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Deep Promos Expected to ContinueSpecialty retailers fared better during FYF2Q13 as the weather normalized, but deep promotions were needed to entice customers, and managers expect the discounting to continue for back to school given the lack of new fall trends.

• OTR Global’s read on ANF is mixed; the read on ARO remains negative; the read on GPS is positive as in the July 3 note; we are suspending our mixed read on AEO because of the com-pany’s 8/5 preannouncement

• GPS: July sales flat to up yy and 24 of 28 stores met or exceeded plan, similar to June; Old Navy stores July sales trended flat to up yy, and 25 of 32 stores met or exceeded plan, vs. all in June

• ANF: FY2Q13 sales met plan for two-thirds of A&F and Hollister sources and trended flat to down yy as shoppers waited for the best promos and discounts to make purchases

• ARO: FY2Q13 sales plummeted, falling below plan for 21 of 29 stores as the new fashion initia-tive was slow to take off

ANF

GAP

ARO

BY LUPINE SKELLY

SOURCES & BACKGROUND

121 store managers, comprising 30 at Aéropostale, 28 at Gap, 32 at Old Navy, 15 at Hollister, 16 at Abercrombie & Fitch

REPEAT SOURCES 64 (15 at Aéropostale, 21 at Gap, 20 at Old Navy, 4 at Hollister and 4 at Abercrombie & Fitch) from OTR Global’s July 3 note

INTERVIEWS July 30- Aug 2

COMPANIES: AEO, ANF, ARO, GPS

121 SOURCES U

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THE GAP INC.

Strong sales continue into JulyThe Gap Inc.’s strong sales trends rolled into July aided by a highly promotional environment

and an end-of-summer sale event that offered additional discounts of 40% off on clearance.

The event made room for the first fall sets, which included the Back-to-Blue campaign featur-

ing newly designed denim. Sources were upbeat about the upcoming fall and back-to-school

season but expected the environment to stay promotional, starting with a BOGO denim Aug.

2-5 (similar yy) at core GapKids locations, followed by the popular yearly Friends and Family

promotion, Aug. 9–12.

• July same-store sales were flat to up yy for 24 of 26 sources who responded and 24 of 28

met or exceeded plan, similar to June. However, fewer sources exceeded plan in July than

in June, when nearly one-half exceeded goals because of strong full-priced sell-through. In

July, customers were attracted to the end-of-summer sale offering an additional 40% off — a

greater depth of discount than the 30% off clearance last year, which ran three days longer

yy.

• July transaction counts were flat–up yy for 25 of 27 sources who responded, similar mm, as

storewide discounts and new fall lines drew traffic.

• July ticket averages increased or remained the same yy for 26 of 27 responding sources

as customers stocked up on clearance and were tempted by full-price purchases of newly

designed denim and children’s uniforms that were released earlier yy.

• Clearance and inventory levels were in line for most, as sell-through was improved with the

heavy promotional month.

“We pushed the summer sales event to mid-July. It built up demand more than last year.” Gap manager

THE GAP INC.’S OLD NAVY

Uniforms off to strong startOld Navy got a boost in traffic at the end of July, when the chain’s school uniform sale started (July

25) and helped stores move items, such as polo shirts and khaki pants. Managers were optimistic

about the back-to-school season and expect sales to be stronger than last year as a result of earlier

shoppers yy. We think the lack of new fall trends could benefit the chain as it will put more focus

on price.

• July same-store sales were flat to up low single digits for most sources; 25 of 32 sources

met or exceeded plan, vs. all stores in June, aided by the uniform promotion, which offered

customers $5 polos, $10 khakis and $9 backpacks.

• July transaction counts increased yy for 21 of 32 sources, as the uniform promotion and

deals on clearance merchandise helped drive traffic and sales at the end of the month after a

slowdown mid-month with the end of the Stuff and Save promotion (July 11–17), which gave

Old Navy cardholder customers 30% off their entire purchases.

