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 November 3, 2001
----------------
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
-------
ABERCROMBIE & FITCH CO.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1469076
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, OH 43054
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
--------------
Not Applicable
----------------------------------------------------
(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 December 11, 2001
-------------------- --------------------------------
$.01 Par Value 98,870,455 Shares
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Thirteen and Thirty-nine Weeks Ended
November 3, 2001 and October 28, 2000.................................3
Condensed Consolidated Balance Sheets
November 3, 2001 and February 3, 2001.................................4
Condensed Consolidated Statements of Cash Flows
Thirty-nine Weeks Ended
November 3, 2001 and October 28, 2000.................................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.........16
Part II. Other Information
Item 1. Legal Proceedings..................................................17
Item 6. Exhibits and Reports on Form 8-K...................................19
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 Thirty-nine Weeks Ended
------------------------------- ------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
NET SALES $354,473 $364,122 $898,269 $798,159
Cost of Goods Sold, Occupancy and Buying Costs 211,070 220,839 548,699 491,708
-------------- ------------- ------------- -------------
GROSS INCOME 143,403 143,283 349,570 306,451
General, Administrative and Store Operating
Expenses 72,511 72,100 206,685 176,893
-------------- ------------- ------------- -------------
OPERATING INCOME 70,892 71,183 142,885 129,558
Interest Income, Net 1,001 1,469 3,849 5,300
-------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 71,893 72,652 146,734 134,858
Provision for Income Taxes 28,030 29,060 57,230 53,940
-------------- ------------- ------------- -------------
NET INCOME $43,863 $43,592 $89,504 $80,918
============== ============= ============= =============
NET INCOME PER SHARE:
Basic $0.44 $0.44 $0.90 $0.81
============== ============= ============= =============
Diluted $0.43 $0.43 $0.87 $0.79
============== ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 99,201 98,969 99,178 100,491
============== ============= ============= =============
Diluted 101,692 101,548 102,866 102,375
============== ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
November 3, February 3,
2001 2001
----------- -----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and Equivalents $ 71,481 $ 137,581
Marketable Securities 31,486 --
Receivables 26,439 15,829
Inventories 153,204 120,997
Store Supplies 23,968 17,817
Other 14,396 11,338
--------- ---------
TOTAL CURRENT ASSETS 320,974 303,562
PROPERTY AND EQUIPMENT, NET 369,902 278,785
DEFERRED INCOME TAXES 4,788 4,788
OTHER ASSETS 273 381
--------- ---------
TOTAL ASSETS $ 695,937 $ 587,516
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 36,422 $ 33,942
Accrued Expenses 127,469 101,302
Income Taxes Payable 11,399 19,318
--------- ---------
TOTAL CURRENT LIABILITIES 175,290 154,562
OTHER LONG-TERM LIABILITIES 10,327 10,254
SHAREHOLDERS' EQUITY:
Common Stock 1,033 1,033
Paid-In Capital 136,350 136,490
Retained Earnings 440,372 350,868
--------- ---------
577,755 488,391
Less: Treasury Stock, at Average Cost (67,435) (65,691)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 510,320 422,700
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 695,937 $ 587,516
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Thirty-nine Weeks Ended
------------------------
November 3, October 28,
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net Income $ 89,504 $ 80,918
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 29,196 21,112
Noncash Charge for Deferred Compensation 3,110 3,386
Changes in Assets and Liabilities:
Inventories (32,207) (47,112)
Accounts Payable and Accrued Expenses 10,745 34,496
Income Taxes (7,919) (25,352)
Other Assets and Liabilities (19,321) 2,195
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 73,108 69,643
--------- ---------
INVESTING ACTIVITIES:
Capital Expenditures (102,411) (114,190)
Purchases of Marketable Securities (31,486) --
Proceeds from Maturities of Marketable Securities -- 45,601
Notes Receivable (317) (3,000)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (134,214) (71,589)
--------- ---------
FINANCING ACTIVITIES:
Stock Option Exercises and Other 6,075 (7,871)
Purchases of Treasury Stock (11,069) (43,929)
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (4,994) (51,800)
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (66,100) (53,746)
Cash and Equivalents, Beginning of Year 137,581 147,908
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 71,481 $ 94,162
========= =========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Accrual for Construction in Progress $ 17,902 $ 29,126
========= =========
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 November 3, 2001 and
for the thirteen and thirty-nine week periods ended November 3, 2001 and
October 28, 2000 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 3, 2001
(the "2000 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 November 3, 2001 and
for the thirteen and thirty-nine week periods ended November 3, 2001 and
October 28, 2000 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 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 of A&F anticipates that
the adoption of SFAS
6
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 of A&F 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 of A&F anticipates
that the adoption of SFAS No. 144 will not have an impact on the Company's
results of operations or its financial position.
