Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
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Delaware
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31-1469076 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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6301 Fitch Path, New Albany, Ohio 43054
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).)
þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class A Common Stock
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Outstanding at December 3, 2010 |
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$.01 Par Value
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87,846,242 Shares |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Thousands, except share and per share amounts)
(Unaudited)
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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October 30, |
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October 31, |
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October 30, |
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October 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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NET SALES |
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$ |
885,778 |
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$ |
753,684 |
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$ |
2,319,381 |
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$ |
1,992,635 |
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Cost of Goods Sold |
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321,346 |
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270,597 |
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838,186 |
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703,579 |
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GROSS PROFIT |
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564,432 |
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483,087 |
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1,481,195 |
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1,289,056 |
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Stores and Distribution Expense |
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385,135 |
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349,362 |
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1,104,027 |
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1,011,968 |
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Marketing, General and Administrative Expense |
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102,612 |
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87,867 |
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294,450 |
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260,878 |
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Other Operating Income, Net |
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(1,692 |
) |
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(1,609 |
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(4,507 |
) |
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(6,266 |
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OPERATING INCOME |
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78,377 |
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47,467 |
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87,225 |
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22,476 |
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Interest Expense (Income), Net |
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671 |
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461 |
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2,303 |
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(2,691 |
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INCOME FROM CONTINUING OPERATIONS BEFORE TAXES |
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77,706 |
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47,006 |
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84,922 |
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25,167 |
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Tax Expense (Benefit) from Continuing Operations |
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27,666 |
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(2,217 |
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27,232 |
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7,239 |
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NET INCOME FROM CONTINUING OPERATIONS |
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$ |
50,040 |
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$ |
49,223 |
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$ |
57,690 |
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$ |
17,928 |
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LOSS FROM DISCONTINUED OPERATIONS, Net of Tax |
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$ |
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$ |
(10,439 |
) |
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$ |
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$ |
(65,131 |
) |
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NET INCOME (LOSS) |
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$ |
50,040 |
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$ |
38,784 |
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$ |
57,690 |
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$ |
(47,203 |
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NET INCOME PER SHARE FROM CONTINUING OPERATIONS: |
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BASIC |
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$ |
0.57 |
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$ |
0.56 |
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$ |
0.65 |
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$ |
0.20 |
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DILUTED |
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$ |
0.56 |
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$ |
0.55 |
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$ |
0.64 |
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$ |
0.20 |
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NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS: |
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BASIC |
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$ |
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$ |
(0.12 |
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$ |
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$ |
(0.74 |
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DILUTED |
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$ |
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$ |
(0.12 |
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$ |
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$ |
(0.74 |
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NET INCOME (LOSS) PER SHARE: |
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BASIC |
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$ |
0.57 |
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$ |
0.44 |
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$ |
0.65 |
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$ |
(0.54 |
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DILUTED |
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$ |
0.56 |
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$ |
0.44 |
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$ |
0.64 |
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$ |
(0.54 |
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WEIGHTED-AVERAGE SHARES OUTSTANDING: |
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BASIC |
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88,236 |
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87,943 |
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88,184 |
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87,839 |
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DILUTED |
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90,069 |
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88,730 |
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89,731 |
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87,839 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.175 |
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$ |
0.175 |
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$ |
0.525 |
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$ |
0.525 |
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OTHER COMPREHENSIVE INCOME |
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Foreign Currency Translation Adjustments |
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$ |
8,866 |
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$ |
1,639 |
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$ |
6,631 |
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$ |
9,640 |
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(Loss) gain on Marketable Securities,
net of taxes of $543 and $(1,402) for
the thirteen week periods ended October
30, 2010 and October 31 2009,
respectively, and $(1,422) and $193 for
the thirty-nine week periods ended
October 30, 2010 and October 31, 2009,
respectively |
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(925 |
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2,387 |
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2,421 |
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(328 |
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Unrealized (loss) gain on derivative
financial instruments, net of taxes of
$1,170 and $(1,088) for the thirteen
week periods ended October 30, 2010 and
October 31, 2009, respectively, and
$846 and $1,586 for the thirty-nine
week periods ended October 30, 2010 and
October 31, 2009, respectively |
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(1,991 |
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1,840 |
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(1,438 |
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(2,699 |
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Other Comprehensive Income |
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$ |
5,950 |
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$ |
5,866 |
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$ |
7,614 |
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$ |
6,613 |
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COMPREHENSIVE INCOME (LOSS) |
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$ |
55,990 |
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$ |
44,650 |
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$ |
65,304 |
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$ |
(40,590 |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
3
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
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October 30, 2010 |
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January 30, 2010 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and Equivalents |
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$ |
618,222 |
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$ |
680,113 |
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Marketable Securities |
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32,356 |
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Receivables |
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82,264 |
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90,865 |
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Inventories |
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511,821 |
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310,645 |
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Deferred Income Taxes |
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69,943 |
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44,570 |
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Other Current Assets |
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83,849 |
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77,297 |
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TOTAL CURRENT ASSETS |
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1,366,099 |
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1,235,846 |
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PROPERTY AND EQUIPMENT, NET |
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1,220,103 |
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1,244,019 |
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NON-CURRENT MARKETABLE SECURITIES |
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124,837 |
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141,794 |
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OTHER ASSETS |
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211,738 |
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200,207 |
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TOTAL ASSETS |
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$ |
2,922,777 |
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$ |
2,821,866 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts Payable |
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$ |
202,044 |
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$ |
150,134 |
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Accrued Expenses |
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242,835 |
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246,289 |
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Deferred Lease Credits |
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43,336 |
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43,597 |
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Income Taxes Payable |
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57,096 |
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9,352 |
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TOTAL CURRENT LIABILITIES |
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545,311 |
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449,372 |
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LONG-TERM LIABILITIES: |
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Deferred Income Taxes |
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47,178 |
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47,142 |
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Deferred Lease Credits |
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202,596 |
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212,052 |
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Long-Term Debt |
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81,670 |
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71,213 |
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Other Liabilities |
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199,191 |
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214,170 |
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TOTAL LONG-TERM LIABILITIES |
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530,635 |
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544,577 |
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SHAREHOLDERS EQUITY: |
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Class A Common Stock $0.01 par value: 150,000
shares authorized and 103,300 shares issued at
each of October 30, 2010 and January 30, 2010 |
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1,033 |
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1,033 |
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Paid-In Capital |
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345,975 |
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339,453 |
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Retained Earnings |
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2,195,096 |
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2,183,690 |
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Accumulated Other Comprehensive Loss, net of tax |
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(1,359 |
) |
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(8,973 |
) |
Treasury Stock, at Average Cost - 15,489 and 15,314 shares at October 30, 2010 and January
30, 2010, respectively |
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(693,914 |
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(687,286 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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1,846,831 |
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1,827,917 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
2,922,777 |
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$ |
2,821,866 |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
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Thirty-Nine Weeks Ended |
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October 30, 2010 |
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October 31, 2009 |
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OPERATING ACTIVITIES: |
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Net Income (Loss) |
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$ |
57,690 |
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$ |
(47,203 |
) |
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Impact of Other Operating Activities on Cash Flows: |
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Depreciation and Amortization |
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167,756 |
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178,693 |
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Loss on Disposal / Write-off of Assets |
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2,702 |
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8,818 |
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Non-Cash Charge for Asset Impairment |
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2,247 |
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51,536 |
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Amortization of Deferred Lease Credits |
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(34,744 |
) |
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(34,726 |
) |
Share-Based Compensation |
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|
30,136 |
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26,615 |
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Tax Deficiency from Share-Based Compensation |
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(1,770 |
) |
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(6,199 |
) |
Deferred Taxes |
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(23,135 |
) |
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(31,722 |
) |
Lessor Construction Allowances |
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26,769 |
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|
29,205 |
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Changes in Assets and Liabilities: |
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Inventories |
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(200,362 |
) |
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|
26,919 |
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Accounts Payable and Accrued Expenses |
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28,877 |
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|
36,942 |
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Income Taxes |
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|
47,731 |
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(7,626 |
) |
Other Assets and Liabilities |
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(26,444 |
) |
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(60,378 |
) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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|
77,453 |
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|
170,874 |
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INVESTING ACTIVITIES: |
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Capital Expenditures |
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(116,965 |
) |
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(144,537 |
) |
Purchase of Trust-Owned Life Insurance Policies |
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(11,583 |
) |
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(9,789 |
) |
Proceeds from Sales of Marketable Securities |
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|
64,917 |
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|
40,350 |
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NET CASH USED FOR INVESTING ACTIVITIES |
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(63,631 |
) |
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(113,976 |
) |
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FINANCING ACTIVITIES: |
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Proceeds from Share-Based Compensation |
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|
5,985 |
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|
1,687 |
|
Repayment of Borrowings under Credit Agreement |
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(100,000 |
) |
Proceeds from Borrowings under Credit Agreement |
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|
48,056 |
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Change in Outstanding Checks and Other |
|
|
(7,356 |
) |
|
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(20,372 |
) |
Dividends Paid |
|
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(46,285 |
) |
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(46,104 |
) |
Purchase of Treasury Shares |
|
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(29,207 |
) |
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NET CASH USED FOR FINANCING ACTIVITIES |
|
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(76,863 |
) |
|
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(116,733 |
) |
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EFFECT OF EXCHANGE RATES ON CASH |
|
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1,150 |
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4,600 |
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NET DECREASE IN CASH AND EQUIVALENTS: |
|
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(61,891 |
) |
|
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(55,235 |
) |
Cash and Equivalents, Beginning of Period |
|
|
680,113 |
|
|
|
522,122 |
|
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CASH AND EQUIVALENTS, END OF PERIOD |
|
$ |
618,222 |
|
|
$ |
466,887 |
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SIGNIFICANT NON-CASH INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Change in Accrual for Construction in Progress |
|
$ |
17,479 |
|
|
$ |
(7,319 |
) |
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5
ABERCROMBIE & FITCH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. (A&F), through its wholly-owned subsidiaries (collectively, A&F and its
wholly-owned subsidiaries are referred to as the Company), is a specialty retailer of
high-quality, casual apparel for men, women and kids with an active, youthful lifestyle.
The accompanying Condensed Consolidated Financial Statements include the historical financial
statements of, and transactions applicable to, the Company and reflect its assets, liabilities,
results of operations and cash flows.
The Companys fiscal year ends on the Saturday closest to January 31. Fiscal years are designated
in the condensed consolidated financial statements and notes by the calendar year in which the
fiscal year commences. All references herein to Fiscal 2010 represent the 52-week fiscal year
that will end on January 29, 2011, and to Fiscal 2009 represent the 52-week fiscal year that
ended January 30, 2010.
The Condensed Consolidated Financial Statements as of October 30, 2010 and for the thirteen and
thirty-nine week periods ended October 30, 2010 and October 31, 2009 are unaudited and are
presented pursuant to the rules and regulations of the U.S. Securities and Exchange Commission
(SEC). Accordingly, these Condensed Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto contained in A&Fs Annual
Report on Form 10-K for Fiscal 2009 filed on March 29, 2010. The January 30, 2010 condensed
consolidated balance sheet data were derived from audited consolidated financial statements, but do
not include all disclosures required by accounting principles generally accepted in the United
States of America.
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, in all
material respects, 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
Fiscal 2010.
On June 16, 2009, A&Fs Board of Directors approved the closure of the Companys 29 RUEHL branded
stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL
branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in Loss from Discontinued Operations,
Net of Tax on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
for the thirteen and thirty-nine weeks ended October 31, 2009. Results from discontinued
operations were immaterial for the thirteen and thirty-nine weeks ended October 30, 2010.
The Condensed Consolidated Financial Statements as of October 30, 2010 and for the thirteen and
thirty-nine week periods ended October 30, 2010 and October 31, 2009 included herein have been
reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, 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, as amended (the Act), for their report on the condensed consolidated
financial statements because their
report is not a report or a part of a registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
6
2. SEGMENT REPORTING
The Company determines its operating segments on the same basis that it uses to evaluate
performance internally. The operating segments identified by the Company are Abercrombie & Fitch,
abercrombie kids, Hollister and Gilly Hicks. The operating segments have been aggregated and are
reported as one reportable segment because they have similar economic characteristics and meet the
required aggregation criteria. The Company believes its operating segments may be aggregated for
financial reporting purposes because they are similar in each of the following areas: class of
consumer, economic characteristics, nature of products, nature of production processes, and
distribution methods.
Geographic Information
Financial information relating to the Companys operations by geographic area follows:
Net Sales:
Net sales includes net sales through stores and direct-to-consumer operations, including shipping
and handling revenue. Net sales are reported by geographic area based on the location of the
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
(in thousands): |
|
October 30, 2010 |
|
|
October 31, 2009 |
|
|
October 30, 2010 |
|
|
October 31, 2009 |
|
United States |
|
$ |
721,705 |
|
|
$ |
665,953 |
|
|
$ |
1,903,082 |
|
|
$ |
1,773,916 |
|
International |
|
|
164,073 |
|
|
|
87,731 |
|
|
|
416,299 |
|
|
|
218,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
885,778 |
|
|
$ |
753,684 |
|
|
$ |
2,319,381 |
|
|
$ |
1,992,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands): |
|
October 30, 2010 |
|
|
January 30, 2010 |
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,054,478 |
|
|
$ |
1,137,844 |
|
|
|
|
|
|
|
|
|
International |
|
|
274,489 |
|
|
|
194,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,328,967 |
|
|
$ |
1,332,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets included in the table above include primarily property and equipment (net),
store supplies and lease deposits.
3. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of $10.2 million and $30.1 million for the
thirteen and thirty-nine week periods ended October 30, 2010, respectively, and $9.3 million and
$26.6 million for the thirteen and thirty-nine week periods ended October 31, 2009, respectively.
The Company also recognized
$3.7 million and $10.8 million in tax benefits related to share-based compensation for the thirteen
and thirty-nine week periods ended October 30, 2010, respectively, and $3.4 million and $9.8
million in tax benefits related to share-based compensation for the thirteen and thirty-nine week
periods ended October 31, 2009, respectively.
7
For share-based compensation that is expected to result in a tax deduction, a deferred tax asset is
established at the time the Company recognizes share-based compensation expense. The actual tax
deduction for share-based compensation generally occurs after an equity award vests or is exercised
and is measured at the equity awards intrinsic value at the time of vesting or exercise. If the
tax deduction exceeds the recorded deferred tax asset, an excess tax benefit is recorded to a pool
of windfall tax benefits account, as a component of additional paid-in capital. If the tax
deduction is less than the recorded deferred tax asset, a shortfall is recorded against the pool
of windfall tax benefits account to the extent of prior recognized aggregate windfalls, with any
remaining amount charged to tax expense. As of October 30, 2010, the pool of windfall tax
benefits account had a balance of $83.3 million, which is sufficient to fully absorb any
shortfall associated with existing outstanding equity awards.
The Company adjusts share-based compensation expense on a quarterly basis for actual award
forfeitures and for changes to the estimate of expected forfeitures based on historical forfeiture
experience. The adjustments for forfeitures were credits of $4.1 million and $3.3 million during
the thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively.
A&F issues shares of Class A Common Stock (Common Stock) for stock option and stock appreciation
right exercises and restricted stock unit vestings from treasury stock. As of October 30, 2010,
A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and
restricted stock units outstanding without having to repurchase additional shares of Common Stock.
Settlement of stock awards in Common Stock also requires that the Company have sufficient shares
available in stockholder-approved plans at the time of settlement.
For stock appreciation rights where the Company has the option to settle in stock or cash, the
Company uses the equity method to account for awards for which it has the intent and ability to
settle in shares of Common Stock.
