Abercrombie & Fitch Co. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of registrant as specified in its charter)
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Delaware
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31-1469076 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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6301 Fitch Path, New Albany, OH
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43054 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class A Common Stock
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Outstanding at December 2, 2005 |
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$.01 Par Value
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87,633,211 Shares |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share data)
(Unaudited)
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Thirteen Weeks Ended |
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Thirty-Nine Weeks Ended |
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October 29, |
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October 30, |
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October 29, |
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October 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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NET SALES |
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$ |
704,918 |
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$ |
520,724 |
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$ |
1,823,319 |
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$ |
1,333,999 |
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Cost of Goods Sold |
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239,832 |
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184,107 |
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611,321 |
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448,542 |
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GROSS PROFIT |
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465,086 |
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336,617 |
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1,211,998 |
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885,457 |
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Stores and Distribution Expense |
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252,947 |
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188,381 |
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707,267 |
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514,411 |
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Marketing, General and Administrative Expense |
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97,644 |
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86,273 |
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232,674 |
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193,760 |
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Other Operating Income, Net |
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(1,379 |
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(15 |
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(3,193 |
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(174 |
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OPERATING INCOME |
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115,874 |
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61,978 |
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275,250 |
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177,460 |
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Interest Income, Net |
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(1,516 |
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(1,574 |
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(4,296 |
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(3,919 |
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INCOME BEFORE INCOME TAXES |
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117,390 |
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63,552 |
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279,546 |
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181,379 |
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Provision for Income Taxes |
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45,790 |
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23,641 |
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110,186 |
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69,263 |
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NET INCOME |
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$ |
71,600 |
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$ |
39,911 |
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$ |
169,360 |
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$ |
112,116 |
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NET INCOME PER SHARE: |
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BASIC |
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$ |
0.81 |
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$ |
0.43 |
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$ |
1.95 |
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$ |
1.19 |
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DILUTED |
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$ |
0.79 |
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$ |
0.42 |
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$ |
1.87 |
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$ |
1.16 |
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WEIGHTED-AVERAGE SHARES OUTSTANDING: |
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BASIC |
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87,862 |
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93,449 |
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87,002 |
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94,490 |
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DILUTED |
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90,458 |
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95,351 |
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90,422 |
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96,522 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.18 |
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$ |
0.13 |
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$ |
0.43 |
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$ |
0.50 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
(Unaudited)
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October 29, 2005 |
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January 29, 2005 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and Equivalents |
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$ |
99,608 |
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$ |
350,368 |
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Marketable Securities |
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178,228 |
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Receivables |
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29,633 |
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26,127 |
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Inventories |
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415,621 |
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211,198 |
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Store Supplies |
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40,800 |
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36,536 |
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Deferred Income Taxes |
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34,696 |
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31,246 |
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Other |
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34,357 |
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28,048 |
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TOTAL CURRENT ASSETS |
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832,943 |
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683,523 |
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PROPERTY AND EQUIPMENT, NET |
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798,391 |
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687,011 |
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OTHER ASSETS |
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8,478 |
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8,413 |
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TOTAL ASSETS |
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1,639,812 |
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1,378,947 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts Payable and Outstanding Checks |
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$ |
167,721 |
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$ |
137,337 |
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Accrued Expenses |
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234,529 |
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194,729 |
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Deferred Lease Credits |
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31,504 |
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31,135 |
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Income Taxes Payable |
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56,935 |
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55,587 |
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TOTAL CURRENT LIABILITIES |
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490,689 |
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418,788 |
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LONG TERM LIABILITIES: |
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Deferred Income Taxes |
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32,329 |
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42,188 |
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Deferred Lease Credits, Net |
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192,407 |
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177,923 |
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Other Liabilities |
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88,333 |
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70,722 |
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TOTAL LONG TERM LIABILITIES |
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313,069 |
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290,833 |
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SHAREHOLDERS EQUITY: |
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Class A Common Stock $.01 par value: 150,000,000 shares
authorized and 103,300,000 shares issued at October 29, 2005
and January 29, 2005, respectively |
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1,033 |
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1,033 |
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Paid-In Capital |
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157,657 |
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140,251 |
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Retained Earnings |
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1,208,540 |
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1,076,023 |
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Treasury Stock, at Average Cost 15,693,501 and 17,262,943
shares at October 29, 2005 and January 29, 2005, respectively |
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(531,176 |
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(547,981 |
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TOTAL SHAREHOLDERS EQUITY |
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836,054 |
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669,326 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,639,812 |
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$ |
1,378,947 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
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Thirty-Nine Weeks Ended |
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October 29, |
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October 30, |
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2005 |
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2004 |
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OPERATING ACTIVITIES: |
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Net Income |
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$ |
169,360 |
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$ |
112,116 |
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Impact of Other Operating Activities on Cash Flows: |
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Depreciation and Amortization |
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90,866 |
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76,989 |
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Amortization of Deferred Lease Credits |
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(23,756 |
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(22,546 |
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Non-Cash Charge for Deferred Compensation |
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23,190 |
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12,948 |
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Deferred Taxes |
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(13,309 |
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(9,983 |
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Loss on Disposal of Assets |
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6,043 |
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2,553 |
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Lessor Construction Allowances |
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28,662 |
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35,028 |
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Changes in Assets and Liabilities: |
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Inventories |
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(191,147 |
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(31,147 |
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Accounts Payable and Accrued Expenses |
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36,313 |
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91,689 |
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Income Taxes |
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1,348 |
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(23 |
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Tax Benefit of Stock Options Exercises |
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51,162 |
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17,308 |
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Other Assets and Liabilities |
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12,085 |
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(29,770 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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190,817 |
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255,162 |
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INVESTING ACTIVITIES: |
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Capital Expenditures Including Capital Lease Obligations |
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(185,776 |
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(141,071 |
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Marketable Securities Activity: |
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Purchases |
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(456,605 |
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(3,630,880 |
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Proceeds from Sales |
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277,674 |
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3,726,765 |
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Net Marketable Securities Activity |
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(178,931 |
) |
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95,885 |
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NET CASH USED FOR INVESTING ACTIVITIES |
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(364,707 |
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(45,186 |
) |
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FINANCING ACTIVITIES: |
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Change in Outstanding Checks |
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(9,762 |
) |
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8,518 |
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Purchases of Treasury Stock |
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(103,296 |
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(197,892 |
) |
Stock Option Exercises and Other |
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73,070 |
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33,162 |
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Dividends Paid |
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(36,882 |
) |
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(35,546 |
) |
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NET CASH USED FOR FINANCING ACTIVITIES |
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(76,870 |
) |
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(191,758 |
) |
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NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS |
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(250,760 |
) |
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18,218 |
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Cash and Equivalents, Beginning of Year |
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350,368 |
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56,373 |
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CASH AND EQUIVALENTS, END OF PERIOD |
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$ |
99,608 |
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$ |
74,591 |
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SIGNIFICANT NON-CASH INVESTING ACTIVITIES: |
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Change in Accrual for Construction in Progress |
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$ |
24,619 |
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($ |
7,295 |
) |
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SIGNIFICANT NON-CASH FINANCING ACTIVITIES: |
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Declaration of Dividend, Unpaid |
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$ |
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$ |
11,319 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ABERCROMBIE & FITCH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
subsidiaries that are more than 50 percent owned and controlled by the Company. All
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts have been reclassified to conform with the current year presentation.
Amounts reclassified did not have an effect on the Companys results of operations or
shareholders equity.
Beginning with the first quarter of
the fiscal year ending January 28, 2006 (the 2005 fiscal year), the Company reclassified the
condensed consolidated statements of income. In prior periods, the Company included buying
and occupancy costs as well as certain home office expenses as part of the gross income
calculation. The Company believes that presenting gross profit as a function of sales
reduced solely by cost of goods sold, as well as presenting stores and distribution expense
and marketing, general and administrative expense, as individual expense categories,
provides a clearer and more transparent representation of gross selling margin and operating
expenses. Prior period results have been reclassified accordingly.
The condensed consolidated financial statements as of October 29, 2005 and for the thirteen
and thirty-nine week periods ended October 29, 2005 and October 30, 2004 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&Fs Annual Report on Form 10-K for the fiscal year ended January 29, 2005 (the 2004
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 2005 fiscal year.
The condensed consolidated financial statements as of October 29, 2005 and for the thirteen
and thirty-nine week periods ended October 29, 2005 and October 30, 2004 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 LLPs report on the condensed
consolidated financial statements is not a report within the meaning of Sections 7 and 11
of the Securities Act of 1933.
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
CompensationTransition and Disclosurean 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 stock unit awards to associates and non-associate directors. If
compensation expense related to options for the thirteen and thirty-nine week periods ended
October 29, 2005 and October 30, 2004, 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 weighted-average basic and diluted
share would have been as follows:
(Thousands except per share amounts)
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Thirteen Weeks Ended |
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Thirty-Nine Weeks Ended |
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|
|
October 29, |
|
|
October 30, |
|
|
October 29, |
|
|
October 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
71,600 |
|
|
$ |
39,911 |
|
|
$ |
169,360 |
|
|
$ |
112,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in
reported net income, net of tax |
|
|
7,022 |
|
|
|
1,424 |
|
|
|
12,027 |
|
|
|
4,585 |
|
Stock-based compensation expense determined
under fair value based method, net of tax(1) |
|
|
(12,733 |
) |
|
|
(6,564 |
) |
|
|
(28,595 |
) |
|
|
(20,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
65,889 |
|
|
$ |
34,771 |
|
|
$ |
152,792 |
|
|
$ |
96,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.81 |
|
|
$ |
0.43 |
|
|
$ |
1.95 |
|
|
$ |
1.19 |
|
Pro forma |
|
$ |
0.75 |
|
|
$ |
0.37 |
|
|
$ |
1.76 |
|
|
$ |
1.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.79 |
|
|
$ |
0.42 |
|
|
$ |
1.87 |
|
|
$ |
1.16 |
|
Pro forma |
|
$ |
0.72 |
|
|
$ |
0.36 |
|
|
$ |
1.67 |
|
|
$ |
1.00 |
|
|
|
|
(1) |
|
Includes stock-based compensation expense related to restricted stock
unit awards actually recognized in net income in each period presented. |
7
The fair value of options granted during the third quarter of the 2005 fiscal year and
the third quarter of the 2004 fiscal year was $24.43 and $13.93, 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
assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
October 29, |
|
October 30, |
|
|
2005 |
|
2004 |
Dividend Yield |
|
|
1.1 |
% |
|
|
1.3 |
% |
Price Volatility |
|
|
44.0 |
% |
|
|
55.3 |
% |
Risk-Free Interest Rate |
|
|
4.1 |
% |
|
|
3.1 |
% |
Estimated Forfeiture Rate |
|
|
25.0 |
% |
|
|
26.4 |
% |
Expected Life (Years) |
|
|
4 |
|
|
|
4 |
|
Weighted-Average Shares Outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
October 29, |
|
|
October 30, |
|
|
|
2005 |
|
|
2004 |
|
Shares of Class A Common Stock issued |
|
|
103,300 |
|
|
|
103,300 |
|
Treasury shares |
|
|
(15,438 |
) |
|
|
(9,851 |
) |
|
|
|
|
|
|
|
Basic shares |
|
|
87,862 |
|
|
|
93,449 |
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and restricted stock units |
|
|
2,596 |
|
|
|
1,902 |
|
|
|
|
|
|
|
|
Diluted shares |
|
|
90,458 |
|
|
|
95,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, |
|
|
October 30, |
|
|
|
2005 |
|
|
2004 |
|
Shares of Class A Common Stock issued |
|
|
103,300 |
|
|
|
103,300 |
|
Treasury shares |
|
|
(16,298 |
) |
|
|
(8,810 |
) |
|
|
|
|
|
|
|
Basic shares |
|
|
87,002 |
|
|
|
94,490 |
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and restricted stock units |
|
|
3,420 |
|
|
|
2,032 |
|
|
|
|
|
|
|
|
Diluted shares |
|
|
90,422 |
|
|
|
96,522 |
|
|
|
|
|
|
|
|
Options to purchase approximately 430 thousand and 5.6 million shares of Class A Common
Stock during the thirteen week periods ended October 29, 2005 and October 30, 2004,
respectively, and 140 thousand and 5.6 million shares of Class A Common Stock during the
thirty-nine week periods ended October 29, 2005 and October 30, 2004, respectively, were
outstanding but not included in the computation of net income per weighted-average diluted
share because the options exercise prices were greater than the average market price of the
underlying shares for the corresponding period.
