UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
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                                    FORM 10-K

(Mark One)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the fiscal year ended January 31, 200429, 2005

                                       OR

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

For the transition period from ________________ to ________________

                         Commission file number 1-12107

                             ABERCROMBIE & FITCH CO.
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             (Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

      
Title of each class Name of each exchange on which registered -------------------Title of each class Name of each exchange on which registered - ------------------------------------ ----------------------------------------- Class A Common Stock, $.01 Par Value New York Stock Exchange, Inc. Series A Participating Cumulative Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Series A Participating Cumulative Preferred New York Stock Exchange, Inc. Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Aggregate market value of the registrant's Class A Common Stock (the only outstanding common equity of the registrant) held by non-affiliates of the registrant as of August 1, 2003: $3,050,347,857.July 31, 2004: $3,523,882,045 Number of shares outstanding of the registrant's common stock as of March 26, 2004: 94,445,669April 1, 2005: 86,252,527 shares of Class A Common Stock. DOCUMENT INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 20, 2004June 15, 2005 are incorporated by reference into Part III of this Annual Report on Form 10-K. PART I ITEM 1. BUSINESS. GENERAL. Abercrombie & Fitch Co., a Delaware corporation ("A&F"), through its subsidiaries (collectively, A&F and its subsidiaries are referred to as "Abercrombie & Fitch" or the "Company"), is a specialty retailer whichthat operates stores selling casual apparel, such as woven and knit shirts, denim, graphic t-shirts, shorts, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, abercrombie, Hollister and HollisterRUEHL brands. As of January 31, 2004,29, 2005, the Company operated 700788 stores in the United States. A&F's Web site is www.abercrombie.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate A&F's Web site into this Annual Report on Form 10-K). A&F makes available free of charge, on or through its Webweb site, www.abercrombie.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission. A&F has included its web site addresses throughout this filing as textual references only. The information contained on these web sites is not incorporated into this Form 10-K. DESCRIPTION OF OPERATIONS. General.Brands. The Abercrombie & Fitch brand was established in 1892 and became well known as a supplier of rugged, high-quality outdoor gear. Famous for outfitting the safaris of Teddy Roosevelt and Ernest Hemingway and the expeditions of Admiral Byrd to the North and South Poles, Abercrombie & Fitch goods were renowned for their durability and dependability - and Abercrombie & Fitch placed a premium on complete customer satisfaction with each item sold. In 1992, a new management team began repositioning Abercrombie & Fitch as a more fashion-oriented casual apparel business directed at men18 to 22 year-old male and womenfemale college students with a youthful lifestyle targeted at 18 to 22 year-old college students.based on an East Coast heritage and Ivy League traditions. In reestablishing the Abercrombie & Fitch brand, the Company combinedCompany's goal was to combine its historical image for quality with a new emphasis on casual American style and youthfulness. In 1998, the Company launched abercrombie, a brand based on the tradition of Abercrombie & Fitch that targets 7 to 14 year-old boys and girls. These stores offer distinctly cool fashion-oriented casual apparel for kids. The Company launched its next brand, Hollister, in 2000. Hollister is a West Coast oriented lifestyle brand targeted at 14 to 18 year-old high school guys and girls that embodies the laid-back California surf lifestyle. Hollister carries casual apparel, personal care and other accessories at lower price points than the Abercrombie & Fitch brand. The RUEHL brand was launched during Fall 2004. RUEHL targets customers 22 to 35 years old, and the merchandise is a mix of business casual and trendy fashion created to appeal to the modern-minded, post-college customer. The RUEHL concept is based on New York City's Greenwich Village and is displayed in the high- quality clothing, leather goods and lifestyle accessories. The store structure is based on a Greenwich Village townhouse apartment and conveys an aura of sophistication through its creative use of interconnected rooms, fine furniture, lighting, vintage books, photography and cool music. 2 The Company's brands, Abercrombie & Fitch, abercrombie, Hollister, and RUEHL represent different American lifestyles and are targeted to appeal to consumers who embody or aspire to these lifestyles. In-store Experience. The Company views the customer's in-store experience as the primary vehicle for communicating the spirit of each of the brands. The Company uses the visual presentation of the merchandise, the in-store marketing, music, fragrances and the sales associates, or brand representatives, to reinforce the aspirational lifestyles represented by the brands. At the end of fiscal year 2004, the Company operated 788 stores. The following table shows the changes in the number of retail stores, by brand, operated by the Company for the past five fiscal years:
Abercrombie & Fitch abercrombie Hollister RUEHL Total --------------- ------------ --------- ----- ------ Fiscal 2000 Beginning of Year 215 35 - - 250 Opened 50 49 5 - 104 Closed - - - - - --------------- ------------ --------- ----- ------ End of Year 265 84 5 - 354 --------------- ------------ --------- ----- ------ Fiscal 2001 Beginning of Year 265 84 5 - 354 Opened 45 64 29 - 138 Closed (1) - - - (1) --------------- ------------ --------- ----- ------ End of Year 309 148 34 - 491 --------------- ------------ --------- ----- ------ Fiscal 2002 Beginning of Year 309 148 34 - 491 Opened 33 19 60 - 112 Closed (2) (3) (1) - (6) --------------- ------------ --------- ----- ------ End of Year 340 164 93 - 597 --------------- ------------ --------- ----- ------ Fiscal 2003 Beginning of Year 340 164 93 - 597 Opened 19 9 79 - 107 Closed (2) (2) - - (4) --------------- ------------ --------- ----- ------ End of Year 357 171 172 - 700 --------------- ------------ --------- ----- ------ Fiscal 2004 Beginning of Year 357 171 172 - 700 Opened 16 9 84 4 113 Closed (16) (9) - - (25) --------------- ------------ --------- ----- ------ End of Year 357 171 256 4 788 --------------- ------------ --------- ----- ------
3 Direct-to-consumer Business. In 1997, the Company introduced the A&F Quarterly (a catalogue/magazine), which was a lifestyle magazine focused on the college experience, and subsequently added a catalogue format. Theformat for the Abercrombie & Fitch brand. In December 2003, the Company retired the A&F Quarterly, has been discontinued andbut continued distributing the Company is re-evaluating its advertising strategy. TheAbercrombie & Fitch catalogue. For the adult Abercrombie & Fitch brand, the Company launched a web-based store featuring lifestyle pieces, such as AFTV,A&FTV, located at its Webweb site, www.abercrombie.com, in 1998. The abercrombie lifestyle web-based store, www.abercrombiekids.com, was introduced in 2000 and the Hollister lifestyle web-based store, www.hollisterco.com, was established in 2003. Products comparablesimilar to those carried at Abercrombie & Fitch stores can also be purchased through its Web site. The Company launched abercrombie, which targets 7 to 14 year-old boys and girls, in 1998. These stores offer fashion-oriented casual apparel in the tradition of Abercrombie & Fitch style and quality. A lifestyle web-based store located at www.abercrombiekids.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate the Web site into this Annual Report on Form 10-K) was introduced in 2000, where products comparable to those carried at abercrombieindividual stores can be purchased on-line. The Hollister brand was launched in 2000. Hollister is a West Coast orientedthrough the web sites. Each of the three web sites reinforces the particular brand's lifestyle brand targeted at 14 to 17-year-old high school guys and girls, at lower price points than Abercrombie & Fitch. Hollister has established a lifestyle Web site at www.hollisterco.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intendeddesigned to incorporatecomplement the Web site into this Annual Report on Form 10-K)in-store experience. Since their introduction, aggregate sales at the web-based stores have grown consistently year over year and since back-to-school 2003, products comparable to those carried at Hollister stores can be purchased on-line. 2 The Company recently announced plans for a new lifestyle brand that will target an older customer than its current brands and expects to open four test stores in August 2004. At the end of fiscal year 2003,allowed the Company operated 700 stores. The following table shows the changesto broaden its market in the number of retail stores operated by the Company for the past five fiscal years:
Fiscal Beginning End Year of Year Opened Closed of Year - -------------- ---------- ------ ------ ------- 1999 196 54 - 250 2000 250 104 - 354 2001 354 138 (1) 491 2002 491 112 (6) 597 2003 597 107 (4) 700
Financial Information about Segments. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company determined its operating segments on the same basis that is used internally to evaluate performance and allocate resources. The operating segments identified by the Company, Abercrombie & Fitch, abercrombie and Hollister, have been aggregated and are reported as one reportable segment. The Company aggregates the operating segments because they meet the aggregation criteria set forth in SFAS No. 131. Operating segments may be aggregated if they are similar in eachoutside of the following areas: economic characteristics, nature of products, nature of production processes, distribution method and nature of regulatory environment.United States. Merchandise Suppliers. During fiscal year 2003,2004, the Company purchased merchandise from approximately 210224 factories and suppliers located throughout the world.world, primarily in Southeast Asia and Central and South America. In fiscal year 2003,2004, the Company sourced approximately 9% of its apparel through Direct Source (Far East) Ltd. In addition to purchases from Direct Source (Far East) Ltd., the Company purchased merchandise directly in foreign markets from other vendors. Additional merchandise was purchased in the domestic market, some of which has been manufactured overseas. Excluding purchases from Direct Source (Far East) Ltd., nodid not source more than 5% of the merchandise purchased by the Company during fiscal year 2003 originatedits apparel from any single factory or supplier. The Company pursues a global sourcing strategy that includes relationships with vendors in over 30 countries.35 countries and the United States. Any event causing a sudden disruption in these sourcing operations, either political or financial, could have ana material adverse effect on the Company's operations. Substantially all of the Company's foreign purchases of merchandise are negotiated and paid forsettled in U.S. dollars. 3 Distribution and Merchandise Inventory. Substantially all of the Company's merchandise and related materials for the Company's stores are shipped to itsthe Company's distribution center in New Albany, Ohio where the merchandise is received and inspected. Merchandise and related materials are then distributed to the Company's stores using contract carriers. The Company's policy is to maintain sufficient quantities of inventory on hand in its retail stores and distribution center so that it can offer customers a full selection of current merchandise. The Company emphasizes rapid inventory turnover and takes markdowns where required to keep merchandise fresh and current with fashion trends. Seasonal Business. The Company views the retail apparel market as havinghas two principal selling seasons, Spring (first and Fall.second quarters) and Fall (third and fourth quarters.) As is generally the case in the apparel industry, the Company experiences its peakgreatest sales activity during the Fall season. This seasonal sales pattern, in which approximately 40% of the Company's sales are realized in the Spring season and 60% in the Fall, results in increased inventory during the back-to-schoolBack-to-School and ChristmasHoliday selling periods. During fiscal year 2003,2004, the highest inventory level approximated $227.3$237.6 million at the end of November 2003 month-end and the lowest inventory level approximated $162.5$149.1 million at the February 2003 month-end.end of May. 4 Store Operations. The Company's storesin-store and point-of-sale marketing are designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a shopping experience that is consistent with the Abercrombie & Fitch, abercrombie, Hollister or HollisterRUEHL lifestyle. The Company's sales associates, or brand representatives and managers are a central element in creating the entertaining, yet comfortable, atmosphere of the stores. In addition to providing a high level of customer service, brand representatives and managers reflect the casual, energetic attitude of the brand and culture.brands. The Company maintains a uniform appearance throughout its store base,the stores for each concept,of its brands in terms of a particular brand's merchandise display and location on the selling floor. Store managers receive detailed store plans that dictatedesignating fixture and merchandise placement to ensure uniform execution of the Company-wide merchandising strategy at the store level. Standardization, by concept,brand, of store design and merchandise presentation also creates cost savings in store furnishings, maximizes usage and productivity of selling space and allows the Company to efficiently open new stores. Trademarks. The Abercrombie & Fitch, abercrombie, and Hollister Co. trademarks, and certain otherRUEHL trademarks either have been registered or are the subject of pending trademark registration applications with the United States Patent and Trademark Office and with the registries of manymost of the foreign countries.countries in which its manufacturers are located. The Company has also registered or has applied to register certain other trademarks with these registries. The Company believes that its products are identified by its trademarks and, thus, its trademarks are of significant value.value within the United States. Each registered trademark has a duration of 3 to 20 years, depending on the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon appropriate application. The Company intends to continue the use of each of its trademarks and to renew each of its registered trademarks. 4 Financial Information about Segments. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company determined its operating segments on the same basis that it uses internally to evaluate performance and allocate resources. The operating segments identified by the Company, Abercrombie & Fitch, abercrombie, Hollister and RUEHL have been aggregated and are reported as one reportable financial segment. The Company aggregates the operating segments because they meet the aggregation criteria set forth in SFAS No. 131. Operating segments may be aggregated for financial reporting purposes if they are similar in each of the following areas: economic characteristics, nature of products, nature of production processes, distribution method and nature of regulatory environment. Other Information. Additional information about the Company's business, including its revenues and profits for the last three fiscal years, plusand gross square footage is set forth under the caption "ITEM 7-Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K. 5 COMPETITION. The sale of apparel and personal care products through retail stores and direct-to-consumer business, e-commerce and catalogue sales, is a highly competitive business with numerous competitors, including individual and chain fashion specialty stores and department stores. Fashion, price, service, store location, selection and quality are the principal competitive factors in retail store sales and on-line sales. The competitive challenges facing the Company include maintaining the aspirational positioning of its brands so that it can maintain its premium pricing position. An additional key challenge is unableanticipating and quickly responding to reasonably estimate the number of competitors or its relative competitive position due to the large number of companies selling apparel and personal care products through retail stores, catalogues and e-commerce.changing fashion trends. ASSOCIATE RELATIONS. On March 26, 2004,As of January 29, 2005, the Company employed approximately 30,20062,140 associates, (nonenone of whom were party to a collective bargaining agreement), approximately 26,400agreement. Approximately 57,150 of whomthese associates were part-time.part-time employees. In addition, temporary associates are hired during peak periods, such as the Holiday season. On average, the Company employed 48,520 associates, approximately 44,240 of whom were part-time, throughout the 2004 fiscal year. The Company believes its relationship with associates is good. However, in the normal course of business, the Company is party to lawsuits involving a small number of its former and current associates. (See "Legal Proceedings.") FORWARD-LOOKING STATEMENTS AND RISK FACTORS. The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Form 10-K or made by management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond its control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and similar expressions may identify forward-looking statements. The following risk factors should be read in connection with evaluatingsome cases have affected and in the future could affect the Company's businessfinancial performance and could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements included in this report or otherwise made by management: - changes in consumer spending patterns and consumer preferences; - the impact of competition and pricing; - disruptive weather conditions; - availability and market prices of key raw materials; - currency and exchange risks and changes in existing or potential duties, tariffs or quotas; - availability of suitable store locations on appropriate terms; - ability to develop new merchandise; - ability to hire, train and retain associates; and - the effects of political and economic events and conditions domestically and in foreign jurisdictions in which the Company operates, including, but not limited to, acts of terrorism or war; 6 Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate and the inclusion of such information should not be regarded as a representation by the Company, or any other person, that its objectives will be achieved. