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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from________________ to ________________
Commission file number 1-12107
ABERCROMBIE & FITCH CO.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1469076
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, OH 43054
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
Not Applicable
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at September 3, 2004
- ---------------------------- --------------------------------------
$.01 Par Value 94,557,496 Shares
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Thirteen and Twenty-Six Weeks Ended
July 31, 2004 and August 2, 2003.......................................................... 3
Condensed Consolidated Balance Sheets
July 31, 2004 and January 31, 2004........................................................ 4
Condensed Consolidated Statements of Cash Flows
Twenty-Six Weeks Ended
July 31, 2004 and August 2, 2003.......................................................... 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Report of Independent Registered Public Accounting Firm............................................ 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 26
Item 4. Controls and Procedures...................................................................... 27
Part II. Other Information
Item 1. Legal Proceedings............................................................................ 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................. 31
Item 6. Exhibits and Reports on Form 8-K............................................................. 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- -----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
--------- --------- --------- ---------
NET SALES $ 401,346 $ 355,719 $ 813,276 $ 702,442
Cost of Goods Sold, Occupancy and Buying Costs 219,758 211,386 466,098 429,921
--------- --------- --------- ---------
GROSS INCOME 181,588 144,333 347,178 272,521
General, Administrative and Store Operating
Expenses 112,881 88,716 231,150 176,614
--------- --------- --------- ---------
OPERATING INCOME 68,707 55,617 116,028 95,907
Interest Income, Net (1,358) (861) (2,343) (1,852)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 70,065 56,478 118,371 97,759
Provision for Income Taxes 27,210 21,660 45,840 37,390
--------- --------- --------- ---------
NET INCOME $ 42,855 $ 34,818 $ 72,531 $ 60,369
========= ========= ========= =========
NET INCOME PER SHARE:
BASIC $ 0.45 $ 0.36 $ 0.76 $ 0.62
========= ========= ========= =========
DILUTED $ 0.44 $ 0.35 $ 0.75 $ 0.60
========= ========= ========= =========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 95,306 97,186 95,010 97,410
========= ========= ========= =========
DILUTED 97,590 100,128 97,118 100,542
========= ========= ========= =========
DIVIDENDS PER SHARE $0.25 $0.00 $0.38 $0.00
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
July 31, January 31,
2004 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and Equivalents $ 572,148 $ 511,073
Marketable Securities 10,000 10,000
Receivables 16,083 7,197
Inventories 199,055 170,703
Store Supplies 32,964 29,993
Other 24,953 23,689
----------- -----------
TOTAL CURRENT ASSETS 855,203 752,655
PROPERTY AND EQUIPMENT, NET 460,254 445,956
OTHER ASSETS 444 552
----------- -----------
TOTAL ASSETS $ 1,315,901 $ 1,199,163
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable & Outstanding Checks $ 137,429 $ 91,364
Accrued Expenses 154,133 138,232
Income Taxes Payable 35,255 50,406
----------- -----------
TOTAL CURRENT LIABILITIES 326,817 280,002
DEFERRED INCOME TAXES 25,464 19,516
OTHER LONG-TERM LIABILITIES 27,526 28,388
SHAREHOLDERS' EQUITY:
Class A Common Stock - $.01 par value: 150,000,000 shares
authorized, 103,300,000 shares outstanding
at July 31, 2004 and January 31, 2004, respectively 1,033 1,033
Paid-In Capital 141,977 139,139
Retained Earnings 956,411 919,577
----------- -----------
1,099,421 1,059,749
Less: Treasury Stock, at Average Cost, 7,526,754
and 8,692,501 shares at July 31, 2004 and
January 31, 2004, respectively (163,327) (188,492)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 936,094 871,257
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,315,901 $ 1,199,163
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Twenty-Six Weeks Ended
-------------------------
July 31, August 2,
2004 2003
---------- ----------
OPERATING ACTIVITIES:
Net Income $ 72,531 $ 60,369
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 37,388 31,462
Loss on Retirement of Property and Equipment 518 -
Noncash Charge for Deferred Compensation 5,224 2,669
Deferred Taxes 3,859 12,194
Changes in Assets and Liabilities:
Inventories (21,839) (37,868)
Accounts Payable and Accrued Expenses 49,207 16,687
Income Taxes (1,950) (13,766)
Other Assets and Liabilities (13,993) (209)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 130,945 71,538
---------- ----------
INVESTING ACTIVITIES:
Capital Expenditures (66,462) (49,323)
Purchases of Marketable Securities (10,000) -
Proceeds from Maturities of Marketable Securities 10,000 10,000
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (66,462) (39,323)
---------- ----------
FINANCING ACTIVITIES:
Change in Cash Overdraft 8,326 2,937
Purchases of Treasury Stock (18,634) (51,246)
Dividends Paid (23,726) -
Stock Option Exercises and Other 30,626 13,183
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES (3,408) (35,126)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 61,075 (2,911)
Cash and Equivalents, Beginning of Year 511,073 420,063
---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD $ 572,148 $ 417,152
========== ==========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Change in Construction Allowance Receivables ($ 14,376) $ 16,516
========== ==========
Change in Accrual for Construction in Progress $ 859 ($ 772)
========== ==========
SIGNIFICANT NONCASH FINANCING ACTIVITIES:
Declaration of Cash Dividend to be Paid $ 11,972 -
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
ABERCROMBIE & FITCH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. ("A&F"), through its subsidiaries (collectively,
A&F and its subsidiaries are referred to as "Abercrombie & Fitch" or the
"Company"), is a specialty retailer of high quality, casual apparel for
men, women and kids with an active, youthful lifestyle.
The condensed consolidated financial statements include the accounts of
A&F and all significant subsidiaries that are more than 50 percent owned
and controlled. All significant intercompany balances and transactions
have been eliminated in consolidation.
Certain amounts have been reclassified to conform with the current year
presentation. The amounts reclassified did not have an effect on the
Company's results of operations or shareholders' equity.
The condensed consolidated financial statements as of July 31, 2004 and
for the thirteen and twenty-six week periods ended July 31, 2004 and
August 2, 2003 are unaudited and are presented pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in
A&F's Annual Report on Form 10-K for the fiscal year ended January 31,
2004 (the "2003 fiscal year"). In the opinion of management, the
accompanying condensed consolidated financial statements reflect all
adjustments (which are of a normal recurring nature) necessary to present
fairly the financial position and results of operations and cash flows for
the interim periods, but are not necessarily indicative of the results of
operations to be anticipated for the fiscal year ending January 29, 2005
(the "2004 fiscal year").
The condensed consolidated financial statements as of July 31, 2004 and
for the thirteen and twenty-six week periods ended July 31, 2004 and
August 2, 2003 included herein have been reviewed by the independent
registered public accounting firm of PricewaterhouseCoopers LLP and the
report of such firm follows the notes to the condensed consolidated
financial statements. PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the
"Act") for its report on the condensed consolidated financial statements
because that report is not a "report" within the meaning of Sections 7 and
11 of the Act.
6
2. STOCK-BASED COMPENSATION
The Company reports stock-based compensation through the disclosure-only
requirements of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure
- an Amendment of FASB Statement No. 123," but elects to measure
compensation expense using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation expense for options has been
recognized as all options are granted at fair market value at the grant
date. The Company recognizes compensation expense related to restricted
share and stock unit awards. If compensation expense related to options
for the thirteen and twenty-six week periods ended July 31, 2004, and
August 2, 2003 had been determined based on the estimated fair value of
options granted, consistent with the methodology in SFAS No. 123, the pro
forma effect on net income and net income per basic and diluted share
would have been as follows:
(Thousands except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------- ---------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income:
As reported $ 42,855 $ 34,818 $ 72,531 $ 60,369
Stock-based compensation expense included in
reported net income, net of tax 1,807 854 2,971 1,650
Stock-based compensation expense determined
under fair value based method, net of tax(1) (6,878) (7,037) (13,049) (13,923)
---------- ---------- ---------- ----------
Pro forma $ 37,784 $ 28,635 $ 62,453 $ 48,096
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.45 $ 0.36 $ 0.76 $ 0.62
Pro forma $ 0.40 $ 0.30 $ 0.66 $ 0.50
Diluted earnings per share:
As reported $ 0.44 $ 0.35 $ 0.75 $ 0.60
Pro forma $ 0.39 $ 0.29 $ 0.65 $ 0.49
(1) Includes stock-based compensation expense related to restricted
share and stock unit awards actually recognized in earnings in each
period presented.