8
4. |
|
MARKETABLE SECURITIES |
|
|
|
Investments with original maturities greater than 90 days are accounted for in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and
are classified accordingly by the Company at the time of purchase. At October 29, 2005, the
Companys investments in marketable securities primarily consisted of investment grade
municipal notes and bonds and investment grade auction rate securities, all classified as
available-for-sale and reported at fair value, with maturities that
could range from three months to forty years. |
|
|
|
The Company began investing in municipal notes and bonds
during the 2005 fiscal year. These
investments have early redemption provisions at predetermined prices.
For the thirteen and thirty-nine week periods ended
October 29, 2005, there were no realized gains or losses and as of October 29, 2005, net
unrealized holding losses were not material. |
|
|
|
For the Companys investments in auction rate securities, the interest rates reset
through an auction process at predetermined periods ranging from one to forty-nine days.
Due to the frequent nature of the reset feature, the investments market price approximates
its fair value; therefore, there are no realized or unrealized gains or losses associated
with these marketable securities. |
|
|
|
As of October 29, 2005, the Company held approximately $178.2 million in marketable
securities and at January 29, 2005, the Company had no investments in marketable
securities. |
|
5. |
|
INVENTORIES |
|
|
|
Inventories are principally valued at the lower of average cost or market, 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). At fiscal quarter end, the Company
reduces inventory value by recording a markdown reserve that represents the estimated future
anticipated selling price decreases necessary to sell through the current season inventory.
In addition, the inventory value is further reduced for estimates of lost or stolen items
that have not been recorded in the inventory system, based on historical trends. |
|
|
|
The inventory reserve for markdowns and valuations was $27.1 million, $6.6 million and $25.5
million at October 29, 2005, January 29, 2005 and October 30, 2004, respectively. The
inventory valuations at January 29, 2005 reflect adjustments for inventory markdowns for the
end of the Fall season. The shrink reserve was $4.7 million, $2.9 million and $3.6 million
at October 29, 2005, January 29, 2005 and October 30, 2004, respectively. |
9
6. |
|
PROPERTY AND EQUIPMENT, NET |
|
|
|
Property and equipment, net, consisted of (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
|
January 29, 2005 |
|
Property and equipment, at cost |
|
$ |
1,239,680 |
|
|
$ |
1,073,412 |
|
Accumulated depreciation and amortization |
|
|
(441,289 |
) |
|
|
(386,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
798,391 |
|
|
$ |
687,011 |
|
|
|
|
|
|
|
|
7. |
|
DEFERRED LEASE CREDITS, NET |
|
|
|
Deferred lease credits are derived from payments received from landlords to partially offset
store construction costs. Furthermore, the Company reclassifies the deferred lease credits
between current and long-term liabilities based on the amount expected to be amortized over
the next twelve months. The amounts, which are amortized over the life of the related
leases, consisted of the following (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
|
January 29, 2005 |
|
Deferred lease credits |
|
$ |
369,574 |
|
|
$ |
334,175 |
|
Amortized deferred lease credits |
|
|
(145,663 |
) |
|
|
(125,117 |
) |
|
|
|
|
|
|
|
Total deferred lease credits, net |
|
$ |
223,911 |
|
|
$ |
209,058 |
|
|
|
|
|
|
|
|
8. |
|
INCOME TAXES |
|
|
|
The provision for income taxes is based on the current estimate of the annual effective tax
rate adjusted to reflect the tax impact of items discrete to the quarter. Income taxes paid
during the thirty-nine weeks ended October 29, 2005 and October 30, 2004 approximated $71.5
million and $62.3 million, respectively. |
|
9. |
|
LONG-TERM DEBT |
|
|
|
On December 15, 2004, the Company entered into an amended and restated $250 million
syndicated unsecured credit agreement (the Credit Agreement). The primary purposes of the
Credit Agreement are for trade and stand-by letters of credit and working capital. The
Credit Agreement has several borrowing options, including interest rates that are based on
the agent banks Alternate Base Rate. Facility fees payable under the Credit Agreement
will be based on the Companys ratio (the leverage ratio) of the sum of total debt plus
600% of forward minimum rent commitments to consolidated earnings before interest, taxes,
depreciation, amortization and rent (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 Credit Agreement contains limitations on indebtedness, liens, sale-leaseback
transactions, significant corporate changes (including mergers and
acquisitions), investments,
restricted payments (including dividends and stock repurchases) and transactions with
affiliates, including investments in foreign subsidiaries. The Credit Agreement will mature
on December 15, 2009. Letters of credit totaling approximately $70.6 million and $72.6
million were outstanding under the Credit Agreement at October 29, 2005 and under the
previous credit agreement at October 30, 2004, respectively. No borrowings were outstanding
under the Credit Agreement at October 29, 2005 nor under the previous credit agreement at October 30, 2004. |
10
|
10. |
|
RELATED PARTY TRANSACTIONS |
|
|
|
Shahid & Company, Inc. has provided advertising and design services for the Company since
1995. Sam N. Shahid, Jr., who served on A&Fs Board of Directors until June 15, 2005, has
been President and Creative Director of Shahid & Company, Inc. since 1993. For the
thirty-nine week period ended October 29, 2005, fees paid to Shahid & Company, Inc. for
services provided until June 15, 2005 were approximately $863 thousand. For services
provided during the thirteen and thirty-nine week periods ended October 30, 2004, fees paid
to Shahid & Company, Inc. were approximately $700 thousand and $1.9 million, respectively.
The amounts do not include reimbursements to Shahid & Company, Inc. for out-of-pocket
expenses incurred while performing these services. |
|
11. |
|
CONTINGENCIES |
|
|
|
The Company is involved in a number of legal proceedings that arise out of, and are
incidental to, the conduct of its business. |
|
|
|
Shelby Port, et al. v. Abercrombie & Fitch Stores, Inc. was initially filed on or about July
18, 2003 in the Washington Superior Court of King County on behalf of a purported class of
employees and former employees of the Company alleging that the defendant required its
employees to purchase and wear specified clothes during specified times in violation of
Washington law and seeking, on behalf of the purported class, injunctive relief and
unspecified amounts of economic and liquidated damages. The parties
have agreed to a settlement
of this matter, which was finally approved by the Washington Superior Court of King County
on September 19, 2005, and the case was dismissed with prejudice on that date. The
settlement will not have a material effect on the Companys consolidated financial
statements. |
|
|
|
Three actions 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. The parties have agreed to a settlement of this matter,
which must be approved by the California Superior Court for Los Angeles County. The parties
filed a joint motion for preliminary approval of the settlement on August 26, 2005, the
California Superior Court for Los Angeles County preliminarily approved the settlement on
September 14, 2005, and a hearing to consider final approval of the settlement has been set
for January 12, 2006. The Company believes that the impact of the proposed settlement will
not have a material effect on the Companys consolidated financial statements. |
|
|
|
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 |
11
|
|
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 was denied as to the two original plaintiffs. The
state law claim of plaintiff Oros was dismissed by the United States District Court for the
Southern District of Ohio on May 17, 2005 and his Fair Labor Standards Act claim remains
pending. The defendants filed an answer to plaintiffs October 28, 2004 amended complaint
on May 23, 2005 and the parties have commenced discovery. On June 17, 2005, the plaintiffs
filed a motion to further amend the complaint to add claims under the laws of a number of
states, and the United States District Court for the Southern District of Ohio granted that
motion on November 8, 2005. On June 24, 2005, the defendants filed motions for summary
judgment seeking summary judgment on all of the claims of each of the three plaintiffs. On
July 1, 2005, the plaintiffs filed a Rule 23 Motion for Certification of a Class of State
Wage Act Claimants and a Motion for Designation of FLSA Claims as Collective Action and
Authority to Send Notice to Similarly Situated Employees. The defendants intend to file
their opposition to both motions in early December 2005. The Company does not believe it is
feasible to predict the outcome of the legal proceedings described in
this paragraph, which with the Fuller case described in the following
paragraph has been consolidated for all purposes, and
intends to defend against them vigorously. The timing of the final resolution of these
legal proceedings is also uncertain. |
|
|
|
In Casey Fuller, Individually and on Behalf of All Others Similarly Situated v. Abercrombie
& Fitch Stores, Inc., which was filed on December 28, 2004 in the United States District
Court for the Eastern District of Tennessee, the plaintiff alleges that he and other
similarly situated assistant managers and managers in training were not paid properly
calculated overtime during their employment and seeks overtime pay under the Fair Labor
Standards Act. The defendant filed an answer on February 7, 2005. Because of its
similarities to the Mitchell case, the defendant filed, on April 19, 2005, a motion to stay
the Fuller case pending the outcome of the Mitchell case or, in the alternative, transfer
the Fuller case to the United States District Court for the Southern District of Ohio. On
May 31, 2005, the United States District Court for the Eastern District of Tennessee
transferred the Fuller case to the United States District Court for the Southern District of
Ohio. On September 2, 2005, the Fuller case was consolidated with the Mitchell case for all
purposes. |
|
|
|
On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch
Company, et al., was filed against A&F and certain of its officers in the United States
District Court for the Southern District of Ohio on behalf of a purported class of all
persons who purchased or acquired shares of Class A Common Stock of A&F between June 2, 2005
and August 16, 2005. In September and October of 2005, five other purported class actions
were subsequently filed against A&F and other defendants in the same Court. All six cases
seek to allege claims under the federal securities laws as a result of a decline in the
price of A&Fs Class A Common Stock in the summer of 2005. On November 1, 2005, a motion to
consolidate all these purported class actions into the first-filed case was filed by some of
the plaintiffs. A&F has joined in that motion. A&F believes the cases have no
merit and intends to vigorously defend itself in court. |
12
|
|
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S.