Fair Value Estimates
The Company estimates the fair value of stock options and stock appreciation rights granted using
the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of
the stock options and stock appreciation rights and expected future stock price volatility over the
expected term. Estimates of expected terms, which represent the expected periods of time the
Company believes stock options and stock appreciation rights will be outstanding, are based on
historical experience. Estimates of expected future stock price volatility are based on the
volatility of A&Fs Common Stock price for the most recent historical period equal to the expected
term of the stock option or stock appreciation right, as appropriate. The Company calculates the
volatility as the annualized standard deviation of the differences in the natural logarithms of the
weekly stock closing price, adjusted for stock splits and dividends.
In the case of restricted stock units, the Company calculates the fair value of the restricted
stock units granted using the market price of the underlying Common Stock on the date of grant
adjusted for anticipated dividend payments during the vesting period.
8
Stock Options
The Company did not grant any stock options during the thirty-nine weeks ended October 30, 2010.
The weighted-average estimated fair value of stock options granted during the thirty-nine weeks
ended October 31, 2009, and the weighted-average assumptions used in calculating such fair value,
on the date of grant, were as follows:
|
|
|
|
|
|
|
Thirty-nine |
|
|
|
Weeks Ended |
|
|
|
October 31, |
|
|
|
2009 |
|
|
|
|
|
|
Grant date market price |
|
$ |
22.87 |
|
Exercise price |
|
$ |
22.87 |
|
Fair value |
|
$ |
8.26 |
|
|
|
|
|
|
Assumptions: |
|
|
|
|
Price volatility |
|
|
50 |
% |
Expected term (Years) |
|
|
4.1 |
|
Risk-free interest rate |
|
|
1.6 |
% |
Dividend yield |
|
|
1.7 |
% |
Below is a summary of stock option activity for the thirty-nine weeks ended October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Average |
|
|
Aggregate |
|
|
Remaining |
|
Stock Options |
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
|
Contractual Life |
|
Outstanding at January 30, 2010 |
|
|
2,969,861 |
|
|
$ |
38.36 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(224,016 |
) |
|
|
28.19 |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(84,750 |
) |
|
|
69.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 30, 2010 |
|
|
2,661,095 |
|
|
$ |
38.22 |
|
|
$ |
31,682,136 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at
October 30, 2010 |
|
|
2,422,582 |
|
|
$ |
35.89 |
|
|
$ |
30,201,366 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options expected to
become exercisable at October
30, 2010 |
|
|
224,582 |
|
|
$ |
62.08 |
|
|
$ |
1,376,608 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the thirty-nine weeks ended
October 30, 2010 was $2.7 million and was immaterial for the thirty-nine weeks ended October 31,
2009.
The grant date fair value of stock options vested during the thirty-nine weeks ended October 30,
2010 and October 31, 2009 was $3.8 million and $5.1 million, respectively.
As of October 30, 2010, there was $2.4 million of total unrecognized compensation cost, net of
estimated forfeitures, related to stock options. The unrecognized compensation cost is expected to
be recognized over a weighted-average period of 0.7 years.
9
Stock Appreciation Rights
The weighted-average estimated fair value of stock appreciation rights granted during the
thirty-nine weeks ended October 30, 2010 and October 31, 2009, and the weighted-average assumptions
used in calculating such fair value, on the date of grant, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine Weeks Ended |
|
|
|
Chairman and Chief |
|
|
|
|
|
|
|
|
|
Executive Officer |
|
|
Other Executive Officers |
|
|
All Other Associates |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Grant date market price |
|
$ |
44.86 |
|
|
$ |
28.42 |
|
|
$ |
44.86 |
|
|
$ |
25.77 |
|
|
$ |
44.28 |
|
|
$ |
25.72 |
|
Exercise price |
|
$ |
44.86 |
|
|
$ |
32.99 |
|
|
$ |
44.86 |
|
|
$ |
25.77 |
|
|
$ |
44.28 |
|
|
$ |
25.72 |
|
Fair value |
|
$ |
16.96 |
|
|
$ |
9.67 |
|
|
$ |
16.99 |
|
|
$ |
10.06 |
|
|
$ |
16.49 |
|
|
$ |
9.84 |
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price volatility |
|
|
50 |
% |
|
|
47 |
% |
|
|
51 |
% |
|
|
52 |
% |
|
|
53 |
% |
|
|
53 |
% |
Expected term (Years) |
|
|
4.7 |
|
|
|
5.6 |
|
|
|
4.5 |
|
|
|
4.5 |
|
|
|
4.1 |
|
|
|
4.1 |
|
Risk-free interest rate |
|
|
2.3 |
% |
|
|
2.5 |
% |
|
|
2.3 |
% |
|
|
1.6 |
% |
|
|
2.0 |
% |
|
|
1.6 |
% |
Dividend yield |
|
|
2.1 |
% |
|
|
2.4 |
% |
|
|
2.1 |
% |
|
|
1.7 |
% |
|
|
2.1 |
% |
|
|
1.7 |
% |
Below is a summary of stock appreciation rights activity for the thirty-nine weeks ended
October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Aggregate |
|
|
Remaining |
|
Stock Appreciation Rights |
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
|
Contractual Life |
|
Outstanding at January 30, 2010 |
|
|
5,788,867 |
|
|
$ |
30.88 |
|
|
|
|
|
|
|
|
|
Granted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman and Chief
Executive Officer |
|
|
829,697 |
|
|
|
44.86 |
|
|
|
|
|
|
|
|
|
Other Executive Officers |
|
|
435,000 |
|
|
|
44.86 |
|
|
|
|
|
|
|
|
|
All Other Associates |
|
|
302,100 |
|
|
|
44.28 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(40,850 |
) |
|
|
25.73 |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(123,475 |
) |
|
|
26.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 30, 2010 |
|
|
7,191,339 |
|
|
$ |
34.00 |
|
|
$ |
70,316,047 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
exercisable at October 30,
2010 |
|
|
402,241 |
|
|
$ |
30.79 |
|
|
$ |
4,853,066 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
expected to become exercisable
at October 30, 2010 |
|
|
6,651,145 |
|
|
$ |
34.10 |
|
|
$ |
64,689,708 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks
ended October 30, 2010 was immaterial.
10
The grant date fair value of stock appreciation rights vested during the thirty-nine weeks ended
October 30, 2010 was $5.0 million.
As of October 30, 2010, there was $58.0 million of total unrecognized compensation cost, net of
estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is
expected to be recognized over a weighted-average period of 1.6 years.
Restricted Stock Units
Below is a summary of restricted stock unit activity for the thirty-nine weeks ended October 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
Restricted Stock Units |
|
Number of Shares |
|
|
Value |
|
Non-vested at January 30, 2010 |
|
|
1,331,048 |
|
|
$ |
55.45 |
|
Granted |
|
|
423,886 |
|
|
|
41.36 |
|
Vested |
|
|
(394,084 |
) |
|
|
59.54 |
|
Forfeited |
|
|
(176,231 |
) |
|
|
52.03 |
|
|
|
|
|
|
|
|
Non-vested at October 30, 2010 |
|
|
1,184,619 |
|
|
$ |
49.52 |
|
|
|
|
|
|
|
|
The total fair value of restricted stock units granted during the thirty-nine weeks ended
October 30, 2010 and October 31, 2009 was $17.5 million and $11.0 million, respectively.
The total grant date fair value of restricted stock units vested during the thirty-nine weeks ended
October 30, 2010 and October 31, 2009 was $23.5 million and $25.5 million, respectively.
As of October 30, 2010, there was $34.5 million of total unrecognized compensation cost, net of
estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation
cost is expected to be recognized over a weighted-average period of 1.1 years.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per basic share is computed based on the weighted-average number of outstanding
shares of Common Stock. Net income (loss) per diluted share includes the weighted-average dilutive
effect of stock options, stock appreciation rights and restricted stock units outstanding.
Weighted-Average Shares Outstanding and Anti-dilutive Shares (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
October 30,
2010 |
|
|
October 31,
2009 |
|
|
October 30,
2010 |
|
|
October 31,
2009 |
|
Shares of Common Stock issued |
|
|
103,300 |
|
|
|
103,300 |
|
|
|
103,300 |
|
|
|
103,300 |
|
Treasury shares |
|
|
(15,064 |
) |
|
|
(15,357 |
) |
|
|
(15,116 |
) |
|
|
(15,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average basic shares |
|
|
88,236 |
|
|
|
87,943 |
|
|
|
88,184 |
|
|
|
87,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, stock
appreciation rights and restricted stock
units |
|
|
1,833 |
|
|
|
787 |
|
|
|
1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average diluted shares |
|
|
90,069 |
|
|
|
88,730 |
|
|
|
89,731 |
|
|
|
87,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares |
|
|
6,848 |
(1) |
|
|
4,548 |
(1) |
|
|
5,491 |
(1) |
|
|
10,113 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the number of stock options, stock appreciation rights and restricted stock
units oustanding, but excluded from the computation of net income per diluted share because the
impact would be anti-dilutive. |
|
(2) |
|
Reflects the number of stock options, stock appreciation rights and restricted stock
units oustanding, but excluded from the computation of net loss per diluted share because the
Company was in a net loss position and the impact would be anti-dilutive. |
11
5. CASH AND EQUIVALENTS
Cash and equivalents consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
January 30, 2010 |
|
Cash and equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
191,274 |
|
|
$ |
196,496 |
|
Money market funds |
|
|
426,948 |
|
|
|
483,617 |
|
|
|
|
|
|
|
|
Total cash and equivalents |
|
$ |
618,222 |
|
|
$ |
680,113 |
|
|
|
|
|
|
|
|
6. INVESTMENTS
Investments consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
January 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Marketable securities Current: |
|
|
|
|
|
|
|
|
Trading securities: |
|
|
|
|
|
|
|
|
Auction rate securities UBS student loan backed |
|
$ |
|
|
|
$ |
20,049 |
|
Auction rate securities UBS municipal
authority bonds |
|
|
|
|
|
|
12,307 |
|
|
|
|
|
|
|
|
Total trading securities |
|
|
|
|
|
|
32,356 |
|
|
|
|
|
|
|
|
|
|
Marketable securities Non-Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Auction rate securities student loan backed |
|
|
100,978 |
|
|
|
118,390 |
|
Auction rate securities municipal authority bonds |
|
|
23,859 |
|
|
|
23,404 |
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
124,837 |
|
|
|
141,794 |
|
|
|
|
|
|
|
|
|
|
Rabbi Trust assets: (1) |
|
|
|
|
|
|
|
|
Money market funds |
|
|
445 |
|
|
|
1,316 |
|
Municipal notes and bonds |
|
|
12,024 |
|
|
|
18,537 |
|
Trust-owned life insurance policies (at cash
surrender value) |
|
|
64,788 |
|
|
|
51,391 |
|
|
|
|
|
|
|
|
Total Rabbi Trust assets |
|
|
77,257 |
|
|
|
71,244 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
202,094 |
|
|
$ |
245,394 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rabbi Trust assets are included in Other Assets on the Condensed Consolidated Balance Sheets
and are restricted as to their use. |
12
At October 30, 2010 and January 30, 2010, the Companys marketable securities consisted of
investment grade
auction rate securities (ARS) invested in insured student loan backed securities and municipal
authority bonds, with maturities ranging from 15 to 32 years. Each investment in student loans is
insured by (1) the U.S. government under the Federal Family Education Loan Program, (2) a private
insurer or (3) a combination of both. The percentage of insurance coverage of the outstanding
principal and interest of the ARS varies by security.
The par and carrying values, and related cumulative temporary impairment charges for the Companys
marketable securities as of October 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary |
|
|
Carrying |
|
(in thousands) |
|
Par Value |
|
|
Impairment |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities student loan backed |
|
$ |
106,649 |
|
|
$ |
(5,671 |
) |
|
$ |
100,978 |
|
Auction rate securities municipal authority bonds |
|
|
28,575 |
|
|
|
(4,716 |
) |
|
|
23,859 |
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
135,224 |
|
|
$ |
(10,387 |
) |
|
$ |
124,837 |
|
|
|
|
|
|
|
|
|
|
|
See Note 7, Fair Value, for further discussion on the valuation of the ARS.
An impairment is considered to be other-than-temporary if an entity (i) intends to sell the
security, (ii) more likely than not will be required to sell the security before recovering its
amortized cost basis, or (iii) does not expect to recover the securitys entire amortized cost
basis, even if there is no intent to sell the security. The Company has not incurred any
credit-related losses on available-for-sale ARS and furthermore, the issuers continued to perform
under the obligations, including making scheduled interest payments, and the Company expects that
this will continue going forward.
On November 13, 2008, the Company entered into an agreement (the UBS Agreement) with UBS AG
(UBS), a Swiss corporation, relating to ARS with a par value of $76.5 million. Pursuant to the
UBS Agreement, the remaining ARS covered by the UBS Agreement, $37.1 million at par, were acquired
by UBS during the thirty-nine weeks ended October 30, 2010.
The irrevocable rabbi trust (the Rabbi Trust) is intended to be used as a source of funds to
match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified
Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and
Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement
Plan. The Rabbi Trust assets are consolidated and recorded at fair value, with the exception of
the trust-owned life insurance policies which are recorded at cash surrender value. The Rabbi
Trust assets are included in Other Assets on the Condensed Consolidated Balance Sheets and are
restricted as to their use as noted above. Net unrealized gains and losses related to the
municipal notes and bonds held in the Rabbi Trust were not material for the thirteen or thirty-nine
week periods ended October 30, 2010 and October 31, 2009. The change in cash surrender value of
the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.7
million for the thirteen weeks ended October 30, 2010 and October 31, 2009 and realized gains of
$1.8 million and $5.0 million for the thirty-nine weeks ended October 30, 2010 and October 31,
2009, respectively, recorded as Interest Expense (Income), Net on the Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss).
13
7. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly
transaction between market participants at the measurement date. The inputs used to measure fair
value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair
value are as follows:
|
|
|
Level 1 inputs are unadjusted quoted prices for identical assets or liabilities
that are available in active markets. |
|
|
|
Level 2 inputs are other than quoted market prices included within Level 1 that
are observable for assets or liabilities, directly or indirectly. |
|
|
|
Level 3 inputs to the valuation methodology are unobservable. |
The lowest level of significant input determines the placement of the entire fair value measurement
in the hierarchy. The three levels of the hierarchy and the distribution of the Companys assets
and liabilities, measured at fair value, within it were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of October 30, 2010 |
|
|
|
(in thousands) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1) |
|
$ |
427,393 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
427,393 |
|
ARS available-for-sale student loan
backed |
|
|
|
|
|
|
|
|
|
|
100,978 |
|
|
|
100,978 |
|
ARS available-for-sale municipal
authority bonds |
|
|
|
|
|
|
|
|
|
|
23,859 |
|
|
|
23,859 |
|
Municipal notes and bonds held in the Rabbi
Trust |
|
|
12,024 |
|
|
|
|
|
|
|
|
|
|
|
12,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
439,417 |
|
|
$ |
|
|
|
$ |
124,837 |
|
|
$ |
564,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
|
|
|
|
|
|
2,130 |
|
|
|
|
|
|
|
2,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
|
|
|
$ |
2,130 |
|
|
$ |
|
|
|
$ |
2,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $426.9 million in money market funds included in Cash and Equivalents and
$0.4 million of money market funds held in the Rabbi Trust included in Other Assets on the
Condensed Consolidated Balance Sheet. |
The level 2 assets consist of derivative financial instruments, primarily forward foreign
exchange contracts. The fair value of forward foreign exchange contracts is determined by using
quoted market prices of the same or similar instruments, adjusted for counterparty risk.
The level 3 assets include investments in insured student loan backed ARS and insured municipal
authority bonds ARS which are available-for-sale.
As a result of a lack of liquidity in the current ARS market, the Company measures the fair value
of its ARS primarily using a discounted cash flow model. Certain significant inputs into the model
are unobservable in the market including the periodic coupon rate adjusted for the marketability
discount, market required rate of return and expected term. The coupon rate is estimated using the
results of a regression analysis factoring in historical data on the par swap rate and the maximum
coupon rate paid in the event of an auction failure. In making the assumption of the market
required rate of return, the Company considered the risk-free interest rate and an appropriate
credit spread, depending on the type of security and the credit rating of the issuer. The expected
term is identified as the time the Company believes the principal will become available to the
investor. The Company utilized a term of five years to value its securities. The Company also
included a marketability discount which takes into account the lack of activity in the current ARS
market.
