Good day, everyone. Welcome to the Abercrombie & Fitch Second Quarter Fiscal Year 2016 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.

Thank you. Good morning, and welcome to our second quarter earnings call. Earlier this morning, we released our second quarter sales and earnings, income statement, balance sheet, store opening and closing summary and an updated financial history. Please feel free to reference these materials, 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 call is being recorded, and the replay may be accessed through the Internet at abercrombie.com under the Investors section. Joining me today are Arthur Martinez, Executive Chairman; Fran Horowitz, President and Chief Merchandising Officer; and Joanne Crevoiserat, Chief Financial Officer. After our prepared remarks, we will be available to take your questions for as long as time permits. [Operator Instructions] Before we begin, I remind you that any forward-looking statements we may make today are subject to the safe harbor statement found in our SEC filings. In addition, we will be referring to certain adjusted non-GAAP financial numbers during the call. Additional details and a reconciliation of GAAP to non-GAAP financial numbers -- measures are included in the release issued earlier this morning. With that, I hand the call over to Arthur for some opening remarks.

Thank you, Brian, and good morning, everybody, and thanks for being with us today. Our results for the quarter were largely in line with the expectations we set out on our last earnings call. Flagship and tourist locations, which are concentrated in the Abercrombie brand business, continue to account for the vast majority of the negative comp sales performance as traffic continues to be a significant headwind. We were encouraged, however, by strong growth in the direct-to-consumer business, both domestically and internationally, and by a comp sales rebound in the Hollister European business, including the U.K. In addition, conversion trends were positive in each channel across brand and geography. The overall business continues to be well managed, with gross margin rates substantially maintained on a constant-currency basis, and expense and inventory under tight control. I want to highlight 2 very important developments in the quarter that give us great confidence in the future of the business. First, we began to roll out new brand positions for both of our brands. While we're in the early stages of these initiatives, a clearly defined brand image and voice are beginning to be communicated to the consumer. Fran will discuss our brand positions in greater detail, but our research shows that the new brand positions resonate strongly with our target customers, and we are confident about their long-term impact. Second, we welcomed 2 talented and experienced brand presidents to work with Fran and the great teams at Abercrombie and Hollister to execute on our strategic priorities, including assuring the successful implementation of our new brand positions. Looking ahead to the rest of the year, we now expect flagship and tourist locations will continue to weigh on the business. Recognizing we are still in a challenging environment, we are confident, however, that we are focusing on the right priorities, and we expect to see traction in our business as we continue to introduce new product and invest in marketing initiatives to drive heightened awareness and increased relevance for our brands. Despite these near-term challenges, we remain confident in our long-term outlook and are increasingly well positioned to capitalize on opportunities. Now Fran will provide more color around brand performance and our strategic initiatives. Fran?

Thank you, Arthur, and good morning, everyone. While I feel strongly that we made a lot of progress in the quarter from both a strategic and operational standpoint, we are not yet satisfied with our results. We still have much work to do to realize the potential of our brands and aggressive steps continue to be taken to accomplish those objectives. I remain confident about the long-term potential of our business. Let me start off by highlighting our results around the quarter. While flagship and tourist stores continued to weigh heavily on comp sales, our overall international business improved, led by a recovery in Hollister Europe business. In the U.S., softness relative to last quarter was largely due to fashion misses in the Hollister girls' tops business, which we are addressing in future deliveries. Turning to our brand performance, starting with Hollister, in addition to underperformance in girls' tops, shorts remained weak. However, we saw strength in jeans where the customer responded well to our assortments in both genders and in our more emerging accessories and intimates businesses. I was particularly pleased with the launch of Hollister Epic Flex throughout the guys' assortment. Epic Flex, a fabric innovation that allows for greater stretch, performed well across polos, jeans and shirts. In Abercrombie, the female business continues to outperform male, with swim, dresses and accessories, all performing well. Shirts and sweaters were also strong, but the overall tops business decelerated. On the male side of the business, tops remained challenged but showed improvement in the trend from last quarter. In addition, the customer continued to respond to the new fabrication and fit in our chino assortments. Coming back to the progress we made on our strategic initiatives during the quarter, we continue to focus on our increasing customer centricity and engagement…