Jeffries, et al., was filed in the United States District Court for the Southern District of
Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages
against nine of A&Fs present and former directors,
alleging various breaches of the directors fiduciary duty. In the following three months (October, November and
December of 2005), four similar derivative actions were filed (three in the United States
District Court for the Southern District of Ohio and one in the Court of Common Pleas for
Franklin County, Ohio) against present and former directors of A&F alleging various breaches
of the directors fiduciary duty and seeking equitable and monetary relief. A&F is
also a nominal defendant in each of the four later derivative actions. |
|
|
|
The Securities and Exchange Commission (SEC) has commenced an informal, non-public inquiry
concerning trading in shares of A&Fs Class A Common Stock. The SEC has informed A&F that the
informal inquiry should not be construed as an indication that any violations of law have
occurred, and the Company and its personnel are cooperating fully with the SEC. |
|
|
|
The Company is aware that a purported class action lawsuit, styled Gibson v. Hollister Co.,
Case No. 05CC00244, was filed on October 25, 2005 in the Superior Court of Orange County,
California. Melissa Gibson alleges that she and a class of hourly employees employed by
Hollister in the State of California were not provided with uniforms or break periods
required by California law. The complaint also alleges other miscellaneous violations of
California wage and hour law. The complaint seeks compensatory damages for alleged unpaid
wages, penalties, injunctive relief, and attorneys fees. The complaint has not yet been
served on the defendant. Upon service, the defendant intends to vigorously defend the case,
the outcome of which cannot be predicted by the Company. |
|
|
|
The Company accrues amounts related to legal matters if reasonably estimable and reviews
these amounts at least quarterly. |
|
|
|
The Company has standby letters of credit in the amount of $4.5 million that are set to
expire primarily during the fourth quarter of the fiscal year ending February 3, 2007 (the
2006 fiscal year). The primary beneficiary, a merchandise supplier, has the right to draw
upon the standby letters of credit if the Company has authorized or filed a voluntary
petition in bankruptcy. To date, the beneficiary has not drawn upon the standby letters of
credit. |
|
|
|
The Company enters into agreements with professional services firms in the ordinary course
of business and, in most agreements, indemnifies these firms from any harm. There is no
financial impact on the Company related to these indemnification agreements. |
13
12. |
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
|
|
|
In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123
(Revised 2004), Share-Based Payment. This
standard is a revision of SFAS No. 123 and requires all share-based payments to employees,
including grants of employee stock options and similar awards, to be recognized in the
financial statements based on their fair values measured at the grant date. |
|
|
|
In April 2005, the SEC delayed the effective date of SFAS No.
123(R) to annual periods beginning after June 15, 2005. The Company is in the process of
evaluating the impact of this pronouncement on its consolidated financial position and
results of operations and cash flows. |
|
13. |
|
SUBSEQUENT EVENTS |
|
|
|
On November 14, 2005, the Company declared a quarterly dividend of $0.175 per share of
Class A Common Stock, which will be paid on December 20, 2005 to stockholders of record as
of November 29, 2005. |
|
|
|
The Company is aware that a purported class action, styled Eltrich v. Abercrombie & Fitch
Stores, Inc., Case No. 05-2-38169-8, was filed on November 22, 2005 in the Washington
Superior Court of King County, alleging that a class of store managers, assistant managers
and managers in training were misclassified as exempt from the overtime compensation
requirements of the State of Washington improperly denied overtime compensation. In
this case, the plaintiff, on behalf of his purported class, seeks injunctive relief and
unspecified amounts of economic and liquidated damages. The complaint has not yet been
served on the defendant. Upon service, the defendant intends to vigorously defend the case,
the outcome of which cannot be predicted by the Company with certainty. |
14
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 29, 2005, and the related condensed consolidated statements of
income for each of the thirteen and thirty-nine week periods ended October 29, 2005 and October 30,
2004 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended
October 29, 2005 and October 30, 2004. These interim financial statements are the responsibility
of the Companys 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 have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of January 29, 2005, and the
related consolidated statements of income, of shareholders equity, and of cash flows for the year
then ended, managements assessment of the effectiveness of the Companys internal control over
financial reporting as of January 29, 2005 and the effectiveness of the Companys internal control
over financial reporting as of January 29, 2005; and in our report dated April 11, 2005 we
expressed (i) an unqualified opinion on those consolidated financial statements, (ii) an
unqualified opinion on managements assessment of the effectiveness of the Companys internal
control over financial reporting, and (iii) an adverse opinion on the effectiveness of the
Companys internal control over financial reporting. The consolidated financial statements and
managements assessment of the effectiveness of internal control over financial reporting referred
to above are not presented herein. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of January 29, 2005, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Columbus, Ohio
December 6, 2005
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company operates four brands: Abercrombie & Fitch, a fashion-oriented, casual apparel brand
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 18 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 high-quality clothing, leather goods and lifestyle accessories, targeted at 22 to 35
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
Beginning with the first quarter of the 2005 fiscal year, the Company reclassified the condensed
consolidated statements of income. In prior periods, the Company included buying and occupancy
costs as well as certain home office expenses as part of the gross income calculation. The Company
believes that presenting gross profit as a function of sales reduced solely by cost of goods sold,
as well as presenting stores and distribution expense and marketing, general and administrative
expense, as individual expense categories, provides a clearer and more transparent representation
of the gross selling margin and operating expenses. Prior period results have been reclassified
accordingly.
During the third quarter of the 2005 fiscal year, net sales increased 35% to $704.9 million from
$520.7 million in the third quarter of the 2004 fiscal year. Operating income increased to $115.9
million in the third quarter of the 2005 fiscal year from $62.0 million in the third quarter of the
2004 fiscal year. Operating income during the third quarter of the 2005 and the 2004 fiscal years
included non-recurring charges of $13.5 million related to an executive officer severance agreement
and $32.9 million related to a legal settlement, respectively. Net income increased to $71.6
million in the third quarter of the 2005 fiscal year compared to $39.9 million in the third quarter
of the 2004 fiscal year. Net income per diluted weighted-average share was $0.79 in the third
quarter of the 2005 fiscal year compared to $0.42 in the third quarter of the 2004 fiscal year.
The non-recurring charges, net of the related tax effect, reduced reported net income per diluted
share by $0.09 per share and $0.22 per share in the third quarter of the 2005 fiscal year and the
third quarter of the 2004 fiscal year, respectively.
16
The following data represent the amounts shown in the Companys condensed consolidated statements
of income for the thirteen and thirty-nine week periods ended October 29, 2005 and October 30,
2004, expressed as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
Thirty-Nine Weeks Ended |
|
|
October 29, |
|
October 30, |
|
October 29, |
|
October 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
NET SALES |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
|
34.0 |
|
|
|
35.4 |
|
|
|
33.5 |
|
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
66.0 |
|
|
|
64.6 |
|
|
|
66.5 |
|
|
|
66.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores and
Distribution
Expense |
|
|
35.9 |
|
|
|
36.2 |
|
|
|
38.8 |
|
|
|
38.6 |
|
Marketing, General
and Administrative
Expense |
|
|
13.9 |
|
|
|
16.6 |
|
|
|
12.8 |
|
|
|
14.5 |
|
Other Operating
Income, Net |
|
|
(0.2 |
) |
|
|
(0.0 |
) |
|
|
(0.2 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
16.4 |
|
|
|
11.9 |
|
|
|
15.1 |
|
|
|
13.3 |
|
Interest Income, Net |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE
INCOME TAXES |
|
|
16.7 |
|
|
|
12.2 |
|
|
|
15.3 |
|
|
|
13.6 |
|
Provision for
Income Taxes |
|
|
6.5 |
|
|
|
4.5 |
|
|
|
6.0 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
10.2 |
% |
|
|
7.7 |
% |
|
|
9.3 |
% |
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Financial Summary
The following summarized financial and statistical data compare the thirteen and thirty-nine week
periods ended October 29, 2005 to the comparable periods of the 2004 fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
|
|
October 29, |
|
October 30, |
|
% |
|
October 29, |
|
October 30, |
|
% |
|
|
2005 |
|
2004 |
|
Change |
|
2005 |
|
2004 |
|
Change |
Net sales
(thousands) |
|
$ |
704,918 |
|
|
$ |
520,724 |
|
|
|
35 |
% |
|
$ |
1,823,319 |
|
|
$ |
1,333,999 |
|
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by brand
(thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
$ |
342,723 |
|
|
$ |
303,698 |
|
|
|
13 |
% |
|
$ |
950,441 |
|
|
$ |
813,876 |
|
|
|
17 |
% |
abercrombie |
|
$ |
96,789 |
|
|
$ |
61,424 |
|
|
|
58 |
% |
|
$ |
223,122 |
|
|
$ |
149,398 |
|
|
|
49 |
% |
Hollister |
|
$ |
261,274 |
|
|
$ |
154,351 |
|
|
|
69 |
% |
|
$ |
640,329 |
|
|
$ |
369,474 |
|
|
|
73 |
% |
RUEHL * |
|
$ |
4,132 |
|
|
$ |
1,251 |
|
|
|
230 |
% |
|
$ |
9,427 |
|
|
$ |
1,251 |
|
|
|
654 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net retail sales
per average store
(thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
$ |
924 |
|
|
$ |
777 |
|
|
