UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2002
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission file number 1-12107
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ABERCROMBIE & FITCH CO.
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(Exact name of registrant as specified in its charter)
Delaware 31-1469076
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, OH 43054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock, New York Stock Exchange, Inc.
$.01 Par Value
Series A Participating
Cumulative Preferred
Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Aggregate market value of the registrant's Class A Common Stock held by
non-affiliates of the registrant as of March 28, 2002: $3,037,458,332.
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Number of shares outstanding of the registrant's common stock as of March 28,
2002: 99,035,648 shares of Class A Common Stock.
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DOCUMENT INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 23, 2002 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS.
General.
Abercrombie & Fitch Co., a Delaware corporation ("A&F"), through its
subsidiaries (collectively, A&F and its subsidiaries are referred to as
"Abercrombie & Fitch" or the "Company"), is a specialty retailer which operates
stores selling casual apparel, personal care and other accessories for men,
women and kids under the Abercrombie & Fitch, abercrombie and Hollister Co.
brands. As of February 2, 2002, the Company operated 491 stores in the United
States.
Description of Operations.
General.
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The Abercrombie & Fitch brand was established in 1892 and became well known as a
supplier of rugged, high-quality outdoor gear. Famous for outfitting the safaris
of Teddy Roosevelt and Ernest Hemingway and the expeditions of Admiral Byrd to
the North and South Poles, Abercrombie & Fitch goods were renowned for their
durability and dependability - and Abercrombie & Fitch placed a premium on
complete customer satisfaction with each item sold. In 1992, a new management
team began repositioning Abercrombie & Fitch as a more fashion-oriented casual
apparel business directed at men and women with a youthful lifestyle. In
reestablishing the Abercrombie & Fitch brand, the Company combined its
historical image for quality with a new emphasis on casual American style and
youthfulness.
In 1997, the Company introduced the A&F Quarterly (a catalogue/magazine), which
is a lifestyle magazine focused on the college experience, and subsequently
added a catalogue format. The Company launched a web-based store featuring
lifestyle pieces, such as AFTV, located at www.abercrombie.com, in 1998.
Products comparable to those carried at Abercrombie & Fitch stores can be
purchased through the Quarterly, catalogue and abercrombie.com.
The Company launched abercrombie, which targets 7 to 14-year-old boys and girls,
in 1998. These stores offer fashion-oriented casual apparel in the tradition of
Abercrombie & Fitch style and quality. A lifestyle web-based store located at
www.abercrombiekids.com was introduced in 2000, where products comparable to
those carried at abercrombie can be purchased on-line.
The Hollister Co. brand was launched in 2000. Hollister Co. is a West Coast
oriented lifestyle brand targeted at 14 to 17-year-old high school guys and
girls, at lower price points than Abercrombie & Fitch. Hollister Co. has
established a lifestyle Web site at www.hollisterco.com but, as yet, no
merchandise is available through the site.
2
At the end of fiscal year 2001, the Company operated 491 stores. The following
table shows the changes in the number of retail stores operated by the Company
for the past five fiscal years:
Fiscal Beginning
Year of Year Opened Closed End of Year
---- ------- ------ ------ -----------
1997 127 30 (1) 156
1998 156 41 (1) 196
1999 196 54 250
2000 250 104 354
2001 354 138 (1) 491
Suppliers.
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During fiscal year 2001, the Company purchased merchandise from approximately
148 suppliers and factories located throughout the world. In fiscal year 2001,
the Company sourced approximately 12% of its apparel through Koos Manufacturing
and 8% through Wooliston Garment, Inc. In addition to purchases from Koos and
Wooliston, the Company purchases merchandise directly in foreign markets, with
additional merchandise purchased in the domestic market, some of which is
manufactured overseas. Excluding purchases from Koos and Wooliston, no more than
5% of the merchandise purchased by the Company originated from any single
manufacturer. The Company pursues a global sourcing strategy that includes
relationships with vendors in over 40 countries. Any event causing a sudden
disruption in these sourcing operations, either political or financial, could
have an adverse effect on the Company's operations. Substantially all of the
Company's foreign purchases of merchandise are negotiated and paid for in U.S.
dollars.
Distribution and Merchandise Inventory.
--------------------------------------
Most of the merchandise and related materials for the Company's stores are
shipped to its distribution center in New Albany, Ohio where the merchandise is
received and inspected. Merchandise and related materials are distributed to the
Company's stores using contract carriers.
The Company's policy is to maintain sufficient quantities of inventory on hand
in its retail stores and distribution center so that it can offer customers a
full selection of current merchandise. The Company emphasizes rapid turnover and
takes markdowns where required to keep merchandise fresh and current with
fashion trends.
Seasonal Business.
-----------------
The Company views the retail apparel market as having two principal selling
seasons, Spring and Fall. As is generally the case in the apparel industry, the
Company experiences its peak sales activity during the Fall season. This
seasonal sales pattern results in increased inventory during the back-to-school
and Christmas selling periods. During fiscal year 2001, the highest inventory
level approximated $157.7 million at the July 2001 month-end and the lowest
inventory level approximated $97.5 million at the December 2001 month-end.
3
Store Operations and Expansion.
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The Company's stores and point-of-sale marketing are designed to convey the
principal elements and personality of each brand. The store design, furniture,
fixtures and music are all carefully planned and coordinated to create a
shopping experience that is consistent with the A&F lifestyle.
The Company's sales associates, or brand representatives, are a central element
in creating the entertaining, yet comfortable, atmosphere of the stores. In
addition to providing a high level of customer service, the brand
representatives reflect the casual, energetic attitude of the brand and culture.
The Company maintains a uniform appearance throughout its store base, in terms
of merchandise display and location on the selling floor. Store managers receive
detailed store plans that dictate fixture and merchandise placement to ensure
uniform execution of the merchandising strategy at the store level.
Standardization of store design and merchandise presentation also creates a cost
savings in store furnishings, maximizes usage and productivity of selling space
and allows the Company to efficiently open new stores.
Trademarks.
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The Abercrombie & Fitch, abercrombie and Hollister Co. trademarks, and certain
other trademarks, either have been registered, or are the subject of pending
trademark applications with the United States Patent and Trademark Office and
with registries of many foreign countries. The Company believes that its
products are identified by its trademarks and, thus, its trademarks are of
significant value. Each registered trademark has a duration of 20 years and is
subject to an indefinite number of renewals for a like period upon appropriate
application. The Company intends to continue the use of each of its trademarks
and to renew each of its registered trademarks.
Other Information.
-----------------
Additional information about the Company's business, including its revenues and
profits for the last three years, plus gross square footage is set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in ITEM 7, which information is incorporated herein by
reference.
Competition.
The sale of apparel and personal care products through retail stores, catalogues
and e-commerce is a highly competitive business with numerous competitors,
including individual and chain fashion specialty stores and department stores.
Fashion, price, service, selection and quality are the principal competitive
factors in retail store sales and on-line sales.
The Company is unable to estimate the number of competitors or its relative
competitive position due to the large number of companies selling apparel and
personal care products through retail stores, catalogues and e-commerce.
Associate Relations.
On February 2, 2002, the Company employed approximately 16,700 associates (none
of whom were party to a collective bargaining agreement), approximately 13,700
of whom were part-time. In addition, temporary associates are hired during peak
periods, such as the Holiday season.
4
The Company believes its relationship with associates is good.
ITEM 2. PROPERTIES.
At the start of fiscal year 2001, the Company's headquarters and support
functions (consisting of office, distribution and shipping facilities) were
located in Reynoldsburg, Ohio and were owned by The Limited, Inc. and leased by
the Company under leases expiring in 2001. The Company began operating out of
its new distribution and shipping facilities in February 2001 and moved to its
new home office in April 2001. The new headquarters and support functions are
located in New Albany, Ohio.
All of the retail stores operated by the Company are located in leased
facilities, primarily in shopping centers throughout the continental United
States. The leases expire at various dates principally between 2002 and 2014.
Typically, when space is leased for a retail store in a shopping center, all
improvements, including interior walls, floors, ceilings, fixtures and
decorations, are supplied by the tenant. In certain cases, the landlord of the
property may provide a construction allowance to fund all or a portion of the
cost of improvements. The cost of improvements varies widely, depending on the
size and location of the store. Rental terms for new locations usually include a
fixed minimum rent plus a percentage of sales in excess of a specified amount.
Certain operating costs such as common area maintenance, utilities, insurance
and taxes are typically paid by tenants.
As of February 2, 2002, the Company's 491 stores were located in 48 states and
the District of Columbia as follows:
Alabama - 6 Hawaii - 1 Massachusetts - 18 New Mexico - 2 South Dakota - 1
Arizona - 11 Idaho - 1 Michigan - 16 New York - 27 Tennessee - 14
Arkansas - 4 Illinois - 27 Minnesota - 9 North Carolina - 15 Texas - 35
California - 33 Indiana - 19 Mississippi - 4 North Dakota - 1 Utah - 4
Colorado - 10 Iowa - 3 Missouri - 13 Ohio - 29 Vermont - 2
Connecticut - 10 Kansas - 5 Montana - 2 Oklahoma - 8 Virginia - 13
Delaware - 1 Kentucky - 7 Nebraska - 2 Oregon - 3 Washington - 13
District of Columbia - 2 Louisiana - 9 Nevada - 1 Pennsylvania - 23 West Virginia - 1
Florida - 19 Maine - 2 New Hampshire - 3 Rhode Island - 3 Wisconsin - 11
Georgia - 21 Maryland - 7 New Jersey - 16 South Carolina - 4
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in lawsuits arising in the ordinary course of
business.
On January 13, 1999, a complaint was filed against many national retailers in
the United States District Court for the Central District of California. The
complaint (1) purported to be filed on behalf of a class of unnamed garment
workers, (2) related to labor practices allegedly employed on the island of
Saipan, Commonwealth of the Northern Mariana Islands, by apparel manufacturers
unrelated to the Company, some of which have sold goods to the Company, and (3)
sought injunctive, unspecified monetary and other relief. On September 29, 1999,
the action was transferred to the United States District Court for the District
of Hawaii. Thereafter, the plaintiffs moved for leave to amend their complaint
to add A&F and others as additional defendants. That motion was granted and, on
April 28, 2000, an amended complaint was filed which adds A&F and others as
defendants, but does not otherwise significantly alter either the claims alleged
or the relief sought by the
5
plaintiffs. A&F moved to dismiss the amended complaint. Certain of the other
defendants also moved to transfer the action to Saipan. On June 23, 2000, the
District Court of Hawaii ordered the case to be transferred to the United States
District Court for the District of the Northern Mariana Islands. Plaintiffs
filed a Petition for Writ of Mandamus challenging the transfer and on March 22,
2001, the Ninth Circuit Court of Appeals issued an order denying the Petition
for Writ of Mandamus, thus allowing the case to be transferred to the United
States District Court for the Northern Mariana Islands. The motion to dismiss
was denied in part and granted in part on November 26, 2001. As to the partial
granting of the motion, the Court also granted the plaintiffs leave to amend to
cure any pleading defects in a second amended complaint. Plaintiffs filed their
motion for class certification on December 13, 2001 and their second amended
complaint on December 17, 2001. The motion for class certification was heard on
February 14, 2002. The motion for preliminary approval of the other defendants'
settlement was also heard the same date.