3. EARNINGS PER SHARE
Weighted Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
------------------------
November 3, October 28,
2001 2000
----------- -----------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (4,099) (4,331)
------- -------
Basic shares 99,201 98,969
Dilutive effect of options and restricted shares 2,491 2,579
------- -------
Diluted shares 101,692 101,548
======= =======
Thirty-nine Weeks Ended
-------------------------
November 3, October 28,
2001 2000
----------- -----------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (4,122) (2,809)
------- -------
Basic shares 99,178 100,491
Dilutive effect of options and restricted shares 3,688 1,884
------- -------
Diluted shares 102,866 102,375
======= =======
Options to purchase 6,388,000 and 5,599,000 shares of Class A Common Stock
during the thirteen and thirty-nine weeks ended November 3, 2001,
respectively, and 8,798,000
7
and 9,015,000 shares during the thirteen and thirty-nine weeks ended October
28, 2000, respectively, were outstanding, 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.
4. 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.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
November 3, February 3,
2001 2001
----------- -----------
Property and equipment, at cost $ 494,154 $ 384,196
Accumulated depreciation and amortization (124,252) (105,411)
--------- ---------
Property and equipment, net $ 369,902 $ 278,785
========= =========
6. INCOME TAXES
The provision for income taxes is based on the current estimate of the annual
effective tax rate. Income taxes paid during the thirty-nine weeks ended
November 3, 2001 and October 28, 2000 approximated $64.7 million and $80.0
million, respectively.
7. 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 November 3, 2001 or February 3, 2001.
8
8. RELATED PARTY TRANSACTIONS
Shahid & Company, Inc. has provided advertising and design services to 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 thirty-nine weeks ended November 3, 2001 and October 28, 2000 were
approximately $1.3 million for each period.
On May 18, 2001, A&F loaned the amount of $4,817,146 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, 2001. The outstanding principal under the note bears interest at
the rate of 4.5% per annum. This note constitutes a replacement of, and
substitute for, the replacement promissory note dated as of August 28, 2000
in the amount of $4.5 million, which has been cancelled.
9. 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 sheets of
Abercrombie & Fitch (the "Company") and its subsidiaries as of November 3, 2001
and October 28, 2000, and the related condensed consolidated statements of
income for each of the thirteen and thirty-nine week periods ended November 3,
2001 and October 28, 2000 and the condensed consolidated statements of cash
flows for the thirty-nine week periods ended November 3, 2001 and October 28,
2000. 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 3, 2001 and the related consolidated statements of income,
shareholders' equity, and of cash flows for the year then ended (not presented
herein) and in our report dated February 20, 2001 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 3, 2001 is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
November 9, 2001
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
During the third quarter of the 2001 fiscal year, net sales decreased 3% to
$354.5 million from $364.1 million a year ago. Operating income declined to
$70.9 million in the third quarter of 2001 from $71.2 million in the third
quarter of 2000. Earnings per diluted share were $.43 in the third quarter of
both 2001 and 2000. Year-to-date earnings per diluted share were $.87 in 2001
compared to $.79 in 2000.
Financial Summary
The following summarized financial and statistical data compares the thirteen
and thirty-nine week periods ended November 3, 2001 to the comparable fiscal
2000 periods:
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------------- -------------------------------------------
November 3, October 28, November 3, October 28,
2001 2000 Change 2001 2000 Change
------------ ----------- ----------- ------------- ----------- -----------
Comparable store sales (15)% (3)% (8)% (5)%
Retail sales increase 12% 31% 21% 24%
attributable to new and
remodeled stores, magazine,
catalogue and Web sites
Retail sales per average gross $104 $138 (25)% $274 $320 (14)%
square foot
Retail sales per average store $797 $1,143 (30)% $2,134 $2,691 (21)%
(thousands)
Average store size at end of 7,594 8,178 (7)%
quarter (gross square feet)
Gross square feet at end of 3,448 2,658 30%
quarter (thousands)
Number of stores:
Beginning of period 405 294 354 250
Opened 49 31 101 75
Closed - - 1 -
----- ------ ------ ------
End of period 454 325 454 325
===== ====== ====== ======
Net Sales
---------
Net sales for the third quarter of 2001 decreased 3% to $354.5 million from
$364.1 million in 2000. The decrease was due to a 15% decline in comparable
store sales as compared with last year's thirteen-week period ended November 4,
2000, which more than offset the sales increase attributable to the addition of
new stores. The decrease in comparable store sales was primarily due to
continued weakness in the men's business. Women's had a negative single-digit
comparable store sales decrease for the quarter. Stronger performing categories
were in denim, gymwear, skirts and women's accessories. The quarter was affected
by an unusual interest in "wear-now" merchandise at the expense of traditionally
strong back-to-school categories such as
11
sweaters, sweats and outerwear. The Company's catalogue, the A&F Quarterly (a
catalogue/magazine), and the Company's Web sites accounted for 3.4% of net sales
in the third quarter of 2001 as compared to 2.9% last year. Operating
improvements in e-commerce fulfillment helped reduce the number of backorders,
increasing sales by improving in-stocks.
