UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 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
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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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Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report.)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at May 28, 2002
------------------------------- ---------------------------------
$.01 Par Value 99,073,347 Shares
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Thirteen Weeks Ended
May 4, 2002 and May 5, 2001 .................................... 3
Condensed Consolidated Balance Sheets
May 4, 2002 and February 2, 2002 ................................ 4
Condensed Consolidated Statements of Cash Flows
Thirteen Weeks Ended
May 4, 2002 and May 5, 2001 ..................................... 5
Notes to Condensed Consolidated Financial Statements ..................... 6
Report of Independent Accountants ........................................ 10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 17
Part II. Other Information
Item 1. Legal Proceedings .................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders .................. 19
Item 6. Exhibits and Reports on Form 8-K ..................................... 21
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended
-----------------------
May 4, May 5,
2002 2001
-------- --------
NET SALES $312,792 $263,680
Cost of Goods Sold, Occupancy and Buying Costs 198,363 165,840
-------- --------
GROSS INCOME 114,429 97,840
General, Administrative and Store Operating
Expenses 77,442 65,777
-------- --------
OPERATING INCOME 36,987 32,063
Interest Income, Net (872) (1,720)
-------- --------
INCOME BEFORE INCOME TAXES 37,859 33,783
Provision for Income Taxes 14,570 13,180
-------- --------
NET INCOME $ 23,289 $ 20,603
======== ========
NET INCOME PER SHARE:
Basic $ 0.24 $ 0.21
======== ========
Diluted $ 0.23 $ 0.20
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 99,023 99,011
======== ========
Diluted 102,130 102,885
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
May 4, February 2,
2002 2002
------------ -----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and Equivalents $ 225,977 $ 167,664
Marketable Securities 15,000 71,220
Receivables 16,245 20,456
Inventories 117,166 108,876
Store Supplies 22,280 21,524
Other 15,343 15,455
------------ -----------
TOTAL CURRENT ASSETS 412,011 405,195
PROPERTY AND EQUIPMENT, NET 382,762 365,112
OTHER ASSETS 203 239
------------ -----------
TOTAL ASSETS $ 794,976 $ 770,546
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 29,666 $ 31,897
Accrued Expenses 120,440 109,586
Income Taxes Payable 10,314 22,096
------------ -----------
TOTAL CURRENT LIABILITIES 160,420 163,579
DEFERRED INCOME TAXES 7,401 1,165
OTHER LONG-TERM LIABILITIES 9,609 10,368
SHAREHOLDERS' EQUITY:
Common Stock 1,033 1,033
Paid-In Capital 142,516 141,394
Retained Earnings 542,829 519,540
------------ -----------
686,378 661,967
Less: Treasury Stock, at Average Cost (68,832) (66,533)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 617,546 595,434
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 794,976 $ 770,546
============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Thirteen Weeks Ended
------------------------
May 4, May 5,
2002 2001
---------- ----------
OPERATING ACTIVITIES:
Net Income $ 23,289 $ 20,603
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 12,389 8,777
Noncash Charge for Deferred Compensation 580 1,229
Changes in Assets and Liabilities:
Inventories (8,290) 11,701
Accounts Payable and Accrued Expenses 3,849 (11,439)
Income Taxes (5,599) (13,920)
Other Assets and Liabilities 2,844 1,705
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,062 18,656
---------- ----------
INVESTING ACTIVITIES:
Capital Expenditures (25,265) (34,739)
Proceeds from Maturities of Marketable Securities 56,220 -
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NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 30,955 (34,739)
---------- ----------
FINANCING ACTIVITIES:
Stock Option Exercises and Other (1,704) 1,761
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 58,313 (14,322)
Cash and Equivalents, Beginning of Period 167,664 137,581
---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD $ 225,977 $ 123,259
========== ==========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Accrual for Construction in Progress $ 4,774 $ 8,470
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ABERCROMBIE & FITCH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 condensed consolidated financial statements include the accounts of
A&F and all significant subsidiaries that are more than 50 percent
owned and controlled. All significant intercompany balances and
transactions have been eliminated in consolidation.
