UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2004
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, Ohio 43054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Class A Common Stock, $.01 Par Value New York Stock Exchange, Inc.
Series A Participating Cumulative Preferred
Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Aggregate market value of the registrant's Class A Common Stock (the only
outstanding common equity of the registrant) held by non-affiliates of the
registrant as of August 1, 2003: $3,050,347,857.
Number of shares outstanding of the registrant's common stock as of March 26,
2004: 94,445,669 shares of Class A Common Stock.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 20, 2004 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS.
GENERAL.
Abercrombie & Fitch Co., a Delaware corporation ("A&F"), through its
subsidiaries (collectively, A&F and its subsidiaries are referred to as
"Abercrombie & Fitch" or the "Company"), is a specialty retailer which operates
stores selling casual apparel, personal care and other accessories for men,
women and kids under the Abercrombie & Fitch, abercrombie and Hollister brands.
As of January 31, 2004, the Company operated 700 stores in the United States.
A&F's Web site is www.abercrombie.com (this uniform resource locator, or URL, is
an inactive textual reference only and is not intended to incorporate A&F's Web
site into this Annual Report on Form 10-K). A&F makes available free of charge,
on or through its Web site, its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after A&F electronically files such
material with, or furnishes it to, the Securities and Exchange Commission.
DESCRIPTION OF OPERATIONS.
General.
The Abercrombie & Fitch brand was established in 1892 and became well known as a
supplier of rugged, high-quality outdoor gear. Famous for outfitting the safaris
of Teddy Roosevelt and Ernest Hemingway and the expeditions of Admiral Byrd to
the North and South Poles, Abercrombie & Fitch goods were renowned for their
durability and dependability - and Abercrombie & Fitch placed a premium on
complete customer satisfaction with each item sold. In 1992, a new management
team began repositioning Abercrombie & Fitch as a more fashion-oriented casual
apparel business directed at men and women with a youthful lifestyle, targeted
at 18 to 22 year-old college students. In reestablishing the Abercrombie & Fitch
brand, the Company combined its historical image for quality with a new emphasis
on casual American style and youthfulness.
In 1997, the Company introduced the A&F Quarterly (a catalogue/magazine), which
was a lifestyle magazine focused on the college experience, and subsequently
added a catalogue format. The A&F Quarterly has been discontinued and the
Company is re-evaluating its advertising strategy. The Company launched a
web-based store featuring lifestyle pieces, such as AFTV, located at its Web
site, www.abercrombie.com, in 1998. Products comparable to those carried at
Abercrombie & Fitch stores can also be purchased through its Web site.
The Company launched abercrombie, which targets 7 to 14 year-old boys and girls,
in 1998. These stores offer fashion-oriented casual apparel in the tradition of
Abercrombie & Fitch style and quality. A lifestyle web-based store located at
www.abercrombiekids.com (this uniform resource locator, or URL, is an inactive
textual reference only and is not intended to incorporate the Web site into this
Annual Report on Form 10-K) was introduced in 2000, where products comparable to
those carried at abercrombie stores can be purchased on-line.
The Hollister brand was launched in 2000. Hollister is a West Coast oriented
lifestyle brand targeted at 14 to 17-year-old high school guys and girls, at
lower price points than Abercrombie & Fitch. Hollister has established a
lifestyle Web site at www.hollisterco.com (this uniform resource locator, or
URL, is an inactive textual reference only and is not intended to incorporate
the Web site into this Annual Report on Form 10-K) and since back-to-school
2003, products comparable to those carried at Hollister stores can be purchased
on-line.
2
The Company recently announced plans for a new lifestyle brand that will target
an older customer than its current brands and expects to open four test stores
in August 2004.
At the end of fiscal year 2003, the Company operated 700 stores. The following
table shows the changes in the number of retail stores operated by the Company
for the past five fiscal years:
Fiscal Beginning End
Year of Year Opened Closed of Year
-------------- ---------- ------ ------ -------
1999 196 54 - 250
2000 250 104 - 354
2001 354 138 (1) 491
2002 491 112 (6) 597
2003 597 107 (4) 700
Financial Information about Segments.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company determined its operating segments on the same basis that is used
internally to evaluate performance and allocate resources. The operating
segments identified by the Company, Abercrombie & Fitch, abercrombie and
Hollister, have been aggregated and are reported as one reportable segment. The
Company aggregates the operating segments because they meet the aggregation
criteria set forth in SFAS No. 131. Operating segments may be aggregated if they
are similar in each of the following areas: economic characteristics, nature of
products, nature of production processes, distribution method and nature of
regulatory environment.
Suppliers.
During fiscal year 2003, the Company purchased merchandise from approximately
210 factories and suppliers located throughout the world. In fiscal year 2003,
the Company sourced approximately 9% of its apparel through Direct Source (Far
East) Ltd. In addition to purchases from Direct Source (Far East) Ltd., the
Company purchased merchandise directly in foreign markets from other vendors.
Additional merchandise was purchased in the domestic market, some of which has
been manufactured overseas. Excluding purchases from Direct Source (Far East)
Ltd., no more than 5% of the merchandise purchased by the Company during fiscal
year 2003 originated from any single factory or supplier. The Company pursues a
global sourcing strategy that includes relationships with vendors in over 30
countries. Any event causing a sudden disruption in these sourcing operations,
either political or financial, could have an adverse effect on the Company's
operations. Substantially all of the Company's foreign purchases of merchandise
are negotiated and paid for in U.S. dollars.
3
Distribution and Merchandise Inventory.
Substantially all of the merchandise and related materials for the Company's
stores are shipped to its distribution center in New Albany, Ohio where the
merchandise is received and inspected. Merchandise and related materials are
then distributed to the Company's stores using contract carriers.
The Company's policy is to maintain sufficient quantities of inventory on hand
in its retail stores and distribution center so that it can offer customers a
full selection of current merchandise. The Company emphasizes rapid inventory
turnover and takes markdowns where required to keep merchandise fresh and
current with fashion trends.
Seasonal Business.
The Company views the retail apparel market as having two principal selling
seasons, Spring and Fall. As is generally the case in the apparel industry, the
Company experiences its peak sales activity during the Fall season. This
seasonal sales pattern results in increased inventory during the back-to-school
and Christmas selling periods. During fiscal year 2003, the highest inventory
level approximated $227.3 million at the November 2003 month-end and the lowest
inventory level approximated $162.5 million at the February 2003 month-end.
Store Operations.
The Company's stores and point-of-sale marketing are designed to convey the
principal elements and personality of each brand. The store design, furniture,
fixtures and music are all carefully planned and coordinated to create a
shopping experience that is consistent with the Abercrombie & Fitch, abercrombie
or Hollister lifestyle.
The Company's sales associates, or brand representatives, are a central element
in creating the entertaining, yet comfortable, atmosphere of the stores. In
addition to providing a high level of customer service, brand representatives
reflect the casual, energetic attitude of the brand and culture.
The Company maintains a uniform appearance throughout its store base, for each
concept, in terms of merchandise display and location on the selling floor.
Store managers receive detailed store plans that dictate fixture and merchandise
placement to ensure uniform execution of the merchandising strategy at the store
level. Standardization, by concept, of store design and merchandise presentation
also creates cost savings in store furnishings, maximizes usage and productivity
of selling space and allows the Company to efficiently open new stores.
Trademarks.
The Abercrombie & Fitch, abercrombie and Hollister Co. trademarks, and certain
other trademarks, either have been registered or are the subject of pending
trademark registration applications with the United States Patent and Trademark
Office and with registries of many foreign countries. The Company believes that
its products are identified by its trademarks and, thus, its trademarks are of
significant value. Each registered trademark has a duration of 20 years and is
subject to an indefinite number of renewals for a like period upon appropriate
application. The Company intends to continue the use of each of its trademarks
and to renew each of its registered trademarks.
4
Other Information.
Additional information about the Company's business, including its revenues and
profits for the last three fiscal years, plus gross square footage is set forth
under the caption "ITEM 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this Annual Report on Form
10-K.
COMPETITION.
The sale of apparel and personal care products through retail stores and
e-commerce is a highly competitive business with numerous competitors, including
individual and chain fashion specialty stores and department stores. Fashion,
price, service, store location, selection and quality are the principal
competitive factors in retail store sales and on-line sales.
The Company is unable to reasonably estimate the number of competitors or its
relative competitive position due to the large number of companies selling
apparel and personal care products through retail stores, catalogues and
e-commerce.
ASSOCIATE RELATIONS.
On March 26, 2004, the Company employed approximately 30,200 associates (none of
whom were party to a collective bargaining agreement), approximately 26,400 of
whom were part-time. In addition, temporary associates are hired during peak
periods, such as the Holiday season.
The Company believes its relationship with associates is good. However, in the
normal course of business, the Company is party to lawsuits involving a small
number of its former and current associates.
RISK FACTORS.
The following risk factors should be read in connection with evaluating the
Company's business and the forward-looking statements contained in this Annual
Report on Form 10-K. Any of the following risks could have a material adverse
effect on the Company's business.
The Loss of the Services of Key Personnel Could Have a Material Adverse Effect
on Business.
The Company's executive officers have substantial experience and expertise in
the retail business and have made significant contributions to the growth and
success of the Company's brands. The unexpected loss of the services of one or
more of these individuals could adversely affect the Company.
Business Could Suffer As a Result of a Manufacturer's Inability to Produce
Merchandise on Time and to Specifications.
The Company does not own or operate any manufacturing facilities and therefore
depends upon independent third parties for the manufacture of all its
merchandise. The Company uses both domestic and international manufacturers to
produce its merchandise. The inability of a manufacturer to ship orders in a
timely manner or meet the Company's quality standards could cause delivery date
requirements to be missed, which could result in lost sales.
5
Business Could Suffer if a Manufacturer Fails to Use Acceptable Labor Practices.
The Company's sourcing agents and independent manufacturers are required to
operate in compliance with all applicable laws and regulations. While the
Company's vendor operating guidelines promote ethical business practices and
Company representatives periodically visit and monitor the operations of the
independent manufacturers, the Company does not control these manufacturers or
their labor practices. The violation of labor or other laws by an independent
manufacturer, or by one of the sourcing agents, or the divergence of an
independent manufacturer's or sourcing agent's labor practices from those
generally accepted as ethical in the United States, could interrupt, or
otherwise disrupt the shipment of finished products or damage the Company's
reputation. Any of these, in turn, could have a material adverse effect on the
Company's financial condition and results of operations.
The Company's Business is Subject to Risks Associated with Importing Products.
The Company sources the majority of its merchandise from outside the United
States through arrangements with approximately 210 foreign manufacturers located
throughout the world. Risks inherent in importing merchandise include:
- quotas imposed by bilateral textile agreements;
- changes in social, political and economic conditions which could
result in the disruption of trade from the countries in which
manufacturers or suppliers are located;
- the imposition of additional regulations relating to imports;
- the imposition of additional duties, taxes and other charges on
imports; and
- foreign currency fluctuations.
The Company's Success Depends on its Ability to Respond to Constantly Changing
Fashion Trends and Consumer Demands.
The Company's success depends on its ability to create and define fashion
products, as well as to anticipate, gauge and react to changing consumer demands
in a timely manner. The merchandise must appeal to each brand's corresponding
target market of consumers whose preferences cannot be predicted with certainty
and are subject to rapid change. The Company cannot guarantee that it will be
able to continue to develop appealing styles or successfully meet constantly
changing consumer demands in the future. Any failure to anticipate, identify and
respond effectively to changing consumer demands and fashion trends could
adversely affect retail and consumer acceptance of the merchandise resulting in
missed opportunities. If that occurs, the Company may need to rely on markdowns
to sell through the excess, slow-moving inventory, which may have a material
adverse effect on the Company's financial condition and results of operations.
At the same time, management's focus on tight inventory control may result, from
time to time, in lost sales due to an inadequate supply of products to meet
consumer demand.
A Downturn in the United States Economy May Affect Consumer Spending Habits.
Consumer purchases of discretionary items and retail products, including the
Company's products, may decline during recessionary periods and also may decline
at other times when disposable income is lower. A downturn in the economy may
adversely affect the Company's sales. The current economic conditions have and
may continue to adversely affect consumer spending and sales of the Company's
products.
6
The Company Relies on a Single Distribution Center.
The Company operates one distribution center to receive, store and distribute
merchandise to all of its stores and fulfill e-commerce sales. Any significant
interruption in the operation of the distribution center due to natural
disasters, accidents, system failures or other unforeseen causes could have a
material adverse effect on the Company's financial condition and results.
The Outcome of Litigation Could Have a Material Adverse Effect on Business.
The Company is involved, from time to time, in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company. However, management's assessment of the Company's
current litigation could change in light of the discovery of facts with respect
to legal actions pending against the Company not presently known to the Company
or determinations by judges, juries or other finders of fact which are not in
accord with management's evaluation of the possible liability or outcome of such
litigation.
Any one of the factors described above could have a material adverse effect on
the Company's financial condition and results of operations.
7
ITEM 2. PROPERTIES.
The Company's headquarters and support functions (consisting of office,
distribution and shipping facilities) are located in New Albany, Ohio and owned
by the Company.
All of the retail stores operated by the Company are located in leased
facilities, primarily in shopping centers throughout the continental United
States. The leases expire at various dates, principally between 2004 and 2016.
Typically, when space is leased for a retail store in a shopping center, all
improvements, including interior walls, floors, ceilings, fixtures and
decorations, are supplied by the tenant. In certain cases, the landlord of the
property may provide a construction allowance to fund all or a portion of the
cost of improvements. The cost of improvements varies widely, depending on the
size and location of the store. Rental terms for new locations usually include a
fixed minimum rent plus a percentage of sales in excess of a specified amount.
Certain operating costs such as common area maintenance, utilities, insurance
and taxes are typically paid by the tenant.
As of January 31, 2004, the Company's 700 stores were located in 49 states and
the District of Columbia as follows:
Alabama 13 Kentucky 10 North Dakota 1
Alaska 1 Louisiana 14 Ohio 33
Arizona 13 Maine 3 Oklahoma 10
Arkansas 4 Maryland 6 Oregon 5
California 69 Massachusetts 17 Pennsylvania 34
Colorado 11 Michigan 29 Rhode Island 3
Connecticut 14 Minnesota 17 South Carolina 6
Delaware 1 Mississippi 5 South Dakota 2
District of Columbia 1 Missouri 22 Tennessee 17
Florida 35 Montana 2 Texas 51
Georgia 25 Nebraska 4 Utah 5
Hawaii 1 Nevada 5 Vermont 2
Idaho 1 New Hampshire 5 Virginia 19
Illinois 37 New Jersey 21 Washington 17
Indiana 20 New Mexico 3 West Virginia 3
Iowa 3 New York 36 Wisconsin 15
Kansas 7 North Carolina 22
8
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in lawsuits arising in the ordinary course of
business.
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. On November 14, 2003, the motions to dismiss the
Amended Complaint were denied. On December 2, 2003, A&F moved for
reconsideration or reargument of the November 14, 2003 order denying the motions
to dismiss. The motions for reconsideration or reargument were fully briefed and
submitted to the Court on January 9, 2004. The motions were denied on February
23, 2004.
A&F is aware of six actions that have been filed on behalf of purported classes
of employees and former employees of the Company alleging that the Company
required its associates to wear and pay for a "uniform" in violation of
applicable law. In each case, the plaintiff, on behalf of his or her purported
class, seeks injunctive relief and unspecified amounts of economic and
liquidated damages. Two of these cases, Jennifer M. Solis v. Abercrombie & Fitch
Stores, Inc. and A&F California, LLC and Sarah Stevenson v. Abercrombie & Fitch
Co., allege violations of California law and were filed on February 10, 2003 and
February 4, 2003 in the California Superior Courts for Los Angeles County and
San Francisco County, respectively. An answer was filed in the Solis case on
March 26, 2003. Pursuant to a Petition for Coordination, the Solis and the
Stevenson cases were coordinated by order issued November 17, 2003. Jadii Mohme
v. Abercrombie & Fitch, which alleges violations of Illinois law, was filed on
July 18, 2003 in the Illinois Circuit Court of St. Clair County. A first amended
complaint was filed in the Mohme case on September 10, 2003 to change the
defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." An
answer to the first amended complaint was filed in the Mohme case on September
26, 2003. The parties are in the process of discovery. Shelby Port v.
Abercrombie & Fitch Stores, Inc., which alleges violations of Washington law,
was filed on or about July 18, 2003 in the Washington Superior Court of King
County. The defendant filed a motion to dismiss the complaint in the Port case
on September 5, 2003. That motion is pending. Holly Zemany v. Abercrombie &
Fitch, which alleges violations of Pennsylvania law, was filed on July 18, 2003
in the Pennsylvania Court of Common Pleas of Allegheny County. A first amended
complaint was filed in the Zemany case on September 9, 2003 to change the
defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." A
second amended complaint was filed November 10, 2003, adding some factual
allegations. Defendant filed an answer to the second amended complaint on
January 22, 2004.
9
In Michael Gualano v. Abercrombie & Fitch, which was filed in the United States
District Court for the Western District of Pennsylvania on March 14, 2003, the
plaintiff alleges that the "uniform," when purchased, drove associates' wages
below the federal minimum wage. The complaint purports to state a collective
action on behalf of all part-time associates nationwide under the Fair Labor
Standards Act. A first amended complaint was filed in the Gualano case on
September 9, 2003, to change the defendant to "Abercrombie & Fitch Stores, Inc."
from "Abercrombie & Fitch." An answer to the first amended complaint was filed
in the Gualano case on or about September 24, 2003, and the parties are in the
process of discovery.
