UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material under §240.14a-12

Abercrombie & Fitch Co.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

þ		No fee required
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

Abercrombie & Fitch Co.
6301 Fitch Path
New Albany, Ohio 43054
(614) 283-6500

 

May 16, 2011

 

Dear Fellow Stockholders:

 

You are cordially invited to attend the Annual Meeting of Stockholders to be held at 10:00 a.m., Eastern Daylight Saving Time, on Thursday, June 16, 2011, at our home office located at 6301 Fitch Path, New Albany, Ohio 43054. We hope that you will be able to attend and participate in the Annual Meeting, at which time we will have the opportunity to review the business and operations of our Company.

 

The formal Notice of Annual Meeting of Stockholders and Proxy Statement are attached, and the matters to be acted upon by our stockholders are described in them.

 

It is important that your shares be represented and voted at the Annual Meeting. After reading the attached Proxy Statement, please complete, date, sign and return the accompanying form of proxy. Alternatively, you may vote electronically through the Internet or by telephone by following the instructions on your form of proxy. If you hold your shares through an account with a brokerage firm, bank or other nominee, please follow the instructions you receive from the holder of record to vote your shares. Your vote is important regardless of the number of shares you own.

 

 

TABLE OF CONTENTS

 

 

To assist you in reviewing the Company’s performance for the fiscal year ended January 29, 2011 (“Fiscal 2010”), we would like to call your attention to key elements of our Proxy Statement. The following description is only a summary. For additional information about these topics, please review the Company’s Annual Report on Form 10-K for Fiscal 2010 filed on March 29, 2011 (the “Fiscal 2010 Form 10-K”) and the complete Proxy Statement.

 

Business Review and Outlook

 

 

		Michael S. Jeffries Chairman and CEO

 

 

As a company, Abercrombie & Fitch is focused on executing our long-term strategy and continuing to improve our financial performance. We are excited about the future, but we are not complacent and do not take our success for granted. We continue to challenge ourselves and take aggressive steps to improve productivity and deliver stronger results.

 

One such step includes our progress in growing the Company’s international business. Our increasing international presence is a significant driver of sales and profit margins. For Fiscal 2010, net sales generated outside the United States, including direct-to-consumer net sales, increased 79% and now represent approximately 19% of total net sales.

 

Building upon this momentum and the proven international appeal of our brands, we anticipate accelerated new store growth in Fiscal 2011. We expect to open up to 40 international mall-based Hollister stores and plan to open five international Abercrombie & Fitch flagships this year. Based on our plans for the next few years, we see a global sales opportunity of approximately $1.5 billion for Hollister in Europe by Fiscal 2015, and potential international Abercrombie & Fitch flagship sales of around $1.25 billion by that point.

 

We also had very strong growth during Fiscal 2010 in our direct-to-consumer business, achieving net merchandise sales of $352.5 million, an increase of 41% from Fiscal 2009, in a high margin business.

 

Finally, during Fiscal 2010, we achieved meaningful productivity improvements in our U.S. stores.

 

In addition to our financial and operating improvements, our directors and management team are focused on corporate governance and have taken actions to substantially enhance our governance practices, as further described below. We are continuing our work to build greater transparency and enhanced dialogue with stockholders, including through our recommendation of an annual vote for “Say on Pay.”

 

In light of the strong improvement in our business performance, the global recognition of our iconic brands and exciting prospects for continued growth, we are confident that our strategy will continue creating long-term stockholder value.

 

Building on our Fiscal 2010 results, we have set a Fiscal 2012 objective to achieve $4.75 in net income per diluted share and remain focused on returning our operating margins towards historical levels. We see a global sales opportunity for the Company of $7.5 billion or greater by Fiscal 2015 if we are successful in executing our strategy. We are confident in the proven economics of our international expansion, and in our ability to further improve our U.S. store productivity, while also continuing to drive strong direct-to-consumer growth. In short, we are committed to leveraging the global appeal of our brands, continuing to improve our financial performance, and creating sustainable long-term value for our stockholders.

The Company’s strong Fiscal 2010 performance was the result of our associates’ passion, hard work and dedication. Our ability to continue to attract, motivate and retain a highly talented team of associates that fit our unique Company culture is critical to the execution of our long-term strategy. We are confident that we have the team in place to accomplish our future objectives.

 

Key Financial Metrics

 

Net Sales

 

 

Net Income per Diluted Share⁽¹⁾

 

 

Proxy Peer Group Comparison

 

 

 

The Company takes a long-term approach to managing its business and believes the success of this approach is reflected in the stockholder returns the Company has generated since its initial public offering in 1996.

 

September 26, 1996 — April 27, 2011

Total Shareholder Return

 

 

Chart Data Source: S&P Research Insight

 

Compensation Highlights

 

Our compensation programs strive to balance the achievement of short-term objectives with the longer-term goal of creating and sustaining stockholder value. Our management team’s compensation shown below reflects the Company’s strong Fiscal 2010 performance (refer to the section captioned “COMPENSATION DISCUSSION AND ANALYSIS” beginning on page 40 of our Proxy Statement for a more detailed discussion on our compensation programs).

 

 

The total direct compensation of our other named executive officers displayed in the table on page 4 reflects our strong Fiscal 2010 results and demonstrates our commitment to provide competitive compensation that is aligned with Company performance and stockholder returns. The pay “at risk” for our three executive vice presidents approximates 80% of their 2010 reported total direct compensation, and more than 50% of their reported total direct compensation for Fiscal 2010 was in the form of long-term incentive awards. Please refer to the “Fiscal 2010

Summary Compensation Table” beginning on page 55 of our Proxy Statement for a more detailed description of our named executive officers’ Fiscal 2010 compensation.

 

 

 

 

Our Governance Practices

 

We take corporate governance seriously and are committed to delivering superior long-term results in an environment and manner that reward and encourage the appropriate behaviors and risk. We have taken a number of steps to enhance the Company’s governance practices, including:

 

	•	Adoption of Majority Voting in Uncontested Director Elections.
	•	Adoption of Stock Ownership Guidelines for officers and directors.
	•	A Director Resignation Policy.
	•	Creating the Corporate Social Responsibility Committee.
	•	The creation of a Lead Independent Director role with a substantive list of duties intended to provide independent Board leadership.
	•	Emphasizing At-Risk Pay — For named executive officers, the majority of their total compensation is contingent upon Company performance and appreciation in the market price of the Company’s Common Stock.
	•	Entering into a Pay for Performance Arrangement with our CEO in 2008 (as illustrated by the pie chart on previous page).

	•	Pursuant to the CEO’s employment agreement, he is only entitled to receive additional performance-based equity awards if the market price of the Company’s Common Stock during each semi-annual measurement period increases beyond that during any previous semi-annual measurement period since December 2008.
	•	CEO Holding Requirements that require mandatory holding periods beyond the expiration date of his current employment agreement.
	•	“Cliff” Vesting (5 years) and a Shorter Term (7 years) for the CEO’s Initial SAR Grants (of which 50% were premium priced).

	•	Eliminating Internal Revenue Code Section 280G Excise Tax Gross-Up Payments for the CEO per a recent amendment to his employment agreement (at no cost to the Company).
	•	A stringent “Clawback” Policy which allows the Company to seek repayment of any incentive amounts that were erroneously paid, without any requirement of misconduct on the part of the plan participant.
	•	A Comprehensive Derivatives and Hedging Policy that prohibits directors and officers from engaging in hedging transactions with respect to any equity securities of the Company held by them.

 

Governance Proposals for Fiscal 2011

 

	•	We are supporting a vote for the “de-staggering” of our Board of Directors.
	•	We are recommending an annual frequency on “Say on Pay” voting to facilitate transparency and communication among our stockholders, directors and members of the management team.

 

Highlights of Requested Stockholder Actions

 

Authorize an additional 3,000,000 shares under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan (the “2007 LTIP”) (Proposal No. 7 begins on page 84 of our Proxy Statement)

 

We operate in the fast-paced and highly competitive arena of specialty retail. To be successful, we must attract, motivate and retain key creative and management talents who thrive in this environment. We set high goals and expect superior performance from our associates. Our competitive compensation programs are designed to reinforce this culture and rely heavily on equity grants for the Company’s management team and eligible associates under the 2007 LTIP. These equity grants currently do and will continue to play an integral role in our success and commitment to building long-term stockholder value.

 

The Board and management of the Company believe that authorizing additional shares under the 2007 LTIP is important to the Company’s business and to stockholders. If 3,000,000 additional 2007 LTIP shares are not approved at the Annual Meeting, then we may have insufficient shares available in the future to settle existing or future awards in our Common Stock, which may result in cash-based settlement or the use of cash-based long-term incentives rather than equity. If either cash-based settlement or cash-based long-term incentives were used, the Company would lose the accounting treatment provided by equity-classified awards, whereby expense is fixed on the grant date. Under this scenario, the Company would be required to adopt “liability accounting” which could create significant earnings volatility and could have a significant impact on operating expense and cash flow on both outstanding and new awards. Please refer to page 51 of our Proxy Statement for further explanation.

 

In addition, approval of Proposal No. 7 will also constitute re-approval of the material terms of the performance goals under the 2007 LTIP and will therefore allow certain awards under the 2007 LTIP to continue to qualify as tax-deductible “performance-based awards” under Section 162(m) of the Internal Revenue Code of 1986, as amended.

 

We understand that maintaining reasonable “overhang” or dilution levels is important to the Company and our stockholders. There are a number of methods of calculating “overhang”. We typically look at “overhang” on both a gross basis (i.e., counting each outstanding award and available award on a one-for-one basis) and also on a net basis (i.e., counting outstanding stock options and restricted stock units on a one-for-one basis but counting outstanding SARs on an intrinsic value basis; in each case, net of associated tax withholding obligations).

 

Accordingly, we calculate our “overhang” before our request for an additional 3,000,000 shares for the 2007 LTIP and then taking into account such request as follows:

 

 

 

 

Re-elect the Five Nominated Directors (Proposal No. 1 begins on page 13 of our Proxy Statement)

 

Five directors are standing for election at the Annual Meeting, each of whom was unanimously recommended by the Nominating and Board Governance Committee and each of whom was unanimously determined to qualify as

independent by the Board of Directors. Information regarding each of our directors is set forth on pages 15 through 19 of our Proxy Statement. In addition to the specific information presented for each nominee, the Company believes that each of its directors has a reputation for the highest character and integrity and that the directors work very cohesively and constructively with each other and with management. They have each demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Board and the Company.

 

Approve the Company’s Recommendation for an Annual “Say on Pay” Proposal (Proposal No. 2 begins on page 38 of our Proxy Statement); Approve the Advisory Resolution on Executive Compensation (Proposal No. 3 begins on page 39 of our Proxy Statement)

 

We are asking our stockholders to support our recommendation of annual “Say on Pay” votes, as set forth in Proposal 2. We believe that an advisory vote every year will allow stockholders the opportunity to provide the Company with more direct and immediate feedback on our compensation disclosures. Further, in connection with the “Say on Pay” vote, please refer to the section above captioned “Our Governance Practices”, which summarizes key corporate governance practices and discusses our progress toward ensuring the alignment of the interests of the Company’s associates and the interests of stockholders. Additional information about our corporate governance policies is also contained in our Proxy Statement.

 

We are also asking our stockholders to cast a non-binding, advisory vote in favor of our executive compensation programs, as set forth in Proposal 3. As discussed above, we believe that our executive compensation programs are effective in achieving our goal of providing compensation that is aligned with Company performance (both short-term and long-term) and the long-term creation of sustained stockholder value. In evaluating the “Say on Pay” proposal, we recommend that you review our “COMPENSATION DISCUSSION AND ANALYSIS” section that begins on page 40 of our Proxy Statement, which explains how and why the Compensation Committee of our Board arrived at its executive compensation actions and decisions for Fiscal 2010.

 

Approve the Company-Sponsored Proposal to Declassify the Board of Directors (Proposal No. 4 begins on page 73 of our Proxy Statement)

 

While we believe that the classified Board structure has promoted stability and continuity, facilitated long-term strategic planning, enhanced the independence of our directors and their knowledge of the Company and protected the Company against abusive takeover tactics, we also recognize the sentiment among stockholders and a number of institutional investor groups that the annual election of directors enhances the Company’s corporate governance policies. As a result of this sentiment and current corporate governance trends, the Board has determined that it is in the best interests of the Company and its stockholders to declassify the Board and provide for the annual election of all directors.

Abercrombie & Fitch Co.

 

 

 

 

 

May 16, 2011

 

TO OUR STOCKHOLDERS:

 

The 2011 Annual Meeting of Stockholders (the “Annual Meeting”) of Abercrombie & Fitch Co. (the “Company”) will be held at the home office of the Company located at 6301 Fitch Path, New Albany, Ohio 43054, on Thursday, June 16, 2011, at 10:00 a.m., Eastern Daylight Saving Time, for the following purposes:

 

1. To elect three directors, each to serve for a term of three years to expire at the Annual Meeting of Stockholders to be held in 2014, and to elect two directors, each to serve for a term of two years to expire at the Annual Meeting of Stockholders to be held in 2013.