• July ticket averages increased yy for 12 of 31 responding sources, vs. 25 of 32 in June. The

deterioration was attributed to customers purchasing mostly promotional items, such as

school uniforms and summer clearance, which were advertised for up to 75% off (July 25–31).

Gap focused on clearing out summer clearance in July

Photo: OTR Global

Old Navy showcases $10 kids’ denim

Photo: OTR Global

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• Clearance levels were in line with expectations for 18 of 30 responding sources, but almost

one-third of sources reported higher-than-expected clearance sections as a result of fall

merchandise coming into stores and new markdowns on summer items.

“People are definitely coming in for the $5 polos and the $9 khakis. We are one of the lower-priced retailers so people are coming in for the uniforms.” Old Navy manager

AÉROPOSTALE INC.

Bold merchandise move hasn’t paid off yetAéropostale Inc. took a big step into fashion during FY2Q13, moving away from a reliance on logo

merchandise and offering more fashion-forward apparel and fall boots. The new fashion was slow

to catch on with customers, however, and 21 of 29 responding sources fell below goals. Managers

were nevertheless enthusiastic about the new merchandise, and 16 of 26 responding sources ex-

pected back-to-school sales to increase because of the improved product. The new initiative also

includes better merchandising with outfits grouped together, such as dynamic signage depicting

fashion-forward looks and prices for each item.

• New denim and an end-of-the-month VIP party helped July sales fare better than the quarter

overall, but same-store sales decreased, and 17 of 30 sources fell below July plan.

• Promotions increased during July, helping traffic, which was flat or higher yy for 17 of 28

responding sources.

• Ramped-up promotional levels hurt July ticket averages, which were lower yy at one-half of

stores.

• In July, the company introduced the Live Love Dream line of performance athletic apparel,

which sources said was being received positively by customers.

“Our greatest challenge right now is to get the word out that we’ve reinvented ourselves. The fashion is awesome, the quality is improved, and our prices are still lower than Hol-lister and American Eagle. I fully believe in our new style and know that if we can get the traffic into the store that we can convert it into more regular-priced sales.” Aéropostale manager

ABERCROMBIE & FITCH CO.

ANF ramps up promos to end FY2Q13Nearly three-fourths of Abercrombie & Fitch Co. and Hollister stores met FY2Q13 sales goals as

the chains ramped up promotional levels during July to draw traffic. Nearly three-fourths of A&F

and Hollister managers who responded said FY2Q13 sales were flat or down yy as shoppers held

off on purchases until late in the period, when an additional 60% off women’s clearance event

began in mid-July and was steeper than last year’s additional 50% off. Based on current sales

trends and the recent uptick in sales, most managers expect back-to-school sales to remain the

same or increase yy. Although an expanded accessories category could benefit tickets during

the back-to-school season, we are concerned about the deep discounts needed to draw in the

customer’s attention and the company’s unseasonably early rollout of fall items, such as puffer

vests and jackets.

Aéropostale focusing on fashion

Photo: OTR Global

Aéropostale’s new merchandising focuses on complete outfi ts

Photo: OTR Global

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www.otrglobal.com

• Twenty-one of 30 A&F and Hollister stores met or exceeded July sales goals, and sales were

flat or up yy for 21 of 28 as an increase in promotions yy aided traffic levels.

• July transaction counts increased yy for one-half of sources as shoppers were tempted by new

promos, including Hollister’s BOGO free shorts event during July 24-30.

• July ticket averages were mixed yy as discounted merchandise dominated purchases,

while some sources said add-on items, such as the expanded jewelry line, were perform-

ing well.

• Despite the popularity of markdowns, clearance inventory levels were higher than expected at

12 stores because of weak summer sales or extra shipments from other stores.

• Overall inventory levels were just right for most sources, but six had higher-than-normal levels

in clearance or summer items, such as swimwear.