A&F is aware of two actions that have been filed on behalf of purported classes
alleged to be discriminated against in hiring or employment decisions due to
race and/or national origin. Eduardo Gonzalez, et al. v. Abercrombie & Fitch Co.
was filed on June 16, 2003 in the United States District Court for the Northern
District of California. The plaintiffs subsequently amended their complaint to
add A&F California, LLC, Abercrombie & Fitch Stores, Inc. and A&F Ohio, Inc. as
defendants. The plaintiffs allege, on behalf of their purported class, that they
were discriminated against in hiring and employment decisions due to their race
and/or national origin. The plaintiffs seek, on behalf of their purported class,
injunctive relief and unspecified amounts of economic, compensatory and punitive
damages. A second amended complaint, which added two additional plaintiffs, was
filed on or about January 9, 2004. Defendant filed an answer to the second
amended complaint on or about January 26, 2004. The parties are in the process
of discovery. A&F is aware that Brandy Hawk v. Abercrombie & Fitch Co. was filed
on or about November 19, 2003 in the United States District Court for the
District of New Jersey. The plaintiff alleged, on behalf of her purported class,
that she was discriminated against in hiring decisions due to her race. The Hawk
matter was voluntarily dismissed without prejudice on or about December 5, 2003.
In addition, the EEOC is conducting nationwide investigations relating to
allegations of discrimination based on race, national origin and gender.
A&F is aware of two actions that have been filed against the Company involving
overtime compensation. In each action, the plaintiffs, on behalf of their
respective purported class, seek injunctive relief and unspecified amounts of
economic and liquidated damages. In Bryan T. Kimbell, Individually and on Behalf
of All Others Similarly Situated and on Behalf of the Public v. Abercrombie &
Fitch Stores, Inc., which was filed on July 10, 2002 in the California Superior
Court for Los Angeles County, the plaintiffs allege that California general and
store managers were entitled to receive overtime pay as "non-exempt" employees
under California wage and hour laws. An answer was filed in the Kimbell case on
September 4, 2002 and the parties are in the process of discovery. In Melissa
Mitchell, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores,
Inc., which was filed on June 13, 2003 in the United States District Court for
the Southern District of Ohio, the plaintiffs allege that assistant managers and
store managers were not paid overtime compensation in violation of the Fair
Labor Standards Act and Ohio law. A&F filed a motion to dismiss the Mitchell
case on July 28, 2003, which is pending.
A&F believes that these actions 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
10
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information regarding the executive officers of A&F
as of March 26, 2004.
Michael S. Jeffries, 59, has been Chairman and Chief Executive Officer of A&F
since May 1998. From February 1992 to May 1998, Mr. Jeffries held the position
of President and Chief Executive Officer of A&F. Mr. Jeffries has also been a
director of A&F since 1996.
Seth R. Johnson, 50, has been Executive Vice President-Chief Operating Officer
of A&F since February 2000. Prior thereto, Mr. Johnson had been Vice
President-Chief Financial Officer of A&F since 1992. Mr. Johnson has been a
director of A&F since 1998.
Diane Chang, 48, has been Senior Vice President-Sourcing of A&F since February
2000. Prior thereto, she held the position of Vice President-Sourcing of A&F
from May 1998 to February 2000 and for six and one-half years prior thereto, Ms.
Chang held the position of Senior Vice President-Manufacturing at J. Crew, Inc,
a clothing retailer.
Carole L. Kerner, 51, was named Senior Vice President-General Merchandise
Manager for the new lifestyle brand of the Company in June 2003 after working
for the Company as an employee since September 2002. Prior thereto, Ms. Kerner
held the position of President at Donna Karan and DKNY womens apparel, a
clothing retailer, from June 1998 to September 2002.
David L. Leino, 40, has been Senior Vice President-Stores of A&F since February
2000. Prior thereto, Mr. Leino held the position of Vice President-Stores of A&F
from February 1996 to February 2000.
Leslee K. O'Neill, 43, has been Senior Vice President-Planning and Allocation of
A&F since February 2000. Prior thereto, Ms. O'Neill held the position of Vice
President-Planning & Allocation of A&F from February 1994 to February 2000.
Susan J. Riley, 45, was named Senior Vice President-Chief Financial Officer of
A&F in February 2004. Prior thereto, Ms. Riley held the position of Chief
Financial Officer at The Mount Sinai Medical Center in New York from August 2002
to November 2003, at The Dial Corporation, a consumer products company, from
August 1997 to August 2000 and at Tambrands Inc, a personal care products
company, from December 1995 to July 1997. Prior to becoming Chief Financial
Officer at Tambrands Inc., Ms. Riley served in a variety of financial positions
of increasing responsibility from 1987 to 1995. Her background also includes
experience as Vice President and Treasurer of Colgate-Palmolive Company, a
consumer products company, where she served from January 2001 to August 2002.
The executive officers serve at the pleasure of the Board of Directors of A&F
and, in the case of Mr. Jeffries, pursuant to an employment agreement.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
A&F's Class A Common Stock is traded on the New York Stock Exchange under the
symbol "ANF." The following is a summary of the high and low sales prices of
A&F's Class A Common Stock as reported on the New York Stock Exchange for the
2003 and 2002 fiscal years:
Sales Price
------------------
High Low
------- -------
2003 Fiscal Year
4th Quarter $ 29.82 $ 23.49
3rd Quarter $ 31.47 $ 26.77
2nd Quarter $ 32.80 $ 26.14
1st Quarter $ 33.11 $ 26.98
2002 Fiscal Year
4th Quarter $ 27.90 $ 17.76
3rd Quarter $ 25.18 $ 15.57
2nd Quarter $ 33.00 $ 20.51
1st Quarter $ 33.30 $ 23.04
A&F has not paid dividends on its shares of Class A Common Stock in the past. In
February 2004, the Board of Directors voted to initiate a cash dividend, at an
annual rate of $0.50 per share. The first quarterly dividend, of $0.125 per
share, was paid on March 30, 2004 to stockholders of record as of March 9, 2004.
On March 26, 2004, there were approximately 5,000 shareholders of record.
However, when including active associates who participate in A&F's stock
purchase plan, associates who own shares through A&F-sponsored retirement plans
and others holding shares in broker accounts under street name, A&F estimates
the shareholder base at approximately 52,000.
12
The SEC recently amended Item 5 of Form 10-K to add the requirement that a
registrant furnish the information required by Item 703 of SEC Regulation S-K
for any repurchase of shares made in a month within the fourth quarter of the
fiscal year covered by the Form 10-K. Although compliance with this new
disclosure requirement is not required in a Form 10-K for a fiscal year ending
prior to March 15, 2004, A&F has voluntarily included the following table in
order to provide information regarding A&F's purchases of its Class A Common
Stock during the three fiscal months ended January 31, 2004:
Total Number of Maximum Number
Total Number Average Shares Purchased as of Shares that May
of Shares Price Paid Part of Publicly Yet be Purchased
Period Purchased per Share Announced Program under the Program(1)
---------------------- ------------ ---------- ------------------- --------------------
November 2 through 29,
2003 - $ - - 2,459,000
November 30, 2003
through January 3,
2004 - $ - - 2,459,000
January 4 through 31,
2004 1,860,000 $ 25.21 1,860,000 599,000
------------ ---------- ------------------- --------------------
Total 1,860,000 $ 25.21 1,860,000 599,000
============ ========== =================== ====================
(1) The number shown represents, as of the end of each period, the
maximum number of shares of Class A Common Stock that may yet be purchased under
the Company's publicly announced stock repurchase program.
On August 8, 2002, A&F announced the authorization of the repurchase of
5,000,000 shares of Class A Common Stock, in addition to the 850,000 shares then
remaining available under the authorization to repurchase 6,000,000 shares
announced on February 14, 2000, for a total of 5,850,000 shares authorized for
repurchase as of August 8, 2002. This stock repurchase authorization will expire
once A&F has repurchased that number of shares representing the number
authorized for repurchase. Repurchases may be made in open market transactions
or through privately negotiated transactions. As of January 31, 2004, A&F had
the authority to still repurchase an aggregate of 599,000 shares of Class A
Common Stock under this stock repurchase authorization.
13
ITEM 6. SELECTED FINANCIAL DATA.
ABERCROMBIE & FITCH
FINANCIAL SUMMARY
(Thousands except per share and per square foot amounts, ratios and store and
associate data)
FISCAL YEAR 2003 2002 2001 2000* 1999
-------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net Sales $ 1,707,810 $ 1,595,757 $ 1,364,853 $ 1,237,604 $ 1,030,858
-------------------------------------------------------------------------------------------------------
Gross Income $ 717,398 $ 656,049 $ 558,034 $ 509,375 $ 450,383
-------------------------------------------------------------------------------------------------------
Operating Income $ 331,634 $ 312,617 $ 271,458 $ 253,652 $ 242,064
-------------------------------------------------------------------------------------------------------
Operating Income as a
Percentage of Net Sales 19.4% 19.6% 19.9% 20.5% 23.5%
-------------------------------------------------------------------------------------------------------
Net Income $ 205,102 $ 194,935 $ 168,672 $ 158,133 $ 149,604
-------------------------------------------------------------------------------------------------------
Net Income as a Percentage
of Net Sales 12.0% 12.2% 12.4% 12.8% 14.5%
-------------------------------------------------------------------------------------------------------
PER SHARE RESULTS (1)
Net Income Per Basic Share $ 2.12 $ 1.99 $ 1.70 $ 1.58 $ 1.45
-------------------------------------------------------------------------------------------------------
Net Income
Per Diluted Share $ 2.06 $ 1.94 $ 1.65 $ 1.55 $ 1.39
-------------------------------------------------------------------------------------------------------
Weighted Average Diluted
Shares Outstanding 99,580 100,631 102,524 102,156 107,641
-------------------------------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
Total Assets $ 1,199,163 $ 1,023,048 $ 795,527 $ 607,793 $ 476,317
-------------------------------------------------------------------------------------------------------
Return on Average Assets 18% 21% 24% 29% 38%
-------------------------------------------------------------------------------------------------------
Capital Expenditures $ 99,128 $ 92,976 $ 126,515 $ 153,481 $ 73,377
-------------------------------------------------------------------------------------------------------
Long-Term Debt - - - - -
-------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 871,257 $ 749,527 $ 595,434 $ 422,700 $ 311,094
-------------------------------------------------------------------------------------------------------
Return on Average
Shareholders' Equity 25% 29% 33% 43% 60%
-------------------------------------------------------------------------------------------------------
Comparable Store Sales
Increase (Decrease) (9%) (5%) (9%) (7%) 10%
-------------------------------------------------------------------------------------------------------
Retail Sales Per Average
Gross Square Foot $ 345 $ 379 $ 401 $ 474 $ 505
-------------------------------------------------------------------------------------------------------
STORES AND ASSOCIATES AT END
OF YEAR
Total Number of Stores Open 700 597 491 354 250
-------------------------------------------------------------------------------------------------------
Gross Square Feet 5,021,000 4,358,000 3,673,000 2,849,000 2,174,000
-------------------------------------------------------------------------------------------------------
Number of Associates 30,200 22,000 16,700 13,900 11,300
-------------------------------------------------------------------------------------------------------
* Fifty-three week fiscal year
(1) Per share amounts have been restated to reflect the two-for-one stock
split on A&F's Class A Common Stock, distributed on June 15, 1999.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the fourth quarter of the 2003 fiscal year were $560.4 million, an
increase of 5% from $534.5 million for the fourth quarter of the 2002 fiscal
year. Operating income for the fourth quarter of the 2003 fiscal year was $154.3
million compared to $149.6 million in the 2002 fiscal year. Net income increased
to $94.3 million in the fourth quarter of fiscal 2003 as compared to $92.8
million in the 2002 fiscal year. Net income per diluted share for the fourth
quarter of the 2003 fiscal year was $.96, up 3% from $.93 in the 2002 fiscal
year.
Net sales for the 2003 fiscal year were $1.7 billion, an increase of 7% over the
2002 fiscal year net sales of $1.6 billion. Operating income for the 2003 fiscal
year increased 6% to $331.6 million from $312.6 million for the 2002 fiscal
year. Net income per diluted share was $2.06 for the 2003 fiscal year compared
to $1.94 in the 2002 fiscal year, an increase of 6%.
During the 2003 fiscal year, the Company continued its growth strategy by
opening 19 Abercrombie & Fitch stores, 9 abercrombie stores and 79 Hollister
stores, for a total of 107 stores. Sales productivity of these new store
openings continues to be high. During the fourth quarter of the 2003 fiscal
year, the new stores in all three concepts opened during the past 12 months
averaged approximately the same sales per square foot as the existing store
base.
The following data represent the Company's consolidated statements of income for
the last three fiscal years, expressed as a percentage of net sales:
2003 2002 2001
------ ------ ------
NET SALES 100.0% 100.0% 100.0%
Cost of Goods Sold, Occupancy and
Buying Costs 58.0 58.9 59.1
------ ------ ------
GROSS INCOME 42.0 41.1 40.9
General, Administrative and Store
Operating Expenses 22.6 21.5 21.0
------ ------ ------
OPERATING INCOME 19.4 19.6 19.9
Interest Income, Net (0.2) (0.2) (0.4)
------ ------ ------
INCOME BEFORE INCOME TAXES 19.6 19.8 20.3
Provision for Income Taxes 7.6 7.6 7.9
------ ------ ------
NET INCOME 12.0 12.2 12.4
====== ====== ======
15
FINANCIAL SUMMARY
The following summarized financial data compares the 2003 fiscal year to the
comparable periods for 2002 and 2001:
Change
----------------------
2003 2002 2001 2002-2003 2001-2002
-------- -------- -------- --------- ---------
Net sales (millions) $ 1,708 $ 1,596 $ 1,365 7% 17%
Decrease in comparable store
sales (9)% (5)% (9)%
Retail sales increase
attributable to new and
remodeled stores, magazine,
catalogue and Web sites 16% 22% 19%
Retail sales per average gross $ 345 $ 379 $ 401 (9)% (5)%
square foot
Retail sales per average store $ 2,494 $ 2,797 $ 3,095 (11)% (10)%
(thousands)
Average store size at year-end 7,173 7,300 7,480 (2)% (2)%
(gross square feet)
Gross square feet at year-end 5,021 4,358 3,673 15% 19%
(thousands)
Number of stores and gross square
feet by concept:
Abercrombie & Fitch:
Stores at beginning of period 340 309 265
Opened 19 33 45
Closed (2) (2) (1)
-------- -------- --------
Stores at end of period 357 340 309
======== ======== ========
Gross square feet
(thousands) 3,154 3,036 2,798
======== ======== ========
abercrombie:
Stores at beginning of period 164 148 84
Opened 9 19 64
Closed (2) (3) -
-------- -------- --------
Stores at end of period 171 164 148
======== ======== ========
Gross square feet
(thousands) 753 727 662
======== ======== ========
Hollister:
Stores at beginning of period 93 34 5
Opened 79 60 29
Closed - (1) -
-------- -------- --------
Stores at end of period 172 93 34
======== ======== ========
Gross square feet
(thousands) 1,114 595 213
======== ======== ========
16
NET SALES
Fourth Quarter 2003
Net sales for the fourth quarter of the 2003 fiscal year were $560.4 million, up
5% over last year's fourth quarter net sales of $534.5 million. Comparable store
sales, defined as sales in stores that have been open for at least one year,
decreased 11% for the quarter.
By merchandise concept, comparable store sales ("comps") for the quarter were as
follows: Abercrombie & Fitch's comps declined 14% with mens comps declining in
the low twenties and womens declining by a high-single digit percentage. In
abercrombie, the kids' business, comps decreased 7% with girls achieving a
low-single digit positive comp increase and boys comps declining in the low
twenties. In Hollister, comps were flat when compared to last year for the
quarter. Hollister girls comps were a positive low-single digit for the fourth
quarter, while guys comps were a negative mid-single digit.
On a regional basis, comp store results across all three concepts were strongest
along the East Coast and in the West and weakest in the Midwest. Stores located
in Florida, Southern California and the New York metropolitan area had the best
comp performance.
From a promotional standpoint, the Company used direct mail promotions during
the fourth quarter of the 2003 fiscal year to drive business between
Thanksgiving and Christmas, but did not anniversary the 2002 fourth quarter
issuance of a bounce-back coupon. Also, the Company did not repeat a 15%-off bag
stuffer coupon that impacted late December and January business in fiscal 2002.
Overall, the Company sought to have a less promotional look to the stores in the
2003 fiscal year.
From a merchandising standpoint, womens continued to outperform mens. In
Abercrombie & Fitch, womens had strong comp store increases in the fourth
quarter in knits, fleece and skirts. Weak classifications included woven shirts
and outerwear. The men's business continued to be difficult. However, graphic
t-shirts and woven shirts were classifications that had comp increases while the
sweater and outerwear classifications had significant decreases.
In the kids' business, for the quarter, knits, sweats and pants had strong comp
store increases in girls, which were somewhat offset by weak business in
sweaters, shirts, outerwear and gymwear. Boys graphic tees, woven shirts and
accessories had comp increases, but these increases were not sufficient to
offset other weaker performing classifications.
In Hollister, girls also achieved stronger comps than guys. In girls, sweats,
skirts, pants and denim had significant comp store increases during the quarter,
while comps in the sweater and outerwear classifications declined. In guys,
woven shirts, denim and sweats had positive comp store increases. However, the
sweater, knit tops and outerwear classifications had significant declines.