 

2. To conduct an advisory vote on the frequency of future advisory votes on executive compensation.

 

3. To approve the advisory resolution on executive compensation.

 

4. To approve amendments to the Company’s Amended and Restated Certificate of Incorporation to declassify the Board of Directors.

 

5. To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending January 28, 2012.

 

6. To re-approve the performance goals under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan for compliance with Internal Revenue Code Section 162(m).

 

7. To approve the amendment and restatement of the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan.

 

8. To consider one stockholder proposal, if the stockholder proposal is properly presented at the Annual Meeting.

 

Your Board of Directors recommends that you vote “FOR” the election of the director nominees listed in the Company’s Proxy Statement for the Annual Meeting under the section captioned “PROPOSAL 1 — ELECTION OF DIRECTORS”, to conduct future advisory votes on executive compensation “EVERY 1 YEAR,” “FOR” the approval of the advisory resolution on executive compensation, “FOR” the approval of amendments to the Company’s Amended and Restated Certificate of Incorporation to declassify the Board of Directors, “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending January 28, 2012, “FOR” the re-approval of the performance goals under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan for compliance with Internal Revenue Code Section 162(m), “FOR” the approval of the amendment and restatement of the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan and “AGAINST” the stockholder proposal described in the Company’s Proxy Statement for the Annual Meeting, if the stockholder proposal is properly presented for consideration at the Annual Meeting.

 

If you were a stockholder of record, as shown by the transfer books of the Company, at the close of business on April 27, 2011, you will be entitled to receive notice of and to vote at the Annual Meeting.

To obtain directions to our home office in order to attend the Annual Meeting and vote in person, please call our Investor Relations telephone number at (614) 283-6500. Directions to our home office may also be found on our website (www.abercrombie.com) on the “Investors” page under the “Directions To A&F” link.

 

By Order of the Board of Directors,

 

 

Michael S. Jeffries

Chairman and Chief Executive Officer

 

 

 

Abercrombie & Fitch Co.

6301 Fitch Path
New Albany, Ohio 43054
(614) 283-6500

Dated May 16, 2011

 

ANNUAL MEETING OF STOCKHOLDERS

To Be Held On June 16, 2011

 

When and where will the Annual Meeting of Stockholders be held?

 

The 2011 Annual Meeting of Stockholders of Abercrombie & Fitch Co. (the “Annual Meeting”) will be held on Thursday, June 16, 2011 at 10:00 a.m., Eastern Daylight Saving Time, at our home office located at 6301 Fitch Path, New Albany, Ohio 43054. The purposes of the Annual Meeting are set forth in the Notice of Annual Meeting of Stockholders to which this Proxy Statement is attached. All references in this Proxy Statement to the “Company,” “we,” “us,” or “Abercrombie & Fitch” refer to Abercrombie & Fitch Co.

 

Why am I receiving these proxy materials?

 

We are providing these proxy materials to holders of shares of the Company’s Class A Common Stock, par value $0.01 per share (the “Common Stock”), in connection with the solicitation of proxies by the Company’s Board of Directors (the “Board”) for use at the Annual Meeting. These proxy materials were first sent or given on or about May 16, 2011 to holders of the Company’s Common Stock as of the close of business on April 27, 2011 (the “Record Date”).

 

What is included in these proxy materials?

 

These proxy materials include:

 

 

Who can vote at the Annual Meeting?

 

The only shares entitled to vote at the Annual Meeting are shares of Common Stock, with each share entitling the holder of record to one vote. To be able to vote your shares at the Annual Meeting, the records of the Company must show that you held your shares as of the close of business on the Record Date. At the close of business on the Record Date, there were 87,798,035 shares of Common Stock outstanding.

 

If I am a registered stockholder, how do I vote?

 

You may ensure your representation at the Annual Meeting by completing, signing, dating and promptly returning the accompanying form of proxy. A return envelope, which requires no postage if mailed in the United States, has been provided for your use. Alternatively, you may give voting instructions electronically via the Internet or by using the toll-free telephone number stated on the form of proxy. The deadline for stockholders to transmit voting instructions electronically via the Internet or telephonically is 11:59 p.m., Eastern Daylight Saving Time, on June 15, 2011. The Internet and telephone voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their voting instructions and to confirm that stockholders’ voting instructions have been properly recorded. If you vote through the Internet or by telephone, you should understand

that there may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies that you will pay.

 

If I am a stockholder holding shares in “street name,” how do I vote?

 

If you hold your shares in “street name” with a broker, brokerage firm, broker-dealer, bank or other nominee, you should review the information provided to you by the holder of record. This information will describe the procedures you must follow in instructing the holder of record how to vote your “street name” shares and how to revoke your previous instructions.

 

How can I revoke my proxy or change my vote?

 

If you are a registered stockholder, you may revoke your proxy at any time before it is actually voted at the Annual Meeting by giving notice of revocation to the Company in writing, by accessing the designated Internet site prior to the deadline for transmitting voting instructions electronically, by using the toll-free number stated on the form of proxy prior to the deadline for transmitting voting instructions electronically or by attending the Annual Meeting and giving notice of revocation in person. You may also change your vote by choosing one of the following options: executing and returning to the Company a later-dated form of proxy; submitting a later-dated vote through the designated Internet site or the toll-free telephone number stated on the form of proxy prior to the deadline for transmitting voting instructions electronically; or voting at the Annual Meeting. Attending the Annual Meeting will not, by itself, revoke your proxy.

 

If you hold your shares in “street name,” you must follow the instructions provided by the holder of record in order to revoke your previous instructions.

 

Who is paying for the cost of this proxy solicitation?

 

The Company will pay the costs of preparing, assembling, printing and mailing this Proxy Statement, the accompanying form of proxy and any other related materials and all other costs incurred in connection with the solicitation of proxies on behalf of the Board, other than the Internet access and telephone usage charges mentioned above. Although the Company is soliciting proxies by mailing the proxy materials to stockholders, proxies may be solicited by Company employees or, as referred to by the Company, “associates,” via mail or by telephone, facsimile, electronic transmission or personal contact without additional compensation. The Company has retained Innisfree, New York, New York, to aid in the solicitation of proxies with respect to shares held by brokers, brokerage firms, broker/dealers, banks and other custodians, fiduciaries and nominees for a fee of approximately $15,000 plus expenses. The Company will reimburse its transfer agent, brokers, brokerage firms, broker/dealers, banks and other custodians, fiduciaries and nominees for their reasonable costs in sending proxy materials to stockholders who beneficially own our shares.

 

Are there any cumulative voting rights in the election of directors?

 

No.

 

What constitutes a quorum to hold and transact business at the Annual Meeting?

 

A quorum for the Annual Meeting is one-third of the outstanding shares of Common Stock. Shares of Common Stock represented by properly executed proxies returned to the Company prior to the Annual Meeting or represented by properly authenticated Internet or telephone voting instructions will be counted toward the establishment of a quorum for the Annual Meeting.

 

How are votes tabulated?

 

The results of stockholder voting will be tabulated by the inspectors of election appointed for the Annual Meeting.

How will my shares be voted?

 

If you vote by mail, through the Internet, by telephone or in person, your shares of Common Stock will be voted as you direct.

 

All valid proxies received prior to the Annual Meeting which do not specify how shares of Common Stock are to be voted will be voted, except in the case of broker non-votes, where applicable, as recommended by the Board.

 

We recommend that you vote as follows:

 

 

What is a “broker non-vote”?

 

A “broker non-vote” occurs when a stockholder holds our shares of Common Stock in “street name” through a broker or similar organization, and the stockholder does not provide the broker with instructions within the required timeframe before the Annual Meeting as to how to vote the shares on “non-routine” matters. Under the rules of the New York Stock Exchange (“NYSE”), your broker cannot vote your shares on non-routine matters unless your broker receives instructions from you as to how to vote.

 

Which proposals are “routine” and which are “non-routine”?

 

The only proposals this year which are considered “routine” are the Company-sponsored proposal to approve the amendments to the Company’s Amended and Restated Certificate of Incorporation to declassify the Company’s Board of Directors and the ratification of the appointment of the Company’s independent registered public accounting firm. The other proposals are considered “non-routine” where your broker can only vote your shares if it receives instructions from you.

Your broker will send you directions on how to instruct your broker to vote your shares. If you want your shares to be voted, you must instruct your broker how to vote: (i) for the election of our director nominees; (ii) with respect to the frequency of future advisory votes on executive compensation; (iii) for the proposal to approve the advisory resolution on executive compensation; (iv) for the proposal to re-approve the performance goals under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan; (v) for the proposal to approve the amendment and restatement of the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan; and (vi) in respect of the stockholder proposal described in this Proxy Statement, if the proposal is properly presented at the Annual Meeting.

 

What are the voting requirements for the proposals discussed in the Proxy Statement?

 

Proposal 1 — Election of Directors

 

The Company and the stockholders have implemented majority voting for uncontested director elections. Under the Company’s Amended and Restated Bylaws, each nominee must be elected by a majority of the votes cast (i.e., the votes cast for such nominee’s election must exceed the vote cast against such nominee’s election). Broker non-votes and abstentions will not be treated as votes cast.

 

As a non-routine matter, if your shares of Common Stock are held in street name by a broker, the broker does not have discretion to vote your shares. The broker can only vote your shares if it receives instructions from you.

 

Proposal 2 — Advisory Vote on the Frequency of Future Advisory Votes on Executive Compensation

 

Stockholders will be able to specify one of four choices for this proposal on the form of proxy: one year, two years, three years or abstain. Stockholders are not voting to approve or disapprove the Board’s recommendation. This advisory vote is non-binding, but the Board and the Compensation Committee will give careful consideration to the results of voting on this proposal. The non-binding vote on the frequency of future advisory votes on executive compensation requires the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting thereon. Broker non-votes will not be treated as votes cast. Abstentions will not be counted as votes “FOR” or “AGAINST” the proposal.

 

As a non-routine matter, if your shares of Common Stock are held in street name by a broker, the broker does not have discretion to vote your shares. The broker can only vote your shares if it receives instructions from you.

 

Proposal 3 — Advisory Vote on Executive Compensation

 

This advisory vote is non-binding but the Board and the Compensation Committee will give careful consideration to the results of voting on this proposal. The approval of the advisory resolution on executive compensation requires the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting thereon. Broker non-votes will not be treated as votes cast. Abstentions will not be counted as votes “FOR” or “AGAINST” the proposal.

 

As a non-routine matter, if your shares of Common Stock are held in street name by a broker, the broker does not have discretion to vote your shares. The broker can only vote your shares if it receives instructions from you.

 

Proposal 4 — Amendment of the Company’s Amended and Restated Certificate of Incorporation to Declassify the Board of Directors

 

The affirmative vote of at least 75% of the outstanding shares of Common Stock entitled to vote thereon is required for approval of this proposal. Abstentions and broker non-votes, if any, will have the effect of votes “AGAINST” the proposal.

 

As a routine matter, if your shares of Common Stock are held in street name by a broker, the broker has the discretion to vote your shares even if it does not receive voting instructions from you.

 

Proposal 5 — Ratification of Appointment of Independent Registered Public Accounting Firm

 

The ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending January 28, 2012 requires the affirmative vote of a majority in

voting interest of the stockholders present in person or by proxy and voting thereon. Abstentions will not be counted as votes “FOR” or “AGAINST” the proposal.

 

As a routine matter, if your shares of Common Stock are held in street name by a broker, the broker has the discretion to vote your shares even if it does not receive voting instructions from you.

 

Proposal 6 — Re-Approval of Performance Goals under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan for Compliance with Internal Revenue Code Section 162(m)

 

Re-approval of the performance goals under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan requires the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting thereon; provided that the total vote cast on the proposal represents over 50% of all shares of Common Stock entitled to vote on the proposal. Broker non-votes will not be treated as votes cast. Abstentions will be treated as votes cast and will have the effect of a vote “AGAINST” the proposal.

 

As a non-routine matter, if your shares of Common Stock are held in street name by a broker, the broker does not have discretion to vote your shares. The broker can only vote your shares if it receives instructions from you.

 

Proposal 7 — Approval of Amendment and Restatement of the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan

 

The approval of the amendment and restatement of the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan requires the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting thereon; provided that the total vote cast on the proposal represents over 50% of all shares of Common Stock entitled to vote on the proposal. Broker non-votes will not be treated as votes cast. Abstentions will be treated as votes cast and will have the effect of a vote “AGAINST” the proposal.

 

As a non-routine matter, if your shares of Common Stock are held in street name by a broker, the broker does not have discretion to vote your shares. The broker can only vote your shares if it receives instructions from you.

 

Proposal 8 — Stockholder Proposal

 

The approval of the stockholder proposal described in this Proxy Statement requires the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting on the proposal. Abstentions and broker non-votes will not be counted as votes “FOR” or “AGAINST” the stockholder proposal.

