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TMF Interview With Abercrombie & Fitch Investor Relations and Communications Director Lonnie Fogel

June 7, 1999

With Dave Marino-Nachison (TMF Braden)

Reynoldsburg, Ohio-based Abercrombie & Fitch (NYSE: ANF) is a retailer of casual clothing and accessories for men and women targeting the collegiate demographic. The company operated a total of 200 stores at the end of the first fiscal quarter -- including 14 "abercrombie" stores for children and teenagers -- and also publishes a quarterly combination magazine/catalog.

TMF: I wanted to ask about a word I read in Chairman [and CEO Michael] Jeffries's letter to shareholders. It's the word "aspirational." I think it's interesting, and I was wondering if you could talk about why Abercrombie & Fitch is going with the aspirational image, maybe more like Polo (NYSE: RL), as opposed to something like the Gap (NYSE: GPS) or American Eagle (Nasdaq: AEOS), which sport more of a commodity image.

Fogel: Sure. I think in our sense the word "aspirational" pertains to the idea that style at Abercrombie & Fitch represents, in terms of the American college experience, something that a lot of people aspire to.

TMF: Is that some of the thinking behind the new "abercrombie" kids' lines of stores, that maybe younger people there could aspire to the image set by their older siblings or people that they see? Is that what you're trying to capitalize on there?

Fogel: Well, it pertains to both. Seven- to 14-year-olds who go to the abercrombie kids store -- that's "abercrombie" with a lower-case "a" -- really are trying to be just like their older brothers and sisters, so yes, for that category they are aspiring to be like their older brothers and sisters. The older students aspire to a high-level college experience.

TMF: Could you go into some more detail about your plans for the "abercrombie with a small 'a' " stores -- openings, merchandise, things like that?

Fogel: Sure. We began testing the stores during fiscal 1998. We opened our first couple of stores almost a year ago -- last July -- and we had 13 open by the end of the fiscal year. We were very pleased with what we saw. In retrospect, we found very little to tinker with and we announced at the beginning of this fiscal year that it was now out of test and we would be rolling out rapidly. Since we built the infrastructure, we are now capable of developing this chain, so you'll see a fairly rapid ramp.

"Our plan is not to grow old with our customer. We think that the sweet spot for us is the 18- to 22-year-old college student."
We expect to open an additional 20 abercrombie stores by the end of this fiscal year and I would expect you would see at least as much, probably more, in fiscal 2000.

TMF: How about as far as merchandise? Is it just sort of a scaled-down version of what you've given in the regular stores?

Fogel: No, not exactly. You design from say, downscaled versions of some of the pants. You really won't find anything else in the store that is exactly the same as what you would find in the adult stores. Although, I would tell you that the kids' stuff is very much in the manner and style of the adult clothes. You may find similar plaid shirts, similar graphic T-shirts, but you won't find the same exact patterns or prints.

TMF: It would seem like that chain would certainly go a long way toward addressing maybe your future Abercrombie & Fitch shopper. How do you feel that Abercrombie & Fitch addresses its former shopper, or its older customer who is coming out of college and is getting a little bit past the demographic that you may be putting into your advertising?

Fogel: Our plan is not to grow old with our customer. We think that the sweet spot for us is the 18- to 22-year-old college student. That demographic is the most fashion-sensitive and fashion-influential. That group is really a prime spot for us.

TMF: That segues well into my next question. One of our writers in a recent column said he went to a store and he -- he's a little bit older -- used to shop at Abercrombie & Fitch in college and thought maybe some of the things like the floral-print shirts and the hula dancers and things brought on a little more risk, that Abercrombie was more fashion-forward than he remembered and he wondered if maybe you guys were taking a little bit more fashion risk than perhaps you used to with items like that?

Fogel: No, not really. Our foundation is primarily highest-quality American classics. We take classics and we will twist them to keep them current, but we will never be on the very edge of fashion. There is a lot of risk there in being very edgy.

TMF: That's right and I think that's what he was concerned about. He thought maybe that's what you were going for, but I guess you're saying maybe not.

Fogel: No, no. It would be obvious: walk through some other stores in the mall to see what really edgy means.

TMF: Sure. Can you talk about how you go about your research and your development of styles, just sort of the process? I know you use a lot of people on campuses to sort of hang around and look at things. Can you talk about how you do that?

Fogel: Sure. Our designers, our merchants, in fact our senior officers spend a tremendous amount of time on campuses at major colleges and small campuses as well, and we're very particular about recruiting certain kinds of people to work as brand representatives in our store.

"At maturity, as currently seen, you're looking at a company with five concepts of 400 stores apiece."
In addition, we have a very popular quarterly magazine called the A&F Quarterly, which now has paid circulation of nearly a quarter of a million per issue [and] 20 field editors, all of whom are students on campus and on a weekly basis they report to us what they are seeing and hearing in terms of the college lifestyle.

And that's a key factor. We are not looking only at clothes, we are trying to completely understand the college experience as well as the clothes that go with it. But first of all you have to understand what college life is all about these days. The clothes follow from that.

TMF: I would not have guessed that the quarterly had that many subscribers because those are all --- I guess some of those are credit card holders.