Sales in the e-commerce business grew by over 42% during the fourth quarter of
the 2003 fiscal year as compared to the same period during the 2002 fiscal year.
The Company added a Hollister e-commerce business during back-to-school 2003.
The direct to consumer business (which includes the Company's catalogue, the A&F
Quarterly (a catalogue/magazine) and the Company's Web sites) accounted for 6.0%
of net sales in the fourth quarter of the 2003 fiscal year as compared to 5.0%
in the fourth quarter of fiscal 2002.
17
Fiscal 2003
Net sales for the 2003 fiscal year reached $1.7 billion, up 7% over the 2002
fiscal year. The sales increase was attributable to the net addition of 103
stores partially offset by a 9% comparable store sales decrease.
By merchandise concept, comps for the 2003 fiscal year were as follows:
Abercrombie & Fitch's comps declined 11% with mens comps declining low twenties
and womens comps declining mid-single digits. abercrombie comps declined 6% with
girls achieving a mid-single digit positive comp store increase and boys posting
a negative comp in the high teens. Overall, the women's and girls' businesses
continued to increase in share of the total business and accounted for
approximately 63% of the adult and kids' businesses in the 2003 fiscal year.
Hollister comps for the 2003 fiscal year were a positive 7%, with girls comps
positive in low double digits and guys slightly negative.
During the year, Hollister continued to gain in productivity relative to
Abercrombie & Fitch. For the 2003 fiscal year, sales per square foot in
Hollister stores were approximately 113% of the sales per square foot of
Abercrombie & Fitch stores in the same malls.
For the 2003 fiscal year, e-commerce sales grew by approximately 39% as compared
to the 2002 fiscal year. The Company's catalogue, the A&F Quarterly, and the
Company's Web sites represented 5.3% of net sales for the 2003 fiscal year
compared to 4.7% in the 2002 fiscal year.
Current Trends and Outlook
The Company experienced double digit comp store increases each year from the
1996 fiscal year to the 1999 fiscal year, reaching sales per gross square foot
of $505 in fiscal 1999, a level significantly higher than most of its
competitors. The Company believes that the comp store decreases since then
reflect both a difficult retail environment and a normalization of the Company's
sales per square foot relative to its competition. The Company achieved positive
comp store increases in January and February 2004 and while March 2004 comps
were down slightly, the Company is encouraged by this improvement in trend.
Although the Company is confident that comps will improve in the future, due to
the uncertain competitive and economic environment, it cannot predict whether
this will occur in the 2004 fiscal year or any subsequent year.
Driving top line revenue will be the Company's priority in the 2004 fiscal year
and the Company has made a number of organizational changes intended to
strengthen the design and merchandising groups. Additionally, changes have been
made in the Company's marketing strategies. The A&F Quarterly has been
discontinued and the Company plans to use a variety of marketing vehicles
(including lifestyle only direct mail and national magazine advertising) in the
future. In addition to emphasizing top line growth, management will focus on
strong operational controls which have been an important factor in the Company's
success.
18
Fourth Quarter 2002
Net sales for the fourth quarter of the 2002 fiscal year were $534.5 million, up
15% over 2001's fourth quarter net sales of $466.6 million. Comparable store
sales decreased 4% for the quarter.
By merchandise concept, comps for the quarter were as follows: Abercrombie &
Fitch's comps declined 5%, with womens achieving positive low-single digit comps
and mens a mid-teen negative comp. Comps for abercrombie declined 4%, with girls
achieving a high-single digit positive comp during the quarter and boys a
negative high-teen comp. Comps in Hollister were a positive 16%, with girls
achieving low twenties positive comps and guys a high-single digit positive
comp. By region, comps were strongest in the West and weakest in the Midwest.
Given continued uncertainty in the economy, the Company entered the fourth
quarter of the 2002 fiscal year with an approach designed to protect both the
bottom line and the aspirational quality of the brands. The Company continued to
strategically use direct mail and bounce-back promotions, but, overall, a much
less aggressive approach to promotions was undertaken as compared to the 2001
fiscal year.
The pre-Christmas selling environment was very challenging and, as expected,
comps were negative for the fourth quarter prior to Christmas. Comps improved
significantly after Christmas, resulting in a flat comp for December 2002.
January 2003 comps were positive 3%, which reflected strong sales of winter
clearance, and positive results from the initial Spring assortment.
From a merchandising standpoint, womens continued to outperform mens. Key
classifications in womens during the quarter included woven shirts, knit tops,
outerwear, pants, sweats and underwear. Mens continued to be difficult and there
remained no solid trend industry-wide. Knit tops and woven shirts performed well
during the quarter.
As for the kids' business, knit tops, sweats, woven tops, pants and outerwear
performed very well in girls. In boys, denim and sweats performed best. As in
the adult men's business, boys continued to be difficult.
In Hollister, girls continued to be more significant than guys, representing
approximately 65% of the overall business. For the quarter, the best performing
girls classifications were woven shirts, knit tops, sweats, skirts and denim. In
guys, denim, knit tops, graphic t-shirts, sweatshirts and accessories performed
best.
Sales in the e-commerce business grew by over 25% during the fourth quarter of
the 2002 fiscal year as compared to the fourth quarter of the 2001 fiscal year.
The direct to consumer business (which includes the Company's catalogue, the A&F
Quarterly and the Company's Web sites) accounted for 5.0% of net sales in the
fourth quarter of the 2002 fiscal year as compared to 4.5% in the 2001 fiscal
year.
19
Fiscal 2002
Net sales for the 2002 fiscal year reached $1.6 billion, up 17% over the 2001
fiscal year. The sales increase was attributable to the net addition of 106
stores offset by a 5% comparable store sales decrease.
By merchandise concept, Abercrombie & Fitch comps declined 6%, abercrombie comps
declined 4% and Hollister comps increased 10%. The decline in comps was
primarily due to the weak performance in both mens and boys. Mens comps
decreased in low-double digits for the 2002 fiscal year while boys comps
decreased in the mid-teens. Overall, the women's and girls' businesses continued
to increase in share of the total business and accounted for approximately 57%
of the adult and kids' businesses in the 2002 fiscal year. For the year, womens
comps were negative low-single digits while girls comps were positive mid-single
digits.
Hollister continued to perform well. For the 2002 fiscal year, sales per square
foot in Hollister stores were approximately 86% of the sales per square foot of
Abercrombie & Fitch stores in the same malls.
The Company's catalogue, the A&F Quarterly and the Company's Web sites
represented 4.7% of the 2002 fiscal year net sales compared to 4.2% in the 2001
fiscal year.
GROSS INCOME
The Company's gross income may not be comparable to those of other retailers
since all significant costs related to the Company's distribution network,
excluding direct shipping costs related to the e-commerce and catalogue sales,
are included in general, administrative and store operating expenses (see
"General, Administrative and Store Operating Expenses" section below).
Fourth Quarter 2003
Gross income for the fourth quarter of the 2003 fiscal year was $261.0 million
compared to $243.0 million in the 2002 fiscal year. The gross income rate (gross
income divided by net sales) for the fourth quarter of the 2003 fiscal year was
46.6%, up 110 basis points from last year's rate of 45.5%. The increase in gross
income rate resulted largely from an increase in initial markup (IMU), partially
offset by a higher markdown rate and an increase in buying and occupancy costs
as a percent of net sales.
Continued progress in sourcing efficiency has been an important factor in
improving IMU and profit. The Company continued to make progress increasing IMU
in the Hollister and abercrombie business, where IMU improved over 400 basis
points versus the fourth quarter of the 2002 fiscal year for both concepts. All
three concepts are operating at very similar margins, both in IMU and
merchandise margin.
The increase in buying and occupancy costs, as a percent of net sales, reflected
the inability to leverage fixed costs, such as rent, depreciation and other real
estate related charges, with a comp store decrease.
The markdown rate, as a percentage of net sales, exceeded last year for the
quarter due to the weaker than expected pre-Christmas business resulting in
aggressive markdowns in the back half of January.
The Company conservatively managed its inventory and despite negative comps
ended the fourth quarter of the 2003 fiscal year with inventories, at cost, up
3% per gross square foot versus the fourth quarter of the 2002 fiscal year.
20
Fiscal 2003
For the 2003 fiscal year, gross income increased to $717.4 million from $656.0
million in the 2002 fiscal year. The gross income rate in the 2003 fiscal year
was 42.0% versus 41.1% in the 2002 fiscal year. The increase was driven by
improvements in IMU that were partially offset by increased buying and occupancy
costs as a percentage of net sales.
Buying and occupancy costs increased over last year, as a percentage of net
sales, due to the inability to leverage fixed expenses with lower sales volume
per average store.
Fourth Quarter 2002
Gross income for the fourth quarter of the 2002 fiscal year was $243.0 million
compared to $208.5 million in the same period in the 2001 fiscal year. The gross
income rate for the fourth quarter of the 2002 fiscal year was 45.5%, up 80
basis points from the 2001 fiscal year rate of 44.7%. The increase in the gross
income rate resulted largely from an increase in IMU, partially offset by an
increase in buying and occupancy costs, as a percent of net sales.
Continued progress in sourcing was an important factor in improving IMU in all
three concepts. The Company continued to make progress increasing IMU in
Hollister, where IMU improved over 700 basis points in the fourth quarter of the
2002 fiscal year versus the fourth quarter of the 2001 fiscal year.
Additionally, the Company's less aggressive approach to promotions during the
fourth quarter of the 2002 fiscal year resulted in selling at higher average
retail prices compared to the fourth quarter of the 2001 fiscal year.
The increase in buying and occupancy costs, as a percent of net sales, reflected
the inability to leverage fixed costs, such as rent, depreciation and other real
estate related charges, with a comp store decrease.
The Company ended the fourth quarter of the 2002 fiscal year with inventories,
at cost, up 12% per gross square foot versus the fourth quarter of the 2001
fiscal year.
Fiscal 2002
Gross income for the 2002 fiscal year was $656.0 million compared to $558.0
million in the 2001 fiscal year. The gross income rate was 41.1% in the 2002
fiscal year versus 40.9% in the 2001 fiscal year. The increase was driven by
improvements in IMU that were almost fully offset by increased buying and
occupancy costs, as a percentage of net sales.
Gross income was also protected as a result of strong inventory management
through most of the first half of the 2002 fiscal year.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
Fourth Quarter 2003
General, administrative and store operating expenses during fourth quarter of
the 2003 fiscal year were $106.7 million compared to $93.4 million during the
same period in the 2002 fiscal year. The fourth quarter of the 2003 fiscal year
general, administrative and store operating expense rate (general,
administrative and store operating expenses divided by net sales) was 19.0%
compared to 17.5% in the fourth quarter of the 2002 fiscal year. The increase in
rate versus the 2002 fiscal year reflects a loss of leverage due to the
double-digit drop in
21
comps partially offset by lower bonuses and efficiencies in store operations,
distribution center operations and the direct to consumer business.
During the fourth quarter of the 2003 fiscal year, store payroll hours were
reduced by 2% per average Abercrombie & Fitch adult store and wages, in all
three concepts, were held relatively flat. Store hours are managed on a weekly
basis in order to match hours with sales volume. Overall, store expenses grew at
approximately the same rate as the Company's square footage growth during the
fourth quarter.
The distribution center achieved record level productivity during the fourth
quarter of the 2003 fiscal year. Productivity, as measured in units processed
per labor hour, was 18% higher than the fourth quarter of the 2002 fiscal year.
This increase was on top of a 39% increase last year and a 50% increase two
years ago.
Costs related to the distribution center, excluding direct shipping costs
related to the e-commerce and catalogue sales, included in general,
administrative and store operating expenses were $5.5 million for the fourth
quarter of the 2003 fiscal year compared to $4.9 million for the fourth quarter
of the 2002 fiscal year.
Fiscal 2003
Full year general, administrative and store operating expenses were $385.8
million in the 2003 fiscal year versus $343.4 million in the 2002 fiscal year.
The general, administrative and store operating expense rate in the 2003 fiscal
year was 22.6% versus 21.5% in the 2002 fiscal year. The increased rate in the
2003 fiscal year resulted primarily from a drop in comps that could not be
offset by lower variable expenses per average store. In addition, legal expense
increased in the 2003 fiscal year compared to the 2002 fiscal year as the
Company reserved expected defense costs for pending litigation. Partially
offsetting these costs were improvements in distribution center productivity,
reduced expenses per order in the direct to consumer business and reduced
marketing expenses, as a percentage of net sales, due to savings from fewer
direct mail campaigns in the 2003 fiscal year. Productivity at the distribution
center, as measured in units processed per labor hour, was 31% higher during the
2003 fiscal year than during the 2002 fiscal year.
Costs related to the distribution center, excluding direct shipping costs
related to the e-commerce and catalogue sales, included in general,
administrative and store operating expenses were $19.3 million in the 2003
fiscal year compared to $19.9 million in the 2002 fiscal year.
Fourth Quarter 2002
For the fourth quarter of the 2002 fiscal year, general, administrative and
store operating expenses were $93.4 million compared to $79.9 million in fourth
quarter of the 2001 fiscal year. The general, administrative and store operating
expense rate was 17.5% compared to 17.1% in the same period the prior year. The
increase in rate versus the 2001 fiscal year resulted primarily from an increase
in home office expenses, largely due to higher bonuses resulting from improved
financial performance.
During the fourth quarter of the 2002 fiscal year, store payroll hours were
reduced by 9% per average Abercrombie & Fitch adult store and 3% per average
kids store. The control of payroll hours helped mitigate the effect of negative
comps on the store operating expense rate.
Efficiencies were also recognized in the distribution center and in the direct
to consumer business. Productivity, as measured in units processed per labor
hour, was 39% higher during the fourth quarter of the 2002 fiscal year than the
fourth quarter of the 2001 fiscal year. For the quarter, more units were
processed than the comparable period in the 2001 fiscal year with 20% fewer
labor hours.
22
Costs related to the distribution center, excluding direct shipping costs
related to the e-commerce and catalogue sales, included in general,
administrative and store operating expenses were $4.9 million for the fourth
quarter of the 2002 fiscal year compared to $4.9 million for the fourth quarter
of the 2001 fiscal year.
Fiscal 2002
The general, administrative and store operating expenses for the 2002 fiscal
year were $343.4 million compared to $286.6 million in the 2001 fiscal year. The
full year general, administrative and store operating expense rate in the 2002
fiscal year was 21.5% versus 21.0% in the 2001 fiscal year. The 2002 fiscal year
rate increase resulted from an increase in store expenses, as a percentage of
sales, due to the inability to leverage fixed costs on a comp store sales
decrease, as well as higher legal and incentive compensation expenses.
Productivity at the distribution center, as measured in units processed per
labor hour, was 46% higher during the 2002 fiscal year than during the 2001
fiscal year.
Costs related to the distribution center, excluding direct shipping costs
related to the e-commerce and catalogue sales, included in general,
administrative and store operating expenses were $19.9 million in the 2002
fiscal year versus $19.5 million the 2001 fiscal year.
OPERATING INCOME
Fourth Quarter 2003
Operating income for the fourth quarter of the 2003 fiscal year increased to
$154.3 million from $149.6 million in the 2002 fiscal year fourth quarter. The
operating income rate (operating income divided by net sales) was 27.5% for the
fourth quarter of the 2003 fiscal year compared to 28.0% for the fourth quarter
of the 2002 fiscal year. Higher general, administrative and store operating
expenses, expressed as a percentage of net sales, reduced the operating income
rate in the current year's fourth quarter. This decline was partially offset by
higher merchandise margins during the quarter.
Fiscal 2003
For the 2003 fiscal year, operating income was $331.6 million compared to $312.6
million for the 2002 fiscal year. The operating income rate for the 2003 fiscal
year was 19.4% versus 19.6% in the 2002 fiscal year. The decline was
attributable to a higher general, administrative and store operating expense
rate due to the inability to leverage fixed costs on a comp store decrease. The
increased expense rate was partially offset by a gross income rate increase.
Fourth Quarter 2002 and Fiscal 2002
Operating income for the fourth quarter of the 2002 fiscal year increased to
$149.6 million from $128.6 million during the same period in the 2001 fiscal
year. The operating income rate was 28.0% for the fourth quarter of the 2002
fiscal year compared to 27.6% for the fourth quarter in the 2001 fiscal year.
The increase in the operating income rate was due to a higher gross income rate
partially offset by a higher general, administrative and store operating expense
rate.
In the 2002 fiscal year, the operating income was $312.6 million compared to
$271.5 million in the 2001 fiscal year. The operating income rates for same time
periods were 19.6% versus 19.9%. The decline was attributable to a higher
general, administrative and store operating expense rate due to the inability to
leverage fixed costs on a comp store decrease. The increased expense rate was
partially offset by a gross income rate increase.
23
INTEREST INCOME AND INCOME TAXES
Fourth quarter and year-to-date net interest income for the 2003 fiscal year
were $1.1 million and $3.7 million, respectively, as compared with net interest
income of $1.3 million and $3.8 million, respectively, for the comparable
periods in the 2002 fiscal year. The decline in the 2003 fiscal year fourth
quarter net interest income was due to lower interest rates. The Company
continued to invest in tax-free securities.