 

As a non-routine matter, if your shares of Common Stock are held in street name by a broker, the broker does not have discretion to vote your shares. The broker can only vote you shares if it receives instructions from you.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders of Abercrombie & Fitch Co. to be Held on June 16, 2011: This Proxy Statement, the Notice of Annual Meeting of Stockholders and the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 are available at www.proxyvote.com.

 

To obtain directions to our home office so that you may attend the Annual Meeting and vote in person, please call our Investor Relations telephone number at (614) 283-6500. Directions to our home office may also be found on our website (www.abercrombie.com) on the “Investors” page under the “Directions To A&F” link.

 

There are currently nine directors — three in the class whose terms expire at the Annual Meeting, three in the class whose terms expire in 2012 and three in the class whose terms expire in 2013. Edward F. Limato served on the Board until his death on July 3, 2010. Robert A. Rosholt served on the Board until his resignation on September 24, 2010. On February 15, 2011, the Board, upon the unanimous recommendation of the Nominating and Board

Governance Committee, unanimously elected Michael E. Greenlees and Kevin S. Huvane to the Board to fill vacancies in the class of directors whose terms expire at the annual meeting of stockholders in 2013.

 

Five directors are standing for election at the Annual Meeting. Except for Messrs. Greenlees and Huvane, directors elected at the Annual Meeting will hold office for a three-year term expiring at the annual meeting of stockholders in 2014 or until their successors are elected and qualified. Messrs. Greenlees and Huvane, upon election at the Annual Meeting, will hold office through the term of their class, which expires at the 2013 annual meeting of stockholders, or until their successors are elected and qualified. The nominees of the Board for election as directors at the Annual Meeting, each of whom was unanimously recommended by the Nominating and Board Governance Committee, are identified below.

 

The individuals named as proxies in the form of proxy solicited by the Board intend to vote the shares of Common Stock represented by the proxies received under this solicitation for the Board’s nominees, unless otherwise instructed. If any nominee who would otherwise receive the required number of votes becomes unable or unwilling to serve as a candidate for election as a director, the individuals designated to vote as proxies will have full discretion to vote the shares of Common Stock represented by the proxies they hold for the election of the remaining nominees and for the election of any substitute nominee designated by the Board upon recommendation by the Nominating and Board Governance Committee. The Board has no reason to believe that any of the Board’s nominees will be unable or unwilling to serve as a director if elected.

 

In an uncontested election of directors, which the Company believes will be the case at the Annual Meeting, each nominee must be elected by a majority of the votes cast (i.e., the votes cast for such nominee’s election must exceed the votes cast against such nominee’s election). Broker non-votes, if any, and abstentions will not be treated as votes cast. Proxies may not cast votes for more than five nominees — three in the class whose terms will expire in 2014 and two in the class whose terms will expire in 2013.

 

The Board has adopted a resignation policy, included in the Company’s Corporate Governance Guidelines, which requires that an incumbent director who receives less than a majority of the votes cast in an uncontested election tender his or her resignation and outlines the procedures by which the Board will consider whether to accept such resignation. The resignation policy provides:

 

 

The information set forth in the table below concerning the principal occupation, other affiliations and business experience, as of April 27, 2011, of each nominee for election as a director has been furnished to the Company by each nominee.

 

 

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR”
EACH OF THE NOMINEES IDENTIFIED ABOVE.

 

The information set forth in the table below concerning the principal occupation, other affiliations and business experience, as of April 27, 2011, of each continuing director has been furnished to the Company by each director.

 

 

Review, Approval or Ratification of Transactions with Related Persons

 

The Board has adopted the Abercrombie & Fitch Co. Related Person Transaction Policy (the “Policy”), which is administered by the Nominating and Board Governance Committee and the Company’s General Counsel. A copy of the Policy is posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. The Policy applies to any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which the Company or one of its subsidiaries participates or will participate, the amount involved exceeds or is expected to exceed $120,000, and a “related person” had, has or will have a direct or indirect interest. Pursuant to the Policy, a “related person” is any person:

 

 

Each director, director nominee or executive officer of the Company must notify the Company’s General Counsel in writing of any interest that such individual or an immediate family member of such individual had, has or may have, in a related person transaction. Each director, director nominee and executive officer also completes a questionnaire on an annual basis designed to elicit information about potential related person transactions. In addition, any related person transaction proposed to be entered into by the Company or one of its subsidiaries must be reported by the Company’s management to the Company’s General Counsel. Any potential related person transaction that is raised will be analyzed by the Company’s General Counsel, in consultation with management and with outside counsel, as appropriate, to determine whether the transaction, arrangement or relationship does, in fact, constitute a related person transaction requiring compliance with the Policy.

 

Pursuant to the Policy, all related person transactions (other than those deemed to be pre-approved or ratified under the terms of the Policy) will be referred to the Nominating and Board Governance Committee for approval (or disapproval), ratification, revision or termination. Whenever practicable, a related person transaction is to be reviewed and approved or disapproved by the Nominating and Board Governance Committee prior to the effective

date or consummation of the transaction. If the Company’s General Counsel determines that advance consideration of a related person transaction is not practicable under the circumstances, the Nominating and Board Governance Committee will review and, in its discretion, may ratify the transaction at the Committee’s next meeting. If the Company becomes aware of a related person transaction not previously approved under the Policy, the Nominating and Board Governance Committee will promptly review the transaction, including the relevant facts and circumstances, and evaluate all options available to the Company, including ratification, revision, termination or rescission of the transaction, and take the course of action the Committee deems appropriate under the circumstances.

 

No director may participate in any approval or ratification of a related person transaction in which the director or an immediate family member of the director is involved. The Nominating and Board Governance Committee may only approve or ratify those transactions that the Committee determines to be in the Company’s best interests. In making this determination, the Nominating and Board Governance Committee will review and consider all relevant information available to it, including:

 

 

Any related person transaction previously approved or ratified by the Nominating and Board Governance Committee or otherwise already existing that is ongoing in nature is to be reviewed by the Nominating and Board Governance Committee annually.

 

Pursuant to the terms of the Policy, the following related person transactions are deemed to be pre-approved or ratified (as appropriate) by the Nominating and Board Governance Committee even if the aggregate amount involved would exceed $120,000:

 

 

The Code of Business Conduct and Ethics adopted by the Board also addresses the potential conflicts of interest which may arise when a director, officer or associate has an interest in a transaction to which the Company or one of its subsidiaries is a party. If a potential conflict of interest arises concerning an officer or director of the Company, all information regarding the issue is to be reported to the Company’s General Counsel for review and, if appropriate or required under the Company’s policies (including the Company’s Related Person Transaction Policy), submitted to the Nominating and Board Governance Committee for review and disposition.

 

Transactions with Related Persons

 

Pursuant to the indemnification provisions contained in the Company’s Amended and Restated Bylaws, the Company is paying the legal fees incurred by current and former executive officers and directors in connection with the derivative lawsuits on behalf of the Company described in the section captioned “Certain Legal Proceedings” on page 35. During Fiscal 2010, the Company advanced approximately $780,000 for such fees on behalf of such current and former executive officers and directors. Each such current or former executive officer or director has undertaken to repay to the Company any expenses advanced by the Company should it be ultimately determined that the executive officer or director was not entitled to indemnification by the Company. The Company expects to be reimbursed for most of these fees under one or more of its insurance policies.

 

The Board has reviewed, considered and discussed each director’s relationships, both direct and indirect, with the Company and its subsidiaries in order to determine whether such director meets the independence requirements of the applicable sections of the NYSE Listed Company Manual (the “NYSE Rules”). The Board has determined that a majority of the current directors qualify as independent under the NYSE Rules. Specifically, the Board has determined that each of James B. Bachmann, Lauren J. Brisky, Michael E. Greenlees, Archie M. Griffin, Kevin S. Huvane, John W. Kessler, Elizabeth M. Lee and Craig R. Stapleton has no commercial, industrial, banking, consulting, legal, accounting, charitable, familial or other relationship with the Company, either directly or indirectly, that would be inconsistent with a determination of independence under the applicable NYSE Rules. Additionally, the Board determined that during his period of service as a director which ended on July 3, 2010, Edward F. Limato had no commercial, industrial, banking, consulting, legal, accounting, charitable, familial or other relationship with the Company, either directly or indirectly, that would be inconsistent with a determination of independence under the NYSE Rules. Also, the Board determined that during his period of service as a director, which ended on September 24, 2010, Robert A. Rosholt had no commercial, industrial, banking, consulting, legal, accounting, charitable, familial or other relationship with the Company, either directly or indirectly, that would be inconsistent with a determination of independence under the NYSE Rules. The Board specifically considered a number of circumstances in the course of reaching these conclusions, including, among other things, the relevant relationships described above in the section captioned “Certain Relationships and Related Transactions — Transactions with Related Persons” above as well as the facts that:

 

 

 

Mr. Jeffries does not qualify as independent because he is an executive officer of the Company.

 

There are no family relationships among any of the directors and executive officers of the Company. Please see the text under the caption “SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT” in Part I of the Company’s Annual Report on Form 10-K for Fiscal 2010 filed on March 29, 2011 for information about the Company’s executive officers.

 

The Board held eight meetings of the full Board and two non-management director meetings and took two actions by written consent during Fiscal 2010. All of the directors attended 75% or more of the total number of meetings of the Board and of committees of the Board on which they served that were held during the period they served.

 

Although the Company does not have a formal policy requiring members of the Board to attend annual meetings of the stockholders, the Company encourages all incumbent directors and director nominees to attend each annual meeting of stockholders. All then incumbent directors other than Mr. Limato, who was gravely ill, attended the Company’s last annual meeting of stockholders held on June 9, 2010.

 

In accordance with the Company’s Corporate Governance Guidelines and applicable NYSE Rules, the non-management directors of the Company meet (without management present) at regularly scheduled executive sessions at least twice per year and at such other times as the directors deem necessary or appropriate. Executive sessions of the non-management directors are scheduled as an agenda item at each regularly scheduled meeting of the Board though the non-management directors do not always meet in executive session. All meetings of non-management or independent directors are presided over by the Lead Independent Director. If the non-management directors include directors who are not independent, then at least once a year the independent directors of the Company will meet in executive session and the Lead Independent Director will preside at each executive session.

 

The Board believes it is important for stockholders and other interested parties to have a process to send communications to the Board and its individual members. Accordingly, stockholders and other interested parties who wish to communicate with the Board, the non-management directors as a group, the independent directors as a group, the Lead Independent Director, or a particular director may do so by sending a letter to such individual or individuals, in care of the Company’s Secretary, to the Company’s executive offices at 6301 Fitch Path, New Albany, Ohio 43054. The mailing envelope must contain a clear notation indicating that the enclosed letter is a

“Stockholder/Interested Party — Non-Management Director Communication,” “Stockholder/Interested Party — Board Communication”, “Stockholder/Interested Party — Independent Director Communication”, “Stockholder/Interested Party — Lead Independent Director Communication” or “Stockholder/Interested Party — Director Communication,” as appropriate. All such letters must identify the author as a stockholder or other interested party and clearly state whether the intended recipients are all members of the Board, all non-management directors, all independent directors or certain specified individual directors. Copies of all such letters will be circulated to the appropriate director or directors. Correspondence marked “personal and confidential” will be delivered to the intended recipient without opening. There is no screening process in respect of communications from stockholders or other interested parties.

 

The Board has five standing committees — the Audit Committee, the Compensation Committee, the Corporate Social Responsibility Committee, the Executive Committee and the Nominating and Board Governance Committee. The current members of these committees are identified in the following table.

 

Committees of the Board

 

 

Audit Committee

 

The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). James B. Bachmann and Lauren J. Brisky served as members of the Audit Committee throughout Fiscal 2010. Craig R. Stapleton was appointed to the Audit Committee on October 11, 2010. Michael E. Greenlees was appointed to the Audit Committee on February 15, 2011 in conjunction with his election to the Board. Robert A. Rosholt served as a member of the Audit Committee until September 24, 2010 when he resigned from the Board. The Board has determined that each current member of the Audit Committee qualifies, and during his period of service on the Audit Committee Mr. Rosholt qualified, as an independent director under the applicable NYSE Rules and under SEC Rule 10A-3. The Board has also determined that each of the current members of the Audit Committee is “financially literate” under the applicable NYSE Rules and that each of Mr. Bachmann, Ms. Brisky, Mr. Greenlees and Mr. Stapleton qualifies as an “audit committee financial expert” under applicable SEC Rules by virtue of their experience described in the section captioned “PROPOSAL 1 — ELECTION OF DIRECTORS” beginning on page 13. The Board believes that each member of its Audit Committee is highly qualified to discharge his or her duties on behalf of the Company and its subsidiaries.

