Edgar Filing: ABERCROMBIE & FITCH CO /DE/

ANF-2013.08.03-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-12107

ABERCROMBIE & FITCH CO.

(Exact name of Registrant as specified in its charter)



Delaware	31-1469076
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6301 Fitch Path, New Albany, Ohio	43054
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (614) 283-6500

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class A Common Stock		Outstanding at August 30, 2013
$.01 Par Value		76,392,808 Shares

Table of Contents

ABERCROMBIE & FITCH CO.

TABLE OF CONTENTS



	Page No.
Part I. Financial Information

Item 1. Financial Statements

Consolidated Statements of Operations and Comprehensive Income (Loss)	3

Consolidated Balance Sheets	4

Consolidated Statements of Cash Flows	5

Notes to Consolidated Financial Statements	6

Report of Independent Registered Public Accounting Firm	21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3. Quantitative and Qualitative Disclosures About Market Risk	35

Item 4. Controls and Procedures	36

Part II. Other Information

Item 1. Legal Proceedings	37

Item 1A. Risk Factors	38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6. Exhibits	40

Table of Contents

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

ABERCROMBIE & FITCH CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Thousands, except share and per share amounts)

(Unaudited)



	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
				(Restated - see Note 3)						(Restated - see Note 3)
NET SALES	$	945,698		$	951,407		$	1,784,467		$	1,872,625
Cost of Goods Sold	341,576			358,956			627,178			739,082
GROSS PROFIT	604,122			592,451			1,157,289			1,133,543
Stores and Distribution Expense	471,722			458,085			920,848			913,817
Marketing, General and Administrative Expense	117,646			111,293			236,425			228,182
Other Operating Income, Net	(4,411		)	(1,933		)	(5,228		)	(4,519		)
OPERATING INCOME (LOSS)	19,165			25,006			5,244			(3,937		)
Interest Expense, Net	1,750			1,546			3,378			2,636
INCOME (LOSS) BEFORE TAXES	17,415			23,460			1,866			(6,573		)
Tax Expense (Benefit)	6,045			6,409			(2,301		)	(2,319		)
NET INCOME (LOSS)	$	11,370		$	17,051		$	4,167		$	(4,254	)
NET INCOME (LOSS) PER SHARE:
BASIC	$	0.15		$	0.21		$	0.05		$	(0.05	)
DILUTED	$	0.14		$	0.20		$	0.05		$	(0.05	)
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC	77,382			82,555			77,853			83,574
DILUTED	79,267			83,441			79,709			83,574
DIVIDENDS DECLARED PER SHARE	$	0.200		$	0.175		$	0.400		$	0.350
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation Adjustments	$	(2,229	)	$	(19,688	)	$	(19,489	)	$	(16,501	)
Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes of $(177) and $(724) for the thirteen-week periods ended August 3, 2013 and July 28, 2012, respectively and $(1,180) and $212 for the twenty-six week periods ended August 3, 2013 and July 28, 2012, respectively.	364			9,231			9,859			2,086
Other Comprehensive Income (Loss)	$	(1,865	)	$	(10,457	)	$	(9,630	)	$	(14,415	)
COMPREHENSIVE INCOME (LOSS)	$	9,505		$	6,594		$	(5,463	)	$	(18,669	)

The accompanying Notes are an integral part of these Consolidated Financial Statements

Table of Contents

ABERCROMBIE & FITCH CO.

CONSOLIDATED BALANCE SHEETS

(Thousands, except par value amounts)



	(unaudited)
	August 3, 2013			February 2, 2013
ASSETS
CURRENT ASSETS:
Cash and Equivalents	$	335,023		$	643,505
Receivables	92,886			99,622
Inventories	633,483			426,962
Deferred Income Taxes	47,057			32,558
Other Current Assets	107,621			105,177
TOTAL CURRENT ASSETS	1,216,070			1,307,824
PROPERTY AND EQUIPMENT, NET	1,252,841			1,308,232
OTHER ASSETS	373,932			371,345
TOTAL ASSETS	$	2,842,843		$	2,987,401
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts Payable	$	195,728		$	140,396
Accrued Expenses	291,772			398,868
Deferred Lease Credits	36,994			39,054
Income Taxes Payable	39,733			112,483
Short-Term Portion of Borrowings	15,000			—
TOTAL CURRENT LIABILITIES	579,227			690,801
LONG-TERM LIABILITIES:
Deferred Lease Credits	157,956			168,397
Long-Term Portion of Borrowings	127,500			—
Leasehold Financing Obligations	61,126			63,942
Other Liabilities	233,369			245,993
TOTAL LONG-TERM LIABILITIES	579,951			478,332
STOCKHOLDERS’ EQUITY:
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of August 3, 2013 and February 2, 2013	1,033			1,033
Paid-In Capital	410,412			403,271
Retained Earnings	2,536,499			2,567,261
Accumulated Other Comprehensive Income (Loss), net of tax	(22,918		)	(13,288		)
Treasury Stock, at Average Cost - 26,915 and 24,855 shares at August 3, 2013 and February 2, 2013, respectively	(1,241,361		)	(1,140,009		)
TOTAL STOCKHOLDERS’ EQUITY	1,683,665			1,818,268
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,842,843		$	2,987,401

The accompanying Notes are an integral part of these Consolidated Financial Statements

Table of Contents

ABERCROMBIE & FITCH CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands)

(Unaudited)



	Twenty-Six Weeks Ended
	August 3, 2013			July 28, 2012
OPERATING ACTIVITIES:				(Restated - see Note 3)
Net Income (Loss)	$	4,167		$	(4,254	)
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization	120,313			109,347
Loss on Disposal / Write-off of Assets	2,338			5,184
Lessor Construction Allowances	13,296			8,394
Amortization of Deferred Lease Credits	(20,940		)	(23,339		)
Deferred Taxes	(26,227		)	(34,839		)
Share-Based Compensation	26,950			25,450
Changes in Assets and Liabilities:
Inventories	(207,674		)	(15,765		)
Accounts Payable and Accrued Expenses	(48,055		)	(44,329		)
Income Taxes	(73,681		)	(43,495		)
Other Assets and Liabilities	793			(6,645		)
NET CASH USED FOR OPERATING ACTIVITIES	(208,720		)	(24,291		)
INVESTING ACTIVITIES:
Capital Expenditures	(81,231		)	(199,958		)
Proceeds from Sales of Marketable Securities	—			80,693
Other Investing	(5,312		)	(6,048		)
NET CASH USED FOR INVESTING ACTIVITIES	(86,543		)	(125,313		)
FINANCING ACTIVITIES:
Proceeds from Share-Based Compensation	191			106
Excess Tax Benefit from Share-Based Compensation	2,370			1,054
Purchase of Treasury Stock	(115,806		)	(161,215		)
Repayments of Borrowings	(7,500		)	—
Proceeds from Borrowings	150,000			75,000
Change in Outstanding Checks and Other	(3,756		)	(3,457		)
Dividends Paid	(31,364		)	(29,260		)
NET CASH USED FOR FINANCING ACTIVITIES	(5,865		)	(117,772		)
EFFECT OF EXCHANGE RATES ON CASH	(7,354		)	(3,966		)
NET DECREASE IN CASH AND EQUIVALENTS:	(308,482		)	(271,342		)
Cash and Equivalents, Beginning of Period	643,505			583,495
CASH AND EQUIVALENTS, END OF PERIOD	$	335,023		$	312,153
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
Change in Accrual for Construction in Progress	$	(598	)	$	6,728

The accompanying Notes are an integral part of these Consolidated Financial Statements

Table of Contents

ABERCROMBIE & FITCH CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Abercrombie & Fitch Co. (“A&F”), through its wholly-owned subsidiaries (collectively, A&F and its wholly-owned subsidiaries are referred to as the “Company”), is a specialty retailer of high-quality, casual apparel for men, women and kids with an active, youthful lifestyle.

The accompanying Consolidated Financial Statements include the historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2013” represent the 52-week fiscal year that will end on February 1, 2014, and to “Fiscal 2012” represent the 53-week fiscal year that ended February 2, 2013.

The Consolidated Financial Statements as of August 3, 2013 and for the thirteen and twenty-six week periods ended August 3, 2013 and July 28, 2012 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2012 filed on April 2, 2013. The February 2, 2013 consolidated balance sheet data were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2013.