The weighted-average fair value of all options granted during the second
quarter of fiscal 2004 and fiscal 2003 were $15.03 and $13.98,
respectively. The fair value of each option, which is included in the pro
forma results above, was estimated using the Black-Scholes option-pricing
model. For purposes of the valuation, the following weighted-average
assumptions were used: a 1.36% dividend yield in 2004 and no expected
dividends in 2003; price volatility of 58% in 2004 and 63% in 2003;
risk-free interest rates of 3.5% in 2004 and 2.9% in 2003; assumed
forfeiture rates of 28% in 2004 and 23% in 2003, respectively and expected
lives of 4 years in 2004 and 2003.
7
3. EARNINGS PER SHARE
Weighted-Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
------------------------------
July 31, 2004 August 2, 2003
------------- --------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (7,994) (6,114)
------- -------
Basic shares 95,306 97,186
Dilutive effect of options and restricted shares 2,284 2,942
------- -------
Diluted shares 97,590 100,128
======= =======
Twenty-Six Weeks Ended
------------------------------
July 31, 2004 August 2, 2003
------------- --------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (8,290) (5,890)
------- -------
Basic shares 95,010 97,410
Dilutive effect of options and restricted shares 2,108 3,132
------- -------
Diluted shares 97,118 100,542
======= =======
Options to purchase 5,481,984 and 5,631,984 shares of Class A Common Stock
during the thirteen and twenty-six week periods ended July 31, 2004,
respectively, and 6,035,217 and 5,760,715 shares of Class A Common Stock
during the thirteen and twenty-six week periods ended August 2, 2003,
respectively, were outstanding but were not included in the computation of
net income per diluted share because the options' exercise prices were
greater than the average market price of the underlying shares.
4. INVENTORIES
Inventories are principally valued at the lower of average cost or market,
on a first-in-first-out basis, utilizing the retail method. An initial
markup is applied to inventory at cost in order to establish a
cost-to-retail ratio. Permanent markdowns, when taken, reduce both the
retail and cost components of inventory on hand so as to maintain the
already established cost-to-retail relationship.
The fiscal year is comprised of two principal selling seasons: spring (the
first and second quarters) and fall (the third and fourth quarters). The
Company further reduces inventory at season end by recording an additional
markdown reserve using the retail carrying value of inventory from the
season just passed. Markdowns on this carryover inventory represent
estimated future anticipated selling price declines. Additionally,
inventory valuation at the end of the first and third quarters reflects
adjustments for inventory markdowns for the total season. Further, as part
of inventory valuation, inventory shrinkage estimates are made based on
historical trends, which reduce the inventory value for lost or stolen
items.
8
The inventory reserve for markdowns and valuations was $8.5 million, $5.5
million and $8.2 million at July 31, 2004, January 31, 2004 and August 2,
2003, respectively. The shrink reserve was $4.3 million, $3.3 million and
$6.6 million at July 31, 2004, January 31, 2004 and August 2, 2003,
respectively. The inventory valuations at July 31, 2004, January 31, 2004
and August 2, 2003 reflect adjustments for inventory markdowns for the end
of the season.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
July 31, January 31,
2004 2004
----------- -----------
Property and equipment, at cost $ 712,782 $ 676,172
Accumulated depreciation and amortization (252,528) (230,216)
----------- -----------
Property and equipment, net $ 460,254 $ 445,956
=========== ===========
6. INCOME TAXES
The provision for income taxes is based on the current estimate of the
annual effective tax rate. Income taxes paid during the twenty-six weeks
ended July 31, 2004 and August 2, 2003, approximated $44.0 million and
$39.6 million, respectively.
7. LONG-TERM DEBT
The Company entered into a $250 million syndicated unsecured credit
agreement (the "Credit Agreement") on November 14, 2002. The primary
purposes of the Credit Agreement are for trade and stand-by letters of
credit and working capital. The Credit Agreement is due to expire on
November 14, 2005. The Credit Agreement has several borrowing options,
including interest rates that are based on the agent bank's "Alternate
Base Rate," or a LIBO Rate. Facility fees payable under the Credit
Agreement are based on the Company's ratio (the "leverage ratio") of the
sum of total debt plus 800% of forward minimum rent commitments to
consolidated EBITDAR for the trailing four-fiscal-quarter period and
currently accrues at .225% of the committed amounts per annum. The Credit
Agreement contains limitations on indebtedness, liens, sale-leaseback
transactions, significant corporate changes including mergers and
acquisitions with third parties, investments, restricted payments
(including dividends and stock repurchases), hedging transactions and
transactions with affiliates. The Credit Agreement also contains financial
covenants requiring a minimum ratio, on a consolidated basis, of EBITDAR
for the trailing four-fiscal-quarter period to the sum of interest expense
and minimum rent for such period, as well as a maximum leverage ratio.
Letters of credit totaling approximately $58.0 million and $56.0 million
were outstanding under the Credit Agreement at July 31, 2004 and at August
2, 2003, respectively. No borrowings were outstanding under the Credit
Agreement at July 31, 2004 or at August 2, 2003.
9
8. RELATED PARTY TRANSACTIONS
Shahid & Company, Inc. has provided advertising and design services for
the Company since 1995. Sam N. Shahid, Jr., who serves on A&F's Board of
Directors, has been President and Creative Director of Shahid & Company,
Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided
during the thirteen and twenty-six week periods ended July 31, 2004 were
approximately $0.6 million and $1.2 million, respectively. For services
provided during the thirteen and twenty-six week periods ended August 2,
2003, the fees paid to Shahid & Company, Inc. were approximately $0.5
million and $1.0 million, respectively. The amounts do not include
reimbursements to Shahid & Company, Inc. for expenses incurred while
performing these services.
9. CONTINGENCIES
The Company is involved in a number of legal proceedings that arise out
of, and are incidental to, the conduct of its business.
In 2003, five actions were filed under various states' laws on behalf of
purported classes of employees and former employees of the Company
alleging that the Company required its associates to wear and pay for a
"uniform" in violation of applicable law. Two of the actions have been
ordered coordinated. In each case, the plaintiff, on behalf of his or her
purported class, seeks injunctive relief and unspecified amounts of
economic and liquidated damages. For certain of the cases, the parties are
in the process of discovery. In one case, the Company has filed a motion
to dismiss; while in all other cases, answers have been filed. Two of
those cases have been stayed, and the plaintiffs in those cases have been
joined in the action described immediately below.
In 2003, an action was filed in which the plaintiff alleges that the
"uniform," when purchased, drove associates' wages below the federal
minimum wage. The complaint purports to state a collective action on
behalf of part-time associates under the Fair Labor Standards Act.
Recently, the plaintiff amended the complaint and added new named
plaintiffs, asserting claims under the laws of six states as well as the
Fair Labor Standards Act. The parties are in the process of settling this
case and two of the five state court cases described in the immediately
preceding paragraph. The Company does not expect the settlement to be
material to the consolidated financial statements.
In each of 2003 and 2002, one action was filed against the Company
involving overtime compensation. In each action, the plaintiffs, on behalf
of their respective purported class, seek injunctive relief and
unspecified amounts of economic and liquidated damages. The Company has
filed a motion to dismiss in one of the cases. In the other case, the
parties are in the process of discovery, and the plaintiff has filed, and
the Company has opposed, a motion to certify a class of California store
managers. That motion is pending.
