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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended January 31, 1998
----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission file number 1-12107
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ABERCROMBIE & FITCH CO.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1469076
- - ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Four Limited Parkway East, P.O. Box 182168 Reynoldsburg, OH 43218
- - ----------------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 577-6500
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
Class A Common Stock, $.01 Par Value The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days. Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-
Aggregate market value of the registrant's Common Stock held by non-affiliates
of the registrant as of April 17, 1998: $334,574,662.
------------
Number of shares outstanding of the registrant's Common Stock as of April 17,
1998: 8,025,779 shares of Class A common stock; 43,000,000 shares of Class B
---------
common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's proxy statement for the next Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
General.
Abercrombie & Fitch Co., a Delaware corporation (the "Company"), is principally
engaged in the purchase, distribution and sale of men's and women's casual
apparel. The Company's retail activities are conducted under the Abercrombie &
Fitch trade name through retail stores bearing the Company name. Merchandise is
targeted to appeal to customers in specialty markets who have distinctive
consumer characteristics.
Description of Operations.
General.
- - -------
The Company was incorporated on June 26, 1996, and on July 15, 1996 acquired the
stock of Abercrombie & Fitch Holdings, the parent company of the Abercrombie &
Fitch business and A&F Trademark, Inc., in exchange for 43 million shares of
Class B common stock issued to The Limited, Inc. ("The Limited"). An initial
public offering of 8.05 million shares of the Company's Class A common stock was
consummated on October 1, 1996 and, as a result, approximately 84% of the
outstanding common stock of the Company is owned by The Limited.
On February 17, 1998, a registration statement was filed with the Securities and
Exchange Commission in connection with a plan to establish the Company as a
fully independent company via a tax-free exchange offer pursuant to which The
Limited shareholders will be given an opportunity to exchange shares of The
Limited for shares of the Company. The Limited currently owns 43 million
shares of the Company's shares.
The following table shows the changes in the number of retail stores operated by
the Company for the past five fiscal years:
Fiscal Beginning
Year of Year Opened Closed End of Year
---- ------- ------ ------ -----------
1993 40 9 49
1994 49 20 (2) 67
1995 67 33 100
1996 100 29 (2) 127
1997 127 30 (1) 156
During fiscal year 1997, the Company purchased merchandise from approximately 58
suppliers and factories located throughout the world. The Company sourced
approximately 41% of its apparel merchandise through Mast Industries, Inc., a
wholly-owned contract manufacturing subsidiary of The Limited. In addition to
2
purchases from Mast, the Company purchases merchandise directly in foreign
markets, with additional merchandise purchased in the domestic market, some of
which is manufactured overseas. No more than 15% of goods purchased originated
from any single third party manufacturer.
Most of the merchandise and related materials for the Company's stores is
shipped to a distribution center owned by The Limited in Reynoldsburg, Ohio,
where the merchandise is received and inspected. The Limited uses common and
contract carriers to distribute merchandise and related materials to the
Company's stores. The Company pays outbound freight for stores to The Limited
based on cartons shipped.
The Company's policy is to maintain sufficient quantities of inventory on hand
in its retail stores and distribution center so that it can offer customers a
full selection of current merchandise. The Company emphasizes rapid turnover
and takes markdowns where required to keep merchandise fresh and current with
fashion trends.
The Company views the retail apparel market as having two principal selling
seasons, Spring and Fall. As is generally the case in the apparel industry, the
Company experiences its peak sales activity during the Fall season. This
seasonal sales pattern results in increased inventory during the back-to-school
and Christmas holiday selling periods. During fiscal year 1997, the highest
inventory level approximated $60.7 million at the July 1997 month-end and the
lowest inventory level approximated $31.0 million at the April 1997 month-end.
Merchandise sales are paid for in cash or by personal check, credit cards issued
by third parties or The Limited's 40% owned credit card processing venture,
Alliance Data Systems ("ADS"). ADS was formed in part from World Financial
Network National Bank ("WFNNB"), a wholly-owned subsidiary of The Limited prior
to January 1996, when a 60% interest was sold to a New York investment firm,
resulting in the formation of a venture that provides private-label and bank
card transaction processing and database management services to retailers,
including the Company's private-label credit card operations.
The Company offers its customers a liberal return policy stated as "No Sale is
Ever Final." The Company believes that certain of its competitors offer similar
credit card and service policies.
The following is a brief description of the Company, including its respective
target markets.
Abercrombie & Fitch is a specialty retailer of quality, casual, classic American
sportswear, targeted to men and women approximately 15-50 years of age. The
Abercrombie & Fitch brand was established in 1892 and became well known as a
supplier of rugged, high-quality outdoor gear who placed a premium on complete
customer satisfaction with each item sold. The Company was acquired by The
Limited in 1988 and in 1992 Abercrombie & Fitch was repositioned as a more
fashion-oriented casual apparel business directed at men and women with a
youthful lifestyle. In re-establishing the Abercrombie & Fitch brand, the
Company combined its historical image for quality with a new emphasis on casual
American style and youthfulness.
Additional information about the Company's business, including its revenues and
profits for the last three years, plus selling square footage is set forth under
the caption "Management's Discussion and Analysis" in ITEM 7.
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Competition.
The sale of apparel and personal care products through retail stores is a highly
competitive business with numerous competitors, including individual and chain
fashion specialty stores and department stores. Fashion, price, service,
selection and quality are the principal competitive factors in retail store
sales.
The Company is unable to estimate the number of competitors or its relative
competitive position due to the large number of companies selling apparel and
personal care products at retail, both through stores and catalogues.
Associate Relations.
On January 31, 1998, the Company employed approximately 6,700 associates (none
of whom were members of a collective bargaining agreement), 5,500 of whom were
part-time. In addition, temporary associates are hired during peak periods,
such as the Holiday season.
ITEM 2. PROPERTIES.
The Company's headquarters and support functions (consisting of office,
distribution and shipping facilities) are located in Reynoldsburg, Ohio.
The distribution and shipping facilities are owned by The Limited and are leased
by the Company under 15 year leases, with options to renew. The Company expects
that the term of the lease covering such distribution and shipping facilities
will be reduced to three years after the Company's split-off from The Limited.
Substantially all of the retail stores operated by the Company are located in
leased facilities, primarily in shopping centers throughout the continental
United States. The leases expire at various dates principally between 1997 and
2010 and generally have renewal options.
Typically, when space is leased for a retail store in a shopping center, all
improvements, including interior walls, floors, ceilings, fixtures and
decorations, are supplied by the tenant. In certain cases, the landlord of the
property may provide a construction allowance to fund all or a portion of the
cost of improvements. The cost of improvements varies widely, depending on the
size and location of the store. Rental terms for new locations usually include
a fixed minimum rent plus a percentage of sales in excess of a specified amount.
Certain operating costs such as common area maintenance, utilities, insurance,
and taxes are typically paid by tenants.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in a variety of lawsuits arising in the ordinary
course of business.
On November 13, 1997, the United States District Court for the Southern District
of Ohio, Eastern Division, dismissed with prejudice an amended complaint that
had been filed against the Company, The Limited and certain of The Limited's
other subsidiaries by the American Textile Manufacturers Institute ("ATMI"), a
textile industry trade association. The amended complaint alleged that the
defendants violated the federal False Claims Act by submitting false country of
origin records to the US Customs Service. On November 26, 1997, ATMI served a
motion to alter or amend judgment and a motion to disqualify the presiding judge
and to vacate
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the order of dismissal. The motion to disqualify was denied on December 22,
1997, but as a matter of his personal discretion, the presiding judge elected to
recuse himself from further proceedings and this matter has been transferred to
another judge of the United States District Court for the Southern District of
Ohio. On January 8, 1998, ATMI filed a second motion to vacate and a motion for
leave to file a second amended complaint. The Company has vigorously opposed all
of the pending motions.