Certain prior period amounts have been reclassified to conform to current year presentation. In addition, the thirteen and twenty-six week periods ended August 3, 2013 include the correction of certain errors relating to prior periods. The thirteen week period ended August 3, 2013 includes a reduction of stores and distribution expense of $4.5 million related to prior periods. The twenty-six week period ended August 3, 2013 includes a reduction of pre-tax expense of $5.5 million, consisting of $4.4 million of stores and distribution expense and $1.1 million in gross margin, and an unrelated tax charge of $1.2 million related to prior periods. The Company does not believe these corrections were material to any current or prior interim or annual periods that were affected.

The Consolidated Financial Statements as of August 3, 2013 and for the thirteen and twenty-six week periods ended August 3, 2013 and July 28, 2012 included herein have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of such firm follows the Notes to Consolidated Financial Statements.

PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the consolidated financial statements because their report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2. SEGMENT REPORTING

The Company determines its segments on the same basis that it uses to allocate resources and assess performance. All of the Company’s segments sell a similar group of products—casual sportswear apparel, personal care products and accessories for men, women and kids and bras, underwear and sleepwear for girls. The Company has three reportable segments: U.S. Stores, International Stores, and Direct-to-Consumer. Corporate functions, interest income and expense, and other income and expense are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included in Other.

The U.S. Stores reportable segment includes the results of store operations in the United States and Puerto Rico. The International Stores reportable segment includes the results of store operations in Canada, Europe, Asia and Australia. The Direct-to-Consumer reportable segment includes the results of operations directly associated with on-line operations, both domestic and international.

Table of Contents

Operating income is the primary measure of profit the Company uses to make decisions regarding the allocation of resources to its segments. For the U.S. Stores and International Stores reportable segments, operating income is defined as aggregate income directly attributable to individual stores on a four-wall basis plus sell-off of excess merchandise to authorized third-party resellers. Four-wall operating income includes: net sales, cost of merchandise, selling payroll and related costs, rent, utilities, depreciation, repairs and maintenance, supplies and packaging and other store sales-related expenses including credit card and bank fees and taxes. Operating income also reflects pre-opening charges related to stores not yet in operation. For the Direct-to-Consumer reportable segment, operating income is defined as aggregate income attributable to the direct-to-consumer business: net sales, shipping and handling revenue, call center costs, fulfillment and shipping expense, charge card fees and direct-to-consumer operations management and support expenses. The U.S. Stores, International Stores and Direct-to-Consumer segments exclude marketing, general and administrative expense; store management and support functions such as regional and district management and other functions not dedicated to an individual store; and distribution center costs. All costs excluded from the three reportable segments are included in Other.

The following table provides the Company’s segment information as of, and for the thirteen and twenty-six week periods ended August 3, 2013 and July 28, 2012.



	U.S. Stores		International Stores		Direct-to- Consumer Operations		Segment Total		Other⁽¹⁾			Total
	(in thousands):
Thirteen Weeks Ended August 3, 2013
Net Sales	$	504,674	$	286,727	$	154,297	$	945,698	$	—		$	945,698
Operating Income (Loss)	58,871		66,647		55,008		180,526		(161,361		)	19,165
Thirteen Weeks Ended July 28, 2012
Net Sales	$	562,105	$	261,625	$	127,677	$	951,407	$	—		$	951,407
Operating Income (Loss) ⁽²⁾	70,658		74,302		43,456		188,416		(163,410		)	25,006

	U.S. Stores		International Stores		Direct-to- Consumer Operations		Segment Total		Other⁽¹⁾			Total
	(in thousands):
Twenty-Six Weeks Ended August 3, 2013
Net Sales	953,290		544,161		287,016		1,784,467		—			1,784,467
Operating Income (Loss)	98,693		120,180		111,191		330,064		(324,820		)	5,244
Twenty-Six Weeks Ended July 28, 2012
Net Sales	1,105,986		490,733		275,906		1,872,625		—			1,872,625
Operating Income (Loss) ⁽²⁾	114,612		124,601		88,754		327,967		(331,904		)	(3,937		)

⁽¹⁾

Includes corporate functions such as Design, Merchandising, Sourcing, Planning, Allocation, Store Management and Support, Marketing, Distribution Center Operations, Information Technology, Real Estate, Finance, Legal, Human Resources and other corporate overhead. Operating Income includes: marketing, general and administrative expense; store management and support functions such as regional and district management and other functions not dedicated to an individual store; and distribution center costs.


⁽²⁾	Results reported above have been adjusted based on the change in accounting principle as noted in Note 3, “CHANGE IN ACCOUNTING PRINCIPLE”.

Table of Contents

Geographic Information

Financial information relating to the Company’s operations by geographic area is as follows:

Net Sales:

Net sales includes net merchandise sales through stores and direct-to-consumer operations, including shipping and handling revenue. Net sales are reported by geographic area based on the location of the customer.



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
(in thousands):	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
United States	$	597,259	$	648,017	$	1,132,156	$	1,292,277
Europe	267,764		250,339		504,418		469,925
Other	80,675		53,051		147,893		110,423
Total	$	945,698	$	951,407	$	1,784,467	$	1,872,625

3. CHANGE IN ACCOUNTING PRINCIPLE

The Company elected to change its method of accounting for inventory from the lower of cost or market utilizing the retail method to the lower of cost or market under the weighted-average cost method effective February 2, 2013. In accordance with generally accepted accounting principles, all periods have been retroactively adjusted to reflect the period-specific effects of the change to the weighted-average cost method. The Company believes that accounting under the weighted-average cost method is preferable as it better aligns with the Company's focus on realized selling margin and improves the comparability of the Company's financial results with those of its competitors. Additionally, it will improve the matching of cost of goods sold with the related net sales and reflect the acquisition cost of inventory outstanding at each balance sheet date.

As a result of the retroactive application of the change in accounting for inventory, the following items in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows have been restated:

Thirteen Weeks Ended July 28, 2012 (in thousands, except per share data)



	As Reported			Effect of Change			As Restated

Net Sales	$	951,407		$	—		$	951,407
Cost of Goods Sold	357,000			1,956			358,956
Gross Profit	594,407			(1,956		)	592,451
Operating Income (Loss)	26,962			(1,956		)	25,006
Income (Loss) Before Taxes	25,416			(1,956		)	23,460
Tax Expense (Benefit)	9,897			(3,488		)	6,409
Net Income (Loss)	15,519			1,532			17,051
Net Income (Loss) Per Share:
Basic	$	0.19		$	0.02		$	0.21
Diluted	$	0.19		$	0.01		$	0.20
Foreign Currency Translation Adjustments	(19,452		)	(236		)	(19,688		)
Other Comprehensive Income (Loss)	(10,221		)	(236		)	(10,457		)
Comprehensive Income (Loss)	5,298			1,296			6,594

Table of Contents

Twenty-Six Weeks Ended July 28, 2012 (in thousands, except per share data)



	As Reported			Effect of Change			As Restated

Net Sales	$	1,872,625		$	—		$	1,872,625
Cost of Goods Sold	701,859			37,223			739,082
Gross Profit	1,170,766			(37,223		)	1,133,543
Operating Income (Loss)	33,286			(37,223		)	(3,937		)
Income (Loss) Before Taxes	30,650			(37,223		)	(6,573		)
Tax Expense (Benefit)	12,146			(14,465		)	(2,319		)
Net Income (Loss)	18,504			(22,758		)	(4,254		)
Net Income (Loss) Per Share:
Basic	$	0.22		$	(0.27	)	$	(0.05	)
Diluted	$	0.22		$	(0.27	)	$	(0.05	)
Foreign Currency Translation Adjustments	(16,068		)	(433		)	(16,501		)
Other Comprehensive Income (Loss)	(13,982		)	(433		)	(14,415		)
Comprehensive Income (Loss)	4,522			(23,191		)	(18,669		)

Twenty-Six Weeks Ended July 28, 2012 (in thousands, except per share data)



	As Reported			Effect of Change			As Restated

Cash flow from operating activities:
Net Income (Loss)	$	18,504		$	(22,758	)	$	(4,254	)
Deferred Taxes	(20,374		)	(14,465		)	(34,839		)
Inventories	(53,421		)	37,656			(15,765		)

4. SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $13.6 million and $26.9 million for the thirteen and twenty-six week periods ended August 3, 2013, respectively, and $12.6 million and $25.5 million for the thirteen and twenty-six week periods ended July 28, 2012, respectively. The Company also recognized $5.2 million and $10.2 million in tax benefits related to share-based compensation expense for the thirteen and twenty-six week periods ended August 3, 2013, respectively, and $4.8 million and $9.7 million for the thirteen and twenty-six week periods ended July 28, 2012, respectively.

