UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12107
ABERCROMBIE & FITCH CO.
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(Exact name of registrant as specified in its charter)
Delaware 31-1469076
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, OH 43054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
-------------------------
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at December 3, 2004
----------------------------- -------------------------------------
$.01 Par Value 87,149,083 Shares
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Thirteen and Thirty-Nine Weeks Ended
October 30, 2004 and November 1, 2003.....................................................3
Condensed Consolidated Balance Sheets
October 30, 2004 and January 31, 2004......................................................4
Condensed Consolidated Statements of Cash Flows
Thirty-Nine Weeks Ended
October 30, 2004 and November 1, 2003......................................................5
Notes to Condensed Consolidated Financial Statements................................................6
Report of Independent Registered Public Accounting Firm............................................14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................29
Item 4. Controls and Procedures......................................................................30
Part II. Other Information
Item 1. Legal Proceedings............................................................................31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .................................34
Item 5. Other Information ...........................................................................35
Item 6. Exhibits ....................................................................................38
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ ------------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET SALES $ 520,724 $ 444,979 $ 1,333,999 $ 1,147,421
Cost of Goods Sold, Occupancy and Buying Costs 293,888 261,114 759,987 691,035
----------- ----------- ----------- -----------
GROSS INCOME 226,836 183,865 574,012 456,386
General, Administrative and Store Operating Expenses 164,559 102,415 395,709 279,030
----------- ----------- ----------- -----------
OPERATING INCOME 62,277 81,450 178,303 177,356
Interest Income, Net (1,574) (757) (3,919) (2,610)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 63,851 82,207 182,222 179,966
Provision for Income Taxes 23,760 31,750 69,600 69,140
----------- ----------- ----------- -----------
NET INCOME $ 40,091 $ 50,457 $ 112,622 $ 110,826
=========== =========== =========== ===========
NET INCOME PER SHARE:
BASIC $ 0.43 $ 0.52 $ 1.19 $ 1.14
=========== =========== =========== ===========
DILUTED $ 0.42 $ 0.51 $ 1.17 $ 1.11
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 93,449 96,407 94,490 97,076
=========== =========== =========== ===========
DILUTED 95,351 99,102 96,522 100,095
=========== =========== =========== ===========
DIVIDENDS PER SHARE $ 0.13 $ 0.00 $ 0.50 $ 0.00
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
October 30, January 31,
2004 2004
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and Equivalents $ 443,406 $ 511,073
Marketable Securities -- 10,000
Receivables 20,027 7,197
Inventories 209,002 170,703
Store Supplies 35,432 29,993
Other 28,531 23,689
----------- -----------
TOTAL CURRENT ASSETS 736,398 752,655
PROPERTY AND EQUIPMENT, NET 484,163 445,956
OTHER ASSETS 7,840 552
----------- -----------
TOTAL ASSETS $ 1,228,401 $ 1,199,163
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable & Outstanding Checks $ 138,740 $ 91,364
Accrued Expenses 200,337 138,232
Income Taxes Payable 37,086 50,406
----------- -----------
TOTAL CURRENT LIABILITIES 376,163 280,002
DEFERRED INCOME TAXES 28,640 19,516
OTHER LONG-TERM LIABILITIES 32,135 28,388
SHAREHOLDERS' EQUITY:
Class A Common Stock - $.01 par value: 150,000,000 shares
authorized and 103,300,000 shares issued at October 30, 2004
and January 31, 2004, respectively 1,033 1,033
Paid-In Capital 141,656 139,139
Retained Earnings 985,333 919,577
----------- -----------
1,128,022 1,059,749
Less: Treasury Stock, at Average Cost, 12,744,016
and 8,692,501 shares at October 30, 2004 and
January 31, 2004, respectively (336,559) (188,492)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 791,463 871,257
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,228,401 $ 1,199,163
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Thirty-Nine Weeks Ended
----------------------------
October 30, November 1,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net Income $ 112,622 $ 110,826
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 55,828 47,894
Loss on Retirement of Property and Equipment 2,553 --
Non-cash Charge for Deferred Compensation 7,670 4,083
Deferred Taxes (9,646) 12,116
Changes in Assets and Liabilities:
Inventories (31,147) (49,875)
Accounts Payable and Accrued Expenses 89,461 19,570
Income Taxes 17,285 (7,340)
Other Assets and Liabilities (24,492) 167
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 220,134 137,441
--------- ---------
INVESTING ACTIVITIES:
Capital Expenditures Including Capital Lease Obligations (106,043) (83,631)
Proceeds from Maturities of Marketable Securities
10,000 10,000
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (96,043) (73,631)
--------- ---------
FINANCING ACTIVITIES:
Change in Cash Overdraft 8,518 (1,686)
Stock Option Exercises and Other 33,162 18,162
Purchases of Treasury Stock (197,892) (68,746)
Dividends Paid (35,546) --
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (191,758) (52,270)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (67,667) 11,540
Cash and Equivalents, Beginning of Year 511,073 420,063
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 443,406 $ 431,603
========= =========
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
Change in Accrual for Construction in Progress $( 7,295) $ 24,921
========= =========
Change in Construction Allowance Receivables $( 2,688) $ 5,591
========= =========
SIGNIFICANT NON-CASH FINANCING ACTIVITIES:
Declaration of Cash Dividend to be Paid $ 11,319 --
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
ABERCROMBIE & FITCH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. ("A&F"), through its subsidiaries
(collectively, A&F and its subsidiaries are referred to as "Abercrombie
& Fitch" or the "Company"), is a specialty retailer of high quality,
casual apparel for men, women, guys, girls and kids with an active,
youthful lifestyle.
The condensed consolidated financial statements include the accounts of
A&F and all significant subsidiaries that are more than 50 percent
owned and controlled. All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain amounts have been reclassified to conform with the current year
presentation. The amounts reclassified did not have an effect on the
Company's results of operations or shareholders' equity.
The condensed consolidated financial statements as of October 30, 2004
and for the thirteen and thirty-nine week periods ended October 30,
2004 and November 1, 2003 are unaudited and are presented pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, these condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes thereto contained in A&F's Annual Report on Form 10-K for the
fiscal year ended January 31, 2004 (the "2003 fiscal year"). In the
opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (which are of a normal
recurring nature) necessary to present fairly the financial position
and results of operations and cash flows for the interim periods, but
are not necessarily indicative of the results of operations to be
anticipated for the fiscal year ending January 29, 2005 (the "2004
fiscal year").
The condensed consolidated financial statements as of October 30, 2004
and for the thirteen and thirty-nine week periods ended October 30,
2004 and November 1, 2003 included herein have been reviewed by the
independent registered public accounting firm of PricewaterhouseCoopers
LLP and the report of such firm follows the notes to the condensed
consolidated financial statements. PricewaterhouseCoopers LLP is not
subject to the liability provisions of Section 11 of the Securities Act
of 1933 (the "Act") for its report on the condensed consolidated
financial statements because that report is not a "report" within the
meaning of Sections 7 and 11 of the Act.
6
2. STOCK-BASED COMPENSATION
The Company reports stock-based compensation through the
disclosure-only requirements of Statement of Financial Accounting
Standards ("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 Statement 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 recognizes
compensation expense related to restricted share and stock unit awards.