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements. Because forward-looking statements involve risks and uncertainties, the Company cautions that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in this Annual Report on Form 10-K. Any of the following risks could have a material adverse effect onforward-looking statements. These factors include the Company's business.following: The Loss of the Services of Key PersonnelSkilled Senior Executive Officers Could Have a Material Adverse Effect on the Company's Business. The success of the Company's business is dependent upon its senior executive officers closely supervising all aspects of its business, in particular the operation of its stores and the designing of its merchandise. The Company's senior executive officers have substantial experience and expertise in the retail business and have made significant contributions to the growth and success of its brands. If the Company's brands. The unexpected lossCompany were to lose the benefit of their involvement, in particular the services of oneMichael S. Jeffries, its Chairman and Chief Executive Officer, Robert S. Singer, its President and Chief Operating Officer, Diane Chang, its Executive Vice President - Sourcing, David L. Leino, its Senior Vice President - Stores and Leslee K. O'Neill, its Executive Vice President - Planning and Allocation, its business could be adversely affected. Competition for such senior executive officers is intense, and the Company cannot be sure that it will be able to attract and retain a sufficient number of qualified senior executive officers in future periods. Delay in Anticipating, Identifying and Responding to Changing Consumer Preferences and Fashion Trends in a Timely Manner Could Cause the Company's Profitability to Decline. The Company's success is largely dependent on its ability to anticipate and gauge the fashion preferences of its consumers, and provide merchandise that satisfies constantly shifting consumer demands in a timely manner. The merchandise must appeal to each brand's corresponding target market of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Because the Company enters into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, it is vulnerable to changes in consumer preference and demand, pricing shifts and the sub-optimal selection and timing of merchandise purchases. There can be no assurance that the Company will be able to continue successfully to anticipate consumer demands in the future. To the extent that the Company fails to anticipate, identify and respond effectively to changing consumer preferences and fashion trends, its sales will be adversely affected, leading to higher markdowns to reduce excess inventory, which, could have a material adverse effect on its financial condition and results of operations. 7 The Company's Market Share May Be Adversely Impacted at any Time by a Significant Number of Competitors. The specialty retail industry is highly competitive. The Company competes primarily on the basis of fashion, selection, quality, service, and price. It competes against a diverse group of retailers, including national and local specialty retail stores, traditional department stores and mail-order retailers. The Company faces a variety of competitive challenges, including: - anticipating and quickly responding to changing consumer demands and preferences; - maintaining favorable brand recognition and effectively marketing its products to consumers in several diverse market segments; - developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups and tastes; and - sourcing merchandise efficiently. There can be no assurance that the Company will be able to compete successfully in the future. The Interruption of the Flow of Merchandise from Key International Manufacturers Could Disrupt the Company's Supply Chain. The Company purchases the majority of its merchandise from outside the United States through arrangements with approximately 176 foreign manufacturers located throughout the world, primarily in Southeast Asia and Central and South America. In addition, many of its domestic manufacturers maintain production facilities overseas. Political, social or moreeconomic instability in Southeast Asia and Central and South America or in other regions in which the Company's manufacturers are located could cause disruptions in trade, including exports to the United States. Other events that could also cause disruptions to imports to the United States include: - the imposition of additional trade law provisions or regulations; - the imposition of additional duties, tariffs and other charges on imports and exports; - quotas imposed by bilateral textile agreements; - foreign currency fluctuations; - restrictions on the transfer of funds; and - significant labor disputes, such as dock strikes. 8 Historically, substantially all of the merchandise the Company imports has been subject to quotas that restrict the quantity of textile or apparel products that can be imported into the United States annually from a given country, and a significant majority of the Company's purchases of such products was from World Trade Organization (WTO) member countries. The United States has agreed, as of January 1, 2005, to a phase out of import quotas for WTO member countries. As a result, the Company should be able freely to import textile and apparel products from WTO member countries, such as China, in which its manufacturers have their manufacturing facilities. At the current time, however, a number of pending applications have been made to U.S. government agencies to delay the elimination of certain quota categories at January 1, 2005. The outcome of these individualsapplications, plus other possible efforts to impede the elimination of quotas, could have a significant impact on worldwide sourcing patterns in 2005; however, the extent of this impact, if any, and the possible effect on the Company's purchasing patterns and costs, cannot be determined at this time. In addition, the Company cannot predict whether any of the countries in which its merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to the Company and adversely affect its business, financial condition and results of operations. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase from any single supplier. A Decrease in Consumer Spending Could Adversely Impact the Company. Business Could SufferCompany's Business. The success of the Company's operations depends to a significant extent upon a number of factors that influence discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates, gasoline prices and consumer confidence. In addition, the Company estimates that a material portion of its sales in urban areas are to foreign tourists. As a Resultresult, fluctuations in foreign currency exchange rates and strengthening of the U.S. dollar with respect to foreign currencies could result in decreased sales to these consumers. There can be no assurance that consumer spending will not be negatively affected by general or local economic conditions, thereby adversely impacting the Company's continued growth and results of operations. The Company's Reliance on a Manufacturer's InabilitySingle Distribution Center Makes It Susceptible to Produce MerchandiseDisruptions at or Adverse Conditions Affecting Its Distribution Center. The Company's only distribution center for the receipt, storage, sorting, packing and distribution of merchandise to all of its stores and direct consumers is located in New Albany, Ohio. As a result, the Company's operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, demographic and population changes, as well as other unforeseen causes. If the Company's distribution center operations were disrupted, its ability to replace inventory in its stores could be interrupted and sales could be negatively impaired. Any significant interruption in the operation of the Company's distribution center could have a material adverse effect on Timeits financial condition and results of operations. 9 The Company's Net Sales and Inventory Levels Fluctuate on a Seasonal Basis, Leaving Its Operating Results Particularly Susceptible to Changes in Back-to-School and Holiday Shopping Patterns. Historically, the Company's operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end Holiday selling season and, to Specifications.a lesser extent, the third quarter, reflecting increased demand during the Back-to-School selling season. The Company's net sales and net income during the first and second fiscal quarters typically are lower due, in part, to the traditional retail slowdown immediately following the year-end Holiday season. As a result of this seasonality, sales during the third and fourth fiscal quarters cannot be used as accurate indicators for the Company's annual results. In addition, any factors negatively affecting the Company during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on its financial condition and results of operations for the entire year. Also, in order to prepare for the Back-to-School and Holiday shopping seasons, the Company must order and keep in stock significantly more merchandise than it would carry during other parts of the year. Any unanticipated decrease in demand for the Company's products during these peak shopping seasons could require it to sell excess inventory at a substantial markdown, which could reduce its net sales and gross margins and negatively impact its profitability. The Company Does Not Own or Operate any Manufacturing Facilities and Therefore Depends Upon Independent Third Parties for the Manufacture of All Its Merchandise. The Company does not own or operate any manufacturing facilities and therefore depends upon independent third parties forfacilities. As a result, the manufacturecontinued success of allthe Company's operations is tied to its merchandise. The Company uses both domestic and international manufacturers to produce its merchandise. Thetimely receipt of quality merchandise from third-party manufacturers. A manufacturer's inability of a manufacturer to ship orders in a timely manner or meet the Company's quality standards could cause delays in responding to consumer demands and negatively affect consumer confidence in the quality and value of the Company's brands and negatively impact its competitive position. The Company's Ability To Attract Customers to Its Stores Depends Heavily on the Success of the Shopping Centers in Which They Are Located. In order to generate customer traffic, the Company locates many of its stores in prominent locations within successful shopping centers. The Company cannot control the development of new shopping centers, the availability or cost of appropriate locations within existing or new shopping centers, or the success of individual shopping centers. Furthermore, factors beyond the Company's control impact shopping center traffic, such as general economic conditions and consumer spending levels. A slowdown in the U.S. economy could negatively affect consumer spending and reduce shopping center traffic. A significant decrease in shopping center traffic would have a material adverse effect on the Company's results of operations. Moreover, as store leases expire from time-to-time, it is possible that the Company may not be able to renew such leases on acceptable terms. The Company's Reliance on Third Parties to Deliver Merchandise from Its Distribution Center to Its Stores Could Result in Disruptions to Its Business. The efficient operation of the Company's stores depends on their timely receipt of merchandise from the Company's distribution center. Independent third party transportation companies deliver the Company's merchandise to its stores. Some of these third parties employ personnel represented by a labor union. Disruptions in the delivery dateof merchandise or work stoppages by employees of these third parties could delay the timely receipt of merchandise. There can be no assurance that such stoppages or disruptions will not occur in the future. Any failure by these third parties to respond adequately to the Company's distribution needs would disrupt its operations and could negatively impact its profitability. 10 The Company's Internal Control Procedures May Not Prevent or Detect all Errors and all Fraud. The Company has spent significant time and money documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires management's assessment of the effectiveness of the Company's internal controls over financial reporting as of the end of fiscal 2004 and a report by the Company's independent registered public accounting firm addressing management's assessment and the effectiveness of the internal controls as of that date. The Company does not expect that its internal control over financial reporting and more broadly its disclosure controls and procedures will prevent and/or detect all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, projections of any evaluation of effectiveness to future periods has risks, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be missed,circumvented by the individual acts of some persons, by collusion of two or more people, or by management's override of the control. Because of its inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect misstatements. Further, these sorts of controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Effects of War or Acts of Terrorism Could Have a Material Adverse Effect on the Company's Financial Condition and Operating Results. The continued threat of terrorism and related heightened security measures in the United States may disrupt commerce and the U.S. economy. Any further acts of terrorism or a future war may disrupt commerce and undermine consumer confidence, which could resultnegatively impact sales revenue by causing consumer spending and/or shopping center traffic to decline. Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact the Company's business by interfering with its ability to obtain merchandise from foreign manufacturers. The terrorist attacks of September 11, 2001 caused extensive disruptions to the Company's supply chain. Any future inability to obtain merchandise from the Company's foreign manufacturers or substitute other manufacturers, at similar costs and in lost sales. 5 a timely manner, could adversely affect its financial condition and operating results. A Manufacturer's Failure to Comply with Applicable Laws, Regulations and Ethical Business Practices Could Suffer if a Manufacturer Fails to Use Acceptable Labor Practices.Adversely Impact the Company's Business. The Company's policy is to use only those sourcing agents and independent manufacturers are required towho operate in compliance with all applicable laws and regulations. While the Company's vendor operating guidelines promote ethical business practices and Company representatives periodically visit and monitor the operations of the independent manufacturers, the Company does not control these manufacturers or theirregulations, particularly labor practices.laws. The violation of labor or other laws by an independent manufacturer, or by one of the sourcing agents, or the divergence of an independent manufacturer's or sourcing agent's labor practices from those generally accepted as ethical in the United States or in the country in which the manufacturing facility is located, and the public revelation of those illegal or unethical practices could interrupt, or otherwise disrupt the shipment of finished products orcause significant damage to the Company's reputation. Any of these, in turn, could have a material adverse effect onAlthough the Company's financial conditionmanufacturer operating guidelines promote ethical business practices and resultsCompany representatives periodically visit and monitor the operations of operations.the independent manufacturers, the Company does not control these manufacturers and cannot guarantee their legal and regulatory compliance. 11 The Company's Business is Subject to Risks Associated with Importing Products. The Company sources the majorityLitigation Exposure Could Exceed Expectations, Materially Adversely Affecting Its Results of its merchandise from outside the United States through arrangements with approximately 210 foreign manufacturers located throughout the world. Risks inherent in importing merchandise include: - quotas imposed by bilateral textile agreements; - changes in social, political and economic conditions which could result in the disruption of trade from the countries in which manufacturersOperations or suppliers are located; - the imposition of additional regulations relating to imports; - the imposition of additional duties, taxes and other charges on imports; and - foreign currency fluctuations. The Company's Success Depends on its Ability to Respond to Constantly Changing Fashion Trends and Consumer Demands. The Company's success depends on its ability to create and define fashion products, as well as to anticipate, gauge and react to changing consumer demands in a timely manner. The merchandise must appeal to each brand's corresponding target market of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. The Company cannot guarantee that it will be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future. Any failure to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect retail and consumer acceptance of the merchandise resulting in missed opportunities. If that occurs, the Company may need to rely on markdowns to sell through the excess, slow-moving inventory, which may have a material adverse effect on the Company's financial condition and results of operations. At the same time, management's focus on tight inventory control may result, from time to time, in lost sales due to an inadequate supply of products to meet consumer demand. A Downturn in the United States Economy May Affect Consumer Spending Habits. Consumer purchases of discretionary items and retail products, including the Company's products, may decline during recessionary periods and also may decline at other times when disposable income is lower. A downturn in the economy may adversely affect the Company's sales. The current economic conditions have and may continue to adversely affect consumer spending and sales of the Company's products. 6 The Company Relies on a Single Distribution Center. The Company operates one distribution center to receive, store and distribute merchandise to all of its stores and fulfill e-commerce sales. Any significant interruption in the operation of the distribution center due to natural disasters, accidents, system failures or other unforeseen causes could have a material adverse effect on the Company's financial condition and results. The Outcome of Litigation Could Have a Material Adverse Effect on Business.Financial Condition. The Company is involved, from time to time,time-to-time, in litigation incidental to its business.business, such as litigation regarding overtime compensation. Management believes that the outcome of currentpending litigation will not have a material adverse effect upon the results of operations or financial condition of the Company. However, management's assessment of the Company's current litigation exposure could change in light of the discovery of damaging facts with respect to legal actions pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact whichthat are not in accord with management's evaluation of the possible liability or outcome of such litigation. Any one ofclaims. Should management's evaluation prove incorrect, particularly in regard to the factors described aboveovertime compensation claims, the Company's litigation exposure could greatly exceed expectations and have a material adverse effect upon the results of operations or financial condition of the Company. The Company's Failure to Adequately Protect Its Trademarks, Abercrombie & Fitch(R), abercrombie(R), Hollister Co(R), and RUEHL (TM) Could Have a Negative Impact on Its Brand Image and Limit Its Ability to Penetrate New Markets. The Company believes that its trademarks Abercrombie & Fitch(R), abercrombie(R), Hollister Co.