The fair value of share-based compensation awards is recognized as compensation expense primarily on a straight-line basis over the awards’ requisite service period, net of forfeitures, with the exception of performance share awards. Performance share award expense is primarily recognized in the dependency period of the awards' requisite service period. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged to additional paid in capital, to the extent of the pool of “windfall tax benefits,” with any remainder recognized as tax expense. The Company’s pool of “windfall tax benefits” as of August 3, 2013 is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.

The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures during both the twenty-six weeks ended August 3, 2013 and July 28, 2012 was insignificant.

Table of Contents

A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of August 3, 2013, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights, restricted stock units and performance share awards outstanding. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in stockholder-approved 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 of Common Stock available to be issued under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan (the “2007 LTIP”) and the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan (the “2005 LTIP”), or under a successor or replacement plan, 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 of Common Stock become available to be issued under the 2007 LTIP, or under a successor or replacement plan. 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.

Plans

As of August 3, 2013, A&F had two primary share-based compensation plans: the 2005 LTIP, under which A&F grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company and non-associate members of the A&F Board of Directors, and the 2007 LTIP, under which A&F grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company. A&F also has four other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors in prior years.

The 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 2.0 million of underlying shares of A&F’s Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 250,000 of underlying shares of A&F’s Common Stock for each award type to any associate of the Company (other than the Chairman and Chief Executive Officer (the "CEO")) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. In addition, any non-associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans, stock appreciation rights and restricted stock units vest primarily over four years for associates, while performance share awards are primarily earned and vest over three years. Under the 2005 LTIP, restricted stock units typically vest after approximately one year for non-associate directors of A&F. Awards granted to the CEO under the 2007 LTIP have a vesting period defined as the shorter of four years or the period from the award date through the end of the CEO's employment agreement subject to the satisfaction of performance-based criteria for awards granted subsequent to May 7, 2012. Under both plans, stock options have a 10-year term and stock appreciation rights have up to a 10-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control as defined in the plans.

Fair Value Estimates

The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of A&F’s Common Stock price for the most recent historical period equal to the expected term of the stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.

In the case of restricted stock units and performance share awards, the Company calculates the fair value of awards granted using the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period. In determining the fair value, the Company does not take into account any performance-based requirements. The performance-based requirements are taken into account in determining the number of awards expected to vest.

Stock Options

The Company did not grant any stock options during the twenty-six week periods ended August 3, 2013 or July 28, 2012.

Table of Contents

Below is a summary of stock option activity for the twenty-six weeks ended August 3, 2013:



Stock Options	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at February 2, 2013	569,400		$	65.40
Granted	—		—
Exercised	(6,750	)	28.18
Forfeited or expired	(20,000	)	76.04
Outstanding at August 3, 2013	542,650		$	65.47	$	2,187,260	3.8
Stock options exercisable at August 3, 2013	542,650		$	65.47	$	2,187,260	3.8
Stock options expected to become exercisable in the future as of August 3, 2013	—		—		—		—

The total intrinsic value of stock options which were exercised during the twenty-six week periods ended August 3, 2013 and July 28, 2012 was insignificant.

The grant date fair value of stock options which vested during the twenty-six week periods ended August 3, 2013 and July 28, 2012 was insignificant and $1.2 million, respectively.

As of August 3, 2013, all compensation cost related to stock options had been recognized.

Stock Appreciation Rights

The weighted-average estimated fair value of stock appreciation rights granted during the twenty-six week periods ended August 3, 2013 and July 28, 2012, and the weighted-average assumptions used in calculating such fair value, on the date of grant, were as follows:



	Twenty-Six Weeks Ended
	Chairman and Chief Executive Officer				Other Executive Officers						All Other Associates
	August 3, 2013	July 28, 2012			August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
Grant date market price	—	$	—		$	46.57		$	52.89		$	45.85		$	52.66
Exercise price	—	$	—		$	46.57		$	52.89		$	45.85		$	52.66
Fair value	—	$	—		$	20.34		$	23.53		$	16.98		$	23.01
Assumptions:
Price volatility	—	—		%	61		%	56		%	54		%	61		%
Expected term (years)	—	—			4.7			5.0			4.1			4.1
Risk-free interest rate	—	—		%	0.7		%	1.3		%	0.6		%	1.0		%
Dividend yield	—	—		%	1.8		%	1.1		%	1.8		%	1.1		%

Below is a summary of stock appreciation rights activity for the twenty-six weeks ended August 3, 2013:



Stock Appreciation Rights	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at February 2, 2013	9,246,859		$	40.17
Granted:
Chairman and Chief Executive Officer	—		—
Other Executive Officers	189,700		46.57
All Other Associates	100,500		45.85
Exercised	(510,875	)	31.99
Forfeited or expired	(18,000	)	50.81
Outstanding at August 3, 2013	9,008,184		$	40.81	$	110,679,725	4.0
Stock appreciation rights exercisable at August 3, 2013	2,657,297		$	46.69	$	17,804,140	4.8
Stock appreciation rights expected to become exercisable in the future as of August 3, 2013	6,292,065		$	38.26	$	92,638,072	3.6

Table of Contents

The total intrinsic value of stock appreciation rights exercised during the twenty-six week periods ended August 3, 2013 and July 28, 2012 was $8.5 million and insignificant, respectively.

The grant date fair value of stock appreciation rights which vested during the twenty-six week periods ended August 3, 2013 and July 28, 2012 was $19.7 million and $18.7 million, respectively.

As of August 3, 2013, there was $27.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 10 months.

Restricted Stock Units

Below is a summary of restricted stock unit activity for the twenty-six weeks ended August 3, 2013:



Restricted Stock Units	Number of Underlying Shares		Weighted-Average Grant Date Fair Value
Non-vested at February 2, 2013	1,198,680		$	46.88
Granted ⁽¹⁾	632,750		44.07
Vested	(343,678	)	40.65
Forfeited	(84,689	)	45.41
Non-vested at August 3, 2013	1,403,063		$	47.30

⁽¹⁾

Number of shares granted includes approximately 103,000 shares related to the grant of performance share awards ("PSAs") in Fiscal 2013. This reflects the target amount granted, however the number of PSAs that ultimately are earned would vary from 0% - 200% of target depending on the level of growth of adjusted diluted earnings per share. The number also includes 15,000 of additional shares earned above the Fiscal 2012 target due to the achievement above target.

The total fair value of restricted stock units and performance share awards granted during the twenty-six week periods ended August 3, 2013 and July 28, 2012 was $27.9 million and $27.5 million, respectively.

The total grant date fair value of restricted stock units and performance share awards which vested during the twenty-six week periods ended August 3, 2013 and July 28, 2012 was $14.0 million and $18.1 million, respectively.

As of August 3, 2013, there was $37.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units and performance share awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 17 months.

5. NET INCOME (LOSS) PER SHARE

Net income (loss) per basic share is computed based on the weighted-average number of outstanding shares of Common Stock. Net income (loss) per diluted share is computed based on the weighted-average dilutive effect of stock options, stock appreciation rights, restricted stock units and performance share awards.

Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
Shares of Common Stock issued	103,300		103,300		103,300		103,300
Treasury shares	(25,918	)	(20,745	)	(25,447	)	(19,726	)
Weighted-Average—Basic Shares	77,382		82,555		77,853		83,574
Dilutive effect of stock options, stock appreciation rights, restricted stock units and performance share awards	1,885		886		1,856		—
Weighted-Average—Diluted Shares	79,267		83,441		79,709		83,574
Anti-Dilutive Shares ⁽¹⁾	3,613		6,280		3,580		11,221


⁽¹⁾	Reflects the number of shares subject to outstanding stock options, stock appreciation rights, restricted stock units and performance share awards but excluded from the computation of net income (loss) per diluted share because the impact would be anti-dilutive.

6. CASH AND EQUIVALENTS

Table of Contents

Cash and equivalents consisted of (in thousands):



	August 3, 2013		February 2, 2013
Cash and equivalents:
Cash	$	331,454	$	398,508
Cash equivalents	3,569		244,997
Total cash and equivalents	$	335,023	$	643,505

Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, with original maturities of less than three months. Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $29.5 million on August 3, 2013 and $31.1 million on February 2, 2013, respectively. Restricted cash includes various cash deposits with international banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform with standard insurance security requirements.