14
As of October 30, 2010, approximately 70% of the Companys ARS were AAA rated, approximately 17%
were AA rated, and approximately 13% were A- rated, in each case as rated by one or more of the
major credit rating agencies.
The table below includes a roll-forward of the Companys level 3 assets and liabilities from
January 30, 2010 to October 30, 2010. When a determination is made to classify an asset or
liability within level 3, the determination is based upon the lack of significance of the
observable parameters to the overall fair value measurement. However, the fair value determination
for level 3 financial assets and liabilities may include observable components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available- |
|
|
Available- |
|
|
|
|
|
|
|
|
|
Trading |
|
|
Trading |
|
|
for-sale |
|
|
for-sale |
|
|
|
|
|
|
|
|
|
ARS - |
|
|
ARS - |
|
|
ARS - |
|
|
ARS - |
|
|
|
|
|
|
|
|
|
Student |
|
|
Muni |
|
|
Student |
|
|
Muni |
|
|
|
|
|
|
|
(in thousands) |
|
Loans |
|
|
Bonds |
|
|
Loans |
|
|
Bonds |
|
|
Put Option |
|
|
Total |
|
Fair value, January 30, 2010 |
|
$ |
20,049 |
|
|
$ |
12,307 |
|
|
$ |
118,390 |
|
|
$ |
23,404 |
|
|
$ |
4,640 |
|
|
$ |
178,790 |
|
Redemptions |
|
|
(22,100 |
) |
|
|
(15,000 |
) |
|
|
(21,450 |
) |
|
|
|
|
|
|
(4,640 |
) |
|
|
(63,190 |
) |
Tranfers (out)/in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Net Income |
|
|
2,051 |
|
|
|
2,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,744 |
|
Reported in Other
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
4,038 |
|
|
|
455 |
|
|
|
|
|
|
|
4,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, October 30, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
100,978 |
|
|
$ |
23,859 |
|
|
$ |
|
|
|
$ |
124,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. INVENTORIES
Inventories are principally valued at the lower of average cost or market utilizing the retail
method. The Company determines market value as the anticipated future selling price of the
merchandise less a normal margin. 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. At first and third fiscal quarter end, the Company reduces inventory value by
recording a valuation reserve that represents the expected future permanent markdowns necessary to
sell through the current season inventory. At second and fourth fiscal quarter end, the Company
reduces inventory value by recording a valuation reserve that represents the expected future
permanent markdowns necessary to sell through any remaining carryover inventory from the season
then ending. The valuation reserve was $34.3 million, $11.4 million and $40.6 million at October
30, 2010, January 30, 2010 and October 31, 2009, respectively.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical
trends from actual physical inventories are made that reduce the inventory value for lost or stolen
items. The Company performs physical inventories on a periodic basis and adjusts the shrink
reserve accordingly. The shrink reserve was $2.9 million, $8.1 million and $10.6 million
at October 30, 2010, January 30, 2010 and October 31, 2009, respectively.
The inventory balance, net of the above mentioned reserves, was $511.8 million, $310.6 million and
$347.2 million at October 30, 2010, January 30, 2010 and October 31, 2009, respectively.
15
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
January 30, 2010 |
|
Property and equipment, at cost |
|
$ |
2,492,467 |
|
|
$ |
2,362,492 |
|
Accumulated depreciation and amortization |
|
|
(1,272,364 |
) |
|
|
(1,118,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
1,220,103 |
|
|
$ |
1,244,019 |
|
|
|
|
|
|
|
|
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically
for impairment or whenever events or changes in circumstances indicate that full recoverability of
net asset balances through future cash flows is in question. Factors used in the evaluation
include, but are not limited to, managements plans for future operations, recent operating
results, and projected cash flows.
In the second quarter of Fiscal 2010, as a result of a strategic review of under-performing stores,
the Company determined that a number of stores were likely to be closed prior to lease expiration,
which caused a triggering event requiring the Company to evaluate the related long-lived assets for
impairment. Associated with these expected closures, the Company incurred a non-cash, pre-tax
asset impairment charge of $2.2 million, included in stores and distribution expense for the
thirty-nine weeks ended October 30, 2010.
Store related assets are considered Level 3 assets in the fair value hierarchy and the fair values
were determined at the store level, primarily using a discounted cash flow model. The estimation
of future cash flows from operating activities requires significant estimates of factors that
include future sales, gross margin performance and operating expenses. In instances where the
discounted cash flow analysis indicated a negative value at the store level, the market exit price
based on historical experience was used to determine the fair value by asset type. The Company had
store related assets measured at fair value of $16.7 million and $19.3 million on the Condensed
Consolidated Balance Sheet at July 31, 2010 and January 30, 2010, respectively.
10. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially
offset store construction costs and are classified between current and long-term liabilities. The
amounts, which are amortized over the life of the related leases, consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
January 30, 2010 |
|
Deferred lease credits |
|
$ |
568,141 |
|
|
$ |
546,191 |
|
Amortized deferred lease credits |
|
|
(322,209 |
) |
|
|
(290,542 |
) |
|
|
|
|
|
|
|
Total deferred lease credits, net |
|
$ |
245,932 |
|
|
$ |
255,649 |
|
|
|
|
|
|
|
|
16
11. INCOME TAXES
The provision for income taxes is based on the current estimate of the annual effective tax rate
adjusted to reflect the impact of items discrete to the thirteen weeks ended October 30, 2010. The
effective tax rate for continuing operations for the thirteen weeks ended October 30, 2010 was a
35.6% expense compared to a 4.7%
benefit for the Fiscal 2009 comparable period. The effective tax rate for continuing operations
for the thirty-nine weeks ended October 30, 2010 was a 32.1% expense compared to a 28.8% expense
for the thirty-nine weeks ended October 31, 2009. The third quarter 2009 rate was favorably
impacted by a true up in the year-to-date tax rate of $18.6 million, along with a benefit of $2.2
million from the settlement of state tax audits.
Cash payments of income taxes made during the thirteen weeks ended October 30, 2010 and October 31,
2009 were approximately $11.8 million and $3.2 million, respectively. Cash payments of income
taxes made during the thirty-nine weeks ended October 30, 2010 and October 31, 2009 were
approximately $29.7 million and $22.0 million, respectively.
The Company recorded a valuation allowance against deferred tax assets arising from net operating
losses of certain foreign subsidiaries and from realized and unrealized U.S. operations investment
losses. A portion of net operating loss carryovers begin expiring in Fiscal 2011, while some have
an indefinite carry forward period. As of October 30, 2010 and January 30, 2010, the valuation
allowance totaled $1.1 million and $1.3 million, respectively. No other valuation allowances have
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.
12. LONG-TERM DEBT
On April 15, 2008, the Company entered into a syndicated unsecured credit agreement (as previously
amended by Amendment No. 1 to Credit Agreement made as of December 29, 2008, the Credit
Agreement) under which up to $450 million was available. On June 16, 2009, the Company amended
the Credit Agreement and, as a result, revised the ratio requirements, as further discussed below,
and also reduced the amount available from $450 million to $350 million (as amended, the Amended
Credit Agreement). As stated in the Amended Credit Agreement, the primary purposes of the
agreement are for trade and stand-by letters of credit in the ordinary course of business, as well
as to fund working capital, capital expenditures, acquisitions and investments, and other general
corporate purposes.
The Amended Credit Agreement has several borrowing options, including interest rates that are based
on: (i) a Base Rate, plus a margin based on the Leverage Ratio, payable quarterly; (ii) an Adjusted
Eurodollar Rate (as defined in the Amended Credit Agreement) plus a margin based on the Leverage
Ratio, payable at the end of the applicable interest period for the borrowing and, for interest
periods in excess of three months, on the date that is three months after the commencement of the
interest period; or (iii) an Adjusted Foreign Currency Rate (as defined in the Amended Credit
Agreement) plus a margin based on the Leverage Ratio, payable at the end of the applicable interest
period for the borrowing and, for interest periods in excess of three months, on the date that is
three months after the commencement of the interest period. The Base Rate represents a rate per
annum equal to the higher of (a) PNC Banks then publicly announced prime rate or (b) the Federal
Funds Effective Rate (as defined in the Amended Credit Agreement) as then in effect plus 1/2 of 1.0%.
The facility fees payable under the Amended Credit Agreement are based on the Companys Leverage
Ratio (i.e., the ratio, on a consolidated basis, of (a) the sum of total debt (excluding trade
letters of credit) plus 600% of forward minimum rent commitments to (b) consolidated earnings
before interest, taxes, depreciation, amortization and rent with the further adjustments to be
discussed in the following paragraphs (Consolidated EBITDAR) for the trailing
four-consecutive-fiscal-quarter periods. The facility fees accrue at a rate of 0.25% to 0.625% per
annum based on the Leverage Ratio for the most recent determination date. The Amended Credit
Agreement did not have a utilization fee as of October 30, 2010. The Amended Credit Agreement
requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing
period. The Amended Credit Agreement also required that the Coverage Ratio for A&F and its
subsidiaries on a consolidated basis of (i) Consolidated EBITDAR
17
for the trailing
four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due
within twelve months of the date of determination and (z) the sum of minimum rent and contingent
store rent, not be less than 1.75 to 1.00 at October 30, 2010. The minimum Coverage Ratio varies
over time based on the terms set forth in the Amended Credit Agreement. The Amended Credit
Agreement amended the definition of Consolidated EBITDAR to add back the following items, among
others: (a) recognized losses arising from investments in certain ARS to the extent such losses do
not exceed a defined level of impairments for those investments; (b) non-cash charges in an amount
not to exceed $50 million related to the closure of RUEHL branded stores and related
direct-to-consumer operations; (c) non-recurring cash charges in an aggregate amount not to exceed
$61 million related to the closure of RUEHL branded stores and related direct-to-consumer
operations; (d) additional non-recurring non-cash charges in an amount not to exceed $20 million in
the aggregate over the trailing four consecutive fiscal quarter period; and (e) other non-recurring
cash charges in an amount not to exceed $10 million in the aggregate over the trailing four
consecutive fiscal quarter period. The Amended Credit Agreement also limits the Companys
consolidated capital expenditures to $325 million in Fiscal 2010, plus $99.5 million representing
the unused portion of the allowable capital expenditures from Fiscal 2009. The Company was in
compliance with the applicable ratio requirements and other covenants at October 30, 2010.
The terms of the Amended Credit Agreement include customary events of default such as payment
defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence
of a defined change in control, or the failure to observe the negative covenants and other
covenants related to the operation and conduct of the business of A&F and its subsidiaries. Upon
an event of default, the lenders will not be obligated to make loans or other extensions of credit
and may, among other things, terminate their commitments to the Company, and declare any then
outstanding loans due and payable immediately.
The Amended Credit Agreement will mature on April 12, 2013. Trade letters of credit totaling
approximately $7.7 million and $35.9 million were outstanding on October 30, 2010 and January 30,
2010, respectively. Stand-by letters of credit totaling approximately $2.9 million and $14.1
million were outstanding on October 30, 2010 and January 30, 2010, respectively. The stand-by
letters of credit are set to expire primarily during the third quarter of Fiscal 2011. To date, no
beneficiary has drawn upon the stand-by letters of credit.
The Company had $57.2 million and $50.9 million outstanding under the Amended Credit Agreement as
of October 30, 2010, and January 30, 2010, respectively. The amounts outstanding under the Amended
Credit Agreement as of October 30, 2010 and January 30, 2010 were denominated in Japanese Yen. As
of October 30, 2010 and January 30, 2010, the Company also had $24.5 million and $20.3 million,
respectively, of long-term debt related to the landlord financing obligation for certain leases
where the Company is deemed the owner of the project for accounting purposes, as substantially all
of the risk of ownership during construction of a leased property is held by the Company. The
landlord financing obligation is amortized over the life of the related lease.
As of October 30, 2010, the carrying value of the Companys long-term debt approximated fair value.
Total interest expense was $1.9 million and $1.8 million for the thirteen week periods ended
October 30, 2010 and October 31, 2009, respectively, and $5.7 million and $4.6 million for the
thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. The average interest
rate for the long-term debt recorded under the Amended Credit Agreement was 2.7% for the thirteen
and thirty-nine week periods ended October 30, 2010.
On March 6, 2009, the Company entered a secured, uncommitted demand line of credit (the UBS Credit
Line). The amount available under the UBS Credit Line was subject to adjustment from time-to-time
based on the market value of the Companys UBS ARS as determined by UBS. As a result of UBS
acquiring the
remaining UBS ARS originally purchased by the Company through UBS and described further in Note 6,
Investments, the UBS Credit Line was terminated during the thirty-nine weeks ended October 30,
2010.
18
13. DERIVATIVES
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses
derivatives, primarily forward contracts, to manage the financial impacts of these exposures. As
of October 30, 2010 and January 30, 2010, all outstanding derivative instruments were designated as
hedges and all but one qualified for hedge accounting treatment. The Company does not use forward
contracts to engage in currency speculation and does not enter into derivative financial
instruments for trading purposes.
In order to qualify for hedge accounting treatment, a derivative must be considered highly
effective at offsetting changes in either the hedged items cash flows or fair value.
Additionally, the hedge relationship must be documented to include the risk management objective
and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge
effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging
instrument has been and is expected to continue to be effective at achieving offsetting changes in
fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness
is reported in current period earnings and hedge accounting is discontinued if it is determined
that the derivative is not highly effective.
For derivatives that either do not qualify for hedge accounting or are not designated as hedges,
all changes in the fair value of the derivative are recognized in earnings. For qualifying cash
flow hedges, the effective portion of the change in the fair value of the derivative is recorded as
a component of Other Comprehensive Income (OCI) and recognized in earnings when the hedged cash
flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes
in the fair value of the derivatives time value are recognized in current period earnings. The
effectiveness of the hedge is assessed based on changes in the fair value attributable to changes
in spot prices. The changes in the fair value of the derivative contract related to the changes in
the difference between the spot price and the forward price are excluded from the assessment of
hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge
relationship is terminated, the derivative gains or losses that are deferred in OCI will be
recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are
terminated because the forecasted transaction is not expected to occur in the original specified
time period, or a two-month period thereafter, the derivative gains or losses are immediately
recognized in earnings. The Company recognized a gain of $0.7 million reclassified into earnings
as a result of the de-designation of cash flow hedges during the thirty-nine weeks ended October
30, 2010. There was no gain or loss reclassified into earnings during the thirteen weeks
ended October 30, 2010.
The Company uses derivative instruments, primarily forward contracts designated as cash flow
hedges, to hedge the foreign currency exposure associated with forecasted
foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related
settlement of the foreign-currency-denominated inter-company receivable. Fluctuations in exchange
rates will either increase or decrease the Companys U.S. dollar equivalent cash flows and affect
the Companys U.S. dollar earnings. Gains or losses on the foreign exchange forward contracts that
are used to hedge these exposures are expected to partially offset this variability. Foreign
exchange forward contracts represent agreements to exchange the currency of one country for the
currency of another country at an agreed-upon settlement date. As of October 30, 2010, the maximum
length of time over which forecasted foreign-currency-denominated inter-company inventory sales
were hedged was twelve months. The sale of the inventory to the Companys customers will result in
the reclassification of related derivative gains and losses that are reported in Accumulated Other
Comprehensive Income (Loss).
19
Substantially all of the remaining unrealized gains or losses related to
foreign-currency-denominated inter-company inventory sales that have occurred as of October 30,
2010 will be recognized in costs of goods sold over the following two months at the values at the
date the inventory was sold to the respective subsidiary.