 

The Audit Committee is organized and conducts its business pursuant to a written charter that was most recently revised by the Board on August 14, 2008, a copy of which is posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. At least annually, the Audit Committee, in consultation with the Nominating and Board Governance Committee, reviews and reassesses

the adequacy of its charter and recommends any proposed changes to the full Board as necessary to reflect changes in regulatory requirements, authoritative guidance and evolving practices.

 

The Audit Committee’s duties and responsibilities are set forth in its charter. The primary functions of the Audit Committee are to assist the Board in its oversight of:

 

 

The Audit Committee’s specific responsibilities include:

 

 

The Audit Committee’s annual report relating to Fiscal 2010 is on page 74.

 

Compensation Committee

 

The Compensation Committee provides overall guidance for the Company’s executive compensation policies and approves the amounts and elements of compensation for the Company’s executive officers. James B.

Bachmann, Lauren J. Brisky and Craig R. Stapleton served as members of the Compensation Committee throughout Fiscal 2010. Michael E. Greenlees and Kevin S. Huvane were appointed to the Compensation Committee on February 15, 2011 in conjunction with their election to the Board. Ms. Brisky rotated off the Compensation Committee on April 11, 2011 and Mr. Greenlees became Chair of the Compensation Committee on such date. Edward F. Limato served as a member of the Compensation Committee until July 3, 2010 when he passed away. The Board has determined that each current member of the Compensation Committee qualifies, and during their respective periods of service on the Compensation Committee each of Ms. Brisky and Mr. Limato qualified, as an independent director under the applicable NYSE Rules.

 

The Compensation Committee is organized and conducts its business pursuant to a written charter which was most recently revised by the Board on August 21, 2007, a copy of which is posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. At least annually, the Compensation Committee reviews and reassesses the adequacy of its charter, in consultation with the Nominating and Board Governance Committee, and recommends any proposed changes to the full Board as necessary to reflect changes in regulatory requirements, authoritative guidance and evolving practices.

 

The Compensation Committee’s charter sets forth the duties and responsibilities of the Compensation Committee, which include:

 

 

The Compensation Committee’s processes and procedures to determine executive compensation, including the use of compensation consultants and the role of executive officers in making recommendations relating to executive

compensation, are described in the section captioned “COMPENSATION DISCUSSION AND ANALYSIS” beginning on page 40.

 

Corporate Social Responsibility Committee

 

The Corporate Social Responsibility Committee provides oversight of the Company’s attention to issues of social responsibility, including diversity, human rights, philanthropy and sustainability and the Company’s policies, practices and progress with respect to such issues. Archie M. Griffin and John W. Kessler served as members of the Corporate Social Responsibility Committee throughout Fiscal 2010. Elizabeth M. Lee was appointed to the Corporate Social Responsibility Committee on March 25, 2010 in conjunction with her election to the Board. Kevin S. Huvane was appointed to the Corporate Social Responsibility Committee on February 15, 2011 in conjunction with his election to the Board.

 

The Corporate Social Responsibility Committee is organized and conducts its business pursuant to a written charter that was adopted by the Board on November 12, 2009, a copy of which is posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. At least annually, the Corporate Social Responsibility Committee reviews and reassesses the adequacy of its charter, in consultation with the Nominating and Board Governance Committee, and recommends any proposed changes to the full Board as necessary to reflect changes in regulatory requirements, authoritative guidance and evolving practices.

 

The Corporate Social Responsibility Committee’s charter sets forth the duties and responsibilities of the Corporate Social Responsibility Committee, which include:

 

 

Executive Committee

 

John W. Kessler and Michael S. Jeffries served as members of the Executive Committee throughout Fiscal 2010. Edward F. Limato served as a member of the Executive Committee until July 3, 2010 when he passed away.

 

The Executive Committee is organized and conducts its business pursuant to a written charter that was adopted by the Board on November 12, 2009, a copy of which is posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. At least annually, the Executive Committee reviews and reassesses the adequacy of its charter, in consultation with the Nominating and Board Governance Committee, and recommends any proposed changes to the full Board as necessary to reflect changes in regulatory requirements, authoritative guidance and evolving practices.

The Executive Committee’s charter sets forth the duties and responsibilities of the Executive Committee, which include:

 

 

Nominating and Board Governance Committee

 

Archie M. Griffin and Craig R. Stapleton served as members of the Nominating and Board Governance Committee throughout Fiscal 2010. Lauren J. Brisky was appointed to the Nominating and Board Governance Committee on February 15, 2011. Robert A. Rosholt served as a member of the Nominating and Board Governance Committee until September 24, 2010 when he resigned from the Board. The Board has determined that each current member of the Nominating and Board Governance Committee qualifies, and during his period of service on the Nominating and Board Governance Committee Mr. Rosholt qualified, as an independent director under the applicable NYSE Rules.

 

The Nominating and Board Governance Committee is organized and conducts its business pursuant to a written charter which was most recently revised by the Board on August 21, 2007, a copy of which is posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. At least annually, the Nominating and Board Governance Committee reviews and reassesses the adequacy of its charter and recommends any proposed changes to the full Board as necessary to reflect changes in regulatory requirements, authoritative guidance and evolving practices.

 

The purpose of the Nominating and Board Governance Committee is to provide oversight on a broad range of issues surrounding the composition and operation of the Board. The primary responsibilities of the Nominating and Board Governance Committee include:

 

 

 

As described above, the Company has a standing Nominating and Board Governance Committee that has responsibility for providing oversight on a broad range of issues surrounding the composition and operation of the Board, including identifying candidates qualified to become directors and recommending director nominees to the Board.

 

When considering candidates for the Board, the Nominating and Board Governance Committee evaluates the entirety of each candidate’s credentials and does not have specific eligibility requirements or minimum qualifications that must be met by a candidate. The Nominating and Board Governance Committee considers those factors it deems appropriate, including independence, judgment, skill, diversity, strength of character, ethics, integrity, experience with businesses and organizations of comparable size or scope, experience as an executive of or adviser to public and private companies, experience and skill relative to other Board members, specialized knowledge or experience, and the desirability of the candidate’s membership on the Board and any committees of the Board. Depending on the current needs of the Board, the Nominating and Board Governance Committee may weigh certain factors more or less heavily. The Nominating and Board Governance Committee does, however, believe that all members of the Board should have the highest character and integrity, a reputation for working constructively with others, sufficient time to devote to Board matters and no conflict of interest that would interfere with performance as a director.

 

While the Board and the Nominating and Board Governance Committee do not have specific eligibility requirements and do not, as a matter of course, weigh any of the factors they deem appropriate more heavily than others, both the Board and the Nominating and Board Governance Committee believe that, as a group, the directors should have diverse backgrounds and qualifications. The Company believes that the members of the Board, as a group, have such backgrounds and qualifications, although this is an area of constant focus for the Board and the Nominating and Board Governance Committee. In connection with their annual Board self-evaluation process, members of the Board have highlighted several backgrounds and qualifications that the Board has sought and/or continues to seek. These include international experience, which the Company believes both Mr. Greenlees and Mr. Stapleton have helped provide; additional female members, which the Company believes Ms. Lee helped address; and additional retail and/or chief executive experience, which the Company believes both Mr. Greenlees and Mr. Huvane have helped provide.

 

The Nominating and Board Governance Committee considers candidates for the Board from any reasonable source, including stockholder recommendations, and does not evaluate candidates differently based on the source of

the recommendation. The process for seeking and vetting additional director candidates is ongoing and is not dependent upon the existence of a vacancy on the Board. Accordingly, the Board believes that this ongoing pursuit of qualified candidates functions as an appropriate director succession plan. Pursuant to its charter, the Nominating and Board Governance Committee has the authority to retain consultants and search firms to assist in the process of identifying and evaluating candidates and to approve the fees and other retention terms for any such consultant or search firm. In Fiscal 2010, the Nominating and Board Governance Committee used Spencer Stuart, a global executive search firm, to help identify and evaluate director candidates. Mr. Greenlees was recommended to the Nominating and Board Governance Committee by Spencer Stuart.

 

Information regarding each of our directors is set forth above. In addition to the specific information presented with respect to such individual, the Company believes that each of its directors has a reputation for the highest character and integrity and that the directors work very cohesively and constructively with each other and with management. They have each demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Board and the Company.

 

The Board, taking into account the recommendations of the Nominating and Board Governance Committee, selects nominees for election as directors at each annual meeting of stockholders. Stockholders may recommend director candidates for consideration by the Nominating and Board Governance Committee by giving written notice of the recommendation to the Chair of the Nominating and Board Governance Committee, in care of the Company, at the Company’s executive offices at 6301 Fitch Path, New Albany, Ohio 43054. The recommendation must include the candidate’s name, age, business address, residence address and principal occupation. The recommendation must also describe the qualifications, attributes, skills or other qualities possessed by the recommended director candidate. A written statement from the candidate consenting to serve as a director, if elected, must accompany any such recommendation.

 

In addition, stockholders wishing to formally nominate a candidate for election as a director may do so provided they comply with the nomination procedures set forth in the Company’s Amended and Restated Bylaws. Each stockholder nomination must be delivered in person or mailed by United States certified mail to the Secretary of the Company and received not less than 120 days nor more than 150 days before the first anniversary date of the Company’s proxy statement in connection with the last annual meeting of stockholders, which, for purposes of the Company’s 2012 Annual Meeting of Stockholders, means no later than January 16, 2012 and no earlier than December 17, 2011. The Secretary of the Company will deliver any stockholder nominations received in a timely manner for review by the Nominating and Board Governance Committee. Each stockholder nomination must contain the following information:

 

 

Each nomination must be accompanied by the written consent of the proposed nominee to be named in the proxy statement and to serve if elected. No person may be elected as a director unless he or she has been nominated by a stockholder in the manner just described or by the Board or a committee of the Board.

 

The Company is led by Mr. Jeffries, who has served as Chief Executive Officer of the Company since February 1992 and as Chairman since May 1998, when the Company was spun off from its former parent. The Company’s Board is comprised of Mr. Jeffries and eight non-management directors. The Company established a Lead Independent Director position in February 2010 and appointed Mr. Stapleton as the initial Lead Independent Director.

 

In addition to other duties more fully described in the Company’s Corporate Governance Guidelines, the Lead Independent Director is responsible for:

 

 

The Board has five standing committees: Audit, Compensation, Corporate Social Responsibility, Executive and Nominating and Board Governance. Each of these committees has a separate independent chair. Detailed information on each Board committee is contained in the section captioned “Committees of the Board” beginning on page 23.

 

The Company believes that a combined Chairman and Chief Executive Officer position, together with independent chairs for each of our Board committees, a Lead Independent Director, regularly scheduled executive sessions of the Board and regularly scheduled meetings of the non-management directors is the most appropriate Board leadership structure for the Company at this time. This structure demonstrates to all of our stakeholders, including our associates, customers and stockholders, that our Board is committed to engaged, independent leadership and the performance of its responsibilities. Experienced and independent directors, sitting on various committees with independent chairs, oversee the Company’s operations, risks, performance and business strategy. The Board believes that combining the Chairman and Chief Executive Officer positions takes advantage of the talent and knowledge of Mr. Jeffries, the person whom the Board recognizes as the “founder” of the modern day Abercrombie & Fitch, and effectively combines the responsibilities for strategy development and execution with management of day-to-day operations. It also reduces the potential for confusion or duplication of efforts and provides clear leadership for the Company. The Board believes that its strong governance practices, including its supermajority of independent members, the combination of the Chairman and Chief Executive Officer roles, and its clearly defined Lead Independent Director responsibilities, provide an appropriate balance among strategy development, operational execution and independent oversight of the Company.

 

The Company’s Board recognizes the unique nature of Mr. Jeffries’ service to the Company both through his role as Chief Executive Officer and as chief creative talent. As the effective “founder” of the modern day Abercrombie & Fitch, he has developed the Company’s brands and been instrumental both in building more than $5 billion in value since the Company’s initial public offering and in creating the Company’s international expansion strategy. The Board also recognizes that replacing such a unique talent would be difficult, particularly at the present point in the Company’s history. Nevertheless, the Board understands that succession planning is an important obligation. As a result, the Board has charged the Executive Committee by charter with succession planning for the chief executive officer position.

 

The Executive Committee, which presently consists of Messrs. Jeffries and Kessler, has developed both an emergency succession plan and a long-term succession plan that involves talent management at both the creative and executive level. Both the emergency succession plan and the long-term succession plan have been discussed among the non-management directors on at least an annual basis.

 

With respect to management positions below the chief executive officer level, the Company has a well-established and extensive succession planning process, managed by the Company’s Human Resources Department, that evaluates talent throughout the organization on an annual basis. For most of the Company’s leadership team, the Company believes that one or more potential successors exist within the Company. The results of the Company’s annual succession planning process are communicated to the Board.

 

Our Board has overall responsibility for risk oversight with a focus on the most significant risks facing the Company. Not all risks can be dealt with in the same way. Some risks may be easily perceived and controllable, and other risks are unknown; some risks can be avoided or mitigated by particular behavior, and some risks are unavoidable as a practical matter. For some risks, the potential adverse impact would be minor, and, as a matter of business judgment, it may not be appropriate to allocate significant resources to avoid the adverse impact; in other cases, the adverse impact could be significant, and it is prudent to expend resources to seek to avoid or mitigate the potential adverse impact. In some cases, a higher degree of risk may be acceptable because of a greater perceived potential for reward.