On June 2, 1998, A&F filed suit against American Eagle Outfitters, Inc. alleging
an intentional and systematic copying of the "Abercrombie & Fitch" brand, its
images and business practices, including the design and look of the Company's
merchandise, marketing and catalogue/magazine. The lawsuit, filed in Federal
District Court in Columbus, Ohio, sought to enjoin American Eagle's practices,
recover lost profits and obtain punitive damages. In July 1999, the District
Court granted a summary judgment dismissing the lawsuit against American Eagle.
A&F filed a motion for reconsideration of the District Court judgment which was
subsequently denied by court order dated September 10, 1999. In October 1999,
A&F filed an appeal in the United States Court of Appeals for the Sixth Circuit
(the "Sixth Circuit") regarding the decisions of the District Court on the
motions for summary judgment and reconsideration. The appeal was fully briefed
and oral arguments were held before the Sixth Circuit on December 7, 2000. On
February 15, 2002, the Sixth Circuit affirmed the decision of the District Court
granting summary judgment in favor of American Eagle.
A&F is aware of 20 actions that have been filed against A&F and certain of its
officers and directors on behalf of a purported, but as yet uncertified, class
of shareholders who purchased A&F's Class A Common Stock between October 8, 1999
and October 13, 1999. These 20 actions have been filed in the United States
District Courts for the Southern District of New York and the Southern District
of Ohio, Eastern Division alleging violations of the federal securities laws and
seeking unspecified damages. On April 12, 2000, the Judicial Panel on
Multidistrict Litigation issued a Transfer Order transferring the 20 pending
actions to the Southern District of New York for consolidated pretrial
proceedings under the caption In re Abercrombie & Fitch Securities Litigation.
On November 16, 2000, the Court signed an Order appointing the Hicks Group, a
group of seven unrelated investors in A&F's securities, as lead plaintiff, and
appointing lead counsel in the consolidated action. On December 14, 2000,
plaintiffs filed a Consolidated Amended Class Action Complaint (the "Amended
Complaint") in which they did not name as defendants Lazard Freres & Co. and
Todd Slater, who had formerly been named as defendants in certain of the 20
complaints. A&F and other defendants filed motions to dismiss the Amended
Complaint on February 14, 2001.
A&F believes that the actions against it are without merit and intends to defend
vigorously against them. However, A&F does not believe it is feasible to predict
the outcome of these proceedings. The timing of the final resolution of these
proceedings is also uncertain.
In addition, the United States Securities and Exchange Commission initiated a
formal investigation regarding trading in the securities of A&F and the
disclosure of sales forecasts in October 1999, and the Ohio Division of
Securities requested information from A&F regarding these same matters. A&F has
cooperated in the investigations.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information regarding the executive officers of A&F
as of March 28, 2002.
Michael S. Jeffries, 57, has been Chairman of the Board and Chief Executive
Officer since May 1998. From February 1992 to May 1998, Mr. Jeffries held the
position of President and Chief Executive Officer. Mr. Jeffries has also been a
director of A&F since 1996.
Seth R. Johnson, 48, has been Executive Vice President-Chief Operating Officer
since February 2000. Prior thereto, Mr. Johnson had been Vice President-Chief
Financial Officer since 1992. Mr. Johnson has been a director of A&F since 1998.
Diane Chang, 46, has been Senior Vice President-Sourcing since February 2000.
Prior thereto, she held the position of Vice President-Sourcing from May 1998 to
February 2000 and for six and one-half years prior thereto, Ms. Chang held the
position of Senior Vice President - Manufacturing at J. Crew, Inc.
Raymond C. Attanasio, 50, has been Senior Vice President, General Merchandise
Manager for Abercrombie & Fitch Boys' since December 2001. Prior thereto, Mr.
Attanasio was Senior Vice President, General Merchandise Manager for Abercrombie
& Fitch Men's and Boys' from January 2001 to December 2001, Senior Vice
President-Human Resources from February 2000 to January 2001 and Vice
President-Human Resources from August 1998 to February 2000. Mr. Attanasio also
held the position of Vice President-General Merchandising Manager-Men's at J.
Crew, Inc. from May 1991 to June 1998.
Leslee K. O'Neill, 41, has been Senior Vice President-Planning & Allocation
since February 2000. Prior thereto, Ms. O'Neill held the position of Vice
President-Planning & Allocation from February 1994 to February 2000.
Wesley S. McDonald, 39, has been Vice President-Chief Financial Officer since
June 2000. Prior thereto, Mr. McDonald held a variety of positions in finance
and distribution at Target Corporation from 1988 to May 2000. His last position
at Target Corporation was Director-Information Systems Finance and
Administration.
The executive officers serve at the pleasure of the Board of Directors of A&F
and in the case of Messrs. Jeffries and Johnson, pursuant to employment
agreements.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following is a summary of A&F's sales prices as reported on the New York
Stock Exchange ("ANF") for the 2001 and 2000 fiscal years:
Sales Price
-----------------------------
High Low
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2001 Fiscal Year
----------------------
4th Quarter $30.40 $18.06
3rd Quarter $38.50 $16.21
2nd Quarter $47.50 $33.10
1st Quarter $37.90 $26.28
2000 Fiscal Year
----------------------
4th Quarter $31.31 $14.75
3rd Quarter $26.56 $15.31
2nd Quarter $16.69 $ 8.00
1st Quarter $24.50 $10.06
A&F has not paid dividends on its shares of Class A Common Stock in the past and
does not presently plan to pay dividends on the shares. It is presently
anticipated that earnings will be retained and reinvested to support the growth
of the Company's business. The payment of any future dividends on shares will be
determined by the A&F Board of Directors in light of conditions then existing,
including earnings, financial condition and capital requirements, restrictions
in financing agreements, business conditions and other factors.
On February 2, 2002, there were approximately 5,000 shareholders of record.
However, when including active associates who participate in A&F's stock
purchase plan, associates who own shares through A&F-sponsored retirement plans
and others holding shares in broker accounts under street name, A&F estimates
the shareholder base at approximately 65,000.
8
ITEM 6. SELECTED FINANCIAL DATA.
ABERCROMBIE & FITCH
FINANCIAL SUMMARY
(Thousands except per share and per square foot amounts, ratios and store and
associate data)
Fiscal Year 2001 2000* 1999 1998 1997 1996 1995*
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SUMMARY OF OPERATIONS
Net Sales $1,364,853 $1,237,604 $1,030,858 $ 805,180 $ 513,109 $ 329,800 $ 232,415
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Gross Income $ 558,034 $ 509,375 $ 450,383 $ 331,354 $ 191,890 $ 118,194 $ 76,550
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Operating Income $ 271,458 $ 253,652 $ 242,064 $ 166,958 $ 84,125 $ 45,993 $ 23,798
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Operating Income as a
Percentage of Net Sales 19.9% 20.5% 23.5% 20.7% 16.4% 13.9% 10.2%
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Net Income $ 168,672 $ 158,133 $ 149,604 $ 102,062 $ 48,322 $ 24,674 $ 14,298
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Net Income as a
Percentage of Net Sales 12.4% 12.8% 14.5% 12.7% 9.4% 7.5% 6.2%
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PER SHARE RESULTS (1)
Net Income Per Basic Share $ 1.70 $ 1.58 $ 1.45 $ .99 $ .47 $ .27 $ .17
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Net Income Per Diluted Share $ 1.65 $ 1.55 $ 1.39 $ .96 $ .47 $ .27 $ .17
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Weighted Average Diluted Shares
Outstanding 102,524 102,156 107,641 106,202 102,956 91,520 86,000
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OTHER FINANCIAL INFORMATION
Total Assets $ 770,546 $ 589,577 $ 458,166 $ 319,161 $ 183,238 $ 105,761 $ 87,693
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Return on Average Assets 25% 30% 38% 41% 33% 26% 20%
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Capital Expenditures $ 126,515 $ 153,481 $ 73,377 $ 37,483 $ 29,486 $ 24,323 $ 24,526
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Long-Term Debt - - - - $ 50,000 $ 50,000 -
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Shareholders' Equity (Deficit) $ 595,434 $ 422,700 $ 311,094 $ 186,105 $ 58,775 $ 11,238 $ (22,622)
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Comparable Store Sales Increase
(Decrease) (9%) (7%) 10% 35% 21% 13% 5%
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Retail Sales Per Average Gross Square
Foot $ 401 $ 474 $ 505 $ 476 $ 370 $ 301 $ 286
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STORES AND ASSOCIATES AT END OF YEAR
Total Number of Stores Open 491 354 250 196 156 127 100
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Gross Square Feet 3,673,000 2,849,000 2,174,000 1,791,000 1,522,000 1,229,000 962,000
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Number of Associates 16,700 13,900 11,300 9,500 6,700 4,900 3,000
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*Fifty-three week fiscal year.
(1) Per share amounts have been restated to reflect the two-for-one stock split
on A&F's Class A Common Stock, distributed on June 15, 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the fourth quarter of the 2001 fiscal year were $466.6 million, an
increase of 6% from $439.4 million for the fourth quarter a year ago. Operating
income was $128.6 million compared to $124.1 million last year. A&F recorded its
38th consecutive quarter of record earnings as net income increased to $79.2
million in the fourth quarter of 2001 as compared to $77.2 million last year.
Earnings per diluted share were $.78, up 3% from $.76 last year.
Net sales for the 2001 fiscal year increased 10% to $1.36 billion from $1.24
billion last year. Operating income for the year increased 7% to $271.5 million
from $253.7 million in 2000. Net income per diluted share was $1.65 compared to
$1.55 a year ago, an increase of 6%.