The Company nets derivative assets and liabilities on the Condensed Consolidated Balance Sheet to
the extent that master netting arrangements meet the specific accounting requirements set forth by
U.S. generally accepted accounting principles.
As of October 30, 2010, the Company had the following outstanding foreign exchange forward
contracts that were entered to hedge either a portion of forecasted foreign-currency-denominated
inter-company inventory sales, the resulting settlement of the foreign-currency-denominated
inter-company accounts receivable, or both:
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|
Notional Amount(1) |
|
Canadian Dollar |
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$ |
9,942 |
|
British Pound |
|
$ |
35,163 |
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Euro |
|
$ |
16,203 |
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Japanese Yen |
|
$ |
8,694 |
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(1) |
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Amounts are reported in thousands and in U.S. Dollars. |
The location and amounts of derivative fair values on the Condensed Consolidated Balance Sheets as of October 30, 2010 and January 30, 2010 were as follows:
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Asset Derivatives |
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Liability Derivatives |
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Balance Sheet |
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October 30, |
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January 30, |
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Balance Sheet |
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October 30, |
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January 30, |
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(in thousands) |
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Location |
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2010 |
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2010 |
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Location |
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2010 |
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2010 |
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Derivatives Designated as Hedging
Instruments: |
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Foreign Exchange Forward Contracts |
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Other Current Assets |
|
$ |
|
|
|
$ |
1,348 |
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|
Accrued Expenses |
|
$ |
2,130 |
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$ |
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|
Refer to Note 7, Fair Value, for further discussion of the determination of the fair value
of derivatives.
20
The location and amounts of derivative gains and losses for the thirteen weeks ended October 30,
2010 and October 31, 2009 on the Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) are as follows:
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Location of Gain |
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Location of Gain |
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Recognized in |
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(Loss) |
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Earnings on |
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Reclassified from |
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Derivative |
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Accumulated |
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(Ineffective |
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Amount of Gain Recognized |
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Amount of (Loss) Gain |
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OCI into |
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Amount of Gain (Loss) |
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Portion and |
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in Earnings on Derivative |
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Recognized in OCI on |
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Earnings |
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Reclassified from |
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Amount Excluded |
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(Ineffective Portion and |
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Derivative Contracts |
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(Effective |
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Accumulated OCI into |
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from Effectiveness |
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Amount Excluded from |
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(Effective Portion) |
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Portion) |
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Earnings (Effective Portion) |
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Testing) |
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Effectiveness Testing) |
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(a) |
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(b) |
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(c) |
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Thirteen Weeks Ended |
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October 30, |
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October 31, |
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October 30, |
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October 31, |
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October 30, |
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October 31, |
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(in thousands) |
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2010 |
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2009 |
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2010 |
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2009 |
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2010 |
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2009 |
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Derivatives in Cash Flow Hedging Relationships |
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Foreign Exchange Forward Contracts |
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$ |
(1,574 |
) |
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$ |
742 |
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Cost of Goods Sold |
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$ |
1,587 |
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$ |
(2,178 |
) |
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Other Operating Income, Net |
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$ |
27 |
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$ |
17 |
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Thirty-nine Weeks Ended |
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October 31, |
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October 30, |
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October 31, |
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October 30, |
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October 31, |
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(in thousands) |
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2010 |
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2009 |
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2010 |
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2009 |
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2010 |
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2009 |
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Derivatives in Cash Flow Hedging Relationships |
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Foreign Exchange Forward Contracts |
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$ |
(94 |
) |
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$ |
(5,420 |
) |
|
Cost of Goods Sold |
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$ |
2,190 |
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$ |
(1,135 |
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Other Operating Income, Net |
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$ |
155 |
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$ |
19 |
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(a) |
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The amount represents the change in fair value of derivative contracts due to changes in
spot rates. |
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(b) |
|
The amount represents reclassification from OCI into earnings that occurs when the hedged item
affects earnings, which is when merchandise is sold to the Companys customers. |
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(c) |
|
The amount represents the change in fair value of derivative contracts due to changes in the
difference between the spot price and forward price that is excluded from the assessment of hedge
effectiveness and, therefore, recognized in earnings. There were no ineffective portions recorded
in earnings for the thirteen weeks ended October 30, 2010 and October 31, 2009. |
14. DISCONTINUED OPERATIONS
On June 16, 2009, A&Fs Board of Directors approved the closure of the Companys 29 RUEHL branded
stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL
branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in Loss from Discontinued Operations,
Net of Tax on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
for the thirteen and thirty-nine weeks ended October 31, 2009. Results from discontinued
operations were immaterial for the thirteen and thirty-nine weeks ended October 30, 2010.
Costs associated with exit or disposal activities are recorded when the liability is incurred.
Below is a roll forward of the liabilities recognized on the Condensed Consolidated Balance Sheet
as of October 30, 2010 related to the closure of RUEHL branded stores and related
direct-to-consumer operations (in millions):
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|
Thirty-nine Weeks Ended |
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|
|
October 30, 2010 |
|
|
|
Beginning Balance |
|
$ |
46.1 |
|
Interest Accretion / Other, Net |
|
|
(0.1 |
) |
Cash Payments |
|
|
(20.8 |
) |
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|
Ending Balance(1) |
|
$ |
25.2 |
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|
(1) |
|
Ending balance primarily reflects the net present value of obligations due under
signed lease termination agreements and obligations due under a lease, for which no termination
agreement exists, less estimated sublease income. As of October 30, 2010, there were $19.6 million
of lease termination charges recorded as a current liability in Accrued Expenses and $5.6 million
of lease termination charges recorded as a long-term liability in Other Liabilities on the
Condensed Consolidated Balance Sheet. |
21
15. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental
Executive Retirement Plan (the SERP) to provide additional retirement income to its Chairman and
Chief Executive Officer (CEO). Subject to service requirements, the CEO will receive a monthly
benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final
average compensation used for the calculation is based on actual compensation, base salary and cash
incentive compensation, averaged over the last 36 consecutive full calendar months ending before
the CEOs retirement. The Company recorded net expense of $0.5 million and $2.4 million for the
thirteen and thirty-nine weeks ended October 30, 2010,
respectively, associated with the SERP. The Company recorded income of $0.4 million and $0.5
million for the thirteen and thirty-nine weeks ended October 31, 2009, respectively, associated
with the SERP.
The expense for the thirty-nine weeks ended October 30, 2010, included an expense of $2.1 million
to correct a cumulative under-accrual of the SERP relating to prior periods, primarily Fiscal 2008.
The Company does not believe this correction was material to the periods affected.
16. CONTINGENCIES
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of
business. Legal costs incurred in connection with the resolution of claims and lawsuits are
generally expensed as incurred, and the Company establishes reserves for the outcome of litigation
where it deems appropriate to do so under applicable accounting rules. Actual liabilities may
exceed the amounts reserved, and there can be no assurance that final resolution of these matters
will not have a material adverse effect on the Companys financial condition, results of operations
or cash flows. The Companys identified contingencies include the following matters:
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores,
Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In
that action, plaintiffs alleged, on behalf of a putative class of California store managers
employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay
as non-exempt employees under California wage and hour laws. The complaint sought injunctive
relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and
attorneys fees and costs. The defendants answered the complaint on August 21, 2006, denying
liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids
store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to
oppose the plaintiffs remaining claims. On January 29, 2009, the Court certified a class
consisting of all store managers who served at Hollister and abercrombie kids stores in California
from May 1, 2004 through the future date upon which the action concludes. The parties then
continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a
notice that they did not intend to continue to pursue their claim that members of the class did not
exercise independent managerial judgment and discretion. They also asked the Court to vacate the
August 9, 2010 trial date previously set by the Court. On July 20, 2010, the trial court vacated
the trial date and the defendants then moved to decertify the putative class.
22
On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company,
et al., was filed against A&F and certain of its officers in the United States District Court for
the Southern District of Ohio on behalf of a purported class of all persons who purchased or
acquired shares of A&Fs Common Stock between June 2, 2005 and August 16, 2005. In September and
October of 2005, five other purported class actions were subsequently filed against A&F and other
defendants in the same Court. All six securities cases alleged claims under the federal securities
laws related to sales of Common Stock by certain defendants and to a decline in the price of A&Fs
Common Stock during the summer of 2005, allegedly as a result of misstatements attributable to A&F.
Plaintiffs sought unspecified monetary damages. On November 1, 2005, a motion to consolidate all
of these purported class actions into the first-filed case was filed by some of the plaintiffs.
A&F joined in that motion. On March 22, 2006, the motions to consolidate were granted, and these
actions (together with the federal court derivative cases described in the following paragraph)
were consolidated for purposes of motion practice, discovery and pretrial proceedings. A
consolidated amended securities class action complaint (the Complaint) was filed on August 14,
2006. On October 13, 2006, all defendants moved to dismiss that
Complaint. On August 9, 2007, the Court denied the motions to dismiss. On September 14, 2007,
defendants filed answers denying the material allegations of the Complaint and asserting
affirmative defenses. On October 26, 2007, plaintiffs moved to certify their purported class.
After briefing and argument, the motion was submitted on March 24, 2009, and granted on May 21,
2009. On June 5, 2009, defendants petitioned the Sixth Circuit for permission to appeal the class
certification order and on August 24, 2009, the Sixth Circuit granted leave to appeal. On May 26,
2010, after mediation which commenced on May 17, 2010, the parties reached an agreement in
principle to settle the consolidated cases as a class action, subject to Court approval. On
September 24, 2010, the District Court approved the settlement and dismissed the class action. The
dismissal has now become final.
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries,
et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F
as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&Fs
present and former directors, alleging various breaches of the directors fiduciary duty and
seeking equitable and monetary relief. In the following three months, four similar derivative
actions were filed (three in the United States District Court for the Southern District of Ohio and
one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of
A&F alleging various breaches of the directors fiduciary duty allegedly arising out of the same
matters alleged in the Ross case and seeking equitable and monetary relief on behalf of A&F. In
March of 2006, the federal court derivative actions were consolidated with the Ross actions for
purposes of motion practice, discovery and pretrial proceedings. A consolidated amended derivative
complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, A&F
announced that its Board of Directors had received a report of the Special Litigation Committee
established by the Board to investigate and act with respect to claims asserted in the derivative
lawsuit, which concluded that there was no evidence to support the asserted claims and directed the
Company to seek dismissal of the derivative cases. On September 10, 2007, the Company moved to
dismiss the federal derivative cases on the authority of the Special Litigation Committee report.
On March 12, 2009, the Companys motion was granted and, on April 10, 2009, plaintiffs filed an
appeal from the order of dismissal. Plaintiffs appeal has been fully briefed and argued and is
awaiting decision. The state court has stayed further proceedings in the state-court derivative
action until resolution of the consolidated federal derivative cases.
The Company intends to defend the aforesaid pending matters vigorously, as appropriate. The
Company is unable to quantify the potential exposure of the aforesaid pending matters. However,
the Companys assessment of the current exposure could change in the event of the discovery of
additional facts with respect to legal matters pending against the Company or determinations by
judges, juries, administrative agencies or other finders of fact that are not in accordance with
the Companys evaluation of the claims.
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying condensed consolidated balance sheet of Abercrombie & Fitch Co.
and its subsidiaries as of October 30, 2010 and the related condensed consolidated statements of
operations and comprehensive income (loss) for each of the thirteen and thirty-nine week periods
ended October 30, 2010 and October 31, 2009 and the condensed consolidated statements of cash flows
for the thirty-nine week periods ended October 30, 2010 and October 31, 2009. These interim
financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), 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 30, 2010, and the related
consolidated statements of operations and comprehensive income, of shareholders equity and of cash
flows for the year then ended (not presented herein), and in our report dated March 29, 2010, 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 30,
2010, is fairly stated in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
December 7, 2010
24
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The Companys fiscal year ends on the Saturday closest to January 31. Fiscal years are designated
in the condensed consolidated financial statements and notes by the calendar year in which the
fiscal year commences. All references herein to Fiscal 2010 represent the 52-week fiscal year
that will end on January 29, 2011, and to Fiscal 2009 represent the 52-week fiscal year that
ended January 30, 2010.
The Company is a specialty retailer that operates stores and direct-to-consumer operations selling
casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and
woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and
kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. In addition, the
Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering
bras, underwear, personal care products, sleepwear and at-home products for women.
Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of
privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an
atmosphere that is confident and just a bit provocative. abercrombie kids directly follows in the
footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids has an energetic attitude
and is popular, wholesome and athletic the signature of All-American cool. Hollister is young,
spirited, with a sense of humor and brings Southern California to the world. Gilly Hicks is the
cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly
Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney
sensibility.
RESULTS OF OPERATIONS
During the third quarter of Fiscal 2010, net sales increased 18% to $885.8 million from $753.7
million for the third quarter of Fiscal 2009. Operating income was $78.4 million for the third
quarter of Fiscal 2010 compared to $47.5 million for the third quarter of Fiscal 2009. The Company
had net income of $50.0 million for the third quarter of Fiscal 2010 compared to net income of
$38.8 million for the third quarter of Fiscal 2009. Net income per diluted share was $0.56 for the
third quarter of Fiscal 2010 compared to net income per basic and diluted share of $0.44 for the
third quarter of Fiscal 2009. Fiscal 2009 third quarter net income per basic and diluted share
included a benefit of $0.21 per basic and diluted share associated with the true up of the
year-to-date tax rate and a net loss of $0.12 per basic and diluted share from discontinued
operations. Results from discontinued operations were immaterial for the third quarter of Fiscal
2010.
During the Fiscal 2010 year-to-date period, net sales increased 16% to $2.319 billion from $1.993
billion for Fiscal 2009. Operating income was $87.2 million for the Fiscal 2010 year-to-date
period compared to operating income of $22.5 million for Fiscal 2009. The Company had net income
of $57.7 million for the Fiscal 2010 year-to-date period compared to a net loss of $47.2 million
for Fiscal 2009. Net income per diluted share was $0.64 for the Fiscal 2010 year-to-date period
compared to net loss per basic and diluted share of $0.54 for Fiscal 2009. Fiscal 2010
year-to-date net income per diluted share included a non-cash asset impairment charge associated
with expected store closures of $0.02 per diluted share. Fiscal 2009 year-to-date net loss per
basic and diluted share included a net loss of $0.74 per basic and diluted share from discontinued
operations. Results from discontinued operations were immaterial for the Fiscal 2010 year-to-date
period.
25
Net cash provided by operating activities was $77.5 million for the thirty-nine weeks ended October
30, 2010. The Company used $117.0 million of cash for capital expenditures, paid dividends
totaling $46.3 million, and
repurchased shares totaling $29.2 million during the thirty-nine weeks ended October 30, 2010. As
of October 30, 2010, the Company had $618.2 million in cash and equivalents and outstanding debt
and letters of credit of $67.8 million, compared to $466.9 million in cash and equivalents and
outstanding debt and letters of credit of $95.9 million as of October 31, 2009.
Due to seasonal variations in the retail industry, the results of operations for any current period
are not necessarily indicative of the results expected for the full fiscal year. The seasonality
of the Companys operations may also lead to significant fluctuations in certain asset and
liability accounts.