The condensed consolidated financial statements as of May 4, 2002 and
for the thirteen week periods ended May 4, 2002 and May 5, 2001 are
unaudited and are presented pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, these condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in
A&F's Annual Report on Form 10-K for the fiscal year ended February 2,
2002 (the "2001 fiscal year"). In the opinion of management, the
accompanying condensed consolidated financial statements reflect all
adjustments (which are of a normal recurring nature) necessary to
present fairly the financial position and results of operations and
cash flows for the interim periods, but are not necessarily indicative
of the results of operations for a full fiscal year.
The condensed consolidated financial statements as of May 4, 2002 and
for the thirteen week periods ended May 4, 2002 and May 5, 2001
included herein have been reviewed by the independent accounting firm
of PricewaterhouseCoopers LLP and the report of such firm follows the
notes to condensed consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 (the "Act") for its report
on the condensed consolidated financial statements because that report
is not a "report" within the meaning of Sections 7 and 11 of the Act.
2. ADOPTION OF ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." The standard is effective for the
Company's 2002 fiscal year. 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. The adoption of SFAS No. 142 had no impact on the
Company's results of operations or its financial position.
6
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets," is effective for the Company's 2002 fiscal year. The standard
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The adoption of this standard had no
impact on the Company's results of operations or its financial
position.
3. ISSUANCE OF ACCOUNTING STANDARDS
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. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," will be
effective for fiscal years beginning after May 15, 2002 (February 2,
2003 for the Company). The standard rescinds FASB statements No. 4 and
64 that deal with issues relating to the extinguishment of debt. The
standard also rescinds FASB Statement No. 44 that deals with intangible
assets of motor carriers. The standard modifies SFAS No. 13,
"Accounting for Leases," so that certain capital lease modifications
must be accounted for by lessees as sale-leaseback transactions.
Additionally, the standard identifies amendments that should have been
made to previously existing pronouncements and formally amends the
appropriate pronouncements. Management anticipates that the adoption of
SFAS No. 145 will not have a significant effect on the Company's
results of operations or its financial position.
4. EARNINGS PER SHARE
Weighted Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
---------------------------
May 4, May 5,
2002 2001
----------- ----------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (4,277) (4,289)
----------- ----------
Basic shares 99,023 99,011
Dilutive effect of options and restricted shares 3,107 3,874
----------- ----------
Diluted shares 102,130 102,885
=========== ==========
7
Options to purchase 6,102,000 and 5,582,000 shares of Class A Common
Stock were outstanding at May 4, 2002 and May 5, 2001, 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.
5. INVENTORIES
The fiscal year of A&F and its subsidiaries is comprised of two
principal selling seasons: Spring (the first and second quarters) and
Fall (the third and fourth quarters). Valuation of finished goods
inventories is based principally upon the lower of average cost or
market determined on a first-in, first-out basis utilizing the retail
method. Inventory valuation at the end of the first and third quarters
reflects adjustments for inventory markdowns and shrinkage estimates
for the total selling season.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
May 4, February 2,
2002 2002
---------- -----------
Property and equipment, at cost $ 531,362 $ 501,323
Accumulated depreciation and amortization (148,600) (136,211)
---------- -----------
Property and equipment, net $ 382,762 $ 365,112
========== ===========
7. INCOME TAXES
The provision for income taxes is based on the current estimate of the
annual effective tax rate. Income taxes paid during the thirteen weeks
ended May 4, 2002 and May 5, 2001 approximated $20.2 million and $26.5
million, respectively.
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.
8
No amounts were outstanding under the Agreement at May 4, 2002 or
February 2, 2002.
9. RELATED PARTY TRANSACTIONS
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 the thirteen weeks ended May 4, 2002 and May
5, 2001 were approximately $.5 million and $.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. 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.