Thanks, Fran, and good morning, everyone. While the top line was challenging, driven by flagship and tourist stores performance, it was in line with our expectations for the quarter. As Arthur mentioned, our business continues to be well managed, and we are making important progress on our strategic initiatives as we position the company for long-term growth. I'll be recapping our results for the quarter and providing an update on our full year outlook, beginning with Q2. Net sales for the quarter were $783 million, down 4% from last year. Foreign currency adversely impacted sales by approximately $5 million. Comp sales were down 4% for the quarter primarily driven by flagship and tourist stores. Conversion was positive by channel across both brands and geographies, but continued to be more than offset by weak traffic. As shown on Page 5 of the Investor Presentation, by geography, comp sales for the quarter were down 4% in the U.S. and down 4% in international markets. Comp sales improvement from last quarter in international markets, driven by a recovery in the Hollister European business, including in the U.K., was offset by a decline in the U.S. trend. By brand, comp sales for the quarter were down 7% for Abercrombie, and down 2% for Hollister. Flagship and tourist stores, which are concentrated in the A&F brand continued to be the main contributor of negative comps across both brands and geographies. Across brands, we saw strong growth in the DTC business in both the U.S. and international markets as investments in mobile and omnichannel capabilities continued to pay off. The direct-to-consumer business grew to 23% of total sales compared to 21% of total sales last year. I'll be recapping the rest of our results for the quarter compared to last year on an adjusted non-GAAP basis.…

Thank you, Joanne. Before we take your questions, I would like to say that it is clear to me that aggressive steps are being taken to position our company for long-term success. While we are certainly not satisfied with our current performance, we believe strongly that the work we are doing to rebuild this company and to develop differentiated and relevant brand positionings is laying the foundation for our future success. Let me now turn the call back to Brian.

Thanks, Arthur. That concludes our prepared comments. At this time, we will be happy to take your questions. [Operator Instructions]

[Operator Instructions] We'll first go to Matthew Boss with JPMorgan.

It's Christina Brathwaite on for Matt. Just to go into the tourism business drag a little bit more. Can you just quantify the drag on comps that you saw during 2Q? And how large that business is as a percentage of total sales? And then looking beyond 2Q, can you walk through your expectations for the tourist store performance throughout the rest of the year? Are you expecting it to accelerate -- that drag to accelerate? And at what point can it moderate?

Thanks, Christina. This is Joanne. As it relates to the tourist stores impact as we mentioned in our comments, the majority of our comp decline was driven by the tourist stores. We haven't, I think, historically disclosed the total impact or the total penetration in our business. What we have seen in the business is consistent traffic headwinds in our tourist locations driven in part by currency devaluation, but also safety and security concerns in those regions. And as we said in our outlook, we expect the environment to remain challenging. We don't see a near-term catalyst for that to change. So we expect the environment to continue to be challenging with those traffic headwinds as we move forward. However, we are focused on our strategic initiatives and are confident that we're focused on the right priorities, including improving our product with our new brand leadership in place, improving the overall store experience and also investing in marketing behind our new brand positioning. And we believe that over time -- and are confident that over time, those changes will lead to improved traffic and top line results.

Next we'll go to Randy Konik with Jefferies.

Just, again, to clarify the exposure. Is there any -- the down 7% sales number in the U.S., is there any kind of guesstimate in terms of what that number would have been, ex tourism? That's my first little question.

Yes, I need to clarify your comment. The U.S. business was down 4% in the second quarter, Randy, so just to clarify that. The overall business in international was also down 4%. We were actually pleased to see recovery in the Hollister European business. So that business did show signs of recovery from the first quarter into the second quarter as the international business in total improved from a down 7% to a down 4% in Q2.

No, I'm talking about the total sales number, the total sales numbers is down 7% in the U.S.? So I'm just trying to get a sense of what would that number look like if you kind of back out the tourism?

Yes, that number was driven likely more by store closings than a comp basis. The tourism effect is more pronounced in our international markets as it's a higher percentage particularly of the -- it's more concentrated in the A&F brand and has a larger impact on the international markets than it does in the U.S.