If compensation expense related to options for the thirteen and
thirty-nine week periods ended October 30, 2004, and November 1, 2003,
respectively, had been determined based on the estimated fair value of
options granted, 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)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- ------------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---------- ----------- ----------- -----------
Net income:
As reported $ 40,091 $ 50,457 $ 112,622 $ 110,826
Stock-based compensation expense included in
reported net income, net of tax 1,424 868 4,361 2,524
Stock-based compensation expense determined
under fair value based method, net of tax(1) (6,564) (6,918) (19,481) (20,575)
---------- ---------- ----------- -----------
Pro forma $ 34,951 $ 44,407 $ 97,502 $ 92,775
========== ========== =========== ===========
Basic net income per share:
As reported $ 0.43 $ 0.52 $ 1.19 $ 1.14
Pro forma $ 0.37 $ 0.46 $ 1.03 $ 0.96
Diluted net income per share:
As reported $ 0.42 $ 0.51 $ 1.17 $ 1.11
Pro forma $ 0.37 $ 0.45 $ 1.01 $ 0.93
(1) Includes stock-based compensation expense related to restricted share
and stock unit awards actually recognized in net income in each period
presented.
The weighted-average fair value of options granted during the third
quarter of the 2004 fiscal year and the 2003 fiscal year was $13.93 and
$14.35, respectively. The fair value of each option, which is included
in the pro forma results above, was estimated using the Black-Scholes
option-pricing model. For purposes of the valuation, the following
weighted-average assumptions were used: a 1.28% dividend yield in 2004
and no dividends in 2003; price volatility of 55.3% in 2004 and 61.7%
in 2003; risk-free interest rates of 3.1% in 2004 and 3.2% in 2003;
assumed forfeiture rates of 26.4% in 2004 and 23.0% in 2003 and
expected lives of four years in 2004 and 2003, respectively.
7
3. NET INCOME PER SHARE
Weighted-Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
--------------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (9,851) (6,893)
-------- --------
Basic shares 93,449 96,407
Dilutive effect of options and restricted shares 1,902 2,695
-------- --------
Diluted shares 95,351 99,102
======== ========
Thirty-Nine Weeks Ended
--------------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (8,810) (6,224)
-------- --------
Basic shares 94,490 97,076
Dilutive effect of options and restricted shares 2,032 3,019
-------- --------
Diluted shares 96,522 100,095
======== ========
Options to purchase 5,639,984 shares of Class A Common Stock during
both the thirteen and thirty-nine week periods ended October 30, 2004
and 6,019,000 and 6,005,000 shares of Class A Common Stock during the
thirteen and thirty-nine week periods ended November 1, 2003,
respectively, were outstanding but were not included in the computation
of net income per diluted share because the options' exercise prices
were greater than the average market price of the underlying shares.
4. INVENTORIES
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,
which reduce the inventory value for lost or stolen items.
8
The inventory reserve for markdowns and valuations was $25.5 million,
$5.5 million and $17.2 million at October 30 2004, January 31, 2004
and November 1, 2003, respectively. The shrink reserve was $3.6
million, $3.3 million and $4.3 million at October 30, 2004, January 31,
2004, and November 1, 2003, respectively. The inventory valuations at
January 31, 2004, reflect adjustments for inventory markdowns for the
end of the season.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
October 30, 2004 January 31, 2004
---------------- ----------------
Property and equipment, at cost $ 750,591 $ 676,172
Accumulated depreciation and amortization (266,428) (230,216)
--------- ---------
Property and equipment, net $ 484,163 $ 445,956
========= =========
6. INCOME TAXES
The provision for income taxes is based on the current estimate of the
annual effective tax rate. Income taxes paid during the thirty-nine
weeks ended October 30, 2004 and November 1, 2003, approximated $62.3
million and $64.7 million, respectively.
7. LONG-TERM DEBT
The Company entered into a $250 million syndicated unsecured credit
agreement (the "Credit Agreement") on November 14, 2002. 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.
9
On September 15, 2004, the Company entered into a Second Amendment in
respect of the Credit Agreement in order to permit additional share
repurchases. The Second Amendment allows the Company to repurchase
shares of A&F Class A Common Stock for cash in any amount so long as no
loans (as defined in the Credit Agreement) have been made pursuant to
the Credit Agreement. If loans have at any time been made, the Company
may repurchase shares of A&F Class A Common Stock (i) in any fiscal
year, in an aggregate amount not in excess of 40% of "consolidated net
income" (as defined in the Credit Agreement) for the immediately
preceding fiscal year less the aggregate amount of any repurchases made
in such fiscal year pursuant to clause (ii) below, plus (ii) an
aggregate cumulative amount of $250,000,000 less the aggregate
cumulative amount of any repurchases made pursuant to clause (i) above
and any repurchases made after September 15, 2004 and prior to the
making of loans pursuant to the Credit Agreement. Letters of credit are
not considered to be "loans" for purposes of the Credit Agreement.
On November 8, 2004, the Company executed a letter of intent to enter
into an amended credit agreement that will replace the Credit Agreement
(see Note 10).
Letters of credit totaling approximately $66.8 million and $62.3
million were outstanding under the Credit Agreement at October 30,
2004 and at November 1, 2003, respectively. No loans were outstanding
under the Credit Agreement at October 30, 2004 or at November 1, 2003.
8. RELATED PARTY TRANSACTIONS
Shahid & Company, Inc. has provided advertising and design services for
the Company since 1995. Sam N. Shahid, Jr., who serves on A&F's Board
of Directors, has been President and Creative Director of Shahid &
Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for
services provided during the thirteen and thirty-nine week periods
ended October 30, 2004, were approximately $700 thousand and $1.9
million, respectively. For services provided during the thirteen and
thirty-nine week periods ended November 1, 2003, the fees paid to
Shahid & Company, Inc. were approximately $500 thousand and $1.5
million, respectively. The amounts do not include reimbursements to
Shahid & Company, Inc. for expenses incurred while performing these
services.
9. 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 one case, the Company has filed a
motion to dismiss; while in all other cases, answers have been filed.
Two of those cases have been stayed, and the plaintiffs in those cases
have been joined in the action described immediately below.
10
In 2003, an action was filed in the U.S. District Court for the Western
District of Pennsylvania, 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 part-time associates under the Fair Labor Standards Act.
Recently, the plaintiff amended the complaint and added new named
plaintiffs, asserting claims under the laws of six states as well as
the Fair Labor Standards Act. The parties are in the process of
settling this case and two of the five state court cases described in
the immediately preceding paragraph (see Note 10).
As previously mentioned, three of the above-described cases are in the
process of being settled. The Company does not believe it is feasible
to predict the outcome of the other legal proceedings described above
and intends to vigorously defend against each of them. The timing of
the final resolution of each of these proceedings is also uncertain.
Accordingly, the Company cannot estimate a range of potential loss, if
any, for any of these legal proceedings.
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. In the other case, the
parties are in the process of discovery, and the trial court has
ordered a class of store managers in California certified for limited
purposes.
In 2003, one lawsuit was filed in the U.S. District Court for the
Northern District of California on behalf of a purported class alleged
to be discriminated against in hiring or employment decisions due to
race and/or national origin. The plaintiffs in this lawsuit sought, on
behalf of their purported class, injunctive relief and unspecified
amounts of economic, compensatory and punitive damages. On November 8,
2004, the Company signed a consent decree settling this lawsuit and two
related class action employment discrimination lawsuits (see Note 10).
The Company accrues amounts related to legal matters if reasonably
estimable and reviews these amounts at least quarterly. During the
first quarter of fiscal 2004, the Company recorded an $8.0 million
charge (net of expected proceeds of $10 million from insurance)
resulting from an increase in expected defense costs related to the
purported class action employment discrimination lawsuit described in
the preceding paragraph. The monetary terms of the consent decree are
described in Note 10.
11
The Company has standby letters of credit in the amount of $4.7 million
that are set to expire during the fourth quarter of the fiscal year
ending January 28, 2006 (the "2005 fiscal 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.
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.