“It seems every day, another store is having the same blowout sale, and the competition has increased so much that people are suddenly hesitant to buy without deep discounts.” Hollister manager

Contributors: Priscilla Barker, Elizabeth Bloomberg, Sabrina Bullock, Alysha Conlangeli,

Vivian Duran, Kathleen Edwards, Jody Goldman, Houston Johansen, Kate Kitchen,

Bridget Maloney, Patricia Newman, Karen Solski, Amanda Woods and OTR Global’s Field Force

Parkas out early again at Abercrombie & Fitch

Photo: OTR Global

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AÉROPOSTALE MANAGERS

“Our whole mall has been slow the last couple of months. We finally got summer then got drenched with rain, and I think it affected our

traffic and sales.”

“Ticket averages were down because customers were overwhelmingly interested in clearance items, and the summer fashion mix was not

appealing enough to shift spending patterns.”

“It’s been really slow. The problem is that people aren’t into the Aero logo anymore, so we started doing more fashion and raised the prices.

And since we have, our sales have gone down.”

“We are so excited about the Monday Back-to-School event. It has been tough because we only have a limited number of invitations to give

out for the 4:00 time slot.”

“July has been very strong; we are getting great traction with our new fall fashion. The price points are a lot higher. The military jacket has

been very popular, and it’s $40 so that is a lot more than hoodies, which we sold mostly last year.”

ABERCROMBIE MANAGERS

“It seems like more people are buying on sale or promotion.”

“The weak economy, customer defections to other stores, and the Internet have really hurt our sales.”

“We already sold out of some of our jewelry. I wish they would send more; all we have left is what goes on the mannequins, and we’re not

allowed to sell that.”

“Denim is our big fashion statement. We have everything in denim — shirts, jackets, jeans.”

“Who buys winter jackets in July? Those haven’t been selling at all.”

HOLLISTER MANAGERS

“It was an OK quarter. When we promote clearance is when our customer is showing up.”

“As these last couple of weeks have passed, we are starting to see an increase in people coming into the mall.”

“Right now, you can get pretty much the same [items] we carry at a number of other stores. So unless we discount them, customers are

walking away.”

“This store has too much clearance inventory, and we continue to reduce the prices to move it out.”

“Our efforts to improve [customer service] have been paying off in spades. This time last year, we were losing customers left and right; now,

we are pulling them back in.”

GAP MANAGERS

“Putting uniforms on the floor early this year was risky but worked out well. We sold through a ton of items at full price early on in the

month.”

“Women’s sales remain about the same as last year, but men and children’s sales have really increased.”

“This weekend is the BOGO kids’ jeans event, and next weekend is Friends and Family, so we’ll be really packed for a while.”

“For fall, we’re doing a kind of palate cleanse, going from all bright and young, back to basics for your wardrobe. Then I think they’ll

introduce more color for the following season.”

“I think Gap realized they went a bit overboard when they pulled most of the Body out of stores. They’re planning on putting in a small

section of Gap Body back into larger stores.”

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OLD NAVY MANAGERS

“We’re getting a lot of people purchasing back-to-school already. The weather was really favorable, and our prices for back-to-school items

are really low.”

“We have seen a very healthy jump in traffic levels this month, thanks to better advertising and promotions.”

“The uniform sales have been on fire for the last week. This store has a huge selection.”

“Since the weather is better this year and Old Navy is offering more back-to-school promotions than ever before, we anticipate a fantastic

August.”

“Our back-to-school promotions are really bringing in more customers this year. We sell what other stores in the mall sell, just cheaper.”

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1. Did your store meet, exceed, or fall below FY2Q13 plan (May-July)?

OLD NAVY GAP HOLLISTER A&F ARO

Exceeded: - - 1 1 1Met: - - 10 10 6Fell below: - - 4 4 21Don’t know: - - - - 1No response: - - - 1 1Not applicable: - - - - -

2. Did your FY2Q13 (May-July) same-store sales increase, decrease, or remain the same yy?

Up 24%–26%: - - - 1 -Up 7%–9%: - - - - -Up 4%–6%: - - - - -Up 1%–3%: - - 2 - -Up: - - 2 2 3Flat: - - 5 3 6Down: - - 4 3 10Down 1%–3%: - - - 2 1Down 4%–6%: - - - 1 1Down 7%–9%: - - - - 1Down 10%–12%: - - - - 2Down 13%–15%: - - - - 2Down 16%–18%: - - 1 - 1Down 19%–20%: - - - - 1No response: - - 1 4 2Not applicable: - - - - -

3. Did your overall sales during July exceed, meet or fall below expectations?

Exceeded: 7 7 4 3 1Met: 18 17 6 8 12Fell below: 7 4 5 4 17No response: - - - 1 -

4a. Were July sales better, worse, or same as last year?

