyze the model and we look at the stores and distribution expense, we're looking at about a 44% of sales ratio for this year versus the trough of 33%, what do you think is a more normal kind of level? And then just maybe give us some color of the $2 billion roughly in stores and distribution expense, how much is fixed and how much is variable?

Those are a lot of questions. I'll start with the competitive environment. I think that the U.S. economies -- the U.S. is going to be very competitive. How competitive? I don't know. It'll be borne out week by week. We'll see. The answer to the question is, I don't know.

In terms of the comp a year ago, Randy, I don't have that number, to hand of what it was. I think it's also important to note, the evolution of the comp base internationally is very significant. So it may be less of a meaningful comparison as an aggregate number. What I can tell you, which we said before is that Hollister international was still positive in Q3 of last year in Europe, it had stepped down from where it had been from the first half of the year. And that A&F flagship had turned negative in the third quarter last year but I just don't have to hand where that netted out in total for the international. I guess coming back to your questions on stores and distribution. I mean, they are kind of detailed to get into. You referenced 44% versus the trough of 33% for stores and distribution, clearly a significant component of that is deleverage from lower productivity relative to the peak in our U.S. stores and then occupancy costs out of the total stores and distribution bucket, most of the occupancy cost is fixed since that's made up largely of fixed rent and depreciation. There are some variable components of that. Of the other stores and distribution expense, there is also obviously a base element in terms of the store operating cost that is fixed. There are minimum staffing levels and so on. I can't really give you a more precise answer than that, but we do think there is opportunity in the variable component of that to make some progress over the next couple of quarters.

May I make a comment to a question, I don't recall who -- it wasn't a question, it was a compliment about the stabilization of our business. And I'd really like to comment on that because this is an important point. The notion that our U.S. business has been in decline is just nonsense. So that reference to stabilization isn't exactly correct. Although the U.S. environment remains tough, we've made consistent progress over the past 3 years and the numbers speak for themselves. And I think that's a really important thing for everyone to look at. The U.S. chain stores have had positive comps for 9 of the past 10 quarters; and including DTC, positive comps for each of the past 11 quarters. So I think the stabilization question isn't exactly the right way to put it.

John Morris with Bank of Montréal has a question.

First, Jonathan, a little bit more color on maybe gross margin progress there. Tell us a little bit about the markdowns and promotional activity relative to your expectations. I assume you finished with lower clearance level, so if you can give us a little bit of color around that. And to the extent you can, quantify how much the lapping of the cotton, the lower cotton cost, it helped on the gross margin, would we expect continue to see those factors carry through into Q4, which I presume?

Sure, John. I think in terms of the first part, what we saw in Q3 was we turned through a little more of the spring inventory than we anticipated, and that pulled the AUR down slightly, because there was a slightly higher clearance component in the domestic business. So that had a slight impact on gross margin and AUR. In terms of average unit cost, that spring product was typically at the higher cost because it was really for the back to school term that we saw the significant reduction in average unit cost, so we were still selling some of that older spring product at the higher cost. So that benefit was still significant. We called it out as being the driver of the gross margin rate improvement for the quarter, along with an international mix benefit. We should get a progressively greater average unit cost benefit in the fourth quarter, which is why we're projecting the gross margin rate for the fourth quarter to be slightly above the year-to-date rate. We haven't really been more specific on that in terms of cotton costs or in terms of the specific AUC reduction. What we have said in the past is that full season receipts in total we expected to be into the double digits in terms of the year-over-year AUC reduction. So we saw some of that benefit in Q3. We'll get a more significant benefit from a mix standpoint in Q4 because of the higher proportion of fall merchandise we'll be selling and then we expect, as Mike said in the prepared comments, that effect to continue through the first half of 2013.

Evren Kopelman with Wells Fargo has our next question.

I wanted to ask about the U.S. chain store closure plans. You gave us the number for this year. Looking at the comp performance, can you share some thoughts going forward on those plans? And secondly on that point, you used to talk about a goal of returning 85% to 90% of your U.S. store productivity. What are your thoughts around that now?

Evren, can you just clarify the first part of your question about the comp effect of store closures, I'm not sure I understood your question.

I'm sorry. What are the plans after this year for U.S. chain store closures?