The following data represents the Company's consolidated statements of income
for the last 3 fiscal years expressed as a percentage of net sales:
2001 2000 1999
---- ---- ----
NET SALES 100.0% 100.0% 100.0%
Cost of Goods Sold, Occupancy and Buying
Costs 59.1 58.8 56.3
---- ---- ----
GROSS INCOME 40.9 41.2 43.7
General, Administrative and Store Operating
Expenses 21.0 20.7 20.2
---- ---- ----
OPERATING INCOME 19.9 20.5 23.5
Interest Income, Net (0.4) (0.6) (0.7)
----- ----- -----
INCOME BEFORE INCOME TAXES 20.3 21.1 24.2
Provision for Income Taxes 7.9 8.3 9.7
--- --- ---
NET INCOME 12.4 12.8 14.5
==== ==== ====
10
FINANCIAL SUMMARY
The following summarized financial data compares the 2001 fiscal year to the
comparable periods for 2000 and 1999:
% Change
-------------------------------
2001 2000 1999 2001-2000 2000-1999
---------------- --------------- ---------------- -------------- ----------------
Net sales (millions) $1,364.9 $1,237.6 $1,030.9 10% 20%
Increase (decrease) in comparable
store sales (9%) (7%) 10%
Retail sales increase attributable
to new and remodeled stores,
magazine, catalogue and Web sites 19% 27% 18%
Retail sales per average gross
square foot $ 401 $ 474 $ 505 (15%) (6%)
Retail sales per average store
(thousands) $ 3,095 $ 3,944 $ 4,487 (22%) (12%)
Average store size at year-end
(gross square feet) 7,480 8,047 8,695 (7%) (7%)
Gross square feet at year-end
(thousands) 3,673 2,849 2,174 29% 31%
Number of stores:
Beginning of year 354 250 196
Opened 138 104 54
Closed (1) -- --
------- ------- -------
End of year 491 354 250
======= ======= =======
NET SALES
Fourth quarter 2001 net sales increased 6% to $466.6 million from $439.4 million
in 2000. The increase was due to the addition of new stores offset by a 9%
decline in comparable store sales as compared with last year's 13 week period
ended February 3, 2001. The fourth quarter of 2001 was highly promotional and a
number of promotional strategies, including direct mail, bouncebacks and
selective price point reductions, were employed to improve the sales trend from
the previous quarter. Although total Company comparable store sales remained
negative, the addition of new and noncomparable store sales resulted in an
addition to net sales of $63.6 million. The decrease in comparable store sales
amounted to a $35.6 million decrease in net sales and was primarily due to
continued weakness in the men's business. Comparable store sales were roughly
flat in the women's business for the quarter. Stronger performing categories
were in graphic knits, denim, skirts and women's accessories. Men's comparable
store sales decreased in the mid-teens for the quarter; however, denim and knits
performed well. The kids' business followed a similar trend to the adult
business with girls' comparable store sales much stronger than boys'. The adult
e-commerce business continued to become a larger part of the business as
Internet sales grew by over 27% during the fourth quarter compared to last year.
The Company's catalogue, the A&F Quarterly (a catalogue/magazine) and the
Company's Web sites accounted for 4.5% of net sales in the fourth quarter of
2001 as compared to 5.0% in 2000. The decrease is primarily due to the Company
not producing an A&F Quarterly in the fourth quarter of 2001.
11
Fourth quarter 2000 net sales increased 21% to $439.4 million from $363.7
million in 1999. The increase was due to the addition of new stores offset by a
9% decline in comparable store sales. The addition of new and noncomparable
store sales resulted in an addition to net sales of $98.4 million. The decline
in comparable store sales, based on a 14 week quarter for both 2000 and 1999,
totaled $30.9 million and was primarily due to comparable store sales decreases
in the men's graphic tees and pants departments due to the difficulty in
anniversarying paratroop pants. Comparable store sales were positive in the
women's business for the quarter based on strong increases in the sweaters,
denim and outerwear departments. The Company's catalogue, the A&F Quarterly and
the Company's Web sites accounted for 5.0% of net sales in the fourth quarter of
2000 as compared to 3.8% in 1999.
Net sales for the 2001 fiscal year increased 10% to $1.36 billion from $1.24
billion in 2000. The sales increase was attributable to the net addition of 137
stores offset by a 9% comparable store sales decrease. The addition of new and
noncomparable store sales resulted in an addition to net sales of $215.4
million. The decline in comparable store sales, as compared with last year's 52
week period ended February 3, 2001, amounted to $98.9 million and was mostly due
to continued weakness in the men's business. Men's comparable store sales
decreased in the high-teens for the year; however, denim, knits and gymwear
performed well. Comparable store sales were up in the mid-single digits in the
women's business for the year. The strongest performing categories were in
denim, knits, skirts, gymwear and women's accessories. Overall, the women's
business has increased to become a larger percentage of the overall business and
the trend is expected to continue. In fiscal 2001, the women's business
accounted for 55% of the total adult business. The kids' business had a mid-teen
decline in comparable store sales for the year with girls' performing better
than boys'. The Company's catalogue, the A&F Quarterly and the Company's Web
sites represented 4.2% of 2001 net sales compared to 3.8% last year. Operating
improvements in e-commerce fulfillment helped reduce the number of backorders,
increasing sales by improving in-stocks. The Company produced only three A&F
Quarterly's in fiscal 2001 versus four in 2000, dampening the increase over last
year in the direct business.
Net sales for the 2000 fiscal year increased 20% to $1.24 billion from $1.03
billion in 1999. The sales increase was attributable to the addition of 104
stores offset by a 7% comparable store sales decrease. The addition of new and
noncomparable store sales resulted in an increase to net sales of $255.4
million. The decline in comparable store sales, based on a 53 week fiscal year
for both 2000 and 1999, totaled $64.9 million and was across both the men's and
women's businesses. During the year, the assortment in each business was
repositioned to be more balanced and less focused on graphics and included items
at key opening price points. The Company's catalogue, the A&F Quarterly and the
Company's Web sites represented 3.8% of 2000 net sales compared to 2.9% last
year.
GROSS INCOME
The gross income rate (gross income divided by net sales) during the fourth
quarter of 2001 was 44.7%, down from 46.2% for the same period in 2000. The
decrease was primarily due to an increase in the markdown rate, attributable to
the expected higher level of promotional business. The planned promotional
strategies for the quarter resulted in selling at lower average retail prices.
For the quarter, average unit retail prices decreased in the low-double digits.
Additionally, buying and occupancy costs, expressed as a percentage of net
sales, increased as a result of the inability to leverage fixed expenses with
lower sales volume per average store. These decreases were partially offset by
higher initial markup (IMU) and tight control of inventory. The increase in IMU
was a result of continued improvement in the sourcing of merchandise,
particularly in the women's business. The tight control of inventory resulted in
inventories being down 30% per gross square foot at year-end as compared with
last year. These low levels of inventory provided downside profit protection as
season-end merchandise was significantly lower on a per square foot basis as
compared to the same period in 2000.
12
For the fourth quarter of 2000, gross income, expressed as a percentage of net
sales, decreased to 46.2% from 50.9% for the same period in 1999. The decrease
was attributable to lower merchandise margins (representing gross income before
the deduction of buying and occupancy costs) due to lower IMU and higher
markdowns. The IMU was affected by both a change in sales mix and the planned
strategy of offering lower opening price points in key product classifications.
For the year, the gross income rate decreased to 40.9% in 2001 from 41.2% in
2000. The decrease was primarily attributable to higher buying and occupancy
costs. Buying and occupancy costs increased, as a percentage of net sales, due
to the deleveraging created by the decrease in comparable store sales. The
decrease was almost entirely offset by higher IMU as continued improvements in
sourcing merchandise have reduced costs. The other factors in protecting gross
income were tight control of inventory, which resulted in disciplined markdown
control, and lower inventory shrinkage as a result of the Company's continued
emphasis on in-store operational controls.
For the year, the gross income rate decreased to 41.2% in 2000 from 43.7% in
1999. The decrease was attributable to lower merchandise margins, primarily due
to lower IMU caused by both a change in sales mix and the planned strategy of
offering lower opening price points in key product classifications.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
The fourth quarter general, administrative and store operating expenses rate
(general, administrative and store operating expenses divided by net sales)
improved to 17.1% as compared to 17.9% in the fourth quarter of 2000. The
Company continues to tightly control expenses in both the stores and the home
office. These cost controls include limiting headcount additions, reducing home
office travel and store payroll hours, and decreasing relocation and recruiting
expenses. Savings were also recognized in the new distribution center and in the
e-commerce business. During the fourth quarter, productivity in the distribution
center, as measured in units processed per labor hour, was over 50% higher than
last year. In the e-commerce business, fulfillment costs per order were down by
over 10%. Last year's general, administrative and store operating expenses were
unfavorably affected by one-time expenses related to the move to the new
distribution center and home office and the inclusion of a 14th week in the
fourth quarter of 2000. These savings in general, administrative and store
operating expenses were partially offset by marketing costs incurred as part of
the promotional strategy implemented during the fourth quarter of 2001.
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 17.9% in the fourth quarter of 2000 and 16.4% in the
comparable period in 1999. The increase in the percentage was primarily due to
the inability to leverage fixed expenses as a result of the decrease in
comparable store sales. The increase was also due to planned one-time expenses
related to the Company's move to a new home office and distribution center. The
increases were offset by tightly controlled headcount additions, travel
expenses, store payroll hours, outside services and compensation expense related
to management bonuses.
The general, administrative and store operating expenses rate for the year was
21.0%, 20.7% and 20.2% in 2001, 2000 and 1999, respectively. The rate increases
in 2001 and 2000 were primarily due to the inability to leverage fixed expenses
as a result of the decrease in sales volume per average store. The increases
were partially offset by the Company's continued focus on discretionary expense
controls.
13
OPERATING INCOME
The operating income rate (operating income divided by net sales) was 27.6% and
19.9% for the fourth quarter and fiscal year of 2001, respectively, compared to
28.2% and 20.5% for the same periods in 2000. The decline in operating income
rate in these periods was primarily due to lower gross income percentages
resulting from planned promotional strategies executed in the fourth quarter.
Lower general, administrative and store operating expenses, expressed as a
percentage of net sales, partially offset the lower gross income rate in the
fourth quarter. For the year, higher general, administrative and store operating
expenses, expressed as a percentage of net sales, added to the decrease in
operating income rate.
Operating income, expressed as a percentage of net sales, was 28.2% and 20.5%
for the fourth quarter and fiscal year of 2000, respectively, compared to 34.5%
and 23.5% for the same periods in 1999. The decline in operating income as a
percentage of net sales in these periods was primarily a result of lower gross
income percentages. Higher general, administrative and store operating expenses,
expressed as a percentage of net sales, also added to the decrease in the
operating income percentage of net sales.