Okay, got it. And then, I guess, just to clarify -- the last kind of clarification just around this tourism impact. Did you see any kind of discrepancy in the tourism impact by region, let's say, New York versus LA or anything like that? And/or by brand Hollister versus Abercrombie, just curious there.

Yes, the tourism headwinds have been very consistent. So I'll say that from quarter-to-quarter, they've been consistent. And by region, there are some differences, but it has affected our business broadly in those tourist markets. And that does impact our, as I said, our A&F business. More of our tourist stores are concentrated and flagship stores are concentrated in the A&F brand. And as I mentioned earlier, the Hollister brand did see a rebound in the European business and in the U.K., where we have more mall-based stores in the Hollister brand, and we were pleased to see that business rebound.

Got it. And I guess, just lastly, if I may. Could you just give us some perspective -- since those were kind of clarification items, just how do you think about the ultimate end game for store footprint in the U.S. market by brand?

Yes, we haven't identified a specific store target. What we have done, Randy, is maintain flexibility. We have been working diligently to improve our overall store productivity and closing unproductive stores has been a very important part of that story, and we've been at it for a number of years and have successfully closed a number of stores. And we continue to maintain flexibility as we see, continue to see customer shopping preferences -- or customers change their shopping preferences. I think it's interesting to note that some of our investments in omnichannel have been exceeding our expectations, like Buy Online Pickup in Store. And so we continue to see our customers shifting in their shopping preferences, and we're investing behind those opportunities, and we'll maintain flexibility and monitor those changes over time.

Next we'll go to Susan Anderson with FBR Capital Markets.

I was wondering if you could maybe talk about any change in sales. You're seeing now that you're starting to cycle the lower prices in the international markets, which, I think, really helped to drive those sales last year. Are you seeing any tougher compares their? And then also if you could talk about, maybe when you expect the FX impact to kind of taper off? I think it's still going to be an impact in third quarter.

Okay, Susan, it's Fran. I'll take the first part of that question regarding our pricing. We specifically last year talked about Hollister and how we had become much more competitive in our pricing internationally. We start to lap those as we get into the back half of the year. We are pleased with the conversion rates that we continue to see and the customers' acceptance of our product.

And as it relates to the FX impact, we have seen FX headwinds increase post-Brexit, particularly as it relates to the pound, and to a lesser degree, the euro. We do expect those FX headwinds to be more pronounced in the third quarter. We still expect headwinds in the fourth quarter but they'll abate somewhat.

Great. And then if I could throw one more in there on AUC. It sounds like you guys still, I think, expect it to be up in the back half. Are you expecting any benefit from cotton or anything to kind of mitigate that?

Yes, actually from an AUC perspective, we're expecting AUC to be a benefit in the back half, weighted a little bit more towards the fourth quarter. But in terms of margin -- gross margin puts and takes, FX a little bit higher headwind as we move through the back half the year, as I just discussed. We expect to continue to offset that with slight increases and improvement in AUR with customer acceptance of product, and as I mentioned, AUC benefit, particularly, as we move into the fourth quarter.

Next we go to Oliver Chen with Cowen and Company.

Great job on inventory control and excited about the positioning. I had a question about the tops business. Do the tops need to improve in order for you to comp positive? And could you clarify the nature of what you were seeing in the tops at Hollister versus Abercrombie? Just key to understanding that. And also the percentage mix of the business that's tops, if it's a critical driver as we look to model growth in comp store sales?

Sure, Oliver. It's Fran. So starting with the question regarding our Hollister mix in the tops area for girls. Listen, we probably stayed a little bit too long at the plaid and boho trends that were happening. We're having success with them. We got a little bit short on getting into the off-the-shoulder and cold shoulder tops trend. But since we have an agile sourcing and supply chain here, we were able to effect on orders going forward, and we feel confident about where we have placed those in our future on order. The tops business versus Abercrombie, I think, was your second question. I'm not sure if you're asking relative to one another or you're asking about within their businesses, if you could just clarify that.