 

Management is responsible for identifying risk and risk controls related to significant business activities; mapping the risks to Company strategy; and developing programs and recommendations to determine the sufficiency of risk identification, the balance of potential risk to potential reward and the appropriate manner in which to control risk. The Board implements its risk oversight responsibilities by having management provide periodic reports on the significant risks that the Company faces and how the Company is seeking to control or mitigate risk, if and when appropriate. In some cases, risk oversight is addressed as part of the full Board’s engagement with the Chief Executive Officer and management. In other cases, a Board committee is responsible for oversight of specific risk topics. For example, the Audit Committee oversees issues related to internal control over financial reporting; the Nominating and Board Governance Committee oversees issues related to the Company’s governance structure, corporate governance matters and processes and risks arising from related person transactions; the Corporate Social Responsibility Committee oversees issues related to diversity, sustainability, human rights and similar issues; and the Compensation Committee oversees risks related to compensation programs, as discussed in greater detail below. Presentations and other information for the Board and Board committees generally identify and discuss relevant risk and risk control; and the Board members assess and oversee the risks as a part of their review of the related business, financial or other activity of the Company.

 

Management recently completed a comprehensive enterprise risk management review, in which the identification of enterprise level risks and mitigation processes were the primary topics. This review was overseen by the Audit Committee. The Audit Committee and the full Board will continue to monitor enterprise risk management and will receive periodic updates on enterprise risk management.

Risk Assessment in Compensation Programs

 

Consistent with SEC disclosure requirements, management and the Compensation Committee have assessed the Company’s compensation programs. Based upon all of the facts and circumstances available to the Company at the time of the filing of this Proxy Statement, management and the Compensation Committee have concluded that there are no risks arising from the Company’s compensation policies and practices that are reasonably likely to have a material adverse effect on the Company. This assessment was overseen by the Compensation Committee, in consultation with its independent counsel and independent compensation consultant.

 

In particular, in reaching its conclusion, the Company has reviewed the compensation of all associates in light of the following areas of risk:

 

 

The Company does not believe that any of these specific areas apply to the Company’s compensation policies and practices in any meaningful manner.

 

In “ITEM 1A. RISK FACTORS” of the Company’s Annual Report on Form 10-K for Fiscal 2010, the Company states that “equity-based compensation awarded under the employment agreement with our Chief Executive Officer could adversely impact our cash flows, financial position or results of operations” in the event that (i) there are insufficient shares of Common Stock available to be issued under the 2007 Long-Term Incentive Plan (the “2007 LTIP”), or under a successor or replacement plan, at the time these equity-based awards are ultimately settled or (ii) as of any applicable measurement date, the Company would be unable to settle these or other outstanding equity-based awards in shares of Common Stock. In addition, equity-based compensation expense associated with the performance-based awards that may be granted to our Chief Executive Officer pursuant to the terms of his employment agreement based on increases in total stockholders’ return could also be material in amount. While the Company and the Compensation Committee do not believe that equity-based compensation expense is a risk that arises from the Company’s compensation policies and practices that is reasonably likely to have a material adverse effect on the Company, the Company has sought to avoid additional expense associated with the liability accounting due to the insufficiency of shares available to settle outstanding equity-based awards and has sought to mitigate the risk of such expense. The Company believes that approval of Proposal No. 7 by the Company’s stockholders and the addition of 3,000,000 shares of Common Stock to the 2007 LTIP would significantly mitigate this risk.

 

Officers who are directors receive no additional compensation for services rendered as directors. Directors who are not associates of the Company or its subsidiaries (“non-associate directors”) receive:

 

 

The annual restricted stock unit grant is subject to the following provisions:

 

 

 

Directors who are elected after the beginning of the fiscal year receive pro-rated retainers and grants of restricted stock units based on the time to be served during the fiscal year.

 

Non-associate directors are also reimbursed for their expenses for attending Board and committee meetings and receive the discount on purchases of the Company’s merchandise extended to all Company associates.

 

The Company has maintained the Directors’ Deferred Compensation Plan since October 1, 1998. The Directors’ Deferred Compensation Plan was split into two plans (Plan I and Plan II) as of January 1, 2005 to comply with Internal Revenue Code Section 409A. The terms of Plan I govern “amounts deferred” (within the meaning of Section 409A) in taxable years beginning before January 1, 2005 and any earnings thereon. The terms of Plan II govern “amounts deferred” in taxable years beginning on or after January 1, 2005 and any earnings thereon. Voluntary participation in the Directors’ Deferred Compensation Plan enables a non-associate director of the Company to defer all or a part of his or her retainers, meeting fees (which are no longer paid) and stock-based incentives (including options, restricted shares of Common Stock and restricted stock units relating to shares of Common Stock). The deferred compensation is credited to a bookkeeping account where it is converted into a share equivalent. Stock-based incentives deferred pursuant to the Directors’ Deferred Compensation Plan are credited as shares of Common Stock. Amounts otherwise payable in cash are converted into a share equivalent based on the fair market value of the Company’s Common Stock on the date the amount is credited to a non-associate director’s bookkeeping account. Dividend equivalents will be credited on the shares of Common Stock credited to a non-associate director’s bookkeeping account (at the same rate as cash dividends are paid in respect of outstanding shares of Common Stock) and converted into a share equivalent. Each non-associate director’s only right with respect to his or her bookkeeping account (and the amounts allocated thereto) will be to receive distribution of the amount in the account in accordance with the terms of the Directors’ Deferred Compensation Plan. Distribution of the deferred amount is made in the form of a single lump-sum transfer of the whole shares of Common Stock represented by the share equivalents in the non-associate director’s bookkeeping account (plus cash representing the value of fractional shares) or annual installments in accordance with the election made by the non-associate director. Shares of Common Stock will be distributed under the 2005 Long-Term Incentive Plan (the “2005 LTIP”) in respect of deferred compensation allocated to non-associate directors’ bookkeeping accounts on or after August 1, 2005, under the 2003 Stock Plan for Non-Associate Directors in respect of deferred compensation allocated to non-associate directors’ bookkeeping accounts between May 22, 2003 and July 31, 2005 and under the 1998 Restatement of the 1996 Stock Plan for Non-Associate Directors in respect of deferred compensation allocated to non-associate directors’ bookkeeping accounts prior to May 22, 2003.

The following table summarizes the compensation paid to, awarded to or earned by, the non-associate directors for Fiscal 2010. The Company’s Chairman and Chief Executive Officer Michael S. Jeffries is not included in this table as he is an officer of the Company and thus receives no compensation for his services as a director. The compensation received by Mr. Jeffries as an officer of the Company is shown in the “Fiscal 2010 Summary Compensation Table” beginning on page 55 and discussed in the text and tables included under the section captioned “EXECUTIVE OFFICER COMPENSATION” beginning on page 55.

 

Director Compensation for Fiscal 2010

 

 

 

 

In accordance with applicable NYSE Rules, the Board has adopted the Abercrombie & Fitch Co. Corporate Governance Guidelines to promote the effective functioning of the Board and its committees and to reflect the Company’s commitment to the highest standards of corporate governance. The Board, with the assistance of the Nominating and Board Governance Committee, periodically reviews the Corporate Governance Guidelines to ensure they are in compliance with all applicable requirements. The Corporate Governance Guidelines, which were

most recently amended by the Board on February 23, 2010, are available on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page.

 

In accordance with applicable NYSE Rules, the Board has adopted the Abercrombie & Fitch Co. Code of Business Conduct and Ethics, which is available on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page. The Code of Business Conduct and Ethics, which is applicable to all associates, includes a Code of Ethics applicable to the Chief Executive Officer, the Chief Financial Officer, the Controller, the Treasurer, all Vice Presidents in the Finance Department and other designated financial associates. The Company intends to satisfy any disclosure requirements regarding any amendment of, or waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page.

 

The Compensation Committee is currently comprised of Michael E. Greenlees (Chair), James B. Bachmann, Kevin S. Huvane and Craig R. Stapleton. Lauren J. Brisky and Messrs. Bachmann and Stapleton served as members of the Compensation Committee throughout Fiscal 2010. Messrs. Greenlees and Huvane were appointed to the Compensation Committee on February 15, 2011, in conjunction with their election to the Board. Ms. Brisky rotated off the Compensation Committee on April 11, 2011 and Mr. Greenlees became Chair of the Compensation Committee on such date. Edward F. Limato served as a member of the Compensation Committee until July 3, 2010 when he passed away.

 

With respect to Fiscal 2010 and from January 30, 2011 through the date of this Proxy Statement, there were no interlocking relationships between any executive officer of the Company and any entity, one of whose executive officers served on the Company’s Compensation Committee or Board, or any other relationship required to be disclosed in this section under the applicable SEC Rules.

 

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 the Company as a nominal defendant and seeking to assert claims for unspecified damages against nine of the Company’s 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 the Company alleging various breaches of the directors’ fiduciary duty allegedly arising out of antecedent employment law and securities class actions brought against the Company. A consolidated amended derivative complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, the Company 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 cases, 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 Company’s motion was granted and, on April 10, 2009, plaintiffs filed an appeal from the order of dismissal in the United States Court of Appeals for the Sixth Circuit. On April 5, 2011, a panel of the United States Court of Appeals for the Sixth Circuit reversed the decision of the District Court and remanded the action for further proceedings. The state court has stayed further proceedings in the state-court derivative action until resolution of the consolidated federal derivative cases.

 

The following table furnishes, as of April 27, 2011 (unless otherwise noted below), with respect to each person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock of the Company, the name and address of such beneficial owner, the number of shares of Common Stock beneficially owned (as determined in accordance with Rule 13d-3 under the Exchange Act) and the percentage such shares comprised of the outstanding shares of Common Stock of the Company.

 

 

 

 

The following table furnishes the number of shares of Common Stock of the Company beneficially owned (as determined in accordance with Rule 13d-3 under the Exchange Act) by each of the current directors and director nominees, by each of the named executive officers, and by all of the current directors and executive officers as a group, as of April 27, 2011.

 

 

 

 

 

The Board believes it is important that the executive officers and directors have, and are recognized both internally and externally as having, long-term financial interests that are aligned with those of the Company’s stockholders. Accordingly, the Board adopted stock ownership guidelines for all directors and executive officers effective as of November 12, 2009. The Company’s stock ownership guidelines are posted on the “Corporate Governance” page of the Company’s website at www.abercrombie.com, accessible through the “Investors” page.

 

The guidelines for the executive officers are: five times annual base salary for the Chief Executive Officer and one times annual base salary for the other executive officers. The guidelines are initially calculated using the executive officer’s base salary as of the later of the date the guidelines were adopted and the date the individual was first designated as an executive officer by the Board. The guidelines may be modified, at the discretion of the Nominating and Board Governance Committee, when an executive officer changes pay grade and otherwise from time to time. Until the amount contemplated by the guidelines is achieved, the executive officer is required to retain an amount equal to 50% of the shares received as a result of the exercise of stock options or stock-settled stock appreciation rights or the vesting of restricted stock or restricted stock units, in each case netted to pay any exercise price or withholding taxes; provided, that for a three-year transition period from the date of adoption, executive officers are required to retain 331/3% of the net shares received if they are not above the applicable guidelines. Failure to meet or, in unique circumstances, to show sustained progress toward meeting these stock ownership guidelines may be a factor considered by the Compensation Committee in determining future long-term incentive equity grants and/or appropriate levels of incentive compensation.

 

The guideline for the directors is three times the amount of the annual retainer paid to directors, calculated using the annual retainer as of the later of the date the guidelines were adopted and the date the director is elected to the Board. It is anticipated that directors should be able to achieve the guideline within three years of joining the Board, or, in the case of directors serving at the time the guidelines were adopted, within three years of the date of adoption of the guidelines.

 

To the Company’s knowledge, based solely on a review of the forms furnished to the Company and written representations that no other forms were required, during Fiscal 2010, all directors, officers and beneficial owners of greater than 10% of the outstanding shares of Common Stock timely filed the reports required by Section 16(a) of the Exchange Act, except James B. Bachmann, Lauren J. Brisky, Archie M. Griffin, John W. Kessler, Elizabeth M. Lee and Craig R. Stapleton, current directors of the Company, and Edward F. Limato and Robert A. Rosholt, former directors of the Company who served during Fiscal 2010, who each filed one late Form 4 reporting one transaction.

 

In Proposal No. 3 below, the Company is asking stockholders to vote on executive compensation, and it will provide this type of advisory vote at least once every three years pursuant to recently adopted Section 14A of the Exchange Act. Also as required by Exchange Act Section 14A, in this Proposal No. 2, the Company is asking stockholders to vote on whether future advisory votes on executive compensation should occur every year, every two years or every three years.