Fourth quarter and year-to-date net interest income were $1.3 million and $3.8
million, respectively, in the 2002 fiscal year as compared with net interest
income of $1.2 million and $5.1 million, respectively, for the comparable
periods in the 2001 fiscal year. The decrease in net interest income in the
year-to-date period was a result of the Company's strategy, at the beginning of
the 2002 fiscal year, to invest cash in tax-free securities due to the decline
in short-term market interest rates. The investment in tax-free securities
lowered the Company's effective tax rate. Previously, the Company primarily
invested in the commercial paper market.
The effective tax rates for the fourth quarter and year-to-date periods of the
2003 fiscal year were 39.3% and 38.8%, respectively, as compared to 38.5% and
38.4%, respectively, for the comparable periods in the 2002 fiscal year.
FINANCIAL CONDITION
Continued growth in net income and cash on hand has afforded the Company
financial strength and flexibility. A more detailed discussion of liquidity,
capital resources and capital requirements follows.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. Furthermore, the Company expects that cash from operating
activities will fund the dividend announced in February 2004. The Board of
Directors will review and approve the appropriateness of future dividend
amounts. A summary of the Company's working capital (current assets less current
liabilities) position and capitalization follows (in thousands):
2003 2002 2001
--------- --------- ---------
Working capital $ 472,653 $ 384,094 $ 241,616
========= ========= =========
Capitalization:
Shareholders' equity $ 871,257 $ 749,527 $ 595,434
========= ========= =========
24
The Company considers the following to be measures of liquidity and capital
resources:
2003 2002 2001
--------- --------- ---------
Current ratio (current assets divided
by current liabilities) 2.69 2.57 2.48
========= ========= =========
Net cash provided by operating
activities (in thousands) $ 281,896 $ 293,146 $ 233,202
========= ========= =========
The decrease in cash provided by operating activities in the 2003 fiscal year
from the 2002 fiscal year was primarily driven by an increase in inventories not
offset by commensurate increases in net income, accounts payable and accrued
expenses. Inventories increased from the net addition of 103 stores representing
an increase of 663,000 gross square feet in 2003. Inventories at fiscal year-end
were 3% higher on a gross square foot basis than at the end of the 2002 fiscal
year.
The increase in cash from operating activities from the 2002 fiscal year from
the 2001 fiscal year was primarily from increases in accounts payable and
accrued expenses, and income taxes payable. Accounts payable increased in the
2002 fiscal year due to both the increased level of inventory and timing of
payments. Accrued expenses increased in the 2002 fiscal year primarily due to
higher store expenses, consistent with the increase in store openings. The
increase in income taxes payable was driven by higher pre-tax income and timing
of payments.
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 during the 2003 fiscal year related to investing activities were
primarily for capital expenditures (see the discussion in the "Capital
Expenditures" section below) related to new stores (net of construction
allowances) with approximately $35 million invested in the completion of the
home office expansion, improvements in the distribution center and information
technology expenditures for a new point-of-sale system. This system was
completely rolled-out to all stores during the third quarter of the 2003 fiscal
year.
Financing activities during the 2003, 2002 and 2001 fiscal years consisted
primarily of the repurchase of 4,401,000 shares, 1,850,000 shares, and 600,000
shares, respectively, of A&F's Class A Common Stock pursuant to previously
authorized stock repurchase programs.
The 2003 repurchase leaves 599,000 shares remaining as of January 31, 2004 of
the 5,000,000 share repurchase authorized by the Board of Directors during its
August 2002 Board meeting. In addition to stock repurchases, financing
activities also consisted of stock option exercises, restricted stock issuances
and overdrafts. These overdrafts are outstanding checks reclassified from cash
to accounts payable.
Effective November 14, 2002, the Company entered into a new $250 million
syndicated unsecured credit agreement (the "Credit Agreement"), which replaced
both the then existing $150 million syndicated unsecured credit agreement and a
$75 million trade letter of credit facility. Additional details regarding the
Credit Agreement can be found in the Notes to Consolidated Financial Statements
(see Note 8).
Letters of credit totaling approximately $42.8 million and $41.8 million were
outstanding under the Credit Agreement at January 31, 2004 and February 1, 2003,
respectively. No borrowings were outstanding under the Credit Agreement at
January 31, 2004 or February 1, 2003.
25
The Company has standby letters of credit in the amount of $4.7 million that
expire during the 2004 fiscal year but automatically renew for a period of one
year. The beneficiary, a merchandise supplier, has 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 beneficiary has not drawn upon the standby
letters of credit.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company does not have any off-balance sheet arrangements or debt
obligations. As of January 31, 2004, the Company's contractual obligations were
as follows:
Payments due by period (thousands)
----------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
------------------------------ ----------- ----------- --------- --------- -----------
Operating Leases $ 1,002,720 $ 141,338 $ 278,417 $ 232,628 $ 350,337
Purchase Obligations and Other 143,600 143,600 - - -
----------- ----------- --------- --------- -----------
Total $ 1,146,320 $ 284,938 $ 278,417 $ 232,628 $ 350,337
=========== =========== ========= ========= ===========
The majority of the Company's contractual obligations are made up of operating
leases for its stores (see Note 5 of the Notes to Consolidated Financial
Statements). The purchase obligations and other category represents purchase
orders for merchandise to be delivered during Spring 2004, preventive
maintenance contracts for the 2004 fiscal year and letters of credit outstanding
as of January 31, 2004 (see Note 8 of the Notes to Consolidated Financial
Statements). The Company expects to fund all of these obligations with cash
provided from operations.
STORES AND GROSS SQUARE FEET
Store count and gross square footage by concept were as follows:
January 31, 2004 February 1, 2003
---------------------------- ----------------------------
Number Gross Square Number Gross Square
of Stores Feet (thousands) of Stores Feet (thousands)
--------- --------------- --------- ---------------
Abercrombie & Fitch 357 3,154 340 3,036
abercrombie 171 753 164 727
Hollister 172 1,114 93 595
--------- --------------- --------- ---------------
Total 700 5,021 597 4,358
========= =============== ========= ===============
CAPITAL EXPENDITURES
Capital expenditures, net of construction allowances, totaled $99.1 million,
$93.0 million and $126.5 million for the 2003, 2002 and 2001 fiscal years,
respectively. Additionally, the non-cash accrual for construction in progress
increased $18.6 million in the 2003 fiscal year, decreased $12.7 million in the
2002 fiscal year and increased $1.0 million the 2001 fiscal year. Capital
expenditures in the 2003 fiscal year related primarily to new store construction
in addition to approximately $35.0 million of the total capital expenditures
invested in the home office expansion, distribution center projects and a new
point-of-sale system. Capital expenditures in the 2002 fiscal year related
primarily to new store construction with approximately $20.0 million invested in
26
information technology and distribution center projects. Capital expenditures in
the 2001 fiscal year related primarily to new store construction. Approximately
$17.0 million of the total capital expenditure in the 2001 fiscal year related
to the construction of a new office and distribution center. The office and
distribution center were completed in the 2001 fiscal year.
The Company anticipates spending $110.0 million to $120.0 million in the 2004
fiscal year for capital expenditures, of which $85.0 million to $95.0 million
will be for new/remodel store construction. The balance of the capital
expenditures will primarily relate to home office and distribution center
projects and other miscellaneous projects.
The Company intends to add approximately 745,000 gross square feet in the 2004
fiscal year, which will represent a 15% increase over year-end 2003. It is
anticipated the increase will result from the addition of approximately 15 new
Abercrombie & Fitch stores, 10 new abercrombie stores and 85 new Hollister
stores. In addition, the Company recently announced plans for a new lifestyle
brand that will target an older customer than its current brands. The Company
expects to open four test stores in August 2004. Additionally, the Company plans
to remodel 10 to 15 Abercrombie & Fitch stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores opened during the 2004
fiscal year will approximate $550,000 per store, net of landlord allowances. In
addition, initial inventory purchases are expected to average approximately
$300,000 per store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for abercrombie stores opened during the 2004 fiscal year
will approximate $450,000 per store, net of landlord allowances. In addition,
initial inventory purchases are expected to average approximately $115,000 per
store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Hollister stores opened during the 2004 fiscal year
will approximate $590,000 per store, net of landlord allowances. In addition,
initial inventory purchases are expected to average approximately $215,000 per
store.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has $250 million
available (less outstanding letters of credit) under its Credit Agreement to
support operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States ("GAAP"). The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Since actual results may
differ from those estimates, the Company revises its estimates and assumptions
as new information becomes available.
The Company's significant accounting policies can be found in the Notes to
Consolidated Financial Statements (see Note 2). The Company believes that the
following policies are most critical to the portrayal of the Company's financial
condition and results of operations.
Revenue Recognition - The Company recognizes retail sales at the time the
customer takes possession of the merchandise and purchases are paid for,
primarily with either cash or credit card. Catalogue and e-commerce
27
sales are recorded upon customer receipt of merchandise. Amounts relating to
shipping and handling billed to customers in a sale transaction are classified
as revenue and the direct shipping costs are classified as cost of goods sold.
Employee discounts are classified as a reduction of revenue. The Company
reserves for sales returns through estimates based on historical experience and
various other assumptions that management believes to be reasonable.
Inventory Valuation - Inventories are principally valued at the lower of average
cost or market, on a first-in first-out basis, utilizing the retail method. The
retail method of inventory valuation is an averaging technique applied to
different categories of inventory. At the Company, the averaging is determined
at the stock keeping unit ("SKU") level by averaging all costs for each SKU. An
initial markup is applied to inventory at cost in order to establish a
cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail
and cost components of inventory on hand so as to maintain the already
established cost-to-retail relationship. The use of the retail method and the
recording of markdowns effectively values inventory at the lower of cost or
market. The Company further reduces inventory by recording an additional
markdown reserve using the retail carrying value of inventory from the season
just passed. Markdowns on this carryover inventory represent estimated future
anticipated selling price declines.
Additionally, as part of inventory valuation, an inventory shrinkage estimate is
made each period that reduces the value of inventory for lost or stolen items.
Inherent in the retail method calculation are certain significant judgments and
estimates including, among others, initial markup, markdowns and shrinkage,
which could significantly impact the ending inventory valuation at cost as well
as the resulting gross margins. Management believes that this inventory
valuation method is appropriate since it preserves the cost-to-retail
relationship in ending inventory.
Property and Equipment - Depreciation and amortization of property and equipment
are computed for financial reporting purposes on a straight-line basis, using
service lives ranging principally from 30 years for buildings, 10 to 15 years
for leasehold improvements and 3 to 10 years for other property and equipment.
Beneficial leaseholds represent the present value of the excess of fair market
rent over contractual rent of existing stores at the 1988 purchase of the
Abercrombie & Fitch business by The Limited, Inc. (now known as Limited Brands,
Inc., "The Limited") and are being amortized over the lives of the related
leases. The cost of assets sold or retired and the related accumulated
depreciation or amortization are removed from the accounts with any resulting
gain or loss included in net income. Maintenance and repairs are charged to
expense as incurred. Major renewals and betterments that extend service lives
are capitalized. Long-lived assets are reviewed at the store level at least
annually for impairment or whenever events or changes in circumstances indicate
that full recoverability is questionable. Factors used in the evaluation
include, but are not limited to, management's plans for future operations,
recent operating results and projected cash flows.
Income Taxes - Income taxes are calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method.
Deferred tax assets and liabilities are recognized based on the difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Inherent in the measurement of
deferred balances are certain judgments and interpretations of enacted tax law
and published guidance with respect to applicability to the Company's
operations. Significant examples of this concept include capitalization policies
for various tangible and intangible costs, income and expense recognition and
inventory valuation methods. No valuation allowance has been provided for
deferred tax assets because management believes the full amount of the net
deferred tax assets will be realized in the future. The effective tax rate
utilized by the Company reflects management's judgment of the expected tax
liabilities within the various taxing jurisdictions.
Contingencies - In the normal course of business, the Company must make
continuing estimates of potential future legal obligations and liabilities,
which requires the use of management's judgment on the outcome of
28
various issues. Management may also use outside legal advice to assist in the
estimating process. However, the ultimate outcome of various legal issues could
be different than management estimates, and adjustments may be required.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," was effective 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,
the adoption of SFAS No. 143 had no impact on the Company's results of
operations or its financial position.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002. SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with the exit and disposal activities, including restructuring
activities, that are currently accounted for pursuant to the guidance that the
Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring.)" SFAS
No. 146 also addresses accounting and reporting standards for costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement or an individual deferred compensation contract. SFAS No.
146 was effective for exit or disposal activities that were initiated after
December 31, 2002. The Company adopted SFAS No. 146 in first quarter of the 2003
fiscal year and adoption did not have an impact on the Company's results of
operations or its financial position.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an Amendment of FASB No. 123," was issued on December 31, 2002.
Pursuant to this standard, companies that chose to adopt the accounting
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
were permitted to select from three transition methods (prospective, modified
prospective and retroactive restatement). Companies that chose not to adopt the
accounting provisions of SFAS No. 123 were affected by the new disclosure
requirements of SFAS No. 148. The new interim disclosure provisions were
effective for the first quarter of the 2003 fiscal year and have been adopted by
the Company (see Note 2 of the Notes to Consolidated Financial Statements).
EITF Issue No. 03-08, "Accounting for Claims-Made Insurance and Retroactive
Insurance Contracts by the Insured Entity," discusses the accounting
implications of retroactive and prospective claims-made insurance policies. The
consensus reached was that a claims-made insurance policy that contains no
retroactive provisions should be accounted for on a prospective basis. However,
if a claims-made insurance policy contains a retroactive provision, the
retroactive and prospective provisions of the policy should be accounted for
separately, if practicable; otherwise, the claims-made insurance policy should
be accounted for entirely as a retroactive contract. This consensus was
effective for new insurance contracts entered into beginning with the third
quarter of the 2003 fiscal year. The Company has evaluated the impact of this
issue and concluded that there was no effect on the consolidated financial
statements.
EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received
From a Vendor." The issue provides accounting guidance on how a reseller should
characterize consideration given by a vendor and when to recognize and how to
measure that consideration in its income statement. EITF Issue No. 02-16 was
effective
29
for fiscal years beginning after December 15, 2002. The Company has evaluated
the impact of this issue and concluded that there was no effect on the
consolidated financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB"), issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"). FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies," relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. The Company adopted FIN 45 at the
beginning of the 2003 fiscal year. The adoption did not have an effect on the
consolidated financial statements.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on its results of operations and
financial condition have been minor.
30
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
A&F cautions that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Form 10-K or
made by management of A&F involve risks and uncertainties and are subject to
change based on various important factors, many of which may be beyond the
Company's control. Words such as "estimate," "project," "plan," "believe,"
"expect," "anticipate," "intend," and similar expressions may identify
forward-looking statements. The following factors, in addition to those included
in the disclosure under the heading "RISK FACTORS" in "ITEM 1. BUSINESS" of
A&F's Annual Report on Form 10-K for the fiscal year ended January 31, 2004 , in
some cases have affected and in the future could affect the Company's financial
performance and could cause actual results for the 2004 fiscal year and beyond
to differ materially from those expressed or implied in any of the
forward-looking statements included in this Annual Report on Form 10-K or
otherwise made by management:
- changes in consumer spending patterns and consumer preferences;
- the effects of political and economic events and conditions
domestically and in foreign jurisdictions in which the Company
operates, including, but not limited to, acts of terrorism or war;
- the impact of competition and pricing;
- changes in weather patterns;
- postal rate increases and changes;
- paper and printing costs;
- market price of key raw materials;
- ability to source product from its global supplier base;
- 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.
Future economic and industry trends that could potentially impact revenue and
profitability are difficult to predict. Therefore, there can be no assurance
that the forward-looking statements included in this Annual Report on Form 10-K
will prove to be accurate. In light of the significant uncertainties in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company, or any other person,
that the objectives of the Company will be achieved. The forward-looking
statements herein are based on information presently available to the management
of the Company. Except as may be required by applicable law, the Company assumes
no obligation to publicly update or revise its forward-looking statements even
if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company maintains its cash equivalents in financial instruments with
original maturities of 90 days or less. The Company also holds marketable
securities with original maturities less than one year. These financial
instruments bear interest at fixed rates and are subject to interest rate risk
through lost income should interest rates increase. The Company does not enter
into financial instruments for trading purposes.