As previously mentioned, three of the above-described cases are in the
process of being settled. The Company does not believe it is feasible to
predict the outcome of the other legal proceedings described above and
intends to vigorously defend against each of them. The timing of the final
resolution of each of these proceedings is also uncertain. Accordingly,
the Company cannot estimate a range of potential loss, if any, for any of
these legal proceedings.
10
In 2003, one action was filed on behalf of a purported class alleged to be
discriminated against in hiring or employment decisions due to race and/or
national origin. The plaintiffs in the action seek, on behalf of their
purported class, injunctive relief and unspecified amounts of economic,
compensatory and punitive damages. The parties are in the process of
discovery. Additionally, the EEOC is conducting nationwide investigations
relating to allegations of discrimination based on race, national origin
and gender.
The Company accrues amounts related to legal matters if reasonably
estimable and reviews these amounts at least quarterly. During the first
quarter of fiscal 2004, the Company recorded an $8.0 million charge (net
of expected proceeds of $10.0 million from insurance) resulting from an
increase in expected defense costs related to the purported class action
employment discrimination suit. The Company does not believe it is
feasible to predict the outcome of this proceeding and intends to
vigorously defend against it. However, if judgment is rendered in this
proceeding which is unfavorable to the Company, the amount could
potentially be material to the consolidated financial statements.
The Company has standby letters of credit in the amount of $4.7 million
that are set to expire during the fourth quarter of fiscal 2005. The
beneficiary, a merchandise supplier, has the right to draw upon the
standby letters of credit if the Company has authorized or filed a
voluntary petition in bankruptcy. To date, the beneficiary has not drawn
upon the standby letters of credit.
The Company enters into agreements with professional services firms, in
the ordinary course of business and, in most agreements, indemnifies these
firms from any harm. There is no financial impact on the Company related
to these indemnification agreements.
11
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 July 31, 2004, and the
related condensed consolidated statements of income for each of the thirteen and
twenty-six week periods ended July 31, 2004 and August 2, 2003 and the condensed
consolidated statements of cash flows for the twenty-six week periods ended July
31, 2004 and August 2, 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
January 31, 2004, and the related consolidated statements of income, of
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 17, 2004 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of January 31, 2004, is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
August 10, 2004
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company operates three brands: Abercrombie & Fitch, a fashion-oriented
casual apparel business directed at men and women with a youthful lifestyle,
targeted at 18 to 22 year-old college students; abercrombie, a fashion-oriented
casual apparel brand in the tradition of Abercrombie & Fitch style and quality,
targeted at 7 to 14 year-old boys and girls; and Hollister, a West Coast
oriented lifestyle brand targeted at 14 to 17 year-old high school guys and
girls, at lower price points than Abercrombie & Fitch. In addition to
predominantly mall based store locations, all three brands also offer Web sites
where products comparable to those carried at the corresponding stores can be
purchased.
RESULTS OF OPERATIONS
During the second quarter of the 2004 fiscal year, net sales increased 13% to
$401.3 million from $355.7 million in the second quarter of the 2003 fiscal
year. Operating income improved to $68.7 million in the second quarter of 2004
from $55.6 million in the second quarter of 2003. Net income increased to $42.9
million in the second quarter of 2004 compared to $34.8 million in the second
quarter of 2003. Net income per diluted share was $.44 in the second quarter of
2004 compared to $.35 in the second quarter of 2003.
The following data represent the amounts shown in the Company's condensed
consolidated statements of income for the thirteen and twenty-six week periods
ended July 31, 2004, and August 2, 2003, expressed as a percentage of net sales:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- -------- ---------
NET SALES 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold, Occupancy and
Buying Costs 54.8 59.4 57.3 61.2
----- ----- ----- -----
GROSS INCOME 45.2 40.6 42.7 38.8
General, Administrative and Store
Operating Expenses 28.1 24.9 28.4 25.1
----- ----- ----- -----
OPERATING INCOME 17.1 15.7 14.3 13.7
Interest Income, Net (0.3) (0.2) (0.3) (0.3)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 17.4 15.9 14.6 14.0
Provision for Income Taxes 6.8 6.1 5.6 5.3
----- ----- ----- -----
NET INCOME 10.6% 9.8% 9.0% 8.7%
===== ===== ===== =====
13
Financial Summary
The following summarized financial and statistical data compares the thirteen
and twenty-six week periods ended July 31, 2004 to the comparable period of the
2003 fiscal year:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-----------------------------------------------------------
July 31, August 2, % July 31, August 2, %
2004 2003 Change 2004 2003 Change
-------- --------- ------ -------- --------- ------
Net sales (millions) $ 401 $ 356 13% $ 813 $ 702 16%
Decrease in comparable
store sales (5)% (8)% (3)% (7)%
Retail sales increase
attributable to new and
remodeled stores, magazine,
catalogue and Web sites 18% 16% 19% 16%
Retail sales per average gross
square foot $ 74 $ 76 (3)% $ 150 $ 151 (1)%
Retail sales per average store
(thousands) $ 528 $554 (5)% $1,071 $1,097 (2)%
Average store size at period-end
(gross square feet) 7,142 7,261 (2)%
Gross square feet at period-end
(thousands) 5,192 4,538 14%
Number of stores and gross square feet by brand
Abercrombie & Fitch:
Stores at beginning of period 359 342 357 340
Opened 1 6 5 9
Closed (1) (2) (3) (3)
----- ----- ------ ------
Stores at end of period 359 346 359 346
===== ===== ====== ======
Gross square feet
(thousands) 3,164 3,082
===== =====
abercrombie:
Stores at beginning of period 170 165 171 164
Opened 1 2 2 3
Closed - - (2) -
----- ----- ------ ------
Stores at end of period 171 167 171 167
===== ===== ====== ======
Gross square feet
(thousands) 754 739
===== =====
Hollister:
Stores at beginning of period 177 95 172 93
Opened 20 17 25 19
Closed - - - -
----- ----- ------ ------
Stores at end of period 197 112 197 112
===== ===== ====== ======
Gross square feet
(thousands) 1,274 717
===== =====
14
Current Trends and Outlook
Although the Company strives for improvement in comparable store sales, defined
as sales in stores that have been open for at least one year, the strategy of
maintaining a non-promotional look in-store and maintaining aspirational
lifestyle brands has, at times, negatively impacted comparable store sales. The
Company's focus is on building, maintaining and controlling its brands because
they express a lifestyle to which their customer aspires. This strategy allows
the Company to maintain high margins over the long term while driving the
Company's growth in sales and profits through the development of new brands. As
a result, comparable store sales may decline in the Company's more mature
business as the Company strives to maintain its brands' aspirational qualities
and high margins.
In order to achieve and maintain the aspirational quality of the brands, the
Company is increasing its expenditures to maintain and enhance the current store
base. Additionally, the Company is increasing its store based personnel to
provide better customer service. Depending on the sales performance of the
Company during the fall season, the initiatives may have a short-term impact on
the operating margin.
SECOND QUARTER RESULTS
Net Sales
Net sales for the second quarter of 2004 were $401.3 million, an increase of 13%
over last year's second quarter net sales of $355.7 million. The net sales
increase was attributable to the net addition of 102 stores, offset by a 5%
comparable store sales decrease.
By merchandise brand, comparable store sales for the quarter versus the same
quarter last year were as follows: Abercrombie & Fitch declined 6% with mens
comparable store sales declining by a low-single digit percentage and womens
declining by a high-single digit percentage. In abercrombie, comparable store
sales decreased 9% with girls comparable store sales declining by a high-single
digit percentage and boys declining in the low-teens. In Hollister, comparable
store sales increased by 4% with guys achieving a high-single digit increase and
girls a low-single digit increase for the quarter.
On a regional basis, comparable store sales results were strongest in the
Northeast and weakest in the Southwest. Stores located in Florida and the New
York metropolitan area had the best comparable store sales performance.