Although it is not possible to predict with certainty the eventual outcome of
any litigation, in the opinion of management, the foregoing proceedings are not
expected to have a material adverse effect on the Company's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information regarding the executive officers of the
Company as of January 31, 1998.
Leslie H. Wexner, 60, has been Chairman of the Board of the Company since 1996.
Mr. Wexner has been President and Chief Executive Officer of The Limited since
he founded The Limited in 1963 and has been Chairman of the Board of Directors
of The Limited for more than five years.
Kenneth B. Gilman, 51, has been Vice Chairman of the Company since 1996. Mr.
Gilman has been Vice Chairman, Chief Administrative Officer of The Limited since
August 1997 and was Vice Chairman and Chief Financial Officer from June 1993 to
August 1997. He was Executive Vice President and Chief Financial Officer of The
Limited for five years prior thereto.
Michael S. Jeffries, 53, has been President and Chief Executive Officer since
February 1992.
Michelle S. Donnan-Martin, 34, has been Vice President-General Merchandising
Manager-Women's since February 1996. For three and one-half years prior
thereto, Ms. Donnan-Martin held the position of Vice President Women's
Merchandising.
Seth R. Johnson, 44, has been Vice President-Chief Financial Officer since June
1992.
All of the above officers serve at the pleasure of the Board of Directors of the
Company.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following is a summary of market price since the Company was originally
listed on the New York Stock Exchange ("ANF") on September 26, 1996:
Market Price
---------------------------------------------
High Low
-------------------- ---------------------
Fiscal Year End 1997
------------------------------------------
4th Quarter $34 11/16 $25 11/16
3rd Quarter $ 27 1/4 $ 19 1/4
2nd Quarter $ 20 1/2 $ 15 3/4
1st Quarter $ 17 5/8 $ 12 7/8
Fiscal Year End 1996
------------------------------------------
4th Quarter $ 23 3/4 $ 12 5/8
3rd Quarter $ 26 1/4 $ 21 3/4
On January 31, 1998, there were approximately 180 shareholders of record.
However, when including active associates who participate in the Company's stock
purchase plan, associates who own shares through Company sponsored retirement
plans and others holding shares in broker accounts under street name, the
Company estimates the shareholder base at approximately 3,300.
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ITEM 6. SELECTED FINANCIAL DATA.
ABERCROMBIE & FITCH CO.
FINANCIAL SUMMARY
(Thousands except per share and per square foot amounts, ratios and store and
associate data)
FISCAL YEAR 1997 1996 1995* 1994 1993 1992 1991
- - -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net Sales $ 521,617 $ 335,372 $235,659 $165,463 $110,952 $ 85,301 $ 62,583
- - -------------------------------------------------------------------------------------------------------------------------
Gross Income $ 201,080 $ 123,766 $ 79,794 $ 56,820 $ 30,562 $ 13,413 $ 9,665
- - -------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ 84,125 $ 45,993 $ 23,798 $ 13,751 $ (4,064) $(10,190) $(11,603)
- - -------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) as a
Percentage of Sales 16.1% 13.7% 10.1% 8.3% (3.7%) (11.9%) (18.5%)
- - -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 48,322 $ 24,674 $ 14,298 $ 8,251 $ (2,464) $ (6,090) $ (7,003)
- - -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) as a
Percentage of Sales 9.3% 7.4% 6.1% 5.0% (2.2%) (7.1%) (11.2%)
- - -------------------------------------------------------------------------------------------------------------------------
PER SHARE RESULTS
Net Income (Loss) Per Basic Share $ .95 $ .54 $ .33 $ .19 $ (.06) $ (.14) $ (.16)
- - -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Dilutive Share $ .94 $ .54 $ .33 $ .19 $ (.06) $ (.14) $ (.16)
- - -------------------------------------------------------------------------------------------------------------------------
Weighted Average Diluted Shares
Outstanding 51,478 45,760 43,000 43,000 43,000 43,000 43,000
- - -------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
Total Assets $ 183,238 $ 105,761 $ 87,693 $ 58,018 $ 48,882 $ 61,626 $ 47,967
- - -------------------------------------------------------------------------------------------------------------------------
Return on Average Assets 33% 26% 20% 15% (4%) (11%) -
- - -------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 29,486 $ 24,323 $ 24,526 $ 12,603 $ 4,694 $ 10,351 $ 7,931
- - -------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 50,000 $ 50,000 - - - - -
- - -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Deficit) $ 58,775 $ 11,238 $(22,622) $(37,070) $(45,341) $(42,877) $(36,787)
- - -------------------------------------------------------------------------------------------------------------------------
Comparable Store Sales Increase 21% 13% 5% 15% 6% 8% 10%
- - -------------------------------------------------------------------------------------------------------------------------
Retail Sales per Average Selling
Square Foot $ 462 $ 373 $ 354 $ 350 $ 301 $ 276 $ 261
- - -------------------------------------------------------------------------------------------------------------------------
STORES AND ASSOCIATES AT END OF YEAR
Total Number of Stores Open 156 127 100 67 49 40 36
- - -------------------------------------------------------------------------------------------------------------------------
Selling Square Feet 1,234,000 1,006,000 792,000 541,000 405,000 332,000 287,000
- - -------------------------------------------------------------------------------------------------------------------------
Number of Associates 6,700 4,900 3,000 2,300 1,300 900 700
- - -------------------------------------------------------------------------------------------------------------------------
*Fifty-three week fiscal year.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Net sales for the fourth quarter were $212.1 million, an increase of 52% from
$139.2 million for the fourth quarter a year ago. Operating income was $59.1
million, up 67% compared to $35.3 million last year. Earnings per diluted share
were $.68, up 70%, from $.40 last year.
Net sales for the fiscal year ended January 31, 1998, increased 56% to $521.6
million from $335.4 million last year. Operating income for the year increased
83% to $84.1 million from $46.0 million in 1996. Earnings per diluted share
were $.94 compared to $.48 on an adjusted basis a year ago, an increase of 96%.
The results of operations shown below are adjusted for both the historical
number of shares outstanding to reflect post-initial public offering shares
outstanding and interest expense to reflect the Company's ongoing capital
structure and seasonal borrowings. The following assumptions were used to
derive the adjusted amounts: 1) 51.05 million post-initial public offering
shares outstanding for the periods presented; prior to the initial public
offering on October 1, 1996, there were 43 million shares outstanding; 2)
interest expense on the Company's seasonal borrowings which were funded from The
Limited's intercompany cash management system; prior to July 11, 1996, the
intercompany cash management account was noninterest bearing; and 3) interest
expense on the Company's ongoing capital structure which included interest
expense on a $50 million mirror note distributed to The Limited prior to the
initial public offering but excluded interest expense on the Company's $150
million credit agreement, entered into on July 2, 1996, and repaid in the fourth
quarter of 1996.