|
19 |
% |
|
$ |
2,542 |
|
|
$ |
2,100 |
|
|
|
21 |
% |
abercrombie |
|
$ |
561 |
|
|
$ |
334 |
|
|
|
68 |
% |
|
$ |
1,274 |
|
|
$ |
817 |
|
|
|
56 |
% |
Hollister |
|
$ |
886 |
|
|
$ |
713 |
|
|
|
24 |
% |
|
$ |
2,280 |
|
|
$ |
1,867 |
|
|
|
22 |
% |
RUEHL * |
|
$ |
689 |
|
|
$ |
469 |
|
|
|
47 |
% |
|
$ |
1,861 |
|
|
$ |
469 |
|
|
|
297 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in comparable store
sales ** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
|
16 |
% |
|
|
(2 |
)% |
|
|
|
|
|
|
19 |
% |
|
|
(3 |
)% |
|
|
|
|
abercrombie |
|
|
62 |
% |
|
|
(4 |
)% |
|
|
|
|
|
|
51 |
% |
|
|
(5 |
)% |
|
|
|
|
Hollister |
|
|
27 |
% |
|
|
13 |
% |
|
|
|
|
|
|
26 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales
increase
attributable to new
and remodeled
stores,
catalogue and
web sites |
|
|
10 |
% |
|
|
16 |
% |
|
|
|
|
|
|
13 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net retail sales
per average gross
square foot |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
$ |
106 |
|
|
$ |
89 |
|
|
|
19 |
% |
|
$ |
290 |
|
|
$ |
238 |
|
|
|
22 |
% |
abercrombie |
|
$ |
128 |
|
|
$ |
76 |
|
|
|
68 |
% |
|
$ |
290 |
|
|
$ |
185 |
|
|
|
57 |
% |
Hollister |
|
$ |
136 |
|
|
$ |
110 |
|
|
|
24 |
% |
|
$ |
351 |
|
|
$ |
288 |
|
|
|
22 |
% |
RUEHL * |
|
$ |
72 |
|
|
$ |
48 |
|
|
|
50 |
% |
|
$ |
196 |
|
|
$ |
48 |
|
|
|
308 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions per
average store |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
|
11,099 |
|
|
|
10,489 |
|
|
|
6 |
% |
|
|
34,294 |
|
|
|
32,145 |
|
|
|
7 |
% |
abercrombie |
|
|
7,765 |
|
|
|
5,264 |
|
|
|
48 |
% |
|
|
19,996 |
|
|
|
14,743 |
|
|
|
36 |
% |
Hollister |
|
|
15,253 |
|
|
|
13,602 |
|
|
|
12 |
% |
|
|
44,178 |
|
|
|
39,729 |
|
|
|
11 |
% |
RUEHL * |
|
|
5,511 |
|
|
|
4,345 |
|
|
|
27 |
% |
|
|
17,348 |
|
|
|
4,345 |
|
|
|
299 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average transaction
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
$ |
83.23 |
|
|
$ |
74.09 |
|
|
|
12 |
% |
|
$ |
74.13 |
|
|
$ |
65.31 |
|
|
|
14 |
% |
abercrombie |
|
$ |
72.23 |
|
|
$ |
63.49 |
|
|
|
14 |
% |
|
$ |
63.72 |
|
|
$ |
55.42 |
|
|
|
15 |
% |
Hollister |
|
$ |
58.11 |
|
|
$ |
52.39 |
|
|
|
11 |
% |
|
$ |
51.61 |
|
|
$ |
46.98 |
|
|
|
10 |
% |
RUEHL * |
|
$ |
124.95 |
|
|
$ |
107.98 |
|
|
|
16 |
% |
|
$ |
107.25 |
|
|
$ |
107.98 |
|
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units per
transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
|
2.13 |
|
|
|
2.17 |
|
|
|
(2 |
)% |
|
|
2.19 |
|
|
|
2.26 |
|
|
|
(3 |
)% |
abercrombie |
|
|
2.71 |
|
|
|
2.78 |
|
|
|
(3 |
)% |
|
|
2.70 |
|
|
|
2.75 |
|
|
|
(2 |
)% |
Hollister |
|
|
2.24 |
|
|
|
2.23 |
|
|
|
n |
m |
|
|
2.20 |
|
|
|
2.23 |
|
|
|
(1 |
)% |
RUEHL * |
|
|
2.22 |
|
|
|
2.33 |
|
|
|
(5 |
)% |
|
|
2.29 |
|
|
|
2.33 |
|
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average unit retail
sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie &
Fitch |
|
$ |
39.08 |
|
|
$ |
34.14 |
|
|
|
14 |
% |
|
$ |
33.85 |
|
|
$ |
28.90 |
|
|
|
17 |
% |
abercrombie |
|
$ |
26.65 |
|
|
$ |
22.84 |
|
|
|
17 |
% |
|
$ |
23.60 |
|
|
$ |
20.15 |
|
|
|
17 |
% |
Hollister |
|
$ |
25.94 |
|
|
$ |
23.49 |
|
|
|
10 |
% |
|
$ |
23.46 |
|
|
$ |
21.07 |
|
|
|
11 |
% |
RUEHL * |
|
$ |
56.28 |
|
|
$ |
46.34 |
|
|
|
21 |
% |
|
$ |
46.83 |
|
|
$ |
46.34 |
|
|
|
1 |
% |
|
|
|
* |
|
Net Sales for RUEHL during the 2004 fiscal year, and the related statistics, reflect the activity
of three stores opened in September 2004; as a result, year-to-year comparisons may not be meaningful. |
|
** |
|
A store is included in comparable store sales when it has been open as the same brand at least
one year and its square footage has not been expanded or reduced by more than 20%. |
18
CURRENT TRENDS AND OUTLOOK
The Companys quarterly results include a 35% net sales growth, a 38% gross profit increase and a
79% increase in net income. The Company believes that these results reflect the broad strength and
successful differentiation of its brands versus the competition and the Companys dedication to
building dominant iconic brands.
The Company believes the key to its current and future success is continuing its strategy to build,
maintain and manage the aspirational positioning of its brands by concentrating on each of the
brands values and focusing on three strategic areas: leading fashion merchandise; quality of
presentation; and in-store experience.
In order
to protect the integrity of its brands, the Company has created an
internal Brand Protection group that is headed by the
Companys General Counsel and includes the addition of an
in-house Trademark Counsel and a Senior Director of Brand Protection.
The new Brand Protection group has implemented initiatives to
aggressively combat the sale of counterfeit and infringing
merchandise around the world.
In November 2005, the Company opened its first Abercrombie & Fitch flagship store on Fifth Avenue
in New York City and is pleased by the stores initial sales results. The Company expects to
disseminate and apply the knowledge gained from this store opening to its other stores and brands
as well. The Company plans to open additional flagship locations in Los Angeles and Las Vegas in
the future.
The Company remains committed to its store investment program, which focuses on improving the
customers in-store experience and is believed to be a key driver of the sales growth. The Company
is committed to managing these expenses in order to create leverage against sales. In addition,
the Company will continue to invest in the home office, although it does not expect future
investment increases in this area to be similar to those made during the first half of the year.
Internationally, the Company plans to open its first Canadian stores by the end of fiscal 2005 and
its London flagship store in early fiscal 2007.
Based on its year-to-date results, the Company now expects net income per share on a fully-diluted
basis, including the non-recurring third quarter charge, to be in the range of $3.35 to $3.40.
19
THIRD QUARTER RESULTS
Net Sales
Net sales for the third quarter of the 2005 fiscal year were $704.9 million, a 35% increase over
last fiscal years third quarter net sales of $520.7 million. The net sales increase was
attributable primarily to a 25% comparable store sales increase and to the net addition of 56
stores.
The comparable store sales growth was due to higher transaction volume and higher average unit
retail price across all brands compared to the third quarter of the 2004 fiscal year. The Company
believes the store investment program, which included increased store inventory levels and a focus
on the customers in-store experience, contributed significantly to increased transaction volume.
Further the higher average unit retail price was driven by higher quality inventory and an increase
in unit sales of higher priced items such as jeans.
By brand, comparable store sales for the quarter versus the same quarter last fiscal year were as
follows: Abercrombie & Fitch increased 16% with womens and mens posting comparable store sales in
the mid-teens. In abercrombie, comparable store sales increased 62% with girls achieving
comparable store sales in the mid-seventies and boys attaining comparable store sales in the
mid-thirties. In Hollister, comparable store sales increased 27% with girls posting a comparable
store sales increase in the high-twenties and guys attaining a high-teens increase for the quarter.
The comparable store sales percentages increased across all of the United States ranging from the
twenties to thirties. On a regional basis, comparable store sales were highest in the Northeast
and West and lowest in the South and Southwest. Stores located in Northern California, Upstate New
York, and the New York metropolitan area had the best comparable store sales performance during
the third quarter.
At Abercrombie & Fitch, the comparable store sales increase during the quarter was driven by strong
results in knits, jeans, fleece and outerwear for women; and knits, jeans and graphic tees for men.
At abercrombie, the comparable store sales increase during the quarter was reflected in knits,
jeans and graphic tees for girls; and knits, jeans and conversation tees for boys, offset by a
decrease in sweaters.
At Hollister, the comparable store sales increase during the quarter was the result of increases in
knits, jeans and graphic knits for girls, offset by decreases in pants and skirts; and knits,
conversation tees and jeans for boys, offset by a decrease in wovens.
The impact of the six RUEHL stores was immaterial to the Companys total net sales for the third
quarter of the 2005 fiscal year.
20
Net direct-to-consumer merchandise sales through the Companys web sites and catalogue for the
third quarter of the 2005 fiscal year were $26.9 million, a decrease of 3% over last fiscal years
third quarter net sales of $27.6 million. Shipping and handling revenue for the corresponding
periods was $3.8 million in the 2005 fiscal year and $4.0 million in the 2004 fiscal year. The
direct-to-consumer business accounted for 4% of net sales in the third quarter of the 2005 fiscal
year compared to 6% in the third quarter of the 2004 fiscal year. The decrease in sales
penetration was due to the implementation of brand protection initiatives that minimize the amount of sale
merchandise on the web sites.
Gross Profit
Gross profit for the third quarter of the 2005 fiscal year was $465.1 million compared to $336.6
million for the comparable period during the 2004 fiscal year. The gross profit rate (gross profit
divided by net sales) for the third quarter of the 2005 fiscal year was 66.0%, up 140 basis points
from last fiscal years rate of 64.6%. The increase in gross profit was driven by higher initial
markup (IMU) and a lower markdown rate.
Overall IMU increased compared to the third quarter of the 2004 fiscal year as a result of higher
unit pricing, which was partially offset by higher initial costs related to the overall increased
quality of the merchandise. The lower markdown rate resulted from the overall increase in sales,
as well as a shift in the inventory mix from fashion to basic merchandise, which has lower markdown
risk.
The Company ended the third quarter of the 2005 fiscal year with an approximate 44% unit increase
in inventories per gross square foot versus the third quarter of the 2004 fiscal year. This
increase translated into an inventory increase, at cost, per gross square foot of 87%. The unit
inventory increase was the result of the Companys focused strategic investment in the jean
business and other basic categories like polos, knits and graphic tees. The Company believes that
basic categories have less markdown risk than fashion categories.