INTEREST INCOME/EXPENSE
Net interest income was $1.2 million in the fourth quarter of 2001 and $5.1
million for the 2001 fiscal year compared with net interest income of $2.5
million and $7.8 million for the corresponding periods last year. The decrease
in net interest income for both the quarter and the year was due to the decline
in interest rates. Net interest income in 2001 and 2000 was primarily from
short-term investments.
Net interest income was $2.5 million in the fourth quarter of 2000 and $7.8
million for all of 2000 compared with net interest income of $2.5 million and
$7.3 million for the corresponding periods in 1999. The increase in net interest
income for the year was due to an increase in interest rates, which was
partially offset by lower cash and equivalents balances. Net interest income in
2000 and 1999 was primarily from short-term investments.
FINANCIAL CONDITION
The Company's continuing growth in net income affords it financial strength and
flexibility. A more detailed discussion of liquidity, capital resources and
capital requirements follows.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (thousands):
2001 2000 1999
---------------- --------------- ----------------
Working capital $241,616 $146,939 $162,351
================ =============== ================
Capitalization
Shareholders' equity $595,434 $422,700 $311,094
================ =============== ================
14
The Company considers the following to be measures of liquidity and capital
resources:
2001 2000 1999
-------- -------- --------
Current ratio (current assets divided by current 2.48 1.94 2.18
liabilities)
Cash flow to capital investment (net cash
provided by operating activities divided
by capital expenditures) 184% 99% 208%
Free cash flow (net cash provided by operating
activities less capital expenditures) (in thousands) $106,687 ($ 2,292)$ 79,374
======== ======== ========
Net cash provided by operating activities, the Company's primary resource of
liquidity, totaled $233.2 million, $151.2 million and $152.8 million for 2001,
2000 and 1999, respectively. Cash was provided primarily by current year net
income adjusted for depreciation and amortization. Additionally in 2001, cash
was provided from increases in deferred income tax liabilities and accrued
expenses and decreases in inventories. Deferred income tax liabilities increased
in the current year as a result of increasing differences in tax and book
depreciation methods due to the number of stores opened in the past few years.
Accrued expenses, including unredeemed gift card revenue and catalogue and
advertising costs, increased in the current year as a result of the continued
growth and development of the business. Inventories decreased $12.1 million
during 2001 due to the tight management of inventory, which resulted in a 30%
decrease in inventory per gross square foot at year-end. Uses of cash were
directly related to store growth and primarily consisted of increases in
capitalized store supplies, construction allowance receivables and prepaid rent
related to stores (classified in other assets).
The Company's operations are seasonal in nature and typically peak during the
back-to-school and Christmas selling periods. Accordingly, cash requirements for
inventory expenditures are highest during these periods.
Cash outflows for investing activities were primarily for capital expenditures
(see the discussion in the "Capital Expenditures" section below) related to new
stores (net of construction allowances) and the construction costs of the new
office and distribution center. Investing activities also included purchases and
maturities of marketable securities. As of February 2, 2002, the Company held
marketable securities with original maturities of three to five months.
Financing activities during 2001, 2000 and 1999 consisted primarily of the
repurchase of 600,000 shares, 3,550,000 shares and 1,510,000 shares,
respectively, of A&F's Class A Common Stock pursuant to previously authorized
stock repurchase programs. As of February 2, 2002, A&F is authorized to
repurchase up to an additional 1,850,000 shares under the current repurchase
program. Financing activities also consisted of stock option exercises and
restricted stock issuances.
The Company has available a $150 million syndicated unsecured credit agreement.
No amounts are currently outstanding. Additional details regarding the credit
agreement can be found in the Notes to Consolidated Financial Statements (Note
8).
The Company also has a $75 million facility for trade letters of credit. The
trade letters of credit are issued to numerous overseas suppliers and serve as
guarantees to the suppliers. As of February 2, 2002, $39.7 million was
outstanding under this trade letter of credit facility.
15
The Company has standby letters of credit in the amount of $8.5 million. The
beneficiaries, two of the Company's suppliers, have the right to draw upon the
standby letters of credit if the Company has authorized or filed a voluntary
petition in bankruptcy. To date, the beneficiaries have not drawn upon the
standby letters of credit.
As of February 2, 2002, the Company was committed to noncancelable leases with
remaining terms of one to fourteen years. These commitments include store leases
with initial terms ranging primarily from ten to fifteen years. A summary of
minimum rent commitments under noncancelable leases follows (thousands):
Payments Due by Period
----------------------
Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
----- ---------------- --------- --------- -------------
$822,920 $104,085 $211,270 $198,459 $309,106
======== ======== ======== ======== ========
STORES AND GROSS SQUARE FEET
Store count and gross square footage by division were as follows:
February 2, 2002 February 3, 2001
---------------- ----------------
Number of Gross Square Number of Gross Square
Stores Feet (thousands) Stores Feet (thousands)
------ ---------------- ------ ----------------
Abercrombie & Fitch 309 2,798 265 2,443
abercrombie 148 662 84 375
Hollister Co. 34 213 5 31
------- --------------- -------- ----------------
Total 491 3,673 354 2,849
======= =============== ======== ================
CAPITAL EXPENDITURES
Capital expenditures, net of construction allowances, totaled $126.5 million,
$153.5 million and $73.4 million for 2001, 2000 and 1999, respectively.
Additionally, the noncash accrual for construction in progress totaled $1.0
million, $9.5 million and $10.4 million in 2001, 2000 and 1999, respectively.
Capital expenditures related to the construction of a new office and
distribution center, including the noncash accrual for construction in progress,
accounted for approximately $17 million, $92 million and $27 million of total
capital expenditures in 2001, 2000 and 1999, respectively. The office and
distribution center were completed in 2001. The balance of capital expenditures
related primarily to new stores.
The Company anticipates spending $105 to $115 million in 2002 for capital
expenditures, of which $85 to $95 million will be for new stores construction.
The balance of expenditures primarily relates to improving the in-store
information technology structure and improvements in the distribution center.
The Company intends to add approximately 815,000 gross square feet in 2002,
which will represent a 22% increase over year-end 2001. It is anticipated the
increase will result from the addition of approximately 40 new Abercrombie &
Fitch stores, 30 abercrombie stores and 60 Hollister Co. stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores opened in 2002 will
approximate $600,000 per store, after giving effect to landlord allowances. In
addition, inventory purchases are expected to average approximately $300,000 per
store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for abercrombie stores opened in 2002 will approximate
$500,000 per store, after giving effect to landlord allowances. In addition,
inventory purchases are expected to average approximately $150,000 per store.
16
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Hollister Co. stores opened in 2002 will approximate
$750,000 per store, after giving effect to landlord allowances. However, the
Company is in the early stages of developing Hollister Co. and, as a result,
current average costs for leasehold improvements and furniture and fixtures are
not representative of future costs. In addition, inventory purchases are
expected to average approximately $250,000 per store.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has available a $150
million credit agreement to support operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Since actual results may
differ from those estimates, the Company revises its estimates and assumptions
as new information becomes available.
The Company's significant accounting policies can be found in the Notes to
Consolidated Financial Statements (Note 2). The Company believes that the
following policies are most critical to the portrayal of the Company's financial
condition and results of operations.
Revenue Recognition - The Company recognizes retail sales at the time the
customer takes possession of the merchandise and purchases are paid for,
primarily with either cash or credit card. Catalogue and e-commerce sales are
recorded upon shipment of merchandise. Amounts relating to shipping and handling
billed to customers in a sale transaction are classified as revenue and the
related costs are classified as cost of goods sold. Employee discounts are
classified as a reduction of revenue. The Company reserves for sales returns
through estimates based on historical experience and various other assumptions
that management believes to be reasonable.
Inventory Valuation - Inventories are principally valued at the lower of average
cost or market, on a first-in first-out basis, utilizing the retail method. The
retail method of inventory valuation is an averaging technique applied to
different categories of inventory. At A&F, the averaging is determined at the
stock keeping unit (SKU) level by averaging all costs for each SKU. An initial
markup is applied to inventory at cost in order to establish a cost-to-retail
ratio. Permanent markdowns, when taken, reduce both the retail and cost
components of inventory on hand so as to maintain the already established
cost-to-retail relationship. The use of the retail method and the taking of
markdowns effectively values inventory at the lower of cost or market. The
Company further reduces inventory by recording an additional markdown reserve
using the retail carrying value of inventory from the season just passed.
Markdowns on this carryover inventory represent the future anticipated selling
prices. Additionally, as part of inventory valuation, an inventory shrinkage
estimate is made each period that reduces the value of inventory for lost or
stolen items. Inherent in the retail method calculation are certain significant
judgments and estimates including, among others, initial markup, markdowns and
shrinkage, which could significantly impact the ending inventory valuation at
cost as well as resulting gross margins. Management believes that this inventory
valuation method provides a conservative inventory valuation as it preserves the
cost-to-retail relationship in inventory.
Property and Equipment - Depreciation and amortization of property and equipment
are computed for financial reporting purposes on a straight-line basis, using
service lives ranging principally from 10-15 years for
17
leasehold improvements and 3-10 years for other property and equipment.
Beneficial leaseholds represent the present value of the excess of fair market
rent over contractual rent of existing stores at the 1988 purchase of the
Abercrombie & Fitch business by The Limited, Inc. ("The Limited") and are being
amortized over the lives of the related leases. The cost of assets sold or
retired and the related accumulated depreciation or amortization are removed
from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments that extend service lives are capitalized. Long-lived assets are
reviewed at the store level at least annually for impairment or whenever events
or changes in circumstances indicate that full recoverability is questionable.
Factors used in the evaluation include, but are not limited to, management's
plans for future operations, recent operating results and projected cash flows.
Income Taxes - Income taxes are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method. Deferred tax assets and
liabilities are recognized based on the difference between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Inherent in the measurement of deferred balances are
certain judgments and interpretations of enacted tax law and published guidance
with respect to applicability to the Company's operations. Significant examples
of this concept include capitalization policies for various tangible and
intangible costs, income and expense recognition and inventory valuation
methods. No valuation allowance has been provided for deferred tax assets
because management believes the full amount of the net deferred tax assets will
be realized in the future. The effective tax rate utilized by the Company
reflects management's judgment of the expected tax liabilities within the
various taxing jurisdictions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets." The standard is effective starting
with fiscal years beginning after December 15, 2001 (February 3, 2002 for the
Company). SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. It also addresses how goodwill and
other intangible assets should be accounted for after they have been initially
recognized in the financial statements. Management anticipates that the adoption
of SFAS No. 142 will not have an impact on the Company's results of operations
or its financial position.