Okay. Well, we said 55 to 60 closures this year through natural lease expirations. We've previously said 180 stores from 2012 through 2015. That number is still in the ballpark. We just did another look at that recently and we're still in that range for total additional closures over the 2012 to 2015 period, so that would imply another 120 to 130 in 2013 through 2015. With regard to the U.S. productivity metric, I think one of the points we're making today is that when you look at our -- you have to look at our U.S. chain business combined with our U.S. direct-to-consumer business to look at the overall effective productivity of our U.S. business. But we clearly have made, as Mike said, we had 9 quarters out of 10, where we've had positive comps in the U.S. chain business. So that productivity has come up. I don't have the precise percentage to hand today, certainly it's still well below peak in terms of the store component of that. Somewhere in the 80s, I think, is where we would be.

Our next question will come from Dorothy Lakner, Caris & Company.

Wondered if we could come back to lead times. Clearly, you're benefiting from the faster flows of fashions at the store and you've been able to shorten lead times. I just wonder if you could give us some kind of benchmark where you were previously, where you are now and how much more do you think you have to go in terms of shortening those lead times?

I don't want to get specific with the dates. I think we've said we're looking for chase to be 60 to 105 days, which is less than our traditional cadence. But I think that Chase is a popular category. But it's not without some downside, so we have to be careful with how we're doing it. Because Chase by virtue of it being Chase, it's air versus sea, which is an increased cost. We think we can make that up in being more right, but there's a risk there. And we have to be very careful with Chase that we're maintaining and enhancing our quality level because if we don't, the whole thing won't work for us because quality is our #1 issue. So yes, we benefited. We're learning a lot of about it. But there are things we have to watch out for.

And our next question will come from Brian Tunick with JPMorgan.

Just following up, I guess, on that question. Just trying to figure out on the changing of the product flows and the newness, is it more skewed to one of the brands? Is it more A&F versus Hollister? Are you guys thinking about ways to bring in sort of a new customer into your brands and sort of find either someone that's less interested in logos or someone that hasn't shopped the brand in the years? And then the second question is on the flagship side of the business, both domestically and internationally. How much do you guys still think that the issue was cannibalization, especially in Europe, or do you think sort of the AUR will adjust itself as we move into next year?

Let me see if I can respond to you, Brian. Our logo percent to business is declining, and it has been purposely so. So yes, we're attracting customers who are not interested in logo or like logo with something else. And that's been one of our major initiatives. In terms of the newness, more often that will happen more in female than male because of the nature of that business, but there's still more new flow in male as well. Let me look at cannibalization versus AUR. Jonathan, you want to tackle that one?

Sure. Let me jump in. I think if you look at what's happened in London, we've clearly had our most severe comp trend in London. And yet, in absolute terms, the A&F London flagship is our most profitable international store. I think we also have to keep in mind that there's a relative component and then there's an absolute performance component. But if we look at London, I mean, there clearly has been cannibalization of other flagships that open, there's probably been cannibalization by Hollister, but there's also clearly been a macro driven component, which we've seen across the U.K. business. I think one of the things that make all of these things harder to kind of read is the opening effect in different countries can vary. Some countries or some stores even, we open incredibly strongly and there's this kind of rage at the opening and then that comes off a little bit. Other countries we -- or other stores we've opened a little more slowly and then they build over time. So I think in Scandinavia, for example, we probably didn't have as strong an opening as we've seen elsewhere, and that's now comping nicely. We're well ahead of plan. So you do see different dynamics in different markets. But coming back to the core of your question, I think we would say that the trend we've seen in flagships is a combination of macro and cannibalization. It's difficult to be too precise in terms of how that breaks out.

Cannibalization is becoming less of a factor.

Yes. And the other point there being that, we will see the end of significant cannibalization over the next few quarters as we essentially reach a more mature footprint in Europe and our store openings become first of all, fewer in absolute terms in Europe but also focused on some remaining under-penetrated markets rather than in markets where we already have a presence. And then as we expand further into Asia, given the early stage, we wouldn't anticipate that cannibalization to be as significant as we've seen in Europe over the past year or so.

Next is Betty Chen with Wedbush.

I was wondering, Jonathan, I think we were talking earlier about the great progress in terms of inventory. I know you also mentioned earlier in the call that you want to continue to maintain a very conservative stance in terms of inventory management. Where should we expect inventory to be at the end of Q4 given your guidance for negative mid-single digit comps? That's my first question. And the second is in terms of expense deleverage, it looks like maybe year-to-date expense deleverage has been roughly about 100 basis points. And you mentioned that we should be looking for it to be a little bit slightly above that for Q4. Any additional color you can provide on that front? And then lastly, my question is for Mike. In terms of flowing product better and the team being more be more disciplined about looking at current trends, where do you think also the mix of fashion, what you would consider fashion assortment is versus logo or maybe even more basic assortment and where would you like that to be, perhaps by the spring or 2013 time frame?