(R), and RUEHL(TM) are an essential element of the Company's strategy. The Company has obtained or applied for federal registration of the trademarks, and has pending trademark registration applications for other trademarks in the United States, and has applied for or obtained registrations in many foreign countries in which its manufacturers are located. There can be no assurance that the Company will obtain such registrations or the registrations the Company obtains will prevent the imitation of its products or infringement of its intellectual property rights by others. If any third party imitates the Company's products in a manner that projects lesser quality or carries a negative connotation, the Company's brand image could be materially adversely affected. Because the Company has not yet registered all of its trademarks in all categories or in all foreign countries in which it now or may in the future source or offer its merchandise, international expansion and its merchandising of non-apparel products using these marks could be limited. In addition, the Company cannot assure that others will not try to block the manufacture, export or sale of its products as violative of their trademarks or other proprietary rights. The pending applications for international registration of various trademarks could be challenged or rejected in manufacturing countries because third parties of which the Company is not currently aware have already registered similar marks for clothing in those countries. Accordingly, it may be possible, in those foreign countries where the status of various registration applications is pending or unclear, for a third party owner of the national trademark registration for a similar mark to enjoin the manufacture, sale or exportation of branded goods to the United States. If the Company is unable to reach a licensing arrangement with these parties, the Company's manufacturers may be unable to manufacture its products and the Company may be unable to sell in those countries. The Company's inability to register its trademarks or purchase or license the right to use its trademarks or logos in these jurisdictions could limit its ability to obtain supplies from or manufacture in less costly markets or penetrate new markets should the Company's business plan include selling its merchandise in those jurisdictions outside the United States. 12 Modifications and/or Upgrades to Information Technology Systems May Disrupt Operations. The Company regularly evaluates its information technology systems and requirements and is currently implementing modifications and upgrades to its information technology systems supporting the business. The Company is currently planning to or beginning to implement modifications and upgrades to its information technology systems for finance, real estate, and human resources. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. The Company is aware of inherent risks associated with replacing and changing these systems, including accurately capturing data and system disruptions and believes it is taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. Information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on the Company's operations. The Company's International Expansion Plan Is Dependent on a Number of Factors, Any of Which Could Delay or Prevent the Successful Penetration into New Markets and Strain Its Resources. As the Company expands internationally, it may incur significant costs related to starting up and maintaining foreign operations. Costs may include, and are not limited to, obtaining prime locations for stores, setting up foreign offices and distribution centers and hiring experienced management. The Company will be unable to open and operate new stores successfully and its growth will be limited unless it can: - identify suitable markets and sites for store locations; - negotiate acceptable lease terms; - hire, train and retain competent store personnel; - foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise; - manage inventory effectively to meet the needs of new and existing stores on a timely basis; - expand its infrastructure to accommodate growth; - generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund its expansion plan; and - manage its foreign exchange risks effectively. In addition, the Company's proposed expansion will place increased demands on its operational, managerial and administrative resources. These increased demands could cause the Company to operate its business less effectively, which in turn could cause deterioration in the financial condition and resultsperformance of operations. 7its individual stores. 13 ITEM 2. PROPERTIES. The Company's headquarters and support functions (consisting of office, distribution and shipping facilities) are located in New Albany, Ohio and owned by the Company. This is a 358.2-acre campus which houses approximately 402,000 square feet of office and design space and a 908,000 square foot distribution center. The facility is organized in a campus-like setting with Company operations centralized in this location. The Company leases small facilities to house its design support centers in the United Kingdom, New York and Los Angeles. All of the retail stores operated by the Company are located in leased facilities, primarily in shopping centers throughout the continental United States. The leases expire at various dates, principally between 20042005 and 2016.2020. Typically, when the Company leases space is leased for a retail store in a shopping center, it supplies all improvements, including interior walls, floors, ceilings, fixtures and decorations, are supplied by the tenant. In certain cases, the landlord of the property maydecorations. Certain landlords provide a construction allowanceallowances to fund all or a portion of the cost of improvements. The Company accounts for construction allowances as deferred lease credits and amortizes them over the life of the applicable leases. The cost of improvements varies widely, depending on the size and location of the store. Rental terms for new locations usually include a fixed minimum rent plus a percentage of sales in excess of a specified amount. CertainThe Company also typically pays certain operating costs such as common area maintenance, utilities, insurance and taxes are typically paid by the tenant.taxes. As of January 31, 2004,April 1, 2005, the Company's 700793 stores were located in 49 states and the District of Columbia as follows: Alabama 1315 Kentucky 1013 North Dakota 1 Alaska 1 Louisiana 14 Ohio 3338 Arizona 13 Maine 3 Oklahoma 10 Arkansas 4 Maryland 610 Oregon 59 California 6983 Massachusetts 1719 Pennsylvania 3437 Colorado 1112 Michigan 2931 Rhode Island 3 Connecticut 1416 Minnesota 17 South Carolina 69 Delaware 1 Mississippi 5 South Dakota 2 District of Columbia 1 Missouri 22 Tennessee 17 Florida 3549 Montana 2 Texas 5162 Georgia 25 Nebraska 45 Utah 5 Hawaii 14 Nevada 56 Vermont 2 Idaho 12 New Hampshire 5 Virginia 1920 Illinois 3741 New Jersey 2122 Washington 1719 Indiana 2022 New Mexico 34 West Virginia 3 Iowa 36 New York 3638 Wisconsin 1513 Kansas 78 North Carolina 2224
814 ITEM 3. LEGAL PROCEEDINGS. TheAs a business with nation-wide operations, the Company is a defendant insubject to various proceedings, lawsuits, disputes and claims arising in the ordinary course of its business. A&F is aware of 20 actions that have been filed against A&F and certain of its officers and directors on behalf of a purported, but as yet uncertified, class of shareholders who purchased A&F's Class A Common Stock between October 8, 1999 and October 13, 1999. These 20 actions have been filed in the United States District Courts for the Southern District of New York and the Southern District of Ohio, Eastern Division, alleging violations of the federal securities laws and seeking unspecified damages. On April 12, 2000, the Judicial Panel on Multidistrict Litigation issued a Transfer Order transferring the 20 pending actions to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities Litigation. On November 16, 2000, the Court signed an Order appointing the Hicks Group, a group of seven unrelated investors in A&F's securities, as lead plaintiff, and appointing lead counsel in the consolidated action. On December 14, 2000, plaintiffs filed a Consolidated Amended Class Action Complaint (the "Amended Complaint") in which they did not name as defendants Lazard Freres & Co. and Todd Slater, who had formerly been named as defendants in certain of the 20 complaints. A&F and other defendants filed motions to dismiss the Amended Complaint on February 14, 2001. On November 14, 2003, the motions to dismiss the Amended Complaint were denied. On December 2, 2003, A&F moved for reconsideration or reargument of the November 14, 2003 order denying the motions to dismiss. The motions for reconsideration or reargument were fully briefed and submitted to the Court on January 9, 2004. The motions were denied on February 23, 2004. A&F is aware of six actions that have been filed on behalf of purported classes of employees and former employees of the Company alleging that the Company required its associates to wear and pay for a "uniform" in violation of applicable law. In each case, the plaintiff, on behalf of his or her purported class, seeks injunctive relief and unspecified amounts of economic and liquidated damages. Two of these cases, Jennifer M. Solis v. Abercrombie & Fitch Stores, Inc. and A&F California, LLC and Sarah Stevenson v. Abercrombie & Fitch Co., allege violations of California law and were filed on February 10, 2003 and February 4, 2003 in the California Superior Courts for Los Angeles County and San Francisco County, respectively. An answer was filed in the Solis case on March 26, 2003. Pursuant to a Petition for Coordination, the Solis and the Stevenson cases were coordinated by order issued November 17, 2003. On February 28, 2005, these cases were settled and dismissed with prejudice as to the individual claims and without prejudice as to the putative class claims. The settlement was not material to the consolidated financial statements. Shelby Port v. Abercrombie & Fitch Stores, Inc., which alleges violations of Washington law, was filed on or about July 18, 2003 in the Washington Superior Court of King County. The defendant filed a motion to dismiss the complaint in the Port case on September 5, 2003. The plaintiff filed an amended complaint on or about August 9, 2004, adding three new named plaintiffs and subsequently filed a second amended complaint on or about October 20, 2004. The defendant filed its answer to the second amended complaint on or about November 19, 2004. The plaintiffs filed, and the defendant opposed, a motion to certify a class of employees in the state of Washington. The Court granted the plaintiffs' motion and the defendant has commenced a discretionary appeal thereof. The Company does not believe it is feasible to predict the outcome of this legal proceeding and intends to defend vigorously against it. The timing of the final resolution of this proceeding is also uncertain. Accordingly, the Company cannot estimate a range of potential loss, if any, for this legal proceeding. 15 Jadii Mohme v. Abercrombie & Fitch, which alleges violations of Illinois law, was filed on July 18, 2003 in the Illinois Circuit Court of St. Clair County. A first amended complaint was filed in the Mohme case on September 10, 2003 to change the defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." An answer to the first amended complaint was filed in the Mohme case on September 26, 2003. The parties are in the process of discovery. Shelby Port v. Abercrombie & Fitch Stores, Inc., which alleges violations of Washington law, was filed on or about July 18, 2003 in the Washington Superior Court of King County. The defendant filed a motion to dismiss the complaint in the Port case on September 5, 2003. That motion is pending. Holly Zemany v. Abercrombie & Fitch, which alleges violations of Pennsylvania law, was filed on July 18, 2003 in the Pennsylvania Court of Common Pleas of Allegheny County. A first amended complaint was filed in the Zemany case on September 9, 2003 to change the defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." A second amended complaint was filed on November 10, 2003, adding some factual allegations. DefendantThe defendant filed an answer to the second amended complaint on January 22, 2004. 9 In Michael Gualano v. Abercrombie & Fitch, which was filed in the United States District Court for the Western District of Pennsylvania on March 14, 2003, the plaintiff alleges that the "uniform," when purchased, drove associates' wages below the federal minimum wage. The complaint purports to state a collective action on behalf of all part-time associates nationwide under the Fair Labor Standards Act. A first amended complaint was filed in the Gualano case on September 9, 2003, to change the defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." An answer to the first amended complaint was filed in the Gualano case on or about September 24, 2003,2003. Jadii Mohme and Holly Zemany have stayed their claims in state court and joined their claims with Michael Gualano along with four other named plaintiffs in four other states in a second amended complaint, which the parties are in the process of discovery. A&F is aware of two actions that have been filed on behalf of purported classes alleged to be discriminated against in hiring or employment decisions due to race and/or national origin. Eduardo Gonzalez, et al. v. Abercrombie & Fitch Co. was filed on June 16, 2003 indefendant has answered. On November 17, 2004, the United States District Court for the NorthernWestern District of California.Pennsylvania gave final approval of the settlement, and dismissal of the case with prejudice was entered. The plaintiffs subsequently amended their complaint to add A&F California, LLC, Abercrombie & Fitch Stores, Inc.Mohme and A&F Ohio, Inc. as defendants. The plaintiffs allege, on behalf of their purported class, that they were discriminated against in hiring and employment decisions due to their race and/or national origin. The plaintiffs seek, on behalf of their purported class, injunctive relief and unspecified amounts of economic, compensatory and punitive damages. A second amended complaint, which added two additional plaintiffs, was filed on or about January 9, 2004. Defendant filed an answerZemany cases have been dismissed with prejudice pursuant to the second amended complaint on or about January 26, 2004.terms of the settlement. The parties aresettlement resolves all claims of hourly employees in the processstates of discovery. A&F is aware that Brandy Hawk v. Abercrombie & Fitch Co.Colorado, Connecticut, Illinois, Minnesota, New Jersey and Pennsylvania under their respective state laws and their claims under the Fair Labor Standards Act. The settlement was filed on or about November 19, 2003 innot material to the United States District Court for the District of New Jersey. The plaintiff alleged, on behalf of her purported class, that she was discriminated against in hiring decisions due to her race. The Hawk matter was voluntarily dismissed without prejudice on or about December 5, 2003. In addition, the EEOC is conducting nationwide investigations relating to allegations of discrimination based on race, national origin and gender.consolidated financial statements. A&F is aware of twothree actions that have been filed against the Company involving overtime compensation. In each action, the plaintiffs, on behalf of their respective purported class, seek injunctive relief and unspecified amounts of economic and liquidated damages. In Bryan T. Kimbell, Individually and on Behalf of All Others Similarly Situated and on Behalf of the Public v. Abercrombie & Fitch Stores, Inc., which was filed on July 10, 2002 in the California Superior Court for Los Angeles County, the plaintiffs allege that California general and store managers were entitled to receive overtime pay as "non-exempt" employees under California wage and hour laws. An answer was filed in the Kimbell case on September 4, 2002 and the parties are in the process of discovery. The trial court has ordered a class of store managers in California certified for limited purposes. In Melissa Mitchell, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., which was filed on June 13, 2003 in the United States District Court for the Southern District of Ohio, the plaintiffs allege that assistant managers and store managers were not paid overtime compensation in violation of the Fair Labor Standards Act and Ohio law. A&FThe defendants filed a motion to dismiss the Mitchell case on July 28, 2003,2003. The case was transferred from the Western Division to the Eastern Division of the Southern District of Ohio on April 21, 2004. The plaintiffs filed an amended complaint to add Scott Oros as a named plaintiff on October 28, 2004. The defendants subsequently renewed their motion to dismiss, which is pending.was denied as to the two original plaintiffs and remains pending as to certain claims of plaintiff Oros. The parties have commenced discovery. In Casey Fuller, Individually and on Behalf of All Others Similarly Situated v. Abercrombie & Fitch Stores, Inc., which was filed on December 28, 2004 in the United States District Court for the Eastern District of Tennessee, the plaintiff alleges that he and other similarly situated assistant managers and managers in training were not paid properly calculated overtime during their employment and seeks overtime pay under the Fair Labor Standards Act. The defendant filed an answer on February 7, 2005. 