As of January 31, 2004, the Company had no long-term debt outstanding. Future
borrowings would bear interest at negotiated rates and would be subject to
interest rate risk. The Company does not believe that an adverse change in
interest rates would have a material affect on the Company's financial
condition.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ABERCROMBIE & FITCH
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
2003 2002 2001
----------- ----------- -----------
NET SALES $ 1,707,810 $ 1,595,757 $ 1,364,853
Cost of Goods Sold, Occupancy and Buying Costs 990,412 939,708 806,819
----------- ----------- -----------
GROSS INCOME 717,398 656,049 558,034
General, Administrative and Store Operating
Expenses 385,764 343,432 286,576
----------- ----------- -----------
OPERATING INCOME 331,634 312,617 271,458
Interest Income, Net (3,708) (3,768) (5,064)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 335,342 316,385 276,522
Provision for Income Taxes 130,240 121,450 107,850
----------- ----------- -----------
NET INCOME $ 205,102 $ 194,935 $ 168,672
=========== =========== ===========
NET INCOME PER SHARE:
BASIC $ 2.12 $ 1.99 $ 1.70
=========== =========== ===========
DILUTED $ 2.06 $ 1.94 $ 1.65
=========== =========== ===========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
33
ABERCROMBIE & FITCH
CONSOLIDATED BALANCE SHEETS
(Thousands)
January 31, February 1,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and Equivalents $ 511,073 $ 420,063
Marketable Securities 10,000 10,000
Receivables 7,197 10,572
Inventories 170,703 143,306
Store Supplies 29,993 25,671
Other 23,689 19,770
----------- -----------
TOTAL CURRENT ASSETS 752,655 629,382
PROPERTY AND EQUIPMENT, NET 445,956 392,941
OTHER ASSETS 552 725
----------- -----------
TOTAL ASSETS $ 1,199,163 $ 1,023,048
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Outstanding Checks $ 91,364 $ 79,291
Accrued Expenses 138,232 119,526
Income Taxes Payable 50,406 46,471
----------- -----------
TOTAL CURRENT LIABILITIES 280,002 245,288
DEFERRED INCOME TAXES 19,516 15,189
OTHER LONG-TERM LIABILITIES 28,388 13,044
SHAREHOLDERS' EQUITY:
Class A Common Stock - $.01 par value: 150,000,000 shares
authorized, 94,607,499 and 97,268,877 shares outstanding
at January 31, 2004 and February 1, 2003, respectively 1,033 1,033
Paid-In Capital 139,139 142,577
Retained Earnings 919,577 714,475
----------- -----------
1,059,749 858,085
Less: Treasury Stock, at Average Cost (188,492) (108,558)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 871,257 749,527
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,199,163 $ 1,023,048
=========== ===========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
34
ABERCROMBIE & FITCH
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands)
Common Stock Treasury Stock
---------------------- ------------------ Total
Shares Paid-In Retained At Average Shareholders'
Outstanding Par Value Capital Earnings Shares Cost Equity
----------- --------- --------- --------- ------ ---------- -------------
Balance, February 3, 2001 98,796 $ 1,033 $ 136,490 $ 350,868 4,504 $ (65,691) $ 422,700
Purchase of Treasury Stock (600) - - - 600 (11,069) (11,069)
Net Income - - - 168,672 - - 168,672
Tax Benefit from Exercise of Stock Options and
Vesting of Restricted Stock - - 5,056 - - - 5,056
Stock Options, Restricted Stock and Other 677 - (152) - (678) 10,227 10,075
----------- --------- --------- --------- ------ ---------- -------------
Balance, February 2, 2002 98,873 $ 1,033 $ 141,394 $ 519,540 4,426 $ (66,533) $ 595,434
Purchase of Treasury Stock (1,850) - - - 1,850 (42,691) (42,691)
Net Income - - - 194,935 - - 194,935
Tax Benefit from Exercise of Stock Options and
Vesting of Restricted Stock - - 164 - - - 164
Stock Options, Restricted Stock and Other 246 - 1,019 - (245) 666 1,685
----------- --------- --------- --------- ------ ---------- -------------
Balance, February 1, 2003 97,269 $ 1,033 $ 142,577 $ 714,475 6,031 $ (108,558) $ 749,527
Purchase of Treasury Stock (4,401) - - - 4,401 (115,670) (115,670)
Net Income - - - 205,102 - - 205,102
Tax Benefit from Exercise of Stock Options and
Vesting of Restricted Stock - - 9,505 - - - 9,505
Stock Options, Restricted Stock and Other 1,739 - (12,943) - (1,740) 35,736 22,793
----------- --------- --------- --------- ------ ---------- -------------
Balance, January 31, 2004 94,607 $ 1,033 $ 139,139 $ 919,577 8,692 $ (188,492) $ 871,257
=========== ========= ========= ========= ====== ========== =============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
35
ABERCROMBIE & FITCH
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES:
Net Income $ 205,102 $ 194,935 $ 168,672
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 66,604 56,925 41,155
Non-cash Charge for Deferred Compensation 5,310 2,295 3,936
Deferred Taxes 7,308 21,213 (3,849)
Non-Cash Charge for Asset Impairment - 1,251 -
Changes in Assets and Liabilities:
Inventories (27,397) (34,430) 11,734
Accounts Payable and Accrued Expenses 5,761 40,964 5,659
Income Taxes 10,459 17,022 17,636
Other Assets and Liabilities 8,749 (7,029) (11,741)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 281,896 293,146 233,202
--------- --------- ---------
INVESTING ACTIVITIES:
Capital Expenditures (99,128) (92,976) (126,515)
Purchases of Marketable Securities (10,000) (10,000) (71,220)
Proceeds from Maturities of Marketable Securities 10,000 71,220 -
Collection (Issuances) of Notes Receivable - 4,954 (454)
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (99,128) (26,802) (198,189)
--------- --------- ---------
FINANCING ACTIVITIES:
Change in Outstanding Checks 4,145 4,047 6,765
Purchases of Treasury Stock (115,670) (42,691) (11,069)
Stock Option Exercises and Other 19,767 (282) 6,139
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (91,758) (38,926) 1,835
--------- --------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 91,010 227,418 36,848
Cash and Equivalents, Beginning of Year 420,063 192,645 155,797
--------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 511,073 $ 420,063 $ 192,645
========= ========= =========
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
Construction Allowance Receivables $ 5,730 $ 8,778 $ 14,030
========= ========= =========
Accrual for Construction in Progress $ 31,269 $ 12,680 $ 25,338
========= ========= =========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
36
ABERCROMBIE & FITCH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. ("A&F"), through its wholly-owned subsidiaries
(collectively, A&F and its wholly-owned subsidiaries are referred to as
"Abercrombie & Fitch" or the "Company"), is a specialty retailer of
high quality, casual apparel for men, women and kids with an active,
youthful lifestyle. The business was established in 1892.
The accompanying consolidated financial statements include the
historical financial statements of, and transactions applicable to, A&F
and its wholly-owned subsidiaries and reflect the assets, liabilities,
results of operations and cash flows on a historical cost basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of A&F and
its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are designated in the financial statements and notes by
the calendar year in which the fiscal year commences. The results for
fiscal years 2003, 2002, and 2001 represent the fifty-two week periods
ended January 31, 2004, February 1, 2003 and February 2, 2002,
respectively.
CASH AND EQUIVALENTS
Cash and equivalents include amounts on deposit with financial
institutions and investments with original maturities of less than 90
days. Outstanding checks at year end are reclassified in the balance
sheet from cash to accounts payable to be reflected as liabilities. At
fiscal year end 2003 and 2002, the outstanding checks reclassified were
$33.2 million and $29.0 million, respectively.
MARKETABLE SECURITIES
All investments with original maturities of greater than 90 days are
accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The Company determines the appropriate
classification at the time of purchase. At January 31, 2004, the
Company held investments in marketable securities that were classified
as held-to-maturity based on the Company's positive intent and ability
to hold the securities to maturity. Primarily all securities held by
the Company at January 31, 2004 were municipal debt securities that
mature within one year and are stated at amortized cost that
approximates market value.
37
INVENTORIES
Inventories are principally valued at the lower of average cost or
market, on a first-in-first-out basis, utilizing the retail method. An
initial markup is applied to inventory at cost in order to establish a
cost-to-retail ratio. Permanent markdowns, when taken, reduce both the
retail and cost components of inventory on hand so as to maintain the
already established cost-to-retail relationship.
The fiscal year is comprised of two principal selling seasons: spring
(the first and second quarters) and fall (the third and fourth
quarters). The Company further reduces inventory at season end by
recording an additional markdown reserve using the retail carrying
value of inventory from the season just passed. Markdowns on this
carryover inventory represent estimated future anticipated selling
price declines. Additionally, inventory valuation at the end of the
first and third quarters reflects adjustments for inventory markdowns
for the total season. Further, as part of inventory valuation,
inventory shrinkage estimates are made, based on historical trends,
that reduce the inventory value for lost or stolen items.
The markdown reserve was $4.7 million and $6.8 million at January 31,
2004 and February 1, 2003, respectively. The shrink reserve was $3.3
million and $11.5 million at January 31, 2004 and February 1, 2003,
respectively.
STORE SUPPLIES
The initial inventory of supplies for new stores including, but not
limited to, hangers, signage, security tags and point-of-sale supplies
are capitalized at the store opening date. Subsequent shipments are
expensed except for new merchandise presentation programs, which are
capitalized.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are computed
for financial reporting purposes on a straight-line basis, using
service lives ranging principally from 30 years for buildings, 10 to 15
years for leasehold improvements and 3 to 10 years for other property
and equipment. Beneficial leaseholds represent the present value of the
excess of fair market rent over contractual rent of existing stores as
of the 1988 purchase of the Abercrombie & Fitch business by The
Limited, Inc. (now known as Limited Brands, Inc., "The Limited") and
are being amortized over the lives of the related leases. The cost of
assets sold or retired and the related accumulated depreciation or
amortization are removed from the accounts with any resulting gain or
loss included in net income. Maintenance and repairs are charged to
expense as incurred. Major renewals and betterments that extend service
lives are capitalized. Long-lived assets are reviewed at the store
level at least annually for impairment or whenever events or changes in
circumstances indicate that full recoverability of net assets through
future cash flows is in question. Factors used in the evaluation
include, but are not limited to, management's plans for future
operations, recent operating results and projected cash flows.
38
INCOME TAXES
Income taxes are calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability
method. Deferred tax assets and liabilities are recognized based on the
difference between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect in the years in which those temporary differences are
expected to reverse. Under SFAS No. 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period that
includes the enactment date.
SHAREHOLDERS' EQUITY
At January 31, 2004 and February 1, 2003, there were 150 million shares
of $.01 par value Class A Common Stock authorized, of which 94.6
million and 97.3 million shares were outstanding at January 31, 2004
and February 1, 2003, respectively, and 106.4 million shares of $.01
par value Class B Common Stock authorized, none of which were
outstanding at January 31, 2004 or February 1, 2003. In addition, 15
million shares of $.01 par value Preferred Stock were authorized, none
of which have been issued. See Note 13 for information about Preferred
Stock Purchase Rights.
Holders of Class A Common Stock generally have identical rights to
holders of Class B Common Stock, except that holders of Class A Common
Stock are entitled to one vote per share while holders of Class B
Common Stock are entitled to three votes per share on all matters
submitted to a vote of shareholders.
REVENUE RECOGNITION
The Company recognizes retail sales at the time the customer takes
possession of the merchandise and purchases are paid for, primarily
with either cash or credit card. Catalogue and e-commerce sales are
recorded upon customer receipt of merchandise. Amounts relating to
shipping and handling billed to customers in a sale transaction are
classified as revenue and the related direct shipping costs are
classified as cost of goods sold. Employee discounts are classified as
a reduction of revenue. The Company reserves for sales returns through
estimates based on historical experience and various other assumptions
that management believes to be reasonable.
COST OF GOODS SOLD, OCCUPANCY AND BUYING COSTS
The following expenses are included as part of Cost of Goods Sold,
Occupancy and Buying Costs: landed cost of merchandise, freight,
payroll and related costs associated with merchandise procurement,
inspection costs, store rents and other real estate costs, store asset
depreciation, inventory shrink, and catalogue production and mailing
costs.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, Administrative and Store Operating Expenses include
distribution center costs including receiving and warehouse costs,
store payroll and expenses, home office payroll and expenses (not
related to merchandise procurement) and advertising.
39
CATALOGUE AND ADVERTISING COSTS
Costs related to the A&F Quarterly, a catalogue/magazine, primarily
consist of catalogue production and mailing costs and are expensed as
incurred as a component of "Cost of Goods Sold, Occupancy and Buying
Costs." Advertising costs consist of in-store photographs and
advertising in selected national publications and are expensed as part
of "General, Administrative and Store Operating Expenses" when the
photographs or publications first appear. Catalogue and advertising
costs, which include photo shoot costs, amounted to $33.6 million in
2003, $33.4 million in 2002 and $30.7 million in 2001.
STORE PREOPENING EXPENSES
Pre-opening expenses related to new store openings are charged to
operations as incurred.
DESIGN AND DEVELOPMENT COSTS
Costs to design and develop the Company's merchandise are expensed as
incurred and are reflected as a component of "Cost of Goods Sold,
Occupancy and Buying Costs."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded values of current assets and current liabilities,
including receivables, marketable securities and accounts payable,
approximate fair value due to the short maturity and because the
average interest rate approximates current market origination rates.
40
STOCK-BASED COMPENSATION
The Company reports stock-based compensation through the
disclosure-only requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB
No. 123," but elects to measure compensation expense using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense for options has been recognized as
all options are granted at fair market value at the grant date. The
Company does recognize compensation expense related to restricted share
awards. If compensation expense related to options had been determined
based on the estimated fair value of options granted in 2003, 2002 and
2001, consistent with the methodology in SFAS No. 123, the pro forma
effect on net income and net income per basic and diluted share would
have been as follows:
(Thousands except per share amounts)
2003 2002 2001
----------- ----------- -----------
Net income:
As reported $ 205,102 $ 194,935 $ 168,672
Stock-based compensation expense included in
reported net income, net of tax 3,250 1,414 2,401
Stock-based compensation expense determined
under fair value based method, net of tax(1) (28,261) (28,184) (22,453)
----------- ----------- -----------
Pro forma $ 180,091 $ 168,165 $ 148,620
=========== =========== ===========
Basic earnings per share:
As reported $ 2.12 $ 1.99 $ 1.70
Pro forma $ 1.86 $ 1.71 $ 1.50
Diluted earnings per share:
As reported $ 2.06 $ 1.94 $ 1.65
Pro forma $ 1.83 $ 1.68 $ 1.48
(1) Includes stock-based compensation expense related to restricted share
awards actually recognized in earnings in each period presented.
The weighted-average fair value of all options granted during the 2003,
2002 and 2001 fiscal years was $14.05, $12.07 and $14.96, respectively.
The fair value of each option was estimated using the Black-Scholes
option-pricing model, which are included in the pro forma results
above. For purposes of the valuation, the following weighted-average
assumptions were used: no expected dividends in the 2003, 2002 and 2001
fiscal years; price volatility of 64% in the 2003 fiscal year, 53% in
the 2002 fiscal year and 54% in the 2001 fiscal year; risk-free
interest rates of 2.5%, 4.3% and 4.7% in the 2003, 2002 and 2001 fiscal
years, respectively; assumed forfeiture rates of 23% in the 2003 fiscal
year and 15% in the 2002 and 2001 fiscal years; and vesting lives of 4
years in the 2003 and 2002 fiscal years and 5 years in the 2001 fiscal
year.
41
EARNINGS PER SHARE
Net income per share is computed in accordance with SFAS No. 128,
"Earnings Per Share." Net income per basic share is computed based on
the weighted-average number of outstanding shares of common stock. Net
income per diluted share includes the weighted-average effect of
dilutive stock options and restricted shares.
Weighted-Average Shares Outstanding (in thousands):
2003 2002 2001
-------- -------- --------
Shares of Class A Common Stock issued 103,300 103,300 103,300
Treasury shares (6,467) (5,129) (4,198)
-------- -------- --------
Basic shares 96,833 98,171 99,102
Dilutive effect of options and restricted shares 2,747 2,460 3,422
-------- -------- --------
Diluted shares 99,580 100,631 102,524
======== ======== ========
Options to purchase 6,151,000, 9,218,000 and 5,630,000 shares of Class
A Common Stock were outstanding at year-end 2003, 2002 and 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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Since actual results may differ from those estimates, the Company
revises its estimates and assumptions as new information becomes
available.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to current year
presentation. The amounts reclassified did not have an effect on the
Company's results of operations or shareholders' equity.
42
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations," was effective 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, the adoption of SFAS No. 143 had no impact on the Company's
results of operations or its financial position.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002. SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and
reporting of costs that are associated with the exit and disposal
activities, including restructuring activities, that are currently
accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring.)" SFAS No. 146 also addresses accounting and reporting
standards for costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement or an individual deferred compensation contract. SFAS No.
146 was effective for exit or disposal activities that were initiated
after December 31, 2002. The Company adopted SFAS No. 146 in first
quarter of the 2003 fiscal year and adoption did not have an impact on
the Company's results of operations or its financial position.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an Amendment of FASB No. 123," was issued on December 31,
2002. Pursuant to this standard, companies that chose to adopt the
accounting provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," were permitted to select from three
transition methods (prospective, modified prospective and retroactive
restatement). Companies that chose not to adopt the accounting
provisions of SFAS No. 123 were affected by the new disclosure
requirements of SFAS No. 148. The new interim disclosure provisions
were effective for the first quarter of 2003 and have been adopted by
the Company (see Note 2).
EITF Issue No. 03-08, "Accounting for Claims-Made Insurance and
Retroactive Insurance Contracts by the Insured Entity," discusses the
accounting implications of retroactive and prospective claims-made
insurance policies. The consensus reached was that a claims-made
insurance policy that contains no retroactive provisions should be
accounted for on a prospective basis. However, if a claims-made
insurance policy contains a retroactive provision, the retroactive and
prospective provisions of the policy should be accounted for
separately, if practicable; otherwise, the claims-made insurance policy
should be accounted for entirely as a retroactive contract. This
consensus was effective for new insurance contracts entered into
beginning with the third quarter of the 2003 fiscal year. The Company
has evaluated the impact of this issue and concluded that there was no
effect on the financial statements.
43
EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration
Received From a Vendor." The issue provides accounting guidance on how
a reseller should characterize consideration given by a vendor and when
to recognize and how to measure that consideration in its income
statement. EITF Issue No. 02-16 was effective for fiscal years
beginning after December 15, 2002. The Company has evaluated the impact
of this issue and concluded that there was no effect on the financial
statements.