7. RABBI TRUST ASSETS

Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use and consist of (in thousands):



	August 3, 2013	February 2, 2013
Rabbi Trust assets:
Money market funds	23	22
Trust-owned life insurance policies (at cash surrender value)	89,202	87,575
Total Rabbi Trust assets	89,225	87,597

The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value. The Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use as noted above. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in insignificant realized gains for each of the thirteen weeks ended August 3, 2013 and July 28, 2012 and $1.6 million and $1.7 million for the twenty-six weeks ended August 3, 2013 and July 28, 2012, respectively, recorded in Interest Expense, Net on the Consolidated Statements of Operations and Comprehensive Income (Loss).

8. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:


•	Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets.


•	Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.


•	Level 3—inputs to the valuation methodology are unobservable.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities, measured at fair value, within it were as follows:

Table of Contents



	Assets and Liabilities at Fair Value as of August 3, 2013 (in thousands):
	Level 1		Level 2		Level 3		Total
ASSETS:
Money market funds	$	3,592	$	—	$	—	$	3,592
Derivative financial instruments	—		3,414		—		3,414
Total assets measured at fair value	$	3,592	$	3,414	$	—	$	7,006
LIABILITIES:
Derivative financial instruments	—		1,407		—		1,407
Total liabilities measured at fair value	$	—	$	1,407	$	—	$	1,407



	Assets and Liabilities at Fair Value as of February 2, 2013 (in thousands):
	Level 1		Level 2		Level 3		Total
ASSETS:
Money market funds	$	245,019	$	—	$	—	$	245,019
Derivative financial instruments	—		2,493		—		2,493
Total assets measured at fair value	$	245,019	$	2,493	$	—	$	247,512
LIABILITIES:
Derivative financial instruments	—		9,987		—		9,987
Total liabilities measured at fair value	$	—	$	9,987	$	—	$	9,987

The level 2 assets and liabilities consist of derivative financial instruments, primarily forward foreign currency exchange contracts. The fair value of forward foreign currency exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.

Disclosures of Fair Value of Other Assets and Liabilities:

The Company’s borrowings under its Term Loan Agreement are carried at historical cost in the accompanying Consolidated Balance Sheets. For disclosure purposes, the Company estimates the fair value of borrowings under the Term Loan Agreement using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt. The inputs used to value the borrowings under the Term Loan Agreement are considered to be Level 2 instruments. The carrying amount of borrowings outstanding under the Term Loan Agreement as of August 3, 2013 was approximately $142.5 million. The fair value of borrowings outstanding under the Term Loan Agreement as of August 3, 2013 was approximately $142.5 million. There were no borrowings outstanding under the Amended and Restated Credit Agreement or Term Loan Agreement at February 2, 2013. See Note 13, “BORROWINGS,” for further discussion on the Amended and Restated Credit Agreement and Term Loan Agreement.

9. INVENTORIES

During the fourth quarter of Fiscal 2012, the Company elected to change its inventory valuation method from the lower of cost or market utilizing the retail method to the lower of cost or market under the weighted-average cost method. The Company believes the new method is preferable as it is consistent with the practices of other specialty retailers and better aligns with the way the Company manages its business with a focus on the actual margin realized. See Note 3, “CHANGE IN ACCOUNTING PRINCIPLE,” for further details on the accounting change.

Inventories are principally valued at the lower of cost or market on a weighted-average cost basis. The Company writes down inventory through a lower of cost or market adjustment, the impact of which is reflected in Cost of Goods Sold on the Consolidated Statements of Operations and Comprehensive Income (Loss). This adjustment is based on management's judgment regarding future demand and market conditions and analysis of historical experience. The lower of cost or market adjustment to inventory was $9.4 million and $9.9 million at August 3, 2013 and February 2, 2013, respectively.

Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each period that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. The shrink reserve was $11.8 million at August 3, 2013 and February 2, 2013.

The inventory balance, net of reserves, was $633.5 million and $427.0 million at August 3, 2013 and February 2, 2013, respectively.

Table of Contents

10. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of (in thousands):



	August 3, 2013			February 2, 2013
Property and equipment, at cost	$	2,950,692		$	2,915,072
Accumulated depreciation and amortization	(1,697,851		)	(1,606,840		)
Property and equipment, net	$	1,252,841		$	1,308,232

Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows.

The Company has adopted Accounting Standards Codification 820-10, “Fair Value Measurements and Disclosures.” Store-related assets are considered level 3 assets in the fair value hierarchy and the fair values are determined at the store level, primarily using a discounted cash flow model. The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales, gross margin performance and operating expenses. In instances where the discounted cash flow analysis indicates a negative value at the store level, and impairment charges are taken, the market exit price based on historical experience is used to determine the fair value by asset type. Significant unobservable inputs of store-related assets will be disclosed when required due to impairment. There were no impairments during the twenty-six week periods ended August 3, 2013 or July 28, 2012.

In certain lease arrangements, the Company is involved in the construction of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing, leased building in Property and Equipment, Net and the related financing obligation in Leasehold Financing Obligations on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company had $52.6 million and $55.2 million of construction project assets in Property and Equipment, Net at August 3, 2013 and February 2, 2013, respectively.

11. DEFERRED LEASE CREDITS

Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective lives of the related leases, consisted of the following (in thousands):



	August 3, 2013			February 2, 2013
Deferred lease credits	$	554,340		$	550,527
Amortized deferred lease credits	(359,390		)	(343,076		)
Total deferred lease credits, net	$	194,950		$	207,451

12. INCOME TAXES

The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. The effective tax rates for the thirteen weeks ended August 3, 2013 and July 28, 2012 were 34.7% and 27.3%, respectively. The effective tax rates for the twenty-six weeks ended August 3, 2013 and July 28, 2012 were a benefit of 123.3% and 35.3%, respectively. The Fiscal 2013 year-to-date effective tax rate reflects a benefit resulting from the settlement of certain state tax audits.

Cash payments of income taxes made during the thirteen weeks ended August 3, 2013 and July 28, 2012 were approximately $7.3 million and $9.6 million, respectively. Cash payments of income taxes made during the twenty-six weeks ended August 3, 2013 and July 28, 2012 were approximately $104.3 million and $79.7 million, respectively.

13. BORROWINGS

Table of Contents

On July 28, 2011, the Company entered into an unsecured Amended and Restated Credit Agreement, as amended by Amendment No. 1, made as of February 24, 2012, and Amendment No. 2, made as of January 23, 2013 (the “Amended and Restated Credit Agreement”) under which up to $350 million is available. As stated in the Amended and Restated Credit Agreement, the primary purposes of the agreement are for trade and stand-by letters of credit in the ordinary course of business, as well as to fund working capital, capital expenditures, acquisitions and investments, and other general corporate purposes, including repurchases of A&F's Common Stock.

The Amended and Restated Credit Agreement has several borrowing options, including interest rates that are based on: (i) a defined Base Rate, plus a margin based on the Leverage Ratio, payable quarterly; (ii) an Adjusted Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) plus a margin based on the Leverage Ratio, payable at the end of the applicable interest period for the borrowing and, for interest periods in excess of three months, on the date that is three months after the commencement of the interest period; or (iii) an Adjusted Foreign Currency Rate (as defined in the Amended and Restated Credit Agreement) plus a margin based on the Leverage Ratio, payable at the end of the applicable interest period for the borrowing and, for interest periods in excess of three months, on the date that is three months after the commencement of the interest period. The Base Rate represents a rate per annum equal to the highest of (a) PNC Bank, National Association’s then publicly announced prime rate, (b) the Federal Funds Open Rate (as defined in the Amended and Restated Credit Agreement) as then in effect plus 1/2 of 1.0% or (c) the Daily Adjusted Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) as then in effect plus 1.0%.

The facility fees payable under the Amended and Restated Credit Agreement are based on the Company’s Leverage Ratio (i.e., the ratio, on a consolidated basis, of (a) the sum of total debt (excluding specified permitted foreign bank guarantees and trade letters of credit) plus 600% of forward minimum rent commitments to (b) consolidated earnings, as adjusted, before interest, taxes, depreciation, amortization and rent (“Consolidated EBITDAR”) for the trailing four-consecutive-fiscal-quarter periods. The facility fees accrue at a rate of 0.125% to 0.30% per annum based on the Leverage Ratio for the most recent determination date. The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement also requires that the “Coverage Ratio” for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination and (z) the sum of minimum rent and contingent store rent, not be less than 1.75 to 1.00.

The Amended and Restated Credit Agreement will mature on July 27, 2016. The Company had no trade letters of credit outstanding at August 3, 2013 and February 2, 2013. Stand-by letters of credit outstanding under the Amended and Restated Credit Agreement on August 3, 2013 and February 2, 2013 were insignificant.