16 In February 2005, two substantially similar actions were filed in the Court of Chancery of the State of Delaware by A&F believesstockholders challenging the compensation received by A&F's Chief Executive Officer, Michael S. Jeffries. The complaints allege, among other things, that thesethe Board of Directors of A&F and the members of the Compensation Committee of the Board breached their fiduciary duties in granting stock options and an increase in cash compensation to Mr. Jeffries in February 2002 and in approving Mr. Jeffries's current employment agreement in January 2003 (the "Amended and Restated Employment Agreement"). The complaints further assert that A&F's disclosures with respect to Mr. Jeffries' compensation were deficient. The complaints seek, among other things, to rescind the purportedly wrongful compensation and to set aside the current employment agreement. The actions are without merithave been consolidated under the caption, In re Abercrombie & Fitch Co. Shareholder Derivative Litigation., C.A. No. 1077 (the "Litigation"). A&F has formed a special committee of independent directors (the "Special Committee") to determine what action to take with respect to the Litigation. A&F and intendsthe defendant members of the Board of Directors have denied, and continue to defend vigorously against them. However,deny, any liability or wrongdoing with respect to all claims alleged in the Litigation. Nevertheless, the Special Committee, A&F and the other defendants have determined that it is desirable to settle the Litigation and thereby eliminate the substantial burden, expense, inconvenience and distraction that the Litigation would entail and to dispel any uncertainty that may exist as a result of the Litigation. Pursuant to a stipulation of settlement dated April 8, 2005, and subject to the approval of the Court, the parties have agreed to settle the Litigation on the following terms: (i) Mr. Jeffries's Amended and Restated Employment Agreement will be amended to reduce his "stay bonus" from twelve million dollars to six million dollars and to condition receipt of the stay bonus on A&F's achieving defined performance criteria (except in certain circumstances), (ii) Mr. Jeffries will not receive any award of stock options during calendar years 2005 and 2006 and in subsequent years will receive stock options only in the discretion of the Compensation Committee, (iii) Mr. Jeffries will hold the Career Shares awarded under Section 4(b) of his Amended and Restated Employment Agreement for a period of one year after he ceases to be an executive officer of A&F (the "Holding Period"), and (iv) Mr. Jeffries will hold one half of the A&F shares received from the first one million stock options exercised following this settlement, net of shares equal to the amount of withholding taxes and exercise price, until the expiration of the Holding Period. Also as part of the settlement, the Special Committee has agreed to recommend to the full Board that the Board cause A&F to take, subject to the directors' fiduciary duties, and A&F has agreed to use its best efforts to take, each of the following actions, with the actions described in clauses (i) through (iv) to be achieved not later than the one year anniversary of the settlement becoming final: (i) A&F shall conduct a full review of its corporate governance practices and procedures, (ii) at least a majority of the members of the Compensation Committee shall be directors who were not members of the Compensation Committee at the time of the events giving rise to the Litigation and who have no substantial business or professional relationship with A&F other than their status as directors, (iii) the Compensation Committee shall retain independent counsel and an independent compensation expert, (iv) A&F shall adopt FAS 123 providing for the expensing of stock option compensation, (v) for a period of five years A&F shall not nominate for election to the Board any director who does not believe it is feasiblemeet the New York Stock Exchange standards for director independence (provided, however, this provision shall not apply to any current member of the Board or to up to three members of A&F's senior management), (vi) one member of the Board who does not meet such standards shall not be nominated for re-election in connection with the 2005 annual meeting, and (vii) the Company shall review the disclosures to appear in A&F's proxy statement for its 2005 Annual Meeting relating to executive compensation and will provide plaintiffs' counsel with an opportunity to comment on the disclosures. The stipulation of settlement provides for a release of all claims that A&F has or may have against any of the defendants relating to the matters and claims that were or could have been raised in the Litigation. The plaintiffs will apply to the Court for an award of attorneys' fees. 17 The German company, adidas-Saloman AG, and its wholly-owned United States subsidiary, adidas America, Inc. (collectively "adidas"), filed a civil action against Abercrombie & Fitch Co. ("Abercrombie"), in the United States District Court for the District of Oregon on December 23, 2004 (CV-04-866-AS). Their complaint alleges causes of action for federal and common law trademark infringement, federal and common law unfair competition, federal and state trademark dilution and injury to business reputation and unfair and deceptive trade practices. adidas seeks injunctive relief, an accounting of profits, treble and punitive damages, costs and attorneys' fees. adidas' allegations arise from the Company's alleged manufacture and sale of garments bearing stripe designs that infringe their "Three-Stripe Mark." The complaint has not yet been served on the Company and the parties are discussing a potential settlement. The Company cannot predict with assurance the outcome of these proceedings.and other actions brought against it. Accordingly, adverse settlements or resolutions may occur and negatively impact earnings in the quarter of settlement or resolution. However, the Company does not believe that the outcome of any current action would have a material adverse effect on its results from operations, liquidity, or financial position taken as a whole. A&F is aware of three actions that have been filed on behalf of a purported class alleged to be discriminated against in hiring or employment decisions due to race, national origin and/or gender. Eduardo Gonzalez, et al. v. Abercrombie & Fitch Co. was filed on June 16, 2003 in the United States District Court for the Northern District of California. The timingplaintiffs subsequently amended their complaint to add A&F California, LLC, Abercrombie & Fitch Stores, Inc. and A&F Ohio, Inc. as defendants. The plaintiffs allege, on behalf of their purported class, that they were discriminated against in hiring and employment decisions due to their race and/or national origin. The plaintiffs seek, on behalf of their purported class, injunctive relief and unspecified amounts of economic, compensatory and punitive damages. A second amended complaint, which added two additional plaintiffs, was filed on or about January 9, 2004. The defendants filed an answer to the second amended complaint on or about January 26, 2004. A third amended complaint was filed on June 10, 2004, restating the original claims and adding two individual, but not class, claims of gender discrimination. The defendants filed an answer on or about June 21, 2004. On November 8, 2004, the plaintiffs filed a fourth amended complaint, adding an additional plaintiff and claims on behalf of those who asserted they were discriminated against in hiring and employment decisions as managers due to their race and/or national origin. On November 11, 2004, the defendants answered the fourth amended complaint. Two other class action employment discrimination lawsuits have been filed in the United States District Court for the Northern District of California, both on November 8, 2004. In Elizabeth West, et al. v. Abercrombie & Fitch Stores, Inc., et al., the plaintiffs allege gender (female) discrimination in hiring or employment decisions and seek, on behalf of their purported class, injunctive relief and unspecified amounts of economic, compensatory and punitive damages. The other was brought by the Equal Employment Opportunity Commission (the "EEOC") and alleges race, ethnicity and gender (female) discrimination in hiring or employment decisions. The EEOC complaint seeks injunctive relief and, on behalf of the purported class, unspecified amounts of economic, compensatory and punitive damages. On November 8, 2004, the Company signed a consent decree settling these three related class action discrimination lawsuits, subject to judicial review and approval. The monetary terms of the consent decree provide that the Company will set aside $40.0 million to pay to the class, approximately $7.5 million for attorneys' fees, and approximately $2.5 million for monitoring and administrative costs to carry out the settlement. As a result, the Company accrued a non-recurring charge of $32.9 million, which was included in general, administrative and store operating expenses for the thirteen weeks ended October 30, 2004. This is in addition to amounts accrued during the first quarter of fiscal 2004 when the Company recorded an $8.0 million charge (net of expected proceeds of $10 million from insurance) resulting from an increase in expected defense costs related to the Gonzalez case. As part of the consent decree, the Company also agreed to implement a series of programs and initiatives that are designed to achieve greater diversity throughout its stores. The preliminary approval order was signed by Judge Susan Illston of the United States District Court for the Northern District of California on November 16, 2004, and that order scheduled a final resolution of these proceedings is also uncertain.fairness and approval hearing for April 14, 2005. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 1019 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is certain information regarding the executive officers of A&F as of March 26, 2004.April 1, 2005. Michael S. Jeffries, 59,60, has been Chairman and Chief Executive Officer of A&F since May 1998. From February 1992 to May 1998, Mr. Jeffries held the position of President and Chief Executive Officer of A&F. Mr. Jeffries has also been a director of A&F since 1996. Seth R. Johnson, 50,Robert S. Singer, 53, has been Executive Vice President-ChiefPresident and Chief Operating Officer of A&F since February 2000.May 2004. Prior thereto, Mr. JohnsonSinger had been Vice President-ChiefChief Financial Officer of A&Fthe Gucci Group N.V., since 1992. Mr. Johnsonits initial public offering in 1995 and served as Executive Vice President from 1999 as the Group grew from one to nine operating divisions. Diane Chang, 49, has been a director of A&F since 1998. Diane Chang, 48, has been SeniorExecutive Vice President-Sourcing of A&F since February 2000.May 2004. Prior thereto, sheMs. Chang held the position of Senior Vice President- Sourcing from February 2000 to May 2004 and the position of Vice President-Sourcing of A&F from May 1998 to February 2000 and for six and one-half years prior thereto, Ms. Chang held the position of Senior Vice President-Manufacturing at J. Crew, Inc, a clothing retailer. Carole L. Kerner, 51, was named Senior Vice President-General Merchandise Manager for the new lifestyle brand of the Company in June 2003 after working for the Company as an employee since September 2002. Prior thereto, Ms. Kerner held the position of President at Donna Karan and DKNY womens apparel, a clothing retailer, from June 1998 to September 2002.2000. David L. Leino, 40,41, has been Senior Vice President-Stores of A&F since February 2000. Prior thereto, Mr. Leino held the position of Vice President-Stores of A&F from February 1996 to February 2000. Leslee K. O'Neill,Thomas D. Mendenhall, 43, has been Senior Vice President & General Manager - Abercrombie & Fitch and abercrombie since November 2004. Prior thereto, Mr. Mendenhall held various positions at the Gucci Group N.V., including Worldwide Director of Merchandising for the Gucci Division since 1999. Leslee K. O'Neill, 44, has been Executive Vice President-Planning and Allocation of A&F since February 2000.May 2004. Prior thereto, Ms. O'Neill held the position of Senior Vice President-Planning and Allocation from February 2000 to May 2004 and the position of Vice President-Planning & Allocation of A&F from February 1994 to February 2000. Susan J. Riley, 45,46, was named Senior Vice President-Chief Financial Officer of A&F in February 2004. Prior thereto, Ms. Riley held the position of Chief Financial Officer at The Mount Sinai Medical Center in New York from August 2002 to November 2003, at2003. She was Vice President and Treasurer of Colgate Palmolive from January 2001 to August 2002 and Senior Vice President and Chief Financial Officer of The Dial Corporation a consumer products company, from August 1997 to August 2000 and at Tambrands Inc, a personal care products company, from December 1995 to July 1997. Prior to becoming Chief Financial Officer at Tambrands Inc., Ms. Riley served in a variety of financial positions of increasing responsibility from 1987 to 1995. Her background also includes experience as Vice President and Treasurer of Colgate-Palmolive Company, a consumer products company, where she served from January 2001 to August 2002.2000. The executive officers serve at the pleasure of the Board of Directors of A&F and, in the case of Mr.Messrs. Jeffries and Singer, pursuant to an employment agreement. 11agreements. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. A&F's Class A Common Stock (the "Common Stock") is traded on the New York Stock Exchange under the symbol "ANF." The following is a summary oftable below sets forth the high and low sales prices of A&F's Class A Common Stock as reported on the New York Stock Exchange for the 20032004 and 20022003 fiscal years:
Sales Price -------------------------------------------- High Low ------- ------- 20032004 Fiscal Year 4th Quarter $ 29.8252.13 $ 23.4939.09 3rd Quarter $ 31.4739.18 $ 26.7728.00 2nd Quarter $ 32.8039.12 $ 26.1431.07 1st Quarter $ 33.1136.10 $ 26.98 200225.54 2003 Fiscal Year 4th Quarter $ 27.9029.82 $ 17.7623.49 3rd Quarter $ 25.1831.47 $ 15.5726.77 2nd Quarter $ 33.0032.80 $ 20.5126.14 1st Quarter $ 33.3033.11 $ 23.0426.98
A&F has not paid dividends on its shares of Class A Common Stock in the past. In February 2004, the Board of Directors voted to initiate a cash dividend, at an annual rate of $0.50 per share. The firstA quarterly dividend, of $0.125 per share, was paid onin March, 30, 2004June, September and December of 2004. The Company currently expects to stockholderscontinue to pay an annual dividend of record as$ 0.50 per share, subject to Board of March 9, 2004. On March 26, 2004,Directors review and approval of the appropriateness of future dividend amounts. As of April 1, 2005, there were approximately 5,0005,300 shareholders of record. However, when including active associates who participate in A&F's stock purchase plan, associates who own shares through A&F-sponsored retirement plans and others holding shares in broker accounts under street name, A&F estimates that there are approximately 53,000 shareholders. 21 During the shareholder base at2004, 2003 and 2002 fiscal years, the Company repurchased shares of its outstanding Common Stock having a value of approximately 52,000. 12 The SEC recently amended Item 5$434.7 million, $115.7 million and $42.7 million, respectively, pursuant to Board of Form 10-KDirectors authorizations. In July 2004, the Board of Directors authorized the Company to addpurchase up to 6.0 million shares of Common Stock and in November 2004, the requirement that a registrant furnishBoard of Directors authorized the information required by Item 703purchase of SEC Regulation S-K for any repurchasean additional 6.0 million shares. As of January 29, 2005, the remaining aggregate number of shares madeof Common Stock authorized for repurchase under the 2004 authorizations was 1.4 million shares. The number and average price of shares purchased in aeach fiscal month withinof the fourth quarter of the 2004 fiscal year covered byare set forth in the Form 10-K. Although compliance with this new disclosure requirement is not required in a Form 10-K for a fiscal year ending prior to March 15, 2004, A&F has voluntarily included the following table in order to provide information regarding A&F's purchases of its Class A Common Stock during the three fiscal months ended January 31, 2004:below:
Total Number of Maximum Number Total Number Average Shares Purchased as of Shares that May of Shares Price Paid Part of Publicly Maximum Number of Shares Total Number of Average Price Announced Plans or that May Yet be Purchased Period Shares Purchased Paid per Share Announced ProgramPrograms under the Program(1)Plans or Programs (1),(2) - ---------------------- ------------ ----------------------------------- ---------------- -------------- ------------------- ------------------------------------------------------- October 31, 2004 - November 2 through 29, 200327, 2004 3,845,000 $44.13 3,845,000 2,798,500 November 28, 2004 - $January 1, 2005 - - 2,459,000 November 30, 2003 through- 2,798,500 January 3, 20042, 2005 - $ - - 2,459,000 January 4 through 31, 2004 1,860,000 $ 25.21 1,860,000 599,000 ------------ ---------- ------------------- -------------------- Total 1,860,000 $ 25.21 1,860,000 599,000 ============ ========== =================== ====================29, 2005 1,350,000 $49.69 1,350,000 1,448,500 --------- ------ --------- --------- Totals 5,195,000 $45.58 5,195,000 1,448,500 ========= ====== ========= =========
(1) The number shown represents, as of the end of each period, the maximum number of shares of Class A Common Stock that may yet be purchased under the Company'sA&F's publicly announced stock repurchase program.purchase authorizations. On August 8, 2002,July 29, 2004, A&F announced the authorization of the repurchase of 5,000,0006,000,000 shares of ClassCommon Stock. The shares may be purchased from time-to-time, depending on market conditions. (2) On November 9, 2004, A Common Stock, in addition&F announced that the Board of Directors had authorized an extension of A&F's stock repurchase program to permit the 850,000 shares then remaining available under the authorization to repurchase of an additional 6,000,000 shares announced on February 14, 2000, for a total of 5,850,000 shares authorized for repurchase as of August 8, 2002. This stock repurchase authorization will expire once A&F has repurchased that number of shares representing the number authorized for repurchase. Repurchases may be made in open market transactions or through privately negotiated transactions. As of January 31, 2004, A&F had the authority to still repurchase an aggregate of 599,000 shares of Class A Common Stock under this stock repurchase authorization. 13Stock. 22 ITEM 6. SELECTED FINANCIAL DATA. ABERCROMBIE & FITCH FINANCIAL SUMMARY (Thousands except per share and per square foot amounts, ratios and store and associate data)