Just trying to get more color on the overall tops deceleration in Abercrombie, and what we should understand about what was driving that and if it's a concern? And how does that interplay with customer acceptance and the opportunity to improve customer acceptance? Or is that just a broader opportunity in the context of the brand repositioning, which you kind of expected?

Yes, Oliver, I'll pick that up. I think we've made progress in the tops business. We still see it, however, as opportunity. We lost a lot of share over the past few years in tops, and we were seeing some traction, as Fran mentioned. And we expect that, that will improve in addition to the rest of our businesses, we're focused on product across the board. We've seen some nice acceptance on the bottoms side with jeans and chinos in both brands and are also seeing nice business in emerging categories in dresses and accessories and intimates. So we're focused on improving the whole assortment, balance in our assortments, and it has been one of the themes of our -- and areas of focus of our strategies as we move forward to make sure that we're appropriately moving forward all parts of our business. But we definitely still expect and see opportunity in the tops space.

Next we go to Tiffany Kanaga of Deutsche Bank.

Can you talk more about what kind of traffic trends you're saying in the mall, not in tourist and flagship locations or online? And also what you're seeing in terms of promotional activity across the mall?

Yes, I think there is definitely, as has been widely reported, mall traffic trends continue to be difficult across the U.S., and we're seeing very similar results in our business. I think in Q2, we did see a step-up across the board in promotional activity. I think that was a bit of a result of a more difficult Q1, cooler early business on the seasonal side. But overall, we feel good about our inventory position. We have had success over the past few quarters in stepping away from the intensity of our promotions and that's driven AUR improvement. And with our inventory position heading into the back half, we expect to continue to be able to do that.

Can you also talk about what specifically you think drove the Hollister rebound in Europe, while Abercrombie continues to lag? Is it simply a matter of flagships being concentrated in the Abercrombie brand? Or are there distinct improvements in the nonflagship stores? And what drove that bounce back?

Tiffany, it's Fran. Yes, specifically, what drove the Hollister rebound was product acceptance by our customer. We continue to see positive conversion across both channels, actually not just internationally but across both channels, but that was the driver internationally.

Next we go to Paul Lejuez with Citi.

Can you talk about the performance in the U.K., both before and after the Brexit vote? Just curious if you found any difference -- any change in sales pattern. Also curious about the performance of Greater China. How that business progressed during the quarter and store performance in the stores opening in that region?

Yes, Paul, this is Joanne. I'll pick that up. We did monitor, certainly, very closely our business both before and during and after the Brexit vote. And we did see, actually, only a minor disruption in traffic and sales trends around the Brexit vote. It really impacted sort of the weekend of the vote. And our business rebounded in the U.K. back to pre-Brexit levels pretty quickly thereafter. So we were very pleased with the way that business moved forward. Certainly the biggest impact on our business, however, was the currency devaluation that we saw post-Brexit and that is a bit of what you heard in terms of our expectation for continued FX headwinds moving forward. In terms of the performance of Greater China, in first quarter, we had very difficult performance in China. We did see that business improve in the second quarter, and we continue to be pleased with the results of our new stores that are -- that we've opened in the region, those open and are exceeding -- meeting or exceeding our expectations. But it is important to note that our exposure in Greater China today is still very modest. We have, I think, about 20 stores in the region, and we still continue to believe that we have opportunity for growth. The other piece of that business that continues to perform strongly is our digital business in China and our DTC business has consistently been positive and growing

Next we go to Neely Tamminga with Piper Jaffray.

This is Kayla Wesser on for Neely. Just would like to go a little deeper on advanced stretch products that you guys have in your jeans at Hollister? Our observation has been that they are actually selling out of that product in some of our store walks. So just wondering how do you feel about that product? And at this point, do you feel like you have the appropriate supply to meet demand? And if not, when do you think you'll be able to calibrate that supply to meet demand?

Kayla, it's Fran. Yes, we had an exciting launch with our Epic Flex for Hollister guys, and we were very, very pleased to see the results. We actually have Epic Flex in more than just denim. We also have it in our shirts and our polos, and we have exceeded our expectation on our selling. Going forward, again, as we've been able to react to the business, we will continue to place orders appropriately.