26
The following data represents the amounts shown in the Companys Condensed Consolidated Statements
of Operations and Comprehensive Income (Loss) for the thirteen and thirty-nine week periods ended
October 30, 2010 and October 31, 2009, expressed as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
NET SALES |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
Cost of Goods Sold |
|
|
36.3 |
% |
|
|
35.9 |
% |
|
|
36.1 |
% |
|
|
35.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
63.7 |
% |
|
|
64.1 |
% |
|
|
63.9 |
% |
|
|
64.7 |
% |
|
|
Stores and Distribution Expense |
|
|
43.5 |
% |
|
|
46.4 |
% |
|
|
47.6 |
% |
|
|
50.8 |
% |
|
|
Marketing, General and Administrative Expense |
|
|
11.6 |
% |
|
|
11.7 |
% |
|
|
12.7 |
% |
|
|
13.1 |
% |
|
|
Other Operating Income, Net |
|
|
(0.2 |
)% |
|
|
(0.2 |
)% |
|
|
(0.2 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
8.8 |
% |
|
|
6.3 |
% |
|
|
3.8 |
% |
|
|
1.1 |
% |
|
|
Interest Expense (Income), Net |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations before Taxes |
|
|
8.8 |
% |
|
|
6.2 |
% |
|
|
3.7 |
% |
|
|
1.3 |
% |
|
|
Tax Expense (Benefit) from Continuing Operations |
|
|
3.1 |
% |
|
|
(0.3 |
)% |
|
|
1.2 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing Operations |
|
|
5.6 |
% |
|
|
6.5 |
% |
|
|
2.5 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Discontinued Operations (net of taxes) |
|
|
|
|
|
|
(1.4 |
)% |
|
|
|
|
|
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
5.6 |
% |
|
|
5.1 |
% |
|
|
2.5 |
% |
|
|
(2.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Financial Summary
The following summarized financial and statistical data compare the thirteen and thirty-nine week
periods ended October 30, 2010 to the thirteen and thirty-nine week periods ended October 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
October 30, 2010 |
|
|
October 31, 2009 |
|
|
October 30, 2010 |
|
|
October 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by brand (in millions) |
|
$ |
885.8 |
|
|
$ |
753.7 |
|
|
$ |
2,319.4 |
|
|
$ |
1,992.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
$ |
384.1 |
|
|
$ |
324.3 |
|
|
$ |
1,023.4 |
|
|
$ |
874.2 |
|
|
|
abercrombie |
|
$ |
99.9 |
|
|
$ |
90.8 |
|
|
$ |
257.7 |
|
|
$ |
231.4 |
|
|
|
Hollister |
|
$ |
392.5 |
|
|
$ |
333.4 |
|
|
$ |
1,012.9 |
|
|
$ |
870.1 |
|
|
|
Gilly Hicks |
|
$ |
9.3 |
|
|
$ |
5.2 |
|
|
$ |
25.4 |
|
|
$ |
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net sales from prior year |
|
|
18 |
% |
|
|
(15 |
)% |
|
|
16 |
% |
|
|
(20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
18 |
% |
|
|
(16 |
)% |
|
|
17 |
% |
|
|
(22 |
)% |
|
|
abercrombie |
|
|
10 |
% |
|
|
(17 |
)% |
|
|
11 |
% |
|
|
(23 |
)% |
|
|
Hollister |
|
|
18 |
% |
|
|
(13 |
)% |
|
|
16 |
% |
|
|
(18 |
)% |
|
|
Gilly Hicks |
|
|
79 |
% |
|
|
34 |
% |
|
|
50 |
% |
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in comparable store sales* |
|
|
7 |
% |
|
|
(22 |
)% |
|
|
5 |
% |
|
|
(27 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
8 |
% |
|
|
(18 |
)% |
|
|
7 |
% |
|
|
(23 |
)% |
|
|
abercrombie |
|
|
2 |
% |
|
|
(22 |
)% |
|
|
3 |
% |
|
|
(28 |
)% |
|
|
Hollister |
|
|
7 |
% |
|
|
(26 |
)% |
|
|
3 |
% |
|
|
(30 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net store sales per average store (in thousands) |
|
$ |
722 |
|
|
$ |
624 |
|
|
$ |
1,887 |
|
|
$ |
1,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
$ |
987 |
|
|
$ |
825 |
|
|
$ |
2,608 |
|
|
$ |
2,202 |
|
|
|
abercrombie |
|
$ |
425 |
|
|
$ |
385 |
|
|
$ |
1,098 |
|
|
$ |
985 |
|
|
|
Hollister |
|
$ |
671 |
|
|
$ |
595 |
|
|
$ |
1,739 |
|
|
$ |
1,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net store sales per average gross square foot |
|
$ |
101 |
|
|
$ |
88 |
|
|
$ |
263 |
|
|
$ |
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
$ |
110 |
|
|
$ |
93 |
|
|
$ |
291 |
|
|
$ |
248 |
|
|
|
abercrombie |
|
$ |
90 |
|
|
$ |
83 |
|
|
$ |
233 |
|
|
$ |
213 |
|
|
|
Hollister |
|
$ |
98 |
|
|
$ |
87 |
|
|
$ |
254 |
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in transactions per average store |
|
|
17 |
% |
|
|
(9 |
)% |
|
|
17 |
% |
|
|
(19 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
17 |
% |
|
|
(10 |
)% |
|
|
16 |
% |
|
|
(19 |
)% |
|
|
abercrombie |
|
|
12 |
% |
|
|
(10 |
)% |
|
|
14 |
% |
|
|
(19 |
)% |
|
|
Hollister |
|
|
16 |
% |
|
|
(8 |
)% |
|
|
17 |
% |
|
|
(21 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in average store transaction value |
|
|
(1 |
)% |
|
|
(11 |
)% |
|
|
(3 |
)% |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
2 |
% |
|
|
(8 |
)% |
|
|
2 |
% |
|
|
(6 |
)% |
|
|
abercrombie |
|
|
(1 |
)% |
|
|
(10 |
)% |
|
|
(3 |
)% |
|
|
(8 |
)% |
|
|
Hollister |
|
|
(2 |
)% |
|
|
(13 |
)% |
|
|
(5 |
)% |
|
|
(7 |
)% |
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
October 30, 2010 |
|
|
October 31, 2009 |
|
|
October 30, 2010 |
|
|
October 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in average units per store transaction |
|
|
10 |
% |
|
|
(2 |
)% |
|
|
9 |
% |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
8 |
% |
|
|
(3 |
)% |
|
|
6 |
% |
|
|
(4 |
)% |
|
|
abercrombie |
|
|
14 |
% |
|
|
(2 |
)% |
|
|
11 |
% |
|
|
(2 |
)% |
|
|
Hollister |
|
|
9 |
% |
|
|
(2 |
)% |
|
|
10 |
% |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in average unit retail sold, including DTC |
|
|
(11 |
)% |
|
|
(9 |
)% |
|
|
(12 |
)% |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
(7 |
)% |
|
|
(5 |
)% |
|
|
(5 |
)% |
|
|
(2 |
)% |
|
|
abercrombie |
|
|
(14 |
)% |
|
|
(7 |
)% |
|
|
(13 |
)% |
|
|
(6 |
)% |
|
|
Hollister |
|
|
(11 |
)% |
|
|
(10 |
)% |
|
|
(14 |
)% |
|
|
(4 |
)% |
|
|
|
* |
|
A store is included in comparable store sales when it has been open as the same brand 12 months
or more and its square footage has not been expanded or reduced by more than 20% within the past
year. |
29
CURRENT TRENDS AND OUTLOOK
During the third quarter of Fiscal 2010, the Company continued to focus on the key long-term
drivers of the business, and was pleased with the year over year progress it made in improving
current operating results. The Companys objective in Fiscal 2010 and subsequent years is to
increase its operating margin back toward historical levels, which the Company believes will
require a combination of the following factors:
First, returning gross margin toward historical levels. During the third quarter, the gross margin
rate decreased 40 basis points primarily due to the 11% decrease in average unit retail, partially
off-set by a reduction in average unit cost. The Company expects the near-term environment to
remain challenging with regard to the gross margin rate. Cost pressures from raw materials and
labor costs have increased throughout the year and transportation costs remain at high levels. At
this point, the Company believes progress on gross margin will be challenging given limited
visibility into sourcing costs beyond the first half of Fiscal 2011.
Second, improving average domestic store productivity levels, both through same store sales growth
and as a result of the closure of underperforming stores. The Company expects to close
approximately 65 domestic stores over the course of Fiscal 2010, predominantly at the end of the
year. The majority of the closures will be by way of natural lease expirations and in the
Abercrombie & Fitch and abercrombie kids brands. The Company also expects approximately 50
additional store closures during Fiscal 2011, also predominantly by way of natural lease
expirations at the end of the year.
Third, achieving significantly profitable international growth. The Company continues with its
plans for international store openings in Fiscal 2010 and is seeking to accelerate its
international growth beyond that. Since the beginning of the fourth quarter of Fiscal 2010, the
Company opened Abercrombie & Fitch flagship stores in Fukuoka, Japan and Copenhagen, Denmark, a
Gilly Hicks store in the United Kingdom and a Hollister Epic store on Fifth Avenue in New York.
The Company will open approximately 20 international mall-based Hollister stores in Fiscal 2010, 11
of which will be opened in the fourth quarter. In Fiscal 2011, the Company also plans to open
Abercrombie & Fitch flagship stores in Paris, France and Madrid, Spain, and continues to work on
further flagship opportunities in 2011 and beyond.
Fourth, sustaining strong growth rates in its direct-to-consumer business.
Fifth, improving the productivity of the Gilly Hicks brand, which the Company believes is a
necessary precursor to expanding the store count for the brand and having a path to profitability.
Finally, maintaining tight control over expenses and seeking greater efficiencies in operations.
The Company ended the third quarter with total inventory at cost up 47% as compared to last year.
The Company expects the year-over-year inventory increase to moderate towards a closer alignment
with sales for the remainder of Fiscal 2010 and over the course of Fiscal 2011.
During Fiscal 2010, based on new store opening plans and other capital expenditures, the Company
now expects total capital expenditures to be approximately $190 million, including approximately
$140 million related to new stores, stores refreshes and remodels, and approximately $50 million
related to information technology, distribution center and other home office projects.
For the remainder of Fiscal 2010, the Company will seek to sustain improvements in its operating
results while continuing to focus on its long-term strategic objectives.
30
THIRD QUARTER AND YEAR-TO-DATE RESULTS
Net Sales
Net sales for the third quarter of Fiscal 2010 were $885.8 million, an increase of 18% from net
sales of $753.7 million during the third quarter of Fiscal 2009. The net sales increase was
attributable to a 7% increase in comparable store sales, a 31% increase in the direct-to-consumer
business, including shipping and handling revenue, and new stores, primarily international.
Comparable store sales by brand for the third quarter of Fiscal 2010 were as follows: Abercrombie &
Fitch increased 8%, with womens increasing by a mid single digit and mens increasing by a low
double digit. abercrombie kids increased 2%, with girls remaining flat and guys increasing by a
mid single digit. Hollister increased 7%, with bettys increasing by a low single digit and dudes
increasing by a low teen.
On a comparable store sales basis, the United Kingdom was the strongest performing region while
Canada and the Midwest U.S. regions were the weakest. Within the U.S., flagship and tourist stores
outperformed the non-tourist stores.
For the third quarter of Fiscal 2010, across all brands, the masculine categories continued to
out-pace the feminine categories. From a merchandise classification standpoint, for the male
business, woven shirts, fleece, and active wear were stronger performing categories while jeans and
graphics were the weaker performing categories. In the female business, woven shirts, fleece, and
sweaters, were stronger performing categories while knit tops and graphics were weaker performing
categories.
Direct-to-consumer net merchandise sales for the third quarter of Fiscal 2010 were $81.4 million,
an increase of 32% from Fiscal 2009 third quarter direct-to-consumer net merchandise sales of $61.8
million. Shipping and handling revenue for the corresponding periods was $12.6 million in Fiscal
2010 and $9.9 million in Fiscal 2009. The direct-to-consumer business, including shipping and
handling revenue, accounted for 10.6% of total net sales in the third quarter of Fiscal 2010
compared to 9.5% in the third quarter of Fiscal 2009.
Year-to-date net sales in Fiscal 2010 were $2.319 billion, an increase of 16% from net sales of
$1.993 billion during the comparable period of Fiscal 2009. The net sales increase was attributable
to a 5% increase in comparable store sales, a 39% increase in the direct-to-consumer business,
including shipping and handling revenue, and new stores, primarily international.
Year-to-date comparable store sales by brand were as follows: Abercrombie & Fitch increased 7%;
abercrombie increased 3%; and Hollister increased 3%.
Direct-to-consumer net merchandise sales for the Fiscal 2010 year-to-date period were $219.1
million, an increase of 40% from Fiscal 2009 year-to-date direct-to-consumer net merchandise sales
of $156.3 million. Shipping and handling revenue for the corresponding periods was $34.9 million
in Fiscal 2010 and $26.4 million in Fiscal 2009. The direct-to-consumer business, including
shipping and handling revenue, accounted for 11.0% of total net sales in the Fiscal 2010
year-to-date period compared to 9.2% in the Fiscal 2009 year-to-date period.
Gross Profit
Gross profit for the third quarter of Fiscal 2010 was $564.4 million compared to $483.1 million for
the comparable period in Fiscal 2009. The gross profit rate (gross profit divided by net sales)
for the third quarter of Fiscal 2010 was 63.7%, down 40 basis points from the third quarter of
Fiscal 2009 rate of 64.1%.
31
The decrease in the gross profit rate for the third quarter of Fiscal 2010 was primarily driven by
an 11% decrease in average unit retail, which was partially offset by a reduction in average unit
cost.
Year-to-date gross profit for Fiscal 2010 was $1.481 billion compared to $1.289 billion for the
comparable period in Fiscal 2009. The gross profit rate for the year-to-date period of Fiscal 2010
was 63.9%, down 80 basis points from the year-to-date Fiscal 2009 rate of 64.7%.
The decrease in the gross profit rate for the Fiscal 2010 year-to-date period was primarily driven
by a 12% decrease in average unit retail, which was partially offset by a reduction in average unit
cost.
Stores and Distribution Expense
Stores and distribution expense for the third quarter of Fiscal 2010 was $385.1 million compared to
$349.4 million for the comparable period in Fiscal 2009. The stores and distribution expense rate
(stores and distribution expense divided by net sales) for the third quarter of Fiscal 2010 was
43.5% compared to 46.4% in the third quarter of Fiscal 2009.
Stores and distribution expense for the Fiscal 2010 year-to-date period was $1.104 billion compared
to $1.012 billion for the comparable period in Fiscal 2009. The stores and distribution expense
rate for the year-to-date period of Fiscal 2010 was 47.6% compared to 50.8% for the Fiscal 2009
year-to-date period.
The decrease in stores and distribution expense rate for the third quarter of Fiscal 2010 and the
Fiscal 2010 year-to-date period was primarily driven by lower store occupancy and payroll costs as
a percentage of net sales.
Total direct-to-consumer expenses included in stores and distribution expense were $16.8 million
and $42.5 million for the thirteen and thirty-nine weeks ended October 30, 2010, respectively.
Total direct-to-consumer expenses included in stores and distribution expense were $13.2 million
and $34.6 million for the thirteen and thirty-nine weeks ended October 31, 2009, respectively.
Stores and distribution expense for the thirty-nine week period ended October 30, 2010 included a
non-cash, pre-tax asset impairment charge associated with expected store closures of $2.2 million,
or 0.1% of net sales.
Marketing, General and Administrative Expense
Marketing, general and administrative expense during the third quarter of Fiscal 2010 was $102.6
million compared to $87.9 million during the same period in Fiscal 2009, a 17% increase. For the
third quarter of Fiscal 2010, the marketing, general and administrative expense rate (marketing,
general and administrative expense divided by net sales) was 11.6% compared to 11.7% for the third
quarter of Fiscal 2009.
The increase in marketing, general and administrative expense for the third quarter was primarily
due to increases in compensation and benefits, including incentive and equity compensation, and the
favorable impact of a $2.5 million insurance recovery in the prior year.
Marketing, general and administrative expense during the Fiscal 2010 year-to-date period was $294.5
million compared to $260.9 million during the same period in Fiscal 2009, a 13% increase. For the
year-to-date period of Fiscal 2010, the marketing, general and administrative expense rate was
12.7% compared to 13.1% for the Fiscal 2009 year-to-date period.
32
The increase in marketing, general and administrative expense for the Fiscal 2010 year-to-date
period was primarily due to increases in compensation and benefits, including incentive and equity
compensation, and increases in net outside service expense.