FISCAL YEAR 2004 2003 2002 2001 2000* 1999 - ------------------------------------------------------------------------------------------------------------------ ----------- ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Net Sales $ 2,021,253 $ 1,707,810 $ 1,595,757 $ 1,364,853 $ 1,237,604 $ 1,030,858 - ------------------------------------------------------------------------------------------------------- Gross Income $ 717,398909,793 $ 656,049716,944 $ 558,034655,747 $ 509,375554,580 $ 450,383 - -------------------------------------------------------------------------------------------------------507,241 Operating Income $ 331,634347,635 $ 312,617331,180 $ 271,458312,315 $ 253,652268,004 $ 242,064 - -------------------------------------------------------------------------------------------------------251,518 Operating Income as a Percentage of Net Sales 17.2% 19.4% 19.6% 19.9% 20.5% 23.5% - -------------------------------------------------------------------------------------------------------19.6% 20.3% Net Income $ 205,102216,376 $ 194,935204,830 $ 168,672194,754 $ 158,133166,600 $ 149,604 - -------------------------------------------------------------------------------------------------------156,853 Net Income as a Percentage of Net Sales 10.7% 12.0% 12.2% 12.4% 12.8% 14.5%12.2% 12.7% Dividends Paid Per Share $ 0.50 - -------------------------------------------------------------------------------------------------------- - - PER WEIGHTED AVERAGE SHARE RESULTS (1) Net Income Per Basic Share $ 2.33 $ 2.12 $ 1.991.98 $ 1.701.68 $ 1.58 $ 1.45 - -------------------------------------------------------------------------------------------------------1.57 Net Income Per Diluted Share $ 2.28 $ 2.06 $ 1.94 $ 1.651.62 $ 1.55 $ 1.39 - -------------------------------------------------------------------------------------------------------1.54 Weighted Average Diluted Shares Outstanding 95,110 99,580 100,631 102,524 102,156 107,641 - ------------------------------------------------------------------------------------------------------- OTHER FINANCIAL INFORMATION Total Assets $ 1,199,1631,347,701 $ 1,023,0481,383,229 $ 795,5271,173,074 $ 607,793916,485 $ 476,317 - -------------------------------------------------------------------------------------------------------692,555 Return on Average Assets 18%16% 16% 19% 21% 24% 29% 38% - -------------------------------------------------------------------------------------------------------26% Capital Expenditures $ 99,128185,065 $ 92,976159,777 $ 126,515145,662 $ 153,481171,673 $ 73,377 - -------------------------------------------------------------------------------------------------------194,604 Long-Term Debt - - - - - - ------------------------------------------------------------------------------------------------------- Shareholders' Equity $ 871,257669,326 $ 749,527857,765 $ 595,434736,307 $ 422,700582,395 $ 311,094 - -------------------------------------------------------------------------------------------------------411,733 Return on Average Shareholders' Equity 25% 29% 33% 43% 60% - -------------------------------------------------------------------------------------------------------28% 26% 30% 34% 44% Comparable Store Sales Increase (Decrease)Sales** 2% (9%) (5%) (9%) (7%) 10% - ------------------------------------------------------------------------------------------------------- Retail Sales Per Average Gross Square Foot $ 360 $ 345 $ 379 $ 401 $ 474 $ 505 - ------------------------------------------------------------------------------------------------------- STORES AND ASSOCIATES AT END OF YEAR Total Number of Stores Open 788 700 597 491 354 250 - -------------------------------------------------------------------------------------------------------Average Gross Square Feet 5,021,0005,590,000 5,016,000 4,358,000 3,673,000 2,849,000 2,174,000 - -------------------------------------------------------------------------------------------------------Average Number of Associates 48,500 30,200 22,000 16,700 13,900 11,300 - -------------------------------------------------------------------------------------------------------
* Fifty-three week fiscal year. ** A store is included in comparable store sales when it has been open at least one year (1) Per share amounts haveand its square footage has not been restated to reflect the two-for-one stock split on A&F's Class A Common Stock, distributed on June 15, 1999. 14expanded or reduced by more than 20%. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS During the 2004 fiscal year, the Company made solid progress in executing its strategic priority to build and maintain the aspirational positioning of its brands. An integral part of this strategy was to reduce the overall level of promotions to emphasize the superior quality of its brands. In addition, the Company increased its spending in its retail stores to improve the overall customer experience and reduce the level of shrink. The Company had net sales of $2.021 billion in fiscal 2004, up 18.3% versus net sales in the fiscal 2003 period. Net sales for the fourth quarter ofincome was $216.4 million in fiscal 2004, up 5.7% versus the 2003 fiscal year were $560.4 million, an increase of 5% from $534.5 million for the fourth quarter of the 2002 fiscal year. Operating income for the fourth quarter of the 20032004 fiscal year was $154.3increased 5.0% to $347.6 million compared to $149.6from $331.2 million in the 2002 fiscal year. Net income increased to $94.3 million in the fourth quarter of fiscal 2003 as compared to $92.8 million in the 2002 fiscal year. Net income per diluted share for the fourth quarter of the 2003 fiscal year was $.96, up 3% from $.93 in the 2002 fiscal year. Net sales for the 2003 fiscal year were $1.7 billion, an increase of 7% over the 2002 fiscal year net sales of $1.6 billion.year. Operating income included a $40.9 million accrual for the 2003 fiscal year increased 6% to $331.6 million from $312.6 million for the 2002 fiscal year.expected settlement of three related class action employment discrimination lawsuits. Net income per weighted average diluted share was $2.06$2.28 for the 20032004 fiscal year compared to $1.94$2.06 in the 20022003 fiscal year, an increase of 6%10.7%. During theThe Company generated cash from operations of $426.1 million in fiscal 2004 versus $342.5 million in fiscal 2003 fiscal year, theresulting primarily from strong earnings coupled with disciplined inventory management. The Company continuedused cash from operations to finance its growth strategy, by opening 1984 Hollister stores, 16 Abercrombie & Fitch stores, 9 abercrombie stores and 79 Hollister4 RUEHL stores, and remodeling 14 Abercrombie & Fitch stores. Further, the Company used excess cash to repurchase 11.2 million shares of common stock for a total$434.7 million and pay dividends of 107 stores. Sales productivity of these new store openings continues$0.50 per share. Cash distributions to shareholders will continue to be high. Duringan important way to deliver shareholder value, but the fourth quarterCompany's first priority will be to invest in the business to support its domestic and international growth plans. Further, the Company is committed to maintaining sufficient cash on the balance sheet to support the needs of the 2003 fiscal year,business and withstand unanticipated business volatility. Therefore, the new stores in all three concepts opened duringCompany plans to retain approximately $300 to $350 million of cash and marketable securities, subject to a variety of factors including inventory purchases and the past 12 months averaged approximately the same sales per square foot as the existing store base.timing of certain payments. 24 The following data represent the Company's consolidated statements of income for the last three fiscal years, expressed as a percentage of net sales:
2004 2003 2002 2001 ------ ------ ----------- ----- ----- NET SALES 100.0% 100.0% 100.0% Cost of Goods Sold, Occupancy and Buying Costs 55.0 58.0 58.9 59.1 ------ ------ ----------- ----- ----- GROSS INCOME 45.0 42.0 41.1 40.9 General, Administrative and Store Operating Expenses 27.8(1) 22.6 21.5 21.0 ------ ------ ----------- ----- ----- OPERATING INCOME 17.2 19.4 19.6 19.9 Interest Income, Net (0.3) (0.2) (0.2) (0.4) ------ ------ ----------- ----- ----- INCOME BEFORE INCOME TAXES 17.5 19.6 19.8 20.3 Provision for Income Taxes 6.8 7.6 7.6 7.9 ------ ------ ----------- ----- ----- NET INCOME 10.7 12.0 12.2 12.4 ====== ====== =========== ===== =====
15(1) Includes 2.0% related to the settlement of the class action diversity lawsuits. 25 FINANCIAL SUMMARY The following summarized financialoperational data compares thefiscal 2004 to fiscal 2003 and fiscal year to the comparable periods for 2002 and 2001:2002:
Change ---------------------- 2004 2003 2002 20012003-2004 2002-2003 2001-2002 -------- -------- ------------------ ---------- ---------- --------- --------- Net sales (millions) $ 1,708 $ 1,596 $ 1,365(thousands) $2,021,253 $1,707,810 $1,595,757 18% 7% 17% DecreaseNet sales by brand Abercrombie & Fitch 1,210,222 1,180,646 1,238,498 3% (5)% abercrombie 227,204 212,276 207,537 7% 2% Hollister 579,687 314,888 149,722 84% 110% RUEHL* 4,140 n/a n/a n/a n/a Increase (decrease) in comparable store sales (9)Abercrombie & Fitch (1)% (5)(11)% (9)(6)% abercrombie 1% (6)% (4)% Hollister 13% 7% 10% Retail sales increase attributable to new and remodeled stores, magazine, catalogue and Webweb sites 16% 16% 22% 19% Retail sales per average gross $ 345 $ 379 $ 401 (9)% (5)% square foot Abercrombie & Fitch $ 352 $ 358 $ 407 (2)% (12)% abercrombie $ 282 $ 270 $ 286 4% (6)% Hollister $ 423 $ 404 $ 385 5% 5% RUEHL* $ 136 n/a n/a n/a n/a Retail sales per average store (thousands) Abercrombie & Fitch $ 2,4943,103 $ 2,7973,184 $ 3,095 (11)3,652 (3)% (13)% abercrombie $ 1,241 $ 1,194 $ 1,271 4% (6)% Hollister $ 2,740 $ 2,594 $ 2,450 6% 6% RUEHL* $ 1,255 n/a n/a n/a n/a Sales statistics per average store Number of transactions Abercrombie & Fitch 45,941 51,234 59,832 (10)% (thousands) Average store size at year-end 7,173 7,300 7,480(14)% abercrombie 21,740 22,128 23,210 (2)% (5)% Hollister 56,687 57,593 58,648 (2)% (2)% (gross square feet) Gross square feet at year-end 5,021 4,358 3,673 15% 19% (thousands) Number of stores and gross square feet by concept:RUEHL* 12,913 n/a n/a n/a n/a Average transaction value Abercrombie & Fitch: Stores at beginning of period 340 309 265 Opened 19 33 45 Closed (2) (2)Fitch $ 67.54 $ 62.15 $ 61.04 9% 2% abercrombie $ 57.10 $ 53.98 $ 54.77 6% (1) -------- -------- -------- Stores at end of period 357 340 309 ======== ======== ======== Gross square feet (thousands) 3,154 3,036 2,798 ======== ======== ======== abercrombie: Stores at beginning of period 164 148 84 Opened 9 19 64 Closed (2) (3) - -------- -------- -------- Stores at end of period 171 164 148 ======== ======== ======== Gross square feet (thousands) 753 727 662 ======== ======== ======== Hollister: Stores at beginning of period 93 34 5 Opened 79 60 29 Closed -% Hollister $ 48.33 $ 45.04 $ 41.78 7% 8% RUEHL* $ 97.16 n/a n/a n/a n/a Units per transaction Abercrombie & Fitch 2.22 2.24 2.22 (1) - -------- -------- -------- Stores at end of period 172 93 34 ======== ======== ======== Gross square feet (thousands) 1,114 595 213 ======== ======== ========% 1% abercrombie 2.68 2.68 2.70 nm (1)% Hollister 2.18 2.14 2.00 2% 7% RUEHL* 2.17 n/a n/a n/a n/a Average unit value Abercrombie & Fitch $ 30.42 $ 27.75 $ 27.50 10% 1% abercrombie $ 21.31 $ 20.14 $ 20.29 6% (1)% Hollister $ 22.17 $ 21.05 $ 20.89 5% 1% RUEHL* $ 44.77 n/a n/a n/a n/a
16* Net Sales for RUEHL, and the related statistics, reflect the activity of three stores opened in September 2004 and one store opened in December 2004. 26 NET SALESFISCAL 2004 COMPARED TO FISCAL 2003 CURRENT TRENDS AND OUTLOOK The Company's focus is on building, maintaining and managing the aspirational positioning of its brands. Management believes that this strategy will allow the Company to maintain high margins over the long-term while driving the Company's growth in sales and profits through the development of new brands. Management expects Hollister to be a significant growth vehicle for the Company domestically, while it continues to differentiate the Abercrombie & Fitch brand from the competition by emphasizing high-quality and fashion content. Management believes that Abercrombie & Fitch's success will continue to favorably impact abercrombie's business. While the Company is encouraged by the results of the RUEHL launch, the brand is still in its early development and as such the Company expects RUEHL to sustain operating losses in 2005 and 2006. In order to achieve and, thereafter, maintain the aspirational positioning of the brands, the Company will continue to manage its expenditures to maintain and enhance the current store base and complement the new stores being opened. The Company will also continue its store investment program to focus on improving the customer's in-store experience through enhanced customer service and improved merchandise presentation. Further, the Company expects to invest in higher inventories to ensure in-stock size and color assortments. While these initiatives will increase the Company's selling costs, management believes the enhanced aspirational image of the Company's brands and improved customer service will have a positive impact on the Company's sales and profit performance. The Company is planning to open up to five stores in Canada during fiscal 2005. Further, in February 2005, the Company established two European subsidiaries that are expected to begin opening stores in Europe by 2006. FOURTH QUARTER RESULTS Net Sales Net sales for the fourth quarter of the 2004 fiscal year were $687.3 million, up 22.6% versus last year's fourth quarter net sales of $560.4 million. The net sales increase was attributable to the net addition of 88 stores during the 2004 fiscal year, a comparable store sales increase of 9% for the quarter and an increase in the direct-to-consumer business net sales of $11.1 million versus the comparable period in the 2003 fiscal year. By merchandise brand, comparable store sales for the quarter were as follows: Abercrombie & Fitch increased 4% with men's comparable store sales increasing by a high-single digit percentage and women's increasing by a low-single digit percentage. abercrombie, the kids' business, achieved a 16% increase in comparable store sales with girls attaining a high-teen positive increase and boys increasing by a low double-digit percentage. In Hollister, comparable store sales increased by 19% for the fourth quarter with guys posting a high-teen increase and girls realizing an increase in the low-twenties. On a regional basis, comparable store sales results across all three brands were strongest along the East Coast and in the West and weakest in the Midwest. However, all regions reported positive comparable store sales for the quarter. Stores located in New York City metropolitan area, Florida, Philadelphia metropolitan area and Southern California had the best comparable store sales performance. 27 The Company committed to a more aspirational and less promotional strategy in early 2004 which it maintained throughout the year. As such, the Company did not anniversary the direct mail promotions used during the fourth quarter of the 2003 fiscal year to drive business between Thanksgiving and Christmas. In Abercrombie & Fitch, the men's comparable store sales increase for the quarter was driven by strong performances in graphic tees, denim, and woven shirts. Women's comparable store sales growth was driven by an increase in polos, denim and fleece, offset by a decrease in sweaters. In the kid's business, for the quarter, girls had comparable store sales increases across most of the categories, especially polos, denim and graphic tees. Boys' comparable store sales increase was driven by graphic tees, denim and fleece. In Hollister, girls achieved a slightly higher comparable store sales increase than guys. In girls, polos, denim and fleece had strong comparable store sales increases. The increase in the guys' comparable store sales was the result of a strong performance in graphic tees, denim and woven shirts categories for the quarter. The impact of the four RUEHL stores was immaterial to the Company's total net sales for the fourth quarter of the 2004 fiscal year. Direct-to-consumer merchandise net sales, which are sold through the Company's web sites and catalogue, in the fourth quarter of the 2004 fiscal year, were $40.1 million, an increase of 29.4% versus last year's fourth quarter net sales of $31.0 million. Shipping and handling revenue for the corresponding periods was $5.5 million in 2004 and $3.5 million in 2003. The direct-to-consumer business, including shipping and handling revenue, accounted for 6.6% of net sales in the fourth quarter of fiscal 2004 compared to 6.2% in the fourth quarter of fiscal 2003. Gross Income The Company's gross income may not be comparable to those of other retailers since all significant costs related to the Company's distribution network, excluding direct shipping costs related to direct-to-consumer sales, are included in general, administrative and store operating expenses (see "General, Administrative and Store Operating Expenses" section below). Gross income during the fourth quarter of the 2004 fiscal year was $336.6 million compared to $261.5 million in the 2003 fiscal year. The gross income rate (gross income divided by net sales) for the fourth quarter of the 2004 fiscal year was 49.0%, up 230 basis points from last year's rate of 46.7%. The increase in gross income rate resulted largely from lower markdowns and an increase in initial markup (IMU) during the fourth quarter of fiscal 2004 versus fourth quarter of fiscal 2003, partially offset by the lower margin of RUEHL. The improvement in IMU during the fourth quarter was a result of higher unit retail pricing in Abercrombie & Fitch, abercrombie and Hollister. The three brands had IMU improvements compared to the fourth quarter of 2003 and operated at similar margins. The Company ended the fourth quarter of the 2004 fiscal year with inventories, at cost, up 11% per gross square foot versus the fourth quarter of the 2003 fiscal year. The inventory increase reflected a planned shift in the timing of Spring and denim merchandise deliveries. 28 General, Administrative and Store Operating Expenses General, administrative and store operating expenses during fourth quarter of the 2004 fiscal year were $166.4 million compared to $106.7 million during the same period in 2003. During the fourth quarter of the 2004 fiscal year, general, administrative and store operating expense rate (general, administrative and store operating expenses divided by net sales) was 24.2% compared to 19.0% in the fourth quarter of the 2003 fiscal year. The increase in the percentage of net sales versus the 2003 comparable period was primarily related to the following: higher store expenses due to an increase in aggregate payroll which represented 250 basis points of the increase and higher incentive compensation bonus accruals resulting from improved financial performance, which represented 160 basis points of the increase. Wage levels, in Abercrombie & Fitch, abercrombie and Hollister decreased, compared to the fourth quarter of 2003. The decrease in wage levels was due to an increase in part-time hours in order to provide better customer service at the stores which resulted in a higher proportion of part-time employees at lower rates of pay than the comparable period last year. The distribution center continued to achieve record levels of productivity during the fourth quarter of the 2004 fiscal year. Productivity, as measured in units processed per labor hour, was 10% higher than the fourth quarter of the 2003 fiscal year. Costs related to the distribution center, excluding direct shipping costs related to the direct-to-consumer net sales, included in general, administrative and store operating expenses were $6.1 million for the fourth quarter of the 2004 fiscal year compared to $5.5 million for the fourth quarter of the 2003 fiscal year. Operating Income Operating income during the fourth quarter of the 2004 fiscal year increased to $170.2 million from $154.8 million in the 2003 fiscal year fourth quarter, an increase of 10.0%. The operating income rate (operating income divided by net sales) was 24.8% for the fourth quarter of the 2004 fiscal year compared to 27.6% for the fourth quarter of the 2003 fiscal year. The decrease in the operating income rate during the fourth quarter of fiscal 2004 was a result of higher general, administrative and store operating expenses during the quarter, partially offset by higher gross income resulting from higher unit retail pricing in Abercrombie & Fitch, abercrombie and Hollister. Interest Income and Income Taxes Fourth Quarterquarter net interest income was $1.3 million in fiscal 2004 compared to $1.1 million during the comparable period in fiscal 2003. The increase in net interest income was due to higher rates during the fourth quarter of the 2004 fiscal year when compared to the same period in the prior year. The Company continued to invest in tax-free securities for the majority of the quarter and then changed its investing strategy to taxable money market investments. The effective tax rate for the fourth quarter was 39.2% compared to 39.3% for the 2003 comparable period. 