So Betty, starting with the inventory piece. So we were down 10 excluding inventory in-transit at the end of Q3, we would expect to be a little bit further down at the end of Q4, again, excluding inventory in-transit. In terms of expense deleverage, yes, we said we would expect slightly greater expense deleverage in the fourth quarter than we've seen year-to-date. There really isn't a single thing I can call out on that. It's a combination of a few relatively minor factors leading to that overall effect. So there really isn't any one thing I can call out that would be the primary driver of that.

To answer your question, I think this conversation about logo is interesting to me because as I said, the logo percentage of our business is dropping. And I think we probably do less logo business than I'm hearing stated around the table. We will increase in fashion but that's fashion from core, which may or may not include logo. So the fashion percentage, what we're talking about as fashion will increase for the spring season.

At this time we'll take a question from Oliver Chen with Citi.

What are you guys thinking with respect to SKU breadth with the increasing popularity of fast fashion, it seems like the SKU breadth is quite the trend and a potential opportunity?

We agree. I don't want to get into the specifics. But it can be a function of a period in time or flow because if you flow fashion more often that will give more SKUs over time. But you're correct, it is an issue and there will be more SKUs because of the increasing number of fashion items.

Next we'll turn to Eric Beder with Brean Capital.

The new club program, where does that -- where do you see that going as you increase the level of knowledge about your customers and as it becomes bigger. How does that -- how can that be a game changer for you?

Well, I think, Eric, the first part of it is obviously, we have a lot more data on how our customers are behaving. We can track their purchases online and in-store. And that enables us to ultimately be able to segment and then individualize or personalize messaging to those customers. So that's ultimately where we see it going and we would see that enabling us to become less overtly promotional in the stores because we would be -- as those programs reach critical mass and as a greater proportion of our customers are in those programs, we can target messages that are tailored either from a merchandise standpoint or from a promotional standpoint to the history of that particular customer or segment of customers. So it's not going to be an overnight thing. It'll be something that we'll continue to evolve towards where we're going to have to make ongoing investments in that with regard to technology. But we've been talking about this for a long time and we're very excited about the progress we've already made and we're optimistic that this, among all those other factors, is going to be a meaningful contributor to ongoing growth in profitability and productivity.

Our next question will come from Erika Maschmeyer with Robert W. Baird.

Could you update us on the trailing 12-month volume figure of flagship A&F stores. I think clearly you said, excluding [indiscernible] that you were annualizing around $400 million and $65 million for London. And then could you give us a sense of how you're thinking about cannibalization in Europe between A&F and Hollister? Have you see that increase as you've opened additional Hollister locations?

I guess, Erika, on the first part, I'm not sure there's really a whole lot more detail I can kind of go into. I mean, obviously, there's a store by store analysis, but I don't think we're in a position we can kind of get into the detail at this point. In terms of cannibalization in Europe between A&F and Hollister, I think as we alluded to a couple of minutes ago, it certainly has occurred to some degree we believe. Measuring that and separating that from macro effect or other effects is difficult. We have an idea, but it's hard to pinpoint specifically what element of cannibalization would be Hollister on A&F versus flagship on flagship or Hollister on Hollister.

Our next question will come from Omar Saad, ISI Group.

Mike, I got to ask you about the comment you made on accessories. I know it's something that you haven't really focused on as much in the past. Can you give us maybe just a little bit of insight into how you're thinking about it. What categories within accessories, maybe a taste to what your vision might be in the category and what's kind of turned the tables on that one for you?

Omar, I'd love to give you category by category, but I don't think I should. What has turned the table is that I think we can offer accessories at a quality level that would be good representatives of the brand. Many accessory categories have been just inexpensive trinkets. I don't think that's where the accessory business is going. And you'll start to see rollouts of the accessories in our stores. As a matter of fact this week, you'll see bracelet presentations but reflecting the quality level of each of the brands. I think it's an exciting opportunity for us.

And that is all the time we have for questions today. And that does conclude today's conference call. We thank you for your participation.