In Abercrombie & Fitch, the decrease in mens comparable store sales was driven
by decreases in shorts and graphic t-shirts that were not offset by strong
increases during the quarter in polos and woven knits. Womens had comparable
store sales increases in polos, denim and skirts which were more than offset by
decreases in pants, graphic knits and shorts for the quarter when compared to
second quarter 2003.
In the kids' business, girls comparable store sales decreased during the second
quarter of 2004 compared to the same quarter last year in graphic tees, pants
and shorts. These decreases were somewhat offset by increases in knits, skirts
and denim. Boys had comparable store sales decreases in graphic tees, shorts and
active wear. Increases in knits, denim and woven shirts were not sufficient to
offset the weaker performing categories.
15
In Hollister, guys achieved stronger comparable store sales than girls. In guys,
decreases in conversation tees and shorts were offset by strong increases during
the quarter in sport shirts, knits and denim. In girls, knits, skirts and denim
had comparable store sales increases; however, graphic knits and pants declined.
Sales in the e-commerce business grew by approximately 44% during the second
quarter of the 2004 fiscal year compared to the same period during the 2003
fiscal year. The direct to consumer business (which includes the Company's
catalogue and the Company's Web sites) accounted for 5.7% of net sales in the
second quarter of the 2004 fiscal year compared to 4.5% in the second quarter of
fiscal 2003. The second quarter 2004 results include sales from the Hollister
Web site that was launched during July 2003.
Gross Income
The Company's gross income may not be comparable to that of other retailers
since all significant costs related to the Company's distribution network,
excluding direct shipping costs related to the e-commerce and catalogue sales,
are included in general, administrative and store operating expenses (see
"General, Administrative and Store Operating Expenses" section below).
Gross income for the second quarter of the 2004 fiscal year was $181.6 million
compared to $144.3 million in the comparable period during the 2003 fiscal year.
The gross income rate (gross income divided by net sales) for the second quarter
of the 2004 fiscal year was 45.2%, up 460 basis points from last year's rate of
40.6%. The increase in gross income rate resulted largely from an increase in
initial markup (IMU), partially offset by a higher markdown rate as a percent of
net sales. The improved IMU reflects continued progress in sourcing across all
businesses, coupled with higher unit retail pricing in Abercrombie & Fitch and
abercrombie. The increased markdown rate reflects the Company's strategy to
clear merchandise quickly in order to add more items to the selling floor. All
three brands had IMU improvements compared to the second quarter of 2003 and are
operating at similar margins.
The Company ended the second quarter of the 2004 fiscal year with inventories,
at cost, down 12% per gross square foot versus the second quarter of the 2003
fiscal year. The inventory decrease reflects a conservative spring merchandising
plan and reduced costs in the ending inventory.
16
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses during the second quarter
of the 2004 fiscal year were $112.9 million compared to $88.7 million during the
same period in the 2003 fiscal year. The second quarter of the 2004 fiscal year
general, administrative and store operating expense rate (general,
administrative and store operating expenses divided by net sales) was 28.1%
compared to 24.9% in the second quarter of the 2003 fiscal year. The increase in
rate versus the 2003 comparable period was primarily due to the following:
higher store expenses due to an increase in aggregate payroll; higher home
office expenses, largely due to higher payroll; higher bonus accruals resulting
from improved financial performance and expenses related to the retirement of an
executive officer. Wage levels, in all three brands, decreased slightly or held
flat compared to the second quarter of 2003.
The distribution center continued to achieve record levels of productivity
during the second quarter of the 2004 fiscal year. Productivity, as measured in
units processed per labor hour, was 15% higher than the second quarter of the
2003 fiscal year. Costs related to the distribution center, excluding direct
shipping costs related to the e-commerce and catalogue sales, included in
general, administrative and store operating expenses were $4.4 million for the
second quarter of the 2004 fiscal year compared to $4.5 million for the second
quarter of the 2003 fiscal year.
Operating Income
Operating income for the second quarter of the 2004 fiscal year increased to
$68.7 million from $55.6 million in the 2003 fiscal year second quarter, an
increase of 23.6%. The operating income rate (operating income divided by net
sales) was 17.1% for the second quarter of the 2004 fiscal year compared to
15.6% for the second quarter of the 2003 fiscal year. The increase in the
operating income during the second quarter of fiscal 2004 was a result of higher
merchandise margins and higher unit retail pricing in Abercrombie & Fitch and
abercrombie, partially offset by higher general, administrative and store
operating expenses during the quarter.
Interest Income and Income Tax Expense
Second quarter net interest income was $1.4 million in 2004 compared to $861
thousand last year. The Company continued to invest in tax-free securities. The
effective tax rate for the second quarter was 38.8% compared to 38.4% for the
2003 comparable period.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company does not have any off-balance sheet arrangements or debt
obligations. The contractual obligations of the Company as of July 31, 2004 have
not significantly changed from the ones disclosed in A&F's Annual Report on Form
10-K for the fiscal year ended January 31, 2004. There have been changes in the
ordinary course of the Company's business during the quarterly period ended July
31, 2004 in the Company's contractual obligations included within both the
"operating leases" category and the "purchase obligations and other" category.
17
YEAR-TO-DATE RESULTS
Net Sales
Year-to-date net sales in 2004 were $813.3 million, an increase of 16% over last
year's net sales of $702.4 million for the same period. The net sales increase
was attributable to the net addition of 102 stores, offset by a 3% comparable
store sales decrease.
Year-to-date comparable store sales by merchandise concept were as follows:
Abercrombie & Fitch comparable store sales declined 4%, abercrombie comparable
stores sales declined 5% and Hollister achieved a 6% comparable store sales
increase. The women's business in each concept continued to be more significant
than mens. Year-to-date, womens and girls represented over 60% of net sales for
each of the brands. Womens had a mid-single digit decline in comparable store
sales year-to-date, while girls was relatively flat. Hollister girls achieved a
mid-single digit comparable store sales increase on a year-to-date basis.
For the year-to-date period, Hollister continued to gain in productivity
relative to Abercrombie & Fitch. For the 2004 year-to-date period, sales per
square foot in Hollister stores were approximately 133% of the sales per square
foot of Abercrombie & Fitch stores in the same malls compared to 113% for the
2003 year-to-date period.
Sales in the e-commerce business grew by approximately 53% during the
year-to-date period as compared to the same period last year. The direct to
consumer business (which includes the Company's catalogue and the Company's Web
sites) accounted for 6.0% of net sales compared to 4.6% for the year-to-date
period ended July 31, 2004 and August 2, 2003, respectively. The year-to-date
2004 results include sales from the Hollister Web site that was launched during
July 2003.
Gross Income
The Company's gross income may not be comparable to that of other retailers
since all significant costs related to the Company's distribution network,
excluding direct shipping costs related to the e-commerce and catalogue sales,
are included in general, administrative and store operating expenses (see
"General, Administrative and Store Operating Expenses" section below).
Year-to-date gross income increased to $347.2 million for the 2004 fiscal year
from $272.5 million in the comparable period during the 2003 fiscal year. The
gross income rate (gross income divided by net sales) for the period was 42.7%,
up 390 basis points from last year's rate of 38.8%. The increase was driven by
improvements in IMU across all three brands and increases in average unit retail
pricing in Abercrombie & Fitch and abercrombie that were partially offset by
increased markdowns, as a percentage of net sales.
As previously mentioned, improved sourcing has been an important factor in
improving the IMU in all three concepts. Improvement was most dramatic in
Hollister and Abercrombie & Fitch. The markdown rate was higher for the 2004
year-to-date period than the comparable period in 2003 due to the Company's
strategy to clear merchandise quickly in order to add more items to the selling
floor.