29 Net Income and Net Income per Share Net income for the fourth quarter of the 2004 fiscal year was $104.3 million versus $94.6 million for the fourth quarter of fiscal 2003, an increase of 10.3%. The increase in net income was the result of higher net sales and higher gross income partially offset by increased spending in general, administrative and store operating expenses. Net income per weighted-average diluted share outstanding for the fourth quarter of fiscal 2004 was $1.15 versus $0.97 for the same period last year, an increase of 18.6%. Net income per share increased by more than net income as a result of the Company's share repurchase program. In the fourth quarter of the 2004 fiscal year the Company had weighted average basic shares outstanding of 87.6 million versus 96.1 million in the fourth quarter of 2003. FISCAL 2004 RESULTS Net Sales Net sales for the 2004 fiscal year were $2.021 billion, an increase of 18.3% versus the 2003 fiscal year net sales of $1.708 billion. The net sales increase was attributable to the net addition of 88 stores during the 2004 fiscal year, an increase in comparable stores sales of 2% for the year and an increase in the direct-to-consumer business net sales of $35.6 million versus the 2003 fiscal year. For the fiscal year, comparable store sales by brand were the following: Abercrombie & Fitch declined 1%; abercrombie increased 1%; Hollister increased 13%; and the women's and girls' businesses in each brand continued to be more significant than the men's and boys'. During the 2004 fiscal year, womens and girls represented over 60% of the net sales for each of the brands. Hollister girls achieved a mid-teen increase and abercrombie girls posted a mid-single digit increase in comparable store sales for the 2004 fiscal year, while Abercrombie & Fitch women's had a low-single digit decrease. For the 2004 fiscal year, sales per square foot in Hollister stores were approximately 135% of the sales per square foot of Abercrombie & Fitch stores in the same malls compared to 113% for the 2003 fiscal year. Direct-to-consumer merchandise net sales, which are sold through the Company's web sites and catalogue, for the 2004 fiscal year were $110.6 million, an increase of 37.6% versus last year's net sales of $80.4 million for the comparable period. Shipping and handling revenue was $15.7 million in fiscal 2004 and $10.2 million in fiscal 2003. The direct-to-consumer business, including shipping and handling revenue, accounted for 6.2% of net sales compared to 5.3% of net sales for the 2004 and 2003 fiscal years, respectively. The impact of the four RUEHL stores opened during the fall of fiscal 2004 was immaterial to the Company's total net sales for the 2004 fiscal year. 30 Gross Income The Company's gross income may not be comparable to those of other retailers since all significant costs related to the Company's distribution network, excluding direct shipping costs related to the direct-to-consumer sales, are included in general, administrative and store operating expenses (see "General, Administrative and Store Operating Expenses" section below). For the 2004 fiscal year, gross income increased to $909.8 million from $716.9 million in the 2003 fiscal year. The gross income rate in the 2004 fiscal year was 45.0% versus 42.0% in the 2003 fiscal year. The increase was driven by improvements in IMU across all three brands due to higher average unit retail pricing, especially in Abercrombie & Fitch. General, Administrative and Store Operating Costs Full year general, administrative and store operating expenses were $562.2 million in the 2004 fiscal year versus $385.8 million in the 2003 fiscal year. The general, administrative and store operating expense rate in 2004 was 27.8% versus 22.6% in 2003. The increased rate during the 2004 fiscal year period was primarily due to higher home office and store expenses. Home office expenses increased largely due to the accrual for the settlement of three related class action employment discrimination lawsuits which represented 200 basis points and higher incentive compensation accruals resulting from improved financial performance during the year which represented 90 basis points. Store expenses increased due to an increase in aggregate payroll which represented 150 basis points. Wage levels in Abercrombie & Fitch, abercrombie and Hollister decreased in fiscal 2004 compared to fiscal 2003. The decrease in wage levels was due to an increase in part-time hours in order to provide better customer service at the stores which resulted in a higher proportion of part-time employees at lower rates of pay than last year. Productivity at the distribution center, as measured in units processed per labor hour, was 10% higher during the 2004 fiscal year than during the 2003 fiscal year. Costs related to the distribution center, excluding direct shipping costs related to the direct-to-consumer sales, included in general, administrative and store operating expenses were $20.3 million and $19.3 million for the 2004 and 2003 fiscal years, respectively. Operating Income For the 2004 fiscal year, operating income was $347.6 million compared to $331.2 million for the 2003 fiscal year, an increase of 5.0%. The operating income rate for the 2004 fiscal year was 17.2% versus 19.4% in the 2003 fiscal year. The decline was primarily due to the accrual for the settlement of three related class action employment discrimination lawsuits and higher payroll expense at both the home office and stores. The decline was partially offset by sales increases, due to the increase in comparable store sales and new stores, higher gross margin and increases in average unit retail pricing in Abercrombie & Fitch, abercrombie and Hollister. Interest Income and Income Taxes Net interest income for the 2004 fiscal year was $5.2 million compared to $3.7 million for the 2003 fiscal year. The increase in net interest income was due to an increase in rates and average cash balances for the 2004 fiscal year when compared to the 2003 fiscal year. Beginning in January 2005, the Company began investing in taxable money market investments; prior thereto, the Company invested in tax-free securities. The effective tax rate for the 2004 fiscal year was 38.7% compared to 38.8% for the 2003 fiscal year. 31 Net Income and Net Income per Share Net income for the 2004 fiscal year was $216.4 million versus $204.8 million for the 2003 fiscal year, an increase of 5.6%. Net income for 2004 included the after-tax impact of the settlement of three class action employment discrimination lawsuits of $25.1 million. Net income per weighted-average diluted share was $2.28 in the fiscal 2004 year versus $2.06 in the fiscal 2003 year, an increase of 10.7%. The increase in net income per diluted share outstanding versus net income was due to the Company's share repurchase program in fiscal 2004. The Company repurchased 11.2 million shares in fiscal 2004 versus 4.4 million shares in fiscal 2003. FISCAL 2003 COMPARED TO FISCAL 2002 FOURTH QUARTER 2003 Net Sales Net sales for the fourth quarter of the 2003 fiscal year were $560.4 million, up 5% over last year's4.8% versus 2002 fourth quarter net sales of $534.5 million. ComparableThe net sales increase was attributable to the net addition of 103 stores and an increase in the direct-to-consumer business net sales of $8.2 million versus the comparable period in the 2002 fiscal year, offset by an 11% decrease in comparable store sales defined as sales in stores that have been open for at least one year, decreased 11% forduring the quarter. By merchandise concept,brand, comparable store sales ("comps") for the quarter were as follows: Abercrombie & Fitch's compscomparable store sales declined 14% with mens comps declining in the low twenties and womens declining by a high-single digit percentage. In abercrombie, the kids' business, compscomparable store sales decreased 7% with girls achieving a low-single digit positive comp increase and boys comps declining in the low twenties. In Hollister, compscomparable store sales were flat when compared to last yearfiscal 2002 for the quarter. Hollister girls compscomparable store sales were a positive low-single digit for the fourth quarter, while guys comps were a negative mid-single digit. On a regional basis, compcomparable store sales results across all three conceptsbrands were strongest along the East Coast and in the West and weakest in the Midwest. Stores located in Florida, Southern California and the New York metropolitan area had the best compcomparable store sales performance. From a promotional standpoint, the Company used direct mail promotions during the fourth quarter of the 2003 fiscal year to drive business between Thanksgiving and Christmas, but did not anniversary the 2002 fourth quarter issuance of a bounce-back coupon. Also, the Company did not repeat a 15%-off bag stuffer coupon that impacted late December and January business in fiscal 2002. Overall, the Company sought to have a less promotional look to the stores in the 2003 fiscal year. From a merchandising standpoint, womens continued to outperform mens. In Abercrombie & Fitch, womens had strong compcomparable store sales increases in the fourth quarter in knits, fleece and skirts. Weak classifications included woven shirts and outerwear. The men'smens business continued to be difficult. However, graphic t-shirtstees and woven shirts were classifications that had compcomparable store sales increases while the sweater and outerwear classifications had significant decreases. In the kids' business, for the quarter, knits, sweats and pants had strong compcomparable store sales increases in girls, which were somewhat offset by weak business in sweaters, shirts, outerwear and gymwear. Boys graphic tees, woven shirts and accessories had compcomparable store sales increases, but these increases were not sufficient to offset other weaker performing classifications. 32 In Hollister, girls also achieved stronger compscomparable store sales than guys. In girls, sweats, skirts, pants and denim had significant compcomparable store sales increases during the quarter, while comps in the sweater and outerwear classifications declined. In guys, woven shirts, denim and sweats had positive compcomparable store sales increases. However, the sweater, knit tops and outerwear classifications had significant declines. Sales inDirect-to-consumer merchandise net sales through the e-commerce business grew by over 42% duringCompany's web sites, the A&F Quarterly (a catalogue/magazine) and catalogue for the fourth quarter of the 2003 fiscal year as compared to the same period during the 2002 fiscal year.were $31.0 million, an increase of 28.6% versus last year's fourth quarter net sales of $24.1 million. The Company added a Hollister e-commerce business during back-to-schoolBack-to-School 2003. Shipping and handling revenue for the corresponding periods was $3.5 million in 2003 and $2.2 million in 2002. The direct to consumerdirect-to-consumer business, (which includes the Company's catalogue, the A&F Quarterly (a catalogue/magazine)including shipping and the Company's Web sites)handling revenue, accounted for 6.0%6.2% of net sales in the fourth quarter of the 2003 fiscal year as compared to 5.0%4.9% in the fourth quarter of fiscal 2002. 17 Fiscal 2003 Net sales for the 2003 fiscal year reached $1.7 billion, up 7% over the 2002 fiscal year. The sales increase was attributable to the net addition of 103 stores partially offset by a 9% comparable store sales decrease. By merchandise concept, comps for the 2003 fiscal year were as follows: Abercrombie & Fitch's comps declined 11% with mens comps declining low twenties and womens comps declining mid-single digits. abercrombie comps declined 6% with girls achieving a mid-single digit positive comp store increase and boys posting a negative comp in the high teens. Overall, the women's and girls' businesses continued to increase in share of the total business and accounted for approximately 63% of the adult and kids' businesses in the 2003 fiscal year. Hollister comps for the 2003 fiscal year were a positive 7%, with girls comps positive in low double digits and guys slightly negative. During the year, Hollister continued to gain in productivity relative to Abercrombie & Fitch. For the 2003 fiscal year, sales per square foot in Hollister stores were approximately 113% of the sales per square foot of Abercrombie & Fitch stores in the same malls. For the 2003 fiscal year, e-commerce sales grew by approximately 39% as compared to the 2002 fiscal year. The Company's catalogue, the A&F Quarterly, and the Company's Web sites represented 5.3% of net sales for the 2003 fiscal year compared to 4.7% in the 2002 fiscal year. Current Trends and Outlook The Company experienced double digit comp store increases each year from the 1996 fiscal year to the 1999 fiscal year, reaching sales per gross square foot of $505 in fiscal 1999, a level significantly higher than most of its competitors. The Company believes that the comp store decreases since then reflect both a difficult retail environment and a normalization of the Company's sales per square foot relative to its competition. The Company achieved positive comp store increases in January and February 2004 and while March 2004 comps were down slightly, the Company is encouraged by this improvement in trend. Although the Company is confident that comps will improve in the future, due to the uncertain competitive and economic environment, it cannot predict whether this will occur in the 2004 fiscal year or any subsequent year. Driving top line revenue will be the Company's priority in the 2004 fiscal year and the Company has made a number of organizational changes intended to strengthen the design and merchandising groups. Additionally, changes have been made in the Company's marketing strategies. The A&F Quarterly has been discontinued and the Company plans to use a variety of marketing vehicles (including lifestyle only direct mail and national magazine advertising) in the future. In addition to emphasizing top line growth, management will focus on strong operational controls which have been an important factor in the Company's success. 18 Fourth Quarter 2002 Net sales for the fourth quarter of the 2002 fiscal year were $534.5 million, up 15% over 2001's fourth quarter net sales of $466.6 million. Comparable store sales decreased 4% for the quarter. By merchandise concept, comps for the quarter were as follows: Abercrombie & Fitch's comps declined 5%, with womens achieving positive low-single digit comps and mens a mid-teen negative comp. Comps for abercrombie declined 4%, with girls achieving a high-single digit positive comp during the quarter and boys a negative high-teen comp. Comps in Hollister were a positive 16%, with girls achieving low twenties positive comps and guys a high-single digit positive comp. By region, comps were strongest in the West and weakest in the Midwest. Given continued uncertainty in the economy, the Company entered the fourth quarter of the 2002 fiscal year with an approach designed to protect both the bottom line and the aspirational quality of the brands. The Company continued to strategically use direct mail and bounce-back promotions, but, overall, a much less aggressive approach to promotions was undertaken as compared to the 2001 fiscal year. The pre-Christmas selling environment was very challenging and, as expected, comps were negative for the fourth quarter prior to Christmas. Comps improved significantly after Christmas, resulting in a flat comp for December 2002. January 2003 comps were positive 3%, which reflected strong sales of winter clearance, and positive results from the initial Spring assortment. From a merchandising standpoint, womens continued to outperform mens. Key classifications in womens during the quarter included woven shirts, knit tops, outerwear, pants, sweats and underwear. Mens continued to be difficult and there remained no solid trend industry-wide. Knit tops and woven shirts performed well during the quarter. As for the kids' business, knit tops, sweats, woven tops, pants and outerwear performed very well in girls. In boys, denim and sweats performed best. As in the adult men's business, boys continued to be difficult. In Hollister, girls continued to be more significant than guys, representing approximately 65% of the overall business. For the quarter, the best performing girls classifications were woven shirts, knit tops, sweats, skirts and denim. In guys, denim, knit tops, graphic t-shirts, sweatshirts and accessories performed best. Sales in the e-commerce business grew by over 25% during the fourth quarter of the 2002 fiscal year as compared to the fourth quarter of the 2001 fiscal year. The direct to consumer business (which includes the Company's catalogue, the A&F Quarterly and the Company's Web sites) accounted for 5.0% of net sales in the fourth quarter of the 2002 fiscal year as compared to 4.5% in the 2001 fiscal year. 19 Fiscal 2002 Net sales for the 2002 fiscal year reached $1.6 billion, up 17% over the 2001 fiscal year. The sales increase was attributable to the net addition of 106 stores offset by a 5% comparable store sales decrease. By merchandise concept, Abercrombie & Fitch comps declined 6%, abercrombie comps declined 4% and Hollister comps increased 10%. The decline in comps was primarily due to the weak performance in both mens and boys. Mens comps decreased in low-double digits for the 2002 fiscal year while boys comps decreased in the mid-teens. Overall, the women's and girls' businesses continued to increase in share of the total business and accounted for approximately 57% of the adult and kids' businesses in the 2002 fiscal year. For the year, womens comps were negative low-single digits while girls comps were positive mid-single digits. Hollister continued to perform well. For the 2002 fiscal year, sales per square foot in Hollister stores were approximately 86% of the sales per square foot of Abercrombie & Fitch stores in the same malls. The Company's catalogue, the A&F Quarterly and the Company's Web sites represented 4.7% of the 2002 fiscal year net sales compared to 4.2% in the 2001 fiscal year. GROSS INCOMEGross Income The Company's gross income may not be comparable to those of other retailers since all significant costs related to the Company's distribution network, excluding direct shipping costs related to the e-commerce and cataloguedirect-to-consumer sales, are included in general, administrative and store operating expenses (see "General, Administrative and Store Operating Expenses" section below). Fourth Quarter 2003 Gross income for the fourth quarter of the 2003 fiscal year was $261.0$261.5 million compared to $243.0$244.2 million in the 2002 fiscal year. The gross income rate (gross income divided by net sales) for the fourth quarter of the 2003 fiscal year was 46.6%46.7%, up 110100 basis points from last year'sthe 2002 rate of 45.5%45.7%. The increase in gross income rate resulted largely from an increase in initial markup (IMU),IMU, partially offset by a higher markdown rate and an increase in buying and occupancy costs, as a percent of net sales. Continued progress in sourcing efficiency has beenwas an important factor in improving IMU and profit. The Company continued to make progress increasing IMU in the Hollister and abercrombie business, where IMU improved over 400 basis points versus the