10. SUBSEQUENT EVENTS
On November 8, 2004, the Company executed a commitment letter in
respect of a contemplated amended and restated credit agreement, (the
"Amended Credit Agreement"). The Amended Credit Agreement will mature
five years from the date of executing the definitive Amended Credit
Agreement. The commitment letter contemplates that the facility fees
payable under the Amended Credit Agreement will be based on the
Company's ratio (the "leverage ratio") of the sum of total debt plus
600% of forward minimum rent commitments to consolidated EBITDAR for
the trailing four-fiscal-quarter period and the facility fees are
projected to accrue at .175% of the committed amounts per annum. The
remaining terms are expected to be largely similar to the current
Credit Agreement (see Note 7).
In addition to the class action employment discrimination lawsuit
described in Note 9, two other class action employment discrimination
lawsuits have been filed in the U.S. District Court for the Northern
District of California, both on November 8, 2004. One alleges gender
(female) discrimination in hiring or employment decisions and seeks, on
behalf of the purported class, injunctive relief and unspecified
amounts of economic, compensatory and punitive damages. The other was
brought by the Equal Employment Opportunity Commission (the "EEOC")
alleging race, ethnicity, and gender (female) discrimination in hiring
or employment decisions. The EEOC complaint seeks injunctive relief
and, on behalf of the purported class, unspecified amounts of economic,
compensatory and punitive damages. On November 8, 2004, the Company
signed a consent decree settling these three related class action
discrimination lawsuits, subject to judicial review and approval. The
monetary terms of the consent decree provide that the Company will set
aside $40.0 million to pay to the class, approximately $7.5 million for
attorneys' fees, and approximately $2.5 million for monitoring and
administrative costs to carry out the settlement. As a result, the
Company accrued a non-recurring charge of $32.9 million, which was
included in general, administrative and store operating expenses for
the thirteen weeks ended October 30, 2004. This is in addition to
amounts accrued during the first quarter of fiscal 2004 when the
Company recorded an $8.0 million charge (net of expected proceeds of
$10 million from insurance) resulting from an increase in expected
defense costs related to the Gonzalez case. The preliminary approval
order was signed by Judge Susan Illston of the U.S. District Court for
the Northern District of California on November 16, 2004, and that
order scheduled a final fairness and approval hearing for April 14,
2005.
12
Also on November 9, 2004, A&F announced that the Board of Directors had
authorized the extension of A&F's stock repurchase program to permit
the repurchase of an additional 6 million shares of A&F Class A Common
Stock.
On November 17, 2004, the court hearing the action filed in the U.S.
District Court for the Western District of Pennsylvania gave final
approval of the settlement. The settlement resolves all claims of
hourly employees in the states of Colorado, Connecticut, Illinois,
Minnesota, New Jersey and Pennsylvania under their respective state
laws and their claims under the Fair Labor Standards Act. The
settlement did not have a material impact to the consolidated
financial statements.
13
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying condensed consolidated balance sheet of
Abercrombie & Fitch Co. and its subsidiaries as of October 30, 2004, and the
related condensed consolidated statements of income for each of the thirteen and
thirty-nine week periods ended October 30, 2004 and November 1, 2003 and the
condensed consolidated statements of cash flows for the thirty-nine week periods
ended October 30, 2004 and November 1, 2003. These interim financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
January 31, 2004, and the related consolidated statements of income, of
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 17, 2004 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of January 31, 2004, is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
December 2, 2004
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company operates four brands: Abercrombie & Fitch, a fashion-oriented casual
apparel business directed at men and women with a youthful lifestyle, targeted
at 18 to 22 year-old college students; abercrombie, a fashion-oriented casual
apparel brand in the tradition of Abercrombie & Fitch style and quality,
targeted at 7 to 14 year-old boys and girls; Hollister, 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; and RUEHL, a fashion-oriented mix
of business casual and trend fashion displaying high quality clothing, leather
goods, and lifestyle accessories, targeted at 22 to 30 year-old modern-minded,
post-college consumers. In addition to predominantly mall-based store locations,
Abercrombie & Fitch, abercrombie and Hollister also offer Web sites, where
products comparable to those carried at the corresponding stores can be
purchased.
RESULTS OF OPERATIONS
During the third quarter of the 2004 fiscal year, net sales increased 17% to
$520.7 million from $445.0 million in the third quarter of the 2003 fiscal year.
Operating income decreased to $62.3 million in the third quarter of 2004 from
$81.5 million in the third quarter of 2003. Operating income included a one-time
accrual of $32.9 million for the settlement of three related class action
employment discrimination lawsuits, which was included in general,
administrative and store operating expenses. Net income decreased to $40.1
million in the third quarter of 2004 compared to $50.5 million in the third
quarter of 2003. Net income per diluted share was $.42 in the third quarter of
2004 compared to $.51 in the third quarter of 2003. The settlement accrual, net
of the related tax effect, reduced reported net income per fully diluted share
in the third quarter of the 2004 fiscal year by $.22.
The following data represent the amounts shown in the Company's condensed
consolidated statements of income for the thirteen and thirty-nine week periods
ended October 30, 2004 and November 1, 2003, expressed as a percentage of net
sales:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ -------------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET SALES 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold, Occupancy and
Buying Costs 56.4 58.7 57.0 60.2
----- ----- ----- -----
GROSS INCOME 43.6 41.3 43.0 39.8
General, Administrative and Store
Operating Expenses 31.6 23.0 29.7 24.3
----- ----- ----- -----
OPERATING INCOME 12.0 18.3 13.3 15.5
Interest Income, Net (0.3) (0.2) (0.3) (0.2)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 12.3 18.5 13.6 15.7
Provision for Income Taxes 4.6 7.1 5.2 6.0
----- ----- ----- -----
NET INCOME 7.7% 11.4% 8.4% 9.7%
===== ===== ===== =====
15
Financial Summary
The following summarized financial and statistical data compare the thirteen and
thirty-nine week periods ended October 30, 2004, to the comparable periods of
the 2003 fiscal year:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- ----------------------------
October 30, November 1, % October 30, November 1, %
2004 2003 Change 2004 2003 Change
----------- ----------- ------ ----------- ----------- -------
Net sales (millions) $ 521 $ 445 17% $ 1,334 $ 1,147 16%
Increase (decrease) in
comparable store sales 1% (9)% (1)% (8)%
Retail sales increase
attributable to new and
remodeled stores, catalogue
and Web sites 16% 15% 17% 16%
Retail sales per average gross
square foot $ 92 $ 91 1% $ 240 $ 241 nm
Retail sales per average store
(thousands) $ 655 $ 659 (1)% $ 1,712 $ 1,749 (2)%
Average store size at period-end
(gross square feet) 7,118 7,233 (2)% n/a n/a
Gross square feet at period-end
(thousands) 5,438 4,709 15% n/a n/a
Sales statistics per average store
Number of transactions
----------------------
Abercrombie & Fitch 10,516 11,997 -12% 32,175 35,644 -10%
abercrombie 5,262 5,563 -5% 14,735 15,223 -3%
Hollister 13,597 14,008 -3% 39,679 40,660 -2%
RUEHL 4,171 n/a 4,171 n/a
Average transaction value
-------------------------
Abercrombie & Fitch $ 74.09 $ 67.50 10% $ 65.31 $ 61.88 6%
abercrombie $ 63.49 $ 60.51 5% $ 55.42 $ 54.91 1%
Hollister $ 52.39 $ 48.68 8% $ 46.98 $ 44.70 5%
RUEHL $ 107.98 n/a $ 107.98 n/a
Units per transaction
---------------------
Abercrombie & Fitch 2.17 2.21 -2% 2.26 2.25 nm
abercrombie 2.78 2.63 6% 2.75 2.74 nm
Hollister 2.23 2.19 2% 2.23 2.13 5%
RUEHL 2.33 n/a 2.33 n/a
Average unit value
------------------
Abercrombie & Fitch $ 34.14 $ 30.54 12% $ 28.90 $ 27.50 5%
abercrombie $ 22.84 $ 23.01 -1% $ 20.15 $ 20.04 1%
Hollister $ 23.49 $ 22.23 8% $ 21.07 $ 20.99 nm
RUEHL $ 46.34 n/a $ 46.34 n/a
16
Current Trends and Outlook
While the Company is pleased with the recent trend improvement in sales and
comparable store sales, defined as sales in stores that have been open for at
least one year, the Company remains cautious about its outlook for the remainder
of the year. The Company's decision not to anniversary holiday promotions this
year may impact holiday sales levels. The Company's focus is on building,
maintaining and controlling its brands because they express a lifestyle to which
their customer aspires. Management believes that this strategy allows the
Company to maintain high margins over the long term while driving the Company's
growth in sales and profits through the development of new brands. As a result,
comparable store sales may decline in the Company's more mature business as the
Company strives to maintain its brands' aspirational qualities and high margins.