18
General, Administrative and Store Operating Expenses
Year-to-date general, administrative and store operating expenses as of the end
of the second quarter of the 2004 fiscal year were $231.2 million versus $176.6
million for the same time period the previous year. The general, administrative
and store operating expense rate in 2004 was 28.4% versus 25.1% in 2003. The
increased rate in the 2004 year-to-date period was primarily due to higher home
office and store expenses. Home office expenses increased largely due to higher
payroll, higher bonus accruals resulting from improved financial performance,
higher legal expense due to a charge taken during the first quarter of the 2004
fiscal year related to expected defense costs in a legal proceeding and expenses
related to the retirement of an executive officer. Store expenses increased due
to an increase in aggregate payroll. Wage levels, in all three brands, decreased
slightly or held flat compared to the comparable period last year.
Costs related to the distribution center, excluding direct shipping costs
related to the e-commerce and catalogue sales, included in general,
administrative and store operating expenses were $8.9 million and $8.8 million
for the year-to-date periods ended July 31, 2004 and August 2, 2003,
respectively.
Operating Income
Year-to-date operating income for the 2004 fiscal year increased to $116.0
million from $95.9 million in the 2003 fiscal year comparable period, an
increase of 21.0%. The operating income rate (operating income divided by net
sales) was 14.3% for the 2004 year-to-date period compared to 13.7% for the
comparable period in the 2003 fiscal year. The increase was primarily due to
sales increases due to new stores, higher gross margin and increases in average
unit retail pricing in Abercrombie & Fitch and abercrombie, partially offset by
higher home office expenses and store expenses.
Interest Income and Income Tax Expense
Year-to-date net interest income for the 2004 fiscal year was $2.3 million
compared to $1.9 million for the comparable period in 2003. The Company
continued to invest in tax-free securities. The effective tax rate for the 2004
year-to-date period was 38.7% compared to 38.2% for the 2003 comparable period.
19
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (in thousands):
July 31, January 31,
2004 2004
-------- -----------
Working capital $528,386 $472,653
======== ========
Capitalization:
Shareholders' equity $936,094 $871,257
======== ========
Net cash provided by operating activities, the Company's primary source of
liquidity, totaled $130.9 million for the twenty-six weeks ended July 31, 2004
versus $71.5 million in the comparable period of 2003. Cash was provided
primarily by current year net income adjusted for depreciation and amortization
and by increases in accounts payable and accrued expenses. Uses of cash
primarily consisted of increases in inventories and other assets and
liabilities.
Accounts payable increased to support the cost of growth in the number of new
stores and the timing of payments. Accrued expenses also increased for items
such as higher payroll, higher bonus accruals resulting from improved financial
performance, higher legal accruals related to expected defense costs in a legal
proceeding, accruals related to the retirement of an executive officer and
property taxes.
Inventories increased as a result of preparation for the back-to-school season
as well as the growth in the store base during the first two quarters of 2004.
Other assets and liabilities increased primarily as a result of an increase in
accounts receivables related to expected proceeds from an insurance claim
pertaining to legal expenses and an increase in supplies as result of the growth
in the store base.
The Company's operations are seasonal in nature and typically peak during the
back-to-school and Christmas selling periods. Accordingly, cash requirements for
inventory expenditures are highest during these periods.
Cash outflows for investing activities were for capital expenditures (see the
discussion in the "Capital Expenditures" section below) related primarily to new
stores and construction in process and purchases of marketable securities in
2004. Cash inflows from investing activities consisted of maturities of
marketable securities. As of July 31, 2004, the Company held $10.0 million of
marketable securities with original maturities of greater than 90 days.
Financing activities, for the twenty-six week period ended July 31, 2004,
consisted of $30.6 million received in connection with stock option exercises,
$23.7 million for the payment of the quarterly $0.125 dividends on March 30,
2004 and June 22, 2004, $18.6 million for the repurchase of A&F's Class A Common
Stock and $8.3 million for cash overdrafts which are outstanding checks
reclassified from cash to accounts payable.
20
During the first quarter of 2004, the Company repurchased 599 thousand shares of
A&F's Class A Common Stock at an average cost of $31.11 for a total of $18.6
million pursuant to a previously authorized stock repurchase program. The
repurchase completed the 5 million share repurchase authorized by the Board of
Directors on August 8, 2002. On July 29, 2004, the Company's Board of Directors
authorized the repurchase of an additional 6 million shares of A&F's Class A
Common Stock.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has $250 million
available (less outstanding letters of credit) under its Credit Agreement to
support operations.
Letters of credit totaling approximately $58.0 million and $56.0 million were
outstanding under the Credit Agreement at July 31, 2004 and August 2, 2003,
respectively. No borrowings were outstanding under the Credit Agreement at July
31, 2004 and August 2, 2003.
The Company has standby letters of credit in the amount of $4.7 million that are
set to expire during the fourth quarter of fiscal 2005. The beneficiary, a
merchandise supplier, has the right to draw upon the standby letters of credit
if the Company has authorized or filed a voluntary petition in bankruptcy. To
date, the beneficiary has not drawn upon the standby letters of credit.
Store Count and Gross Square Feet
Store count and gross square footage by brand were as follows:
July 31, 2004 August 2, 2003
------------------------------- -----------------------------
Number Gross Square Number Gross Square
of Stores Feet (thousands) of Stores Feet (thousands)
--------- ---------------- --------- ----------------
Abercrombie & Fitch 359 3,164 346 3,082
abercrombie 171 754 167 739
Hollister 197 1,274 112 717
--- ----- --- -----
Total 727 5,192 625 4,538
=== ===== === =====
21
Capital Expenditures
Capital expenditures, net of construction allowances, totaled $66.5 million and
$49.3 million for the twenty-six weeks ended July 31, 2004 and August 2, 2003,
respectively. Additionally, the non-cash accrual for construction in progress
decreased $14.4 million in the first half of 2004 and increased $16.5 million in
the first half of 2003. Capital expenditures related primarily to new store
construction, including the non-cash accrual for construction in progress. The
balance of capital expenditures related primarily to miscellaneous store
remodeling projects.
The Company anticipates spending $125.0 million to $135.0 million in the 2004
fiscal year for capital expenditures, of which $85.0 million to $95.0 million
will be for new/remodel store construction. The balance of the capital
expenditures will primarily relate to home office and distribution center
projects and other miscellaneous projects.
The Company intends to add approximately 700,000 gross square feet of store
space in the 2004 fiscal year, which will represent a 14% increase over year-end
2003. It is anticipated the increase will result from the addition of
approximately 12 new Abercrombie & Fitch stores, 9 new abercrombie stores and 85
new Hollister stores. In addition, earlier in year the Company announced plans
for a new lifestyle brand that will target an older customer than its current
brands. The Company expects to open four test stores by the end of September
2004. Additionally, the Company plans to remodel 10 to 15 Abercrombie & Fitch
stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores opened during the 2004
fiscal year will approximate $605,000 per store, net of landlord allowances. In
addition, initial inventory purchases are expected to average approximately
$270,000 per store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for abercrombie stores opened during the 2004 fiscal year
will approximate $510,000 per store, net of landlord allowances. In addition,
initial inventory purchases are expected to average approximately $130,000 per
store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Hollister stores opened during the 2004 fiscal year
will approximate $587,000 per store, net of landlord allowances. In addition,
initial inventory purchases are expected to average approximately $190,000 per
store.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has $250 million
available (less outstanding letters of credit) under its Credit Agreement to
support operations.
22
Critical Accounting Policies and Estimates
The Company's significant and critical accounting policies and estimates can be
found in the Notes to Consolidated Financial Statements contained in Item 8 of
A&F's Annual Report on Form 10-K for the fiscal year ended January 31, 2004
(Note 2). Additionally, the Company believes that the following policies are
critical to the portrayal of the Company's financial condition and results of
operations for interim periods.
Revenue Recognition - The Company recognizes retail sales at the time the
customer takes possession of the merchandise and purchases are paid for,
primarily with either cash or credit card. Catalogue and e-commerce sales are
recorded upon customer receipt of merchandise. Amounts relating to shipping and
handling billed to customers in a sale transaction are classified as revenue and
the direct shipping costs are classified as cost of goods sold. Employee
discounts are classified as a reduction of revenue. The Company reserves for
sales returns through estimates based on historical experience and various other
assumptions that management believes to be reasonable.