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be effective
for fiscal years beginning after June 15, 2002 (February 2, 2003 for the
Company). The standard requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is a cost by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related obligation for its recorded
amount or the entity incurs a gain or loss upon settlement. Because costs
associated with exiting leased properties at the end of lease terms are minimal,
management anticipates that the adoption of SFAS No. 143 will not have a
significant effect on the Company's results of operations or its financial
position.
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," will
be effective for fiscal years beginning after December 15, 2001 (February 3,
2002 for the Company), and interim periods within those fiscal years. The
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Management anticipates that the adoption of SFAS
No. 144 will not have an impact on the Company's results of operations or its
financial position.
18
RELATIONSHIP WITH THE LIMITED
Effective May 19, 1998, The Limited completed a tax-free exchange offer to
establish A&F as an independent company. Subsequent to the exchange offer (see
Note 1 of the Notes to Consolidated Financial Statements), A&F and The Limited
entered into various service agreements for terms ranging from one to three
years. A&F hired associates with the appropriate expertise or contracted with
outside parties to replace those services which expired in May 1999. Service
agreements were also entered into for the continued use by the Company of its
distribution and home office space and transportation and logistic services. The
distribution space agreement terminated in April 2001. The home office space and
transportation and logistic services agreements expired in May 2001. The cost of
these services generally was equal to The Limited's cost in providing the
relevant services plus 5% of such costs.
Costs incurred to replace the services provided by The Limited did not have a
material adverse impact on the Company's financial condition.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on its results of operations and
financial condition have been minor.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
A&F cautions that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Form 10-K or
made by management of A&F involve risks and uncertainties and are subject to
change based on various important factors. The following factors, among others,
in some cases have affected and in the future could affect the Company's
financial performance and actual results and could cause actual results for 2002
and beyond to differ materially from those expressed or implied in any of the
forward-looking statements included in this Form 10-K or otherwise made by
management: changes in consumer spending patterns and consumer preferences; the
effects of political and economic events and conditions domestically and in
foreign jurisdictions in which the Company operates, including, but not limited
to, acts of terrorism or war; the impact of competition and pricing; changes in
weather patterns; political stability; currency and exchange risks and changes
in existing or potential duties, tariffs or quotas; availability of suitable
store locations at appropriate terms; ability to develop new merchandise; and
ability to hire, train and retain associates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company maintains its cash and equivalents in financial instruments with
original maturities of three months or less. The Company also holds marketable
securities with original maturities of three to five months. These financial
instruments bear interest at fixed rates and are subject to interest rate risk
through lost income should interest rates increase. The Company does not enter
into financial instruments for trading purposes.
As of February 2, 2002, the Company has no long-term debt outstanding. Future
borrowings would bear interest at negotiated rates and would be subject to
interest rate risk. The Company does not believe that a hypothetical adverse
change of 10% in interest rates would have a material affect on the Company's
financial condition.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ABERCROMBIE & FITCH
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
2001 2000 1999
------------- ------------- -------------
NET SALES $1,364,853 $1,237,604 $1,030,858
Cost of Goods Sold, Occupancy and Buying Costs 806,819 728,229 580,475
------------- ------------- -------------
GROSS INCOME 558,034 509,375 450,383
General, Administrative and Store Operating Expenses 286,576 255,723 208,319
------------- ------------- -------------
OPERATING INCOME 271,458 253,652 242,064
Interest Income, Net (5,064) (7,801) (7,270)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 276,522 261,453 249,334
Provision for Income Taxes 107,850 103,320 99,730
------------- ------------- -------------
NET INCOME $ 168,672 $ 158,133 $ 149,604
============= ============= =============
NET INCOME PER SHARE:
BASIC $ 1.70 $ 1.58 $ 1.45
============= ============= =============
DILUTED $ 1.65 $ 1.55 $ 1.39
============= ============= =============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
20
ABERCROMBIE & FITCH
CONSOLIDATED BALANCE SHEETS
(Thousands)
February 2, February 3,
2002 2001
---------------- ---------------
ASSETS
------
CURRENT ASSETS:
Cash and Equivalents $167,664 $137,581
Marketable Securities 71,220 -
Receivables 20,456 15,829
Inventories 108,876 120,997
Store Supplies 21,524 17,817
Other 15,455 11,338
---------------- ---------------
TOTAL CURRENT ASSETS 405,195 303,562
PROPERTY AND EQUIPMENT, NET 365,112 278,785
DEFERRED INCOME TAXES - 6,849
OTHER ASSETS 239 381
---------------- ---------------
TOTAL ASSETS $770,546 $589,577
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $31,897 $33,942
Accrued Expenses 109,586 101,302
Income Taxes Payable 22,096 21,379
---------------- ---------------
TOTAL CURRENT LIABILITIES 163,579 156,623
DEFERRED INCOME TAXES 1,165 -
OTHER LONG-TERM LIABILITIES 10,368 10,254
SHAREHOLDERS' EQUITY:
Common Stock - $.01 par value 1,033 1,033
Paid-In Capital 141,394 136,490
Retained Earnings 519,540 350,868
---------------- ---------------
661,967 488,391
Less: Treasury Stock, at Average Cost (66,533) (65,691)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 595,434 422,700
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $770,546 $589,577
================ ===============
The accompanying Notes are an intergral part of these Consolidated Financial
Statements.
21
ABERCROMBIE & FITCH
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands)
Common Stock
-------------------------
Treasury
Stock, at Total
Shares Par Paid-In Retained Average Shareholders'
Outstanding Value Capital Earnings Cost Equity
--------------- --------- ------------ ------------- ------------ ----------------
Balance, January 30, 1999 102,814 $1,033 $143,626 $ 43,131 $ (1,685) $186,105
Purchase of Treasury Stock (1,510) - - - (50,856) (50,856)
Net Income - - - 149,604 - 149,604
Tax Benefit from Exercise of Stock
Options and Vesting of
Restricted Stock - - 9,389 - - 9,389
Stock Options, Restricted Stock
and Other 700 - (5,710) - 22,562 16,852
--------------- --------- ------------ ------------- ------------ ----------------
Balance, January 29, 2000 102,004 $1,033 $147,305 $ 192,735 $(29,979) $311,094
Purchase of Treasury Stock (3,550) - - - (43,929) (43,929)
Net Income - - - 158,133 - 158,133
Tax Benefit from Exercise of Stock
Options and Vesting of
Restricted Stock - - 462 - - 462
Stock Options, Restricted Stock
and Other 342 - (11,277) - 8,217 (3,060)
--------------- --------- ------------ ------------- ------------ ----------------
Balance, February 3, 2001 98,796 $1,033 $136,490 $ 350,868 $(65,691) $422,700
Purchase of Treasury Stock (600) - - - (11,069) (11,069)
Net Income - - - 168,672 - 168,672
Tax Benefit from Exercise of Stock
Options and Vesting of
Restricted Stock - - 5,056 - - 5,056
Stock Options, Restricted Stock
and Other 677 - (152) - 10,227 10,075
--------------- --------- ------------ ------------- ------------ ----------------
Balance, February 2, 2002 98,873 $1,033 $141,394 $ 519,540 $(66,533) $595,434
=============== ========= ============ ============= ============ ================
The accompanying Notes are an intergral of these Consolidated Financial
Statements.
22
ABERCROMBIE & FITCH
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
2001 2000 1999
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income $ 168,672 $ 158,133 $ 149,604
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 41,155 30,731 27,721
Noncash Charge for Deferred Compensation 3,936 4,340 5,212
Changes in Assets and Liabilities:
Inventories 12,121 (45,735) (31,270)
Accounts Payable and Accrued Expenses 5,272 21,626 4,999
Income Taxes 13,787 (8,420) 9,258
Other Assets and Liabilities (11,741) (9,486) (12,773)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 233,202 151,189 152,751
---------- ---------- ----------
INVESTING ACTIVITIES:
Capital Expenditures (126,515) (153,481) (73,377)
Proceeds from Maturities of Marketable Securities - 45,601 11,332
Purchase of Marketable Securities (71,220) - (56,933)
Note Receivable (454) (3,000) (1,500)
---------- ---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (198,189) (110,880) (120,478)
---------- ---------- ----------
FINANCING ACTIVITIES:
Purchase of Treasury Stock (11,069) (43,929) (50,856)
Other Changes in Shareholders' Equity 6,139 (6,707) 2,927
---------- ---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES (4,930) (50,636) (47,929)
---------- ---------- ----------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 30,083 (10,327) (15,656)
Cash and Equivalents, Beginning of Year 137,581 147,908 163,564
---------- ---------- ----------
CASH AND EQUIVALENTS, END OF YEAR $ 167,664 $ 137,581 $ 147,908
========== ========== ==========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Accrual for Construction in Progress $ 967 $ 9,531 $ 10,447
========== ========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
23
ABERCROMBIE & FITCH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. ("A&F"), through its subsidiaries (collectively,
A&F and its subsidiaries are referred to as "Abercrombie & Fitch" or the
"Company"), is a specialty retailer of high quality, casual apparel for
men, women and kids with an active, youthful lifestyle. The business was
established in 1892 and subsequently acquired by The Limited, Inc. ("The
Limited") in 1988.
A&F was established as an independent Company through an initial public
offering (the "Offering") which was consummated on October 1, 1996. As a
result of the Offering, 84.2% of the outstanding common stock of A&F was
owned by The Limited, until the completion of a tax-free exchange offer
(the "Exchange Offer") on May 19, 1998.
The accompanying consolidated financial statements include the historical
financial statements of, and transactions applicable to, A&F and its
subsidiaries and reflect the assets, liabilities, results of operations
and cash flows on a historical cost basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of A&F and all
significant subsidiaries that are more than 50% owned and controlled. All
significant intercompany balances and transactions have been eliminated
in consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are designated in the financial statements and notes by the
calendar year in which the fiscal year commences. The results for fiscal
years 2001 and 1999 represent the fifty-two week periods ended February
2, 2002 and January 29, 2000. The results for fiscal year 2000 represent
the fifty-three week period ended February 3, 2001.
CASH AND EQUIVALENTS
Cash and equivalents include amounts on deposit with financial
institutions and investments with original maturities of less than 90
days.
MARKETABLE SECURITIES
All investments with original maturities of greater than 90 days are
accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The Company determines the appropriate
classification at the time of purchase. At February 2, 2002, the Company
held investments in marketable securities which were classified as held
to maturity based on the Company's positive intent and ability to hold
the securities to maturity. All securities held by the Company at
February 2, 2002 were corporate debt securities which mature within one
year and are stated at amortized cost which approximates market value.