Fogel: Actually, no. The quarterly is available only by single copy sales in the stores or by annual subscriptions, which are now $12 for the year, $6 per copy in store.

TMF: Does that generate a significant amount of sales or is it more of a marketing tool?

Fogel: We see it primarily as a brand builder, that's the design. It does generate sales. It functions in terms of response rate and average transaction value. Most people would see it as a very successful catalog, but our primary intent here is to have a magazine that reflects the college lifestyle.

TMF: I would say it certainly does that; we were having some fun with them last week, in fact. I probably should have asked this earlier when I was talking about your plans for expansion of the abercrombie line, but can you talk about your general plans for expansion of the full-line stores, perhaps both overseas and geographically in the U.S.?

Fogel: Sure. It's a very simple profitability model. The general idea is to open new stores at the approximate rate of 20% per year to achieve comparable-store sales in the range of 5% to 6% and with leverage on your fixed expense base you can achieve 30% EPS growth. Now, clearly the kids' business now is above and beyond the 20% profitability model so there's some upside to that, but in terms of a long-term profitability model that's our focus.

Now, we have nearly 200 Abercrombie & Fitch stores at this point in time. Conservatively, our thinking is that 400 domestically is pretty much where we max out, although some people on Wall Street are arguing that there's more room. For us, we're feeling conservative. So we figure at some point you become close to at least theoretical saturation domestically. We haven't even really began to seriously consider anything international.

The kids' business we think again maxes out around 400 stores in the U.S. In addition, we have said that we plan to test one new store concept every couple of years and we have three others on the drawing board, which means that about in a year's time you should see the third concept entering test in some locations. We haven't disclosed what that will be except to say that we're very much enamored of lifestyle branding and that's pretty much where we're going to stay.

TMF: That was my next question. It looks like I won't be able to get a more specific answer.

Fogel: At maturity, as currently seen, you're looking at a company with five concepts of 400 stores apiece. So you're looking at a 2,000-store chain that's all domestic and that doesn't include any potential for some other venture that we may or may not do in the future.

TMF: Would it be safe to say that when you've got these five concepts going that shoppers would be able to know that they're all under the same umbrella?

Fogel: I'm going to be a little coy about that. It may be true, it may not be true.

TMF: With the stores, the magazines, the catalogs, and things like that, certainly they have a very consistent feel and look. I wonder if you can talk about how you plan to carry that over to the website when that launches?

Fogel: Well, you should surf to the website now because we've had the website up for, I guess, a year and a half to two years. Here again, like the quarterly magazine and the catalog, it's really seen as a brand builder. If you go through the pages you will see lots of features and services that mostly reflect interests and activities of the college student. In addition, you'll see links from our page to other websites that seem appropriate for the current season in terms of what students are interested in.

But I also point out that we don't accept advertising for either the quarterly, the catalog, or the website even though it's an extremely popular destination website. We don't take advertising because we want the content to be authentic and real.

TMF: Are you still planning to launch e-commerce on the site in the fall?

Fogel: We said last month that we plan to provide e-commerce on the website sometime this fall, possibly as early as the back-to-school season. No more update on that yet.

TMF: A couple of nuts and bolts questions. One about your website: Unless I am completely blind, I didn't find a lot of resources for investors on there. Do you plan to beef up those offerings online at any point?

Fogel: No, actually that's my choice. I'm very well aware of the potential of using a corporate website for investor information, but I think in this case the website is primarily intended for customers and students and I think by having investor information on the Web, it would serve to detract from the value of the website. Frankly, all of us are pretty Web-savvy these days. All of the corporate releases and information is readily available through hundreds, if not thousands of other Web pages.

TMF: One of our readers suggested a related question: As far as we know you don't report monthly sales figures and we were wondering why that is.

Fogel: That's correct. The company's view -- this is a view that I've felt for a decade -- is I think investors are very shortsighted. We're trying to get people to look beyond the current week, the current month, even beyond the current quarter. I worked for Home Depot (NYSE: HD) and set up their IR and PR operations many years ago and Home Depot still does not provide anything beyond quarterly sales information and I think it's a very appropriate way to manage expectations.

By the same token, people will often ask what's the hot item in the store this month or this quarter and that really is misleading because this is a brand-centered business, and the key to understanding the Abercrombie story is understanding how the brand is managed for long-term success, not how you find the next hot item and the next hot item and the next hot item, but you keep sales at a high plane. Working off of the next hot item is often a recipe for disaster. By the same token, we are looking for true partners who will invest in the company and aren't looking for how sales were over the weekend or how sales were this week or this month.

And I can tell you there have been in my experience -- not necessarily here -- there have been many periods of time, I've looked at sales over a certain period that haven't been great compared to some other benchmarks and have been able to report excellent quarters. I think to some degree the stock can become less volatile with less data points.

TMF: Now is probably a good time for us to wrap things up. Is there anything you'd like to add?

Fogel: In summary, I would say the key to the story is understanding how a brand is managed for the long term.

TMF: Well, Mr. Fogel, I appreciate your taking some time to chat. Thank you very much.

Fogel: Sure, bye bye.

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