21
Stores and Distribution Expense
Stores and distribution expense for the third quarter of the 2005 fiscal year was $252.9 million
compared to $188.4 million for the comparable period in the 2004 fiscal year. For the third
quarter of the 2005 fiscal year, the stores and distribution expense rate (stores and distribution
expense divided by net sales) was 35.9% compared to 36.2% in the third quarter of the 2004 fiscal
year. Stores and distribution expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
|
|
|
|
|
% of net |
|
|
|
|
|
|
% of net |
|
|
|
(in millions) |
|
|
sales |
|
|
(in millions) |
|
|
sales |
|
Store Payroll Expense |
|
$ |
103.2 |
|
|
|
14.6 |
% |
|
$ |
64.7 |
|
|
|
12.4 |
% |
Rent, Utilities and Other Landlord
Expense |
|
|
70.0 |
|
|
|
9.9 |
% |
|
|
57.3 |
|
|
|
11.0 |
% |
Depreciation and Amortization |
|
|
27.1 |
|
|
|
3.9 |
% |
|
|
23.2 |
|
|
|
4.5 |
% |
Repairs and Maintenance Expense |
|
|
10.1 |
|
|
|
1.4 |
% |
|
|
9.9 |
|
|
|
1.9 |
% |
Other Store Expense |
|
|
25.6 |
|
|
|
3.6 |
% |
|
|
19.2 |
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores Expense |
|
$ |
236.0 |
|
|
|
33.5 |
% |
|
$ |
174.3 |
|
|
|
33.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer Expense |
|
|
10.4 |
|
|
|
1.5 |
% |
|
|
8.8 |
|
|
|
1.7 |
% |
Distribution Center Expense |
|
|
6.6 |
|
|
|
0.9 |
% |
|
|
5.3 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores and Distribution Expense |
|
$ |
252.9 |
|
|
|
35.9 |
% |
|
$ |
188.4 |
|
|
|
36.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total store expenses as a percent of net sales during the third quarter of the
2005 fiscal year remained flat versus the comparable period during the 2004 fiscal year. The
distribution center productivity level, measured in units processed per labor hour (UPH), was 9%
lower in the third quarter of the 2005 fiscal year versus the third quarter of the 2004 fiscal
year. The UPH rate decreased as a result of the change in product mix during the current year
compared to the prior year. Increases primarily in jeans and fleece inventory during the third
quarter of the 2005 fiscal year compared to the third quarter of the 2004 fiscal year resulted in a
lower productivity rate due to the increased handling required.
Marketing, General and Administrative Expense
Marketing, general and administrative expense during the third quarter of the 2005 fiscal year was
$97.6 million compared to $86.3 million during the same period in the 2004 fiscal year. For the
third quarter of the 2005 fiscal year, the marketing, general and administrative expense rate
(marketing, general and administrative expense divided by net sales) was 13.9% compared to 16.6% in
the third quarter of the 2004 fiscal year. The decrease in the marketing, general and
administrative expense rate was due to non-recurring charges of $13.5 million (1.9% of net sales)
in the third quarter of the 2005 fiscal year related to an executive officer severance agreement
and $32.9 million (6.3% of net sales) in the third quarter of the 2004 fiscal year related to a
legal settlement; offset by increases in the 2005 fiscal year period in home office payroll,
marketing, other legal costs and depreciation expense.
22
Other Operating Income, Net
Third quarter other operating income for the 2005 fiscal year was $1.4 million compared to $15
thousand for the third quarter of the 2004 fiscal year. The increase was related to the favorable
settlement of a class action lawsuit related to credit card fees in which the Company was a class
member.
Operating Income
Operating income for the third quarter of the 2005 fiscal year increased to $115.9 million from
$62.0 million in the third quarter of the 2004 fiscal year. The operating income rate (operating
income divided by net sales) was 16.4% for the third quarter of the 2005 fiscal year compared to
11.9% for the third quarter of the 2004 fiscal year. The increase in the operating income rate
during the quarter was a result of a higher gross profit rate and lower stores and distribution
expense and marketing, general and administrative expense rates during the quarter.
Interest Income and Income Tax Expense
Third quarter net interest income was $1.5 million in 2005 compared to $1.6 million in the third
quarter of the 2004 fiscal year. The effective tax rate for the third quarter was 39.0% as
compared to 37.2% for the 2004 fiscal year comparable period. The increase in the rate was
primarily due to a favorable settlement of state tax matters during the third quarter of the 2004
fiscal year.
23
YEAR-TO-DATE RESULTS
Net Sales
Year-to-date
net sales in the 2005 fiscal year were $1.823 billion, an increase of 37% over last years net
sales of $1.334 billion for the same period. The net sales increase was attributable primarily to
the combination of a 24% comparable store sales increase and to the net addition of 56 stores.
Year-to-date comparable store sales by brand were as follows: Abercrombie & Fitch increased 19%,
abercrombie increased 51% and Hollister posted a 26% increase. The womens business in each
concept continued to be more significant than mens. Year-to-date, women and girls represented over
60% of net sales for each of the brands. Abercrombie girls achieved a low-sixties comparable
stores sales increase, Hollister girls had a mid-twenties comparable store sales increase and
Abercrombie & Fitch women posted an increase in the high-teens.
For the year-to-date period, Hollister continued to gain in productivity relative to Abercrombie &
Fitch. For the fiscal 2005 year-to-date period, sales per gross square foot in Hollister stores
were approximately 146% of the sales per gross square foot of Abercrombie & Fitch stores in the
same malls compared to 137% for the fiscal 2004 year-to-date period.
Net direct-to-consumer merchandise sales through the Companys web sites and catalogue for the
year-to-date period for the 2005 fiscal year were $75.0 million, an increase of 6% over last years
comparable period net sales of $70.5 million. Shipping and handling revenue for the corresponding
periods was $11.4 million in the 2005 fiscal year and $10.1 million in the 2004 fiscal year. The
direct-to-consumer business accounted for 5% of net sales for the fiscal 2005 year-to-date period
compared to 6% in the fiscal 2004 year-to-date period. The decrease in sales penetration was due
to the implementation of brand protection initiatives that minimize the amount of sale merchandise on the web sites.
The impact of the six RUEHL stores was immaterial to the Companys total net sales for the 2005
fiscal year-to-date period.
Gross Profit
Year-to-date gross profit for the 2005 fiscal year was $1.212 billion compared to $885.5 million in
the comparable period during the 2004 fiscal year. The gross profit rate for the year-to-date
period of the 2005 fiscal year was 66.5%, which was relatively flat versus last fiscal years rate of 66.4%.
Overall IMU increases across Abercrombie & Fitch, abercrombie and Hollister compared to last fiscal
year were offset by the impact of RUEHLs lower initial margins during the first half of the 2005
fiscal year.
24
Stores and Distribution Expense
Stores and distribution expense for the fiscal 2005 year-to-date period was $707.3 million compared
to $514.4 million for the comparable period in the 2004 fiscal year. The stores and distribution
expense rate was 38.8% compared to 38.6% in the corresponding period of the 2004 fiscal year.
Stores and distribution expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
|
|
|
|
|
% of net |
|
|
|
|
|
|
% of net |
|
|
|
(in millions) |
|
|
sales |
|
|
(in millions) |
|
|
sales |
|
Store Payroll Expense |
|
$ |
277.3 |
|
|
|
15.2 |
% |
|
$ |
167.9 |
|
|
|
12.6 |
% |
Rent, Utilities and Other Landlord
Expense |
|
|
202.1 |
|
|
|
11.1 |
% |
|
|
166.9 |
|
|
|
12.5 |
% |
Depreciation and Amortization |
|
|
81.4 |
|
|
|
4.5 |
% |
|
|
68.0 |
|
|
|
5.1 |
% |
Repairs and Maintenance Expense |
|
|
34.6 |
|
|
|
1.9 |
% |
|
|
26.4 |
|
|
|
2.0 |
% |
Other Store Expense |
|
|
67.2 |
|
|
|
3.7 |
% |
|
|
48.4 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores Expense |
|
$ |
662.7 |
|
|
|
36.3 |
% |
|
$ |
477.6 |
|
|
|
35.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer Expense |
|
|
25.4 |
|
|
|
1.4 |
% |
|
|
22.5 |
|
|
|
1.7 |
% |
Distribution Center Expense |
|
|
19.1 |
|
|
|
1.0 |
% |
|
|
14.3 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores and Distribution Expense |
|
$ |
707.3 |
|
|
|
38.8 |
% |
|
$ |
514.4 |
|
|
|
38.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The stores and distribution expense as a percentage of net sales remained relatively flat year
over year as a result of increases in store payroll expense being offset by leverage achieved
against relatively fixed store costs such as rent, utilities and other landlord expense, and
depreciation and amortization.
Marketing, General and Administrative Expense
Marketing, general and administrative expense for the fiscal 2005 year-to-date period was $232.7
million compared to $193.8 million during the same period in the 2004 fiscal year. The marketing,
general and administrative expense rate was 12.8% compared to 14.5% for the year-to-date period of
the 2004 fiscal year. The decrease in the marketing, general and administrative expense rate was
due to a non-recurring charge of $13.5 million (0.7% of net sales) in the third quarter of the 2005
fiscal year related to an executive officer severance agreement, which was more than offset by a
non-recurring charge of $32.9 million (2.5% of net sales) in the third quarter of the 2004 fiscal
year related to a legal settlement.
Other Operating Income, Net
Year-to-date other operating income for the 2005 fiscal year was $3.2 million compared to $174
thousand for the third quarter of the 2004 fiscal year. The increase was related to the favorable
settlement of the class action lawsuit related to credit card fees in which the Company was a class
member, the quarterly adjustment for unredeemed gift certificates and lease buyout payments from
landlords.
25
Operating Income
For the fiscal 2005 year-to-date period, operating income was $275.3 million compared to $177.5
million for the 2004 comparable period. The operating income rate for the fiscal 2005 year-to-date
period was 15.1% versus 13.3% for the fiscal 2004 year-to-date period. The increase in the
operating income rate during the year was a result of lower marketing, general and administrative
expense rates.
Interest Income and Income Tax Expense
Year-to-date net interest income for the 2005 fiscal year was $4.3 million compared to $3.9 million
for the comparable period in 2004. The effective tax rate for the 2005 year-to-date period was
39.4% compared to 38.2% for the 2004 comparable period.
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 Companys
working capital position and capitalization follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
|
January 29, 2005 |
|
Working capital |
|
$ |
342,254 |
|
|
$ |
264,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization: |
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
836,054 |
|
|
$ |
669,326 |
|
|
|
|
|
|
|
|
Net cash
provided by operating activities, the Companys primary source
of liquidity, decreased to $190.8 million for the thirty-nine weeks ended October 29,
2005 from $255.2 million in the
comparable period of the 2004 fiscal year primarily due to inventory purchases. Cash was provided
primarily by current year net income, adjusted for depreciation and amortization and non-cash
charges for deferred compensation; lessor construction allowances received; and changes in accounts
payable and accrued expenses and the effect of the tax benefit received related to stock option
exercises. Uses of cash primarily consisted of purchases of inventory.