As of August 3, 2013 and February 2, 2013, the Company had no borrowings outstanding under the Amended and Restated Credit Agreement.

On February 24, 2012, the Company entered into a $300 million Term Loan Agreement. On January 23, 2013, the Company entered into Amendment No. 1 to the Term Loan Agreement (the "Term Loan Agreement") lowering its availability to $150 million. In conjunction with the Term Loan Agreement Amendment, the Company amended the Amended and Restated Credit Agreement (via Amendment No. 2 thereto) on January 23, 2013, which lowered the required Coverage Ratio to 1.75 to 1.00. On February 21, 2013, the Company elected to draw down the full amount available under the Term Loan Agreement. Repayments of $3.75 million are due on the last day of each quarter beginning May 2013, with the final repayment of $90.0 million due upon maturity at February 23, 2017. Interest on borrowings may be determined under several alternative methods including LIBOR plus a margin based upon the Company’s Leverage Ratio, as defined above. The Company was in compliance with the applicable ratio requirements and other covenants under both agreements at August 3, 2013.

As of August 3, 2013, the Company had $142.5 million in borrowings outstanding under the Term Loan Agreement. The Company had no borrowings under the Term Loan Agreement as of February 2, 2013.

Total interest expense and fees associated with borrowing agreements were $1.1 million and insignificant for the thirteen weeks ended August 3, 2013 and July 28, 2012, respectively, and $2.1 million and $1.5 million for the twenty-six weeks ended August 3, 2013 and July 28, 2012, respectively.

The terms of both the Amended and Restated Credit Agreement and Term Loan Agreement include customary events of default such as payment defaults, cross-defaults to other material indebtedness, undischarged material judgments, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation and conduct of the business of A&F and its subsidiaries. Upon an event of default: (i) the lenders under the Amended and Restated Credit Agreement will not be obligated to make loans or other extensions of credit and may, among other things, terminate their commitments to the Company; and (ii) the lenders under the Amended and Restated Credit Agreement and the lenders under the Term Loan Agreement may declare any then outstanding loans due and payable immediately.

Table of Contents

14. LEASEHOLD FINANCING OBLIGATIONS

As of August 3, 2013 and February 2, 2013, the Company had $61.1 million and $63.9 million, respectively, of long-term liabilities related to leasehold financing obligations. In certain lease arrangements, the Company is involved in the construction of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in Property and Equipment, Net and the related financing obligation in Leasehold Financing Obligations on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company does not report rent expense for the portion of the rent payment determined to be related to the assets which are determined to be owned for accounting purposes. Rather, this portion of the rental payments under the lease are recognized as a reduction of the financing obligation and interest expense.

Total interest expense related to landlord financing obligations was $1.6 million and $1.7 million for the thirteen weeks ended August 3, 2013 and July 28, 2012, respectively. Total interest expense related to landlord financing obligations was $3.3 million for each of the twenty-six weeks ended August 3, 2013 and July 28, 2012.

15. DERIVATIVES

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivatives, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

In order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative is not highly effective.

For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded as a component of Other Comprehensive Income (Loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative’s time value are recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative contract related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.

The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivable. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. As of August 3, 2013, the typical length of time over which forecasted foreign-currency-denominated intercompany inventory sales were hedged was 12 months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in Accumulated Other Comprehensive Income (Loss). Substantially all of the remaining unrealized gains or losses related to foreign-currency-denominated intercompany inventory sales that have occurred as of August 3, 2013 will be recognized in cost of goods sold over the following two months at the values at the date the inventory was sold to the respective subsidiary.

The Company presents its derivative assets and derivative liabilities at their gross fair values on the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions.

Table of Contents

As of August 3, 2013, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:



	Notional Amount⁽¹⁾
Euro	$	104,456
British Pound	$	43,808
Canadian Dollar	$	12,428


⁽¹⁾	Amounts are reported in thousands and in U.S. Dollar equivalent as of August 3, 2013.

The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instrument and the hedged item.

As of August 3, 2013, the Company had outstanding the following foreign currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:



	Notional Amount⁽¹⁾
Euro	$	29,662
Swiss Franc	$	17,098


⁽¹⁾	Amounts are reported in thousands and in U.S. Dollar equivalent as of August 3, 2013.

The location and amounts of derivative fair values on the Consolidated Balance Sheets as of August 3, 2013 and February 2, 2013 were as follows:



	Balance Sheet	Asset Derivatives				Balance Sheet	Liability Derivatives
(in thousands):	Location	August 3, 2013		February 2, 2013		Location	August 3, 2013		February 2, 2013
Derivatives Designated as Hedging Instruments:
Foreign Currency Exchange Forward Contracts	Other Current Assets	$	3,285	$	1,967	Other Liabilities	$	1,176	$	9,270
Derivatives Not Designated as Hedging Instruments:
Foreign Currency Exchange Forward Contracts	Other Current Assets	$	129	$	526	Other Liabilities	$	231	$	717
Total	Other Current Assets	$	3,414	$	2,493	Other Liabilities	$	1,407	$	9,987

Refer to Note 8, “FAIR VALUE,” for further discussion of the determination of the fair value of derivatives.

The location and amounts of derivative gains and losses for the thirteen and twenty-six weeks ended August 3, 2013 and July 28, 2012 on the Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

August 3,
2013

July 28,
2012

August 3,
2013

July 28,
2012

(in thousands):

Location

Gain/(Loss)

Derivatives not designated as Hedging Instruments:

Foreign Exchange Forward Contracts

Other Operating (Income) Expense, Net

(44

)

3,617

1,260

4,457

Table of Contents



	Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (Effective Portion) (a)				Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (b)				Location of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing) (c)
	Thirteen Weeks Ended
(in thousands):	August 3, 2013		July 28, 2012			August 3, 2013		July 28, 2012			August 3, 2013		July 28, 2012
Derivatives in Cash Flow Hedging Relationships
Foreign Currency Exchange Forward Contracts	$	1,493	$	13,939	Cost of Goods Sold	$	952	$	3,984	Other Operating (Income) Expense, Net	$	79	$	(98	)
	Twenty-Six Weeks Ended
(in thousands):	August 3, 2013		July 28, 2012			August 3, 2013		July 28, 2012			August 3, 2013		July 28, 2012
Derivatives in Cash Flow Hedging Relationships
Foreign Currency Exchange Forward Contracts	$	11,262	$	10,713	Cost of Goods Sold	$	223	$	8,839	Other Operating (Income) Expense, Net	$	176	$	(212	)


(a)	The amount represents the change in fair value of derivative contracts due to changes in spot rates.


(b)	The amount represents reclassification from OCI into earnings that occurs when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.


(c)	The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.

16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The activity in accumulated other comprehensive income (loss), net of tax, for the thirteen and twenty-six weeks ended August 3, 2013 is as follows (in thousands):



	Thirteen Weeks Ended August 3, 2013
	Derivative Financial Instruments		Foreign Currency Translation		Total
Beginning balance at May 4, 2013	2,275		(23,328	)	(21,053	)
Other comprehensive income (loss) before reclassifications	1,194		(2,229	)	(1,035	)
Reclassified from accumulated other comprehensive income (loss) ⁽¹⁾	(830	)	—		(830	)
Net current-period other comprehensive income (loss)	364		(2,229	)	(1,865	)
Ending balance at August 3, 2013	2,639		(25,557	)	(22,918	)

⁽¹⁾ For the thirteen weeks ended August 3, 2013, the gain or loss was reclassified from Other Comprehensive Income (Loss) to the Cost of Goods Sold line item on the Consolidated Statement of Operations and Comprehensive Income (Loss).



	Twenty-Six Weeks Ended August 3, 2013
	Derivative Financial Instruments		Foreign Currency Translation		Total
Beginning balance at February 2, 2013	(7,220	)	(6,068	)	(13,288	)
Other comprehensive income (loss) before reclassifications	10,019		(19,489	)	(9,470	)
Reclassified from accumulated other comprehensive income (loss) ⁽¹⁾	(160	)	—		(160	)
Net current-period other comprehensive income (loss)	9,859		(19,489	)	(9,630	)
Ending balance at August 3, 2013	2,639		(25,557	)	(22,918	)

Table of Contents

⁽¹⁾ For the twenty-six weeks ended August 3, 2013, the gain or loss was reclassified from Other Comprehensive Income (Loss) to the Cost of Goods Sold line item on the Consolidated Statement of Operations and Comprehensive Income (Loss).

17. CONTINGENCIES

A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against the Company for which accruals have not been established.

18. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued ASU 2013-02, which amends Accounting Standards Codification Topic 220, "Comprehensive Income." The ASU contains new requirements related to the presentation and disclosure of items that are reclassified out of other comprehensive income. The new requirements will give financial statement users a more comprehensive view of items that are reclassified out of other comprehensive income. ASU 2013-02 is effective for the Company's fiscal year and interim periods beginning after December 15, 2012, and is to be applied prospectively. The adoption did not have a material effect on the Company's consolidated financial statements.

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Abercrombie & Fitch Co.:

We have reviewed the accompanying consolidated balance sheet of Abercrombie & Fitch Co. and its subsidiaries as of August 3, 2013 and the related consolidated statements of operations and comprehensive income (loss) for the thirteen and twenty-six week periods ended August 3, 2013 and July 28, 2012 and the consolidated statements of cash flows for the twenty-six week periods ended August 3, 2013 and July 28, 2012. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of February 2, 2013, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated April 2, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 2, 2013, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Columbus, Ohio

September 9, 2013

Table of Contents


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company is a specialty retailer that operates stores in North America, Europe, Asia and Australia and direct-to-consumer operations in North America and Europe that service its brands throughout the world. The Company sells casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. In addition, the Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering bras, underwear, personal care products, sleepwear and at-home products for girls.

Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an atmosphere that is confident and just a bit provocative. abercrombie kids directly follows in the footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids has an energetic attitude and is popular, wholesome and athletic – the signature of All-American cool. Hollister is young, spirited, with a sense of humor and brings Southern California to the world. Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney sensibility.

RESULTS OF OPERATIONS

During the second quarter of Fiscal 2013, net sales decreased 1% to $945.7 million from $951.4 million for the second quarter of Fiscal 2012. The gross profit rate for the second quarter of Fiscal 2013 was 63.9% compared to 62.3% for the second quarter of Fiscal 2012. Operating income was $19.2 million for the second quarter of Fiscal 2013 compared to $25.0 million for the second quarter of Fiscal 2012. The Company had net income of $11.4 million and net income per diluted share of $0.14 for the second quarter of Fiscal 2013 compared to net income of $17.1 million and net income per diluted share of $0.20 for the second quarter of Fiscal 2012. Net income per diluted share for the thirteen weeks ended August 3, 2013 includes $0.02 in charges related to the implementation of the on-going profit improvement initiative.

During the Fiscal 2013 year-to-date period, net sales decreased 5% to $1.784 billion from $1.873 billion for the comparable period of Fiscal 2012. The gross profit rate for the Fiscal 2013 year-to-date period was 64.9% compared to 60.5% for the comparable period of Fiscal 2012. Operating income was $5.2 million for the Fiscal 2013 year-to-date period compared to an operating loss of $3.9 million for the comparable period of Fiscal 2012. The Company had net income of $4.2 million and net income per diluted share of $0.05 for the Fiscal 2013 year-to-date period compared to a net loss of $4.3 million and a net loss per basic and diluted share of $0.05 for the comparable period of Fiscal 2012.

As of August 3, 2013, the Company had $335.0 million in cash and equivalents and $142.5 million in borrowings outstanding under the Term Loan Agreement. Net cash used for operating activities was $208.7 million for the twenty-six weeks ended August 3, 2013 primarily to acquire inventory. The Company also used cash of $81.2 million for capital expenditures, $115.8 million to repurchase approximately 2.4 million shares of A&F’s Common Stock and $31.4 million for dividends paid during the twenty-six weeks ended August 3, 2013.

Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.

Table of Contents

The following data represents the amounts shown in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and twenty-six week periods ended August 3, 2013 and July 28, 2012, expressed as a percentage of net sales:



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	August 3, 2013		July 28, 2012 (Restated)		August 3, 2013		July 28, 2012 (Restated)
NET SALES	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	36.1	%	37.7	%	35.1	%	39.5	%
GROSS PROFIT	63.9	%	62.3	%	64.9	%	60.5	%
Stores and Distribution Expense	49.9	%	48.1	%	51.6	%	48.8	%
Marketing, General and Administrative Expense	12.4	%	11.7	%	13.2	%	12.2	%
Other Operating Income, Net	(0.5	)%	(0.2	)%	(0.3	)%	(0.2	)%
OPERATING INCOME (LOSS)	2.0	%	2.6	%	0.3	%	(0.2	)%
Interest Expense, Net	0.2	%	0.2	%	0.2	%	0.1	%
INCOME (LOSS) BEFORE TAXES	1.8	%	2.5	%	0.1	%	(0.4	)%
Tax Expense (Benefit)	0.6	%	0.7	%	(0.1	)%	(0.1	)%
NET INCOME (LOSS)	1.2	%	1.8	%	0.2	%	(0.2	)%

Table of Contents

Financial Summary

The following summarized financial and statistical data compare the thirteen and twenty-six week periods ended August 3, 2013 to the thirteen and twenty-six week periods ended July 28, 2012:



	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
Net sales by segment (millions)	$	945.7		$	951.4		$	1,784.5		$	1,872.6
U.S. Stores	$	504.7		$	562.1		$	953.3		$	1,106.0
International Stores	$	286.7		$	261.6		$	544.2		$	490.7
Direct-to-Consumer	$	154.3		$	127.7		$	287.0		$	275.9
Net sales as a % of total sales
U.S. Stores	54		%	59		%	53		%	59		%
International Stores	30		%	28		%	31		%	26		%
Direct-to-Consumer	16		%	13		%	16		%	15		%
Net sales by brand (millions)	$	945.7		$	951.4		$	1,784.5		$	1,872.6
Abercrombie & Fitch	$	356.6		$	362.5		$	681.6		$	722.9
abercrombie	$	76.0		$	76.3		$	149.0		$	154.0
Hollister	$	488.5		$	485.6		$	909.7		$	949.3
Gilly Hicks**	$	24.6		$	27.0		$	44.2		$	46.5
Increase (decrease) in comparable sales*	(10		)%	(6		)%	(12		)%	(2		)%
Abercrombie & Fitch	(6		)%	(8		)%	(10		)%	(4		)%
abercrombie	(3		)%	(4		)%	(4		)%	(4		)%
Hollister	(13		)%	(5		)%	(15		)%	(2		)%
U.S.	(11		)%	(3		)%	(13		)%	0		%
International	(7		)%	(16		)%	(11		)%	(12		)%

A store is included in comparable sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year. Comparable sales include comparable direct-to-consumer sales. Due to the fifty-third week in Fiscal 2012, second quarter comparable sales are compared to the thirteen and twenty-six week periods ended August 4, 2012.


**	Net sales for the thirteen and twenty-six week periods ended August 3, 2013 and July 28, 2012, reflect the activity of 28 and 25 stores, respectively.

Table of Contents

CURRENT TRENDS AND OUTLOOK

Our results for the second quarter of Fiscal 2013 reflect a six cent decline in earnings per share versus the comparable period last year, reflective of a decline in comparable sales partially offset by new store sales and gross margin rate improvement.

Sales for the quarter were lower than expected due to weaker traffic, particularly in July, and continued softness in the female business. While we believe that much of the weakness in sales is macro driven, we are working hard to improve the trend for the back half of the year. In addition, we are pleased by strong growth in our direct-to-consumer business and continued strong sales growth in China.

With regard to gross margin, despite a highly promotional environment, we generated a healthy margin rate improvement. The increase in gross profit was primarily driven by lower product costs. Going forward, we intend to continue our ongoing initiative to identify opportunities to increase our average unit retail, particularly in the U.S. stores and U.S. direct-to-consumer operations, which should also help improve our gross margins over time.

We continue to make progress on our profit improvement initiative, which includes a detailed review of our operational processes. The initiative is divided into seven work-streams covering general non-merchandise expense, marketing, supply chain, merchandise planning and allocation, home office, store operations, and real estate and construction. Based on our progress thus far, we now expect savings from these initiatives to exceed $100 million on an annualized basis. We plan to conduct in-store pilot studies over the next few months which will provide insight into additional savings opportunities.

Beyond the two initiatives above, we are nearing completion of our long-term strategic review and are confident that this will provide us with a clear roadmap for sustainable and meaningful improvements in our operating margin and return on invested capital.

The Company's third quarter diluted earnings per share projection of $0.40 to $0.45 is based on an assumption that third quarter comparable sales will be down slightly more than the second quarter percentage decline. Due to the lack of visibility given the recent traffic trends, we are not providing guidance beyond the third quarter. Our projected diluted earnings per share guidance does not include the impact of any potential impairment and store closure charges or additional charges related to the implementation of the profit improvement initiative.