In order to achieve and maintain the aspirational quality of the brands, the
Company is increasing expenditures to maintain and enhance the current store
base. Additionally, the Company is increasing its store-based personnel to
provide better customer service and reduce levels of inventory shrink. Depending
on the sales performance of the Company during the remainder of the fall season,
the initiatives may have a short-term impact on the operating margin.
Finally, the Company is hoping to capitalize on its success in international
sales through its Web sites by investigating opportunities to enter
international markets in the near future. The Company is currently evaluating
opportunities to enter both the Canadian and European markets by the end of the
2005 fiscal year.
THIRD QUARTER RESULTS
Net Sales
Net sales for the third quarter of 2004 were $520.7 million, an increase of 17%
over last year's third quarter net sales of $445.0 million. The net sales
increase was attributable to the net addition of 113 stores and a 1% comparable
store sales increase.
By brand, comparable store sales for the quarter versus the same quarter last
year were as follows: Abercrombie & Fitch declined 2% with mens comparable store
sales increasing by a high-single digit percentage and womens declining by a
high-single digit percentage. In abercrombie, comparable store sales decreased
3% with both girls and boys comparable store sales declining by the same
low-single digit percentage. In Hollister, comparable store sales increased by
13% with both guys and girls achieving similar mid-teen digit increases for the
quarter.
On a regional basis, comparable store sales results were strongest in the West
and Northeast and weakest in the Midwest and South. Stores located in the New
York metropolitan area and Southern California had the best comparable store
sales performance for the third quarter.
In Abercrombie & Fitch, mens achieved positive comparable store sales during the
quarter driven by strong results in denim, woven shirts and polos. Womens had
comparable store sales decreases in polos, pants and graphic tees that were not
offset by increases in denim and fleece when compared to third quarter 2003.
17
In the kids' business, girls comparable store sales increased during the third
quarter of 2004 compared to the same quarter last year in knits and denim but
these results could not offset decreases in graphic tees and pants. Boys had
comparable store sales decreases in conversation tees, pants and fleece.
Increases in knits and denim were not sufficient to offset the weaker performing
boys categories.
In Hollister, guys achieved stronger comparable store sales than girls. In guys,
increases in conversation tees, denim, woven shirts and fleece during the
quarter more than offset decreases in knits. In girls, knits, denim, fleece and
sweaters had comparable store sales increases; however, graphic tees and pants
declined.
The impact of opening three RUEHL stores was immaterial to the Company's total
results for the third quarter of the 2004 fiscal year.
Direct to consumer merchandise net sales through the Company's Web sites and
catalogue for the third quarter of the 2004 fiscal year were $27.6 million, an
increase of 28.4% over last year's third quarter net sales of $21.5 million.
Shipping and handling revenue for the corresponding periods was $4.0 million in
2004 and $2.8 million in 2003. The direct to consumer business accounted for
6.1% of net sales in the third quarter of the 2004 fiscal year compared to 5.5%
in the third quarter of fiscal 2003.
Gross Income
The Company's gross income may not be comparable to that 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).
Gross income for the third quarter of the 2004 fiscal year was $226.8 million
compared to $183.9 million in the comparable period during the 2003 fiscal year.
The gross income rate (gross income divided by net sales) for the third quarter
of the 2004 fiscal year was 43.6%, up 230 basis points from last year's rate of
41.3%. The increase in gross income rate resulted largely from an increase in
initial markup (IMU). The improvement in IMU during the third quarter was as a
result of higher unit retail pricing in Abercrombie & Fitch and Hollister. All
three brands had IMU improvements compared to the third quarter of 2003 and are
operating at similar margins.
The Company ended the third quarter of the 2004 fiscal year with inventories, at
cost, down 15% per gross square foot versus the third quarter of the 2003 fiscal
year. The inventory decrease reflects a shift in the timing of deliveries during
the quarter coupled with stronger sales this year compared to weaker sales last
year.
18
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses during the third quarter of
the 2004 fiscal year were $164.6 million compared to $102.4 million during the
same period in the 2003 fiscal year. For the third quarter of the 2004 fiscal
year, the general, administrative and store operating expense rate (general,
administrative and store operating expenses divided by net sales) was 31.6%
compared to 23.0% in the third quarter of the 2003 fiscal year. The increase in
rate versus the 2003 comparable period was primarily due to the following: a
one-time accrual for the settlement of three related class action employment
discrimination lawsuits which represented 630 basis points of the increase and
higher store expenses due to an increase in aggregate payroll which represented
160 basis points of the increase. Wage levels, in all three brands, decreased
compared to the third quarter of 2003. The decrease in wage levels was due to an
increase in part-time hours in order to provide better customer service at the
stores.
The distribution center continued to achieve record levels of productivity
during the third quarter of the 2004 fiscal year. Productivity, as measured in
units processed per labor hour, was 2% higher than the third quarter of the 2003
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 $5.3 million for the third
quarter of the 2004 fiscal year compared to $4.9 million for the third quarter
of the 2003 fiscal year.
Operating Income
Operating income for the third quarter of the 2004 fiscal year decreased to
$62.3 million from $81.5 million in the 2003 fiscal year third quarter, a
decrease of 23.6%. The operating income rate (operating income divided by net
sales) was 12.0% for the third quarter of the 2004 fiscal year compared to 18.3%
for the third quarter of the 2003 fiscal year. The decrease in the operating
income during the third quarter of fiscal 2004 was a result of higher general,
administrative and store operating expenses during the quarter, partially offset
by higher IMU resulting from higher unit retail pricing in Abercrombie & Fitch
and Hollister.
Interest Income and Income Tax Expense
Third quarter net interest income was $1.6 million in 2004 compared to $757
thousand last year. The increase in net interest income was due to higher rates
during the third quarter of the 2004 fiscal year when compared to the same
period in the prior year. The Company continued to invest in tax-free
securities. The effective tax rate for the third quarter was 37.2% compared to
38.6% for the 2003 comparable period. The reduction in rate was primarily due to
the favorable settlement of state tax matters during the third quarter.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company does not have off-balance sheet arrangements or debt obligations.
The contractual obligations of the Company as of October 30, 2004, have not
significantly changed from the ones disclosed in A&F's Annual Report on Form
10-K for the fiscal year ended January 31, 2004. There have been changes in the
ordinary course of the Company's business during the quarterly period ended
October 30, 2004 in the Company's contractual obligations included within both
the "operating leases" category and the "purchase obligations and other"
category.
19
YEAR-TO-DATE RESULTS
Net Sales
Year-to-date net sales in 2004 were $1.334 billion, an increase of 16.3% over
last year's net sales of $1.147 billion for the same period. The net sales
increase was attributable to the net addition of 113 stores, offset by a 1%
comparable store sales decrease.