The net income increase was a result of sales growth during the third quarter of the 2005 fiscal
year. The adjustments for depreciation and amortization and lessor construction allowances
received were part of the normal course of business. The increase in the non-cash charge for
deferred compensation is primarily due to a non-recurring charge related to an executive officer
severance agreement. The change in accounts payable and accrued expenses was due to increased
payables as a result of inventory purchases.
Inventories increased as a result of the program to increase store inventory levels combined with a
cost per unit increase, as previously discussed. Deferred taxes increased as a result of lower tax
depreciation and an increase in deferred compensation expense and non-deductible accruals.
26
The Companys operations are seasonal in nature with sales typically peaking during the
Back-to-School and Christmas selling periods. Accordingly, cash requirements for inventory
expenditures are highest leading up to those periods.
Cash outflows for investing activities were for purchases of marketable securities and capital
expenditures related primarily to new stores and construction in process (see the discussion in
Capital Expenditures and Landlord Construction Allowances). Cash inflows from investing
activities consisted of proceeds from the sales of marketable securities. As of October 29, 2005,
the Company held $178.2 million of marketable securities with original maturities greater than 90
days.
Financing activities for the thirty-nine week period ended October 29, 2005 consisted of $73.1
million primarily related to cash received in connection with stock option exercises, $103.3
million paid for the repurchase of A&Fs Class A Common Stock, $36.9 million for the payment of
three quarterly dividends, and $9.8 million for the change in cash overdrafts, which are
outstanding checks reclassified from cash to accounts payable.
During the thirty-nine week period ended October 29, 2005, the Company repurchased 1.8 million
shares of A&Fs Class A Common Stock at an average cost of $58.52 per share for a total of $103.3
million. As of October 29, 2005, 5.7 million shares are authorized for repurchase as part of the
August 15, 2005 A&F Board of Directors authorization to repurchase 6 million shares.
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 $70.6 million and $72.6 million were outstanding on
October 29, 2005 and October 30, 2004, respectively. No loans were outstanding on October 29, 2005
or October 30, 2004.
The Company has standby letters of credit in the amount of $4.5 million that are set to expire
primarily during the fourth quarter of the 2006 fiscal year. The primary 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.
27
Off-Balance Sheet Arrangements and Contractual Obligations
As of October 29, 2005, the Company did not have any off-balance sheet arrangements and the
Companys contractual obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (thousands) |
Contractual Obligations |
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
More than 5 years |
|
Operating Leases
Obligations |
|
$ |
1,363,588 |
|
|
$ |
48,193 |
|
|
$ |
361,500 |
|
|
$ |
329,884 |
|
|
$ |
624,011 |
|
Purchase Obligations |
|
|
290,733 |
|
|
|
271,893 |
|
|
|
18,840 |
|
|
|
|
|
|
|
|
|
Other Obligations |
|
|
75,811 |
|
|
|
71,188 |
|
|
|
4,553 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,730,132 |
|
|
$ |
391,274 |
|
|
$ |
384,893 |
|
|
$ |
329,954 |
|
|
$ |
624,011 |
|
|
|
|
The majority of the Companys contractual obligations are made up of operating leases for its
stores. The purchase obligations category represents purchase orders for merchandise to be
delivered during Fall 2005 and Spring 2006 and commitments for fabric and trim to be used during
the next several seasons. Other obligations represent capital lease obligations and letters of
credit outstanding as of October 29, 2005 (see Note 9 of the Notes to Condensed Consolidated
Financial Statements). The Company expects to fund all of these obligations with cash provided
from operations.
28
Store Count and Gross Square Feet
Store count and gross square footage by brand were as follows for the thirteen weeks ending October
29, 2005 and October 30, 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
Abercrombie |
|
Hollister |
|
RUEHL |
|
Total |
Store
Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
355 |
|
|
|
163 |
|
|
|
281 |
|
|
|
5 |
|
|
|
804 |
|
Opened |
|
|
4 |
|
|
|
2 |
|
|
|
17 |
|
|
|
1 |
|
|
|
24 |
|
Remodels/Conversions
(net activity) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
4 |
|
Closed |
|
|
(7 |
)1 |
|
|
(2 |
) |
|
|
(3 |
)1 |
|
|
|
|
|
|
(12 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 29, 2005 |
|
|
354 |
|
|
|
163 |
|
|
|
297 |
|
|
|
6 |
|
|
|
820 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
3,086 |
|
|
|
714 |
|
|
|
1,826 |
|
|
|
47 |
|
|
|
5,673 |
|
Opened |
|
|
35 |
|
|
|
8 |
|
|
|
122 |
|
|
|
11 |
|
|
|
176 |
|
Remodels/Conversions
(net activity) |
|
|
9 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
23 |
|
Closed |
|
|
(53 |
)1 |
|
|
(9 |
) |
|
|
(21 |
)1 |
|
|
|
|
|
|
(83 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 29, 2005 |
|
|
3,077 |
|
|
|
713 |
|
|
|
1,941 |
|
|
|
58 |
|
|
|
5,789 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Store Size |
|
|
8,692 |
|
|
|
4,374 |
|
|
|
6,535 |
|
|
|
9,667 |
|
|
|
7,060 |
|
|
|
|
1 |
|
Includes two Abercrombie & Fitch and three Hollister stores temporarily closed due
to hurricane damage. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
Abercrombie |
|
Hollister |
|
RUEHL |
|
Total |
Store
Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2004 |
|
|
359 |
|
|
|
171 |
|
|
|
197 |
|
|
|
|
|
|
|
727 |
|
Opened |
|
|
6 |
|
|
|
3 |
|
|
|
27 |
|
|
|
3 |
|
|
|
39 |
|
Closed |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 30, 2004 |
|
|
363 |
|
|
|
174 |
|
|
|
224 |
|
|
|
3 |
|
|
|
764 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2004 |
|
|
3,164 |
|
|
|
755 |
|
|
|
1,274 |
|
|
|
|
|
|
|
5,193 |
|
Opened |
|
|
42 |
|
|
|
12 |
|
|
|
178 |
|
|
|
28 |
|
|
|
261 |
|
Closed |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 30, 2004 |
|
|
3,191 |
|
|
|
767 |
|
|
|
1,452 |
|
|
|
28 |
|
|
|
5,439 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Store Size |
|
|
8,790 |
|
|
|
4,409 |
|
|
|
6,483 |
|
|
|
9,400 |
|
|
|
7,119 |
|
29
Store count and gross square footage by brand were as follows for the thirty-nine weeks ending
October 29, 2005 and October 30, 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
Abercrombie |
|
Hollister |
|
RUEHL |
|
Total |
Store
Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2005 |
|
|
357 |
|
|
|
171 |
|
|
|
256 |
|
|
|
4 |
|
|
|
788 |
|
Opened |
|
|
9 |
|
|
|
3 |
|
|
|
40 |
|
|
|
2 |
|
|
|
54 |
|
Remodels/Conversions
(net activity) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
4 |
|
|
|
|
|
|
|
1 |
|
Closed |
|
|
(10 |
)1 |
|
|
(10 |
) |
|
|
(3 |
)1 |
|
|
|
|
|
|
(23 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 29, 2005 |
|
|
354 |
|
|
|
163 |
|
|
|
297 |
|
|
|
6 |
|
|
|
820 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2005 |
|
|
3,138 |
|
|
|
752 |
|
|
|
1,663 |
|
|
|
37 |
|
|
|
5,590 |
|
Opened |
|
|
71 |
|
|
|
12 |
|
|
|
276 |
|
|
|
21 |
|
|
|
380 |
|
Remodels/Conversions
(net activity) |
|
|
(50 |
) |
|
|
(4 |
) |
|
|
23 |
|
|
|
|
|
|
|
(31 |
) |
Closed |
|
|
(82 |
)1 |
|
|
(47 |
) |
|
|
(21 |
)1 |
|
|
|
|
|
|
(150 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 29, 2005 |
|
|
3,077 |
|
|
|
713 |
|
|
|
1,941 |
|
|
|
58 |
|
|
|
5,789 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Store Size |
|
|
8,692 |
|
|
|
4,374 |
|
|
|
6,535 |
|
|
|
9,667 |
|
|
|
7,060 |
|
|
|
|
1 |
|
Includes two Abercrombie & Fitch and three Hollister stores temporarily closed due
to hurricane damage. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
Abercrombie |
|
Hollister |
|
RUEHL |
|
Total |
Store
Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2004 |
|
|
357 |
|
|
|
171 |
|
|
|
172 |
|
|
|
|
|
|
|
700 |
|
Opened |
|
|
10 |
|
|
|
5 |
|
|
|
52 |
|
|
|
3 |
|
|
|
70 |
|
Closed |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 30, 2004 |
|
|
363 |
|
|
|
174 |
|
|
|
224 |
|
|
|
3 |
|
|
|
764 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2004 |
|
|
3,152 |
|
|
|
753 |
|
|
|
1,111 |
|
|
|
|
|
|
|
5,016 |
|
Opened |
|
|
74 |
|
|
|
21 |
|
|
|
341 |
|
|
|
28 |
|
|
|
464 |
|
Closed |
|
|
(35 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
October 30, 2004 |
|
|
3,191 |
|
|
|
767 |
|
|
|
1,452 |
|
|
|
28 |
|
|
|
5,439 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Store Size |
|
|
8,791 |
|
|
|
4,407 |
|
|
|
6,483 |
|
|
|
9,400 |
|
|
|
7,119 |
|
30
By the end of the 2005 fiscal year, the Company plans to operate 360 Abercrombie & Fitch
stores, 163 abercrombie stores, 318 Hollister stores, and eight RUEHL stores and increase gross
square footage by approximately 8% over fiscal year-end 2004.
Capital Expenditures and Landlord Construction Allowances
Capital expenditures totaled $185.8 million and $141.1 million for the thirty-nine weeks ended
October 29, 2005 and October 30, 2004, respectively. Additionally, the non-cash accrual for
construction in progress increased by $24.6 million for the thirty-nine week period ended October
29, 2005 and decreased by $7.3 million for the thirty-nine week period ended October 30, 2004,
respectively. Capital expenditures were primarily for new store construction, including the
flagship store on Fifth Avenue in New York City, and the home office expansion project. The
balance of capital expenditures related primarily to miscellaneous store remodeling, home office
and distribution center projects.
Construction allowances are an integral part of the decision-making process for assessing the
viability of new store leases. In making the decision whether to invest in a store location, the
Company calculates the estimated future return on its investment based on the cost of construction,
less any construction allowances to be received from the
landlord. For the thirty-nine week periods ended October 29, 2005 and October 30, 2004, the
Company received $28.7 million and $35.0 million in construction allowances, respectively. For
accounting purposes, the Company treats construction allowances as a deferred lease credit, which
reduces rent expense in accordance with Statement of Financial Accounting Standards No.13,
Accounting for Leases and Financial Accounting Standards Board Technical Bulletin No. 88-1,
Issues Relating to Accounting for Leases.