Year-to-date net sales were $898.3 million, an increase of 13% from $798.2
million for the same period in 2000. Sales growth resulted from the addition of
new stores offset by an 8% decline in comparable store sales. The decrease in
comparable store sales was primarily due to continued weakness in the men's
business. Comparable store sales were positive in the women's business with
strong performances in denim, knits, sweaters, skirts and gymwear. The Company's
catalogue, the A&F Quarterly and the Company's Web sites represented 4.0% of
2001 year-to-date net sales as compared to 3.1% last year.
Gross Income
------------
Gross income, expressed as a percentage of net sales, increased to 40.5% during
the third quarter of 2001 from 39.4% for the same period in 2000. The increase
was primarily attributable to higher merchandise margins (representing gross
income before the deduction of buying and occupancy costs) due to higher initial
markup (IMU), a lower markdown rate and lower inventory shrinkage. The increase
in IMU was a result of continued improvement in the sourcing of merchandise,
which allowed for increased markup while maintaining similar retail prices as
compared to last year. Merchandise margins also increased because of a cautious
investment in back-to-school inventory, which led to a lower level of inventory
per square foot. The reduced level of inventory allowed for a reduction in
markdowns, expressed as a percentage of net sales, as compared to last year.
Additionally, the Company continues to emphasize its in-store operational
controls to improve inventory shrinkage. Partially offsetting these improvements
was an increase in buying and occupancy costs, expressed as a percentage of net
sales, as a result of the inability to leverage fixed expenses with lower sales
volume per average store.
The 2001 year-to-date gross income, expressed as a percentage of net sales,
increased to 38.9% from 38.4% for the comparable period in 2000. The increase
was attributable to higher IMU as a result of the improved sourcing of
merchandise, a lower markdown rate and lower inventory shrinkage. Partially
offsetting these improvements was an increase in buying and occupancy costs,
expressed as a percentage of net sales, as a result of the inability to leverage
fixed expenses with lower sales volume per average store.
General, Administrative and Store Operating Expenses
----------------------------------------------------
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 20.5% and 19.8% in the third quarter of 2001 and 2000,
respectively. 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
outside services expenses as a percentage of net sales. The savings from these
cost controls were offset by the inability to leverage fixed expenses as a
result of the decrease in sales volume per average store. Also offsetting the
cost savings were higher depreciation and occupancy expenses related to the new
home office complex and distribution center. General, administrative and store
operating expenses were also negatively impacted by a significant
12
increase in charitable contributions. All profits from "freedom" t-shirts and
savings from the cancellation of the Christmas magazine were donated to help
victims of the September 11th attack. These contributions totaled approximately
$1.6 million for the quarter.
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 23.0% and 22.2% for the year-to-date periods in 2001 and
2000, respectively. The percentage increase resulted primarily from the
inability to leverage fixed expenses as a result of the decrease in sales
volume per average store.
Operating Income
----------------
Operating income, expressed as a percentage of net sales, increased to 20.0%
during the third quarter of 2001 from 19.5% for the comparable period of 2000.
The increase is a result of a higher gross income percentage. The increase was
partially offset by higher general, administrative and store operating expenses,
expressed as a percentage of net sales.
Operating income, expressed as a percentage of net sales, declined to 15.9% for
the year-to-date period in 2001 from 16.2% for the comparable period in 2000.
The decline in the operating income percentage is a result of higher general,
administrative and store operating expenses, expressed as a percentage of net
sales, which were partially offset by the increased gross income percentage.
Interest Income
---------------
Third quarter and year-to-date net interest income were $1.0 and $3.8 million in
2001 as compared with net interest income of $1.5 and $5.3 million for the third
quarter and year-to-date periods last year. Net interest income in 2001 and 2000
was primarily from short-term investments.
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):
November 3, February 3,
2001 2001
----------- -----------
Working capital $145,684 $149,000
======== ========
Capitalization:
Shareholders' equity $510,320 $422,700
======== ========
Net cash provided by operating activities totaled $73.1 million for the
thirty-nine weeks ended November 3, 2001 versus $69.6 million in the comparable
period of 2000. Cash was provided primarily by current year net income adjusted
for depreciation and amortization. Additionally, cash was provided from an
increase in both accounts payable and accrued expenses as a result of
13
the continued growth of the business. Cash was used primarily to fund inventory
and store supplies required to support the addition of new stores and for tax
payments on earnings in the fourth quarter of 2000 and estimated tax payments
for fiscal year 2001 earnings. In addition, receivables increased primarily as a
result of higher construction allowances related to the timing of new store
openings.