9
Report of Independent Accountants
---------------------------------
To the Board of Directors and
Shareholders of Abercrombie & Fitch
We have reviewed the accompanying condensed consolidated balance sheet of
Abercrombie & Fitch (the "Company") and its subsidiaries as of May 4, 2002 and
the related condensed consolidated statements of income for each of the
thirteen-week periods ended May 4, 2002 and May 5, 2001 and the condensed
consolidated statements of cash flows for the thirteen-week periods ended May 4,
2002 and May 5, 2001. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of February
2, 2002 and the related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended (not presented herein) and in our report
dated February 19, 2002 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of February 2, 2002 is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
PricewaterhouseCoopers LLP
Columbus, Ohio
May 14, 2002
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
During the first quarter of the 2002 fiscal year, net sales increased 19% to
$312.8 million from $263.7 million a year ago. Operating income improved to
$37.0 million in the first quarter of 2002 from $32.1 million in the first
quarter of 2001. A&F recorded its 39th consecutive comparative quarter of record
earnings as net income increased to $23.3 million in the first quarter of 2002
as compared to $20.6 million last year. Earnings per diluted share were $.23 in
the first quarter of 2002 compared to $.20 a year ago.
The following data represents the amounts shown in the Company's condensed
consolidated statements of income for the first quarter of the 2002 and 2001
fiscal years expressed as a percentage of net sales:
Thirteen Weeks Ended
-------------------------------
May 4, 2002 May 5, 2001
----------- -----------
NET SALES 100.0% 100.0%
Cost of Goods Sold, Occupancy and
Buying Costs 63.4 62.9
----- -----
GROSS INCOME 36.6 37.1
General, Administrative and Store
Operating Expenses 24.8 24.9
----- -----
OPERATING INCOME 11.8 12.2
Interest Income, Net (0.3) (0.7)
----- -----
INCOME BEFORE INCOME TAXES 12.1 12.8
Provision for Income Taxes 4.7 5.0
----- -----
NET INCOME 7.4% 7.8%
===== =====
11
Financial Summary
-----------------
The following summarized financial and statistical data compares the thirteen
week period ended May 4, 2002 to the comparable fiscal 2001 period:
Thirteen Thirteen
Weeks Ended Weeks Ended
May 4, 2002 May 5, 2001 % Change
------------- ------------- ------------
Increase (decrease) in
comparable store sales (6)% 2%
Retail sales increase
attributable to new and
remodeled stores, magazine,
catalogue and Web sites 25% 27%
Retail sales per average gross
square foot $ 80 $ 88 (9)%
Retail sales per average store
(thousands) $ 593 $ 707 (16)%
Average store size at end of
quarter (gross square feet) 7,440 8,045 (8)%
Gross square feet at end of
quarter (thousands) 3,772 2,856 32%
Number of stores:
Beginning of year 491 354
Opened 19 2
Closed (3) (1)
------- -------
End of period 507 355
======= =======
Net Sales
---------
Net sales for the first quarter of 2002 increased 19% to $312.8 million from
$263.7 million in 2001. The increase was due to the addition of new stores
offset by a 6% decline in comparable store sales. The Company continued to
utilize certain promotional strategies during the first quarter of 2002 that had
been implemented in the fourth quarter of 2001. Although total Company
comparable store sales remained negative, the addition of new and noncomparable
store sales resulted in an addition to net sales of $60.6 million. The decrease
in comparable store sales amounted to a $14.3 million decrease in net sales.
Comparable store sales were down in the low-single digits in the women's
business for the quarter. Stronger performing categories were skirts, shirts,
denim, knits and women's accessories. Men's comparable store sales decreased in
the high-single digits for the quarter; however, denim, activewear, underwear
and knits performed well. Overall, the women's business accounted for 57% of the
total adult business. The kids' business had a comparable store sales decrease
in the high-single digits with girls' much stronger than boys'. The newest
business, Hollister Co., continues to demonstrate strong customer acceptance.