Next we'll go to Adrienne Yih from Wolfe Research.

It's actually Cody Ross for Adrienne, this morning. Two quick questions. You had previously mentioned changing your strategy a little bit about -- at Abercrombie going after an older customer. Can you update us on that strategy? And then also, with Aéropostale kind of falling to the layway [ph] going into holiday, can you update us on some of your strategy going after that market share?

Sure. Cody, it's Fran. So yes, we've talked about -- and you'll see in our Investor Presentation, the brand positioning that we've landed for Abercrombie, which is to be the iconic American casual luxury brand for the 20-something consumer. Today, we actually have -- the majority of our customers are over 20, so we are targeting that particular consumer. As we did this research and we pressure tested around the world, we actually had very positive feedback from both our existing and hopefully future customers that it was a brand position that really resonated with our customer -- with our customer base. Regarding the Aero market share going into the back half the year, we are working diligently on our own plans and our own strategies relative to the marketing for both of our brand positions as we move into the back half of the year.

Next we go to Janet Kloppenburg with JJK Research.

Just a couple of quick questions. Fran, in terms of the Hollister stores, the 60 that, I think, have been renovated. Can give us an update on the performance there? And also if you're planning on more stores to be renovated going forward? And just on the tops issue at Hollister in women's and it sounds like maybe at A&F as well, I'm just wondering when you think those assortments maybe better balanced?

Sure. So first regarding the Hollister remodels, Q1 and Q2, cumulatively we've -- I think we said we've remodeled about 32. We have about a balance of 20 left for the rest of the year, and we'll continue on this initiative, as we move forward. For [indiscernible] doing, the ones that we just reopened for Back-to-School are a little bit too early to read, but prior to that, they are continuing to meet our expectations. I think your second question was regarding the tops business.

Yes [indiscernible] Hollister -- yes, women's.

Sure. The Hollister business specifically, we have a very agile supply chain, so we were able to affect our future on orders and we have been able to really specifically figure out what the customer was looking forward through our -- listening to our customer, our voice of customer and have adjusted those. As far as A&F women's goes, we've decelerated a bit into the quarter but we still had strong performance out there in our tops business.

Okay. And Joanne, is the FX impact that you've detailed in the outlook, is that exclusively because of the -- excuse me, because of the British pound's devaluation?

The majority of the change, Janet, would be related to the currency devaluation we saw during the quarter, which was predominantly the pound but also, to a lesser extent, the euro. Most of it was related to the pound devaluation.

And next we'll go to Betty Chen with Mizuho Securities.

In regard to the brand positioning for A&F, Fran, I was wondering if you can talk a little bit about from your studies, what did you learn about where the customer went or where they are currently shopping. And where you think where they are coming back from? What are also the implications in terms of pricing or product design that you may need to make and the timing of those changes if possible?

Okay. Starting with tops, what did we learn? We learned that our customer out there globally is very excited and very positive about our brand. In fact, we have things quoted to us like: there is the latent affection for the brand, we are excited to see what the brand is up to. So there have been very, very positive feedback, and we actually went around the world and pressure tested all of our positions and got very, very positive feedback. As far as pricing goes, specifically for A&F, we are comfortable with where our ticket pricing is. I think one of the things that we really have to work on is our degree of promotion, as we mentioned a little bit earlier today. We've been focused on reducing our promotional activity. But as far as pricing goes, we are positioned where we believe is appropriate for the product. And I'm not sure the last piece of your question regarding product design?

Yes, just wondering from your study, did you anticipate any adjustment to the designs, whether it's in the tops or the bottoms at A&F?

Part of our brand strategy is honestly to be very clear on our fit and our value for our customer. We will continue to reach out and make sure our customer goes to our reviews and our online information that we're able to get from our customer. We seem to be able to tell whether or not, sorry -- we are set on where we are for our fit for Abercrombie as our quality goes, as far as the adjustments for designs.

My second question, if I could, is for Joanne. I think overall inventory was really clean. But just curious given the comments you made about the tourist or flagship stores may be a predominant impact on the A&F brand. Is the inventory also adequately clean at A&F? Or are there any sort of carryover in the second half?