After careful consideration, the Board has determined that holding an advisory vote on executive compensation every year is the most appropriate policy for the Company at this time, and unanimously recommends that stockholders vote for future advisory votes on executive compensation to occur every year. While the Company’s executive compensation programs are designed to promote a long-term connection between pay and performance, the Board recognizes that executive compensation disclosures are made annually. Given that the “Say on Pay” advisory vote provisions are new, holding an annual advisory vote on executive compensation provides the Company with more direct and immediate feedback on our compensation disclosures. However, stockholders should note that because the advisory vote on executive compensation occurs well after the beginning of the compensation year, and because the different elements of our executive compensation programs are designed to operate in an integrated manner and to complement one another, in many cases it may not be appropriate or feasible to change the Company’s executive compensation programs in consideration of any one year’s advisory vote on executive compensation by the time of the following year’s annual meeting of stockholders.

 

The Company understands that its stockholders may have different views as to what is an appropriate frequency for advisory votes on executive compensation, and we will carefully review the voting results on this proposal. Stockholders will be able to specify one of four choices for this proposal on the form of proxy: one year; two years; three years; or abstain. Stockholders are not voting to approve or disapprove the Board’s recommendation. This advisory vote on the frequency of future advisory votes on executive compensation is non-binding on the Board. Notwithstanding the Board’s recommendation and the outcome of the stockholder vote, the Board may in the future decide to conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as discussions with stockholders and the adoption of material changes to compensation programs.

 

THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO CONDUCT FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION “EVERY 1 YEAR.”

 

The non-binding vote on the frequency of future advisory votes on executive compensation requires the approval of the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting thereon. Under applicable NYSE Rules, broker non-votes will not be treated as votes cast. Abstentions will not be counted as votes “FOR” or “AGAINST” the proposal.

 

We are asking stockholders to approve an advisory resolution on the Company’s executive compensation as reported in this Proxy Statement. As described below in the “COMPENSATION DISCUSSION AND ANALYSIS” section of this Proxy Statement beginning on page 40, the Compensation Committee has structured the Company’s executive compensation programs, among other things, to achieve the following key objectives:

 

 

The Company’s executive compensation programs have a number of features that we believe are designed to promote these objectives. The Company’s executive compensation programs seek to align pay for performance by providing a large portion of executive pay via “at-risk” vehicles. For example, the Company’s Chief Executive Officer receives the majority of his annual compensation in the form of performance-based equity grants, and is eligible for such grants only if the market price of the Company’s Common Stock during each semi-annual measurement period increases beyond that during any previous semi-annual measurement period since December 2008. Furthermore, a majority of the Company’s named executive officers’ compensation, provided in the form of short-term annual incentives and long-term equity incentives, is contingent upon Company financial performance and appreciation in the market price of the Company’s Common Stock. The Company fosters a team-based

approach and an environment of cooperation by tying both annual cash incentive compensation and long-term equity compensation to the financial results of the Company as a whole.

 

In addition to the foregoing, in recent years, the Company has made changes to its executive compensation programs to conform to “best practices.” For example, during Fiscal 2010, the Chief Executive Officer’s employment agreement was amended (at no cost to the Company) to provide that the Chief Executive Officer will no longer be entitled to any Internal Revenue Code Section 280G gross-up payments. Also, the Company’s incentive plans are subject to a strict “clawback,” allowing the Company to seek repayment of any incentive amounts that were erroneously paid with no requirement of misconduct on the part of the plan participant before the clawback is triggered. Further, the Company has implemented stock ownership guidelines for all directors and executive officers and has imposed holding requirements and five-year cliff vesting on many of the equity awards granted to the Chief Executive Officer.

 

In Fiscal 2010, the Company believes it achieved strong financial performance despite a challenging economic environment. The Company exceeded its objectives in terms of net sales, operating income and net income per diluted share. The Company believes that its executive compensation programs provide incentives that have facilitated the Company’s performance.

 

Stockholders are urged to read the “COMPENSATION DISCUSSION AND ANALYSIS” beginning on page 40, which describes in more detail how the Company’s executive compensation policies and procedures achieve its compensation objectives, as well as the “Fiscal 2010 Summary Compensation Table” beginning on page 55 and related compensation tables and narrative, which provide detailed information on the compensation of the named executive officers.

 

In accordance with recently adopted Section 14A of the Exchange Act, and as a matter of good corporate governance, the Company is asking stockholders to approve the following advisory resolution at the Annual Meeting:

 

RESOLVED, that the stockholders of Abercrombie & Fitch Co. (the “Company”) approve, on an advisory basis, the compensation of the Company’s Named Executive Officers disclosed in the Compensation Discussion and Analysis, the Fiscal 2010 Summary Compensation Table and the related compensation tables, notes and narrative in the Proxy Statement for the Company’s 2011 Annual Meeting of Stockholders.

 

This advisory resolution, commonly referred to as a “Say on Pay” vote, is non-binding on the Board. Although non-binding, the Board and the Compensation Committee will carefully review and consider the voting results when evaluating our executive compensation programs.

 

THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR”
THE APPROVAL OF THE ADVISORY RESOLUTION ON EXECUTIVE COMPENSATION.

 

The advisory resolution on executive compensation requires the approval of the affirmative vote of a majority in voting interest of the stockholders present in person or by proxy and voting thereon. Under applicable NYSE Rules, broker non-votes will not be treated as votes cast. Abstentions will not be counted as votes “FOR” or “AGAINST” the proposal.

 

This Compensation Discussion and Analysis provides important information on our executive compensation program and the amounts shown in the executive compensation tables that follow. In this Proxy Statement, the term “named executive officers” (sometimes referred to as “NEOs”) means the six individuals now or formerly serving as executive officers named in the executive compensation tables that follow (and listed below). “Compensation Committee” or “Committee” means the Compensation Committee of the Board.

The Company’s NEOs include the following individuals who are or were serving as executive officers of the Company during Fiscal 2010:

 

Michael S. Jeffries, Chairman and Chief Executive Officer (“CEO”)

 

Jonathan E. Ramsden, Executive Vice President and Chief Financial Officer (“CFO”)

 

Diane Chang, Executive Vice President — Sourcing

 

Leslee K. Herro, Executive Vice President — Planning and Allocation

 

Ronald A. Robins, Jr., Senior Vice President, General Counsel and Secretary

 

David S. Cupps, former Senior Vice President, General Counsel and Secretary and currently Senior Counsel

 

The Company’s compensation programs are closely aligned with the Company’s performance, reflect best practices and are uniquely suited to fit our culture and our brands. The Company has created a pay for performance program that aligns executive and stockholder interests by reinforcing the long-term growth and sustainability of the Abercrombie & Fitch brands, which we believe have delivered industry-leading performance and returns since the Company’s initial public offering in 1996. The structure is designed to encourage a high degree of teamwork and rewards individuals for the achievement of challenging goals that we believe lead to the creation of stockholder value.

 

The Compensation Committee, in consultation with Company management and the Compensation Committee’s independent outside advisors, oversees the executive compensation and benefits program for the Company’s NEOs. The compensation program is comprised of a combination of base salary, annual incentive compensation, long-term incentives and associate benefits. The objective of the compensation program is to attract, motivate and retain key creative and management talent who thrive in the highly competitive specialty retail industry.

 

The Company believes that the compensation programs for the NEOs have been integral to our long-term financial and operational success. The Company is operated with the objective of creating long-term value for stockholders and associates by delivering a unique customer experience, high-quality fashion forward apparel and an American lifestyle that is synonymous with our iconic global brands. We believe this strategy has been successful, as demonstrated by the fact that the Company’s results have translated into significant value for the Company’s stockholders since the initial public offering in 1996.

 

September 26, 1996 — April 27, 2011

Total Shareholder Return

 

 

Chart Data Source: S&P Research Insight

Mr. Jeffries, the Company’s current Chairman and CEO, is effectively the “founder” of the modern day Abercrombie & Fitch due to his unique role and contributions during his 19-year tenure. In addition to his formal role as Chairman and CEO, he also functions as the brand visionary and chief creative talent for the Company. Under his leadership, the Company’s market value has increased by approximately $5 billion since 1996 and has significantly outperformed the S&P 500 and S&P Retail Indexes (as shown on the chart on page 41).

 

The Company’s compensation arrangement with the CEO reflects his unique “founder” status and the extraordinary contributions he continues to deliver. To ensure the continuation of Mr. Jeffries’ service with the Company, the Board entered into a new five-year employment agreement in December 2008, when his previous agreement expired. The United States was in the midst of a severe economic downturn and the Company was embarking on a plan of aggressive international expansion. The Company recently released its revenue projections for Fiscal 2015 (the investor presentation is available at www.abercrombie.com) that demonstrate the Company’s belief that significant growth and continued strong performance are achievable as the Company continues to execute this international expansion plan.

 

Under the 2008 employment agreement, the CEO’s base salary is not subject to annual increases and incentive compensation is tied directly to the achievement of financial objectives. The compensation program is structured so that a large majority of the CEO’s compensation is “at risk” (in the form of equity grants and performance-based awards under the Company’s 2007 LTIP) and dependent on the Company’s ability to grow and sustain total stockholder return. The Company believes that its arrangement with the CEO effectively aligns executive pay and Company performance. The equity grants are performance-based and double-triggered first by accretion in total stockholder return and then by continued accretion above the grant price. In sum:

 

 

Additionally, the CEO is subject to mandatory holding periods beyond the completion of his employment agreement for a significant portion of the equity awards he has received under his current employment agreement.

 

The 2005 LTIP and the 2007 LTIP provide equity awards to key individuals and provide an additional measure of alignment with stockholder interests. The Company has limited shares available for future issuance under the 2007 LTIP. Therefore, under Proposal No. 7, the Company is requesting that stockholders authorize an additional 3,000,000 shares under the 2007 LTIP. If 3,000,000 additional 2007 LTIP shares are not approved at the Annual Meeting, then we may have insufficient shares available in the future to settle existing or future awards in our Common Stock, which may result in cash-based settlement or the use of cash-based long-term incentives rather than equity. If either cash-based settlement or cash-based long-term incentives were used, the Company and our stockholders would lose the accounting treatment provided by equity-classified awards, whereby expense is fixed on the grant date. Under this scenario, the Company would be forced to move to liability accounting which could create significant earnings volatility and could have a significant impact on operating expense and cash flow on both outstanding and new awards. In addition, in order to ensure compliance with the Internal Revenue Code Section 162(m) rules governing the deductibility of “performance-based compensation”, under Proposal No. 6, stockholders are being asked to re-approve the performance goals under the 2005 LTIP. Additionally, approval of Proposal No. 7 will constitute re-approval of the material terms of the performance goals under the 2007 LTIP and will therefore allow certain awards under the 2007 LTIP to continue to qualify as tax-deductible “performance-based awards” under Section 162(m) of the Internal Revenue Code.

 

In light of the strength of the Company’s business performance, total return to stockholders and prospects for continued growth and value creation, we believe our performance-based compensation program is appropriate and is achieving its objective with respect to long-term stockholder value creation.

Fiscal 2010 — The Year in Review

 

During Fiscal 2010, the Company exceeded its objectives in terms of net sales, operating income and net income per diluted share and did so while continuing to invest for the future and to build the organization to capitalize on the major opportunities the Company sees ahead. The Company believes its Fiscal 2010 results were strong when considered against the backdrop of the challenging economic and consumer environments in which they were achieved. The Company’s executive compensation and benefit programs are aligned with the organization’s pay for performance philosophy and designed to drive high performance through the achievement of financial goals and the creation of long-term stockholder value. Consistent with this approach, compensation awarded to the NEOs for Fiscal 2010 was a result of the Company’s strong performance.

 

 

 

 

 

 

 

 

The following compensation decisions and practices demonstrate how the Company’s executive compensation program reflects best practices and reinforces the Company’s culture and values:

 

 

 

The compensation programs are governed by the Compensation Committee of the Board, which is comprised solely of independent, non-associate directors of the Company. See the description of the Compensation Committee beginning on page 24.

 

The Company operates in the fast-paced and highly-competitive arena of specialty retail. To be successful, the Company must attract and retain key creative and management talents who thrive in this environment. The Company sets high goals and expects superior performance from these individuals. The Company’s executive compensation structure is designed to support this culture. As such, the Company’s executive compensation and benefit programs are designed to:

 

 

Management, in consultation with the Compensation Committee and the Compensation Committee’s independent outside advisors, described below under the caption “Role of the Compensation Committee”, has developed an executive compensation and benefits strategy that rewards the performance, behaviors and culture that the Company believes create stockholder value. Thus, the incentive compensation earned by executive officers reflects:

 

 

 

In making executive compensation decisions, the Compensation Committee is advised by both an independent compensation consultant, Pearl Meyer & Partners, LLC (“Pearl Meyer”) and an independent outside counsel, Gibson, Dunn & Crutcher LLP (“Gibson Dunn”). The only services that Pearl Meyer and Gibson Dunn perform for the Company are at the direction of the Compensation Committee. Pearl Meyer and Gibson Dunn did not provide any services to the Company in Fiscal 2010 other than executive and director compensation consulting and advisory services. In this regard, the Compensation Committee has adopted a policy regarding the use of outside compensation consultants that provides as follows:

 

If the Committee retains a compensation consultant to provide advice, information and other services to the Committee relating to the compensation of the Company’s Chief Executive Officer, its officers identified in Rule 16a-1(f) under the Exchange Act or its non-associate directors or other matters within the responsibility of the Committee, such consultant may only provide services to, or under the direction of, the Committee and is prohibited from providing any other services to the Company.