24
INVENTORIES
Inventories are principally valued at the lower of average cost or
market, on a first-in first-out basis, utilizing the retail method.
STORE SUPPLIES
The initial inventory of supplies for new stores including, but not
limited to, hangers, signage, security tags and point-of-sale supplies
are capitalized at the store opening date. Subsequent shipments are
expensed except for new merchandise presentation programs which are
capitalized.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service
lives ranging principally from 10-15 years for leasehold improvements and
3-10 years for other property and equipment. Beneficial leaseholds
represent the present value of the excess of fair market rent over
contractual rent of existing stores at the 1988 purchase of the
Abercrombie & Fitch business by The Limited and are being amortized over
the lives of the related leases. The cost of assets sold or retired and
the related accumulated depreciation or amortization are removed from the
accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments that extend service lives are capitalized.
Long-lived assets are reviewed at the store level at least annually for
impairment or whenever events or changes in circumstances indicate that
full recoverability is questionable. Factors used in the evaluation
include, but are not limited to, management's plans for future
operations, recent operating results and projected cash flows.
INCOME TAXES
Income taxes are calculated in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires the use of the liability method.
Deferred tax assets and liabilities are recognized based on the
difference between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
in effect in the years in which those temporary differences are expected
to reverse. Under SFAS No. 109, the effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Prior to the Exchange Offer, the Company was included in The Limited's
consolidated federal and certain state income tax groups for income tax
reporting purposes and was responsible for its proportionate share of
income taxes calculated upon its federal taxable income at a current
estimate of the Company's annual effective tax rate. Subsequent to the
Exchange Offer, the Company began filing its tax returns on a separate
basis.
SHAREHOLDERS' EQUITY
The Board of Directors declared a two-for-one stock split on A&F's Class
A Common Stock, distributed on June 15, 1999 to shareholders of record at
the close of business on May 25, 1999. All share and per share amounts in
the accompanying consolidated financial statements for all periods have
been restated to reflect the stock split.
25
At February 2, 2002, there were 150 million shares of $.01 par value
Class A Common Stock authorized, of which 98.9 million and 98.8 million
shares were outstanding at February 2, 2002 and February 3, 2001,
respectively, and 106.4 million shares of $.01 par value Class B Common
Stock authorized, none of which were outstanding at February 2, 2002 or
February 3, 2001. In addition, 15 million shares of $.01 par value
Preferred Stock were authorized, none of which have been issued. See Note
13 for information about Preferred Stock Purchase Rights.
Holders of Class A Common Stock generally have identical rights to
holders of Class B Common Stock, except that holders of Class A Common
Stock are entitled to one vote per share while holders of Class B Common
Stock are entitled to three votes per share on all matters submitted to a
vote of shareholders.
REVENUE RECOGNITION
The Company recognizes retail sales at the time the customer takes
possession of the merchandise and purchases are paid for, primarily with
either cash or credit card. Catalogue and e-commerce sales are recorded
upon shipment of merchandise. Amounts relating to shipping and handling
billed to customers in a sale transaction are classified as revenue and
the related costs are classified as cost of goods sold. Employee
discounts are classified as a reduction of revenue. The Company reserves
for sales returns through estimates based on historical experience and
various other assumptions that management believes to be reasonable.
CATALOGUE AND ADVERTISING COSTS
Costs related to the A&F Quarterly, a catalogue/magazine, primarily
consist of catalogue production and mailing costs and are expensed as
incurred. Advertising costs consist of in-store photographs and
advertising in selected national publications and are expensed when the
photographs or publications first appear. Catalogue and advertising costs
amounted to $30.7 million in 2001, $30.4 million in 2000 and $30.3
million in 1999.
STORE PREOPENING EXPENSES
Preopening expenses related to new store openings are charged to
operations as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded values of current assets and current liabilities, including
receivables, marketable securities and accounts payable, approximate fair
value due to the short maturity and because the average interest rate
approximates current market origination rates.
EARNINGS PER SHARE
Net income per share is computed in accordance with SFAS No. 128,
"Earnings Per Share." Net income per basic share is computed based on the
weighted average number of outstanding shares of common stock. Net income
per diluted share includes the weighted average effect of dilutive stock
options and restricted shares.
26
Weighted Average Shares Outstanding (thousands):
2001 2000 1999
---------- ----------- ----------
Shares of common stock issued 103,300 103,300 103,300
Treasury shares (4,198) (3,239) (429)
--------- ----------- ----------
Basic shares 99,102 100,061 102,871
Dilutive effect of options and restricted shares 3,422 2,095 4,770
--------- ----------- ----------
Diluted shares 102,524 102,156 107,641
========= =========== ==========
Options to purchase 5,630,000, 9,100,000 and 5,600,000 shares of Class A
Common Stock were outstanding at year-end 2001, 2000 and 1999,
respectively, but were not included in the computation of net income per
diluted share because the options' exercise prices were greater than the
average market price of the underlying shares.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Since actual results
may differ from those estimates, the Company revises its estimates and
assumptions as new information becomes available.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with current year
presentation. The amounts reclassified did not have an effect on the
Company's results of operations or shareholders' equity.
3. ISSUANCES OF ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets." The standard is
effective starting with fiscal years beginning after December 15, 2001
(February 3, 2002 for the Company). SFAS No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets
should be accounted for in financial statements upon their acquisition.
It also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Management anticipates that the adoption of SFAS No. 142 will
not have an impact on the Company's results of operations or its
financial position.
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be
effective for fiscal years beginning after June 15, 2002 (February 2,
2003 for the Company). The standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the
useful life of the related obligation for its recorded amount or the
entity incurs a gain or loss upon settlement. Because costs associated
with exiting leased properties at the end of lease terms are minimal,
management anticipates that the adoption of SFAS No. 143 will not have a
significant effect on the Company's results of operations or its
financial position.
SFAS No.144, "Accounting for Impairment or Disposal of Long-Lived
Assets," will be effective for fiscal years beginning after December 15,
2001 (February 3, 2002 for the Company), and interim periods within those
fiscal years. The standard addresses financial accounting and
27
reporting for the impairment or disposal of long-lived assets. Management
anticipates that the adoption of SFAS No. 144 will not have an impact on
the Company's results of operations or its financial position.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of (thousands):
2001 2000
-------------- -------------
Land $ 15,414 $ 14,007
Building 91,531 -
Furniture, fixtures and equipment 303,606 212,674
Beneficial leaseholds 7,349 7,349
Leasehold improvements 54,702 31,613
Construction in progress 28,721 118,553
-------------
-------------
Total $ 501,323 $ 384,196
Less: accumulated depreciation and amortization 136,211 105,411
------------- -------------
Property and equipment, net $ 365,112 $ 278,785
============= -============
5. LEASED FACILITIES AND COMMITMENTS
Annual store rent is comprised of a fixed minimum amount, plus contingent
rent based on a percentage of sales exceeding a stipulated amount. Store
lease terms generally require additional payments covering taxes, common
area costs and certain other expenses.
A summary of rent expense follows (thousands):
2001 2000 1999
------------- ------------- --------------
Store rent:
Fixed minimum $ 83,608 $ 65,716 $ 51,086
Contingent 4,897 7,079 8,246
------------- ------------- --------------
Total store rent $ 88,505 $ 72,795 $ 59,332
Buildings, equipment and other 1,566 2,777 2,574
------------- ------------- --------------
Total rent expense $ 90,071 $ 75,572 $ 61,906
============= ============= ==============
At February 2, 2002, the Company was committed to noncancelable leases
with remaining terms of one to fourteen years. These commitments include
store leases with initial terms ranging primarily from ten to fifteen
years. A summary of minimum rent commitments under noncancelable leases
follows (thousands):
2002 $104,085
2003 105,953
2004 105,317
2005 102,533
2006 95,926
Thereafter 309,106
28
6. ACCRUED EXPENSES
Accrued expenses consisted of the following (thousands):
2001 2000
---------- ---------
Accrual for construction in progress $ 25,338 $ 24,371
Unredeemed gift card revenue 17,031 11,636
Rent and landlord charges 16,247 15,634
Catalogue and advertising costs 11,178 7,818
Compensation and benefits 9,492 11,771
Taxes, other than income 3,552 5,102
Other 26,748 24,970
---------- ---------
Total $ 109,586 $ 101,302
========== =========
7. INCOME TAXES
The provision for income taxes consisted of (thousands):
2001 2000 1999
---------- ---------- ------------
Currently Payable:
Federal $ 80,126 $ 80,856 $ 84,335
State 14,567 18,403 20,251
---------- ---------- ------------
$ 94,693 $ 99,259 $ 104,586
---------- ---------- ------------
Deferred:
Federal 11,133 2,814 (3,885)
State 2,024 1,247 (971)
---------- ---------- ------------
$ 13,157 $ 4,061 $ (4,856)
---------- ---------- ------------
Total provision $ 107,850 $ 103,320 $ 99,730
========== ========== ============
A reconciliation between the statutory Federal income tax rate and the
effectice income tax rate follows:
2001 2000 1999
--------------- ------------- ------------
Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal income
tax effect 3.9% 4.1% 4.6%
Other items, net 0.1% 0.4% 0.4%
--------------- ------------- ------------
Total 39.0% 39.5% 40.0%
=============== ============= ============
Income taxes payable included net current deferred tax assets of $4.9
million and $12.6 million at February 2, 2002 and February 3, 2001,
respectively.
Subsequent to the Exchange Offer, the Company began filing its tax
returns on a separate basis and made tax payments directly to taxing
authorities. Prior to the Exchange Offer, the Company was included in the
consolidated federal and certain state income tax groups of The Limited
for income tax purposes. Under this arrangement, the Company was
responsible for and paid The Limited its proportionate share of income
taxes, calculated upon its separate taxable income at the estimated
annual effective tax rate. Amounts paid to The Limited totaled $20
thousand, $829 thousand and
29
$9.1 million in 2001, 2000 and 1999, respectively. Amounts paid directly
to taxing authorities were $94.3 million, $111.7 million and $81.1
million in 2001, 2000 and 1999, respectively.