In November 2002, the Financial Accounting Standards Board, FASB,
issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the
requirements of SFAS No. 5 "Accounting for Contingencies", relating to
a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Company adopted FIN 45 at the
beginning of the 2003 fiscal year. The adoption did not have an effect
on the financial statements.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of (thousands):
2003 2002
-------- --------
Land $ 15,985 $ 15,949
Building 110,726 92,680
Furniture, fixtures and equipment 469,135 394,276
Leasehold improvements 46,586 52,293
Construction in progress 27,901 23,095
Beneficial leaseholds 5,839 7,349
-------- --------
Total $676,172 $585,642
Less: Accumulated depreciation and amortization 230,216 192,701
-------- --------
Property and equipment, net $445,956 $392,941
======== ========
44
5. LEASED FACILITIES AND COMMITMENTS
Annual store rent is comprised of a fixed minimum amount, plus
contingent rent based on a percentage of sales exceeding a stipulated
amount. Store lease terms generally require additional payments
covering taxes, common area costs and certain other expenses.
A summary of rent expense follows (thousands):
2003 2002 2001
-------- -------- --------
Store rent:
Fixed minimum $121,547 $105,751 $ 83,608
Contingent 5,194 4,886 4,897
-------- -------- --------
Total store rent $126,741 $110,637 $ 88,505
Buildings, equipment and other 1,219 1,133 1,566
-------- -------- --------
Total rent expense $127,960 $111,770 $ 90,071
======== ======== ========
At January 31, 2004, the Company was committed to noncancelable leases with
remaining terms of one to thirteen years. These commitments include store leases
with initial terms ranging primarily from ten to fifteen years. A summary of
minimum rent commitments under noncancelable leases follows (thousands):
2004 $ 141,338
2005 142,266
2006 136,151
2007 122,478
2008 110,150
Thereafter 350,337
6. ACCRUED EXPENSES
Accrued expenses consisted of the following (thousands):
2003 2002
-------- --------
Accrual for construction in progress $ 31,269 $ 12,680
Current portion of unredeemed gift card revenue 20,417 23,454
Rent and landlord charges 17,689 18,465
Compensation and benefits 14,589 15,857
Catalogue and advertising costs 14,183 9,701
Legal 9,248 5,136
Store accruals 6,671 10,773
Other 24,166 23,460
-------- --------
Total $138,232 $119,526
======== ========
45
7. INCOME TAXES
The provision for income taxes consisted of (thousands):
2003 2002 2001
-------- -------- --------
Currently Payable:
Federal $101,692 $ 88,238 $ 79,691
State 18,248 13,865 15,002
-------- -------- --------
$119,940 $102,103 $ 94,693
-------- -------- --------
Deferred:
Federal $ 8,748 $ 16,727 $ 11,133
State 1,552 2,620 2,024
-------- -------- --------
$ 10,300 $ 19,347 $ 13,157
-------- -------- --------
Total provision $130,240 $121,450 $107,850
======== ======== ========
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate follows:
2003 2002 2001
-------- -------- --------
Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal income tax effect 3.8 3.5 3.9
Other items, net 0.0 (0.1) 0.1
-------- -------- --------
Total 38.8% 38.4% 39.0%
======== ======== ========
Income taxes payable included net current deferred tax assets of $3.5
million and $6.5 million at January 31, 2004 and February 1, 2003,
respectively.
Under a tax sharing arrangement with The Limited, which owned 84.2% of
the outstanding Common Stock through May 19, 1998, the Company was
responsible for and paid to The Limited its proportionate share of
income taxes calculated upon its separate taxable income at the
estimated annual effective tax rate for periods prior to May 19, 1998.
In 2002, a final tax sharing payment was made to The Limited pursuant
to an agreement to terminate the tax sharing agreement. As a result,
the Company has been indemnified by The Limited for any federal, state
or local taxes asserted with respect to The Limited for all periods
prior to May 19, 1998. Amounts paid to The Limited totaled $1.4 million
and $ 20 thousand in 2002 and 2001, respectively.
Amounts paid directly to taxing authorities were $113.0 million, $82.3
million, and $94.3 million in 2003, 2002, and 2001, respectively.
46
The effect of temporary differences which give rise to deferred income
tax assets (liabilities) was as follows (thousands):
2003 2002
--------- ---------
Deferred tax assets:
Deferred compensation $ 10,208 $ 8,182
Accrued expenses 5,736 6,724
Rent 4,125 1,523
Inventory 1,717 2,960
Other, net 0 124
--------- ---------
Total deferred tax assets $ 21,786 $ 19,513
--------- ---------
Deferred tax liabilities:
Property and equipment ($ 28,396) ($ 20,135)
Store supplies (9,384) (8,061)
--------- ---------
Total deferred tax liabilities ($ 37,780) ($ 28,196)
--------- ---------
Net deferred income tax liabilities ($ 15,994) ($ 8,683)
========= =========
No valuation allowance has been provided for deferred tax assets
because management believes that it is more likely than not that the
full amount of the net deferred tax assets will be realized in the
future.
8. LONG-TERM DEBT
The Company entered into a $250 million syndicated unsecured credit
agreement (the "Credit Agreement") on November 14, 2002 to replace both
a $150 million syndicated unsecured credit agreement and a separate $75
million facility for the issuance of trade letters of credit. The
primary purposes of the Credit Agreement are for trade and stand-by
letters of credit and working capital. The Credit Agreement is due to
expire on November 14, 2005. The Credit Agreement has several borrowing
options, including interest rates that are based on the agent bank's
"Alternate Base Rate," or a LIBO Rate. Facility fees payable under the
Credit 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 consolidated EBITDAR for the trailing
four-fiscal-quarter period and currently accrues at .225% of the
committed amounts per annum. The Credit Agreement contains limitations
on indebtedness, liens, sale-leaseback transactions, significant
corporate changes including mergers and acquisitions with third
parties, investments, restricted payments (including dividends and
stock repurchases), hedging transactions and transactions with
affiliates. The Credit Agreement also contains financial covenants
requiring a minimum ratio, on a consolidated basis, of EBITDAR for the
trailing four-fiscal-quarter period to the sum of interest expense and
minimum rent for such period, as well as a maximum leverage ratio.
Letters of credit totaling approximately $42.8 million and $41.8
million were outstanding under the Credit Agreement at January 31, 2004
and at February 1, 2003. No borrowings were outstanding under the
Credit Agreement at January 31, 2004 or February 1, 2003.
47
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 2003, 2002 and 2001 fiscal years were
approximately $2.0 million, $1.9 million and $1.8 million,
respectively. These amounts do not include reimbursements to Shahid &
Company, Inc. for expenses incurred while performing these services.
On January 1, 2002, A&F loaned $4,953,833 to its Chairman, pursuant to
the terms of a replacement promissory note, which provided that such
amount was due and payable on December 31, 2002. The outstanding
principal under the note did not bear interest as the net sales
threshold, per the terms of the note, was met. This note was paid in
full by the Chairman on December 31, 2002. This note constituted a
replacement of, and substitute for, several promissory notes dated from
November 17, 1999 through May 18, 2001.
10. STOCK OPTIONS AND RESTRICTED SHARES
Under the Company's stock plans, associates and non-associate directors
may be granted up to a total of 24.0 million restricted shares and
options to purchase A&F's common stock at the market price on the date
of grant. In 2003, associates of the Company were granted options
covering approximately 552,000 shares, with a vesting period of four
years. Options covering a total of 84,000 shares were granted to
non-associate directors in 2003. Options covering 64,000 of these
shares vest over four years. Options covering the remaining 20,000
shares vest on the first anniversary of the grant date. All options
have a maximum term of ten years.
Options Exercisable at
Options Outstanding at January 31, 2004 January 31, 2004
--------------------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- -----------
$ 8-$23 2,691,000 4.3 $ 13.50 1,618,000 $ 13.86
$23-$38 7,039,000 6.9 $ 26.50 3,094,000 $ 26.17
$38-$51 5,131,000 5.4 $ 43.54 1,479,000 $ 43.25
------- ----------- ----------- --------- ----------- -----------
$ 8-$51 14,861,000 5.9 $ 30.03 6,191,000 $ 27.04
======= =========== =========== ========= =========== ===========
48
A summary of option activity for 2003, 2002 and 2001 follows:
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Option Price Shares Option Price Shares Option Price
----------- ------------ ----------- ------------ ----------- ------------
Outstanding at beginning of year 16,059,000 $ 28.31 12,961,000 $ 28.65 12,994,000 $ 28.01
Granted 636,000 27.89 3,583,000 26.53 648,000 29.38
Exercised (1,586,000) 12.39 (93,000) 16.44 (521,000) 15.00
Canceled (248,000) 27.04 (392,000) 26.31 (160,000) 24.09
----------- ------------ ----------- ------------ ----------- ------------
Outstanding at end of year 14,861,000 $ 30.03 16,059,000 $ 28.31 12,961,000 $ 28.65
=========== ============ =========== ============ =========== ============
Options exercisable at year-end 6,191,000 $ 27.04 4,556,000 $ 19.10 3,065,000 $ 18.49
=========== ============ =========== ============ =========== ============
A total of 78,000, 1,046,000 and 19,000 restricted shares were granted
in 2003, 2002 and 2001, respectively, with a total market value at
grant date of $2.1 million, $28.0 million and $.6 million,
respectively. Of the restricted shares granted in 2002, 1,000,000
shares were awarded to the Company's Chairman, which become vested on
December 31, 2008 provided the Chairman remains continuously employed
by the Company through such date. The remaining restricted share grants
generally vest either on a graduated scale over four years or 100% at
the end of a fixed vesting period, principally five years. The market
value of restricted shares is being amortized as compensation expense
over the vesting period, generally four to five years. Compensation
expenses related to restricted share awards amounted to $5.3 million,
$2.3 million and $3.9 million in 2003, 2002 and 2001, respectively.
11. RETIREMENT BENEFITS
The Company maintains a qualified defined contribution retirement plan
and a nonqualified supplemental retirement plan. Participation in the
qualified plan is available to all associates who have completed 1,000
or more hours of service with the Company during certain 12-month
periods and attained the age of 21. Participation in the nonqualified
plan is subject to service and compensation requirements. The Company's
contributions to these plans are based on a percentage of associates'
eligible annual compensation. The cost of these plans was $6.4 million
in 2003, $5.6 million in 2002 and $3.9 million in 2001.
Effective February 2, 2003, the Company established a Supplemental
Executive Retirement Plan (the "SERP") to provide additional retirement
income to its Chairman. Subject to service requirements, the Chairman
will receive a monthly prorated share of his final average compensation
(as defined in the SERP) for life. The SERP has been actuarially valued
by an independent third party and the expense associated with the SERP
is being accrued over the stated term of the Amended and Restated
Employment Agreement, dated as of January 30, 2003, between the Company
and its Chairman.
49
12. CONTINGENCIES
The Company is involved in a number of legal proceedings that arise out
of, and are incidental to, the conduct of its business.
In 2003, five actions were filed under various states' laws on behalf
of purported classes of employees and former employees of the Company
alleging that the Company required its associates to wear and pay for a
"uniform" in violation of applicable law. Two of the actions have been
ordered coordinated. In each case, the plaintiff, on behalf of his or
her purported class, seeks injunctive relief and unspecified amounts of
economic and liquidated damages. For certain of the cases, the parties
are in the process of discovery. In other cases, answers have been
filed. In one case, the Company has filed a motion to dismiss and that
motion is pending.
In 2003, an action was filed in which the plaintiff alleges that the
"uniform," when purchased, drove associates' wages below the federal
minimum wage. The complaint purports to state a collective action on
behalf of all part-time associates nationwide under the Fair Labor
Standards Act. The parties are in the process of discovery.
In 2003, two actions were filed on behalf of purported classes alleged
to be discriminated against in hiring or employment decisions due to
race and/or national origin. One of the actions was voluntarily
dismissed. Additionally, the EEOC has under taken an investigation into
these allegations. The plaintiffs in the action seek, on behalf of
their purported class, injunctive relief and unspecified amounts of
economic, compensatory and punitive damages . The parties are in the
process of discovery.
In each of 2003 and 2002, one action was filed against the Company
involving overtime compensation. In each action, the plaintiffs, on
behalf of their respective purported class, seek injunctive relief and
unspecified amounts of economic and liquidated damages. The Company has
filed a motion to dismiss in one of the cases and that motion is
pending. In the other case, the parties are in the process of
discovery.
The Company accrues amounts related to legal matters if reasonably
estimable and reviews these amounts at least quarterly. The Company
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. Accordingly, the Company cannot estimate a range of
potential loss, if any, for these legal proceedings.
The Company has standby letters of credit in the amount of $4.7 million
that are set to expire during the third quarter of fiscal 2004. The
beneficiary, a merchandise supplier, has 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 beneficiary has not
drawn upon the standby letters of credit.
The Company enters into agreements with professional services firms, in
the ordinary course of business and, in most agreements, indemnifies
these firms from any harm. There is no financial impact on the Company
related to these indemnification agreements.
13. PREFERRED STOCK PURCHASE RIGHTS
On July 16, 1998, A&F's Board of Directors declared a dividend of .50
of a Series A Participating Cumulative Preferred Stock Purchase Right
(Right) for each outstanding share of Class A Common Stock, par value
$.01 per share (Common Stock), of A&F. The dividend was paid to
shareholders of record on July 28, 1998. Shares of Common Stock issued
after July 28, 1998 and prior to the Distribution Date described below
will be issued with a Right attached. Under certain conditions,
50
each whole Right may be exercised to purchase one one-thousandth of a
share of Series A Participating Cumulative Preferred Stock at an
initial exercise price of $250. The Rights initially will be attached
to the shares of Common Stock. The Rights will separate from the Common
Stock and a Distribution Date will occur upon the earlier of 10
business days after a public announcement that a person or group has
acquired beneficial ownership of 20% or more of A&F's outstanding
shares of Common Stock and become an "Acquiring Person" (Share
Acquisition Date) or 10 business days (or such later date as the Board
shall determine before any person has become an Acquiring Person) after
the date of the commencement of a tender or exchange offer which, if
consummated, would result in a person or group beneficially owning 20%
or more of A&F's outstanding Common Stock. The Rights are not
exercisable until the Distribution Date.
In the event that any person becomes an Acquiring Person, each holder
of a Right (other than the Acquiring Person and certain affiliated
persons) will be entitled to purchase, upon exercise of the Right,
shares of Common Stock having a market value two times the exercise
price of the Right. At any time after any person becomes an Acquiring
Person (but before any person becomes the beneficial owner of 50% or
more of the outstanding shares), A&F's Board of Directors may exchange
all or part of the Rights (other than Rights beneficially owned by an
Acquiring Person and certain affiliated persons) for shares of Common
Stock at an exchange ratio of one share of Common Stock per Right. In
the event that, at any time following the Share Acquisition Date, A&F
is involved in a merger or other business combination transaction in
which A&F is not the surviving corporation, the Common Stock is
exchanged for other securities or assets or 50% or more of the assets
or earning power of A&F and its subsidiaries, taken as a whole, is sold
or transferred, the holder of a Right will be entitled to buy, for the
exercise price of the Rights, the number of shares of common stock of
the other party to the business combination or sale which at the time
of such transaction will have a market value of two times the exercise
price of the Right.
The Rights, which do not have any voting rights, expire on July 16,
2008, and may be redeemed by A&F at a price of $.01 per whole Right at
any time before a person becomes an Acquiring Person.
Rights holders have no rights as a shareholder of A&F, including the
right to vote and to receive dividends.
14. SUBSEQUENT EVENTS
On February 17, 2004, the Company announced that its Board of Directors
voted to initiate a cash dividend, at an annual rate of $0.50 per
share. The first quarterly payment, of $0.125 per share, was paid on
March 30, 2004 to stockholders of record as of March 9, 2004.
51
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial results for 2003 and 2002 follow
(thousands except per share amounts):
2003 Quarter First Second Third Fourth
---------------------------- ---------- ---------- ---------- ----------
Net sales $ 346,722 $ 355,719 $ 444,979 $ 560,389
Gross income 128,188 144,333 183,865 261,012
Operating income 40,290 55,617 81,450 154,278
Net income 25,551 34,818 50,457 94,277
Net income per basic share $ 0.26 $ 0.36 $ 0.52 $ 0.98
Net income per diluted share $ 0.26 $ 0.35 $ 0.51 $ 0.96
2003 Quarter First Second Third Fourth
---------------------------- ---------- ---------- ---------- ----------
Net sales $ 312,792 $ 329,154 $ 419,329 $ 534,482
Gross income 114,429 131,874 166,736 243,010
Operating income 36,987 49,570 76,432 149,628
Net income 23,289 31,141 47,687 92,818
Net income per basic share $ 0.24 $ 0.32 $ 0.49 $ 0.95
Net income per diluted share $ 0.23 $ 0.31 $ 0.48 $ 0.93
52
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of Abercrombie & Fitch Co.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Abercrombie & Fitch
Co. and its subsidiaries at January 31, 2004 and February 1, 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 17, 2004
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
With the participation of the Chairman and Chief Executive Officer (the
principal executive officer) and the Senior Vice President - Chief Financial
Officer (the principal financial officer) of Abercrombie & Fitch Co. ("A&F"),
A&F's management has evaluated the effectiveness of A&F's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of the end of the period covered by
this Annual Report on Form 10-K. Based on that evaluation, A&F's Chairman and
Chief Executive Officer and A&F's Senior Vice President - Chief Financial
Officer have concluded that:
- information required to be disclosed by A&F in this Annual Report on
Form 10-K would be accumulated and communicated to A&F's management,
including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure;
- information required to be disclosed by A&F in this Annual Report on
Form 10-K would be recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms; and
- A&F's disclosure controls and procedures are effective as of the end of
the period covered by this Annual Report on Form 10-K to ensure that
material information relating to A&F and its consolidated subsidiaries
is made known to them, particularly during the period for which the
periodic reports of A&F, including this Annual Report on Form 10-K, are
being prepared.