 

The Compensation Committee has the right to terminate the services of the outside counsel and the compensation consultant at any time. While the Compensation Committee retains Gibson Dunn and Pearl Meyer directly, Gibson Dunn and Pearl Meyer interact with the Company’s Senior Vice President of Human Resources, the Company’s office of General Counsel and the Company’s CFO and their respective staffs in carrying out assignments in order to obtain compensation and performance data for the executive officers and the Company. In addition, the Compensation Committee’s advisors may, at their discretion, seek input and feedback from management of the Company regarding their work product prior to presentation to the Compensation Committee in order to confirm information is accurate or address other similar issues. Representatives from Gibson Dunn and Pearl Meyer are present at all Compensation Committee meetings, and generally attend executive sessions of the Committee. Both firms provide independent perspectives on any management proposals.

 

Decisions regarding the compensation of the CEO and the other NEOs are made solely by the Compensation Committee, although it does receive input from its independent advisors and management of the Company. The CEO provides recommendations for the compensation of the other NEOs. The CEO also provides input regarding his own goals, targets and performance. The Compensation Committee often requests certain Company executive officers to be present at Compensation Committee meetings where executive compensation and Company and individual performance are discussed and evaluated so they can provide input into the decision-making process. Executive officers may provide insight, suggestions or recommendations regarding executive compensation during periods of general discussion, but do not have a vote in any decision-making.

 

Pay Level — Determination of the appropriate pay opportunity

 

Pay levels for all associates of the Company, including the NEOs listed in the “Fiscal 2010 Summary Compensation Table” on page 55, are based on a number of factors, including each individual’s role and responsibilities within the Company, current compensation, experience and expertise, pay levels in the competitive market for similar positions, internal pay equity relationships including those between the executive officers and the CEO and the performance of the individual, his/her area of responsibility and the Company as a whole. The Compensation Committee approves the pay levels for all the executive officers. In determining the pay levels, the Compensation Committee considers all elements of compensation and benefits.

 

The Compensation Committee uses a number of sources to determine the “competitive market”. The primary data source used in setting competitive market levels for the NEOs is information publicly disclosed by the peer retail companies listed below. Annually, the independent compensation consultant to the Compensation Committee and the Compensation Committee evaluate whether companies should be added to or removed from the list of peer retail companies. The annual review considers such factors as revenue, market capitalization and geographic location. The Compensation Committee reviews information on all forms of compensation provided by the peer retail companies (e.g., salary, bonus, short-term incentives and long-term incentives). The public information for the peer retail companies is supplemented with survey data, which provides position-based compensation levels across broad industry segments. The independent compensation consultant to the Compensation Committee uses survey data from multiple providers, including Hay Group, Mercer, Salary.com, Hewitt Associates, Inc., and Towers Watson. The Compensation Committee does not make any decisions with respect to the companies that participate in these surveys, and views the name of each such company as immaterial to its decision-making process. For corporate staff positions, such as the CFO, the Compensation Committee considers survey data based on companies of similar size, without regard to industry. For industry specific positions, such as the Executive Vice President — Sourcing and the Executive Vice President — Planning and Allocation, the Compensation Committee considers retail industry survey data for companies of a similar size.

 

The peer retail companies used by the Compensation Committee in determining the “competitive market” with respect to Fiscal 2010 compensation decisions are included in the table below. The peer group remained unchanged from the group used with respect to Fiscal 2009 compensation decisions.

 

 

As of the end of Fiscal 2010, the revenues for the peer group ranged from $1.944 billion at the 25^th percentile to $3.721 billion at the 75^th percentile; and market capitalization for the peer group ranged from $1.309 billion at the 25^th percentile to $7.676 billion at the 75^th percentile. For both metrics, the Company fell at approximately the 66^th percentile of the peer group.

 

As noted above, pay opportunities for specific individuals vary based on a number of factors. The Compensation Committee does not precisely benchmark each executive officer’s compensation to market levels on an annual basis, but it does review market information and, in a given year, may engage in a more detailed review which may result in significant adjustments to a given executive officer’s compensation. Actual total compensation in a given year will vary above or below the target compensation levels based primarily on the attainment of overall Company financial goals and the creation of stockholder value.

Pay Mix — Determination of each element of compensation, its purpose and design, and its relationship to the overall pay program

 

The Company’s compensation program consists of the following elements:

 

 

Base Salary

 

NEO base salaries reflect the Company’s operating philosophy, culture and business direction, with each salary determined by an annual assessment of a number of factors, including the individual’s current base salary, job responsibilities, impact on development and achievement of business strategy, labor market compensation data, individual performance relative to job requirements, the Company’s ability to attract and retain critical executive officers and salaries paid for comparable positions within an identified compensation peer group. No specific goals or weighting is applied to the factors considered in setting the level of base salary, and thus the process relies on the subjective exercise of the Compensation Committee’s judgment.

 

Annual Incentive Compensation Plan

 

The Incentive Compensation Performance Plan (the “Incentive Plan”), approved by stockholders at the 2007 Annual Meeting, is designed to focus on and reward short-term operating performance. It is the broadest of the Company’s management incentive programs with eligibility approaching 900 participants, including the CEO and the other NEOs. The Incentive Plan has target incentive levels, expressed as a percentage of base salary, for each level of eligible associate. Each participant in the Incentive Plan is assigned to an incentive level based on his/her position within the Company, with more senior positions having more pay at risk. The short-term incentive level for each associate is determined in conjunction with the other principal elements of compensation (base salary and long-term incentives) by an annual assessment of a number of factors, including the individual’s current base salary, job responsibilities, impact on development and achievement of business strategy, labor market compensation data, individual performance relative to job requirements, the Company’s ability to attract and retain critical executive officers and salaries paid for comparable positions within an identified compensation peer group. No specific goals or weighting are applied to the factors considered in setting the incentive level for the NEOs, and thus the process relies on the subjective exercise of the Compensation Committee’s judgment.

 

 

 

 

The Company’s Incentive Plan is divided into two six-month periods that correspond to the Company’s major seasons, February through July (the “Spring” season) and August through January (the “Fall” season). Each participant’s annual incentive opportunity is divided into two performance periods — the target incentive payout for the Spring season equals 40% of the annual incentive target opportunity and the target incentive payout for the Fall season equals 60% of the annual incentive target opportunity. The split in the annual incentive target opportunity is based on historical seasonality of operating results going back several years. Actual awards under the Incentive Plan vary based upon actual performance of the Company relative to the goals set by the Compensation Committee at the beginning of each season (as discussed in the section captioned “Pay-for-Performance — Determination of the performance measures and goals used in the pay programs”, beginning on page 51). The maximum incentive opportunity that can be earned under the Incentive Plan is two times the target award, for the achievement of outstanding performance. For performance falling in between the “threshold,” “target” and “maximum” performance levels, the Company awards incentive payout amounts on an interpolated basis.

 

The Compensation Committee administers the Incentive Plan in a manner such that payments under the Incentive Plan qualify as “performance-based” compensation under Section 162(m) of the Internal Revenue Code.

 

Long-Term Incentive Program for NEOs other than the CEO

 

Long-term incentives are used to balance the short-term focus of the annual cash incentive compensation program by tying a significant portion of total compensation to performance achieved over multi-year periods. Under the 2005 LTIP, which was approved by stockholders at the 2005 Annual Meeting, and the 2007 LTIP, which was approved by stockholders at the 2007 Annual Meeting, the Compensation Committee may grant a variety of long-term incentive vehicles, including stock options, SARs, restricted stock units, and performance shares. Under Proposal No. 7, stockholders are being asked to approve an amendment and restatement of the 2007 LTIP to increase the number of shares available by 3,000,000 shares to allow the Compensation Committee to continue to provide these types of long-term incentives to our executive officers and other employees. For NEOs other than the CEO, the Company currently relies on a combination of restricted stock units, stock options and SARs. The combination of the types of awards provides a balance between retention (through restricted stock units) and long-term performance (through stock options and SARs), as described below. Furthermore, the use of stock-based compensation in the long-term incentive program balances the cash-based nature of short-term incentive pay (i.e., base salary and annual cash incentive payouts).

 

In general, the restricted stock unit grants vest according to the schedule below, provided that the associate continues to work for the Company through the vesting dates. The weighting of the vesting toward the later years promotes retention.

 

 

Beginning with awards made to Executive Vice Presidents who were NEOs on the Fiscal 2008 grant date, the Company added a performance component to the vesting schedule for restricted stock units. These restricted stock units will vest 25% a year if net income grows at 2% or more over the previous year’s net income achievement. If this performance hurdle is not met, the restricted stock units will not vest in accordance with the vesting schedule for that year. The executive officers have the opportunity to earn back this unvested portion of the award if cumulative performance hurdles are met in subsequent years. The Compensation Committee retains the right to adjust equity vesting schedules for specific circumstances.

 

In Fiscal 2010, as described in the “Fiscal 2010 Grants of Plan-Based Awards” table on page 57, the Executive Vice Presidents were all granted SARs. The Compensation Committee believes that awarding SARs instead of restricted stock units on an annual basis provided greater alignment between the interests of these executive officers and stockholders, as the Executive Vice Presidents will only receive value from these awards if the market price of the Company’s Common Stock appreciates over the price on the date of grant.

In general, stock option and SAR grants vest according to the schedule below, provided that the associate continues to work for the Company through the vesting dates.

 

 

While the Company believes that both retention and long-term performance are important objectives for a long-term incentive program, the Company also believes that the “at risk” component of the long-term incentive program should be higher for the more senior executive officers. Structuring more of the long-term incentive compensation of senior executive officers “at risk” more closely aligns the economic benefit of such compensation to the interests of stockholders as a significant portion of their potential compensation will only be realized if the market price of the Company’s Common Stock increases. Therefore, the ratio of restricted stock units to SARs (or stock options) varies by level of participant. When compared to the percentage of the total long-term award value received by a majority of the associates in the form of restricted stock units versus SARs (or stock options), the more senior executive officers receive a relatively lower percentage of their long-term award value in the form of restricted stock units and a relatively higher percentage in the form of SARs or stock options. For the Executive Vice Presidents, 100% of their total long-term incentive awards granted during Fiscal 2010 was in the form of SARs. The remaining NEOs were granted a mix of SARs and restricted stock units. Mr. Robins, who joined the Company in November 2009, did not receive an equity grant during Fiscal 2010.

 

Equity awards for the CEO are established by the terms of his employment agreement and described beginning on page 57.

 

Target long-term incentive award levels are set by an annual assessment of a number of factors, including the individual’s current base salary, job responsibilities, impact on development and achievement of business strategy, labor market compensation data, individual performance relative to job requirements, the Company’s ability to attract and retain critical executive officers and salaries paid for comparable positions within an identified compensation peer group. No specific goals or weighting is applied to the factors considered in setting the target long-term incentive award level for each associate, and thus the process relies on the subjective exercise of the Compensation Committee’s judgment. The Compensation Committee also assesses aggregate share usage and dilution levels in comparison to the peer retail companies and general industry norms.

 

The Compensation Committee follows an Equity Grant Policy pursuant to which it reviews and approves individual grants for the NEOs, as well as the total number of stock options, SARs and restricted stock unit grants made to all associates. The annual equity grants are typically reviewed and approved at the Compensation Committee’s scheduled March meeting. The grant date for these annual grants is the date of the Compensation Committee meeting at which they are approved. Administration of restricted stock unit, stock option and SAR awards is managed by the Company’s Human Resources Department with specific instructions related to timing of grants given by the Compensation Committee. The Company has no intention, plan or practice to select annual grant dates for NEOs in coordination with the release of material, non-public information, or to time the release of such information because of award dates.

 

Benefits

 

As associates of the Company, the NEOs are eligible to participate in all of the broad-based Company-sponsored benefits programs on the same basis as other full-time associates.