Year-to-date comparable store sales by merchandise concept were as follows:
Abercrombie & Fitch comparable store sales declined 3%, abercrombie comparable
stores sales declined 4% and Hollister achieved a 9% comparable store sales
increase. The women's business in each brand continued to be more significant
than mens. Year-to-date, womens and girls represented over 60% of the net sales
for each of the brands. In Abercrombie & Fitch, womens had a mid-single digit
decline in comparable store sales year-to-date, while in abercrombie, girls had
a low-single digit decline. Hollister girls achieved a high-single digit
comparable store sales increase on a year-to-date basis.
For the 2004 year-to-date period, sales per square foot in Hollister stores were
approximately 137% of the sales per square foot of Abercrombie & Fitch stores in
the same malls compared to 116% for the 2003 year-to-date period.
Direct to consumer merchandise net sales through the Company's Web sites and
catalogue for the 2004 year-to-date period were $70.5 million, an increase of
42.4% over last year's net sales of $49.5 million for the comparable period.
Shipping and handling revenue for the corresponding periods was $10.1 million in
2004 and $6.7 million in 2003. The direct to consumer business accounted for
6.0% of net sales compared to 4.9% for the year-to-date periods ended October
30, 2004 and November 1, 2003, respectively.
The impact of opening three RUEHL stores was immaterial to the Company's total
results for the year-to-date period of the 2004 fiscal year.
Gross Income
The Company's gross income may not be comparable to that 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).
Year-to-date gross income increased to $574.0 million for the 2004 fiscal year
from $456.4 million in the comparable period during the 2003 fiscal year. The
gross income rate (gross income divided by net sales) for the period was 43.0%,
up 320 basis points from last year's rate of 39.8%. The increase was driven by
improvements in IMU across all three brands due to higher average unit retail
pricing, especially in Abercrombie & Fitch, which was partially offset by
increased markdowns, as a percentage of net sales.
As previously mentioned, improved sourcing has been an important factor in
improving IMU in all three concepts. The markdown rate was higher for the 2004
year-to-date period than the comparable period in 2003 due to the Company's
strategy of clearing merchandise quickly in order to add more items to the
selling floor.
20
General, Administrative and Store Operating Expenses
Year-to-date general, administrative and store operating expenses at the end of
the third quarter of the 2004 fiscal year were $395.7 million versus $279.0
million for the same time period the previous year. The general, administrative
and store operating expense rate in 2004 was 29.7% versus 24.3% in 2003. The
increased rate in the 2004 year-to-date period was primarily due to higher home
office and store expenses. Home office expenses increased largely due to the
accrual for the settlement of three related class action employment
discrimination lawsuits which represented 310 basis points, higher payroll,
higher bonus accruals resulting from improved financial performance during the
spring season, and expenses related to the retirement of an executive officer.
Store expenses increased due to an increase in aggregate payroll. Wage levels,
in all three brands, decreased compared to the comparable period last year. The
decrease in wage levels was due to an increase in part-time hours in order to
provide better customer service at the stores.
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 $14.2 million and $13.7 million
for the year-to-date periods ended October 30, 2004 and November 1, 2003,
respectively.
Operating Income
Year-to-date operating income for the 2004 fiscal year increased to $178.3
million from $177.4 million in the 2003 fiscal year comparable period, an
increase of 1%. The operating income rate (operating income divided by net
sales) was 13.3% for the 2004 year-to-date period compared to 15.5% for the
comparable period in the 2003 fiscal year. The decrease was primarily due to the
accrual for the settlement of three related class action employment
discrimination lawsuits, partially offset by sales increases due to new stores,
higher gross margin and increases in average unit retail pricing in all three
brands.
Interest Income and Income Tax Expense
Year-to-date net interest income for the 2004 fiscal year was $3.9 million
compared to $2.6 million for the comparable period in 2003. The increase in net
interest income was due to higher rates and higher average cash balances for the
year-to-date period of the 2004 fiscal year when compared to the same period of
the prior year. The Company continued to invest in tax-free securities. The
effective tax rate for the 2004 year-to-date period was 38.2% compared to 38.4%
for the 2003 comparable period.
21
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (in thousands):
October 30, January 31,
2004 2004
----------- -----------
Working capital $360,235 $472,653
=========== ===========
Capitalization:
Shareholders' equity $791,463 $871,257
=========== ===========
Net cash provided by operating activities, the Company's primary source of
liquidity, totaled $220.1 million for the thirty-nine weeks ended October 30,
2004 versus $137.4 million in the comparable period of 2003. Cash was provided
primarily by current year net income adjusted for depreciation and amortization
and by increases in accounts payable and accrued expenses. Uses of cash
primarily consisted of increases in inventories and other assets and
liabilities.
Accounts payable increased to support the cost of growth in the number of new
stores, the declaration of the third quarter dividend payment and the timing of
payments. Accrued expenses also increased for items such as higher legal
accruals related to the settlement of three related class action employment
discrimination lawsuits, higher payroll, accruals related to the retirement of
an executive officer and accruals related to store repairs and maintenance in
preparation for the holiday season.
Inventories increased as a result of preparation for the holiday season as well
as growth in the store base during the first three quarters of 2004. Other
assets and liabilities increased primarily as a result of an increase in
accounts receivables related to expected proceeds from an insurance claim
pertaining to legal expenses and an increase in supplies as a result of the
growth in the store base.
The Company's operations are seasonal in nature and typically peak during the
back-to-school and Christmas selling periods. Accordingly, cash requirements for
inventory expenditures are highest during these periods.
Cash outflows for investing activities were for capital expenditures (see the
discussion in the "Capital Expenditures" section below) related primarily to new
stores and construction in process in 2004. Cash inflows from investing
activities consisted of maturities of marketable securities.
Financing activities for the thirty-nine week period ended October 30, 2004,
consisted of $33.2 million received in connection with stock option exercises,
$35.5 million for the payment of the quarterly $0.125 dividends on March 30,
2004, June 22, 2004 and September 21, 2004, respectively, $197.9 million for the
repurchase of A&F's Class A Common Stock and $8.5 million for cash overdrafts
which are outstanding checks reclassified from cash to accounts payable.
22
During the third quarter of 2004, the Company repurchased 5.4 million shares of
A&F's Class A Common Stock at an average cost of $33.47 per share for a total of
$179.3 million pursuant to the July 29, 2004 A&F Board of Directors'
authorization to repurchase 6 million shares of A&F's Class A Common Stock. On
November 8, 2004, A&F's Board of Directors authorized the repurchase of 6
million shares of A&F's Class A Common Stock in addition to the remaining
balance of the July 29, 2004 authorization.
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 current Credit
Agreement to support operations.
Letters of credit totaling approximately $66.8 million and $62.3 million were
outstanding under the current Credit Agreement at October 30, 2004 and November
1, 2003, respectively. No loans were outstanding under the current Credit
Agreement on October 30, 2004 or November 1, 2003.
The Company has standby letters of credit in the amount of $4.7 million that are
set to expire during the fourth quarter of the 2005 fiscal year. The
beneficiary, a merchandise supplier, has the right to draw upon the standby
letters of credit if the Company authorizes or files a voluntary petition in
bankruptcy. To date, the beneficiary has not drawn upon the standby letters of
credit.