No, I think we feel very good about our inventory position across the globe in terms of not only the overall quantity but the content of that inventory, as we move into the third quarter. And inventory management has been a strength of ours, as we've moved through this brand repositioning and the teams have done a really nice job at managing and maintaining the inventory levels.

Next we go to Simeon Siegel with Nomura Securities.

This is actually Gene Vladimirov on for Simeon. I was wondering if you can give us some color around what drove the relatively robust performance in the DTC business. How that compared to your expectations? Any divergences you saw either across the brands or the geographies? And how would you expect those trends to continue going forward?

We were pleased with the DTC growth. We did see growth across geographies and across brands, so it was very widely distributed. And one of the particular good things that we saw was that mobile, we were able to capture very high increases in mobile traffic, and conversion was up double digits, particularly in the mobile space. So that's an area where we've been investing and those investments are paying off. It's also a space were our customers prefer to shop. They are increasingly going to their mobile device to browse and as an entry point for their shopping experience, and we've been pleased with the results to-date and we'll continue to invest behind the DTC business.

And did you see any divergences across the brands?

There were some differences but it was broadly positive across brand and geographies.

And now we'll go to Michael Binetti with UBS.

I want to just talk to you about some of the promos we're seeing at Hollister on the denim side in particular, as that category has been called out a little bit this earnings season. You guys -- do you guys buy the denim at Hollister to be at that price point, at $25 Everyday that we see on the website? And do you feel like there was an opportunity maybe or there could be in the third quarter take those prices higher given the denim environment we're hearing about from a lot of folks at the mall?

Yes, hey Michael, it's Fran. We certainly have a promotional plan that we are able to buy our product to provide for our customer the best prices that are out there. We don't normally comment, I guess, on our promotional pricing but we feel that we are very strategically positioned in the mall with where we are. We are able to do good, better, best pricing, if that's what you are referencing, which we certainly have out there today, and we will continue to have through the balance of the year. That varies between our core basics and the customer that we can offer them some fashion at some higher price points.

In particularly -- yes, we've been particularly pleased with the performance of newness and innovation. And I think that's the other thing that we're hearing a lot of about in the denim space. And when we get behind newness and innovation, both from a product perspective but also with marketing, we've seen really nice response from our customers. So we offer that as well in the denim space.

If I could switch gears for one second to the store fleet. As you look at the U.S. store fleet, you guys have been pretty good about staying on the balls of your feet with -- in light of the recent closures though and from some of the peers, I guess some of your peers have commented on adding some flexibility into lease renewals going forward to help stay nimble in case some of the B and C malls, the environment there changes. Could you comment on how you guys are thinking about the store fleet going forward given some of the recent commentary around those malls?

Yes, our approach hasn't really changed. We've been on this path for quite some time. We have had a tremendous amount of flexibility and expect to continue. We have tremendous flexibility going through 2017, as I noted in my comments earlier. We expect that we will be closing more stores, and we evaluate those based on the economic merits of each store and the specific positioning of each mall. So our plans haven't changed. We've been on this path for a while, and we continued to leverage the level of flexibility that we do have.

Next we'll go to Brian Tunick with the Royal Bank of Canada.

Just had 2 or 3 quick questions here. I guess we're already getting some e-mails from investors. Joanne, when you say challenging comps to remain in the back half, do you expect any sequential improvement into the fourth quarter from the third quarter? Do you look at the down forward year-to-date, is that how you define challenging? Just curious on that perspective. And then same thing on the gross margin commentary. How much, roughly, would you expect either the third quarter to be pressured or fourth quarter, could it be expected to be up 50 basis points because of last year's either outerwear or sweater issues or is it FX? So just curious about those comments if you could add any clarity because, again, we are assuming we're going to get a lot of questions on this topic.