 

In addition to the qualified Abercrombie & Fitch Co. Savings and Retirement Plan (the “401(k) Plan”), the Company has a nonqualified deferred compensation plan, the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (the “Nonqualified Savings and Supplemental Retirement Plan”), that allows executive officers to defer a portion of their compensation over-and-above the Internal Revenue Service (“IRS”) limits imposed on the Company’s 401(k) Plan. The Company also makes matching and retirement contributions to

the Nonqualified Savings and Supplemental Retirement Plan on behalf of the participants. Company contributions have a five-year vesting schedule. The Nonqualified Savings and Supplemental Retirement Plan allows participants the opportunity to save and invest their own money on the same basis (as a percentage of their pay) as other associates under the 401(k) Plan. Furthermore, the Nonqualified Savings and Supplemental Retirement Plan is competitive, and the Company’s contribution element provides retention value. The Company’s Nonqualified Savings and Supplemental Retirement Plan is further described and Company contributions and the individual account balances for the NEOs are disclosed under the section captioned “Nonqualified Deferred Compensation” beginning on page 62. The Company provides a separate Supplemental Executive Retirement Plan to the Company’s Chairman and CEO, the material provisions of which are described under the section captioned “Pension Benefits” on page 62.

 

The Company offers a life insurance benefit for all full-time associates equal to two times base salary. For Vice Presidents and above, the death benefit is set at four times base salary.

 

The Company offers a long-term disability benefit to all full-time associates which covers 60% of base salary for the disability period. In addition, the Company offers an Executive Long-Term Disability Plan for all associates earning over $200,000 in base salary which covers an additional 15% of base salary and 75% of target annual cash incentive compensation for the disability period.

 

The Company does not offer perquisites to its executive officers that are not widely available to all full-time associates, with the exception of the CEO, who is currently provided certain perquisites, including supplemental life insurance, personal security and limited personal use of Company aircraft, as more fully described in the footnotes to the “Fiscal 2010 Summary Compensation Table” beginning on page 55. At the time the CEO’s employment agreement was entered into or amended, as applicable, the Compensation Committee carefully considered the provision of these benefits, including limited aircraft use and personal security, and approved those benefits out of concern for the CEO’s safety and his extensive travel schedule.

 

Employment Agreements, Severance and Change-in-Control Benefits

 

The Compensation Committee carefully considers the use and conditions of employment agreements. The Compensation Committee recognizes that, in certain circumstances, formal written employment contracts are necessary in order to successfully recruit and retain senior executive officers. Currently, only Mr. Jeffries, the CEO, has such an employment agreement, the material provisions of which are described in the section captioned “Employment Agreement with Mr. Jeffries” beginning on page 57. The Compensation Committee believes it is in the best interest of the Company to ensure that Mr. Jeffries’ employment is secured through the use of an agreement. Although the Company has existed for more than 100 years, Mr. Jeffries’ role is more akin to founder than a typical chief executive officer. His vision has transformed the Company into one of the most successful and widely-known specialty retailers.

 

All associates who participate in the Company’s stock-based compensation plans, including the NEOs (other than the CEO with respect to awards granted to him pursuant to his employment agreement), are entitled to certain benefits in the event of termination due to death or disability or a change in control as set forth in the plan documents for the Company’s stock-based compensation plans. The Compensation Committee and the CEO agreed to an amendment to the CEO’s employment agreement (entered into on January 28, 2011), pursuant to which the CEO has voluntarily agreed, for no compensation, that he will no longer be entitled to any gross-up payments in the event that any payments or benefits provided to him by the Company are subject to the golden parachute excise tax under Sections 280G and 4999 of the Internal Revenue Code. The foregoing arrangements are discussed in further detail in the section captioned “Potential Payments Upon Termination or Change in Control” beginning on page 65.

 

Compensation Considerations Related to General Accounting

 

When determining amounts of long-term incentive grants to executive officers and associates, the Compensation Committee examines the accounting cost associated with the grants. Under U.S. generally accepted accounting principles, grants of options, SARs, restricted stock units and other share-based payments result in an accounting charge for the Company.

The grant date fair value of equity-classified, stock-based compensation awards is expensed, net of estimated forfeitures, over the requisite service period on a straight-line basis. The Company estimates the fair value of stock options and SARs granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock options and SARs and expected future stock price volatility over the expected term. 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.

 

Compensation Considerations Related to Liability Accounting

 

Settlement of stock-based compensation awards in Common Stock requires that the Company has sufficient shares available in stockholder-approved equity compensation plans at the applicable time. In the event, at each reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares available to be issued under stock-holder approved equity compensation plans, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards is re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares become available to be issued under stockholder-approved equity compensation plans. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered.

 

Compensation Considerations Related to Tax Deductibility under Internal Revenue Code Section 162(m)

 

Section 162(m) of the Internal Revenue Code generally prohibits any publicly-held corporation from taking a federal income tax deduction for compensation paid in excess of $1,000,000 in any taxable year to the CEO and to each of the other three most highly compensated executive officers (excluding the CFO) whose compensation is required to be disclosed pursuant to Item 402 of SEC Regulation S-K. Section 162(m) exempts qualified performance-based compensation, among other things, from this deductibility limitation. It is the Compensation Committee’s policy to maximize the deductibility of executive compensation, to the extent compatible with the needs of the business, as the Compensation Committee believes that compensation and benefits decisions should be primarily driven by the needs of the business, rather than by tax policy. Therefore, the Compensation Committee may make pay decisions (such as the determination of the CEO’s base salary) that result in compensation expense that is not fully deductible under Section 162(m). For Fiscal 2010, Section 162(m) prohibited the deduction of approximately $2.7 million in executive compensation, primarily as a result of restricted stock unit awards granted prior to Fiscal 2008 to Mr. Jeffries, Ms. Chang and Ms. Herro that do not contain performance-based vesting criteria. Beginning in Fiscal 2008, restricted stock unit grants made to NEOs at the Executive Vice President level have a performance-based vesting schedule that would qualify any compensation recognized from the grants as performance-based compensation under Section 162(m) and, therefore, exempt such compensation from the Section 162(m) deductibility limitation.

 

Pay-for-Performance — Determination of the performance measures and goals used in the pay programs

 

The Company uses several vehicles to create a strong link between pay and performance.

 

The Incentive Plan rewards participants for the achievement of short-term, operational goals. As mentioned above, the Company has used the Incentive Plan as a means to focus the organization on the achievement of seasonal financial performance goals. Consistent with Fiscal 2009, for Fiscal 2010, the Company performance measure for both the Spring and Fall seasons was operating income. The metrics for each period were as follows:

 

 

 

 

For Spring 2010, the threshold level of payout was tied to the Company’s overall budget expectation for the period. Although the budget called for significant improvement in adjusted operating income year over year, the target payouts were set such that, at budget, participants would receive only 63% of their target payout. Based on the Company’s actual performance, the plan participants, including the NEOs, earned bonuses equal to 76% of their target payouts.

 

For Fall 2010, the Compensation Committee again set an operating income goal for the Incentive Plan. Due to the increasing stabilization in the economy and consistent with the Company’s historical practice prior to the downturn in the economy, the Compensation Committee set the target payouts such that participants would receive 100% of their target payout with performance at the Company’s budgeted level.

 

 

 

 

To recognize the associates’ hard work and contribution to the success realized in Fiscal 2010, the Company provided supplemental bonuses for salaried associates who were not eligible to participate in the Incentive Plan.

 

As mentioned above, the Incentive Plan gives the Compensation Committee members discretion to adjust cash incentive payouts downward based on their business judgment. However, the Compensation Committee may not adjust cash incentive payouts upward under the terms of the Incentive Plan.

 

Clawback Policy

 

Each of the plans pursuant to which short-term and long-term incentive compensation is paid to the Company’s executive officers (i.e., the Incentive Plan, the 2005 LTIP and the 2007 LTIP) includes a stringent “clawback” provision, which allows the Company to seek repayment of any incentive amounts that were erroneously paid. Each of the plans provides that if (i) a participant (including one or more NEOs) has received payments under the plan pursuant to the achievement of a performance goal and (ii) the Compensation Committee determines that the earlier determination as to the achievement of the performance goal was based on incorrect data and in fact the performance goal had not been achieved or had been achieved to a lesser extent than originally determined and a portion of such payment would not have been paid given the correct data, then such portion of any such payment made to the participant must be repaid by such participant to the Company, without any requirement of misconduct on the part of the participant.

 

Stock Ownership Guidelines

 

As discussed above under the caption “Best Practices” beginning on page 43, the Board believes it is important that the executive officers and directors have, and are recognized both internally and externally as having, long-term financial interests that are aligned with those of the Company’s stockholders. Accordingly, the Board adopted stock ownership guidelines for all directors and executive officers effective as of November 12, 2009. The guidelines for the executive officers are five times annual base salary for the CEO and one times annual base salary for the other executive officers. The guideline for the directors is three times the amount of the annual retainer paid to directors, calculated using the annual retainer as of the later of the date the guidelines were adopted and the date the director is elected to the Board.

 

CEO Employment Agreement

 

As noted above, the Compensation Committee believes it is in the best interest of the Company to secure Mr. Jeffries’ employment through the use of an agreement because his vision and leadership transformed the Company into one of the strongest specialty retailers in the country over the past two decades. As previously reported, Mr. Jeffries and the Company were party to an employment agreement that was scheduled to expire on December 31, 2008. Given the importance of his vision and leadership to the Company, the Compensation Committee was keenly interested in keeping Mr. Jeffries engaged in the Company’s business and thus desired a long-term employment agreement that would motivate Mr. Jeffries’ performance, and also seek to implement executive compensation and corporate governance best practices. The Compensation Committee believes that these goals were attained and are reflected in the employment agreement entered into between the Company and Mr. Jeffries as of December 19, 2008, as amended to date. The material terms of the employment agreement are provided in the section captioned “Employment Agreement with Mr. Jeffries” beginning on page 57.

 

Compensation for Fiscal 2010 related to Mr. Jeffries

 

The “Fiscal 2010 Summary Compensation Table” on page 55 shows Fiscal 2010 total compensation for Mr. Jeffries of $23,244,908, as calculated under executive compensation disclosure rules adopted by the SEC on December 23, 2009, and effective as of February 28, 2010. The Compensation Committee did not award a base salary increase to the CEO as his base salary was competitive and is determined pursuant to his employment agreement. In addition to his base salary and Incentive Plan bonus for Fiscal 2010, pursuant to the terms of his employment agreement, the CEO was eligible to receive semi-annual equity grants if the market price of the Company’s Common Stock during each semi-annual measurement period increases beyond that during any previous semi-annual measurement period. The CEO received a performance-based equity grant in March 2010, but did not receive a performance-based equity grant in September 2010.

 

Merit Increases for NEOs other than Mr. Jeffries

 

In Fiscal 2010, the Company established an aggregate base salary increase budget. In doing so, the Company reviewed market data on projected base salary increases published by numerous sources including WorldatWork and Towers Watson. The NEOs other than the CEO received the following base salary increases during Fiscal 2010:

 

 

 

 

The base salary increases for Mr. Ramsden, Ms. Chang and Ms. Herro were based upon a variety of factors, as discussed above, and were primarily driven by each of their performance ratings and market comparisons. Mr. Robins’ base salary increase was attributable primarily to his promotion to Senior Vice President and General Counsel. Mr. Robins’ base salary was set at a level similar to the prior General Counsel’s initial base salary.

 

Incentive Compensation and Long-Term Incentives

 

The Incentive Plan goals are set seasonally. For the Spring 2010 season, the Company made cash incentive payouts to a total of 775 associates, and for the Fall 2010 season, the Company made cash incentive payouts to a total of 878 associates. The NEOs received incentive cash payouts in both seasons as reflected in the “Fiscal 2010 Summary Compensation Table” beginning on page 55.

In Fiscal 2010, the Company granted restricted stock unit awards covering a total of 431,286 shares to a total of 940 associates. In addition, the Company granted SARs covering a total of 1,571,197 shares to a total of 59 associates. As discussed above with respect to the NEOs, target long-term incentive award levels are set by an annual assessment of a number of factors, including the individual’s current base salary, job responsibilities, impact on development and achievement of business strategy, labor market compensation data, individual performance relative to job requirements, the Company’s ability to attract and retain critical associates and salaries paid for comparable positions within an identified compensation peer group. Before the Compensation Committee approves the equity grants in total, the Committee reviews the overall dilution represented by the awards to ensure that the overall share usage is consistent with competitive practice.

 

In addition to the foregoing, a portion of the restricted stock unit grants that were made in Fiscal 2008 to Mr. Ramsden, Ms. Chang and Ms. Herro vested as a result of Fiscal 2010 performance. The 2008 and 2009 targets for these awards were not satisfied, and to date, the cumulative targets have not been satisfied and thus portions of the awards remain unvested.

 

The Compensation Committee of the Board reviewed the “COMPENSATION DISCUSSION AND ANALYSIS” and discussed it with management. Based on such review and discussion, the Compensation Committee recommended to the Board that the “COMPENSATION DISCUSSION AND ANALYSIS” be included in this Proxy Statement.

 

Submitted by the Compensation Committee of the Board:

 

 

The following table summarizes the compensation paid to, awarded to or earned by the NEOs for Fiscal 2010, Fiscal 2009 and Fiscal 2008 in accordance with the rules promulgated by the SEC effective as of February 28, 2010.

 

Fiscal 2010 Summary Compensation Table