Inventory Valuation - Inventories are principally valued at the lower of average
cost or market, on a first-in first-out basis, utilizing the retail method. The
retail method of inventory valuation is an averaging technique applied to
different categories of inventory. At the Company, the averaging is determined
at the stock keeping unit ("SKU") level by averaging all costs for each SKU. An
initial markup is applied to inventory at cost in order to establish a
cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail
and cost components of inventory on hand so as to maintain the already
established cost-to-retail relationship. The use of the retail method and the
recording of markdowns effectively values inventory at the lower of cost or
market. The Company further reduces inventory by recording an additional
markdown reserve using the retail carrying value of inventory from the season
just passed. Markdowns on this carryover inventory represent estimated future
anticipated selling price declines.
Additionally, as part of inventory valuation, an inventory shrinkage estimate is
made each period that reduces the value of inventory for lost or stolen items.
Inherent in the retail method calculation are certain significant judgments and
estimates including, among others, initial markup, markdowns and shrinkage,
which could significantly impact the ending inventory valuation at cost as well
as the resulting gross margins. Management believes that this inventory
valuation method is appropriate since it preserves the cost-to-retail
relationship in ending inventory.
23
Income Taxes - Income taxes are calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method.
Deferred tax assets and liabilities are recognized based on the difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Inherent in the measurement of
deferred balances are certain judgments and interpretations of enacted tax law
and published guidance with respect to applicability to the Company's
operations. Significant examples of this concept include capitalization policies
for various tangible and intangible costs, income and expense recognition and
inventory valuation methods. No valuation allowance has been provided for
deferred tax assets because management believes the full amount of the net
deferred tax assets will be realized in the future. The effective tax rate
utilized by the Company reflects management's judgment of the expected tax
liabilities within the various taxing jurisdictions.
Contingencies - In the normal course of business, the Company must make
continuing estimates of potential future legal obligations and liabilities,
which requires the use of management's judgment on the outcome of various
issues. Management may also use outside legal advice to assist in the estimating
process. However, the ultimate outcome of various legal issues could be
different than management estimates, and adjustments may be required.
24
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
A&F cautions that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Quarterly
Report on Form 10-Q or made by management of A&F involve risks and uncertainties
and are subject to change based on various important factors, many of which may
be beyond the Company's control. Words such as "estimate," "project," "plan,"
"believe," "expect," "anticipate," "intend," and similar expressions may
identify forward-looking statements. The following factors, in addition to those
included in the disclosure under the heading "RISK FACTORS" in "ITEM 1.
BUSINESS" of A&F's Annual Report on Form 10-K for the fiscal year ended January
31, 2004, in some cases have affected and in the future could affect the
Company's financial performance and could cause actual results for the 2004
fiscal year and beyond to differ materially from those expressed or implied in
any of the forward-looking statements included in this Quarterly Report on Form
10-Q or otherwise made by management:
- changes in consumer spending patterns and consumer
preferences;
- the effects of political and economic events and conditions
domestically and in foreign jurisdictions in which the Company
operates, including, but not limited to, acts of terrorism or
war;
- the impact of competition and pricing;
- changes in weather patterns;
- postal rate increases and changes;
- paper and printing costs;
- market price of key raw materials;
- ability to source product from its global supplier base;
- political stability;
- currency and exchange risks and changes in existing or
potential duties, tariffs or quotas;
- availability of suitable store locations at appropriate terms;
- ability to develop new merchandise; and
- ability to hire, train and retain associates.
Future economic and industry trends that could potentially impact revenue and
profitability are difficult to predict. Therefore, there can be no assurance
that the forward-looking statements included in this Quarterly Report on Form
10-Q will prove to be accurate. In light of the significant uncertainties in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company, or any other person,
that the objectives of the Company will be achieved. The forward-looking
statements herein are based on information presently available to the management
of the Company. Except as may be required by applicable law, the Company assumes
no obligation to publicly update or revise its forward-looking statements even
if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of July 31, 2004 has
not significantly changed since January 31, 2004. The Company's market risk
profile as of January 31, 2004 is disclosed in "Item 7A - Quantitative and
Qualitative Disclosures about Market Risk" of A&F's Annual Report on Form 10-K
for the fiscal year ended January 31, 2004.
26
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the Chairman and Chief Executive Officer (the
principal executive officer) and the Senior Vice President - Chief Financial
Officer (the principal financial officer) of Abercrombie & Fitch Co. ("A&F"),
A&F's management has evaluated the effectiveness of A&F's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period
covered by this Quarterly Report on Form 10-Q. Based on that evaluation, A&F's
Chairman and Chief Executive Officer and A&F's Senior Vice President - Chief
Financial Officer have concluded that:
- information required to be disclosed by A&F in this Quarterly Report
on Form 10-Q would be accumulated and communicated to A&F's
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure;
- information required to be disclosed by A&F in this Quarterly Report
on Form 10-Q would be recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms; and
- A&F's disclosure controls and procedures are effective as of the end
of the quarterly period covered by this Quarterly Report on Form
10-Q to ensure that material information relating to A&F and its
consolidated subsidiaries is made known to them, particularly during
the period for which the periodic reports of A&F, including this
Quarterly Report on Form 10-Q, are being prepared.
Changes in Internal Control over Financial Reporting
There were no changes in A&F's internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during A&F's
fiscal quarter ended July 31, 2004, that have materially affected, or are
reasonably likely to materially affect, A&F's internal control over financial
reporting.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits arising in the ordinary course of
business.
A&F is aware of 20 actions that have been filed against A&F and certain of its
officers and directors on behalf of a purported, but as yet uncertified, class
of shareholders who purchased A&F's Class A Common Stock between October 8, 1999
and October 13, 1999. These 20 actions have been filed in the United States
District Courts for the Southern District of New York and the Southern District
of Ohio, Eastern Division, alleging violations of the federal securities laws
and seeking unspecified damages. On April 12, 2000, the Judicial Panel on
Multidistrict Litigation issued a Transfer Order transferring the 20 pending
actions to the Southern District of New York for consolidated pretrial
proceedings under the caption In re Abercrombie & Fitch Securities Litigation.
On November 16, 2000, the Court signed an Order appointing the Hicks Group, a
group of seven unrelated investors in A&F's securities, as lead plaintiff, and
appointing lead counsel in the consolidated action. On December 14, 2000,
plaintiffs filed a Consolidated Amended Class Action Complaint (the "Amended
Complaint") in which they did not name as defendants Lazard Freres & Co. and
Todd Slater, who had formerly been named as defendants in certain of the 20
complaints. A&F and other defendants filed motions to dismiss the Amended
Complaint on February 14, 2001. On November 14, 2003, the motions to dismiss the
Amended Complaint were denied. On December 2, 2003, A&F moved for
reconsideration or reargument of the November 14, 2003 order denying the motions
to dismiss. The motions for reconsideration or reargument were fully briefed and
submitted to the Court on January 9, 2004. The motions were denied on February
23, 2004.
A&F is aware of six actions that have been filed on behalf of purported classes
of employees and former employees of the Company alleging that the Company
required its associates to wear and pay for a "uniform" in violation of
applicable law. In each case, the plaintiff, on behalf of his or her purported
class, seeks injunctive relief and unspecified amounts of economic and
liquidated damages. Two of these cases, Jennifer M. Solis v. Abercrombie & Fitch
Stores, Inc. and A&F California, LLC and Sarah Stevenson v. Abercrombie & Fitch
Co., allege violations of California law and were filed on February 10, 2003 and
February 4, 2003 in the California Superior Courts for Los Angeles County and
San Francisco County, respectively. An answer was filed in the Solis case on
March 26, 2003. Pursuant to a Petition for Coordination, the Solis and the
Stevenson cases were coordinated by order issued November 17, 2003. Shelby Port
v. Abercrombie & Fitch Stores, Inc., which alleges violations of Washington law,
was filed on or about July 18, 2003 in the Washington Superior Court of King
County. The defendant filed a motion to dismiss the complaint in the Port case
on September 5, 2003. Plaintiff since filed an amended complaint on or about
August 9, 2004, adding three new named plaintiffs. The defendant intends to
re-file its motion to dismiss. The Company does not believe it is feasible to
predict the outcome of the legal proceedings identified in this paragraph and
intends to defend vigorously against them. The timing of the final resolution of
each of these proceedings is also uncertain. Accordingly, the Company cannot
estimate a range of potential loss, if any, for any of these legal proceedings.