Other Operating Income, Net
Third quarter other operating income, net for Fiscal 2010 was $1.7 million compared to $1.6 million
for the third quarter of Fiscal 2009.
Year-to-date other operating income, net for Fiscal 2010 was $4.5 million compared to $6.3 million
for the year-to-date period of Fiscal 2009.
The decrease for the year-to-date period of Fiscal 2010 was driven primarily by lower net gains
from foreign currency denominated transactions in the current period versus the comparable prior
year period.
Interest Expense (Income), Net and Tax Expense (Benefit) from Continuing Operations
Third quarter interest expense was $1.9 million in Fiscal 2010, offset by interest income of $1.2
million, compared to interest expense of $1.8 million, offset by interest income of $1.4. million
in the third quarter of Fiscal 2009.
Year-to-date interest expense was $5.7 million in Fiscal 2010, offset by interest income of $3.4
million, compared to interest income of $7.3 million, offset by interest expense of $4.6 million in
the year-to-date period of Fiscal 2009. The decrease in interest income was primarily the result
of a lower average rate of return on investments. The increase in interest expense was due
primarily to imputed interest expense related to certain store lease transactions, additional
borrowings under the unsecured amended credit agreement and higher fees associated with the
unsecured amended credit agreement.
The effective tax rate for continuing operations for the thirteen weeks ended October 30, 2010 was
a 35.6% expense compared to a benefit of 4.7% for the 2009 comparable period. The third quarter
2009 rate was favorably impacted by a benefit of $2.2 million from the settlement of state tax
audits along with a true up for the difference between the year-to-date tax rate as of the second
quarter and the third quarter year-to-date tax rate.
The effective tax rate for continuing operations for the year-to-date period of Fiscal 2010 was a
32.1% expense, compared to a 28.8% expense for the year-to-date period of Fiscal 2009.
On a full year basis, the Company expects the effective tax rate to be approximately 35%. The rate
remains sensitive to the domestic/international profit mix and other factors.
Net Loss from Discontinued Operations
The Company completed the closure of its RUEHL branded stores and related direct-to-consumer
operations in the fourth quarter of Fiscal 2009. Accordingly, the after-tax operating results
appear in Loss from Discontinued Operations, Net of Tax on the Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended October 31,
2009. Net loss from discontinued operations, net of tax, was $10.4 million and $65.1 million for
the thirteen and thirty-nine weeks ended October 31, 2009, respectively. Results from discontinued
operations were immaterial for the thirteen and thirty-nine weeks ended October 30, 2010.
Refer to Note 14, Discontinued Operations, of the Notes to Condensed Consolidated Financial
Statements for further discussion.
33
Net Income (Loss) and Net Income (Loss) per Share
Net income for the third quarter of Fiscal 2010 was $50.0 million compared to net income of $38.8
million for the third quarter of Fiscal 2009. Net income per diluted share for the third quarter
of Fiscal 2010 was $0.56 compared to net income per basic and diluted share of $0.44 for the same
period of Fiscal 2009. Net income per basic and diluted share for the third quarter of Fiscal
2009 included a benefit of $0.21 per basic and diluted share associated with the true up of the
year-to-date tax rate, as well as a net loss of $0.12 per basic and diluted share from discontinued
operations.
Net income for the year-to-date period of Fiscal 2010 was $57.7 million compared to a net loss of
$47.2 million for the year-to-date period of Fiscal 2009. Net income per diluted share for the
year-to-date period of Fiscal 2010 was $0.64 compared to net loss per basic and diluted share of
$0.54 for the same period of Fiscal 2009. Net loss per basic and diluted share for the
year-to-date period of Fiscal 2009 included a net loss of $0.74 per basic and diluted share from
discontinued operations. Net income per diluted share for the thirty-nine week period ended
October 30, 2010 included a non-cash asset impairment charge associated with the expected store
closures of $0.02 per diluted share.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company had $618.2 million in cash and equivalents available as of October 30, 2010, as well as
an additional $292.8 million available (less outstanding letters of credit of $10.6 million) under
its unsecured Amended Credit Agreement (as amended in June 2009), as described in Note 12,
Long-Term Debt, of the Notes to Condensed Consolidated Financial Statements. The unsecured
Amended Credit Agreement contains financial covenants that require the Company to maintain a
minimum coverage ratio and a maximum leverage ratio and also limits the Companys consolidated
capital expenditures to $325 million in Fiscal 2010, plus the $99.5 million representing the unused
portion of the allowable expenditures from Fiscal 2009, all defined in the Amended Credit
Agreement. The Company was in compliance with the applicable ratio requirements and other
covenants at October 30, 2010. If circumstances occur that would lead to the Company failing to
meet the covenants under the Amended Credit Agreement and the Company is unable to obtain a waiver
or amendment, an event of default would result and the lenders could declare outstanding borrowings
immediately due and payable. The Company believes it is likely that it would either obtain a
waiver or amendment in advance of a default, or would have sufficient cash available to repay
borrowings in the event a waiver was not obtained.
Operating Activities
Net cash provided by operating activities was $77.5 million for the thirty-nine weeks ended October
30, 2010, compared to net cash provided by operating activities of $170.9 million for the
thirty-nine weeks ended October 31, 2009. The reduction in cash provided by operating activities
compared to Fiscal 2009 was driven primarily by an increase in inventory, partially offset by an
increase in net income.
Investing Activities
Cash outflows for investing activities for the thirty-nine weeks ended October 30, 2010 were
primarily for capital expenditures related to new store construction and information technology
investments (see the discussion in Capital Expenditures and Lessor Construction Allowances). The
decrease in capital
expenditures compared to Fiscal 2009 primarily related to the timing of new flagship store
openings. For the thirty-nine week periods ended October 30, 2010 and October 31, 2009, the
Company also had cash outflows for investing activities related to the purchase of trust owned life
insurance policies and cash inflows from investing activities related to proceeds from the sale of
marketable securities.
34
Financing Activities
Financing activities for the thirty-nine week period ended October 30, 2010 consisted of cash
outflows of $46.3 million related to the payment of the $0.175 per share quarterly dividends on
March 16, 2010, June 15, 2010, and September 14, 2010.
In addition, the Company repurchased 669,100 shares of A&Fs Common Stock for the thirteen weeks
ended October 30, 2010. As of October 30, 2010, approximately 10.7 million shares were authorized
for repurchase as part of the August 15, 2005 and November 20, 2007 A&F Board of Directors
authorizations to repurchase 6.0 million shares and 10.0 million shares, respectively, of A&Fs
Common Stock.
The Company had $57.2 million and $50.9 million of debt outstanding under its unsecured Amended
Credit Agreement on October 30, 2010 and January 30, 2010, respectively. The debt outstanding as
of October 30, 2010 and January 30, 2010 was denominated in Japanese Yen. The average interest
rate for the thirty-nine weeks ended was 2.7%. As of October 30, 2010, the Company had an
additional $292.8 million available (less outstanding letters of credit) under its unsecured
Amended Credit Agreement.
The Amended Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at
the end of each testing period. The Amended Credit Agreement also required that the Coverage Ratio
for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing
four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest
expense for such period, (y) scheduled payments of long-term debt due within twelve months of the
date of determination and (z) the sum of minimum rent and contingent store rent, not be less than
1.75 to 1.00 at October 30, 2010. The minimum Coverage Ratio varies over time based on the terms
set forth in the Amended Credit Agreement. On June 16, 2009, the definition of Consolidated
EBITDAR was amended for the purpose of the Amended Credit Agreement, to add back the following
items, among others, (a) recognized losses arising from investments in certain auction rate
securities to the extent such losses do not exceed a defined level of impairments for those
investments, (b) non-cash charges in an amount not to exceed $50 million related to the closure of
RUEHL branded stores and related direct-to-consumer operations, (c) non-recurring cash charges in
an aggregate amount not to exceed $61 million related to the closure of RUEHL branded stores and
related direct-to-consumer operations, (d) additional non-recurring non-cash charges in an amount
not to exceed $20 million in the aggregate over the trailing four consecutive fiscal quarter period
and (e) other non-recurring cash charges in an amount not to exceed $10 million in the aggregate
over the trailing four consecutive fiscal quarter period. The Amended Credit Agreement also limits
the Companys consolidated capital expenditures to $325 million in Fiscal 2010, plus $99.5 million
representing the unused portion of the allowable capital expenditures from Fiscal 2009. The
Company was in compliance with the applicable ratio requirements and other covenants at October 30,
2010.
The unsecured Amended Credit Agreement is more fully described in Note 12, Long-Term Debt, of the
Notes to Condensed Consolidated Financial Statements.
Trade letters of credit totaling approximately $7.7 million and $35.9 million were outstanding on
October 30, 2010 and January 30, 2010, respectively. Stand-by letters of credit totaling
approximately $2.9 million and $14.1 million were outstanding on October 30, 2010 and January 30,
2010, respectively. The stand-by letters of credit are set to expire primarily during the third
quarter of Fiscal 2011. To date, no beneficiary has drawn upon
the stand-by letters of credit.
35
Off-Balance Sheet Arrangements
As of October 30, 2010, the Company did not have any off-balance sheet arrangements.
Contractual Obligations
The Companys contractual obligations consist primarily of letters of credit outstanding, operating
leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement
obligations, lease deposits and other agreements to purchase goods and services that are legally
binding and that require minimum quantities to be purchased. These contractual obligations impact
the Companys short- and long-term liquidity and capital resource needs. During the thirty-nine
weeks ended October 30, 2010, changes to the contractual obligations from those as of January 30,
2010 included the payment of $20.8 million in previously accrued charges related to the closure of
RUEHL branded stores and related direct-to-consumer operations. There were no other material
changes in contractual obligations as of October 30, 2010, with the exception of those obligations
which occurred in the normal course of business (primarily changes in the Companys merchandise
inventory-related purchases and lease obligations, which fluctuate throughout the year as a result
of the seasonal nature of the Companys operations).
36
Third Quarter Store Count and Gross Square Feet
Store count and gross square footage by brand for the thirteen weeks ended October 30, 2010 and
October 31, 2009, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
345 |
|
|
|
206 |
|
|
|
530 |
|
|
|
17 |
|
|
|
1,098 |
|
New |
|
|
2 |
|
|
|
1 |
|
|
|
7 |
|
|
|
|
|
|
|
10 |
|
Remodels/Conversions (net
activity) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Closed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
347 |
|
|
|
205 |
|
|
|
537 |
|
|
|
17 |
|
|
|
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
3,097 |
|
|
|
976 |
|
|
|
3,629 |
|
|
|
166 |
|
|
|
7,868 |
|
New |
|
|
15 |
|
|
|
6 |
|
|
|
54 |
|
|
|
|
|
|
|
75 |
|
Remodels/Conversions (net
activity) |
|
|
6 |
|
|
|
(10 |
) |
|
|
1 |
|
|
|
|
|
|
|
(3 |
) |
Closed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
3,118 |
|
|
|
972 |
|
|
|
3,684 |
|
|
|
166 |
|
|
|
7,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
8,986 |
|
|
|
4,741 |
|
|
|
6,860 |
|
|
|
9,765 |
|
|
|
7,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2009 |
|
|
354 |
|
|
|
213 |
|
|
|
520 |
|
|
|
16 |
|
|
|
1,103 |
|
New |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
6 |
|
Remodels/Conversions (net
activity) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
352 |
|
|
|
213 |
|
|
|
522 |
|
|
|
16 |
|
|
|
1,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2009 |
|
|
3,144 |
|
|
|
986 |
|
|
|
3,552 |
|
|
|
161 |
|
|
|
7,843 |
|
New |
|
|
20 |
|
|
|
21 |
|
|
|
24 |
|
|
|
|
|
|
|
65 |
|
Remodels/Conversions (net
activity) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(27 |
) |
|
|
(10 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
3,137 |
|
|
|
997 |
|
|
|
3,569 |
|
|
|
161 |
|
|
|
7,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
8,912 |
|
|
|
4,681 |
|
|
|
6,837 |
|
|
|
10,063 |
|
|
|
7,130 |
|
37
Year-To-Date Store Count and Gross Square Feet
Store count and gross square footage by brand for the thirty-nine weeks ended October 30, 2010 and
October 31, 2009, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2010 |
|
|
346 |
|
|
|
209 |
|
|
|
525 |
|
|
|
16 |
|
|
|
1,096 |
|
New |
|
|
5 |
|
|
|
3 |
|
|
|
13 |
|
|
|
1 |
|
|
|
22 |
|
Remodels/Conversions (net
activity) |
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Closed |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
347 |
|
|
|
205 |
|
|
|
537 |
|
|
|
17 |
|
|
|
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2010 |
|
|
3,110 |
|
|
|
979 |
|
|
|
3,597 |
|
|
|
161 |
|
|
|
7,847 |
|
New |
|
|
41 |
|
|
|
25 |
|
|
|
97 |
|
|
|
5 |
|
|
|
168 |
|
Remodels/Conversions (net
activity) |
|
|
9 |
|
|
|
(9 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Closed |
|
|
(42 |
) |
|
|
(23 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2010 |
|
|
3,118 |
|
|
|
972 |
|
|
|
3,684 |
|
|
|
166 |
|
|
|
7,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
8,986 |
|
|
|
4,741 |
|
|
|
6,860 |
|
|
|
9,765 |
|
|
|
7,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
Store Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2009 |
|
|
356 |
|
|
|
212 |
|
|
|
515 |
|
|
|
14 |
|
|
|
1,097 |
|
New |
|
|
1 |
|
|
|
5 |
|
|
|
9 |
|
|
|
2 |
|
|
|
17 |
|
Remodels/Conversions (net
activity) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
352 |
|
|
|
213 |
|
|
|
522 |
|
|
|
16 |
|
|
|
1,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2009 |
|
|
3,164 |
|
|
|
976 |
|
|
|
3,474 |
|
|
|
146 |
|
|
|
7,760 |
|
New |
|
|
20 |
|
|
|
40 |
|
|
|
111 |
|
|
|
15 |
|
|
|
186 |
|
Remodels/Conversions (net
activity) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Closed |
|
|
(47 |
) |
|
|
(19 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
3,137 |
|
|
|
997 |
|
|
|
3,569 |
|
|
|
161 |
|
|
|
7,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
8,912 |
|
|
|
4,681 |
|
|
|
6,837 |
|
|
|
10,063 |
|
|
|
7,130 |
|
38
CAPITAL EXPENDITURES
Since the beginning of the fourth quarter of Fiscal 2010, the Company has opened Abercrombie &
Fitch flagships in Fukuoka, Japan and Copenhagen, Denmark, its first international Gilly Hicks
store in the United Kingdom, and a Hollister Epic store on Fifth Avenue in New York. In Fiscal
2011, the Company expects to open Abercrombie & Fitch flagship stores in Paris, France and Madrid,
Spain.
The Company continues to expect to open approximately 20 international mall-based Hollister stores
in Fiscal 2010, 11 of which will be opened in the fourth quarter.
Domestically, the Company expects to open its first Abercrombie & Fitch store in Puerto Rico and
one Gilly Hicks store in the fourth quarter of Fiscal 2010.
Capital expenditures totaled $117.0 million and $144.5 million for the thirty-nine weeks ended
October 30, 2010 and October 31, 2009, respectively. A summary of capital expenditures is as
follows:
|
|
|
|
|
|
|
|
|
|
|
October 30, |
|
|
October 31, |
|
Capital Expenditures (in millions) |
|
2010 |
|
|
2009 |
|
New Store Construction, Store Refreshes and Remodels |
|
$ |
86.6 |
|
|
$ |
110.1 |
|
Home Office, Distribution Centers and Information
Technology |
|
|
30.4 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
Total Capital Expenditures |
|
$ |
117.0 |
|
|
$ |
144.5 |
|
|
|
|
|
|
|
|
During Fiscal 2010, based on new store opening plans and other capital expenditures, the Company
now expects total capital expenditures to be approximately $190 million, including approximately
$140 million related to new stores, store refreshes and remodels, and approximately $50 million
related to information technology, distribution center and other home office projects.