The effect of temporary differences which gives rise to deferred income
tax assets (liabilities) was as follows (thousands):
2001 2000
---------------- -----------------
Deferred tax assets:
Deferred compensation $ 8,833 $ 8,311
Rent 1,525 2,414
Accrued expenses 7,216 8,144
Inventory 1,747 2,767
Other, net 139 -
---------------- -----------------
Total deferred tax assets 19,460 21,636
---------------- -----------------
Deferred tax liabilities:
Store supplies (7,417) (2,061)
Property and equipment (8,307) (85)
---------------- -----------------
Total deferred tax liabilities (15,724) (2,146)
---------------- -----------------
Net deferred income tax assets $ 3,736 $19,490
================ =================
No valuation allowance has been provided for deferred tax assets because
management believes that it is more likely than not that the full amount
of the net deferred tax assets will be realized in the future.
8. LONG-TERM DEBT
The Company entered into a $150 million syndicated unsecured credit
agreement (the "Agreement") on April 30, 1998. Borrowings outstanding
under the Agreement are due April 30, 2003. The Agreement has several
borrowing options, including interest rates that are based on the bank
agent's "Alternate Base Rate," a LIBO Rate or a rate submitted under a
bidding process. Facility fees payable under the Agreement are based on
the Company's ratio (the "leverage ratio") of the sum of total debt plus
800% of forward minimum rent commitments to trailing four-quarters
EBITDAR and currently accrues at .225% of the committed amount per annum.
The Agreement contains limitations on debt, liens, restricted payments
(including dividends), mergers and acquisitions, sale-leaseback
transactions, investments, acquisitions, hedging transactions, and
transactions with affiliates. It also contains financial covenants
requiring a minimum ratio of EBITDAR to interest expense and minimum rent
and a maximum leverage ratio. No amounts were outstanding under the
Agreement at February 2, 2002 or February 3, 2001.
9. RELATED PARTY TRANSACTIONS
Subsequent to the Exchange Offer, A&F and The Limited entered into
various service agreements for terms ranging from one to three years. A&F
hired associates with the appropriate expertise or contracted with
outside parties to replace those services which expired in May 1999.
Service agreements were also entered into for the continued use by the
Company of its distribution and home office space and transportation and
logistic services. The agreement for use of distribution space terminated
in April 2001. The agreements for home office space and transportation
and logistics services expired in May 2001. The cost of these services
generally was equal to The Limited's cost in providing the relevant
services plus 5% of such costs.
30
Costs incurred to replace the services provided by The Limited did not
have a material adverse impact on the Company's financial condition.
Shahid & Company, Inc. has provided advertising and design services for
the Company since 1995. Sam N. Shahid Jr., who serves on A&F's Board of
Directors, has been President and Creative Director of Shahid & Company,
Inc. since 1993. Fees paid to Shahid & Company, Inc. for services
provided during fiscal years 2001, 2000 and 1999 were approximately $1.8
million, $1.7 million and $1.4 million, respectively.
On January 1, 2002, A&F loaned the amount of $4,953,833 to its Chairman
of the Board, a major shareholder of A&F, pursuant to the terms of a
replacement promissory note, which provides that such amount is due and
payable on December 31, 2002. If A&F records net sales of at least
$1,156,100,000 during the period from February 3, 2002 through November
30, 2002, the outstanding principal under the note will not bear
interest. If A&F does not record net sales exceeding that threshold, the
outstanding principal under the note will bear interest from January 1,
2002 at the rate of 4.5% per annum. This note constitutes a replacement
of, and substitute for, the replacement promissory note dated as of May
18, 2001 in the amount of $4,817,146, which has been cancelled. The
replacement promissory note dated May 18, 2001 constituted a replacement
of, and substitute for, the replacement promissory note dated as of
August 28, 2000 in the amount of $4.5 million. The replacement promissory
note dated August 28, 2000 constituted a replacement of, and substitute
for, the promissory note dated March 1, 2000 and the replacement
promissory note dated May 19, 2000 in the amounts of $1.5 million and
$3.0 million, respectively. The replacement promissory note dated May 19,
2000 constituted a replacement of, and substitute for, the promissory
note dated as of November 17, 1999 in the amount of $1.5 million.
10. STOCK OPTIONS AND RESTRICTED SHARES
Under A&F's stock plans, associates and non-associate directors may be
granted up to a total of 21.3 million restricted shares and options to
purchase A&F's common stock at the market price on the date of grant. In
2001, associates of the Company were granted approximately 600 thousand
options, with vesting periods from four to five years. A total of 84,000
options were granted to non-associate directors in 2001, all of which
vest over four years. All options have a maximum term of ten years.
The Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," in 1996, but elected to
continue to measure compensation expense in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense for stock options has
been recognized. If compensation expense had been determined based on the
estimated fair value of options granted in 2001, 2000 and 1999,
consistent with the methodology in SFAS No. 123, the pro forma effect
on net income and net income per diluted share would have been a
reduction of approximately $20.6 million or $.20 per share in 2001,
$20.0 million or $.20 per share in 2000 and $18.5 million or $.17 per
share in 1999. The weighted-average fair value of all options granted
during fiscal 2001, 2000 and 1999 was $14.96, $8.90 and $23.34,
respectively. The fair value of each option was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999: no expected dividends; price
volatility of 54% in 2001, 50% in 2000 and 45% in 1999; risk-free
interest rates of 4.7%, 6.2% and 6.0% in 2001, 2000 and 1999,
respectively; assumed forfeiture rates of 15% in 2001 and 10% in 2000 and
1999; and expected lives of 5 years in 2001 and 2000 and 6.5 years in
1999.
The pro forma effect on net income for 2001, 2000 and 1999 is not
representative of the pro forma effect on net income in future years
because it takes into consideration pro forma compensation expense
related only to those grants made subsequent to the Offering.
31
Options Outstanding at February 2, 2002
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
----------------- --------------- --------------- ------------- --------------- --------------
$ 8 - $23 4,449,000 6.3 $13.02 1,762,000 $11.21
$23 - $38 3,304,000 7.2 $26.29 1,126,000 $26.34
$38 - $52 5,208,000 7.5 $43.50 177,000 $41.07
----------------- --------------- --------------- ------------- --------------- --------------
$ 8 - $52 12,961,000 7.0 $28.65 3,065,000 $18.49
================= =============== =============== ============= =============== ==============
A summary of option activity for 2001, 2000 and 1999 follows:
2001 2000 1999
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
-------------- ------------ ------------- ------------- ------------- ------------
Outstanding at beginning of year 12,994,000 $28.01 12,809,000 $28.03 7,568,000 $15.87
Granted 648,000 29.38 1,414,000 17.25 5,794,000 42.90
Exercised (521,000) 15.00 (193,000) 14.57 (337,000) 9.39
Canceled (160,000) 24.09 (1,036,000) 16.06 (216,000) 25.25
-------------- ------------ ------------- ------------- ------------ -------------
Outstanding at end of year 12,961,000 $28.65 12,994,000 $28.01 12,809,000 $28.03
============== ============ ============= ============= ============= ============
Options exercisable at year-end 3,065,000 $18.49 2,164,000 $16.13 556,000 $ 9.85
============== ============ ============= ============= ============= ============
A total of 19,000, 102,000 and 140,000 restricted shares were granted in
2001, 2000 and 1999, respectively, with a total market value at grant
date of $.6 million, $2.3 million and $5.4 million, respectively. The
restricted share grants generally vest either on a graduated scale over
four years or 100% at the end of a fixed vesting period, principally five
years. The market value of restricted shares is being amortized as
compensation expense over the vesting period, generally four to five
years. Compensation expenses related to restricted share awards amounted
to $3.9 million, $4.3 million and $5.2 million in 2001, 2000 and 1999,
respectively.
11. RETIREMENT BENEFITS
The Company participates in a qualified defined contribution retirement
plan and a nonqualified supplemental retirement plan. Participation in
the qualified plan is available to all associates who have completed
1,000 or more hours of service with the Company during certain 12-month
periods and attained the age of 21. Participation in the nonqualified
plan is subject to service and compensation requirements. The Company's
contributions to these plans are based on a percentage of associates'
eligible annual compensation. The cost of these plans was $3.9 million in
2001, $3.0 million in 2000 and $2.6 million in 1999.
32
12. CONTINGENCIES
The Company is involved in a number of legal proceedings. Although it is
not possible to predict with any certainty the eventual outcome of any
legal proceedings, it is the opinion of management that the ultimate
resolution of these matters will not have a material impact on the
Company's results of operations, cash flows or financial position.
13. PREFERRED STOCK PURCHASE RIGHTS
On July 16, 1998, A&F's Board of Directors declared a dividend of .50 of
a Series A Participating Cumulative Preferred Stock Purchase Right
(Right) for each outstanding share of Class A Common Stock, par value
$.01 per share (Common Stock), of A&F. The dividend was paid to
shareholders of record on July 28, 1998. Shares of Common Stock issued
after July 28, 1998 and prior to the Distribution Date described below
will be issued with .50 Right attached. Under certain conditions, each
whole Right may be exercised to purchase one one-thousandth of a share of
Series A Participating Cumulative Preferred Stock at an initial price of
$250. The Rights initially will be attached to the shares of Common
Stock. The Rights will separate from the Common Stock and a Distribution
Date will occur upon the earlier of 10 business days after a public
announcement that a person or group has acquired beneficial ownership of
20% or more of A&F's outstanding shares of Common Stock and become an
"Acquiring Person" (Share Acquisition Date) or 10 business days (or such
later date as the Board shall determine before any person has become an
Acquiring Person) after commencement of a tender or exchange offer which
would result in a person or group beneficially owning 20% or more of
A&F's outstanding Common Stock. The Rights are not exercisable until the
Distribution Date.
In the event that any person becomes an Acquiring Person, each holder of
a Right (other than the Acquiring Person and certain affiliated persons)
will be entitled to purchase, upon exercise of the Right, shares of
Common Stock having a market value two times the exercise price of the
Right. At any time after any person becomes an Acquiring Person (but
before any person becomes the beneficial owner of 50% or more of the
outstanding shares), A&F's Board of Directors may exchange all or part of
the Rights (other than Rights beneficially owned by an Acquiring Person
and certain affiliated persons) for shares of Common Stock at an exchange
ratio of one share of Common Stock per Right. In the event that, at any
time following the Share Acquisition Date, A&F is acquired in a merger or
other business combination transaction in which A&F is not the surviving
corporation, the Common Stock is exchanged for other securities or assets
or 50% or more of A&F's assets or earning power is sold or transferred,
the holder of a Right will be entitled to buy, for the exercise price of
the Rights, the number of shares of Common Stock of the acquiring company
which at the time of such transaction will have a market value of two
times the exercise price of the Right.
The Rights, which do not have any voting rights, expire on July 16, 2008,
and may be redeemed by A&F at a price of $.01 per whole Right at any time
before a person becomes an Acquiring Person.