28
Jadii Mohme v. Abercrombie & Fitch, which alleges violations of Illinois law,
was filed on July 18, 2003 in the Illinois Circuit Court of St. Clair County. A
first amended complaint was filed in the Mohme case on September 10, 2003 to
change the defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie &
Fitch." An answer to the first amended complaint was filed in the Mohme case on
September 26, 2003. Holly Zemany v. Abercrombie & Fitch, which alleges
violations of Pennsylvania law, was filed on July 18, 2003 in the Pennsylvania
Court of Common Pleas of Allegheny County. A first amended complaint was filed
in the Zemany case on September 9, 2003 to change the defendant to "Abercrombie
& Fitch Stores, Inc." from "Abercrombie & Fitch." A second amended complaint was
filed November 10, 2003, adding some factual allegations. Defendant filed an
answer to the second amended complaint on January 22, 2004. In Michael Gualano
v. Abercrombie & Fitch, which was filed in the United States District Court for
the Western District of Pennsylvania on March 14, 2003, the plaintiff alleges
that the "uniform," when purchased, drove associates' wages below the federal
minimum wage. The complaint purports to state a collective action on behalf of
part-time associates under the Fair Labor Standards Act. A first amended
complaint was filed in the Gualano case on September 9, 2003, to change the
defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." An
answer to the first amended complaint was filed in the Gualano case on or about
September 24, 2003. Jadii Mohme and Holly Zemany have stayed their claims in
state court and joined their claims with Michael Gualano along with four other
named plaintiffs in four other states in a second amended complaint, which the
defendant has answered. The parties are in the process of settling these claims.
The Company does not expect the settlement to be material to the consolidated
financial statements.
A&F is aware of two actions that have been filed against the Company involving
overtime compensation. In each action, the plaintiffs, on behalf of their
respective purported class, seek injunctive relief and unspecified amounts of
economic and liquidated damages. In Bryan T. Kimbell, Individually and on Behalf
of All Others Similarly Situated and on Behalf of the Public v. Abercrombie &
Fitch Stores, Inc., which was filed on July 10, 2002 in the California Superior
Court for Los Angeles County, the plaintiffs allege that California general and
store managers were entitled to receive overtime pay as "non-exempt" employees
under California wage and hour laws. An answer was filed in the Kimbell case on
September 4, 2002 and the parties are in the process of discovery. Plaintiff has
filed, and the defendant has opposed, a motion to certify a class of store
managers in California. That motion is pending. In Melissa Mitchell, et al. v.
Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., which was filed on
June 13, 2003 in the United States District Court for the Southern District of
Ohio, the plaintiffs allege that assistant managers and store managers were not
paid overtime compensation in violation of the Fair Labor Standards Act and Ohio
law. The defendants filed a motion to dismiss the Mitchell case on July 28,
2003. The case was transferred from the Western Division to the Eastern Division
of the Southern District of Ohio on April 21, 2004. The defendants subsequently
renewed their motion to dismiss, which is pending.
The Company does not believe it is feasible to predict the outcome of the legal
proceedings described in the immediately preceding paragraph and intends to
defend vigorously against them. The timing of the final resolution of each of
these proceedings is also uncertain. Accordingly, the Company cannot estimate a
range of potential loss, if any, for any of these legal proceedings.
29
A&F is aware of one action that has been filed on behalf of a purported class
alleged to be discriminated against in hiring or employment decisions due to
race and/or national origin. Eduardo Gonzalez, et al. v. Abercrombie & Fitch Co.
was filed on June 16, 2003 in the United States District Court for the Northern
District of California. The plaintiffs subsequently amended their complaint to
add A&F California, LLC, Abercrombie & Fitch Stores, Inc. and A&F Ohio, Inc. as
defendants. The plaintiffs allege, on behalf of their purported class, that they
were discriminated against in hiring and employment decisions due to their race
and/or national origin. The plaintiffs seek, on behalf of their purported class,
injunctive relief and unspecified amounts of economic, compensatory and punitive
damages. A second amended complaint, which added two additional plaintiffs, was
filed on or about January 9, 2004. Defendants filed an answer to the second
amended complaint on or about January 26, 2004. A third amended complaint was
filed June 10, 2004, restating the original claims and adding two individual,
but not class, claims of gender discrimination. The defendants filed an answer
on or about June 21, 2004. During the first quarter of fiscal 2004, the Company
recorded an $8.0 million charge (net of expected proceeds of $10.0 million from
insurance) resulting from an increase in expected defense costs related to this
purported class action employment discrimination suit. The Company does not
believe it is feasible to predict the outcome of this proceeding and intends to
vigorously defend against it. However, if judgment is rendered in this
proceeding which is unfavorable to the Company, the amount could potentially be
material to the Company's financial statements. The parties are in the process
of discovery. In addition, the EEOC is conducting nationwide investigations
relating to allegations of discrimination based on race, national origin and
gender.
30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) The following table provides information regarding A&F's purchase of its
Class A Common Stock during each fiscal month of the quarterly period ended July
31, 2004:
Total Number of Maximum Number
Total Shares Purchased of Shares that May
Number Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans under the Plans or
Period Purchased per Share or Programs Programs (1)
------ --------- ---------- ------------------- ------------------
May 2 through May 29,
2004 - $ - - -
May 30 through July 3,
2004 113 (2) $ 37.12 (2) - -
July 4 through July 31,
2004 - $ - - 6,000,000
--- ------- ----------- ---------
Total 113 (2) $ 37.12 (2) - 6,000,000
=== ======= =========== =========
(1) The number shown represents, as of the end of each period, the maximum
number of shares of Class A Common Stock that may yet be purchased under
A&F's publicly announced stock purchase authorizations. As disclosed in
A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 1,
2004, during the quarterly period ended May 1, 2004, A&F had repurchased
all of the shares of Class A Common Stock which had remained available at
that time under the stock repurchase authorization announced on August 8,
2002, and, as a result, that authorization had expired. On July 29, 2004,
A&F announced the authorization of the repurchase of 6,000,000 shares of
Class A Common Stock. The shares may be purchased from time-to-time,
depending on market conditions.
(2) Reflects shares of Class A Common Stock withheld from employees for
payment of taxes due upon the vesting of restricted share awards.