CLOSURE OF RUEHL BRANDED STORES AND RELATED DIRECT-TO-CONSUMER OPERATIONS
On June 16, 2009, A&Fs Board of Directors approved the closure of the Companys 29 RUEHL branded
stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL
branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in Loss from Discontinued Operations,
Net of Tax on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
for the thirteen and thirty-nine weeks ended October 31, 2009. Results from discontinued
operations were immaterial for the thirteen and thirty-nine weeks ended October 30, 2010.
Costs associated with exit or disposal activities are recorded when the liability is incurred. The
Company expects to make gross cash payments of approximately $28.9 million in Fiscal 2010, of which
$20.8 million was paid during the thirty-nine weeks ended October 30, 2010, and an aggregate of
$19.2 million in fiscal years thereafter, related primarily to lease termination agreements
associated with the closure of RUEHL branded stores.
39
Below is a roll forward of the present value of liabilities recognized on the Condensed
Consolidated Balance Sheet as of October 30, 2010 related to the closure of the RUEHL branded
stores and related direct-to-consumer operations (in millions):
|
|
|
|
|
|
|
Thirty-nine Weeks Ended |
|
|
|
October 30, 2010 |
|
Beginning Balance |
|
$ |
46.1 |
|
Interest Accretion / Other, Net |
|
|
(0.1 |
) |
Cash Payments |
|
|
(20.8 |
) |
|
|
|
|
Ending Balance(1) |
|
$ |
25.2 |
|
|
|
|
|
|
|
|
(1) |
|
Ending balance primarily reflects the net present
value of obligations due under signed lease
termination agreements and obligations due under a
lease, for which no termination agreement exists,
less estimated sublease income. As of October 30,
2010, there were $19.6 million of lease
termination charges recorded as a current
liability in Accrued Expenses and $5.6 million of
lease termination charges recorded as a long-term
liability in Other Liabilities on the Condensed
Consolidated Balance Sheet. |
Critical Accounting Estimates
The Companys discussion and analysis of its financial condition and results of operations are
based upon the Companys condensed consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these condensed consolidated financial statements requires the Company to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses. Since actual results may differ from those estimates, the Company revises its estimates
and assumptions as new information becomes available.
The Companys significant accounting policies can be found in Note 2 of the Notes to Consolidated
Financial Statements contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of A&Fs
Annual Report on Form 10-K for Fiscal 2009 filed on March 29, 2010. The Company believes the
following policies are the most critical to the portrayal of the Companys financial condition and
results of operations.
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Revenue Recognition |
|
|
|
|
|
The Company recognizes retail
sales at the time the customer
takes possession of the
merchandise. The Company
reserves for sales returns
through estimates based on
historical experience and
various other assumptions that
management believes to be
reasonable. The value of
point of sale coupons that
result in a reduction of the
price paid by the customer are
recorded as a reduction of
sales.
The Company sells gift cards
in its stores and through
direct-to-consumer operations.
The Company accounts for gift
cards sold to customers by
recognizing a liability at the
time of sale. The liability
remains on the Companys books
until the earlier of
redemption (recognized as
revenue) or when the Company
determines the likelihood of
redemption is remote, known as
breakage (recognized as other
operating income), based on
historical redemption
patterns.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
the sales return reserve and revenue
recognition for gift cards over the past three
fiscal years.
The Company does not expect material changes in
the near term to the underlying assumptions
used to measure the sales return reserve or to
measure the timing and amount of future gift
card redemptions as of October 30, 2010.
However, changes in these assumptions do occur,
and, should those changes be significant, the
Company may be exposed to gains or losses that
could be material.
A 10% change in the sales return reserve as of
October 30, 2010 would have affected pre-tax
income by approximately $1.0 million for the
thirteen and thirty-nine week periods ended
October 30, 2010.
A 10% change in the assumption of the
redemption pattern for gift cards as of October
30, 2010 would have been immaterial to pre-tax
income for the thirteen and thirty-nine week
periods ended October 30, 2010. |
40
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
Auction Rate Securities (ARS) |
|
|
|
|
As a result of the market
failure and lack of liquidity
in the current ARS market, the
Company measured the fair
value of its ARS primarily
using a discounted cash flow
model. Certain significant
inputs into the model are
unobservable in the market
including the periodic coupon
rate adjusted for the
marketability discount, market
required rate of return and
expected term.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
the fair value of the ARS.
The Company does not expect material changes in
the near term to the underlying assumptions
used to determine the unobservable inputs used
to calculate the fair value of the ARS as of
October 30, 2010. However, changes in these
assumptions do occur, and, should those changes
be significant, the Company may be exposed to
gains or losses that could be material.
Assuming all other assumptions disclosed in
Note 7, Fair Value of the Notes to Condensed
Consolidated Financial Statements, being equal,
a 50 basis point increase in the market
required rate of return will yield a 25%
increase in impairment and a 50 basis point
decrease in the market required rate of return
will yield a 25% decrease in impairment. |
|
|
|
Inventory Valuation |
|
|
|
|
|
Inventories are principally
valued at the lower of average
cost or market utilizing the
retail method.
The Company reduces inventory
value by recording a valuation
reserve that represents
estimated future permanent
markdowns necessary to
sell-through the inventory.
Additionally, as part of
inventory valuation, an
inventory shrink estimate is
made each period that reduces
the value of inventory for
lost or stolen items.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
the shrink reserve or valuation reserve over
the past three fiscal years.
The Company does not expect material changes in
the near term to the underlying assumptions
used to determine the shrink reserve or
valuation reserve as of October 30, 2010.
However, changes in these assumptions do occur,
and, should those changes be significant, they
could significantly impact the ending inventory
valuation at cost, as well as the resulting
gross margin(s).
An increase or decrease in the valuation
reserve of 10% would have affected pre-tax
income by approximately $3.4 million for the
thirteen and thirty-nine week periods ended
October 30, 2010.
An increase or decrease in the inventory shrink
accrual of 10% would have been immaterial to
pre-tax income for the thirteen and thirty-nine
week periods ended October 30, 2010. |
41
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Property and Equipment |
|
|
|
|
|
Long-lived assets, primarily
comprised of property and
equipment, are reviewed
periodically for impairment or
whenever events or changes in
circumstances indicate that
full recoverability of net
asset balances through future
cash flows is in question.
The Companys impairment
calculation requires
management to make assumptions
and judgments related to
factors used in the evaluation
for impairment, including, but
not limited to, managements
expectations for future
operations and projected cash
flows.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
impairment loss over the past three fiscal
years.
The Company does not expect material changes in
the near term to the assumptions underlying its
impairment calculations as of October 30, 2010.
However, changes in these assumptions do
occur, and, should those changes be
significant, they could have a material impact
on the Companys determination of whether or
not there has been an impairment. |
|
|
|
Income Taxes |
|
|
|
|
|
Income taxes are calculated
using the asset and liability
method. Deferred tax assets
and liabilities are measured
using current enacted tax
rates in effect for the years
in which those temporary
differences are expected to
reverse. Inherent in the
measurement of deferred
balances are certain judgments
and interpretations of enacted
tax law and published guidance
with respect to applicability
to the Companys operations.
The provision for income taxes
is based on the current
estimate of the annual
effective tax rate adjusted to
reflect the tax impact of
items discrete to the quarter.
The effective tax rate is
affected by changes in law,
the tax jurisdiction of new
stores, the level of earnings,
provision-to-return
adjustments, tax-exempt
income, the results of tax
audits, etc.
|
|
The Company does not expect material changes in
the judgments and interpretations used to
calculate deferred tax assets and liabilities
as of October 30, 2010. However, changes may
occur and actual results could differ
materially.
The Company does not expect material changes in
the near term to underlying assumptions used to
calculate the tax provisions for the thirteen
and thirty-nine week periods ended October 30,
2010. However, changes in these assumptions
may occur and should those changes be
significant, they could have a material impact
on the Companys income tax expense. |
|
|
|
Equity Compensation Expense |
|
|
|
|
|
The Companys equity
compensation expense related
to stock options and stock
appreciation rights is
estimated using the
Black-Scholes option-pricing
model to determine the fair
value of the stock option and
stock appreciation right
grants, which requires the
Company to estimate the
expected term of the stock
option and stock appreciation
right grants and expected
future stock price volatility
over the expected term.
|
|
The Company does not expect material changes in
the near term to the underlying assumptions
used to calculate equity compensation expense
for the thirty-nine week period ended October
30, 2010. However, changes in these
assumptions do occur, and, should those changes
be significant, they could have a material
impact on the Companys equity compensation
expense.
A 10% increase in term would yield a 3%
increase in the Black-Scholes valuation for
stock appreciation rights, while a 10% increase
in volatility would yield a 9% increase in the
Black-Scholes valuation for stock appreciation
rights. |
42
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Supplemental Executive Retirement Plan |
|
|
|
|
Effective February 2, 2003,
the Company established a
Chief Executive Officer
Supplemental Executive
Retirement Plan (the SERP)
to provide additional
retirement income to its
Chairman and Chief Executive
Officer (CEO). Subject to
service requirements, the CEO
will receive a monthly benefit
equal to 50% of his final
average compensation (as
defined in the SERP) for life.
The final average compensation
used for the calculation is
based on actual compensation
(base salary and cash
incentive compensation)
averaged over the last 36
consecutive full calendar
months ending before the CEOs
retirement.
|
|
The Company does not expect material changes in
the near term to the underlying assumptions
used to determine the accrual for the SERP as
of October 30, 2010. However, changes in these
assumptions do occur, and, should those changes
be significant, the Company may be exposed to
gains or losses that could be material.
A 10% increase in final average compensation as
of October 30, 2010 would increase the SERP
accrual by approximately $1.3 million. A 50
basis point increase in the discount rate as of
October 30, 2010 would decrease the SERP
accrual by an immaterial amount. |
|
|
|
The Companys accrual for the
SERP requires management to
make assumptions and judgments
related to the CEOs final
average compensation, life
expectancy and discount rate.
|
|
|
43
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 Quarterly Report on Form 10-Q or made
by the Company, its management or spokespeople involve risks and uncertainties and are subject to
change based on various important factors, many of which may be beyond the Companys control.
Words such as estimate, project, plan, believe, expect, anticipate, intend, and
similar expressions may identify forward-looking statements.
The following factors, included in the disclosure under the heading FORWARD-LOOKING STATEMENTS AND
RISK FACTORS in ITEM 1A. RISK FACTORS of A&Fs Annual Report on Form 10-K for Fiscal 2009 filed
on March 29, 2010, in some cases have affected and in the future could affect the Companys
financial performance and could cause actual results for Fiscal 2010 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:
|
|
|
general economic and financial conditions could have a material adverse effect on the
Companys business, results of operations and liquidity; |
|
|
|
loss of the services of skilled senior executive officers could have a material adverse
effect on the Companys business; |
|
|
|
ability to hire, train and retain qualified associates could have a material adverse
effect on the Companys business; |
|
|
|
equity-based compensation awarded under the employment agreement with the Companys
Chief Executive Officer could adversely impact the Companys cash flows, financial position
or results of operations and could have a dilutive effect on the Companys outstanding
Common Stock; |
|
|
|
failure to anticipate, identify and respond to changing consumer preferences and fashion
trends in a timely manner could cause the Companys profitability to decline; |
|
|
|
unseasonable weather conditions affecting consumer preferences could have a material
adverse effect on the Companys business; |
|
|
|
disruptive weather conditions affecting the consumers ability to shop could have a
material adverse effect on the Companys business; |
|
|
|
the Companys market share may be adversely impacted at any time by a significant number
of competitors; |
|
|
|
the Companys international expansion plan is dependent on many factors, any of which
could delay or prevent successful penetration into new markets and strain its resources; |
|
|
|
the Companys growth strategy relies on the addition of new stores, which may strain the
Companys resources and adversely impact current store performance; |
|
|
|
the Company may incur costs related to store closures; |
|
|
|
availability and market prices of key raw materials and labor costs could have a
material adverse effect on the Companys business and results of operations; |
|
|
|
the interruption or cessation of the flow of merchandise from key vendors and
international manufacturers could disrupt the Companys supply chain; |
44
|
|
|
the Company does not own or operate any manufacturing facilities and therefore depends
upon independent third parties for the manufacture of all its merchandise; |
|
|
|
the Companys reliance on two distribution centers domestically located in the same
vicinity, and one distribution center internationally, makes it susceptible to disruptions
or adverse conditions affecting its distribution centers; |
|
|
|
the Companys reliance on third parties to deliver merchandise from its distribution
centers to its stores and direct-to-consumer customers could result in disruptions to its
business; |
|
|
|
the Companys development of new brand concepts could have a material adverse effect on
the Companys financial condition or results of operations; |
|
|
|
fluctuations in foreign currency exchange rates could adversely impact financial
results; |
|
|
|
the Companys net sales and inventory levels fluctuate on a seasonal basis, causing its
results of operations to be particularly susceptible to changes to back-to-school and
holiday shopping patterns; |
|
|
|
the Companys ability to attract customers to its stores depends heavily on the success
of the shopping centers in which they are located; |
|
|
|
comparable store sales will continue to fluctuate on a regular basis; |
|
|
|
the Companys net sales are affected by direct-to-consumer sales; |
|
|
|
the Company may be exposed to risks and costs associated with credit card fraud and
identity theft; |
|
|
|
the Companys litigation exposure could exceed expectations, having a material adverse
effect on the Companys financial condition or results of operations; |
|
|
|
the Companys failure to adequately protect its trademarks could have a negative impact
on its brand image and limit its ability to penetrate new markets; |
|
|
|
the Companys unsecured credit agreement includes financial and other covenants that
impose restrictions on its financial and business operations; |
|
|
|
changes in taxation requirements could adversely impact financial results; |
|
|
|
the Companys inability to obtain commercial insurance at acceptable prices or failure
to adequately reserve for self-insured exposures might increase expense and adversely
impact financial results; |
|
|
|
modifications and/or upgrades to information technology systems may disrupt operations; |
|
|
|
the Company could suffer if the Companys computer systems are disrupted or cease to
operate effectively; |
45
|
|
|
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 could have a material adverse effect on the Companys business; |
|
|
|
potential disruption of the Companys business due to the occurrence of, or fear of, a
health pandemic could have a material adverse effect on the Companys business; |
|
|
|
changes in the regulatory or compliance landscape could adversely affect the Companys
business or results of operations; and |
|
|
|
the Companys operations may be effected by greenhouse emissions and climate change. |
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 included 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.
46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Securities
The Company maintains its cash equivalents in financial instruments, primarily money market funds,
with original maturities of three months or less. The Company also holds investments in investment
grade auction rate securities (ARS) that have maturities ranging from 15 to 32 years. The par
and carrying values, and related cumulative temporary impairment charges for the Companys
marketable securities as of October 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary |
|
|
Carrying |
|
(in thousands) |
|
Par Value |
|
|
Impairment |
|
|
Value |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities student loan backed |
|
$ |
106,649 |
|
|
$ |
(5,671 |
) |
|
$ |
100,978 |
|
Auction rate securities municipal authority bonds |
|
|
28,575 |
|
|
|
(4,716 |
) |
|
|
23,859 |
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
135,224 |
|
|
$ |
(10,387 |
) |
|
$ |
124,837 |
|
|
|
|
|
|
|
|
|
|
|
As of October 30, 2010, approximately 70% of the Companys ARS were AAA rated, approximately 17%
of the Companys ARS were AA rated, and approximately 13% were A- rated, in each case as rated
by one or more of the major credit rating agencies. The ratings take into account insurance
policies guaranteeing both the principal and accrued interest. Each investment in student loans is
insured by (1) the U.S. government under the Federal Family Education Loan Program, (2) a private
insurer or (3) a combination of both. The percentage coverage of the outstanding principal and
interest of the ARS varies by security. The credit ratings may change over time and would be an
indicator of the default risk associated with the ARS and could have a material effect on the value
of the ARS. If the Company expects that it will not recover the entire cost basis of the
available-for-sale ARS, intends to sell the available-for-sale ARS or it becomes more than likely
that the Company will be required to sell the available-for-sale ARS before recovery of their cost
basis, which may be at maturity, the Company may be required to record an other-than-temporary
impairment or additional temporary impairment to write down the assets fair value. The Company
did not incur any credit losses on available-for-sale ARS, and furthermore, the issuers continued
to perform under the obligations, including making scheduled interest payments, and the Company
expects that this will continue going forward.