Year Ended
--------------------------------------------------------
Actual Adjusted Actual
January 31, February 1, February 1,
1998 1997 1997
------------------ -------------- -------------
Operating income $84,125 $45,993 $45,993
Interest expense, net 3,583 5,016 4,919
------------------ ------------- --------------
Income before income taxes 80,542 40,977 41,074
Provision for income taxes 32,220 16,400 16,400
------------------ ------------- --------------
Net income $48,322 $24,577 $24,674
================== ============= ==============
Net income per share:
Basic $ .95 $ .48 $ .54
================== ============= ==============
Diluted $ .94 $ .48 $ .54
================== ============= ==============
Weighted average shares outstanding:
Basic 51,011 51,050 45,749
================== ============= ==============
Diluted 51,478 51,050 45,760
================== ============= ==============
8
FINANCIAL SUMMARY
The following summarized financial data compares 1997 to the comparable periods
for 1996 and 1995:
% Change
---------------------------------
1997 1996 1995 1997-1996 1996-1995
--------------- --------------- -------------- --------------- ---------------
Net sales (millions) $521.6 $335.4 $235.7 56% 42%
Increase in comparable
store sales 21% 13% 5%
Retail sales increase attributable
to new and remodeled stores 34% 29% 37%
Retail sales per average selling
square foot $ 462 $ 373 $ 354 24% 5%
Retail sales per average store
(thousands) $3,653 $2,955 $2,823 24% 5%
Average store size at year-end
(selling square feet) 7,910 7,921 7,920 0% 0%
Selling square feet at year-end
(thousands) 1,234 1,006 792 23% 27%
Number of Stores:
Beginning of year 127 100 67
Opened 30 29 33
Closed (1) (2) -
--------------- --------------- --------------
End of year 156 127 100
=============== =============== ==============
NET SALES
Fourth quarter 1997 net sales as compared to net sales for the fourth quarter
1996 increased 52% to $212.1 million, due to a 23% increase in comparable store
sales and sales attributable to new and remodeled stores. Comparable store sales
increases were strong in both the men's and women's businesses as both were
driven by a very strong knit business. Additionally, fourth quarter 1997 net
sales included results from the first Holiday issue of the A&F Quarterly, a
catalogue/magazine, which accounted for 1.7% of total net sales.
Thirteen-week fourth quarter 1996 net sales as compared to net sales for the
fourteen-week fourth quarter 1995 increased 31% to $139.2 million, due to an 8%
increase in comparable store sales and sales attributable to new and remodeled
stores. Comparable store sales increases were strong in both the men's and
women's businesses. Sweaters were the best performing category in each
business.
Net sales for 1997 increased 56% to $521.6 million over the same period in 1996.
The sales increase was attributable to the net addition of 29 stores and a 21%
comparable store sales increase. Comparable store sales increases were equally
strong in both men's and women's businesses and their performance strength was
broadly based across all major merchandise categories. Net sales per selling
square foot for the total Company increased 24%, driven principally by an
increase in the number of transactions per store.
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Net sales for 1996 increased 42% to $335.4 million over the fifty-three week
1995 fiscal year. The sales increase was attributable to the net addition of 27
stores and a 13% comparable store sales increase. Consistent with the Company's
strategy, the women's business continued to increase as a proportion of the
total business, with sweaters and pants the strongest performing categories.
The men's business also achieved significant growth with its strongest
categories being sweaters, pants and denim. Net sales per selling square foot
for the total Company increased 5%.
GROSS INCOME
Gross income increased, expressed as a percentage of net sales, to 45.4% for the
fourth quarter of 1997 from 43.0% for the same period in 1996. The increase was
attributable to improved merchandise margins (representing gross income before
the deduction of buying and occupancy costs) resulting from higher initial
markups (IMU) and a lower markdown rate. As a result of improved inventory
turnover fewer markdowns, expressed as a percentage of net sales, were needed in
the fourth quarter of 1997 to clear season-end merchandise as compared to the
same period in 1996.
Gross income increased, expressed as a percentage of net sales, to 43.0% for the
fourth quarter of 1996 from 37.4% for the same period in 1995. The increase was
due to a significant increase in merchandise margins and a reduction in buying
and occupancy costs, expressed as a percentage of net sales. The increase in
merchandise margins was the result of higher IMU. The decrease in buying and
occupancy costs was primarily attributable to higher sales productivity
associated with the 8% increase in comparable store sales.
For the year, the gross income rate increased to 38.5% in 1997 from 36.9% in
1996. The improvement was the result of higher merchandise margins, expressed
as a percentage of net sales. Improved IMU, in both the men's and women's
businesses drove the increase in merchandise margins. Buying and occupancy
costs, expressed as a percentage of net sales, declined slightly due to leverage
achieved from comparable store sales increases.
In 1996, the gross income rate increased to 36.9% from 33.9% in 1995.
Merchandise margins, expressed as a percentage of net sales, improved due to a
higher IMU in both the men's and women's businesses. Buying and occupancy costs,
expressed as a percentage of net sales, declined due to a 13% increase in
comparable store sales, including a 5% increase in net sales per selling square
foot.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 17.5% in the fourth quarter of 1997 and 17.6% in the
comparable period in 1996. The improvement resulted primarily from favorable
leveraging of expenses due to higher sales volume. Included in these expenses
for the fourth quarter of 1997 was approximately $2.6 million of compensation
expense associated with restricted stock grants awarded to key executives of the
Company.
For the year, general, administrative and store operating expenses, expressed as
a percentage of net sales, were 22.4%, 23.2% and 23.8% for 1997, 1996 and 1995.
The improvement during the three-year period resulted from management's
continued emphasis on expense control and favorable leveraging of expenses,
primarily stores expenses, due to higher sales volume.
10
OPERATING INCOME
Operating income, expressed as a percentage of net sales, was 27.9%, 25.4% and
19.8% for the fourth quarter of 1997, 1996 and 1995 and 16.1%, 13.7% and 10.1%
for fiscal years 1997, 1996 and 1995. The improvement was the result of higher
merchandise margins coupled with lower general, administrative and store
operating expenses, expressed as a percentage of net sales. Sales volume and
gross income have increased at a faster rate than general, administrative and
store operating expenses as the Company continues to emphasize cost controls.
INTEREST EXPENSE
Fourth quarter 1997 net interest expense of $305 thousand improved $820 thousand
from 1996 fourth quarter net interest expense of $1.1 million. Interest expense
in the fourth quarter of 1997 and 1996 included $975 thousand associated with
$50 million of long-term debt. The balance represented net interest income from
temporary investments in the fourth quarter of 1997, while net interest expense
in the fourth quarter of 1996 was primarily due to higher borrowing levels.
The Company's year-to-date interest expense was $3.6 million, down $1.3 million
from $4.9 million in 1996 due primarily to lower average borrowing levels.
FINANCIAL CONDITION
The Company's continuing growth in operating income provides evidence of
financial strength and flexibility. A more detailed discussion of liquidity,
capital resources and capital requirements follows.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities and cash funding from The Limited's
centralized cash management system provided the resources to support operations,
including seasonal requirements and capital expenditures. A summary of the
Company's working capital position and capitalization follows (thousands):
1997 1996 1995
---------------- --------------- ---------------
Cash provided by operating activities $100,195 $46,836 $ 12,714
Working capital $ 42,000 $ 1,288 $(70,940)
Capitalization
Long-term debt $ 50,000 $50,000 -
Shareholders' equity (deficit) 58,775 11,238 $(22,622)
---------------- --------------- ---------------
Total Capitalization $108,775 $61,238 $(22,622)
================ =============== ===============
11
The Company considers the following to be measures of liquidity and capital
resources:
1997 1996 1995
---------------- --------------- ---------------
Debt-to-capitalization ratio (long-term debt
divided by total capitalization) 46% 82% n/m
Cash flow to capital investment (net cash
provided by operating activities divided
by capital expenditures) 340% 193% 52%
n/m = not meaningful
Net cash provided by operating activities totaled $100.2 million, $46.8 million
and $12.7 million for 1997, 1996 and 1995.
In 1997, the $100.2 million net cash provided by operating activities increased
from the comparable period last year due primarily to the increase in net income
before depreciation and amortization. Accounts payable and accrued expenses
increased in 1997 as a result of the increases of $7.8 million in merchandise
payables due to the timing of receipts for Spring goods and $2.3 million of
accrued rent. Cash requirements for inventory decreased in 1997 consistent with
the Company's strategy to improve inventory turnover.
Investing activities were for capital expenditures, which were primarily for new
stores.