Sales per square foot in the Hollister stores were approximately 80% of the
Abercrombie & Fitch adult stores in the same mall. The adult and kids e-commerce
business continues to become a larger part of the business as Internet sales
grew by over 60% during the first quarter compared to last year. The Company's
catalogue, the A&F Quarterly (a
12
catalogue/magazine), and the Company's Web sites accounted for 5.3% of net sales
in the first quarter of 2002 as compared to 4.9% last year.
Gross Income
------------
The gross income rate (gross income divided by net sales) decreased to 36.6%
during the first quarter of 2002 from 37.1% for the same period in 2001. The
decrease was primarily attributable to higher buying and occupancy costs as a
percentage of net sales due to the inability to leverage fixed expenses with
lower sales volume per average store. Additionally, the markdown rate was
slightly higher due to the impact of promotional strategies. The average unit
retail price for the quarter was 8% lower than last year in the adult business
and 12% lower in kids. 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. The continued tight
control of inventory resulted in inventories being down 19% per gross square
foot at quarter-end as compared with last year.
General, Administrative and Store Operating Expenses
----------------------------------------------------
The general, administrative and store operating expenses rate (general,
administrative and store operating expenses divided by net sales) was 24.8% and
24.9% in the first quarter of 2002 and 2001, respectively. The Company continues
to tightly control expenses in both the home office and the stores, including
limiting headcount additions and reducing store payroll hours. Savings were also
recognized in the new distribution center and in the direct business. During the
first quarter, productivity in the distribution center, as measured in units
processed per labor hour, was over 50% higher than last year. Last year's
productivity was somewhat hindered by the move into the new facility last
February, and smaller productivity improvement is expected for the balance of
the year. In the direct business, fulfillment costs per order were down from
last year. During the first quarter of 2002, the transition of the entire direct
business to in-house fulfillment was completed. With all e-commerce and retail
inventories now located and processed at A&F's own distribution center, orders
should be filled more efficiently. As a result, it is expected that costs per
order and backorder rates will continue to improve. These savings in general,
administrative and store operating expenses were partially offset by marketing
costs incurred as part of the Company's promotional strategy.
Operating Income
----------------
The first quarter operating income rate (operating income divided by net sales)
was 11.8% in 2002, down from 12.2% for the comparable period in 2001. The
decline in operating income rate was the result of a lower gross income rate.
Interest Income/Expense
-----------------------
First quarter 2002 net interest income was $.9 million as compared with net
interest income of $1.7 million for the first quarter last year. The decrease in
net interest income was primarily due to a decline in interest rates.
Additionally, in the first quarter of 2002, cash was primarily invested in
tax-free securities bearing a lower interest rate versus last year's commercial
paper investments. The tax-free investments lowered the effective tax rate in
the first quarter to 38.5%.
13
FINANCIAL CONDITION
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):
May 4, February 2,
2002 2002
---------- ----------
Working capital $251,591 $241,616
========== ==========
Capitalization:
Shareholders' equity $617,546 $595,434
========== ==========
Net cash provided by operating activities, the Company's primary resource of
liquidity, totaled $29.1 million for the thirteen weeks ended May 4, 2002 versus
$18.7 million in the comparable period of 2001. Cash was provided primarily by
current year net income adjusted for depreciation and amortization.
Additionally, cash was provided from increases in accrued expenses and
collections of construction allowance receivables. Accrued expenses, primarily
compensation and benefits and taxes, other than income, increased as a result of
the continued growth and development of the business. Uses of cash primarily
consisted of increases in inventories and decreases in income taxes payable.
Although inventories were down by 19% per gross square foot at quarter-end, the
total inventory balance has increased as a result of a 32% increase in gross
square feet. The decrease in income taxes is due to the impact of deferred
income taxes during the quarter as differences in tax and book depreciation
methods continue to increase.