Yes. Thanks, Brian. I appreciate the opportunity to clarify. What we did say regarding comps in the back half is that the environment we expect to remain challenging with continued -- and we've seen very persistent traffic headwinds, and we expect that to continue in the back half. As I mentioned, with currency devaluation and safety and security concerns, we see that more pronounced in our flagship and tourist business, and we don't see a catalyst for that to change in the near term. We are focused and confident that we're focused on the right priorities to improve those trends over time, with the new brand leadership that we have on board, our focus on improving the product, improving the store experience as well as the investments we're making behind marketing, we have confidence that over time, we'll show improvement in both traffic and top line. Related to the margin conversation, the -- what we've provided in the outlook is an expectation that margins will be managed flat for the year. We will -- we do expect to see some headwinds in the third quarter in margin related to FX. And as I mentioned, the FX headwinds are more pronounced in the third quarter and begin to abate in the fourth quarter. The other lever within -- or the other 2 levers within margin, AUR, we expect to continue to show some slight improvement in AUR as we step away from promotional activity but we also expect benefit from AUC in the back half and that's weighted more toward the fourth quarter.

Next we'll go to Mark Altschwager with Robert W. Baird.

I also wanted to follow-up on margin. Just regarding the updated SG&A guidance, where are you seeing the incremental savings versus your prior outlook? And bigger picture, just any updated thoughts on the longer term operating expense savings opportunities?

Yes, Mark, this is Joanne. We've talked about our continuous improvement, profit improvement efforts here. We've had a lot of success over the years taking cost out of the business, and we've evolved those efforts into a continuous improvement mind-set in the company, and we're leveraging that for savings. It's not big buckets of money in one specific area. We're finding savings sort of little -- to use a baseball expression, we're hitting a lot of singles, not a lot of home runs, but they're adding up. And they're -- so we expect to continue to be able to drive operating expense improvement through those continuous profit improvement efforts and the efforts of the teams across the globe. In terms of the long-term outlook for OpEx, we have also been able to leverage those savings to allow us to invest in the things that we think are important to drive our growth going forward, and that includes the investments that we made in the second quarter in marketing. We continue to invest in the DTC space. As I mentioned a little while ago, those investments have been paying off with strong performance on the DTC side, and we expect to continue to invest in marketing as we move through the back half.

And we'll take the question from Kimberly Greenberger with Morgan Stanley.

Joanne, I think, you mentioned you're expecting AUC benefits here in the second half weighted towards the fourth quarter. I just want to make sure I heard that correctly. And then if you could give us any sort of feel for how you're thinking about 2017 on the AUC side? And then for Fran. Fran, I'm not sure I understand the deceleration at Hollister from Q1 to Q2. Is there something going on at Hollister after what I think was a generally more stable performance? And what are the strategies in place to address that?

I'll pick up the AUC. You were correct. We do expect to see AUC benefit in the back half, more weighted toward the fourth quarter and that is the result of the currency and commodity price decreases that we've been able to take advantage of in the back half of the year. As it relates to 2017, we haven't provided an outlook on our 2017 financials at this point and would look to do that as we move into the fourth quarter.

Kimberly, it's Fran. Regarding your second question, so listen, we did have some misses in Hollister. I think that's what we've acknowledged, particularly in the girls' tops business. But considering that we have an agile sourcing supply chain here, we were really able to react to what some of those challenges were and correct them on our -- on going forward. But you know what's really exciting is when we get it right, like we did with our Epic Flex promotion for the guys' Back-to-School, our customer really responds and has been incredibly positive about that product. We have new leadership. I mean, Kristin has brought in a tremendous amount of energy for that team. She brings in a lot of leadership experience that will continue to help us drive that business forward.

Now we'll go to Richard Jaffe with Stifel.

Just a follow-up on Hollister. I guess, in the past you've said Hollister renovations would provide a double-digit lift in traffic and sales. I'm wondering if the comments you made tonight -- or today rather, management expectations are being realized at the Hollister renovation. Would that be consistent with the double-digit lift in traffic and sales you've previously stated?

Yes, Richard, it's Fran. Yes, we continue to be pleased and we continue to meet our expectations with the renovations. The only thing I said was that the ones -- the most recent ones during the previous period are little bit hard to read already. But prior to that we continue to be pleased with our expectations -- or meeting our expectations, sorry.