Financing activities in 1997 consisted primarily of activity through The
Limited's centralized cash management system. Financing activities in 1996
include $150 million in proceeds from borrowings under a bank credit agreement,
which, along with the $8.6 million working capital note, were later repaid with
funds made available from the IPO and cash flow from operations. Proceeds of
the $150 million bank credit agreement were used to repay $91 million of
intercompany debt and $32 million of trademark obligations and fund a $27
million dividend to The Limited. Other financing activities were due to
intercompany and cash management account activity (see Note 8).
In connection with the plan to establish Abercrombie & Fitch as a fully
independent company (see Note 11), the Company is in the process of negotiating
credit facilities that will be separate and independent of The Limited.
CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, amounted to $29.5
million, $24.3 million and $24.5 million for 1997, 1996 and 1995.
The Company anticipates spending $40 to $50 million in 1998 for capital
expenditures, of which $35 to $42 million will be for new stores, remodeling
and/or expansion of existing stores and related improvements. The Company
intends to add approximately 235,000 selling square feet in 1998, which will
represent a 19% increase over year end 1997. It is anticipated the increase will
result from the addition of 30 new stores and the remodeling and/or expansion of
four stores. The Company estimates that the average cost for leasehold
improvements, furniture and fixtures for stores opened in 1998 will approximate
$750,000 per store, after
12
giving effect to landlord allowances. In addition, inventory purchases are
expected to average approximately $275,000 per store.
Additionally, the Company plans to open 10 to 15 children's stores in 1998. The
planned store size is approximately 3,200 selling square feet and the average
cost for leasehold improvements, furniture and fixtures will be approximately
$470,000.
The Company expects that substantially all future capital expenditures will be
funded by net cash provided by operating activities.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
The Company recently completed a comprehensive review of its information systems
and is involved in a program to update computer systems and applications in
preparation for the year 2000. The Company will incur internal staff costs as
well as outside consulting and other expenditures related to this initiative.
Total expenditures related to remediation, testing, conversion, replacement and
upgrading system applications are expected to range from $3.0 to $4.0 million
from 1997 through 2000. Total incremental expenses, including depreciation and
amortization of new package systems, remediation to bring current systems into
compliance and writing off legacy systems are not expected to have a material
impact on the Company's financial condition in any year during the conversion
process from 1997 through 2000.
The Company is attempting to contact vendors and others on whom it relies to
ensure that their systems will be converted in a timely fashion. However, there
can be no assurance that the systems of other companies on which the Company's
systems rely will also be converted in a timely fashion or that any such failure
to convert by another company would not have an adverse effect on the Company's
systems. Furthermore, no assurance can be given that any or all of the
Company's systems are or will be Year 2000 compliant, or that the ultimate costs
required to address the Year 2000 issue or the impact of any failure to achieve
substantial Year 2000 compliance will not have a material adverse effect on the
Company's financial condition.
REGISTRATION STATEMENT FOR EXCHANGE OFFER
The Company and The Limited will enter into certain service agreements upon the
consummation of the Exchange Offer (see Note 11) which will include among other
things, tax, information technology and store design and construction. These
agreements generally will be for a term of one year. Service agreements will
also be entered into for the continued use by the Company of its distribution
and home office space and transportation and logistic services. These
agreements generally will be for a term of three years. Costs for these
services will generally be the costs and expenses incurred by The Limited plus
5% of such amounts. Upon expiration of these agreements with The Limited, the
Company may bring certain services in-house, contract with other outside parties
or take other actions the Company deems appropriate at that time.
The Company does not anticipate that costs associated with these service
agreements or costs to be incurred upon their expiration will have a material
impact on its financial condition.
13
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on its results of operations and
financial condition have been minor.
ADOPTION OF NEW ACCOUNTING STANDARDS
During the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which requires the
Company to disclose earnings per basic and diluted share for all periods
presented.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report, the Company's Form 10-K or made by management of the Company
involve risks and uncertainties, and are subject to change based on various
important factors. The following factors, among others, in some cases have
affected and in the future could affect the Company's financial performance and
actual results and could cause actual results for 1998 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: changes in consumer spending patterns, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, political stability, currency and exchange risks and changes
in existing or potential duties, tariffs or quotas, availability of suitable
store locations at appropriate terms, ability to develop new merchandise and
ability to hire and train associates.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
1997 1996 1995
--------------- ------------- -------------
NET SALES $521,617 $335,372 $235,659
Costs of Goods Sold, Occupancy and Buying Costs 320,537 211,606 155,865
--------------- ------------- -------------
GROSS INCOME 201,080 123,766 79,794
General, Administrative and Store Operating Expenses 116,955 77,773 55,996
--------------- ------------- -------------
OPERATING INCOME 84,125 45,993 23,798
Interest Expense, Net 3,583 4,919 -
--------------- ------------- -------------
INCOME BEFORE INCOME TAXES 80,542 41,074 23,798
Provision for Income Taxes 32,220 16,400 9,500
--------------- ------------- -------------
NET INCOME $ 48,322 $ 24,674 $ 14,298
=============== ============= =============
NET INCOME PER SHARE:
BASIC $ .95 $ .54 $ .33
=============== ============= =============
DILUTED $ .94 $ .54 $ .33
=============== ============= =============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
15
ABERCROMBIE & FITCH CO.
CONSOLIDATED BALANCE SHEETS
(Thousands)
January 31, February 1,
1998 1997
---------------- ----------------
ASSETS
------
CURRENT ASSETS:
Cash and Equivalents $ 42,667 $ 1,945
Accounts Receivable 1,695 2,102
Inventories 33,927 34,943
Store Supplies 5,592 5,300
Intercompany Receivable 23,785 -
Other 1,296 588
---------------- ----------------
TOTAL CURRENT ASSETS 108,962 44,878
PROPERTY AND EQUIPMENT, NET 70,517 58,992
DEFERRED INCOME TAXES 3,759 1,885
OTHER ASSETS - 6
---------------- ----------------
TOTAL ASSETS $183,238 $ 105,761
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 15,968 $ 6,414
Accrued Expenses 35,143 22,388
Income Taxes Payable 15,851 9,371
Intercompany Payable - 5,417
---------------- ----------------
TOTAL CURRENT LIABILITIES 66,962 43,590
LONG-TERM DEBT 50,000 50,000
OTHER LONG-TERM LIABILITIES 7,501 933
SHAREHOLDERS' EQUITY:
Common Stock 511 511
Paid-In Capital 117,972 117,980
Retained Earnings (Deficit) (58,931) (107,253)
59,552 11,238
Less: Treasury Stock, at Cost (777) -
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 58,775 11,238
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $183,238 $ 105,761
================ ================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
16
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands)
Common Stock
-------------------------------
Total
Retained Treasury Shareholders'
Shares Par Paid-In Earnings Stock, Equity
Outstanding Value Capital (Deficit) at Cost (Deficit)
--------------- ------------ ------------ ------------- ---------- --------------
Balance, January 28, 1995 43,000 - $ 155 $ (37,225) - $(37,070)
Net Income - - - 14,298 - 14,298
Other - - 150 - - 150
--------------- ------------ ------------ ------------- ---------- --------------
Balance, February 3, 1996 43,000 - $ 305 $ (22,927) - $(22,622)
Transfer of Equity to Debt
($50,000 Long-Term Debt and
$32,000 Short-Term Borrowings) - - - (82,000) - (82,000)
Cash Dividend to Parent Prior to
Initial Public Offering - - - (27,000) - (27,000)
Sale of Common Stock in Initial
Public Offering 8,050 $511 117,667 - - 118,178
Net Income - - - 24,674 - 24,674
Other - - 8 - - 8
--------------- ------------ ------------ ------------- ---------- --------------
Balance, February 1, 1997 51,050 $511 $117,980 $(107,253) - $ 11,238
Purchase of Treasury Stock (50) - - - $(929) (929)
Net Income - - - 48,322 - 48,322
Exercise of Stock Options and 9 - (8) - 152 144
Other
--------------- ------------ ------------ ------------- ------------ --------------
Balance, January 31, 1998 51,009 $511 $117,972 $ (58,931) $(777) $ 58,775
=============== ============ ============ ============ ============= =============
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
17
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
1997 1996 1995
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48,322 $ 24,674 $ 14,298
Impact of Other Operating Activities on Cash Flows
Depreciation and Amortization 16,342 11,759 9,104
Noncash Charge for Deferred Compensation 6,219 - -
Change in Assets and Liabilities:
Inventories 1,016 (4,555) (13,837)
Accounts Payable and Accrued Expenses 22,309 9,943 4,069
Income Taxes 4,606 4,218 (2,525)
Other Assets and Liabilities 1,381 797 1,605
---------------- ---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
100,195 46,836 12,714
---------------- ---------------- ----------------
CASH USED FOR INVESTING ACTIVITIES
Capital Expenditures (29,486) (24,323) (24,526)
---------------- ---------------- ----------------
FINANCING ACTIVITIES
Increase (Decrease) in Intercompany Balance (29,202) 18,988 11,944
Dividend Paid to Parent - (27,000) -
Net Proceeds from Issuance of Common Stock - 118,178 -
Proceeds from Credit Agreement - 150,000 -
Repayment of Credit Agreement - (150,000) -
Repayment of Trademark Obligations - (32,000) -
Repayment of Intercompany Debt - (91,000) -
Repayment of Working Capital Note - (8,616) -
Purchase of Treasury Stock (929) - -
Other Changes in Shareholders' Equity 144 8 150
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ---------------- ---------------- ----------------
(29,987) (21,442) 12,094
---------------- ---------------- ----------------
NET INCREASE IN CASH AND EQUIVALENTS 40,722 1,071 282
Cash and Equivalents, Beginning of Year 1,945 874 592
---------------- ---------------- ----------------
CASH AND EQUIVALENTS, END OF YEAR $ 42,667 $ 1,945 $ 874
================ ================ ================
In 1996, noncash financing activities included the distribution of a note
representing preexisting obligations of the Company's operating subsidiary in
respect of certain trademarks in the amount of $32 million by the Company's
trademark subsidiary to The Limited, Inc., distribution of the $50 million in
long-term debt and the conversion of $8.6 million of intercompany debt into a
working capital note.