23
Store Count and Gross Square Feet
Store count and gross square footage by brand were as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Number of stores and gross square feet by brand
Abercrombie & Fitch:
Stores at beginning of period 359 346 357 340
Opened 6 6 11 14
Closed (2) -- (5) (2)
------ ------ ------ ------
Stores at end of period 363 352 363 352
====== ====== ====== ======
Gross square feet
(thousands) 3,191 3,128
====== ======
abercrombie:
Stores at beginning of period 171 167 171 164
Opened 3 3 5 6
Closed -- -- (2) --
------ ------ ------ ------
Stores at end of period 174 170 174 170
====== ====== ====== ======
Gross square feet
(thousands) 767 753
====== ======
Hollister:
Stores at beginning of period 197 112 172 93
Opened 27 17 52 36
Closed -- -- -- --
------ ------ ------ ------
Stores at end of period 224 129 224 129
====== ====== ====== ======
Gross square feet
(thousands) 1,452 828
====== ======
RUEHL
Stores at beginning of period -- -- -- --
Opened 3 -- 3 --
Closed -- -- -- --
------ ------ ------ ------
Stores at end of period 3 -- 3 --
====== ====== ====== ======
Gross square feet
(thousands) 28 --
====== ======
24
Capital Expenditures
Capital expenditures, net of construction allowances, totaled $106.0 million and
$83.6 million for the thirty-nine weeks ended October 30, 2004 and November 1,
2003, respectively. Additionally, the non-cash accrual for construction in
progress decreased $7.3 million and increased $24.9 million for the thirty-nine
week periods ended October 30, 2004, and November 1, 2003, respectively. Capital
expenditures related primarily to new store construction, including the non-cash
accrual for construction in progress. The balance of capital expenditures
related primarily to miscellaneous store remodeling projects.
The Company anticipates spending $125.0 million to $135.0 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 have added approximately 700,000 gross square feet of
store space in the 2004 fiscal year, which will represent a 14% increase over
year-end 2003. It is anticipated that the increase will result from the addition
of approximately 12 new Abercrombie & Fitch stores, 9 new abercrombie stores, 85
new Hollister stores and four RUEHL stores by the end of the 2004 fiscal year
versus last year. The Company will also have remodeled approximately 15
Abercrombie & Fitch stores by the end of the 2004 fiscal year.
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 $625,000 per store, net of landlord allowances. In
addition, initial inventory purchases are expected to average approximately
$270,000 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 $541,000 per store, net of landlord allowances. In addition,
initial inventory purchases are expected to average approximately $130,000 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 $597,000 per store, net of landlord allowances. In addition,
initial inventory purchases are expected to average approximately $190,000 per
store.
Although the Company opened three RUEHL stores during the third quarter, it
believes that the costs it has incurred to-date for the stores is not
representative of the future average cost of opening a 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 current Credit
Agreement to support operations.
25
Critical Accounting Policies and Estimates
The Company's significant and critical accounting policies and estimates can be
found in the Notes to Consolidated Financial Statements contained in Item 8 of
A&F's Annual Report on Form 10-K for the fiscal year ended January 31, 2004 (see
Note 2). Additionally, the Company believes that the following policies are
critical to the portrayal of the Company's financial condition and results of
operations for interim periods.
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 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 ("IMU") 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 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, 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.
26
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 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.
27
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 Quarterly
Report on Form 10-Q 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 Quarterly Report on Form
10-Q or otherwise made by management:
- changes in consumer spending patterns and consumer
preferences;
- the effects of political and economic events and conditions
domestically and in foreign jurisdictions in which the Company
operates, including, but not limited to, acts of terrorism or
war;
- the impact of competition and pricing;
- changes in weather patterns;
- 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 Quarterly Report on Form
10-Q 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.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of October 30, 2004
has not significantly changed since January 31, 2004. The Company's market risk
profile as of January 31, 2004 is disclosed in "Item 7A - Quantitative and
Qualitative Disclosures about Market Risk" of A&F's Annual Report on Form 10-K
for the fiscal year ended January 31, 2004.
29
ITEM 4. 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 quarterly period
covered by this Quarterly Report on Form 10-Q. 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 Quarterly
Report on Form 10-Q and other reports which A&F files or
submits under the Exchange Act 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 Quarterly
Report on Form 10-Q and other reports which A&F files or
submits under the Exchange Act 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 quarterly period covered by this Quarterly
Report on Form 10-Q 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 Quarterly Report on
Form 10-Q, 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 October 30, 2004, that have materially affected, or are
reasonably likely to materially affect, A&F's internal control over financial
reporting.
30
PART II - OTHER INFORMATION
ITEM 1. 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. 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. The plaintiff filed an amended complaint on or about
August 9, 2004, adding three new named plaintiffs and subsequently filed a
second amended complaint on or about October 20, 2004. The defendant filed its
answer to the second amended complaint on or about November 19, 2004. The
plaintiffs filed a motion to certify a class of employees in the state of
Washington on or about November 10, 2004. The defendant intends to oppose that
motion. The Company does not believe it is feasible to predict the outcome of
the legal proceedings identified in this paragraph and intends to defend
vigorously against them. The timing of the final resolution of each of these
proceedings is also uncertain. Accordingly, the Company cannot estimate a range
of potential loss, if any, for any of these legal proceedings.
31
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. 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 on November 10, 2003, adding some factual allegations. The defendant filed
an answer to the second amended complaint on January 22, 2004. 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 part-time associates 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. Jadii Mohme and Holly Zemany have stayed their claims
in state court and joined their claims with Michael Gualano along with four
other named plaintiffs in four other states in a second amended complaint, which
the defendant has answered. The parties are in the process of settling these
claims. On November 17, 2004, the United States District Court for the Western
District of Pennsylvania gave final approval of the settlement, and dismissal of
the case with prejudice was entered. The Mohme and Zemany cases are in the
process of being dismissed with prejudice pursuant to the terms of the
settlement. The settlement resolves all claims of hourly employees in the states
of Colorado, Connecticut, Illinois, Minnesota, New Jersey and Pennsylvania under
their respective state laws and their claims under the Fair Labor Standards Act.
The Company does not expect the settlement to be material to the consolidated
financial statements.
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. The trial
court has ordered a class of store managers in California certified for limited
purposes. 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. The defendants filed a
motion to dismiss the Mitchell case on July 28, 2003. The case was transferred
from the Western Division to the Eastern Division of the Southern District of
Ohio on April 21, 2004. The plaintiffs filed an amended complaint to add Scott
Oros as a named plaintiff on October 28, 2004. The defendants subsequently
renewed their motion to dismiss, which is pending.
32
The Company does not believe it is feasible to predict the outcome of the legal
proceedings described in the immediately preceding paragraph and intends to
defend vigorously against them. The timing of the final resolution of each of
these proceedings is also uncertain. Accordingly, the Company cannot estimate a
range of potential loss, if any, for any of these legal proceedings.
A&F is aware of three actions that have been filed on behalf of a purported
class alleged to be discriminated against in hiring or employment decisions due
to race, national origin and/or gender. 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. The defendants
filed an answer to the second amended complaint on or about January 26, 2004. A
third amended complaint was filed June on 10, 2004, restating the original
claims and adding two individual, but not class, claims of gender
discrimination. The defendants filed an answer on or about June 21, 2004. On
November 8, 2004, the plaintiffs filed a fourth amended complaint, adding an
additional plaintiff and claims on behalf of those who asserted they were
discriminated against in hiring and employment decisions as managers due to
their race and/or national origin. On November 11, 2004, the defendants answered
the fourth amended complaint. Two other class action employment discrimination
lawsuits have been filed in the United States District Court for the Northern
District of California, both on November 8, 2004. In Elizabeth West, et al. v.