The Company anticipates spending $270 million to $280 million, excluding landlord construction
allowances, in the 2005 fiscal year for capital expenditures, of which $205 million to $215 million
has been appropriated for the construction of approximately 80 new stores as well as the remodeling
of 25 to 35 existing stores and other miscellaneous store projects. The balance of the capital
expenditures will be spent on new home office buildings and other miscellaneous home office and
distribution center projects.
The Company estimates that the average cost for leasehold improvements and furniture and fixtures
for new Abercrombie & Fitch stores, excluding the New York City flagship store, opened during the
2005 fiscal year will approximate $782,000 per store, net of construction allowances. In addition,
initial inventory purchases for the stores are expected to average approximately $354,000, at cost,
per store.
The Company estimates that the average cost for leasehold improvements and furniture and fixtures
for new abercrombie stores opened during the 2005 fiscal year will approximate $525,000 per store,
net of construction allowances. In addition, initial inventory purchases are expected to average
approximately $117,000, at cost, per store.
The Company estimates that the average cost for leasehold improvements and furniture and fixtures
for new Hollister stores opened during the 2005 fiscal year will approximate $843,000 per store,
net of construction allowances. In addition, initial inventory purchases are expected to average
approximately $233,000, at cost, per store.
31
Although the Company has opened six RUEHL stores, it believes the construction costs it has
incurred to-date for these stores are not representative of the future average cost of opening a
such store.
The Company expects that substantially all future capital expenditures will be funded with cash
from operations and landlord construction allowances. In addition, the Company has $250 million
available (less outstanding letters of credit) under its Credit Agreement to support operations.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of operations are
based upon the Companys consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP). The preparation of
these financial statements requires the Company to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Since actual results may differ
from those estimates, the Company revises its estimates and assumptions as new information becomes
available.
The Companys significant accounting policies can be found in the Notes to Consolidated Financial
Statements (see Note 2 of the Notes to Consolidated Financial Statements of A&Fs Annual Report on
Form 10-K). The Company believes that the following policies are most critical to the portrayal of
the Companys financial condition and results of operations.
Revenue
Recognition The Company recognizes retail sales at the time the customer takes possession
of the merchandise and purchases are paid for, primarily with either cash or credit card.
Catalogue and e-commerce sales are recorded upon the estimated customer receipt of merchandise.
Amounts relating to shipping and handling billed to customers 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.
The Company accounts for gift cards by recognizing a liability at the time when a gift card is
sold. Revenue is recognized when the gift card is redeemed for merchandise. The Company reviews
its gift card liability quarterly and adjusts the liability based on historical redemption patterns
as required.
32
Inventory
Valuation Inventories are principally valued at the lower of average cost or market,
utilizing the retail method. The retail method of inventory valuation is an averaging technique
applied to different categories of inventory. At the Company, the averaging is determined at the
stock keeping unit (SKU) level by averaging all costs for each SKU. An initial markup is applied
to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken,
reduce both the retail and cost components of inventory on-hand so as to maintain the already
established cost-to-retail relationship. The use of the retail method and the recording of
markdowns effectively values inventory at the lower of cost or market. At fiscal quarter end, the
Company reduces inventory value by recording a markdown reserve that represents the estimated
future anticipated selling price decreases necessary to sell-through the current season inventory.
Additionally, as part of inventory valuation, an inventory shrinkage estimate is made each period
that reduces the value of inventory for lost or stolen items. Inherent in the retail method
calculation are certain significant judgments and estimates including, among others, initial
markup, markdowns and shrinkage, which could significantly impact the ending inventory valuation at
cost as well as the resulting gross profit. Management believes this inventory valuation method is
appropriate as it preserves the cost-to-retail relationship in ending inventory.
Property
and Equipment Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives ranging principally from
30 years for buildings, the lesser of 10 years or the life of the lease for leasehold improvements
and 3 to 10 years for other property and equipment. The cost of assets sold or retired and the
related accumulated depreciation or amortizations are removed from the accounts with any resulting
gain or loss included in net income. Maintenance and repairs are charged to expense as incurred.
Major remodels and improvements that extend service lives of the assets are capitalized.
Long-lived assets are reviewed at the store level at least annually for impairment or whenever
events or changes in circumstances indicate that full recoverability is questionable. Factors used
in the evaluation include, but are not limited to, managements plans for future operations, recent
operating results and projected cash flows.
33
Income
Taxes Income taxes are calculated in accordance with SFAS No. 109, Accounting for Income
Taxes, which requires the use of the asset and 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 Companys operations. Significant examples of this
concept include capitalization policies for various tangible and intangible costs, income and
expense recognition and inventory valuation methods. A valuation allowance has been provided for
losses related to the start-up costs associated with foreign operations. This valuation allowance
is not material. For all other deferred tax assets, management believes it is more likely than not
that the full amount of the net deferred assets will be realized in the future, thus no valuation
allowance has been provided for the deferred taxes assets. The effective tax rate utilized by the
Company reflects managements 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 managements 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 from
management estimates, and adjustments may be required.
Recently Issued Accounting Pronoucements
In
December 2004, the FASB issued SFAS No. 123 (Revised 2004),
Share-Based Payment. This standard
is a revision of SFAS No. 123 and requires all share-based payments to employees, including grants
of employee stock options and similar awards, to be recognized in the financial statements based on
their fair values measured at the grant date.
In April 2005, the Securities and Exchange Commission delayed the effective date of SFAS No. 123(R)
to annual periods beginning after June 15, 2005. The Company is in the process of evaluating the
impact of this pronouncement on its consolidated financial position and results of operations and
cash flows.
34
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 Companys 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 FORWARD-LOOKING STATEMENTS AND RISK FACTORS in ITEM 1. BUSINESS of A&Fs
Annual Report on Form 10-K for the fiscal year ended January 29, 2005, in some cases have affected
and in the future could affect the Companys financial performance and could cause actual results
for the 2005 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 impact of competition and pricing; |
|
|
|
|
changes in weather patterns; |
|
|
|
|
availability and market prices of key raw materials; |
|
|
|
|
currency and exchange risks and changes in existing or
potential duties, tariffs or quotas; |
|
|
|
|
availability of suitable store locations on appropriate terms; |
|
|
|
|
ability to develop new merchandise; |
|
|
|
|
ability to hire, train and retain associates; and |
|
|
|
|
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; |
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 herein will not be realized.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains its cash equivalents in financial instruments with original maturities of 90
days or less. The Company also holds investments in marketable securities, which primarily consist
of investment grade municipal notes and bonds and investment grade auction rate securities, all
classified as available-for-sale and could have maturities ranging
from three months to forty years. These securities are consistent with the investment objectives
contained within the investment policy established by the Companys Board of Directors. The basic
objectives of the investment policy are the preservation of capital, maintaining sufficient
liquidity to meet operating requirements and maximizing net after-tax yield.
Investments in municipal notes and bonds have
early redemption provisions at predetermined prices. Taking these provisions into account none of these investments extend beyond
five years, in accordance with the Companys investment policy.
The Company believes that a significant increase in interest rates could result in a material loss if the Company sells the investment
prior to the early redemption provision. For the thirteen and thirty-nine week periods ended
October 29, 2005, there were no realized gains or losses and as of October 29, 2005, net unrealized
holding losses were not material.
Despite the underlying long-term maturity of auction rate securities, from the investors
perspective, such securities are priced and subsequently traded as short-term investments because
of the interest rate reset feature. Interest rates are reset through an auction process at
predetermined periods ranging from one to forty-nine days. Failed auctions rarely occur. As of
October 29, 2005, the Company held approximately $178.2 million in marketable securities.
The Company does not enter into financial instruments for trading purposes.
As of October 29, 2005, the Company had no long-term debt outstanding. Future borrowings would
bear interest at negotiated rates and would be subject to interest rate risk.
The Companys market risk profile as of October 29, 2005 has not significantly changed since
January 29, 2005. The Companys market risk profile on January 29, 2005 is disclosed in A&Fs
Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
36
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are
designed to provide reasonable assurance that information required to be disclosed in the reports
that the Company files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to the Companys management,
including the Chairman and Chief Executive Officer and the Senior Vice President and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required financial
disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how
well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of disclosure controls and procedures are met.
The Companys management, including the Chairman and Chief Executive Officer and the Senior Vice
President and Chief Financial Officer, evaluated the effectiveness of the Companys design and
operation of its disclosure controls and procedures as of the end of the fiscal quarter ended
October 29, 2005. Based upon that evaluation, the Chairman and Chief Executive Officer and the
Senior Vice President and Chief Financial Officer concluded that the material weakness discussed in
the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2005 had been
remediated and the Companys disclosure controls and procedures were effective at a reasonable
level of assurance as of the period covered by this Form 10-Q.
Change in Internal Control Over Financial Reporting
There were no changes in A&Fs internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during A&Fs fiscal quarter ended October 29, 2005
that have materially affected, or are reasonably likely to materially affect, A&Fs internal
control over financial reporting.
37
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In Melissa Mitchell, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., the
state law claim of plaintiff Oros was dismissed by the United States District Court for the
Southern District of Ohio on May 17, 2005 and his Fair Labor Standards Act claim remains pending.
The defendants filed an answer to plaintiffs October 28, 2004 amended complaint on May 23, 2005
and the parties have commenced discovery. On June 17, 2005, plaintiffs filed a motion to further
amend the complaint to add claims under the laws of a number of states, and the United States
District Court for the Southern District of Ohio granted that motion on November 8, 2005. On June
24, 2005, the defendants filed motions for summary judgment seeking summary judgment on all of the
claims of each of the three plaintiffs. On July 1, 2005, the plaintiffs filed a Rule 23 Motion for
Certification of a Class of State Wage Act Claimants and a Motion for Designation of FLSA Claims as
Collective Action and Authority to Send Notice to Similarly Situated Employees. The defendants
intend to file their opposition to both motions in early December 2005. In Casey Fuller,
Individually and on Behalf of All Others Similarly Situated v. Abercrombie & Fitch Stores, Inc.,
because of its similarities to the Mitchell case, the defendant filed, on April 19, 2005, a motion
to stay the Fuller case pending the outcome of the Mitchell case or, in the alternative, transfer
the Fuller case to the United States District Court for the Southern District of Ohio. On May 31,
2005, the United States District Court for the Eastern District of Tennessee transferred the Fuller
case to the United States District Court for the Southern District of Ohio. On September 2, 2005,
the Fuller case was consolidated with the Mitchell case for all purposes. The Company does not
believe it is feasible to predict the outcome of the legal proceedings described in this paragraph
and intends to defend against them vigorously. The timing of the final resolution of these legal
proceedings is also uncertain.