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
18
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. (the "Company") was incorporated on June 26, 1996,
and on July 15, 1996 acquired the stock of Abercrombie & Fitch Holdings, the
parent company of the Abercrombie & Fitch business, and A&F Trademark, Inc.,
in exchange for 43 million shares of Class B common stock issued to The
Limited, Inc. ("The Limited"). The Company is a specialty retailer of high
quality, casual apparel for men and women with an active, youthful lifestyle.
The business was established in 1892 and subsequently acquired by The Limited
in 1988.
An initial public offering (the "Offering") of 8.05 million shares of the
Company's Class A common stock, including the sale of 1.05 million shares
pursuant to the exercise by the underwriters of their options to purchase
additional shares, was consummated on October 1, 1996. As a result of the
Offering, 84.2% of the outstanding common stock of the Company is owned by
The Limited.
The net proceeds received by the Company from the Offering, approximating
$118.2 million, and cash from operations were used to repay the borrowings
under a $150 million credit agreement.
The accompanying consolidated financial statements include the historical
financial statements of, and transactions applicable to the Company and its
subsidiaries and reflect the assets, liabilities, results of operations and
cash flows on a historical cost basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all significant subsidiaries that are more than 50% owned and controlled. All
significant intercompany balances and transactions have been eliminated in
consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
years are designated in the financial statements and notes by the calendar
year in which the fiscal year commences. The results for fiscal years 1997
and 1996 represent the fifty-two week periods ended January 31, 1998 and
February 1, 1997. The results for fiscal year 1995 represent the fifty-three
week period ended February 3, 1996.
CASH AND EQUIVALENTS
Cash and equivalents include amounts on deposit with financial institutions
and investments with maturities of less than 90 days.
19
INVENTORIES
Inventories are principally valued at the lower of average cost or market, on
a first-in first-out basis, utilizing the retail method.
STORE SUPPLIES
The initial inventory of supplies for new stores including, but not limited
to, hangers, signage, security tags and point-of-sale supplies are
capitalized at the store opening date. Subsequent shipments are expensed
except for new merchandise presentation programs which are capitalized.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives
ranging principally from 10-15 years for building improvements and 3-10 years
for other property and equipment. Beneficial leaseholds represent the present
value of the excess of fair market rent over contractual rent of existing
stores at the 1988 purchase of the Company by The Limited and are being
amortized over the lives of the related leases. The cost of assets sold or
retired and the related accumulated depreciation or amortization are removed
from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major renewals
and betterments that extend service lives are capitalized. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances
indicate that full recoverability is questionable. Factors used in the
valuation include, but are not limited to, management's plans for future
operations, recent operating results and projected cash flows.
INCOME TAXES
Income taxes are calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires the use of the liability method. Deferred tax assets and liabilities
are recognized based on the difference between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect in the years in which those temporary differences are expected to
reverse. Under SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company is included in The Limited's consolidated federal and certain
state income tax groups for income tax reporting purposes and is responsible
for its proportionate share of income taxes calculated upon its federal
taxable income at a current estimate of the annual effective tax rate.
SHAREHOLDERS' EQUITY
At January 31, 1998, there were 150 million of $.01 par value Class A shares
authorized, of which 8.01 million and 8.05 million shares were outstanding at
January 31, 1998 and February 1, 1997 and 150 million of $.01 par value Class
B shares authorized, of which 43 million shares were
20
issued and outstanding. In addition there were 15 million of $.01 par value
preferred shares authorized, none of which have been issued.
Holders of Class A common stock generally have identical rights to holders of
Class B common stock, except that holders of Class A common stock are
entitled to one vote per share while holders of Class B common stock are
entitled to three votes per share on all matters submitted to a vote of
shareholders. Each share of Class B common stock is convertible while held by
The Limited or any of its subsidiaries into one share of Class A common stock
(see Note 11).
REVENUE RECOGNITION
Sales are recorded upon purchase by customers.
CATALOGUE AND ADVERTISING COSTS
Costs related to the A&F Quarterly, which premiered in 1997, primarily
consist of catalogue production and mailing costs and are expensed as
incurred. Advertising costs consist of in-store photographs and advertising
in selected national publications and are expensed when the photographs or
publications first appear. Catalogue and advertising costs amounted to $13.7
million in 1997, $4.1 million in 1996 and $3.1 million in 1995.
STORE PREOPENING EXPENSES
Preopening expenses related to new store openings are charged to operations
as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded values of current assets and current liabilities, including
accounts receivable and accounts payable, approximate fair value due to the
short maturity and because the average interest rate approximates current
market origination rates.
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturity. The estimated
fair value of the Company's long-term debt was $52.2 million at January 31,
1998 and $50.6 million at February 1, 1997.
EARNINGS PER SHARE
Net income per share is computed in accordance with SFAS No. 128, "Earnings
Per Share," which the Company adopted in the fourth quarter of 1997. Earnings
per basic share are computed based on the weighted average number of
outstanding common shares. Earnings per diluted share include the weighted
average effect of dilutive stock options and restricted stock. The common
stock issued to The Limited (43 million Class B shares) in connection with
the incorporation of the Company is assumed to have been outstanding for all
periods.
21
PAGE>
Weighted Average Common Shares Outstanding (thousands):
1997 1996 1995
------------ ------------ -----------
Common shares issued 51,050 45,749 43,000
Treasury shares (39) - -
------------ ------------ -----------
Basic shares 51,011 45,749 43,000
Dilutive effect of options and restricted shares 467 11 -
------------ ------------ -----------
Diluted shares 51,478 45,760 43,000
============ ============ ===========
Options to purchase 228,000 and 240,000 shares of common stock were
outstanding at year-end 1997 and 1996 but were not included in the
computation of earnings per diluted share because the options' exercise price
was greater than the average market price of the common shares.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Since actual results may differ from those
estimates, the Company revises its estimates and assumptions as new
information becomes available.