Abercrombie & Fitch'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 related to
new and remodeled stores (net of construction allowances) and the construction
costs of the new home office and distribution center. In 2001, cash outflows for
investing activities also consisted of the purchase of short-term marketable
securities. In 2000, capital expenditures were offset by maturities of
marketable securities.
Financing activities during 2001 and 2000 consisted primarily of the repurchase
of 600,000 and 3,550,000 shares of A&F's Class A Common Stock pursuant to
previously authorized stock repurchase programs. As of November 3, 2001, A&F
was authorized to repurchase up to an additional 1,850,000 shares under the
current repurchase program. Financing activities also consisted of stock option
exercises.
Capital Expenditures
--------------------
Capital expenditures, primarily for new and remodeled stores and the
construction of the new home office and distribution center, totaled $102.4
million and $114.2 million for the thirty-nine weeks ended November 3, 2001 and
October 28, 2000, respectively. Additionally, the noncash accrual for
construction in progress increased by $17.9 million in 2001 and by $29.1 million
in 2000.
The Company anticipates spending $125 to $135 million in 2001 for capital
expenditures, of which $100 to $110 million will be for new stores, remodeling
and/or expansion of existing stores and related improvements. The balance of
capital expenditures will chiefly be related to the new home office and
distribution center, which were completed in April 2001 and February 2001,
respectively, as well as to the decision to in-source IT data center operations
and e-commerce fulfillment. The Company intends to add approximately 820,000
gross square feet in 2001, which will represent a 29% increase over year-end
2000. It is anticipated the increase will result from the net addition of
approximately 44 new Abercrombie & Fitch stores, 63 abercrombie stores and 29
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 2001 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 2001 will
approximate $500,000 per store, after
14
giving effect to landlord allowances. In addition, inventory purchases are
expected to average approximately $150,000 per store.
The Company is in the early stages of developing Hollister Co. As a result,
current average costs for leasehold improvements, furniture and fixtures and
inventory purchases are not representative of future costs.
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.
Relationship with The Limited
-----------------------------
Effective May 19, 1998, The Limited, Inc. ("The Limited") completed a tax-free
exchange offer to establish A&F as an independent company. 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 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 formerly provided by The Limited did not
have a material adverse impact nor are they expected to have a material adverse
impact on the Company's financial condition.
Recently Issued 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 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 of A&F 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
15
terms are minimal, management of A&F 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 of A&F anticipates that the adoption
of SFAS No. 144 will not have an impact 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 Report 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 2001
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 and train associates.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of A&F's financial instruments as of November 3, 2001 has not
significantly changed since February 3, 2001. A&F's market risk profile as of
February 3, 2001 is disclosed in A&F's Annual Report on Form 10-K.
16
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 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 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. Plaintiffs filed their motion for
class certification on December 13, 2001 and their second amended
complaint on December 17, 2001. The Court has set a hearing for class
certification for February 14, 2002 and class certification discovery
has commenced. The motion for preliminary approval of the other
defendants' settlement is also set for hearing on February 28, 2002.
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 has been fully briefed and oral arguments were held before
the Sixth Circuit on December 7, 2000. A&F is awaiting a written
decision.
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
17
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.
18
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
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, incorporated by reference to
Exhibit 3.2 to A&F's Quarterly Report on Form 10-Q for the quarter
ended November 2, 1996. (File No. 1-12107)
3.5 Certificate regarding adoption of amendment to Subsection 1.10(c) of
Amended and Restated Bylaws of A&F by Board of Directors on April 4,
2000, incorporated by reference to Exhibit 3.5 to A&F's Annual
Report on Form 10-K for the year ended January 29, 2000. (File No.
1-12107)
3.6 Amended and Restated Bylaws of A&F (reflecting amendments through
April 4, 2000) (for SEC reporting compliance purposes only),
incorporated by reference to Exhibit 3.6 to A&F's Annual Report on
Form 10-K for the year ended January 29, 2000. (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
19
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).
10.4 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)
10.5 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).
10.6 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)
10.7 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 May 18, 2001, issued by Michael
S. Jeffries to A&F, incorporated by reference to Exhibit 10.11 to
A&F's Quarterly Report on Form 10-Q for the quarter ended May 5,
2001. (File No. 1-12107)
20
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
November 3, 2001.
21
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: December 17, 2001
* Mr. Johnson has been duly authorized to sign on behalf of the Registrant as
its principal financial officer.
22
EXHIBIT INDEX
-------------
Exhibit No. Document
----------- --------
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).
15 Letter re: Unaudited Interim Financial Information to Securities
and Exchange Commission re: Inclusion of Report of Independent
Accountants.