Changes in Internal Control over Financial Reporting
There were no changes in A&F's internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during A&F's
fiscal quarter ended January 31, 2004, that have materially affected, or are
reasonably likely to materially affect, A&F's internal control over financial
reporting.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of A&F is set forth under the captions "ELECTION
OF DIRECTORS - Nominees and Directors," "- Security Ownership of Directors and
Management," "- Meetings of and Communications with the Board," and "-
Committees of the Board" and "EXECUTIVE COMPENSATION - Employment Agreements and
Other Transactions with Certain Executive Officers" in A&F's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 20, 2004 (the
"Proxy Statement") and is incorporated herein by reference. Information
regarding executive officers of A&F is set forth under the captions "ELECTION OF
DIRECTORS - Nominees and Directors," "- Executive Officers", and "- Security
Ownership of Directors and Management" and "EXECUTIVE COMPENSATION - Employment
Agreements and Other Transactions with Certain Executive Officers" in the Proxy
Statement and is incorporated herein by reference. In addition, information
regarding executive officers of A&F is included in this Annual Report on Form
10-K under the caption "SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT"
in Part I and is incorporated herein by reference. Information regarding
beneficial ownership reporting compliance under Section 16(a) of the Securities
Exchange Act of 1934 is set forth under the caption "PRINCIPAL HOLDERS OF SHARES
- Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement and is incorporated herein by reference.
Information concerning A&F's Audit Committee is set forth under the captions
"ELECTION OF DIRECTORS - Committees of the Board - Audit Committee" and "-
Nominees and Directors" in the Proxy Statement and is incorporated herein by
reference.
Information concerning the nomination process for director candidates is set
forth under the captions "ELECTION OF DIRECTORS - Committees of the Board -
Nominating and Board Governance Committee" and "ELECTION OF DIRECTORS -
Nominating Procedures" in the Proxy Statement and is incorporated herein by
reference.
A&F's Board of Directors has adopted charters for each of the Audit Committee,
the Compensation Committee and the Nominating and Board Governance Committee as
well as Corporate Governance Guidelines, in each case as contemplated by the
applicable sections of the New York Stock Exchange Listed Company Manual.
In accordance with the requirements of Section 303A(10) of the New York Stock
Exchange Listed Company Manual, the Board of Directors of A&F has adopted a Code
of Business Conduct and Ethics covering the directors, officers and associates
(employees) of A&F, including A&F's Chairman and Chief Executive Officer (the
principal executive officer) and Senior Vice President - Chief Financial Officer
(the principal financial and accounting officer). As required by the applicable
rules of the SEC and the requirements of Section 303A(10) of the New York Stock
Exchange Listed Company Manual, A&F intends to disclose the following on the
"Corporate Governance" page of its Web site located at www.abercrombie.com
within the required time period following their occurrence: (A) the nature of
any amendment to a provision of its Code of Business Conduct and Ethics that (i)
applies to A&F's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, (ii) relates to any element of the "code of ethics" definition
enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical,
administrative or other non-substantive amendment; and (B) a description of any
waiver (including the nature of the waiver, the name of the person to whom the
waiver was granted and the date of the waiver), including an implicit waiver,
from a provision of the Code of Business Conduct and Ethics granted to A&F's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, that relates to
one or more of the items set forth in Item 406(b) of SEC Regulation S-K.
55
The text of each of the Charter of the Audit Committee, the Charter of the
Compensation Committee, the Charter of the Nominating and Board Governance
Committee, the Corporate Governance Guidelines and the Code of Business Conduct
and Ethics is posted on the "Corporate Governance" page of A&F's Web site
located at www.abercrombie.com. Interested persons may also obtain copies of the
Charter of the Audit Committee, the Charter of the Compensation Committee, the
Charter of the Nominating and Board Governance Committee, the Corporate
Governance Guidelines and the Code of Business Conduct and Ethics, without
charge, by writing to Abercrombie & Fitch Co. at 6301 Fitch Path, New Albany,
Ohio 43054, Attention: Investor Relations. In addition, a copy of A&F's Code of
Business Conduct and Ethics is being filed as Exhibit 14 to this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under the captions
"EXECUTIVE COMPENSATION" and "ELECTION OF DIRECTORS - Compensation Committee
Interlocks and Insider Participation" and "- Security Ownership of Directors
and Management" in the Proxy Statement and is incorporated herein by reference.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information referred to in Item 402(a)(8) of SEC Regulation
S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information regarding the security ownership of certain beneficial owners and
management is set forth under the captions "PRINCIPAL HOLDERS OF SHARES,"
"ELECTION OF DIRECTORS - Security Ownership of Directors and Management" and
"EXECUTIVE COMPENSATION - Summary Compensation Table," "- Compensation of
Directors" and "- Employment Agreements and Other Transactions with Certain
Executive Officers" in the Proxy Statement and is incorporated herein by
reference.
Abercrombie & Fitch Co. ("A&F") has four equity compensation plans under which
its shares of Class A Common Stock, $0.01 par value ("Common Stock"), are
authorized for issuance to eligible directors, officers and employees in
exchange for consideration in the form of goods or services: (i) the 1996 Stock
Option and Performance Incentive Plan (1998 Restatement) (the "1998 Associates
Plan"); (ii) the 1996 Stock Plan for Non-Associate Directors (1998 Restatement)
(the "1998 Non-Associate Directors Plan"); (iii) the 2002 Stock Plan for
Associates (the "2002 Associates Plan"); and (iv) the 2003 Stock Plan for
Non-Associate Directors (the "2003 Non-Associate Directors Plan"). Any shares of
Common Stock distributable in respect of amounts deferred by non-associate
directors of A&F under the Directors' Deferred Compensation Plan (the "Deferred
Compensation Plan") will be distributed under the 2003 Non-Associate Directors
Plan in respect of deferred compensation allocated to non-associate directors'
stock accounts under the Deferred Compensation Plan on or after May 22, 2003 and
under the 1998 Non-Associate Directors Plan in respect of deferred compensation
allocated to non-associate directors' stock accounts under the Deferred
Compensation Plan prior to May 22, 2003. The 1998 Associates Plan and the 1998
Non-Associate Directors Plan have been approved by the stockholders of A&F while
the 2002 Associate Plan, the 2003 Non-Associate Directors Plan and the Deferred
Compensation Plan have not. The 1998 Non-Associate Directors Plan was terminated
as of May 22, 2003 in respect of future grants pf options and issuances and
distributions of shares of Common Stock other than issuances of shares of Common
Stock upon exercise of options granted under the 1998 Non-Associate Directors
Plan which remained outstanding as of May 21, 2003 and issuances and
distributions of shares of Common Stock in respect of deferred compensation
allocated to accounts under the Deferred Compensation Plan as of May 21, 2003.
56
The following table summarizes equity compensation plan information for the 1998
Associates Plan and the 1998 Non-Associate Directors Plan as a group and for the
2002 Associates Plan and the 2003 Non-Associate Directors Plan as a group, in
each case as of January 31, 2004.
NUMBER OF SHARES
OF COMMON STOCK
REMAINING
NUMBER OF SHARES AVAILABLE FOR
OF COMMON STOCK WEIGHTED- FUTURE ISSUANCE
TO BE ISSUED UPON AVERAGE EXERCISE UNDER EQUITY
EXERCISE OF PRICE OF COMPENSATION
OUTSTANDING OUTSTANDING PLANS (EXCLUDING
OPTIONS, WARRANTS OPTIONS, WARRANTS SHARES REFLECTED
AND RIGHTS AND RIGHTS IN COLUMN (a))
PLAN CATEGORY (a)* (b)* (c)*
------------- ----------------- ----------------- ----------------
Equity compensation plans approved by
stockholders 12,027,078 (1) $ 31.22(2) 606,787 (3)
Equity compensation plans not approved by
stockholders 3,958,119 (4) $ 26.71(5) 3,551,864 (6)
Total 15,985,197 $ 30.02 4,158,651
-----------------
*Reflects adjustments for changes in A&F's capitalization.
(1) Includes 10,616,748 shares of Common Stock issuable upon exercise of
options granted under the 1998 Associates Plan, 102,830 shares of Common
Stock issuable upon vesting of awards of restricted shares of Common Stock
granted under the 1998 Associates Plan, 290,000 shares of Common Stock
issuable upon exercise of options granted under the 1998 Non-Associate
Directors Plan and 17,500 shares of Common Stock reflecting share
equivalents attributable to compensation deferred by non-associate
directors participating in the Deferred Compensation Plan and distributable
in the form of shares of Common Stock under the 1998 Non-Associate
Directors Plan. Also includes the right of Michael S. Jeffries to receive
1,000,000 shares of Common Stock as a career share award under the 1998
Associates Plan in accordance with the terms of his Amended and Restated
Employment Agreement, dated as of January 30, 2003. This award vests
December 31, 2008 if Mr. Jeffries remains employed with A&F. A pro rata
portion of the award may vest earlier upon Mr. Jeffries' death or permanent
and total disability or termination of his employment by A&F without cause
or by Mr. Jeffries with good reason and will vest in full upon a change of
control of A&F. Mr. Jeffries will not receive any of the shares of Common
Stock subject to the career share award until after the award has vested
and the delivery date specified in the Amended and Restated Employment
Agreement occurred.
(2) Represents weighted-average exercise price of options outstanding under the
1998 Associates Plan and the 1998 Non-Associate Directors Plan and
weighted-average price of share equivalents attributable to compensation
deferred by non-associate directors participating in the Deferred
Compensation Plan distributable in the form of shares of Common Stock under
the 1998 Non-Associate Directors Plan.
57
(3) Includes 594,725 shares of Common Stock remaining available for future
issuance under the 1998 Associates Plan (no more than 195,592 of which may
be the subject of awards which are not options or stock appreciation
rights) and 12,062 shares of Common Stock remaining available for future
issuance under the 1998 Non-Associate Directors Plan, in each case
excluding the shares of Common Stock shown in footnote (1).
(4) Includes 3,914,026 shares of Common Stock issuable upon exercise of options
granted under the 2002 Associates Plan, 40,000 shares of Common Stock
issuable upon exercise of options granted under the 2003 Non-Associate
Directors Plan and 4,093 shares of Common Stock reflecting share
equivalents attributable to compensation deferred by non-associate
directors participating in the Deferred Compensation Plan distributable in
the form of shares of Common Stock under the 2003 Non-Associate Directors
Plan.
(5) Represents weighted-average exercise price of options outstanding under the
2002 Associates Plan and the 2003 Non-Associate Directors Plan and
weighted-average price of share equivalents attributable to compensation
deferred by non-associate directors participating in the Deferred
Compensation Plan distributable in the form of shares of Common Stock under
the 2003 Non-Associate Directors Plan.
(6) Includes 3,045,957 shares of Common Stock remaining available for the
future issuance under the 2002 Associates Plan and 505,907 shares of Common
Stock remaining available for future issuance under the 2003 Non-Associate
Directors Plan, in each case excluding shares of Common Stock shown in
footnote (4).
2002 STOCK PLAN FOR ASSOCIATES
The 2002 Associates Plan, which was adopted in January 2002 and amended and
restated May 22, 2003 by the Board of Directors of A&F, is administered by the
Compensation Committee of the Board. The 2002 Associates Plan permits A&F to
provide equity-based awards in the form of non-qualified stock options ("NSOs"),
restricted shares of Common Stock ("Restricted Shares") and stock units, each
representing the right to receive one share of Common Stock ("Stock Units" and,
collectively with NSOs and Restricted Shares, "Awards").
Shares Subject to the Plan
The maximum number of shares of Common Stock which may be delivered to
participants under the 2002 Associates Plan is 7,000,000 shares of Common Stock,
subject to adjustment as described below. Shares of Common Stock to be delivered
under the 2002 Associates Plan will be shares currently held or subsequently
acquired by A&F as treasury shares. The number of shares of Common Stock
authorized for delivery under the 2002 Associates Plan, the number of shares
subject to outstanding Awards, the respective exercise price, number of shares
and other limitations applicable to outstanding Awards and any other factors,
limits or terms affecting outstanding Awards, will be appropriately adjusted for
any future stock split, stock dividend, recapitalization, merger, consolidation,
combination, spin-off, distribution of assets to stockholders, exchange of
shares or other similar corporate change affecting the shares of Common Stock.
Shares attributable to Awards which have not been fully exercised or vested
prior to termination for any reason or which have been surrendered or cancelled
without the delivery of shares and Restricted Shares which have been forfeited
to A&F will be available for subsequent grants under the 2002 Associates Plan.
If any shares covered by an Award are not delivered because the Award is settled
in cash or used to satisfy any applicable tax withholding obligation, those
shares will not be deemed to have been delivered under the 2002 Associates Plan
for purposes of determining the maximum number of shares of Common Stock
available for delivery. If the exercise price of any NSO granted under the 2002
Associates Plan is satisfied by tendering already owned shares, only the number
of shares
58
issued net of the shares tendered will be deemed delivered under the 2002
Associates Plan for purposes of determining the maximum number of shares of
Common Stock available for delivery.
Eligibility for Participation
Associates of A&F and its subsidiaries who are selected by the Compensation
Committee are eligible to participate in the 2002 Associates Plan.
Terms of NSOs
The Compensation Committee selects the individuals to whom NSOs are granted and
determines the terms and conditions of the NSOs granted. The exercise price of
NSOs granted under the 2002 Associates Plan has been and will be equal to 100%
of the fair market value of A&F's Common Stock on the grant date. Payment of the
exercise price may be made in cash or shares of Common Stock already owned by
the option holder. Each NSO has and will have a term of ten years from its grant
date. The Compensation Committee will determine the vesting schedule for each
NSO at the time of grant and may accelerate the exercisability of any NSO at any
time. The NSOs become fully exercisable in the event of defined changes of
control of A&F. If an option holder's employment is terminated by reason of
total disability, the NSOs may thereafter be exercised in full for the first
nine months that the option holder receives benefits under A&F's long-term
disability program, subject to the stated term of the NSOs. If an option
holder's employment is terminated by reason of death, the NSOs may thereafter be
exercised in full for a period of one year after the date of the option holder's
death or any other period which the Compensation Committee determines, subject
to the stated term of the NSOs. If an option holder's employment is terminated
for any other reason, any vested NSOs held by the option holder at the date of
termination may be exercised for the period specified in the option agreement or
as otherwise determined by the Compensation Committee, subject to the stated
term of the NSOs. At the discretion of the Compensation Committee, NSOs may have
a tax withholding feature. NSOs are not transferable except by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order.
Terms of Restricted Shares
The Compensation Committee will determine the individuals to whom Restricted
Shares are granted. At the time a grant of Restricted Shares is made, the
Compensation Committee will determine the duration of the period (the
"Restricted Period") during which, and the conditions under which, the
Restricted Shares will vest. Unless the Compensation Committee determines
otherwise, either at the time of grant or any time thereafter, holders of
Restricted Shares will not have the right to vote the Restricted Shares or
receive any dividends with respect to them. All restrictions and conditions
applicable to outstanding Restricted Shares will lapse in the event of defined
changes of control of A&F. If the employment of the holder of Restricted Shares
is terminated by reason of total disability or death, all applicable
restrictions and conditions will lapse. If the holder of Restricted Shares
retires, the Compensation Committee may shorten or terminate the applicable
Restricted Period or waive any other applicable restrictions or conditions. If
the employment of the holder of Restricted Shares is terminated for any other
reason prior to the expiration or termination of the applicable Restricted
Period and the satisfaction of any other applicable conditions, unless the
Compensation Committee otherwise provides, the Restricted Shares will be
forfeited. At the discretion of the Compensation Committee, Restricted Shares
may have a tax withholding feature. Restricted Shares are not transferable
except pursuant to a qualified domestic relations order.
Terms of Stock Units
The Compensation Committee selects the individuals to whom Stock Units are
granted under the 2002 Associates Plan. Each Stock Unit represents the right to
receive one share of Common Stock, subject to the terms and conditions set by
the Compensation Committee. When Stock Units are granted, the Compensation
Committee will determine the conditions under which the Stock Unit will vest.
Stock
59
Units are not transferable except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order. Stock Units
will vest in full in the event of defined changes of control of A&F or upon the
death or total disability of the holder of the Stock Units. If the employment of
the holder of Stock Units is terminated for any other reason, unless the
Compensation Committee otherwise provides, any unvested Stock Units will be
forfeited. At the discretion of the Compensation Committee, Stock Units may have
a tax withholding feature.
Term of the Plan
The 2002 Associates Plan will terminate on January 30, 2012, unless the Plan is
terminated earlier by A&F's Board of Directors or by exhaustion of the shares of
Common Stock available for delivery.
2003 STOCK PLAN FOR NON-ASSOCIATE DIRECTORS
The 2003 Non-Associate Directors Plan, which was adopted by the Board of
Directors of A&F on May 22, 2003, is administered by the Board of Directors. The
2003 Non-Associate Directors Plan permits A&F to provide equity-based Awards in
the form of NSOs, Restricted Shares and Stock Units to directors of A&F who are
not associates of A&F or any of its affiliates ("non-associate directors"). In
addition, any shares of Common Stock distributable in respect of deferred
compensation allocated to the stock accounts of non-associate directors under
the Deferred Compensation Plan, described below, on or after May 22, 2003, will
be deemed to have been delivered under the 2003 Non-Associate Directors Plan.