RECLASSIFICATIONS
Certain amounts in previously reported financial statement captions have been
reclassified to conform with current year presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of (thousands):
1997 1996
---------------- --------------
Furniture, fixtures and equipment $104,671 $ 88,248
Beneficial leaseholds 7,349 7,925
Leasehold improvements 11,615 5,565
Construction in progress 365 181
---------------- --------------
Total $124,000 $101,919
Less: accumulated depreciation and amortization 53,483 42,927
---------------- --------------
Property and equipment, net $ 70,517 $ 58,992
================ ==============
22
4. LEASED FACILITIES AND COMMITMENTS
Annual store rent is comprised of a fixed minimum amount, plus contingent
rent based on a percentage of sales exceeding a stipulated amount. Store
lease terms generally require additional payments covering taxes, common area
costs and certain other expenses. Rent expense also includes charges from The
Limited and its subsidiaries for space under formal agreements which
approximate market rates (see Note 8).
A summary of rent expense for 1997, 1996 and 1995 follows (thousands):
1997 1996 1995
-------------------- ----------------- -------------------
Store rent:
Fixed minimum $34,402 $24,599 $17,465
Contingent 2,138 1,620 1,322
-------------------- ----------------- -------------------
Total store rent $36,540 $26,219 $18,787
Buildings, equipment and other 1,400 1,229 1,058
-------------------- ----------------- -------------------
Total rent expense $37,940 $27,448 $19,845
==================== ================= ===================
At January 31, 1998, the Company was committed to noncancelable leases with
remaining terms of one to fifteen years. These commitments include store
leases with initial terms ranging primarily from ten to fifteen years and
offices and a distribution center leased from an affiliate of The Limited
with an initial term of fifteen years. A majority of the Company's store
leases are guaranteed by The Limited. A summary of minimum rent commitments
under noncancelable leases follows (thousands):
1998 $ 40,775
1999 41,747
2000 41,866
2001 42,170
2002 42,254
Thereafter 181,769
5. ACCRUED EXPENSES
Accrued expenses consisted of the following (thousands):
1997 1996
--------------- ---------------
Rent and landlord charges $ 8,105 $ 5,624
Compensation and benefits 8,357 4,638
Catalogue and advertising costs 4,012 1,449
Interest 986 2,162
Taxes, other than income 1,827 1,761
Other 11,856 6,754
Total $35,143 $22,388
=============== ===============
23
6. INCOME TAXES
The provision for income taxes consisted of (thousands):
1997 1996 1995
------------------- ----------------- -------------------
Currently Payable:
Federal $29,620 $13,800 $6,900
State 3,470 1,300 1,700
------------------- ----------------- -------------------
$33,090 $15,100 $8,600
------------------- ----------------- -------------------
Deferred:
Federal (3,200) (400) 700
State 2,330 1,700 200
------------------- ----------------- -------------------
$ (870) $ 1,300 $ 900
------------------- ----------------- -------------------
Total provision $32,220 $16,400 $9,500
=================== ================= ===================
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate follows:
1997 1996 1995
------------------ ---------------- -----------------
Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal income
tax effect 4.7% 4.7% 5.2%
Other items, net 0.3% 0.2% (0.3)%
------------------ ---------------- -----------------
Total 40.0% 39.9% 39.9%
================== ================ =================
Income taxes payable included net current deferred tax assets of $2.3 million
and $1.2 million at January 31, 1998 and February 1, 1997.
Current income tax obligations are treated as having been settled through the
intercompany accounts as if the Company were filing its income tax returns on
a separate company basis. Such amounts were $27.6 million, $10.6 million and
$7.5 million in 1997, 1996 and 1995.
The effect of temporary differences which give rise to net deferred income
tax assets was as follows (thousands):
1997 1996
----------------- -----------------
Depreciation and amortization $1,540 $1,480
Rent 1,510 (413)
Accrued expenses 3,450 1,343
Other, net (450) 683
----------------- -----------------
Total deferred income taxes $6,050 $3,093
================= =================
24
No valuation allowance has been provided for deferred tax assets because
management believes that it is more likely than not that the full amount of
the net deferred tax assets will be realized in the future.
7. LONG-TERM DEBT
Long-term debt consists of a 7.80% unsecured note in the amount of $50
million that matures May 15, 2002, and represents the Company's proportionate
share of certain long-term debt of The Limited. The interest rate and
maturity of the note parallels that of corresponding debt of The Limited. The
note is to be automatically prepaid concurrently with any prepayment of the
corresponding debt of The Limited.
8. RELATED PARTY TRANSACTIONS
Transactions between the Company, The Limited, and its subsidiaries and
affiliates commonly occur in the normal course of business and principally
consist of the following:
Merchandise purchases
Real estate management and leasing
Capital expenditures
Inbound and outbound transportation
Corporate services
Information with regard to these transactions is as follows:
Significant purchases are made from Mast, a wholly-owned subsidiary of The
Limited. Purchases are also made from Gryphon, an indirect subsidiary of The
Limited. Mast is a contract manufacturer and apparel importer, while Gryphon
is a developer of fragrance and personal care products and also a contract
manufacturer. Prices are negotiated on a competitive basis by merchants of
the Company with Mast, Gryphon and the manufacturers.
The Company's real estate operations, including all aspects of lease
negotiations and ongoing dealings with landlords and developers, are handled
centrally by the Real Estate Division of The Limited ("Real Estate
Division"). Real Estate Division expenses are allocated to the Company based
on a combination of new and remodeled store construction projects and open
selling square feet.
The Company's store design and construction operations are coordinated
centrally by the Store Planning Division of The Limited ("Store Planning
Division"). The Store Planning Division facilitates the design and
construction of the stores and upon completion transfers the stores to the
Company at actual cost. Store Planning Division expenses are charged to the
Company based on a combination of new and remodeled store construction
projects and open selling square feet.
The Company's inbound and outbound transportation expenses are managed
centrally by Limited Distribution Services ("LDS"), a wholly-owned subsidiary
of The Limited. Inbound freight is charged to the Company based on actual
receipts, while outbound freight is charged on a percentage of cartons
shipped basis.
25
The Limited provides certain services to the Company including, among other
things, aircraft, tax, treasury, legal, corporate secretary, accounting,
auditing, corporate development, risk management, associate benefit plan
administration, human resource and compensation, government affairs and
public relation services. Identifiable costs are charged directly to the
Company. All other services-related costs not specifically attributable to
the business have been allocated to the Company based upon a percentage of
sales.
The Company participates in The Limited's centralized cash management system
whereby cash received from operations is transferred to The Limited's
centralized cash accounts and cash disbursements are funded from the
centralized cash accounts on a daily basis. Prior to the initial
capitalization of the Company, the intercompany cash management account was
noninterest bearing. After the initial capitalization of the Company on July
11, 1996, the intercompany cash management account became an interest earning
asset or interest bearing liability of the Company depending upon the level
of cash receipts and disbursements. Interest on the intercompany cash
management account is calculated based on 30-day commercial paper rates for
"AA" rated companies as reported in the Federal Reserve's H.15 statistical
release. The average outstanding balance of the noninterest bearing
intercompany payable to The Limited in the twenty-six week period ending
August 3, 1996 and fifty-three weeks ended February 3, 1996 approximated
$64.5 million and $89.8 million. A summary of the intercompany payment
activity during the noninterest bearing periods follows:
Twenty-six weeks Fifty-three weeks
ended August 3, ended February 3,
1996 1996
-------------------- ----------------------
Balance at beginning of period $ 86,045 $ 74,101
Mast and Gryphon purchases 23,178 35,167
Other transactions with related parties 9,667 33,546
Centralized cash management (16,417) (64,269)
Settlement of current period income taxes 5,700 7,500
Payment to The Limited (91,000) -
Conversion to Working Capital Note (8,616) -
---------------------- ----------------------
Balance at end of period $ 8,557 $ 86,045
====================== ======================
The Company is charged rent expense, common area maintenance charges and
utilities for stores shared with other consolidated subsidiaries of The
Limited. The charges are based on square footage and represent the
proportionate share of the underlying leases with third parties.