Abercrombie & Fitch Stores, Inc., et al., the plaintiffs allege gender (female)
discrimination in hiring or employment decisions and seek, on behalf of their
purported class, injunctive relief and unspecified amounts of economic,
compensatory and punitive damages. The other was brought by the Equal Employment
Opportunity Commission (the "EEOC") and alleges race, ethnicity and gender
(female) discrimination in hiring or employment decisions. The EEOC complaint
seeks injunctive relief and, on behalf of the purported class, unspecified
amounts of economic, compensatory and punitive damages. On November 8, 2004, the
Company signed a consent decree settling these three related class action
discrimination lawsuits, subject to judicial review and approval. The monetary
terms of the consent decree provide that the Company will set aside $40.0
million to pay to the class, approximately $7.5 million for attorneys' fees, and
approximately $2.5 million for monitoring and administrative costs to carry out
the settlement. As a result, the Company accrued a non-recurring charge of $32.9
million, which was included in general, administrative and store operating
expenses for the thirteen weeks ended October 30, 2004. This is in addition to
amounts accrued during the first quarter of fiscal 2004 when the Company
recorded an $8.0 million charge (net of expected proceeds of $10 million from
insurance) resulting from an increase in expected defense costs related to the
Gonzalez case. As part of the consent decree, the Company also agreed to
implement a series of programs and initiatives that are designed to achieve
greater diversity throughout its stores. The preliminary approval order was
signed by Judge Susan Illston of the United States District Court for the
Northern District of California on November 16, 2004, and that order scheduled a
final fairness and approval hearing for April 14, 2005.
33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) The following table provides information regarding A&F's purchase of its
Class A Common Stock during each fiscal month of the quarterly period ended
October 30, 2004:
Total Number of Maximum Number of
Average Shares Purchased as Shares that May Yet
Total Number Price Paid Part of Publicly be Purchased under the
of Shares per Announced Plans or Plans or Programs
Period Purchased Share Programs (1), (2)
------------ ----------- ------------------- ----------------------
August 1 through 1,220,000 $ 29.17 1,220,000 4,385,000
August 28, 2004
August 29 through
October 2, 2004 1,766,500 $ 32.27 1,766,500 2,618,500
October 3 through
October 30, 2004 2,370,000 $ 36.56 2,370,000 643,500
--------- --------- --------- ---------
Total 5,356,500 $ 33.47 5,356,500 643,500
========= ========= ========= =========
(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 A&F's publicly announced stock purchase authorizations. On July
29, 2004, A&F announced the authorization of the repurchase of
6,000,000 shares of Class A Common Stock. The shares may be purchased
from time-to-time, depending on market conditions.
(2) On November 9, 2004, A&F announced that the Board of Directors had
authorized the extension of A&F's stock repurchase program to permit
the repurchase of an additional 6,000,000 shares of A&F Class A Common
Stock. This authorization in not reflected in the numbers in this
column.
34
Part II
Item 5. Other Information.
1. Form of Restricted Shares Award Agreement under the 1998 Restatement of
the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive
Plan prior to November 28, 2004 -- Attached as Exhibit 10.11 is the form
of award agreement that A&F has previously entered into and delivered to
grantees of restricted shares under the 1998 Restatement of the
Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan.
Grantees have included executive officers of A&F.
2. Form of Restricted Shares Award Agreement (No Performance-Based Goals)
under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock
Option and Performance Incentive Plan after November 28, 2004 -- Attached
as Exhibit 10.12 is the new form of award agreement to be entered into by
A&F in respect of restricted shares to be granted under the 1998
Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan which do not require the satisfaction of
performance goals to be earned. The purpose of the new form of award
agreement is to provide further information in respect of the grant
consistent with the terms of the Plan. As of the date of this Quarterly
Report on Form 10-Q, no grants have been evidenced by this new form.
Grantees may include executive officers of A&F other than Michael S.
Jeffries.
3. Form of Restricted Shares Award Agreement (Performance-Based Goals) under
the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan after November 28, 2004 - Attached as
Exhibit 10.13 is the new form of award agreement to be entered into by
A&F in respect of restricted shares to be granted under the 1998
Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan which require the satisfaction of performance
goals to be earned. The purpose of the new form of award agreement is to
provide further information in respect of the grant consistent with the
terms of the Plan. As of the date of this Quarterly Report on Form 10-Q,
no grants have been evidenced by this new form. Grantees may include
executive officers of A&F other than Michael S. Jeffries.
4. Form of Stock Option Agreement (Nonstatutory Stock Options) under the 1998
Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan prior to November 28, 2004 -- Attached as
Exhibit 10.14 is the form of stock option agreement that A&F has
previously entered into and delivered to grantees of nonstatutory stock
options under the 1998 Restatement of the Abercrombie & Fitch Co. 1996
Stock Option and Performance Incentive Plan. Grantees have included
executive officers of A&F.
5. Form of Stock Option Agreement (Nonstatutory Stock Options) under the 1998
Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan after November 28, 2004 -- Attached as Exhibit
10.15 is the new form of stock option agreement to be entered into by A&F
in respect of nonstatutory stock options granted and to be granted under
the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and
35
Performance Incentive Plan. The purpose of the new form of stock option
agreement is to provide further information in respect of the grant
consistent with the terms of the Plan. As of the date of this Quarterly
Report on Form 10-Q, no grants have been evidenced by this new form other
than the one made to Thomas D. Mendenhall, an executive officer of A&F, on
November 29, 2004. Future grantees will include executive officers of A&F.
6. Form of Stock Option Agreement under the 1998 Restatement of the
Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors --
Attached as Exhibit 10.16 is the form of stock option agreement that A&F
has previously entered into and delivered to grantees of nonstatutory
stock options under the 1998 Restatement of the Abercrombie & Fitch Co.
1996 Stock Plan for Non-Associate Directors. Grantees have included
non-employee directors of A&F. No further grants of nonstatutory stock
options may be made under this Plan.
7. Form of Restricted Shares Award Agreement under the Abercrombie & Fitch
Co. 2002 Stock Plan for Associates prior to November 28, 2004 -- Attached
as Exhibit 10.17 is the form of award agreement that A&F has previously
entered into and delivered to grantees of restricted shares under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates. Grantees have
included executive officers of A&F.
8. Form of Restricted Shares Award Agreement under the Abercrombie & Fitch
Co. 2002 Stock Plan for Associates after November 28, 2004 -- Attached as
Exhibit 10.18 is the new form of award agreement to be entered into by
A&F in respect of restricted shares granted and to be granted under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates. The purpose of the
new form of award agreement is to provide further information in respect
of the grant consistent with the terms of the Plan. As of the date of this
Quarterly Report on Form 10-Q, no grants have been evidenced by this new
form other than the one made to Thomas D. Mendenhall, an executive officer
of A&F, on November 29, 2004. Future grantees may include executive
officers of A&F other than Michael S. Jeffries.
9. Form of Stock Option Agreement (Nonstatutory Stock Options) under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates prior to
November 28, 2004 -- Attached as Exhibit 10.19 is the form of stock option
agreement that A&F has previously entered into and delivered to grantees
of nonstatutory stock options under the Abercrombie & Fitch Co. 2002 Stock
Plan for Associates. Grantees have included executive officers of A&F.
10. Form of Stock Option Agreement (Nonstatutory Stock Options) under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates after November 28,
2004 -- Attached as Exhibit 10.20 is the new form of award agreement for
nonstatutory stock options to be granted under the Abercrombie & Fitch Co.
2002 Stock Plan for Associates. The purpose of the new form of stock
option agreement is to provide further information in respect of the grant
consistent with the terms of the Plan. As of the date of this Quarterly
Report on Form 10-Q, no grants have been evidenced by this new form.
Grantees will include executive officers of A&F.
36
11. Form of Stock Option Agreement under the Abercrombie & Fitch Co. 2003
Stock Plan for Non-Associate Directors prior to November 28, 2004 --
Attached as Exhibit 10.21 is the form of stock option agreement that A&F
has previously entered into and delivered to grantees of nonstatutory
stock options under the Abercrombie & Fitch Co. 2003 Stock Plan for
Non-Associate Directors. Grantees have included non-employee directors of
A&F.