Up 39%–41%: - 1 - - -Up 7%–9%: - - - - -Up 4%–6%: 3 4 2 - -Up 1%–3%: 6 6 - 3 1Up: 10 9 3 7 5Flat: 7 4 5 1 7Down: 1 1 3 4 14Down 1%–3%: 5 1 - - -Down 4%–6%: - - - - 1Down 7%–9%: - - 1 - -Down 10%–12%: - - - - 2No response: - 2 1 1 -

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4b. Based on current spending habits and trends, do you expect back-to-school sales to increase, decrease or remain the same yy?

OLD NAVY GAP HOLLISTER A&F ARO

Increase: 24 18 9 6 16Remain the same: 6 5 3 7 8Decrease: - - 2 2 2Don’t know: - 3 - 1 -No response: 2 2 1 - 4

5. Did July transaction counts (traffic) increase, decrease or remain the same yy?

Increased: 21 20 6 9 10Remained the same: 5 5 5 3 7Decreased: 6 2 3 4 11No response: - 1 1 - 2

6. Did customers spend more, the same, or less (ticket averages) during July yy?

More: 12 15 5 3 4The same: 16 11 5 9 10Less: 3 1 4 4 15No response: 1 1 1 - 1

7. Are clearance levels higher, in line with or lower than what is expected at this store?

In line: 18 14 8 6 17Higher: 8 11 6 7 5Lower: 4 3 - 2 5Don’t know: - - - - 1No response: 2 - 1 1 -Not applicable: - - - - 2

8. Are current inventory levels just right, heavy or light?

Heavy: 5 2 4 2 5Just right: 22 22 9 13 24Light: 2 1 1 1 1Don’t know: - 1 - - -No response: 3 - 1 - -Other: - 2 - - -

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ANALYST CERTIFICATION

The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any

and all of the subject securities and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific

recommendations or views in this report.

ADDITIONAL DISCLOSURES

OTR Global LLC is an investment advisor subsidiary of OTR Global Holdings II Inc. OTA Financial Group LP is the controlling shareholder of OTR

Global Holdings II Inc. OTA LLC is a registered broker dealer subsidiary of OTA Financial Group LP. The affiliated companies of the OTA Financial

Group LP, OTR Global Holdings II Inc. and/or its principals, employees, clients or researchers may have an interest in the securities of issuers

discussed herein or in securities of other issuers in other industries. The affiliated companies may provide bids and offers for securities of

the subject company(ies) discussed in this report and may act as principal in connection with such transactions. The affiliated companies, its

principals and/or employees may also hold a position (long or short) in the shares of the subject company(ies) discussed in this report.

OTR does not financially compensate sources for participating in its research reports. OTR conducts industry events where sources who par-

ticipated in OTR’s research reports may be compensated or have their expenses paid by OTR to attend the industry event. Additionally, sources

who participate in OTR’s research reports may directly interact with clients at these OTR industry events.

©2013 OTR Global LLC (OTR). All rights reserved. This report was produced for the exclusive use of OTR and its affiliates and may not be

reproduced, electronically or via hard copy or relied upon, in whole or in part, without written consent. The information herein is not intended to

be a complete analysis of every material fact in respect to any company, industry or the subject discussed, nor by itself sufficient upon which

to base an investment decision. OTR uses a set of symbols to represent its read: Thumb Up denotes positive, Thumb Down denotes negative,

and Fist denotes mixed. These symbols are not a recommendation to buy, sell or hold a security.

Additional information available upon request.

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