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 for capital expenditures (see the
discussion in the "Captial Expenditures" section below) related primarily to new
stores. Cash inflows from investing activities consisted of maturities of
marketable securities. As of May 4, 2002, the Company held marketable securities
with original maturities of three to four months.
Financing activities consisted primarily of stock option exercises and
restricted stock issuances. No shares were repurchased during the first quarters
of 2002 and 2001. As of May 4, 2002, A&F was authorized to repurchase up to an
additional 1,850,000 shares under the current stock repurchase program.
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
14
Notes to Condensed 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 May 4, 2002, $34.8 million was outstanding
under this trade letter of credit facility.
The Company also has standby letters of credit in the aggregate 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.
Store Count and Gross Square Feet
---------------------------------
Store count and gross square footage by division were as follows:
May 4, 2002 May 5, 2001
----------- -----------
Number of Gross Square Number of Gross Square
Stores Feet (thousands) Stores Feet (thousands)
------ ---------------- --------- ----------------
Abercrombie & Fitch 311 2,815 265 2,445
abercrombie 153 683 85 380
Hollister Co. 43 274 5 31
----- ----- ----- -----
Total 507 3,772 355 2,856
===== ===== ===== =====
Capital Expenditures
--------------------
Capital expenditures, net of construction allowances, totaled $25.3 million and
$34.7 million for the thirteen weeks ended May 4, 2002 and May 5, 2001,
respectively. Additionally, the noncash accrual for construction in progress
increased $4.8 million in 2002 and $8.5 million in 2001. Capital expenditures
related to new stores, including the noncash accrual for construction in
progress, accounted for approximately $28 million during the first quarter of
2002. The balance of capital expenditures related primarily to improvements in
the distribution center.
The Company anticipates spending $95 to $105 million in 2002 for capital
expenditures, of which $80 to $90 million will be for new stores construction.
The balance of capital expenditures primarily relates to improving the in-store
information technology structure and improvements in the distribution center.
The Company intends to add approximately 731,000 gross square feet in 2002,
which will represent a 20% increase over year-end 2001. It is anticipated the
increase will result from the addition of approximately 38 new "Abercrombie &
Fitch" stores, 20 "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 to be 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 to be opened in 2002 will
approximate $500,000 per store, after
15
giving effect to landlord allowances. In addition, inventory purchases are
expected to average approximately $125,000 per store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Hollister Co. stores to be 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 $200,000 per store.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has available the
$150 million credit agreement to support operations.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's significant and critical accounting policies and estimates can be
found in the Notes to Consolidated Financial Statements contained in A&F's
Annual Report on Form 10-K for the fiscal year ended February 2, 2002 (Note 2).
Additionally, the Company believes that the following policies are critical to
the portrayal of the Company's financial condition and results of operations for
interim periods.
Inventory Valuation - Inventory valuation at the end of the first and third
quarters reflects adjustments for inventory markdowns and shrinkage estimates
for the total selling season.
Income Taxes - At the end of each interim period, the Company makes its best
estimate of the effective tax rate expected to be applicable for the full fiscal
year. The rate so determined is used in providing for income taxes on a current
year-to-date basis.
Recently Adopted Accounting Pronouncements
------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." The standard is effective for the Company's 2002 fiscal
year. 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. The adoption of SFAS No. 142 had no
impact on the Company's results of operations or its financial position.
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," is
effective for the Company's 2002 fiscal year. The standard addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of this standard had no impact on the Company's results of
operations or its financial position.
Recently Issued Accounting Pronouncements
-----------------------------------------
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be effective
for fiscal years
16
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. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," will be effective for fiscal
years beginning after May 15, 2002 (February 2, 2003 for the Company). The
standard rescinds FASB statements No. 4 and 64 that deal with issues relating to
the extinguishment of debt. The standard also rescinds FASB Statement No. 44
that deals with intangible assets of motor carriers. The standard modifies SFAS
No. 13, "Accounting for Leases," so that certain capital lease modifications
must be accounted for by lessees as sale-leaseback transactions. Additionally,
the standard identifies amendments that should have been made to previously
existing pronouncements and formally amends the appropriate pronouncements.