Rights holders have no rights as a shareholder of A&F, including the
right to vote and to receive dividends.
33
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial results for 2001 and 2000 follow
(thousands except per share amounts):
2001 Quarter First Second Third Fourth
--------------------------------- ------------- -------------- -------------- --------------
Net sales $263,680 $280,116 $354,473 $466,584
Gross income 97,840 108,327 143,403 208,464
Net income 20,603 25,038 43,863 79,168
Net income per basic share $.21 $.25 $.44 $.80
Net income per diluted share $.20 $.24 $.43 $.78
2000 Quarter First Second Third Fourth
--------------------------------- ------------- -------------- -------------- --------------
Net sales $205,006 $229,031 $364,122 $439,445
Gross income 75,403 87,765 143,283 202,924
Net income 16,163 21,163 43,592 77,215
Net income per basic share $.16 $.21 $.44 $.78
Net income per diluted share $.16 $.21 $.43 $.76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
Report of Independent Accountants
To the Board of Directors and
Shareholders of Abercrombie & Fitch:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Abercrombie & Fitch
and its subsidiaries at February 2, 2002 and February 3, 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended February 2, 2002 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Columbus, Ohio
February 19, 2002
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of A&F is set forth under the captions "ELECTION
OF DIRECTORS - Nominees and Directors", "- Business Experience", "- Information
Concerning the Board of Directors" and "- Security Ownership of Directors and
Management" and "EXECUTIVE COMPENSATION - Employment Agreements and Other
Transactions with Certain Executive Officers" in A&F's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 23, 2002 (the
"Proxy Statement") and is incorporated herein by reference. Information
regarding executive officers of A&F is set forth under the captions "ELECTION OF
DIRECTORS - Business Experience", " - Executive Officers", and "- Security
Ownership of Directors and Management" and "EXECUTIVE COMPENSATION - Employment
Agreements and Other Transactions with Certain Executive Officers" in the Proxy
Statement and is incorporated herein by reference. In addition, information
regarding executive officers of A&F is included in this Annual Report on Form
10-K under the caption "SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT"
in Part I and is incorporated herein by reference. No disclosure is required to
be made under Item 405 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under the caption
"EXECUTIVE COMPENSATION" in the Proxy Statement and is incorporated herein by
reference. Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding the security ownership of certain beneficial owners and
management is set forth under the captions "PRINCIPAL HOLDERS OF SHARES" and
"ELECTION OF DIRECTORS - Security Ownership of Directors and Management" in the
Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is set
forth under the captions "ELECTION OF DIRECTORS - Business Experience" and
"EXECUTIVE COMPENSATION - Employment Agreements and Other Transactions with
Certain Executive Officers" in the Proxy Statement and is incorporated herein by
reference.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) List of Financial Statements.
----------------------------
The following consolidated financial statements of Abercrombie & Fitch and
the related notes are filed as a part of this report pursuant to ITEM 8:
Consolidated Statements of Income for the fiscal years ended February 2,
2002, February 3, 2001 and January 29, 2000.
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001.
Consolidated Statements of Shareholders' Equity for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000.
Consolidated Statements of Cash Flows for the fiscal years ended February
2, 2002, February 3, 2001 and January 29, 2000.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
(a)(2) List of Financial Statement Schedules.
-------------------------------------
All schedules are omitted because the required information is either
presented in the consolidated financial statements or notes thereto, or is
not applicable, required or material.
(a)(3) List of Exhibits.
----------------
3. Certificate of Incorporation and Bylaws
3.1 Amended and Restated Certificate of Incorporation of A&F as filed
with the Delaware Secretary of State on August 27, 1996,
incorporated by reference to Exhibit 3.1 to A&F's Quarterly
Report on Form 10-Q for the quarter ended November 2, 1996. (File
No. 1-12107)
3.2 Certificate of Designation of Series A Participating Cumulative
Preferred Stock of A&F as filed with the Delaware Secretary of
State on July 21, 1998, incorporated by reference to Exhibit 3.2
to A&F's Annual Report on Form 10-K for the year ended January
30, 1999. (File No. 1-12107)
3.3 Certificate of Decrease of Shares Designated as Class B Common
Stock as filed with the Delaware Secretary of State on July 30,
1999, incorporated by reference to Exhibit 3.3 to A&F's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1999. (File
No. 1-12107)
3.4 Amended and Restated Bylaws of A&F, effective January 31, 2002.
4. Instruments Defining the Rights of Security Holders.
4.1 Credit Agreement, dated as of April 30, 1998, among Abercrombie &
Fitch Stores, Inc., as Borrower, A&F, as Guarantor, the Lenders
party thereto, The Chase Manhattan Bank, as Administrative Agent,
and Chase Securities, Inc., as Arranger,
37
incorporated by reference to Exhibit 4.1 to A&F's Current Report on
Form 8-K dated May 7, 1998. (File No. 1-12107)
4.2 First Amendment and Waiver, dated as of July 30, 1999, to the Credit
Agreement, dated as of April 30, 1998, among Abercrombie & Fitch
Stores, Inc., A&F, the lenders party thereto and The Chase Manhattan
Bank, as Administrative Agent, incorporated by reference to Exhibit
4.3 to A&F's Quarterly Report on Form 10-Q for the quarter ended July
31, 1999. (File No. 1-12107)
4.3 Rights Agreement, dated as of July 16, 1998, between A&F and First
Chicago Trust Company of New York, as Rights Agent, incorporated by
reference to Exhibit 1 to A&F's Registration Statement on Form 8-A
dated July 21, 1998. (File No. 1-12107)
4.4 Amendment No. 1 to Rights Agreement, dated as of April 21, 1999,
between A&F and First Chicago Trust Company of New York, as Rights
Agent, incorporated by reference to Exhibit 2 to A&F's Amendment No. 1
to Form 8-A dated April 23, 1999. (File No. 1-12107)
4.5 Certificate of adjustment of number of Rights associated with each
share of Class A Common Stock, dated May 27, 1999, incorporated by
reference to Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1999. (File No. 1-12107)
4.6 Appointment and Acceptance of Successor Rights Agent, effective as of
the opening of business on October 8, 2001, between A&F and National
City Bank, incorporated by reference to Exhibit 4.6 to A&F's Quarterly
Report on Form 10-Q for the quarter ended August 4, 2001. (File No.
1-12107)
10. Material Contracts.
10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan,
incorporated by reference to Exhibit A to A&F's Proxy Statement dated
April 14, 1997. (File No. 1-12107)
10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan (reflects amendments through December 7,
1999 and the two-for-one stock split distributed June 15, 1999 to
stockholders of record on May 25, 1999), incorporated by reference to
Exhibit 10.2 to A&F's Annual Report on Form 10-K for the year ended
January 29, 2000. (File No. 1-12107)
10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for
Non-Associate Directors (reflects amendments through November 1, 2001
and the two-for-one stock split distributed June 15, 1999 to
stockholders of record on May 25, 1999), incorporated by reference to
Exhibit 10.3 to A&F's Quarterly Report on Form 10-Q for the quarter
ended November 3, 2001. (File No. 1-12107)
10.4 Abercrombie & Fitch Co. 2002 Stock Option Plan for Associates.
10.5 Employment Agreement by and between A&F and Michael S. Jeffries dated
as of May 13, 1997 with exhibits and amendment, incorporated by
reference to Exhibit 10.4 to A&F's Quarterly Report on Form 10-Q for
the quarter ended November 1, 1997. (File No. 1-12107)
10.6 Employment Agreement by and between A&F and Seth R. Johnson dated as
of December 5, 1997, incorporated by reference to Exhibit 10.10 to
A&F's
38
Amendment No. 4 to Form S-4 Registration Statement filed on April 14,
1998 (Registration No. 333-46423).
10.7 Tax Disaffiliation Agreement dated as of May 19, 1998 between The
Limited, Inc. and A&F, incorporated by reference to Exhibit 10.7 to
A&F's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998.
(File No. 1-12107)
10.8 Abercrombie & Fitch, Inc. Directors' Deferred Compensation Plan,
incorporated by reference to Exhibit 10.14 to A&F's Annual Report on
Form 10-K for the year ended January 30, 1999. (File No. 1-12107)
10.9 Replacement Promissory Note, dated January 1, 2002, issued by Michael
S. Jeffries to A&F.
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
24. Powers of Attorney.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the fiscal quarter ended February
2, 2002.
(c) Exhibits.
--------
The exhibits to this report are listed in section (a)(3) of Item 14 above.
(d) Financial Statement Schedules.
-----------------------------
Not applicable.
39
SIGNATURES
Pursuant to the requirements of Section 13 or l5(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 17, 2002
ABERCROMBIE & FITCH CO.
By /s/ SETH R. JOHNSON
--------------------------------------------------
Seth R. Johnson,
Executive Vice President - Chief Operating Officer
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 17, 2002.
Signature Title
--------- -----
/s/ MICHAEL S. JEFFRIES* Chairman of the Board of Directors and
------------------------- Chief Executive Officer
Michael S. Jeffries
/s/ SETH R. JOHNSON Executive Vice President - Chief Operating
------------------------- Officer and Director
Seth R. Johnson
/s/ RUSSELL M. GERTMENIAN* Director
--------------------------
Russell M. Gertmenian
/s/ JOHN A. GOLDEN* Director
-------------------------
John A. Golden
/s/ ARCHIE M. GRIFFIN* Director
-------------------------
Archie M. Griffin
/s/ JOHN W. KESSLER* Director
-------------------------
John W. Kessler
/s/ SAM N. SHAHID* Director
-------------------------
Sam N. Shahid
/s/ KATHRYN D. SULLIVAN, Ph.D.* Director
-------------------------------
Kathryn D. Sullivan, Ph.D.
*The undersigned, by signing his name hereto, does hereby sign this report on
behalf of each of the above-indicated directors and executive officers of the
registrant pursuant to powers of attorney executed by such directors and
executive officers.
By /s/ SETH R. JOHNSON
--------------------------------------
Seth R. Johnson
Attorney-in-fact
40
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
_________
ABERCROMBIE & FITCH CO.
(Exact name of registrant as specified in its charter)
_________
EXHIBITS
_________
================================================================================
EXHIBIT INDEX
-------------
Exhibit No. Document
----------- ------------------------------
3.4 Amended and Restated Bylaws of A&F, effective January 31, 2002.
10.4 Abercrombie & Fitch Co. 2002 Stock Option Plan For Associates.
10.9 Replacement Promissory Note, dated January 1, 2002, issued by
Michael S. Jeffries to A&F.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Powers of Attorney.