Shares Subject to the Plan
The maximum number of shares of Common Stock which may be delivered to
participants under the 2003 Non-Associate Directors Plan is 550,000 shares of
Common Stock, subject to adjustment as described below. Shares of Common Stock
to be delivered under the 2003 Non-Associate Directors Plan will be shares
currently held or subsequently acquired by A&F as treasury shares. The number of
shares of Common Stock authorized for delivery under the 2003 Non-Associate
Directors Plan, the number of shares subject to outstanding Awards, the
respective exercise price, number of shares and other limitations applicable to
outstanding or subsequently issuable Awards and any other factors, limits or
terms affecting outstanding or subsequently issuable Awards, will be
appropriately adjusted for any future stock split, stock dividend,
recapitalization, merger, consolidation, combination, spin-off, distribution of
assets to stockholders, exchange of shares or other similar corporate change
affecting the shares of Common Stock. Shares attributable to Awards which have
not been fully exercised or vested prior to termination for any reason or which
have been surrendered or cancelled without the delivery of shares and Restricted
Shares which have been forfeited to A&F will be available for subsequent grants
under the 2003 Non-Associate Directors Plan. If any shares covered by an Award
are not delivered because the Award is settled in cash or used to satisfy any
applicable tax withholding obligation, those shares will not be deemed to have
been delivered under the 2003 Non-Associate Directors Plan for purposes of
determining the maximum number of shares of Common Stock available for delivery.
If the exercise price of any NSO granted under the 2003 Non-Associate Directors
Plan is satisfied by tendering already owned shares, only the number of shares
issued net of the shares tendered will be deemed delivered under the 2003
Non-Associate Directors Plan for purposes of determining the maximum number of
shares of Common Stock available for delivery.
Eligibility for Participation
Only non-associate directors of A&F are eligible to receive grants of Awards
under the 2003 Non-Associate Directors Plan.
60
Terms of NSOs
On the first business day of each of the second fiscal quarter and the fourth
fiscal quarter of each fiscal year of A&F, beginning after May 22, 2003, each
individual then serving as a non-associate director has been and will be
automatically granted an NSO to purchase 2,500 shares of Common Stock. Each NSO
so granted vests in full on the first anniversary of the grant date, subject to
continued service as a director of A&F. The Board of Directors may grant NSOs to
non-associate directors in addition to the automatic grants described above. The
Board of Directors determines the non-associate directors to whom discretionary
NSOs are granted, the grant date of each discretionary NSO, the number of shares
covered by each discretionary NSO and the date(s) when each discretionary NSO
will become exercisable.
The exercise price of NSOs granted under the 2003 Non-Associate Directors Plan
has been and will be equal to 100% of the fair market value of A&F's Common
Stock on the grant date. Payment of the exercise price may be made in cash or
shares of Common Stock already owned by the option holder. The NSOs become fully
exercisable in the event of defined changes of control of A&F or upon the death
or total disability of a non-associate director. The NSOs remain exercisable
until the earlier of (a) the tenth anniversary of the grant date or (b) one year
after the non-associate director ceases to be a member of A&F's Board of
Directors. At the discretion of the Board of Directors, NSOs may have a tax
withholding feature. NSOs are not transferable except by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order.
Terms of Restricted Shares
The Board of Directors may grant Restricted Shares to non-associate directors
subject to such restrictions, conditions and other terms as the Board
determines. At the time a grant of Restricted Shares is made, the Board of
Directors will determine the duration of the Restricted Period during which, and
the conditions under which, the Restricted Shares will vest. Holders of
Restricted Shares will not have the right to vote the Restricted Shares or
receive any dividends with respect to them. All restrictions and conditions
applicable to outstanding Restricted Shares will lapse in the event of defined
changes of control of A&F. If a non-associate director's service as a director
of A&F is terminated by reason of total disability or death, all restrictions
and conditions applicable to the Restricted Shares will lapse. If a
non-associate director's service as a director of A&F is terminated for any
other reason prior to the expiration or termination of the applicable Restricted
Period and the satisfaction of any other applicable conditions, the Restricted
Shares will be forfeited. At the discretion of the Board of Directors,
Restricted Shares may have a tax withholding feature. Restricted Shares are not
transferable except pursuant to a qualified domestic relations order.
Terms of Stock Units
On the first business day of each fiscal year of A&F, beginning after May 22,
2003, each non-associate director then serving has been and will continue to be
granted Stock Units representing the right to receive that number of shares of
Common Stock which equals the number determined by dividing (i) $60,000 by (ii)
the average of the closing sale prices of a share of Common Stock on NYSE during
the 20-trading-day period immediately preceding the grant date. Each Stock Unit
so granted will vest in full on the first anniversary of the grant date, subject
to continued service as a director. The Board of Directors may grant Stock Units
to non-associate directors in addition to the automatic grants described above
and will determine the conditions under which those discretionary Stock Units
will vest. Stock Units are not transferable except by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order.
Stock Units will vest in full in the event of defined changes of control of A&F
or upon the death or total disability of the holder of the Stock Units. If a
non-associate director's service as a director of A&F is terminated for any
other reason, any unvested Stock Units will be forfeited. At the discretion of
the Board of Directors, Stock Units may have a tax withholding feature.
61
Term of Plan
The 2003 Non-Associate Directors Plan will continue in effect until May 22,
2013, unless the Plan is earlier terminated by exhaustion of the shares of
Common Stock available for delivery.
DIRECTORS' DEFERRED COMPENSATION PLAN
A&F has maintained the Deferred Compensation Plan since October 1, 1998. The
Deferred Compensation Plan was amended and restated May 22, 2003. Voluntary
participation in the Deferred Compensation Plan allows a non-associate director
of A&F to defer all or a part of his or her quarterly retainers, meeting fees
and stock-based incentives (including NSOs, Restricted Shares and Stock Units),
including federal income tax thereon. The deferred compensation is credited to a
stock account where it is converted into a share equivalent. Stock-based
incentives deferred pursuant to the Deferred Compensation Plan are credited as
shares of Common Stock. Amounts otherwise payable in cash are converted into a
share equivalent based on the fair market value of the Company's Common Stock on
the date the amounts are credited to the non-associate director's stock account.
Cash dividends will be credited on the shares of Common Stock credited to a
non-associate director's stock account and converted into a share equivalent.
Each non-associate director's only right with respect to his or her stock
account (and the amounts allocated thereto) will be to receive distribution of
the amount in the non-associate director's stock account in accordance with the
terms of the Deferred Compensation Plan. Distribution of the deferred amount is
made in the form of a single lump sum transfer of the whole shares of Common
Stock represented by the share equivalent in the non-associate director's stock
account (plus cash representing the value of fractional shares) or annual
installments in accordance with the election made by the non-associate director.
Shares of Common Stock will be distributed under the 2003 Non-Associate
Directors Plan in respect of deferred compensation allocated to non-associate
directors' stock accounts on or after May 22, 2003 and under the 1998
Non-Associate Directors Plan in respect of deferred compensation allocated to
non-associate directors' stock accounts prior to May 22, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is set
forth under the captions "ELECTION OF DIRECTORS - Nominees and Directors" and "
- Compensation Committee Interlocks and Insider Participation" and "EXECUTIVE
COMPENSATION - Employment Agreements and Other Transactions with Certain
Executive Officers" in the Proxy Statement and is incorporated herein by
reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding A&F's pre-approval policy and services rendered by A&F's
principal independent auditors is set forth under the captions "AUDIT COMMITTEE
MATTERS - Pre-approval Policy" and "- Fees of Independent Auditors" in the
Proxy Statement and incorporated herein by reference.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) List of Financial Statements.
The following consolidated financial statements of Abercrombie & Fitch
and the related notes are filed as a part of this Annual Report on Form
10-K in ITEM 8:
Consolidated Statements of Income for the fiscal years ended January
31, 2004, February 1, 2003 and February 2, 2002.
Consolidated Balance Sheets as of January 31, 2004 and February 1,
2003.
Consolidated Statements of Shareholders' Equity for the fiscal years
ended January 31, 2004, February 1, 2003 and February 2, 2002.
Consolidated Statements of Cash Flows for the fiscal years ended
January 31, 2004, February 1, 2003 and February 2, 2002.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(a)(2) List of Financial Statement Schedules.
All schedules are omitted because the required information is either
presented in the consolidated financial statements or notes thereto, or
is not applicable, required or material.
(a)(3) List of Exhibits.
3. Certificate of Incorporation and Bylaws
3.1 Amended and Restated Certificate of Incorporation of
A&F as filed with the Delaware Secretary of State on
August 27, 1996, incorporated herein by reference to
Exhibit 3.1 to A&F's Quarterly Report on Form 10-Q
for the quarterly period 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 herein by reference to Exhibit 3.2 to
A&F's Annual Report on Form 10-K for the fiscal 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 herein by
reference to Exhibit 3.3 to A&F's Quarterly Report on
Form 10-Q for the quarterly period ended July 31,
1999. (File No. 1-12107)
3.4 Amended and Restated Bylaws of A&F, effective January
31, 2002, incorporated herein by reference to Exhibit
3.4 to A&F's Annual Report on Form 10-K for the
fiscal year ended February 2, 2002. (File No.
1-12107)
3.5 Certificate regarding adoption of amendment to
Section 2.02 of Amended and Restated Bylaws of A&F by
Board of Directors on July 10, 2003, incorporated
herein by reference to Exhibit 3.5 to A&F's Quarterly
Report on Form 10-Q for the quarterly period ended
November 1, 2003 (File No. 1-12107)
63
3.6 Amended and Restated Bylaws of A&F (reflecting
amendments through July 10, 2003) [for SEC reporting
compliances purposes only], incorporated herein by
reference to Exhibit 3.6 to A&F's Quarterly Report on
Form 10-Q for the quarterly period ended November 1,
2003 (File No. 1-12107)
4. Instruments Defining the Rights of Security Holders.
4.1 Credit Agreement, dated as of November 14, 2002,
among Abercrombie & Fitch Management Co., as
Borrower, Abercrombie & Fitch Co., as Guarantor, the
Lenders party thereto, and National City Bank, as
Administrative Agent and Lead Arranger (the "Credit
Agreement"), incorporated herein by reference to
Exhibit 4.1 to A&F's Current Report on Form 8-K dated
November 26, 2002. (File No. 1-12107)
4.2 Guarantee Agreement, dated as of November 14, 2002,
among Abercrombie & Fitch Co., each direct and
indirect domestic subsidiary of Abercrombie & Fitch
Co. other than Abercrombie & Fitch Management Co.,
and National City Bank, as administrative agent for
the Lenders party to the Credit Agreement,
incorporated herein by reference to Exhibit 4.2 to
A&F's Current Report on Form 8-K dated November 26,
2002. (File No. 1-12107)
4.3 First Amendment and Waiver, dated as of January 26,
2004, to the Credit Agreement, dated as of November
14, 2002, among Abercrombie & Fitch Management Co.,
Abercrombie & Fitch Co., the Lenders party thereto
and National City Bank, as Administrative Agent.
4.4 Rights Agreement, dated as of July 16, 1998, between
A&F and First Chicago Trust Company of New York, as
Rights Agent, incorporated herein by reference to
Exhibit 1 to A&F's Registration Statement on Form 8-A
dated July 21, 1998. (File No. 1-12107)
4.5 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
herein by reference to Exhibit 2 to A&F's Amendment
No. 1 to Form 8-A dated April 23, 1999. (File No.
1-12107)
4.6 Certificate of adjustment of number of Rights
associated with each share of Class A Common Stock,
dated May 27, 1999, incorporated herein by reference
to Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q
for the quarterly period ended July 31, 1999. (File
No. 1-12107)
4.7 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 herein by reference to Exhibit 4.6 to
A&F's Quarterly Report on Form 10-Q for the quarterly
period ended August 4, 2001. (File No. 1-12107)
10. Material Contracts.
10.1 Abercrombie & Fitch Co. Incentive Compensation
Performance Plan, incorporated herein by reference to
Exhibit 10.1 to A&F's Quarterly Report on Form 10-Q
for the quarterly period ended May 4, 2002. (File No.
1-12107)
64
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
herein by reference to Exhibit 10.2 to A&F's Annual
Report on Form 10-K for the fiscal 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 January 30, 2003 and the
two-for-one stock split distributed June 15, 1999 to
stockholders of record on May 25, 1999), incorporated
herein by reference to Exhibit 10.3 to A&F's Annual
Report on Form 10-K for the fiscal year ended
February 1, 2003 (File No. 1-12107)
10.4 Abercrombie & Fitch Co. 2002 Stock Plan for
Associates (as amended and restated May 22, 2003),
incorporated herein by reference to Exhibit 10.4 to
A&F's Quarterly Report on Form 10-Q for the quarterly
period ended May 3, 2003 (File No. 1-12107)
10.5 Amended and Restated Employment Agreement, dated as
of January 30, 2003, by and between Abercrombie &
Fitch Co. and Michael S. Jeffries, including as
Exhibit A thereto the Supplemental Executive
Retirement Plan effective February 2, 2003,
incorporated herein by reference to Exhibit 10.1 to
A&F's Current Report on Form 8-K dated February 11,
2003. (File No. 1-12107)
10.6 Abercrombie & Fitch, Inc. Directors' Deferred
Compensation Plan (as amended and restated May 22,
2003), incorporated herein by reference to Exhibit
10.7 to A&F's Quarterly Report on Form 10-Q for the
quarterly period ended May 3, 2003 (File No. 1-12107)
10.7 Abercrombie & Fitch Nonqualified Savings and
Supplemental Retirement Plan (formerly know as the
Abercrombie & Fitch Co. Supplemental Retirement
Plan), as amended and restated effective January 1,
2001, incorporated herein by reference to Exhibit
10.9 to A&F's Annual Report on Form 10-K for the
fiscal year ended February 1, 2003 (File No. 1-12107)
10.8 Abercrombie & Fitch Co. 2003 Stock Plan for
Non-Associate Directors, incorporated herein by
reference to Exhibit 10.9 to A&F's Quarterly Report
on Form 10-Q for the quarterly period ended May 3,
2003 (File No. 1-12107)
14. Code of Business Conduct and Ethics.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors.
24. Powers of Attorney.
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
Officer)
32. Section 1350 Certification (Principal Executive Officer and
Principal Financial Officer)
65
(b) Reports on Form 8-K.
A&F did not file any Current Reports on Form 8-K
during the quarterly period ended January 31, 2004.
On February 23, 2004, A&F filed a Current Report on
Form 8-K dated February 23, 2004, reporting under
"Item 5. Other Events and Regulation FD Disclosure,"
that Susan J. Riley had been named Senior Vice
President - Chief Financial Officer of A&F.
(c) Exhibits.
The exhibits to this Annual Report on Form 10-K are
listed in Item 15(a)(3) above.
(d) Financial Statement Schedules.
Not applicable.
66
SIGNATURES
Pursuant to the requirements of Section 13 or l5(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ABERCROMBIE & FITCH CO.
Date: April 14, 2004 By /s/ SUSAN J. RILEY
------------------------
Susan J. Riley,
Senior Vice President-
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 14, 2004.
Signature Title
--------- -----
/s/ MICHAEL S. JEFFRIES Chairman, Chief Executive Officer and Director
------------------------------------
Michael S. Jeffries
/s/ SETH R. JOHNSON* Executive Vice President - Chief Operating Officer
------------------------------------ and Director
Seth R. Johnson
/s/ JAMES B. BACHMANN* Director
----------------------
James B. Bachmann
/s/ LAUREN J. BRISKY* Director
---------------------
Lauren J. Brisky
/s/ RUSSELL M. GERTMENIAN* Director
------------------------------------
Russell M. Gertmenian
/s/ JOHN A. GOLDEN* Director
------------------------------------
John A. Golden
/s/ ARCHIE M. GRIFFIN* Director
------------------------------------
Archie M. Griffin
/s/ JOHN W. KESSLER* Director
------------------------------------
John W. Kessler
/s/ EDWARD F. LIMATO* Director
------------------------------------
Edward F. Limato
/s/ SAM N. SHAHID, JR* Director
------------------------------------
Sam N. Shahid, Jr.
/s/ SUSAN J. RILEY Senior Vice President-Chief Financial Officer (Principal
------------------------------------ Financial and Accounting Officer)
Susan J. Riley
*The undersigned, by signing her name hereto, does hereby sign this report on
behalf of each of the above-indicated directors and executive officers of the
registrant pursuant to powers of attorney executed by such directors and
executive officers.
By /s/ SUSAN J. RILEY
---------------------------
Susan J. Riley
Attorney-in-fact
67
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
________
ABERCROMBIE & FITCH CO.
(Exact name of registrant as specified in its charter)
________
EXHIBITS
________
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit No. Document
----------- --------
4.3 First Amendment and Waiver, dated as of January 26, 2004, to
the Credit Agreement, dated as of November 14, 2002, among
Abercrombie & Fitch Management Co., Abercrombie & Fitch Co.,
the Lenders party thereto and National City Bank, as
Administrative Agent
14 Code of Business Conduct and Ethics
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
24 Powers of Attorney
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
Officer)
32 Section 1350 Certification (Principal Executive Officer and
Principal Financial Officer)