The Company is also charged rent expense and utilities for the distribution
and home office space occupied (which approximates fair market value).
The Company and The Limited have entered into intercompany agreements that
establish the provision of services in accordance with the terms described
above. The prices charged to the Company for services provided under these
agreements may be higher or lower than prices that may be charged by third
parties. It is not practicable, therefore, to estimate what these costs would
be if The Limited were not providing these services and the Company was
required to purchase
26
these services from outsiders or develop internal expertise. Management
believes the charges and allocations described above are fair and reasonable.
The following table summarizes the related party transactions between the
Company and The Limited and its subsidiaries, for the years indicated
(thousands):
1997 1996 1995
-------------- -------------- -------------
Mast and Gryphon purchases $ 89,892 $61,776 $35,167
Capital expenditures 27,012 20,839 20,280
Inbound and outbound transportation 5,524 3,326 2,869
Corporate charges 6,857 3,989 4,019
Store leases and other occupancy, net 1,184 1,509 1,397
Distribution center, IT and home office expenses 3,102 2,696 2,564
Centrally managed benefits 3,596 3,136 2,417
Interest charges 3,583 2,190 -
-------------- -------------- -------------
$140,750 $99,461 $68,713
============== ============== =============
The Company and The Limited are parties to a corporate agreement under which
the Company granted to The Limited a continuing option to purchase, under
certain circumstances, additional shares of Class B Common Stock or shares of
nonvoting capital stock of the Company.
The Company has no arrangements with The Limited which result in the
Company's guarantee, pledge of assets or stock to provide security for The
Limited's debt obligations.
The Company's proprietary credit card processing is performed by Alliance
Data Systems which is approximately 40% owned by The Limited.
9. STOCK OPTIONS AND RESTRICTED STOCK
Under the Company's stock plan, associates may be granted up to a total of
3.5 million restricted shares and options to purchase the Company's common
stock at the market price on the date of grant. In 1997, associates of the
Company were granted approximately 1.7 million options, most of which are
expected to vest on a graduated basis over six years, subject to certain
performance goals. The remaining options generally vest 25% per year over
the first four years of the grant. A total of 12,000 shares have been issued
to nonassociate directors, all of which vest over four years. All options
have a maximum term of ten years.
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," effective with the 1996 financial statements,
but elected to continue to measure compensation expense in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no compensation expense for stock options has been recognized. If
compensation expense had been determined based on the estimated fair value of
options granted in 1997 and 1996, consistent with the methodology in SFAS No.
123, the pro forma effect on net income and earnings per diluted share would
have been a reduction of approximately $1.7 million, or $.03 per share in
1997. In 1996, the pro forma effect would have had no impact on net income
and earnings per diluted share. The weighted-average fair value of all
options granted during fiscal 1997 and 1996 was $8.50 and $6.67. The fair
value of each option was estimated using the Black-Scholes option-pricing
model with the following weighted-average
27
assumptions for 1997 and 1996: no expected dividends, price volatility of
35%, risk-free interest rates of 6.0% and 6.25%, assumed forfeiture rates of
10% and expected lives of 6.5 and 5 years.
The pro forma effect on net income for 1997 and 1996 is not representative of
the pro forma effect on net income in future years because it takes into
consideration pro forma compensation expense related only to those grants
made subsequent to the Company's initial public offering.
A summary of option activity for 1997 and 1996 follows:
1997 1996
-------------------------------------- ---------------------------------
Weighted Weighted
Average Average
Shares Option Price Shares Option Price
----------------- ----------------- ------------- -----------------
Outstanding at beginning of year 240,000 $16.00 - -
Granted 1,669,000 18.03 240,000 $16.00
Exercised (4,000) 16.00 - -
Canceled (21,000) 16.00 - -
----------------- ----------------- ------------- -----------------
Outstanding at end of year 1,884,000 $17.81 240,000 $16.00
================= ================= ============= =================
Options exercisable at year end 35,000 $16.00 -
================= ================= =============
Approximately 88% of the options outstanding at year-end are at $16 per
share. Most of the remaining options outstanding are at $31 per share.
A total of 547,000 restricted shares were granted in 1997, with a total
market value at grant date of $8.7 million. Of this total, 500,000 shares
were subject to performance requirements and a defined vesting schedule over
six years. The remaining restricted stock grants generally vest either on a
graduated scale over four years or 100% at the end of a fixed vesting period,
principally five years. The market value of restricted stock, subject to
adjustment at the measurement date for shares with performance requirements,
is being amortized as compensation expense over the vesting period, generally
four to six years. Compensation expenses related to restricted stock awards
amounted to $6.2 million, $0.5 million and $0.4 million in 1997, 1996 and
1995.
10.RETIREMENT BENEFITS
The Company participates in a qualified defined contribution retirement plan
and a nonqualified supplemental retirement plan sponsored by The Limited.
Participation in the qualified plan is available to all associates who have
completed 1,000 or more hours of service with the Company during certain 12-
month periods and attained the age of 21. Participation in the nonqualified
plan is subject to service and compensation requirements. The Company's
contributions to these plans are based on a percentage of associates'
eligible annual compensation. The cost of these plans was $1.6 million in
1997, $753 thousand in 1996 and $564 thousand in 1995.
11.REGISTRATION STATEMENT FOR EXCHANGE OFFER
On February 17, 1998, a registration statement was filed with the Securities
and Exchange Commission in connection with a plan to establish the Company as
a fully independent company
28
via a tax-free exchange offer pursuant to which The Limited shareholders will
be given an opportunity to exchange shares of The Limited for shares of the
Company. At year-end, The Limited owned 43 million of the Company's shares.
29
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial results for 1997 and 1996 follow (thousands
except per share amounts):
Quarter First Second Third Fourth
--------------------------------------------- -------------- -------------- -------------- --------------
1997
----
Net sales $74,316 $86,640 $148,516 $212,145
Gross income 23,941 27,786 52,990 96,363
Net income 565 2,053 10,403 35,301
Net income per basic share $ .01 $ .04 $ .20 $ .69
Net income per diluted share $ .01 $ .04 $ .20 $ .68
1996
----
Net sales $51,020 $57,431 $ 87,688 $139,233
Gross income 14,894 18,052 30,957 59,863
Net income (loss) (199) 374 3,982 20,517
Net income (loss) per basic share $ .00 $ .01 $ .09 $ .40
Net income (loss) per diluted share $ .00 $ .01 $ .09 $ .40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of the Company is set forth under the captions
"ELECTION OF DIRECTORS - Nominees and Directors", "- Business Experience", "-
Information Concerning the Board of Directors" and "- Security Ownership of
Directors and Management" in the Company's proxy statement for the Annual
Meeting of Shareholders to be held in 1998 (the "Proxy Statement") and is
incorporated herein by reference. Information regarding compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the
caption "EXECUTIVE COMPENSATION-Beneficial Ownership Reporting Compliance" in
the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under the caption
"EXECUTIVE COMPENSATION" in the Proxy Statement and is incorporated herein by
reference. Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information regarding the security ownership of certain beneficial owners and
management is set forth under the captions "ELECTION OF DIRECTORS - Security
Ownership of Directors and Management" in the Proxy Statement and "PRINCIPAL
HOLDERS OF VOTING SECURITIES" in the Proxy Statement and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is set
forth under the caption "ELECTION OF DIRECTORS - Business Experience" on page 2
of the Proxy Statement and "RELATIONSHIP AND TRANSCATIONS WITH THE LIMITED" on
pages 16 through 19 of the Proxy Statement. Information regarding executive
officers is set forth herein under the caption "SUPPLEMENTAL ITEM. EXECUTIVE
OFFICERS OF THE REGISTRANT" in Part I and is incorporated herein by reference.