In Shelby
Port, et al. v. Abercrombie & Fitch Stores, Inc., the parties have agreed to a settlement of
the matter, which was finally approved by the Washington Superior Court of King County on
September 19, 2005, and the case was dismissed with prejudice on that date. The settlement will
not have a material effect on the Companys consolidated financial statements.
In Bryan T. Kimbell, Individually and on Behalf of All Others Similarly Situated and on Behalf of
the Public v. Abercrombie & Fitch Stores, Inc., the parties have agreed to a settlement of the
matter, which must be approved by the California Superior Court for Los Angeles County. The
parties filed a joint motion for preliminary approval of the settlement on August 26, 2005, the
California Superior Court for Los Angeles County preliminarily approved the settlement on September
14, 2005, and a hearing to consider final approval of the settlement has been set for January 12,
2006. The Company believes that the impact of the proposed settlement will not have a material
effect on the Companys consolidated financial statements.
38
On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company,
et al., was filed against A&F and certain of its officers in the United States District Court for
the Southern District of Ohio on behalf of a purported class of all persons who purchased or
acquired shares of Class A Common Stock of A&F between June 2, 2005 and August 16, 2005. In
September and October of 2005, five other purported class actions were subsequently filed against
A&F and other defendants in the same Court. All six cases seek to allege claims under the federal
securities laws as a result of a decline in the price of A&Fs Class A Common Stock in the summer
of 2005. On November 1, 2005, a motion to consolidate all these purported class actions into the
first-filed case was filed by some of the plaintiffs. A&F has joined in that motion. A&F believes
the cases have no merit and intends to vigorously defend itself in court.
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries,
et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F
as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&Fs
present and former directors, alleging various breaches of the directors fiduciary duty. In the
following three months (October, November and December of 2005), four similar derivative actions
were filed (three in the United States District Court for the Southern District of Ohio and one in
the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F
alleging various breaches of the directors fiduciary duty and seeking equitable and monetary
relief. A&F is also a nominal defendant in each of the four later derivative actions.
The SEC has commenced an informal, non-public inquiry
concerning trading in shares of A&Fs Class A Common Stock. The SEC has informed A&F that the informal
inquiry should not be construed as an indication that any violations of law have occurred, and the
Company and its personnel are cooperating fully with the SEC.
The Company is aware that a purported class action lawsuit, styled Gibson v. Hollister Co., Case
No. 05CC00244, was filed on October 25, 2005 in the Superior Court of Orange County, California.
Melissa Gibson alleges that she and a class of hourly employees employed by Hollister in the State
of California were not provided with uniforms or break periods required by California law. The
complaint also alleges other miscellaneous violations of California wage and hour law. The
complaint seeks compensatory damages for alleged unpaid wages, penalties, injunctive relief, and
attorneys fees. The complaint has not yet been served on the defendant. Upon service, the
defendant intends to vigorously defend the case, the outcome of which cannot be predicted by the
Company.
The Company is aware that a purported class action, styled Eltrich v. Abercrombie & Fitch Stores,
Inc., Case No. 05-2-38169-8, was filed on November 22, 2005 in the Washington Superior Court of
King County, alleging that a class of store managers, assistant managers and managers in training
were misclassified as exempt from the overtime compensation requirements of the State of
Washington, and improperly denied overtime compensation. In this case, the plaintiff, on behalf of
his purported class, seeks injunctive relief and unspecified amounts of economic and liquidated
damages. The complaint has not yet been served on the defendant. Upon service, the defendant
intends to vigorously defend the case, the outcome of which cannot be predicted by the Company.
39
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding purchases made by or on behalf of A&F or any
affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934,
as amended, of A&Fs Class A Common Stock during each fiscal month of the quarterly period ended
October 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
Total Number |
|
|
Average |
|
|
Shares Purchased as |
|
|
of Shares that May |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Part of Publicly |
|
|
Yet be Purchased |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Announced Program |
|
|
under the Program(1) |
|
July 31 through
August 27, 2005 |
|
|
1,290,000 |
|
|
$ |
59.22 |
|
|
|
1,290,000 |
|
|
|
5,683,500 |
|
August 28 through
October 1, 2005 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
5,683,500 |
|
October 2 through
October 29, 2005 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
5,683,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,290,000 |
|
|
$ |
59.22 |
|
|
|
1,290,000 |
|
|
|
5,683,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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&Fs publicly
announced stock purchase authorizations. On August 15, 2005, A&F announced the
authorization for 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. |
40
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
42
ITEM 5. OTHER INFORMATION
Not Applicable.
43
ITEM 6. EXHIBITS
Exhibits
|
|
|
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&Fs
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&Fs Annual Report on Form 10-K for the fiscal year ended January 30, 1999
(File No. 1-12107). |
|
|
|
3.3
|
|
Certificate of Decrease of Shares Designated as Class B Common Stock as filed with the
Delaware Secretary of State on July 30, 1999, incorporated herein by reference to Exhibit 3.3
to A&Fs 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&Fs 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&Fs 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&Fs 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), incorporated
herein by reference to Exhibit 3.7 to A&Fs Quarterly Report on Form 10-Q for the quarterly
period ended May 1, 2004 (File No. 1-12107). |
|
|
|
4.1
|
|
Credit Agreement, dated as of November 14, 2002, as amended and restated as of December 15,
2004, among Abercrombie & Fitch Management Co., as Borrower; Abercrombie & Fitch Co., as
Guarantor; the Lenders party thereto; National City Bank, as Administrative Agent; JPMorgan
Chase Bank, N.A., as Syndication Agent; and National City Bank and J.P. Morgan Securities
Inc., as Co-Lead Arrangers and Joint Bookrunners (the Amended Credit Agreement),
incorporated herein by reference to Exhibit 4.1 to A&Fs Current Report on Form 8-K dated
December 21, 2004 (File No. 1-12107). |
44
|
|
|
4.2
|
|
Guarantee Agreement, dated as of November 14, 2002, as amended and restated as of December
15, 2004, among Abercrombie & Fitch Co.; each direct and indirect domestic subsidiary of
Abercrombie & Fitch Co. other than Abercrombie & Fitch Management Co.; and National City Bank,
as Administrative Agent for the Lenders party to the Amended Credit Agreement, incorporated
herein by reference to Exhibit 4.2 to A&Fs Current Report on Form 8-K dated December 21, 2004
(File No. 1-12107). |
|
|
|
4.3
|
|
Rights Agreement, dated as of July 16, 1998, between A&F and First Chicago Trust Company of
New York, as Rights Agent, incorporated herein by reference to Exhibit 1 to A&Fs Registration
Statement on Form 8-A dated July 21, 1998 (File No. 1-12107). |
|
|
|
4.4
|
|
Amendment No. 1 to Rights Agreement, dated as of April 21, 1999, between A&F and First
Chicago Trust Company of New York, as Rights Agent, incorporated herein by reference to
Exhibit 2 to A&Fs Amendment No. 1 to Form 8-A dated April 23, 1999 (File No. 1-12107). |
|
|
|
4.5
|
|
Certificate of adjustment of number of Rights associated with each share of Class A Common
Stock, dated May 27, 1999, incorporated herein by reference to Exhibit 4.6 to A&Fs Quarterly
Report on Form 10-Q for the quarterly period ended July 31, 1999 (File No. 1-12107). |
|
|
|
4.6
|
|
Appointment and Acceptance of Successor Rights Agent, effective as of the opening of the
business on October 8, 2001, between A&F and National City Bank, incorporated herein by
reference to Exhibit 4.6 to A&Fs Quarterly Report on Form 10-Q for the quarterly period ended
August 4, 2001 (File No. 1-12107). |
|
|
|
4.7
|
|
First Amendment, dated as of June 22, 2005, to the Credit Agreement, dated as of November 14,
2002, as amended and restated as of December 15, 2004, among Abercrombie & Fitch Management
Co., as Borrower; Abercrombie & Fitch Co., as Guarantor; the Lenders party thereto; and
National City Bank, as Administrative Agent, incorporated herein by reference to Exhibit 4.1
to A&Fs Current Report on Form 8-K filed on June 22, 2005 (File No. 1-12107). |
|
|
|
10.1
|
|
Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to
Exhibit 10.1 to A&Fs Current Report on Form 8-K filed on June 17, 2005 (File No. 1-12107). |
|
|
|
10.2
|
|
Form of Nonstatutory Stock Option Agreement under the Abercrombie & Fitch Co. 2005 Long-Term
Incentive Plan, incorporated herein by reference to Exhibit 99.4 to A&Fs Current Report on
Form 8-K filed on August 19, 2005 (File No. 1-12107). |
|
|
|
10.3
|
|
Form of Restricted Stock Unit Award Agreement for Employees under the Abercrombie & Fitch Co.
2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 99.5 to A&Fs
Current Report on Form 8-K filed on August 19, 2005 (File No. 1-12107). |
|
|
|
10.4
|
|
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the
Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to
Exhibit 99.6 to A&Fs Current Report on Form 8-K filed on August 19, 2005 (File No. 1-12107). |
|
|
|
10.5
|
|
Supplemental Stipulation of Settlement dated as of June 1, 2005 regarding In re Abercrombie &
Fitch Co. Shareholder Derivative Litigation, Consol. C.A. No. 1077-N, |
45
|
|
|
|
|
incorporated herein by reference to Exhibit 10.2 to A&Fs Quarterly Report on Form 10-Q for
the quarterly period ended April 30, 2005 (File No. 1-12107). |
|
|
|
10.6
|
|
Summary of Compensation Structure for Non-Employee Members of Board of Directors of
Abercrombie & Fitch Co., effective August 1, 2005 incorporated herein by reference to the
discussion under the caption Non-Employee Director Compensation in Item 1.01 Entry into a
Material Definitive Agreement of A&Fs Current Report on Form 8-K filed August 19, 2005 (File
No. 1-12107). |
|
|
|
10.7
|
|
Amended and Restated Employment Agreement entered into as of August 15, 2005, between
Abercrombie & Fitch Co. and Michael S. Jeffries, incorporated herein by reference to Exhibit
10.1 to A&Fs Current Report on Form 8-K filed August 26, 2005 (File No. 1-12107). |
|
|
|
10.8
|
|
Separation Agreement signed on August 31, 2005, between Abercrombie & Fitch Co. and Robert S.
Singer, incorporated herein by reference to Exhibit 10.1 to A&Fs Current Report on Form 8-K
filed September 1, 2005 (File No. 1-12107). |
|
|
|
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).*
|
46
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 8, 2005
|
|
By
|
|
/s/ Michael W. Kramer
|
|
|
|
|
Michael W. Kramer, |
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
* Mr. Kramer has been duly authorized to sign on behalf of the Registrant as its Principal
Financial Officer.
47
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Document |
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). |
48