Now we'll go to Omar Saad with Evercore ISI.

Wanted to ask about the A&F brand positioning. Maybe you could talk a little bit about how it'll impact the stores? You mentioned maybe a new prototype for next year. The brand is obviously known for its stores, especially the flagships. Do you see a lot of change that's going to need to happen there as you adjust and reposition the brand?

Sure. Omar, it's Fran. Listen, we are just beginning to talk to our customer, right. We are beginning to bring together the brand position as well our DNA and our voice out there for our customers. We've spent a lot of time in the past year working on our customer experience, which was really for both brands, Abercrombie and Hollister. Through our voice of customer, we're hearing that very positive things about our customers' experience within the stores. So we will continue to move along that path, specifically the prototype, yes, we announced a couple of weeks that we will be launching a prototype in the first half of '17.

And next we'll go to Marni Shapiro with Retail Tracker.

I wanted to dive in a little deeper to some of your online. It was a nice lift here in DTC, and it's still growing. Can you talk a little bit about the average transaction size that you see online in comparison to what you might see in a store? And are you seeing the online shopper skewed more towards new products, because they seem to highlight the new products earlier? Or is it more of clearance shopper? And then 1 last follow-up after that on the same business.

Well Marni, this is Joanne. We definitely value the online shopper. In fact, we expect most customers are browsing, if not shopping online. So we continue to invest in the omnichannel experience, and we've seen nice response to the changes that we have made. I think the online shopper is and has been more price elastic, so there is definitely a customer out there for the clearance business online. However, we see nice traction with the online shopper also with new products. And increasingly, we're seeing that customer -- our customer shop on their mobile device, and we've been very pleased with the conversion we're seeing. The changes that we've made to reduce friction in the shopping experience on a mobile device have yielded nice strong improvements in overall conversion. So we've been pleased with the DTC business, and we continue to invest in that space, and we know that it's important for our customers, specifically, as one point of entry to the brands.

The one question, as she walks into your store, whether it's online or virtually, is she buying about the same size basket? Is it the same 3 units at ex dollars, whether it's online or in-store? And then just one follow-up about the customer coming online, are you seeing new customers come into the brand? And are they coming through your social media efforts?

Yes, in terms of the basket size, the online basket size is higher. And in terms of new customers, we are capturing new customers through social media but those are details that we haven't disclosed previously.

And now we'll take our final question from Dana Telsey with Telsey Advisory Group.

As you've got -- ventured a little bit into the wholesale channel whether it's with Zalando, with ASOS, what results are you seeing there? And what are you learning from product acceptance there versus product acceptance in your own stores? And then with the increased marketing spend that's going to be happening in Q3, what are you planning to do differently than Q2? And how are you thinking about the holiday season game plan this year versus last year?

Dana, yes, we're excited about our wholesale business. And what we've seen as we've rolled out the wholesale business in Europe, specifically through ASOS and through NEXT is it has been a nice complement to our other businesses there, both our in-store and our online business -- our own online business. So we are expanding our brand reach and reaching new customers through these wholesale channels. And with our Zalando announcement last week, we expect to have now access to 18 million new customers through that platform. So we have been very pleased with the results. From a product acceptance standpoint, I think we haven't learned anything specific from the selling there that we wouldn't see or haven't seen in our own business. But we have seen a nice complement to our businesses in those regions.

It's Fran. And your question regarding marketing, so competitively, we can't really comment on where we're headed for Q3. But what I can tell you is that the success and the things that we've been doing in the business and Hollister, and we're going to start to ramp up doing in our Abercrombie business is a holistic marketing campaign, which encompasses social, digital out there. So we're going to continue on the path that we've been on.

And there are no further questions at this time.

Thank you, all. This is Arthur. Thank you, all, for your thoughtful questions today. I do want to say that I'm confident that the teams here have a very firm grasp, the challenges we face and are in vigorous action to address them. While there may be few obvious near-term catalysts to change the macro environment for the better, we are firmly in control of our business and are committed to getting the business moving and making progress in rebuilding this great company. Once again, thank you.

And that does conclude today's conference. We thank everyone again for their participation.