The Company's Certificate of Incorporation includes provisions relating to
potential conflicts of interest that may arise between the Company and The
Limited. Such provisions were adopted in light of the fact that the Company and
The Limited and its subsidiaries are engaged in retail businesses and may pursue
similar opportunities in the ordinary course of business. Among other things,
these provisions generally eliminate the liability of directors and officers of
the Company with respect to certain matters involving The Limited and its
subsidiaries, including matters that may constitute corporate opportunities of
The Limited, its subsidiaries or the Company. Any person purchasing or
acquiring an interest in shares of capital stock of the Company will be deemed
to have consented to such provisions relating to conflicts of interest and
corporate opportunities, and such consent may restrict such person's ability to
challenge transactions carried out in compliance with such provisions.
Investors should review the Company's Certificate of Incorporation before making
any investment in shares of the Company's capital stock.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) List of Financial Statements.
----------------------------
The following consolidated financial statements of Abercrombie & Fitch Co.
and subsidiaries and the related notes are filed as a part of this report
pursuant to ITEM 8:
Consolidated Statements of Income for the fiscal years ended January 31,
1998, February 1, 1997 and February 3, 1996.
Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.
Consolidated Statements of Shareholders' Equity (Deficit) for the fiscal
years ended January 31, 1998, February 1, 1997 and February 3, 1996.
Consolidated Statements of Cash Flows for the fiscal years ended January
31, 1998, February 1, 1997 and February 3, 1996.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
(a)(2) List of Financial Statement Schedules.
-------------------------------------
All schedules are omitted because the required information is either
presented in the financial statements or notes thereto, or is not
applicable, required or material.
(a)(3) List of Exhibits.
-----------------
3. Articles of Incorporation and Bylaws.
3.1. Amended and Restated Certificate of Incorporation of the Company
incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended November 2,
1996.
3.2. Bylaws of the Company incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended November 2, 1996.
4. Instruments Defining the Rights of Security Holders.
4.1. Specimen Certificate of Class A Common Stock of the Company
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 33-92568) (the
"Form S-1").
32
4.2. Certificate of Incorporation of The Limited, Inc. incorporated by
reference to Exhibit 4.2 to the Company's Form S-1.
4.3. Bylaws of The Limited, Inc. incorporated by reference to Exhibit
4.3 to the Company's Form S-1.
10. Material Contracts.
10.1. Services Agreement by and between Abercrombie & Fitch Co. and The
Limited, Inc., dated September 27, 1996 incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 2, 1996.
10.2. Shared Facilities Agreement, dated September 27, 1996, by and
between Abercrombie & Fitch Co. and The Limited, Inc.
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended November 2,
1996.
10.3. Shared Facilities Agreement, dated September 27, 1996, by and
between Abercrombie & Fitch Co. and The Limited, Inc.
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended November 2,
1996.
10.4. Corporate Agreement by and between Abercrombie & Fitch Co. and
The Limited, Inc., dated October 1, 1996 incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 2, 1996.
10.5. Tax Sharing Agreement by and between Abercrombie & Fitch Co. and
The Limited, Inc., dated September 27, 1996 incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 2, 1996.
10.6. Sublease Agreement by and between Victoria's Secret Stores, Inc.
and Abercrombie & Fitch Co., dated June 1, 1995 incorporated by
reference to Exhibit 10.3 to the Company's Form S-1.
10.7. Abercrombie & Fitch Co. 1996 Stock Option and Performance
Incentive Plan incorporated by reference to Exhibit B to the
Proxy Statement dated April 14, 1997.
33
10.8. Abercrombie & Fitch Co. Incentive Compensation Performance Plan
incorporated by reference to Exhibit A to the Company's Proxy
Statement dated April 14, 1997.
10.9. Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate
Directors incorporated by reference to Exhibit C to the
Company's Proxy Statement dated April 14, 1997.
10.10. Form of Indemnification Agreement between the Company and the
directors and officers of the Company incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the year ended February 1, 1997.
10.11. Employment Agreement by and between Abercrombie & Fitch Co. and
Michael S. Jeffries dated May 13, 1997 with exhibits and
amendment incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 1, 1997.
10.12 Employment Agreement by and between Abercrombie & Fitch Co. and
Michele Donnan-Martin dated December 5, 1997 incorporated by
reference to Exhibit 10.9 to Abercrombie & Fitch Co.'s Form S-4.
10.13 Employment Agreement by and between Abercrombie & Fitch Co. and
Seth R. Johnson dated December 5, 1997 incorporated by reference
to Exhibit 10.10 to Abercrombie & Fitch Co.'s Form S-4.
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
24. Powers of Attorney.
27. Financial Data Schedule.
99. Annual Report of the Limited, Inc. Savings and Retirement Plan.
(b) Reports on Form 8-K.
-------------------
The Company filed a Form 8-K on February 18, 1998 relating to the
issuance of a press release announcing its fourth quarter results and
the proposed exchange offer to be conducted by its parent, The Limited,
a Delaware corporation. The Limited will be offering to exchange
shares of the Company for shares of The Limited, subject to the terms
and conditions of such exchange offer. The Company also filed a
Registration Statement on Form S-4 relating to the shares of the
Company to be issued pursuant to The Limited's proposed Exchange Offer.
The February 17, 1998 press release was included in the Form 8-K
filing.
(c) Exhibits.
--------
The exhibits to this report are listed in section (a)(3) of Item 14
above.
(d) Financial Statement Schedules.
-----------------------------
Not applicable.
34
SIGNATURES
Pursuant to the requirements of Section 13 or l5(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 29, 1998
ABERCROMBIE & FITCH CO.
(registrant)
By /s/ Seth R. Johnson
-------------------
Seth R. Johnson,
Vice President - Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 29, 1998:
Signature Title
--------- -----
/s/ Leslie H. Wexner* Chairman of the Board of Directors
- - --------------------------
Leslie H. Wexner
/s/ Kenneth B. Gilman* Vice Chairman
- - ---------------------------
Kenneth B. Gilman
/s/ Michael S. Jeffries* Director
- - ---------------------------
Michael S. Jeffries
/s/ Roger D. Blackwell* Director
- - ---------------------------
Roger D. Blackwell
/s/ E. Gordon Gee* Director
- - ---------------------------
E. Gordon Gee
/s/ Donald B. Shackelford* Director
- - ---------------------------
Donald B. Shackelford
*The undersigned, by signing his name hereto, does hereby sign this report on
behalf of each of the above-indicated directors of the registrant pursuant to
powers of attorney executed by such directors.
By /s/ Kenneth B. Gilman
---------------------
Kenneth B. Gilman
Attorney-in-fact
35
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Abercrombie & Fitch Co.
We have audited the accompanying consolidated balance sheets of Abercrombie &
Fitch Co. and Subsidiaries as of January 31, 1998 and February 1, 1997, and the
related consolidated statements of income, shareholders' equity (deficit) and
cash flows for each of the three fiscal years in the period ended January 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Abercrombie &
Fitch Co. and Subsidiaries as of January 31, 1998 and February 1, 1997 and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 31, 1998, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
February 20, 1998
36
EXHIBIT INDEX
-------------
Exhibit No. Document
- - ----------- ---------------------------
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
99 Annual Report of The Limited, Inc. Savings and Retirement Plan