Table of Contents

SECOND QUARTER AND YEAR-TO-DATE RESULTS

Net Sales

Net sales for the second quarter of Fiscal 2013 were $945.7 million, a decrease of 1% from net sales of $951.4 million during the second quarter of Fiscal 2012. The net sales decrease was attributable to a 10% decrease in total comparable sales partially off-set by new international stores and the impact of the calendar shift, that resulted from the 53-week fiscal year in Fiscal 2012. Including direct-to-consumer sales, U.S. sales decreased 8% to $597.3 million and international sales increased 15% to $348.4 million. The impact of changes in foreign currency benefited sales by approximately $3.4 million for the thirteen weeks ended August 3, 2013 (based on converting prior year sales at current year exchange rates).

Year-to-date net sales in Fiscal 2013 were $1.784 billion, a decrease of 5% from net sales of $1.873 billion during the comparable period in Fiscal 2012. The net sales decrease was attributable to a 12% decrease in total comparable sales partially off-set by new international stores and the impact of the calendar shift. Including direct-to-consumer sales, U.S. sales decreased 12% to $1.132 billion and international sales increased 12% to $652.3 million. The impact of changes in foreign currency adversely affected sales by approximately $1.5 million for the twenty-six weeks ended August 3, 2013.

By brand, comparable sales for the second quarter of Fiscal 2013, including direct-to-consumer, were as follows: Abercrombie & Fitch decreased 6%, abercrombie kids decreased 3% and Hollister decreased 13%. Across the brands, the male business performed significantly better than the female business.

Total comparable sales for the quarter, including direct-to-consumer sales, decreased 10% with comparable U.S. sales decreasing 11% and international decreasing 7%. Within the quarter, comparable sales were weakest in July.

Due to the 53rd week in Fiscal 2012, second quarter comparable sales are compared to the thirteen and twenty-six week period ended August 4, 2012. The thirteen-week period ended August 4, 2012 included approximately $44 million of additional sales versus the reported thirteen-week period ended July 28, 2012.

Direct-to-consumer sales, including shipping and handling revenue, for the second quarter of Fiscal 2013 were $154.3 million, an increase of 21% from Fiscal 2012 second quarter direct-to-consumer sales of $127.7 million. The direct-to-consumer sales increase was primarily driven by an increase in the international business. The direct-to-consumer business, including shipping and handling revenue, accounted for 16.3% of total net sales in the second quarter of Fiscal 2013 compared to 13.4% in the second quarter of Fiscal 2012.

Direct-to-consumer sales, including shipping and handling revenue, for the Fiscal 2013 year-to-date period were $287.0 million, an increase of 4% from Fiscal 2012 year-to-date direct-to-consumer sales of $275.9 million. The direct-to-consumer business, including shipping and handling revenue, accounted for 16.1% of total net sales for the year-to-date period of Fiscal 2013 compared to 14.7% in the Fiscal 2012 year-to-date period.

Gross Profit

Gross profit for the second quarter of Fiscal 2013 was $604.1 million compared to $592.5 million for the comparable period in Fiscal 2012. The gross profit rate (gross profit divided by net sales) for the second quarter of Fiscal 2013 was 63.9%, up 160 basis points from the second quarter of Fiscal 2012 rate of 62.3%.

The increase in the gross profit rate for the second quarter was primarily driven by a decrease in product costs and product related costs.

Year-to-date gross profit for Fiscal 2013 was $1.157 billion compared to $1.134 billion for the comparable period in Fiscal 2012. The gross profit rate for the year-to-date period of Fiscal 2013 was 64.9%, up 440 basis points from the year-to-date period of Fiscal 2012 rate of 60.5%.

The increase in the gross profit rate for the year-to-date period was primarily driven by a selling mix benefit and a decrease in product costs.

Stores and Distribution Expense

Stores and distribution expense for the second quarter of Fiscal 2013 was $471.7 million compared to $458.1 million for the comparable period in Fiscal 2012. The stores and distribution expense rate (stores and distribution expense divided by net sales) for the second quarter of Fiscal 2013 was 49.9% compared to 48.1% in the second quarter of Fiscal 2012. Included in stores and distribution expense for the second quarter of Fiscal 2013 is a reduction of expense of $4.5 million related to prior periods.

Table of Contents

Stores and distribution expense for the Fiscal 2013 year-to-date period was $920.8 million compared to $913.8 million for the comparable period in Fiscal 2012. The stores and distribution expense rate for the year-to-date period of Fiscal 2013 was 51.6% compared to 48.8% for the Fiscal 2012 year-to-date period. Included in stores and distribution expense for the year-to-date period of Fiscal 2013 is a reduction of expense of $4.4 million related to prior periods.

Expense savings in store payroll, repairs and maintenance and other stores and distribution expense, enacted in response to sales trends, were more than offset by the deleveraging effect of negative comparable sales during the second quarter and year-to-date periods of Fiscal 2013.

Shipping and handling costs, including costs incurred to store, move and prepare the products for shipment and costs incurred to physically move the product to the customer, associated with direct-to-consumer operations were $19.4 million for the thirteen weeks ended August 3, 2013 compared to $14.7 million for the thirteen weeks ended July 28, 2012 and $34.2 million for the twenty-six weeks ended August 3, 2013 compared to $31.2 million for the twenty-six weeks ended July 28, 2012. These amounts are recorded in Stores and Distribution Expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Handling costs, including costs incurred to store, move and prepare the products for shipment to stores were $14.4 million for the thirteen weeks ended August 3, 2013 compared to $13.8 million for the thirteen weeks ended July 28, 2012 and $26.0 million for the twenty-six weeks ended August 3, 2013 compared to $29.1 million for the twenty-six weeks ended July 28, 2012. These amounts are recorded in Stores and Distribution Expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Marketing, General and Administrative Expense

Marketing, general and administrative expense during the second quarter of Fiscal 2013 increased 6% to $117.6 million compared to $111.3 million during the same period in Fiscal 2012.

The increase in marketing, general and administrative expense for the second quarter was primarily driven by increases in consulting and other services. The second quarter includes $2.6 million in charges related to the implementation of the on-going profit improvement initiative.

Marketing, general and administrative expense during the Fiscal 2013 year-to-date period increased 4% to $236.4 million compared to $228.2 million during the same period in Fiscal 2012.

The increase in marketing, general and administrative expense for the year-to-date period was primarily driven by increases in consulting and other services, including charges related to the implementation of the profit improvement initiative and information technology, partially offset by savings in travel and marketing.

Other Operating Income, Net

Second quarter other operating income, net for Fiscal 2013 was $4.4 million compared to other operating income, net, of $1.9 million for the second quarter of Fiscal 2012. The increase is due primarily to insurance proceeds included in the Fiscal 2013 amounts.

Year-to-date other operating income, net for Fiscal 2013 was $5.2 million compared to $4.5 million for the year-to-date period of Fiscal 2012.

Operating Income (Loss)

Operating income for the second quarter of Fiscal 2013 was $19.2 million, a decrease of 23% from operating income of $25.0 million during the second quarter of Fiscal 2012. The reduction in operating income was primarily driven by the deleveraging effect of negative comparable store sales, partially offset by new international stores, direct-to-consumer operations and expense reductions.

Year-to-date operating income in Fiscal 2013 was $5.2 million, compared to an operating loss of $3.9 million during the comparable period of Fiscal 2012. The increase in operating income was driven by new international stores, direct-to-consumer operations, gross margin improvement and expense reductions, partially offset by the deleveraging effect of negative comparable store sales.

Interest Expense, Net and Tax Expense (Benefit)

Second quarter interest expense was $2.7 million in Fiscal 2013, offset by interest income of $1.0 million, compared to interest expense of $2.6 million, offset by interest income of $1.0 million in the second quarter of Fiscal 2012.

Table of Contents

Year-to-date interest expense was $5.5 million in Fiscal 2013, offset by interest income of $2.1 million, compared to interest expense of $4.7 million in Fiscal 2012, offset by interest income of $2.1 million.

The effective tax rate for the second quarter of Fiscal 2013 was 34.7% compared to 27.3% for the Fiscal 2012 comparable period.

The effective tax rate for the year-to-date period of Fiscal 2013 was a benefit of 123.3% compared to a benefit of 35.3% for the Fiscal 2012 comparable period.

The Fiscal 2013 effective tax rate reflects a benefit resulting from the settlement of state income tax audits.

On a full-year basis, the Company expects the effective tax rate in the mid 30's. The rate remains sensitive to the domestic/international profit mix, including the effect of foreign currencies.