Management anticipates that the adoption of SFAS No. 145 will not have a
significant effect on the Company's results of operations or its financial
position.
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-Q 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-Q 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of A&F's financial instruments as of May 4, 2002 has not
significantly changed since February 2, 2002. A&F's market risk profile as of
February 2, 2002 is disclosed in A&F's Annual Report on Form 10-K.
17
PART II - OTHER INFORMATION
Item 1. 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 had 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 added A&F and others as defendants, but did
not otherwise significantly alter either the claims alleged or the
relief sought by the plaintiffs. A&F joined with other retailer
defendants in moving 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 defendants'
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 settlement as
to certain other retailer defendants was also heard the same date. A
motion to dismiss the second amended complaint was heard on March 19,
2002. On May 10, 2002, the Court granted in part and denied in part the
motion to dismiss the second amended complaint as to the remaining RICO
claim and granted the motion to dismiss the second amended complaint as
to the Common Law Peonage claim, the Anti-Peonage statutory claim, and
the Alien Tort Claims Act claim. The motions for class certification
and preliminary approval of settlement as to certain other retailer
defendents were also granted.
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
18
Court on the motions for summary judgment and reconsideration. 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2002, A&F held its annual meeting of shareholders at
Abercrombie & Fitch Headquarters, New Albany, Ohio. At such meeting,
Messrs. Russell M. Gertmenian, Archie M. Griffin and Sam N. Shahid, Jr.
were reelected to A&F's Board of Directors, each to serve for a
three-year term expiring in 2005. The vote on the election of directors
was as follows:
For Withheld Broker Non-Votes
--- -------- ----------------
Russell M. Gertmenian 88,616,642 1,355,010 0
Archie M. Griffin 89,412,278 559,374 0
Samuel N. Shahid, Jr. 89,423,401 548,251 0
19
The following individuals also continue to serve on the Board of
Directors: Messrs. John A. Golden, Michael S. Jeffries, Seth R. Johnson
and John W. Kessler and Kathryn D. Sullivan, Ph.D.
The proposal to re-approve the material terms of the performance goals
under the Abercrombie & Fitch Co. Incentive Compensation Performance
Plan was also approved by the shareholders of A&F. The vote on this
proposal was as follows:
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
86,853,280 2,905,167 213,194 11
20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 of A&F 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, incorporated by reference to Exhibit 3.4 to A&F's Annual
Report on Form 10-K for the year ended February 2, 2002. (File
No. 1-12107)
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, 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
21
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.
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,
incorporated by reference to Exhibit 10.4 to A&F's Annual
Report on Form 10-K for the year ended February 2, 2002. (File
No. 1-12107)
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 Amendment No. 4 to Form S-4
Registration Statement filed on April 14, 1998 (Registration
No. 333-46423).
10.7 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)
10.8 Replacement Promissory Note, dated January 1, 2002, issued by
Michael S. Jeffries to A&F, incorporated by reference to
Exhibit 10.9 to A&F's Annual Report on Form 10-K for the year
ended February 2, 2002. (File No. 1-12107)
15. Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Inclusion of Report of Independent Accountants.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the fiscal quarter ended May 4,
2002.
22
SIGNATURES
----------
Pursuant to the requirements 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.
ABERCROMBIE & FITCH CO.
(Registrant)
By /s/ Seth R. Johnson
-----------------------------------
Seth R. Johnson,
Executive Vice President and Chief
Operating Officer*
Date: May 31, 2002
________________________________
* Mr. Johnson has been duly authorized to sign on behalf of the Registrant as
its principal financial officer.
23
EXHIBIT INDEX
-------------
Exhibit No. Document
----------- ------------------------------------
10.1 Abercrombie & Fitch Co. Incentive Compensation
Performance Plan
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Inclusion of
Report of Independent Accountants.