31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Certificate of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation of A&F as
filed with the Delaware Secretary of State on August 27, 1996,
incorporated herein by reference to Exhibit 3.1 to A&F's
Quarterly Report on Form 10-Q for the quarterly period ended
November 2, 1996. (File No. 1-12107)
3.2 Certificate of Designation of Series A Participating
Cumulative Preferred Stock of A&F as filed with the Delaware
Secretary of State on July 21, 1998, incorporated herein by
reference to Exhibit 3.2 to A&F's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999. (File No. 1-12107)
3.3 Certificate of Decrease of Shares Designated as Class B Common
Stock of A&F as filed with the Delaware Secretary of State on
July 30, 1999, incorporated herein by reference to Exhibit 3.3
to A&F's Quarterly Report on Form 10-Q for the quarterly
period ended July 31, 1999. (File No. 1-12107)
3.4 Amended and Restated Bylaws of A&F, effective January 31,
2002, incorporated herein by reference to Exhibit 3.4 to A&F's
Annual Report on Form 10-K for the fiscal year ended February
2, 2002. (File No. 1-12107)
3.5 Certificate regarding adoption of amendment to Section 2.02 of
Amended and Restated Bylaws of A&F by Board of Directors on
July 10, 2003, incorporated herein by reference to Exhibit 3.5
to A&F's Quarterly Report on Form 10-Q for the quarterly
period ended November 1, 2003 (File No. 1-12107)
3.6 Certificate regarding adoption of amendments to Sections 1.02,
1.06, 3.01, 3.05, 4.02, 4.03, 4.04, 4.05, 4.06, 6.01 and 6.02
of Amended and Restated Bylaws of A&F by Board of Directors on
May 20, 2004, incorporated herein by reference to Exhibit 3.6
to A&F's Quarterly Report on Form 10-Q for the quarterly
period ended May 1, 2004 (File No. 1-12107)
3.7 Amended and Restated Bylaws of A&F (reflecting amendments
through May 20, 2004) [for SEC reporting compliance purposes
only], incorporated herein by reference to Exhibit 3.7 to
A&F's Quarterly Report on Form 10-Q for the quarterly period
ended May 1, 2004 (File No. 1-12107)
4. Instruments Defining the Rights of Security Holders.
4.1 Credit Agreement, dated as of November 14, 2002, among
Abercrombie & Fitch Management Co., as Borrower, A&F, as
Guarantor, the Lenders party thereto, and National City Bank,
as Administrative Agent and Lead Arranger (the "Credit
Agreement"), incorporated herein by reference to Exhibit 4.1
to A&F's Current Report on Form 8-K dated November 26, 2002.
(File No. 1-12107)
4.2 Guarantee Agreement, dated as of November 14, 2002, among A&F,
each direct and indirect domestic subsidiary of A&F other than
Abercrombie & Fitch Management Co., and National City Bank, as
Administrative Agent for the Lenders party to the Credit
Agreement, incorporated herein by
32
reference to Exhibit 4.2 to A&F's Current Report on Form 8-K
dated November 26, 2002. (File No. 1-12107)
4.3 First Amendment and Waiver, dated as of January 26, 2004, to
the Credit Agreement, dated as of November 14, 2002, among
Abercrombie & Fitch Management Co., A&F, the Lenders party
thereto and National City Bank, as Administrative Agent,
incorporated herein by reference to Exhibit 4.3 to A&F's
Annual Report on Form 10-K for the fiscal year ended January
31, 2004 (File No. 1-12107)
4.4 Rights Agreement, dated as of July 16, 1998, between A&F and
First Chicago Trust Company of New York, as Rights Agent,
incorporated herein by reference to Exhibit 1 to A&F's
Registration Statement on Form 8-A dated July 21, 1998. (File
No. 1-12107)
4.5 Amendment No. 1 to Rights Agreement, dated as of April 21,
1999, between A&F and First Chicago Trust Company of New York,
as Rights Agent, incorporated herein by reference to Exhibit 2
to A&F's Amendment No. 1 to Form 8-A dated April 23, 1999.
(File No. 1-12107)
4.6 Certificate of adjustment of number of Rights associated with
each share of Class A Common Stock, dated May 27, 1999,
incorporated herein by reference to Exhibit 4.6 to A&F's
Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 1999. (File No. 1-12107)
4.7 Appointment and Acceptance of Successor Rights Agent,
effective as of the opening of business on October 8, 2001,
between A&F and National City Bank, incorporated herein by
reference to Exhibit 4.6 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended August 4, 2001. (File No.
1-12107)
10. Material Contracts.
10.1 Abercrombie & Fitch Co. Incentive Compensation Performance
Plan, incorporated herein by reference to Exhibit 10.1 to
A&F's Quarterly Report on Form 10-Q for the quarterly period
ended May 4, 2002. (File No. 1-12107)
10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock
Option and Performance Incentive Plan (reflects amendments
through December 7, 1999 and the two-for-one stock split
distributed June 15, 1999 to stockholders of record on May 25,
1999), incorporated herein by reference to Exhibit 10.2 to
A&F's Annual Report on Form 10-K for the fiscal year ended
January 29, 2000. (File No. 1-12107)
10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock
Plan for Non-Associate Directors (reflects amendments through
January 30, 2003 and the two-for-one stock split distributed
June 15, 1999 to stockholders of record on May 25, 1999),
incorporated herein by reference to Exhibit 10.3 to A&F's
Annual Report on Form 10-K for the fiscal year ended February
1, 2003. (File No. 1-12107)
10.4 Abercrombie & Fitch Co. 2002 Stock Plan for Associates (as
amended and restated May 22, 2003), incorporated herein by
reference to Exhibit 10.4 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended May 3, 2003. (File No.
1-12107)
33
10.5 Amended and Restated Employment Agreement, dated as of January
30, 2003, by and between A&F and Michael S. Jeffries,
including as Exhibit A thereto the Supplemental Executive
Retirement Plan (Michael S. Jeffries), effective February 2,
2003, incorporated herein by reference to Exhibit 10.1 to
A&F's Current Report on Form 8-K dated February 11, 2003.
(File No. 1-12107)
10.6 Abercrombie & Fitch Co. Directors' Deferred Compensation Plan
(as amended and restated May 22, 2003), incorporated herein by
reference to Exhibit 10.7 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended May 3, 2003. (File No.
1-12107)
10.7 Abercrombie & Fitch Nonqualified Savings and Supplemental
Retirement Plan (formerly known as the Abercrombie & Fitch Co.
Supplemental Retirement Plan), as amended and restated
effective January 1, 2001, incorporated herein by reference to
Exhibit 10.9 to A&F's Annual Report on Form 10-K for the
fiscal year ended February 1, 2003. (File No. 1-12107)
10.8 Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate
Directors, incorporated herein by reference to Exhibit 10.9 to
A&F's Quarterly Report on Form 10-Q for the quarterly period
ended May 3, 2003. (File No. 1-12107)
10.9 Retirement Agreement, executed on May 20, 2004, by and between
Seth R. Johnson and A&F, incorporated herein by reference to
Exhibit 10.9 to A&F's Quarterly Report on Form 10-Q for the
quarterly period ended May 1, 2004 (File No. 1-12107)
10.10 Employment Agreement, entered into as of May 17, 2004, by and
between A&F and Robert S. Singer, including as Exhibit A
thereto the Supplemental Executive Retirement Plan II (Robert
S. Singer), effective May 17, 2004, incorporated herein by
reference to Exhibit 10.10 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended May 1, 2004 (File No.
1-12107)
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)
34
(b) Reports on Form 8-K.
On May 20, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on May 18, 2004 announcing the retirement of Seth R. Johnson
from A&F effective June 18, 2004 and the issuance of a second news release
on May 18, 2004 announcing that Robert S. Singer had been named President
and Chief Operating Officer of A&F.
On May 21, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on May 20, 2004 announcing the declaration of a quarterly
cash dividend of $0.125 per share, payable June 22, 2004 to A&F
shareholders of record on June 1, 2004 and the issuance of a second
news release on May 20, 2004 announcing the election of Robert S. Singer
to the A&F Board of Directors.
On May 28, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on May 28, 2004 announcing the resignation of Seth R. Johnson
from the A&F Board of Directors, effective July 26, 2004.
On July 29, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on July 29, 2004 announcing the declaration of a quarterly
cash dividend of $0.125 per share, payable September 21, 2004 to A&F
shareholders of record on August 31, 2004 and the issuance of a second
news release on July 29, 2004 announcing that the A&F Board of Directors
had authorized a stock repurchase program to repurchase up to 6 million
shares of A&F's Class A Common Stock.
35
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: September 9, 2004 By /s/ Susan J. Riley
------------------------------
Susan J. Riley,
Senior Vice President - Chief
Financial Officer
* Ms. Riley has been duly authorized to sign on behalf of the Registrant as its
principal financial officer.
36
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)
37