As of August 3, 2013, there were approximately $22.2 million of net deferred tax assets in Japan. The realization of the net deferred tax assets is dependent upon the future generation of sufficient taxable profits in Japan. While the Company believes it is more likely than not that the net deferred tax assets will be realized, it is not certain. Should circumstances change, the net deferred tax assets not currently subject to a valuation allowance may become subject to one in the future. Additional valuation allowances would result in additional tax expense.

Net Income (Loss) and Net Income (Loss) per Share

Net income for the second quarter of Fiscal 2013 was $11.4 million compared to $17.1 million for the second quarter of Fiscal 2012. Net income per diluted share for the second quarter of Fiscal 2013 was $0.14 compared to $0.20 for the same period of Fiscal 2012.

Net income for the year-to-date period of Fiscal 2013 was $4.2 million compared to a net loss of $4.3 million for the year-to-date period of Fiscal 2012. Net income per diluted share for the year-to-date period of Fiscal 2013 was $0.05 compared to a net loss per basic and diluted share of $0.05 for the same period in Fiscal 2012.

FINANCIAL CONDITION

Liquidity and Capital Resources

Historical Sources and Uses of Cash

Seasonality of Cash Flows

The Company’s business has two principal selling seasons: the Spring season which includes the first and second fiscal quarters (“Spring”) and the Fall season which includes the third and fourth fiscal quarters ("Fall"). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Holiday sales periods, particularly in the U.S. The Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operating expenses throughout the year and to reinvest in the business to support future growth. The Company also has a credit facility available as a source of additional funding.

Credit Agreements

On July 28, 2011, the Company entered into an unsecured amended and restated credit agreement (the “Amended and Restated Credit Agreement”) under which up to $350 million is available. The Company had no borrowings outstanding under the Amended and Restated Credit Agreement on August 3, 2013 or February 2, 2013.

On February 24, 2012, the Company entered into a $300 million Term Loan Agreement. On January 23, 2013, the Company amended both the Amended and Restated Credit Agreement and Term Loan Agreement to reduce the amount available for borrowing under the Term Loan Agreement to $150 million and lower the applicable Coverage Ratio to 1.75 to 1.00. The Company had $142.5 million in borrowings outstanding under the Term Loan Agreement on August 3, 2013. Repayments of $3.75 million are due on the last day of each quarter beginning May 2013, with the final repayment of $90.0 million due upon maturity at February 23, 2017. The Company had no borrowings outstanding under the Term Loan Agreement as of February 2, 2013.

The Amended and Restated Credit Agreement and the Term Loan Agreement are described in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements.

The Amended and Restated Credit Agreement and the Term Loan Agreement have a Leverage Ratio covenant and a Coverage Ratio financial covenant. The Company was in compliance with the applicable ratio requirements and other covenants at August 3, 2013.

Table of Contents

Stand-by letters of credit outstanding on August 3, 2013 and February 2, 2013 were insignificant.

Operating Activities

Net cash used for operating activities was $208.7 million for the twenty-six weeks ended August 3, 2013 compared to $24.3 million for the twenty-six weeks ended July 28, 2012. The increase in cash used for operating activities was primarily to acquire inventory. Inventory decreased 9% from $694.2 million in the second quarter of Fiscal 2012 to $633.5 million at the end of the second quarter of Fiscal 2013.

Investing Activities

Cash outflows for investing activities for the twenty-six week periods ended August 3, 2013 and July 28, 2012 were used primarily for capital expenditures related to new store construction and information technology investments. Cash outflows for capital expenditures were lower in Fiscal 2013 than in Fiscal 2012, due to fewer new international stores, as well as a decrease in home office, distribution centers and information technology infrastructure projects. Cash inflows from investing activities for the twenty-six weeks ended July 28, 2012 included proceeds from sales of auction rate marketable securities.

Financing Activities

For the twenty-six week periods ended August 3, 2013 and July 28, 2012, cash outflows for financing activities consisted primarily of the repurchase of A&F’s Common Stock and the payment of dividends. For the twenty-six weeks ended August 3, 2013, cash inflows from financing activities consisted primarily of proceeds from borrowings under the Term Loan Agreement.

During the twenty-six weeks ended August 3, 2013, A&F repurchased approximately 2.4 million shares of A&F’s Common Stock in the open market with a market value of approximately $115.8 million. During the twenty-six weeks ended July 28, 2012, A&F repurchased approximately 3.3 million shares of A&F’s Common Stock in the open market with a market value of approximately $161.2 million. Repurchases of A&F’s Common Stock were made pursuant to the A&F Board of Directors’ authorizations.

As of August 3, 2013, A&F had approximately 16.3 million remaining shares available for repurchase as part of the A&F Board of Directors’ previously approved authorizations.

Future Cash Requirements and Sources of Cash

Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, rent, taxes and other operating activities, as well as to fund capital expenditures and quarterly dividends to stockholders subject to the A&F Board of Directors’ approval. The Company has availability under the Amended and Restated Credit Agreement as a source of additional funding.

Subject to suitable market conditions and available liquidity, A&F expects to continue to repurchase shares of its Common Stock. The Company anticipates funding these cash requirements with available cash and, as appropriate, borrowings under the Amended and Restated Credit Agreement.

The Company is not dependent on dividends from its foreign subsidiaries to fund its U.S. operations or make distributions to A&F's shareholders. Unremitted earnings from foreign subsidiaries, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends or were lent to A&F or a U.S. affiliate.

Off-Balance Sheet Arrangements

As of August 3, 2013, the Company did not have any off-balance sheet arrangements.

Contractual Obligations

The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short- and long-term liquidity and capital resource needs. During the twenty-six weeks ended August 3, 2013, there were no material changes in the contractual obligations as of February 2, 2013, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations) and the borrowings under the Term Loan Agreement.

Store Activity

Table of Contents

During the second quarter ending August 3, 2013, the Company opened four international Hollister chain stores, including two stores in China, and a combined Abercrombie & Fitch and abercrombie kids outlet store in each of the U.K and U.S.

The Company continues to anticipate opening an Abercrombie & Fitch flagship store in Seoul, as well as approximately 20 international Hollister chain stores throughout the year. In addition, the Company will open a small number of international and U.S. outlet stores during the year. The planned opening of an Abercrombie & Fitch flagship store in Shanghai is now expected in the spring of 2014.

The Company expects total capital expenditures for Fiscal 2013 to be approximately $200 million, predominately related to new stores and investments in IT initiatives. Capital expenditures totaled $81.2 million and $200.0 million for the twenty-six week periods ended August 3, 2013 and July 28, 2012, respectively.

During the twenty-six weeks ended August 3, 2013, the Company closed seven U.S. and one Canadian store. For Fiscal 2013, the Company anticipates closing a total of approximately 40-50 U.S. stores, inclusive of the seven which were closed in the first half of Fiscal 2013. The remaining store closures are expected to be through natural lease expirations and will occur at the end of the fiscal year.

Table of Contents

Second Quarter Store Count and Gross Square Feet

Store count and gross square footage by brand for the thirteen weeks ended August 3, 2013 and July 28, 2012, respectively, were as follows:



Store Activity	Abercrombie & Fitch		abercrombie		Hollister		Gilly Hicks	Total
U.S. Stores
May 4, 2013	264		144		481		20	909
New	1		1		—		—	2
Closed	—		(1	)	(3	)	—	(4	)
August 3, 2013	265		144		478		20	907
Gross Square Feet at August 3, 2013	2,367		675		3,260		169	6,471
International Stores
May 4, 2013	19		5		112		8	144
New	1		1		4		—	6
Closed	—		—		—		—	—
August 3, 2013	20		6		116		8	150
Gross Square Feet at August 3, 2013	408		65		1,013		49	1,535
Total Stores	285		150		594		28	1,057
Total Gross Square Feet at August 3, 2013	2,775		740		4,273		218	8,006
Store Activity	Abercrombie & Fitch		abercrombie		Hollister		Gilly Hicks	Total
U.S. Stores
April 28, 2012	279		154		491		18	942
New	—		—		—		—	—
Closed	(1	)	—		(5	)	—	(6	)
July 28, 2012	278		154		486		18	936
Gross Square Feet at July 28, 2012	2,495		727		3,317		176	6,715
International Stores
April 28, 2012	15		5		84		3	107
New	—		—		8		4	12
Closed	—		—		—		—	—
July 28, 2012	15		5		92		7	119
Gross Square Feet at July 28, 2012	286		59		793		47	1,185
Total Stores	293		159		578		25	1,055