12. Form of Stock Option Agreement under the Abercrombie & Fitch Co. 2003
Stock Plan for Non-Associate Directors after November 28, 2004 -- Attached
as Exhibit 10.22 is the new form of stock option agreement for
nonstatutory stock options to be granted under the Abercrombie & Fitch Co.
2003 Stock Plan for Non-Associate Directors. The purpose of the new form
of stock option agreement is to provide further information in respect of
the grant consistent with the terms of the Plan. As of the date of this
Quarterly Report on Form 10-Q, no grants have been evidenced by this new
form. Grantees will include non-employee directors of A&F.
37
Item 6. EXHIBITS
(a) Exhibits
3. Certificate of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation of
A&F as filed with the Delaware Secretary of State on
August 27, 1996, incorporated 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 of A&F 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)
3.6 Certificate regarding adoption of amendments to
Sections 1.02, 1.06, 3.01, 3.05, 4.02, 4.03, 4.04,
4.05, 4.06, 6.01 and 6.02 of Amended and Restated
Bylaws of A&F by Board of Directors on May 20, 2004,
incorporated herein by reference to Exhibit 3.6 to
A&F's Quarterly Report on Form 10-Q for the quarterly
period ended May 1, 2004 (File No.
1-12107)
3.7 Amended and Restated Bylaws of A&F (reflecting
amendments through May 20, 2004) [for SEC reporting
compliance purposes only], incorporated herein by
reference to Exhibit 3.7 to A&F's Quarterly Report on
Form 10-Q for the quarterly period ended May 1, 2004
(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, A&F,
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 A&F, each direct and indirect domestic subsidiary
of A&F other than Abercrombie & Fitch Management Co.,
and National City Bank, as Administrative Agent for the
Lenders party to the Credit Agreement, incorporated
herein by
38
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., A&F,
the Lenders party thereto and National City Bank, as
Administrative Agent, incorporated herein by reference
to Exhibit 4.3 to A&F's Annual Report on Form 10-K for
the fiscal year ended January 31, 2004 (File No.
1-12107)
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)
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)
39
10.5 Amended and Restated Employment Agreement, dated as of
January 30, 2003, by and between A&F and Michael S.
Jeffries, including as Exhibit A thereto the
Supplemental Executive Retirement Plan (Michael S.
Jeffries), 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 Co. 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 known 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)
10.9 Retirement Agreement, executed on May 20, 2004, by and
between Seth R. Johnson and A&F, incorporated herein by
reference to Exhibit 10.9 to A&F's Quarterly Report on
Form 10-Q for the quarterly period ended May 1, 2004
(File No. 1-12107)
10.10 Employment Agreement, entered into as of May 17, 2004,
by and between A&F and Robert S. Singer, including as
Exhibit A thereto the Supplemental Executive
Retirement Plan II (Robert S. Singer), effective May
17, 2004, incorporated herein by reference to Exhibit
10.10 to A&F's Quarterly Report on Form 10-Q for the
quarterly period ended May 1, 2004 (File No. 1-12107)
10.11 Form of Restricted Shares Award Agreement under the
1998 Restatement of the Abercrombie & Fitch Co. 1996
Stock Option and Performance Incentive Plan prior to
November 28, 2004
10.12 Form of Restricted Shares Award Agreement (No
Performance-Based Goals) under the 1998 Restatement of
the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan after November 28, 2004
10.13 Form of Restricted Shares Award Agreement
(Performance-Based Goals) under the 1998 Restatement
of the Abercrombie & Fitch Co. 1996 Stock Option and
Performance Incentive Plan after November 28, 2004
10.14 Form of Stock Option Agreement (Nonstatutory Stock
Options) under the 1998 Restatement of the Abercrombie
& Fitch Co. 1996 Stock Option and Performance
Incentive Plan prior to November 28, 2004
10.15 Form of Stock Option Agreement (Nonstatutory Stock
Options) under the 1998 Restatement of the Abercrombie
& Fitch Co. 1996 Stock Option and Performance
Incentive Plan November 28, 2004
10.16 Form of Stock Option Agreement under the 1998
Restatement of the Abercrombie & Fitch Co. 1996 Stock
Plan for Non-Associate Directors
10.17 Form of Restricted Shares Award Agreement under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates
prior to November 28, 2004
10.18 Form of Restricted Shares Award Agreement under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates
after November 28, 2004
10.19 Form of Stock Option Agreement (Nonstatutory Stock
Options) under the Abercrombie & Fitch Co. 2002 Stock
Plan for Associates prior to November 28, 2004
10.20 Form of Stock Option Agreement (Nonstatutory Stock
Options) under the Abercrombie & Fitch Co. 2002 Stock
Plan for Associates after November 28, 2004
10.21 Form of Stock Option Agreement under the Abercrombie &
Fitch Co. 2003 Stock Plan for Non-Associate Directors
prior to November 28, 2004
10.22 Form of Stock Option Agreement under the Abercrombie &
Fitch Co. 2003 Stock Plan for Non-Associate Directors
after November 28, 2004
15. Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Inclusion of Report of Independent Registered
Public Accounting Firm.
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 Certifications (Principal Executive Officer and Principal
Financial Officer)
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABERCROMBIE & FITCH CO.
Date: December 9, 2004 By /s/ Susan J. Riley
-------------------------------------------
Susan J. Riley,
Senior Vice President - Chief Financial Officer
* Ms. Riley has been duly authorized to sign on behalf of the Registrant as its
principal financial officer.
41
EXHIBIT INDEX
Exhibit No. Document
----------- -------------------------------------------------
10.11 Form of Restricted Shares Award Agreement under the 1998
Restatement of the Abercrombie & Fitch Co. 1996 Stock Option
and Performance Incentive Plan prior to November 28, 2004
10.12 Form of Restricted Shares Award Agreement (No
Performance-Based Goals) under the 1998 Restatement of the
Abercrombie & Fitch Co. 1996 Stock Option and Performance
Incentive Plan after November 28, 2004
10.13 Form of Restricted Shares Award Agreement (Performance-Based
Goals) under the 1998 Restatement of the Abercrombie & Fitch
Co. 1996 Stock Option and Performance Incentive Plan after
November 28, 2004
10.14 Form of Stock Option Agreement (Nonstatutory Stock Options)
under the 1998 Restatement of the Abercrombie & Fitch Co. 1996
Stock Option and Performance Incentive Plan prior to November
28, 2004
10.15 Form of Stock Option Agreement (Nonstatutory Stock Options)
under the 1998 Restatement of the Abercrombie & Fitch Co. 1996
Stock Option and Performance Incentive Plan November 28, 2004
10.16 Form of Stock Option Agreement under the 1998 Restatement of
the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate
Directors
10.17 Form of Restricted Shares Award Agreement under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates prior
to November 28, 2004
10.18 Form of Restricted Shares Award Agreement under the
Abercrombie & Fitch Co. 2002 Stock Plan for Associates after
November 28, 2004
10.19 Form of Stock Option Agreement (Nonstatutory Stock Options)
under the Abercrombie & Fitch Co. 2002 Stock Plan for
Associates prior to November 28, 2004
10.20 Form of Stock Option Agreement (Nonstatutory Stock Options)
under the Abercrombie & Fitch Co. 2002 Stock Plan for
Associates after November 28, 2004
10.21 Form of Stock Option Agreement under the Abercrombie & Fitch
Co. 2003 Stock Plan for Non-Associate Directors prior to
November 28, 2004
10.22 Form of Stock Option Agreement under the Abercrombie & Fitch
Co. 2003 Stock Plan for Non-Associate Directors after November
28, 2004
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Inclusion of Report of
Independent Registered Public Accounting Firm
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 Certifications (Principal Executive Officer and
Principal Financial Officer)
42