The irrevocable rabbi trust (the Rabbi Trust) is intended to be used as a source of funds to
match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified
Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and
Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement
Plan. As of October 30, 2010, total assets held in the Rabbi Trust were $77.3 million, which
included $12.0 million of municipal notes and bonds with maturities that ranged from one to three
years, trust-owned life insurance policies with a cash surrender value of $64.8 million and $0.5
million held in money market funds. The Rabbi Trust assets are consolidated and recorded at fair
value, with the exception of the trust-owned life insurance policies which are recorded at cash
surrender value in Other Assets on the Condensed Consolidated Balance Sheet and are restricted as
to their use as noted above. Net unrealized gains or losses related to the municipal notes and
bonds held in the Rabbi Trust were not material for the thirteen and thirty-nine week periods ended
October 30, 2010 and October 31, 2009, respectively. The change in cash surrender value of the
trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.7
million for the thirteen weeks ended October 30, 2010 and October 31, 2009. The change in cash
surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in
realized gains of $1.8 million and $5.0 million for the thirty-nine weeks ended October 30, 2010
and October 31, 2009, respectively.
47
Interest Rate Risks
As of October 30, 2010, the Company had $57.2 million in long-term debt outstanding under the
unsecured Amended Credit Agreement. This borrowing and any future borrowings will bear interest at
negotiated rates and would be subject to interest rate risk. The unsecured Amended Credit
Agreement has several borrowing options, including interest rates that are based on: (i) a Base
Rate, plus a margin based on a Leverage Ratio, payable quarterly; (ii) an Adjusted Eurodollar Rate
(as defined in the unsecured Amended Credit Agreement) plus a margin based on a Leverage Ratio,
payable at the end of the applicable interest period for the borrowing and, for interest periods in
excess of three months, on the date that is three months after the commencement of the interest
period; or (iii) an Adjusted Foreign Currency Rate (as defined in the Amended Credit Agreement)
plus a margin based on the Leverage Ratio, payable at the end of the applicable interest period for
the borrowing and, for interest periods in excess of three months, on the date that is three months
after the commencement of the interest period. The Base Rate represents a rate per annum equal to
the higher of (a) PNC Banks then publicly announced prime rate or (b) the Federal Funds Effective
Rate (as defined in the unsecured Amended Credit Agreement) as then in effect plus 1/2 of 1.0%. The
average interest rate was 2.7% for the thirteen and thirty-nine week period ended October 30, 2010.
Additionally, as of October 30, 2010, the Company had $292.8 million available, less outstanding
letters of credit, under its unsecured Amended Credit Agreement. Assuming no changes in the
Companys financial structure as it stood at October 30, 2010, if market interest rates average an
increase of 100 basis points over the final thirty-nine week period for Fiscal 2010 compared to the
interest rates incurred for the thirty-nine week period ended October 30, 2010, there would be an
immaterial change in interest expense. This amount was determined by calculating the effect of the
average hypothetical interest rate increase on the Companys variable rate unsecured Amended Credit
Agreement. This hypothetical increase in interest rate for the fifty-two week period ended January
29, 2011 may be different from the actual increase in interest expense due to varying interest rate
reset dates under the Companys unsecured Amended Credit Agreement.
Foreign Exchange Rate Risk
The Companys international subsidiaries generally operate with functional currencies other than
the U.S. dollar. The Companys Condensed Consolidated Financial Statements are presented in U.S.
dollars. Therefore, the Company must translate revenues, expenses, assets and liabilities from
functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the
reporting period. The fluctuation in the value of the U.S. dollar against other currencies affects
the reported amounts of revenues, expenses, assets and liabilities.
The Company and its subsidiaries have exposure to changes in currency exchange rates associated
with foreign currency transactions and forecasted foreign currency transactions, including the sale
of inventory between subsidiaries and foreign denominated assets and liabilities. Such transactions
are denominated primarily in U.S. dollars, Euros, Canadian Dollars, Japanese Yen and British
Pounds. The Company has established a program that primarily utilizes foreign currency forward
contracts to partially offset the risks associated with the effects of certain foreign currency
transactions and forecasted transactions. Under this program, increases or decreases in foreign
currency exposures are partially offset by gains or losses on forward contracts, to mitigate the
impact of foreign currency gains or losses. The Company does not use forward contracts to engage in
currency speculation. All outstanding foreign currency forward contracts are recorded at fair
value at the end of each fiscal period.
48
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to provide
reasonable assurance that information required to be disclosed in the reports that A&F files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to A&Fs management, including the Chairman and Chief Executive Officer of A&F (the
principal executive officer) and the Executive Vice President and Chief Financial Officer of A&F
(the principal financial officer), as appropriate to allow timely decisions regarding required
disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how
well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of disclosure controls and procedures are met.
A&Fs management, including the Chairman and Chief Executive Officer of A&F and the Executive Vice
President and Chief Financial Officer of A&F, evaluated the effectiveness of A&Fs design and
operation of its disclosure controls and procedures as of the end of the fiscal quarter ended
October 30, 2010. Based upon that evaluation, the Chairman and Chief Executive Officer of A&F and
the Executive Vice President and Chief Financial Officer of A&F concluded that A&Fs disclosure
controls and procedures were effective at a reasonable level of assurance as of October 30, 2010,
the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes in A&Fs internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during A&Fs fiscal quarter ended
October 30, 2010 that materially affected, or are reasonably likely to materially affect, A&Fs
internal control over financial reporting.
49
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of
business. Legal costs incurred in connection with the resolution of claims and lawsuits are
generally expensed as incurred, and the Company establishes reserves for the outcome of litigation
where it deems appropriate to do so under applicable accounting rules. Actual liabilities may
exceed the amounts reserved, and there can be no assurance that final resolution of these matters
will not have a material adverse effect on the Companys financial condition, results of operations
or cash flows. The Companys identified contingencies include the following matters:
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores,
Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In
that action, plaintiffs alleged, on behalf of a putative class of California store managers
employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay
as non-exempt employees under California wage and hour laws. The complaint sought injunctive
relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and
attorneys fees and costs. The defendants answered the complaint on August 21, 2006, denying
liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids
store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to
oppose the plaintiffs remaining claims. On January 29, 2009, the Court certified a class
consisting of all store managers who served at Hollister and abercrombie kids stores in California
from May 1, 2004 through the future date upon which the action concludes. The parties then
continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a
notice that they did not intend to continue to pursue their claim that members of the class did not
exercise independent managerial judgment and discretion. They also asked the Court to vacate the
August 9, 2010 trial date previously set by the Court. On July 20, 2010, the trial court vacated
the trial date and the defendants then moved to decertify the putative class.
On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company,
et al., was filed against A&F and certain of its officers in the United States District Court for
the Southern District of Ohio on behalf of a purported class of all persons who purchased or
acquired shares of A&Fs Common Stock between June 2, 2005 and August 16, 2005. In September and
October of 2005, five other purported class actions were subsequently filed against A&F and other
defendants in the same Court. All six securities cases alleged claims under the federal securities
laws related to sales of Common Stock by certain defendants and to a decline in the price of A&Fs
Common Stock during the summer of 2005, allegedly as a result of misstatements attributable to A&F.
Plaintiffs sought unspecified monetary damages. On November 1, 2005, a motion to consolidate all
of these purported class actions into the first-filed case was filed by some of the plaintiffs.
A&F joined in that motion. On March 22, 2006, the motions to consolidate were granted, and these
actions (together with the federal court derivative cases described in the following paragraph)
were consolidated for purposes of motion practice, discovery and pretrial proceedings. A
consolidated amended securities class action complaint (the Complaint) was filed on August 14,
2006. On October 13, 2006, all defendants moved to dismiss that Complaint. On August 9, 2007, the
Court denied the motions to dismiss. On September 14, 2007, defendants filed answers denying the
material allegations of the Complaint and asserting affirmative defenses. On October 26, 2007,
plaintiffs moved to certify their purported class. After briefing and argument, the motion was
submitted on March 24, 2009, and granted on May 21, 2009. On June 5, 2009, defendants petitioned
the Sixth Circuit for permission to appeal the class certification order and on August 24, 2009,
the Sixth Circuit granted leave to appeal. On May 26, 2010, after mediation which commenced on May
17, 2010, the parties reached an agreement in principle to settle the consolidated cases as a class
action, subject to Court approval. On September 24, 2010, the District Court approved the
settlement and dismissed the class action. The dismissal
has now become final.
50
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries,
et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F
as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&Fs
present and former directors, alleging various breaches of the directors fiduciary duty and
seeking equitable and monetary relief. In the following three months, four similar derivative
actions were filed (three in the United States District Court for the Southern District of Ohio and
one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of
A&F alleging various breaches of the directors fiduciary duty allegedly arising out of the same
matters alleged in the Ross case and seeking equitable and monetary relief on behalf of A&F. In
March of 2006, the federal court derivative actions were consolidated with the Ross actions for
purposes of motion practice, discovery and pretrial proceedings. A consolidated amended derivative
complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, A&F
announced that its Board of Directors had received a report of the Special Litigation Committee
established by the Board to investigate and act with respect to claims asserted in the derivative
lawsuit, which concluded that there was no evidence to support the asserted claims and directed the
Company to seek dismissal of the derivative cases. On September 10, 2007, the Company moved to
dismiss the federal derivative cases on the authority of the Special Litigation Committee report.
On March 12, 2009, the Companys motion was granted and, on April 10, 2009, plaintiffs filed an
appeal from the order of dismissal. Plaintiffs appeal has been fully briefed and argued and is
awaiting decision. The state court has stayed further proceedings in the state-court derivative
action until resolution of the consolidated federal derivative cases.
The Company intends to defend the aforesaid pending matters vigorously, as appropriate. The
Company is unable to quantify the potential exposure of the aforesaid pending matters. However,
the Companys assessment of the current exposure could change in the event of the discovery of
additional facts with respect to legal matters pending against the Company or determinations by
judges, juries, administrative agencies or other finders of fact that are not in accordance with
the Companys evaluation of the claims.
51
ITEM 1A. RISK FACTORS
The Companys risk factors as of October 30, 2010 have not changed materially from those disclosed
in Part I, ITEM 1A. RISK FACTORS of A&Fs Annual Report on Form 10-K for Fiscal 2009 filed on
March 29, 2010.
52
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding A&Fs purchases of its Common Stock during the
thirteen-week period ended October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
|
|
Total |
|
|
|
|
|
|
Shares Purchased |
|
|
Shares that May Yet |
|
|
|
Number of |
|
|
Average |
|
|
as Part of Publicly |
|
|
be Purchased under |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
the Plans or |
|
|
|
Purchased |
|
|
per Share |
|
|
or Programs |
|
|
Programs |
|
Period (Fiscal Month) |
|
(1) |
|
|
(2) |
|
|
(3) |
|
|
(4) |
|
August 1, 2010 through August 28, 2010 |
|
|
9,186 |
|
|
$ |
36.52 |
|
|
|
|
|
|
|
11,346,900 |
|
|
|
August 29, 2010 through October 2, 2010 |
|
|
728 |
|
|
$ |
35.93 |
|
|
|
|
|
|
|
11,346,900 |
|
|
|
October 3, 2010 through October 30, 2010 |
|
|
669,292 |
|
|
$ |
43.65 |
|
|
|
669,100 |
|
|
|
10,677,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
679,206 |
|
|
$ |
43.55 |
|
|
|
669,100 |
|
|
|
10,677,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
An aggregate of 10,106 of the shares of A&Fs Common Stock purchased during
the quarterly period (thirteen-week period) ended October 30, 2010 represented
shares which were withheld for tax payments due upon the vesting of employee
restricted stock unit and restricted stock awards. All other shares of A&F
Common Stock purchased during the quarterly period were purchased pursuant to
A&Fs publicly announced stock repurchase authorizations described in footnote
3 below. |
|
(2) |
|
The average price paid per share includes broker commissions, as applicable. |
|
(3) |
|
The reported shares were purchased pursuant to A&Fs publicly announced
stock repurchase authorizations. On August 16, 2005, A&F announced the August
15, 2005 authorization by A&Fs Board of Directors to repurchase 6.0 million
shares of A&Fs Common Stock. On November 21, 2007, A&F announced the November
20, 2007 authorization by A&Fs Board of Directors to repurchase 10.0 million
shares of A&Fs Common Stock, in addition to the approximately 2.0 million
shares of A&Fs Common Stock which remained available under the August 2005
authorization as of November 20, 2007. |
|
(4) |
|
The number shown represents, as of the end of each period, the maximum
number of shares of Common Stock that may yet be purchased under A&Fs publicly
announced stock repurchase authorizations described in footnote 3 above. The
shares may be purchased, from time to time, depending on market conditions. |
53
ITEM 6. EXHIBITS
(a) Exhibits
|
|
|
|
|
|
10.1 |
|
|
Aircraft Time Sharing Agreement, made and entered into to be effective as of June 1, 2010, by
and between Abercrombie & Fitch Management Co., as Lessor, and Michael S. Jeffries, as Lessee,
and consented to by DFZ, LLC, as Owner, incorporated herein by reference to Exhibit 10.2 to
Abercrombie & Fitch Co.s Quarterly Report on Form 10-Q for the quarterly period ended May 1,
2010 (File No. 001-12107). |
|
|
|
|
|
|
15 |
|
|
Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: |
|
|
|
|
Inclusion of Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers
LLP.* |
|
|
|
|
|
|
31.1 |
|
|
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
|
|
|
31.2 |
|
|
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
|
|
|
32 |
|
|
Certifications by Principal Executive Officer and Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
|
|
|
|
101 |
|
|
The following materials from Abercrombie & Fitch Co.s Quarterly Report on Form 10-Q for
the quarterly period ended October 30, 2010, formatted in XBRL (eXtensible Business
Reporting Language): (i) Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31,
2009; (ii) Condensed Consolidated Balance Sheets at October 30, 2010 and January 30, 2010;
(iii) Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended
October 30, 2010 and October 31, 2009; and (iv) Notes to Condensed Consolidated Financial
Statements*** |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
*** |
|
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101
hereto are deemed not filed or part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise
are not subject to liability under these Sections. |
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ABERCROMBIE & FITCH CO.
|
|
Date: December 7, 2010 |
By |
|
/s/ JONATHAN E. RAMSDEN
|
|
|
|
|
Jonathan E. Ramsden |
|
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized Officer) |
|
|
55
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 -
PricewaterhouseCoopers LLP.* |
|
|
|
|
|
|
31.1 |
|
|
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
|
|
|
31.2 |
|
|
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
|
|
|
32 |
|
|
Certifications by Principal Executive Officer and Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.** |
|
|
|
|
|
|
101 |
|
|
The following materials from Abercrombie & Fitch Co.s Quarterly Report on Form 10-Q
for the quarterly period ended October 30, 2010, formatted in XBRL (eXtensible Business
Reporting Language): (i) Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended October 30, 2010
and October 31, 2009; (ii) Condensed Consolidated Balance Sheets at October 30, 2010 and
January 30, 2010; (iii) Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended October 30, 2010 and October 31, 2009; and (iv) Notes to
Condensed Consolidated Financial Statements.*** |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
*** |
|
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101
hereto are deemed not filed or part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise
are not subject to liability under these Sections. |
56