fourth quarter of the 2002 fiscal year for both concepts. All three concepts are operatingoperated at very similar margins, both in IMU and merchandise margin. The increase in buying and occupancy costs, as a percent of net sales, reflected the inability to leverage fixed costs, such as rent, depreciation and other real estate related charges, with a comp storecomparable stores sales decrease. The markdown rate, as a percentage of net sales, exceeded last year for thefiscal 2002's fourth quarter due to the weaker than expected pre-Christmas business resulting in aggressive markdowns in the back half of January. The Company conservatively managed its inventory and despite negative compscomparable store sales ended the fourth quarter of the 2003 fiscal year with inventories, at cost, up 3% per gross square foot versus the fourth quarter of the 2002 fiscal year. 20 Fiscal 2003 For the 2003 fiscal year, gross income increased to $717.4 million from $656.0 million in the 2002 fiscal year. The gross income rate in the 2003 fiscal year was 42.0% versus 41.1% in the 2002 fiscal year. The increase was driven by improvements in IMU that were partially offset by increased buyingGeneral, Administrative and occupancy costs as a percentage of net sales. Buying and occupancy costs increased over last year, as a percentage of net sales, due to the inability to leverage fixed expenses with lower sales volume per average store. Fourth Quarter 2002 Gross income for the fourth quarter of the 2002 fiscal year was $243.0 million compared to $208.5 million in the same period in the 2001 fiscal year. The gross income rate for the fourth quarter of the 2002 fiscal year was 45.5%, up 80 basis points from the 2001 fiscal year rate of 44.7%. The increase in the gross income rate resulted largely from an increase in IMU, partially offset by an increase in buying and occupancy costs, as a percent of net sales. Continued progress in sourcing was an important factor in improving IMU in all three concepts. The Company continued to make progress increasing IMU in Hollister, where IMU improved over 700 basis points in the fourth quarter of the 2002 fiscal year versus the fourth quarter of the 2001 fiscal year. Additionally, the Company's less aggressive approach to promotions during the fourth quarter of the 2002 fiscal year resulted in selling at higher average retail prices compared to the fourth quarter of the 2001 fiscal year. The increase in buying and occupancy costs, as a percent of net sales, reflected the inability to leverage fixed costs, such as rent, depreciation and other real estate related charges, with a comp store decrease. The Company ended the fourth quarter of the 2002 fiscal year with inventories, at cost, up 12% per gross square foot versus the fourth quarter of the 2001 fiscal year. Fiscal 2002 Gross income for the 2002 fiscal year was $656.0 million compared to $558.0 million in the 2001 fiscal year. The gross income rate was 41.1% in the 2002 fiscal year versus 40.9% in the 2001 fiscal year. The increase was driven by improvements in IMU that were almost fully offset by increased buying and occupancy costs, as a percentage of net sales. Gross income was also protected as a result of strong inventory management through most of the first half of the 2002 fiscal year. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES Fourth Quarter 2003Store Operating Expenses General, administrative and store operating expenses during fourth quarter of the 2003 fiscal year were $106.7 million compared to $93.4 million during the same period in the 2002 fiscal year. The fourth quarter of the 2003 fiscal year general, administrative and store operating expense rate (general, administrative and store operating expenses divided by net sales) was 19.0% compared to 17.5% in the fourth quarter of the 2002 fiscal year. The increase in rate versus the 2002 fiscal year reflects a loss of leverage due to the double-digit drop in 21 compscomparable store sales partially offset by lower bonuses and efficiencies in store operations, distribution center operations and the direct to consumerdirect-to-consumer business. 33 During the fourth quarter of the 2003 fiscal year, store payroll hours were reduced by 2% per average Abercrombie & Fitch adult store and wages, in all three concepts, were held relatively flat. Store hours arewere managed on a weekly basis in order to match hours with sales volume. Overall, store expenses grew at approximately the same rate as the Company's square footage growth during the fourth quarter. The distribution center achieved record level productivity during the fourth quarter of the 2003 fiscal year. Productivity, as measured in units processed per labor hour, was 18% higher than the fourth quarter of the 2002 fiscal year. This increase was on top of a 39% increase last yearin the fourth quarter of fiscal 2002 and a 50% increase two years ago.in the fourth quarter of fiscal 2001. Costs related to the distribution center, excluding direct shipping costs related to the e-commerce and cataloguedirect-to-consumer sales, included in general, administrative and store operating expenses were $5.5 million for the fourth quarter of the 2003 fiscal year compared to $4.9 million for the fourth quarter of the 2002 fiscal year. FiscalOperating Income Operating income for the fourth quarter of the 2003 fiscal year increased to $154.8 million from $150.8 million in the 2002 fiscal year fourth quarter. The operating income rate was 27.6% for the fourth quarter of the 2003 fiscal year compared to 28.2% for the fourth quarter of the 2002 fiscal year. Higher general, administrative and store operating expenses, expressed as a percentage of net sales, reduced the operating income rate in the fiscal 2003 fourth quarter. This decline was partially offset by higher merchandise margins during the quarter. Interest Income and Income Taxes Fourth quarter net interest income for the 2003 fiscal year was $1.1 million compared with net interest income of $1.3 million for the comparable period in the 2002 fiscal year. The decline in the 2003 fiscal year fourth quarter net interest income was due to lower interest rates. The Company continued to invest in tax-free securities. The effective tax rate for the fourth quarter was 39.3% compared to 38.5% for the 2002 comparable period. Net Income and Net Income per Share Net income for the fourth quarter of the 2003 fiscal year was $94.6 million versus $93.5 million for the same period in fiscal 2002, an increase of 1.2%. The increase in net income was the result of higher net sales and higher gross income partially offset by increased spending in general, administrative and store operating expenses. Net income per weighted-average diluted share outstanding for the fourth quarter of fiscal 2003 was $0.97 versus $0.94 for the fourth quarter of fiscal 2002, an increase of 3.2%. Net income per share increased by more than net income as a result of the Company's share repurchase program. In the fourth quarter of the 2003 fiscal year the Company had weighted average basic shares outstanding of 96.1 million versus 97.2 million in the fourth quarter of 2002. 34 FISCAL 2003 Net Sales Net sales for the 2003 fiscal year reached $1.708 billion, an increase of 7.0% versus the 2002 fiscal year net sales of $1.596 billion. The net sales increase was attributable to the net addition of 103 stores and an increase in the direct-to-consumer business net sales of $16.9 million versus the 2002 fiscal year, offset by a 9% decrease in comparable store sales for the year. By merchandise concept, comparable store sales for the 2003 fiscal year were as follows: Abercrombie & Fitch's declined 11% with mens declining in the low twenties and womens declining by mid-single digits. abercrombie comparable store sales declined 6% with girls achieving a mid-single digit increase and boys posting a high-teen decrease. Overall, the women's and girls' businesses continued to increase in share of the total business and accounted for approximately 63% of the adult's and kids' businesses in the 2003 fiscal year. Hollister comparable store sales for the 2003 fiscal year increased 7%, with girls achieving a low double-digits increase and guys a slight decrease. During the year, Hollister continued to gain in productivity relative to Abercrombie & Fitch. For the 2003 fiscal year, sales per square foot in Hollister stores were approximately 113% of the sales per square foot of Abercrombie & Fitch stores in the same malls compared to 86% for the 2002 fiscal year. Direct-to-consumer merchandise net sales through the Company's web sites, the A&F Quarterly (a catalogue/magazine) and catalogue for the 2003 fiscal year were $80.4 million, an increase of 22.0% versus net sales of $65.9 million for the comparable period in fiscal 2002. The Company added a Hollister direct-to-consumer business during Back-to-School 2003. Shipping and handling revenue for the corresponding periods was $10.2 million in 2003 and $7.8 million in 2002. The direct-to-consumer business, including shipping and handling revenue, accounted for 5.3% of net sales compared to 4.6% for the 2003 and 2002 fiscal years, respectively. Gross Income The Company's gross income may not be comparable to those of other retailers since all significant costs related to the Company's distribution network, excluding direct shipping costs related to the direct-to-consumer sales, are included in general, administrative and store operating expenses (see "General, Administrative and Store Operating Expenses" section below). For the 2003 fiscal year, gross income increased to $716.9 million from $655.7 million in the 2002 fiscal year. The gross income rate in the 2003 fiscal year was 42.0% versus 41.1% in the 2002 fiscal year. The increase was driven by improvements in IMU that were partially offset by increased buying and occupancy costs as a percentage of net sales. Buying and occupancy costs increased versus fiscal 2002, as a percentage of net sales, due to the inability to leverage fixed expenses with lower sales volume per average store. 35 General Administrative and Store Operating Expenses Full year general, administrative and store operating expenses were $385.8 million in the 2003 fiscal year versus $343.4 million in the 2002 fiscal year. The general, administrative and store operating expense rate in the 2003 fiscal year was 22.6% versus 21.5% in the 2002 fiscal year. The increased rate in the 2003 fiscal year resulted primarily from a drop in compscomparable store sales that could not be offset by lower variable expenses per average store. In addition, legal expense increased in the 2003 fiscal year compared to the 2002 fiscal year as the Company reserved expected defense costs for pending litigation. Partially offsetting these costs were improvements in distribution center productivity, reduced expenses per order in the direct to consumerdirect-to-consumer business and reduced marketing expenses, as a percentage of net sales, due to savings from fewer direct mail campaigns in the 2003 fiscal year. Productivity at the distribution center, as measured in units processed per labor hour, was 31% higher during the 2003 fiscal year than during the 2002 fiscal year. Costs related to the distribution center, excluding direct shipping costs related to the e-commerce and cataloguedirect-to-consumer sales, included in general, administrative and store operating expenses were $19.3 million in the 2003 fiscal year compared to $19.9 million in the 2002 fiscal year. Fourth Quarter 2002 For the fourth quarter of the 2002 fiscal year, general, administrative and store operating expenses were $93.4 million compared to $79.9 million in fourth quarter of the 2001 fiscal year. The general, administrative and store operating expense rate was 17.5% compared to 17.1% in the same period the prior year. The increase in rate versus the 2001 fiscal year resulted primarily from an increase in home office expenses, largely due to higher bonuses resulting from improved financial performance. During the fourth quarter of the 2002 fiscal year, store payroll hours were reduced by 9% per average Abercrombie & Fitch adult store and 3% per average kids store. The control of payroll hours helped mitigate the effect of negative comps on the store operating expense rate. Efficiencies were also recognized in the distribution center and in the direct to consumer business. Productivity, as measured in units processed per labor hour, was 39% higher during the fourth quarter of the 2002 fiscal year than the fourth quarter of the 2001 fiscal year. For the quarter, more units were processed than the comparable period in the 2001 fiscal year with 20% fewer labor hours. 22 Costs related to the distribution center, excluding direct shipping costs related to the e-commerce and catalogue sales, included in general, administrative and store operating expenses were $4.9 million for the fourth quarter of the 2002 fiscal year compared to $4.9 million for the fourth quarter of the 2001 fiscal year. Fiscal 2002 The general, administrative and store operating expenses for the 2002 fiscal year were $343.4 million compared to $286.6 million in the 2001 fiscal year. The full year general, administrative and store operating expense rate in the 2002 fiscal year was 21.5% versus 21.0% in the 2001 fiscal year. The 2002 fiscal year rate increase resulted from an increase in store expenses, as a percentage of sales, due to the inability to leverage fixed costs on a comp store sales decrease, as well as higher legal and incentive compensation expenses. Productivity at the distribution center, as measured in units processed per labor hour, was 46% higher during the 2002 fiscal year than during the 2001 fiscal year. Costs related to the distribution center, excluding direct shipping costs related to the e-commerce and catalogue sales, included in general, administrative and store operating expenses were $19.9 million in the 2002 fiscal year versus $19.5 million the 2001 fiscal year. OPERATING INCOME Fourth Quarter 2003 Operating income for the fourth quarter of the 2003 fiscal year increased to $154.3 million from $149.6 million in the 2002 fiscal year fourth quarter. The operating income rate (operating income divided by net sales) was 27.5% for the fourth quarter of the 2003 fiscal year compared to 28.0% for the fourth quarter of the 2002 fiscal year. Higher general, administrative and store operating expenses, expressed as a percentage of net sales, reduced the operating income rate in the current year's fourth quarter. This decline was partially offset by higher merchandise margins during the quarter. Fiscal 2003Income For the 2003 fiscal year, operating income was $331.6$331.2 million compared to $312.6$312.3 million for the 2002 fiscal year. The operating income rate for the 2003 fiscal year was 19.4% versus 19.6% in the 2002 fiscal year. The decline was attributable to a higher general, administrative and store operating expense rate due to the inability to leverage fixed costs on a compcomparable store sales decrease. The increased expense rate was partially offset by a gross income rate increase. Fourth Quarter 2002Interest Income and Fiscal 2002 Operating income for the fourth quarter of the 2002 fiscal year increased to $149.6 million from $128.6 million during the same period in the 2001 fiscal year. The operating income rate was 28.0% for the fourth quarter of the 2002 fiscal year compared to 27.6% for the fourth quarter in the 2001 fiscal year. The increase in the operating income rate was due to a higher gross income rate partially offset by a higher general, administrative and store operating expense rate. In the 2002 fiscal year, the operating income was $312.6 million compared to $271.5 million in the 2001 fiscal year. The operating income rates for same time periods were 19.6% versus 19.9%. The decline was attributable to a higher general, administrative and store operating expense rate due to the inability to leverage fixed costs on a comp store decrease. The increased expense rate was partially offset by a gross income rate increase. 23 INTEREST INCOME AND INCOME TAXES Fourth quarter and year-to-date netIncome Taxes Net interest income for the 2003 fiscal year were $1.1 million andwas $3.7 million respectively, as compared with net interest income of $1.3 million andto $3.8 million respectively, for the comparable periods in the 2002 fiscal year. The decline in the 2003 fiscal year fourth quarter net interest income was due to lower interest rates. The Company continued to invest in tax-free securities. Fourth quarterThe effective tax rate for the 2003 fiscal year was 38.8% compared to 38.4% for the 2002 fiscal year. Net Income and year-to-date net interestNet Income per Share Net income were $1.3for the 2003 fiscal year was $204.8 million and $3.8versus $194.8 million respectively, infor the 2002 fiscal year, as compared with net interestan increase of 5.1%. Net income of $1.2 million and $5.1 million, respectively, for the comparable periodsper weighted average diluted share was $2.06 in the 2001 fiscal year.2003 year versus $1.94 in the fiscal 2002 year, an increase of 6.2%. The decreaseincrease in net interest income in the year-to-date periodper diluted share outstanding versus net income was a result of the Company's strategy, at the beginning of the 2002 fiscal year, to invest cash in tax-free securities due to the declineCompany's repurchase program in short-term market interest rates.fiscal 2003. The investmentCompany repurchased 4.4 million shares in tax-free securities lowered the Company's effective tax rate. Previously, the Company primarily investedfiscal 2003 versus 1.9 million shares in the commercial paper market. The effective tax rates for the fourth quarter and year-to-date periods of the 2003 fiscal year were 39.3% and 38.8%, respectively, as compared to 38.5% and 38.4%, respectively, for the comparable periods in the 2002 fiscal year.2002. 36 FINANCIAL CONDITION Continued growth in net income andresulted in higher cash on hand has afforded the Company financial strength and flexibility.provided by operating activities. A more detailed discussion of liquidity, capital resources and capital requirements follows. LIQUIDITY AND CAPITAL RESOURCES CashThe Company believes cash provided by operating activities provides theand cash on hand will provide adequate resources to support operations, including projected growth, seasonal requirements and capital expenditures. Furthermore, the Company expects that cash from operating activities will fund the dividend announced in February 2004.dividends currently being paid at a rate of $0.125 per quarter. The Board of Directors will review and approve the appropriateness of future dividend amounts. A summary of the Company's working capital (current assets less current liabilities) position and capitalization follows (in thousands):
2004 2003 2002 2001 --------- --------- --------- Working capital $ 472,653238,412 $ 384,094441,583 $ 241,616357,585 ========= ========= ========= Capitalization: Shareholders' equity $ 871,257669,326 $ 749,527857,765 $ 595,434736,307 ========= ========= =========
24 The decrease in working capital in fiscal 2004 versus fiscal 2003 was the result of lower cash and marketable securities resulting primarily from the Company's repurchase of 11.2 million shares of common stock at a cost of $434.7 million. The increase in working capital in fiscal 2003 versus fiscal 2002 was the result of higher cash and marketable securities. The Company considers the following to be measures of liquidity and capital resources:
2004 2003 2002 2001 --------- --------- --------- Current ratio (current assets divided by current liabilities) 2.69 2.57 2.481.58 2.42 2.32 ========= ========= ========= Net cash provided by operating activities (in thousands) $ 281,896426,125 $ 293,146342,545 $ 233,202345,832 ========= ========= =========
The increase in cash provided by operating activities in the 2004 fiscal year from the 2003 fiscal year was primarily driven by increases in net income, accounts payable and accrued expenses, lessor construction allowances received and income taxes. The increase in accounts payable and accrued expenses was primarily due to the accrual for the settlement of three related class action employment discrimination lawsuits, for rent due to the net addition of 88 stores, representing an increase of 574,000 gross square feet in 2004, and increases in accounts payable for the purchase of merchandise. The decrease in cash provided by operating activities in the 2003 fiscal year from the 2002 fiscal year was primarily driven by an increase in inventories not offset by commensurate increases in net income, lessor construction allowances received, accounts payable and accrued expenses. Inventories increased from the net addition of 103 stores representing an increase of 663,000658,000 gross square feet in 2003. Inventories at fiscal year-end were 3% higher on a per gross square foot basis than at the end of the 2002 fiscal year. 37 The increase in cash fromprovided by operating activities fromin the 2002 fiscal year from the 2001 fiscal year was primarily fromdue to increases in lessor construction allowances, accounts payable and accrued expenses, and income taxes payable. Accounts payable increased in the 2002 fiscal year due to both the increased level of inventory and timing of payments. Accrued expenses increased in the 2002 fiscal year primarily due to higher store expenses, consistent with the increase in store openings. The increase in income taxes payable was driven by higher pre-tax income and timing of payments. The Company's operations are seasonal in nature and typically peak during the back-to-schoolBack-to-School and ChristmasHoliday selling periods. Accordingly, cash requirements for inventory expenditures are highest during these periods. Cash outflows during the 20032004 fiscal year related to investing activities were primarily for purchase of marketable securities and for capital expenditures (see the discussion in the "Capital Expenditures" section below) related to new stores, (netthe remodeling of construction allowances)existing stores, expenditures in home office, improvements in the distribution center, and information technology expenditures. See "Capital Expenditures and Lessor Construction Allowances". Cash inflows from investing activities consisted of proceeds from the sale of marketable securities. As of January 29, 2005, all investments had original maturities of less than 90 days and accordingly were classified as cash equivalents. Cash outflows during the 2003 fiscal year also related to purchases of marketable securities and capital expenditures related to new stores with approximately $35 million invested in the completion of the home office expansion, improvements in the distribution center and information technology expenditures for a new point-of-sale system. This system was completely rolled-out to all stores during the third quarter of the 2003 fiscal year. Cash inflows from investing activities consisted of proceeds from the sale of marketable securities. As of January 31, 2004, the Company held $464.7 million of marketable securities with original maturities of greater than 90 days. Financing activities during the 2004, 2003 2002 and 20012002 fiscal years consisted primarily of the repurchase of 11,150,500 shares, 4,401,000 shares, 1,850,000 shares, and 600,0001,850,000 shares, respectively, of A&F's Class A Common Stock pursuant to previously authorized stock repurchase programs. The 2003After the repurchases in 2004, the Company had 1,448,500 shares available to repurchase leaves 599,000 shares remaining as of January 31, 200429, 2005 of the 5,000,000 share repurchase6,000,000 shares authorized by the Board of Directors during its August 2002 Board meeting.in November 2004. In addition to stock repurchases, financing activities also consisted of stock option exercises, restricted stock issuances and overdrafts. These overdrafts are outstanding checks reclassified from cash to accounts payable. Effective November 14, 2002,December 15, 2004, the Company entered into a newan amended and restated $250 million syndicated unsecured credit agreement, (the "Credit"Amended Credit Agreement"), which replaced bothextended the then existing $150 million syndicated unsecured creditoriginal agreement, and a $75 million trade letterdated November 14, 2002 (the "Original Credit Agreement"). The Amended Credit Agreement will expire on December 15, 2009. The primary purpose of the Amended Credit Agreement is for letters of credit facility.(trade and stand-by) and working capital. The Amended Credit Agreement has several borrowing options, including interest rates that are based on the agent banks "Alternate Base Rate," or a LIBO rate. The facility fees payable under the Amended Credit Agreement are based on the Company's ratio (the "leverage ratio") of the sum of total debt plus 600% of forward minimum rent commitments to consolidated EBITDAR for the trailing four-fiscal-quarter period. The facility fees are projected to accrue at .175% on the committed amounts per annum. The remaining terms of the Amended Credit Agreement are similar to the Original Credit Agreement. Additional details regarding the Credit Agreement can be found in the Notes to Consolidated Financial Statements (see Note 8). Letters of credit totaling approximately $42.8$49.6 million and $41.8$42.8 million were outstanding under the Credit Agreement at January 29, 2005 and January 31, 2004, and February 1, 2003, respectively. No borrowings were outstanding under the Credit Agreement at January 29, 2005 or January 31, 2004 or February 1, 2003. 252004. 38 The Company has standby letters of credit in the amount of $4.7 million that are set to expire during the 2004fourth quarter of the 2005 fiscal year but automatically renew for a period of one year. The beneficiary, a merchandise supplier, has the right to draw upon the standby letters of credit if the Company has authorizedauthorizes or filedfiles a voluntary petition in bankruptcy. To date, the beneficiary has not drawn upon the standby letters of credit. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS The Company does not have any off-balance sheet arrangements or debt obligations. CONTRACTUAL OBLIGATIONS As of January 31, 2004,29, 2005, the Company's contractual obligations were as follows:
Payments due by period (thousands) ----------------------------------------------------------------------------------------------------- Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years - ---------------------------------------------------------- ----------- ----------- --------- --------- ----------- Operating Leases Obligations $ 1,002,7201,256,107 $ 141,338164,577 $ 278,417323,255 $ 232,628282,525 $ 350,337485,750 Purchase Obligations and222,404 215,971 6,433 - - Other 143,600 143,600 -Obligations $ 65,167 $ 64,372 $ 795 - - ----------- ----------- --------- --------- ----------- TotalTotals $ 1,146,3201,543,678 $ 284,938444,920 $ 278,417330,483 $ 232,628282,525 $ 350,337485,750 =========== =========== ========= ========= ===========
The majority of the Company's contractual obligations are made up of operating leases for its stores (see Note 5 of the Notes to Consolidated Financial Statements). The purchase obligations and other category represents purchase orders for merchandise to be delivered during Spring 2004,2005 and commitments for fabric to be used during the next several seasons. Other obligations represent preventive maintenance contracts for the 20042005 fiscal year and letters of credit outstanding as of January 31, 200429, 2005 (see Note 8 of the Notes to Consolidated Financial Statements). The Company expects to fund all of these obligations with cash provided from operations. STORES AND GROSS SQUARE FEET Store count and gross square footage by conceptbrand were as follows:
January 29, 2005 January 31, 2004 February 1, 2003 ---------------------------- ---------------------------- Number Gross Square Number Gross Square of Stores Feet (thousands) of Stores Feet (thousands) --------- --------------- --------- ------------------------------- ---------------- Number of Stores Abercrombie & Fitch 357 3,154 340 3,036357 abercrombie 171 171 Hollister 256 172 RUEHL 4 - ----- ----- Total 788 700 ===== ===== Gross square feet at period-end (thousands) Abercrombie & Fitch 3,138 3,152 abercrombie 752 753 164 727 Hollister 172 1,114 93 595 --------- --------------- --------- ---------------1,663 1,111 RUEHL 37 - ----- ----- Total 700 5,021 597 4,358 ========= =============== ========= ===============5,590 5,016 ===== ===== Average store size at period-end (gross square feet) Abercrombie & Fitch 8,790 8,828 abercrombie 4,399 4,401 Hollister 6,495 6,461 RUEHL 9,350 - ----- ----- Total 7,094 7,165 ===== =====
39 CAPITAL EXPENDITURES AND LESSOR CONSTRUCTION ALLOWANCES Capital expenditures net of construction allowances, totaled $99.1$185.1 million, $93.0$159.8 million and $126.5$145.7 million for the 2004, 2003 2002 and 20012002 fiscal years, respectively. Additionally, the non-cash accrual for construction in progress decreased $15.5 million and $ 12.7 million in fiscal 2004 and fiscal 2002, respectively, and increased $18.6 million in fiscal 2003. Capital expenditures in the 20032004 fiscal year decreased $12.7related primarily to new store construction in addition to approximately $15.4 million invested in the 2002 fiscal yearinformation technology, home office expansion and increased $1.0 million the 2001 fiscal year.distribution center projects. Capital expenditures in the 2003 fiscal year related primarily to new store construction in addition towith approximately $35.0 million of the total capital expenditures invested in the home office expansion, distribution center projects andinformation technology, including a new point-of-sale system.system and distribution center projects. Capital expenditures in the 2002 fiscal year related primarily to new store construction with approximately $20.0 million invested in 26 information technology and distribution center projects. Capital expenditures inLessor construction allowances are an integral part of the 2001 fiscal year related primarily todecision making process for assessing the viability of new store construction. Approximately $17.0leases. In making the decision whether to invest in a store location, the Company calculates the estimated future return on its investment based on the cost of construction, less any construction allowances to be received from the landlord. The Company received $55.0 million, $60.6 million and $52.7 million in construction allowances during the 2004, 2003 and 2002 fiscal years, respectively. For accounting purposes, the Company treats construction allowances as a deferred lease credit which is amortized to reduce rent expense on a straight-line basis over the life of the total capital expenditureleases in the 2001 fiscal year relatedaccordance with Statement of Financial Accounting Standards No.13, "Accounting for Leases" and Financial Accounting Standards Board Technical Bulletin No. 88-1, "Issues Relating to the construction of a new office and distribution center. The office and distribution center were completed in the 2001 fiscal year.Accounting for Leases". The Company anticipates spending $110.0$240.0 million to $120.0$250.0 million in the 20042005 fiscal year for capital expenditures, of which $85.0$205.0 million to $95.0$215.0 million willis planned to be for new/remodel store construction.the construction of approximately 87 new stores as well as the remodeling of 25 to 35 existing stores. The balance of the capital expenditures will primarily relate to a new home office building and other miscellaneous home office and distribution center projects and other miscellaneous projects. The Company intends to add approximately 745,000520,000 gross square feet of stores in the 20042005 fiscal year, which will represent a 15%9% increase over year-end 2003. It is anticipated2004. Management anticipates the increase during fiscal 2005 will result frombe due to the net addition of approximately 1567 new Abercrombie & FitchHollister stores, 10 new abercrombie5 RUEHL stores and 85 new Hollister5 international stores. In addition, the Company recently announced plans for a new lifestyle brand that will target an older customer than its current brands. The Company expects to open four test stores in August 2004. Additionally, the Company plans to remodel 1025 to 1535 Abercrombie & Fitch stores.stores and convert a total of 9 Abercrombie & Fitch and abercrombie stores to 8 Hollister stores and one RUEHL store. In addition the Company plans to open a new 34,000 gross square foot flagship store on the corner of Fifth Avenue and 56th Street in Manhattan, New York and expand its store in The Grove in Los Angeles by approximately 14,000 gross square feet. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for new Abercrombie & Fitch stores, excluding the above mentioned New York and Los Angeles flagship stores, opened during the 20042005 fiscal year will approximate $550,000$618,000 per store, net of landlordconstruction allowances. In addition, initial inventory purchases for the stores are expected to average approximately $300,000$270,000 per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for new abercrombie stores opened during the 20042005 fiscal year will approximate $450,000 per store,$581,000, net of landlord allowances.construction allowances, per store. In addition, initial inventory purchases are expected to average approximately $115,000$130,000 per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for new Hollister stores opened during the 20042005 fiscal year will approximate $590,000 per store,$613,000, net of landlord allowances.construction allowances, per store. In addition, initial inventory purchases are expected to average approximately $215,000$190,000 per store. 40 Although the Company opened four RUEHL stores during the 2004 fiscal year, it believes that the costs it has incurred to-date for the stores are not representative of the future average cost of opening a store. The Company expects that substantially all future capital expenditures will be funded with cash from operations. In addition, the Company has $250 million available (less outstanding letters of credit) under its Credit Agreement to support operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. The Company's significant accounting policies can be found in the Notes to Consolidated Financial Statements (see Note 2)2 of the Notes to Consolidated Financial Statements). The Company believes that the following policies are most critical to the portrayal of the Company's financial condition and results of operations. Revenue Recognition - The Company recognizes retail sales at the time the customer takes possession of the merchandise and purchases are paid for, primarily with either cash or credit card. Catalogue and e-commerce 27 sales are recorded upon customer receipt of merchandise. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as revenue and the direct shipping costs are classified as cost of goods sold. Employee discounts are classified as a reduction of revenue. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable. The Company accounts for gift cards by recognizing a liability at the time a gift card is sold. Revenue is recognized when the gift card is redeemed for merchandise. The Company reviews its gift card liability at least annually and adjusts the liability based on historical redemption patterns as required. Inventory Valuation - Inventories are principally valued at the lower of average cost or market, on a first-in first-out basis, utilizing the retail method. The retail method of inventory valuation is an averaging technique applied to different categories of inventory. At the Company, the averaging is determined at the stock keeping unit ("SKU") level by averaging all costs for each SKU. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost components of inventory on hand so as to maintain the already established cost-to-retail relationship. The use of the retail method and the recording of markdowns effectively values inventory at the lower of cost or market. The Company further reduces inventory by recording an additional markdown reserve using the retail carrying value of inventory from the season just passed. Markdowns on this carryover inventory represent estimated future anticipated selling price declines. Additionally, as part of inventory valuation, an inventory shrinkage estimate is made each period that reduces the value of inventory for lost or stolen items. Inherent in the retail method calculation are certain significant judgments and estimates including, among others, initial markup, markdowns and shrinkage, which could significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management believes that this inventory valuation method is appropriate since it preserves the cost-to-retail relationship in ending inventory. 41 Property and Equipment - Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from 30 years for buildings, the lesser of 10 to 15 years or the life of the lease for leasehold improvements and 3 to 10 years for other property and equipment. Beneficial leaseholds represent the present value of the excess of fair market rent over contractual rent of existing stores at the 1988 purchase of the Abercrombie & Fitch business by The Limited, Inc. (now known as Limited Brands, Inc., "The Limited") and are being amortized over the lives of the related leases. The cost of assets sold or retired and the related accumulated depreciation or amortizationamortizations are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major renewalsremodels and bettermentsimprovements that extend service lives of the assets are capitalized. Long-lived assets are reviewed at the store level at least annually for impairment or whenever events or changes in circumstances indicate that full recoverability is questionable. Factors used in the evaluation include, but are not limited to, management's plans for future operations, recent operating results and projected cash flows. Income Taxes - Income taxes are calculated in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company's operations. Significant examples of this concept include capitalization policies for various tangible and intangible costs, income and expense recognition and inventory valuation methods. No valuation allowance has been provided for deferred tax assets because management believes the full amount of the net deferred tax assets will be realized in the future. The effective tax rate utilized by the Company reflects management's judgment of the expected tax liabilities within the various taxing jurisdictions. Contingencies - In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities, which requires the use of management's judgment on the outcome of 28 various issues. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments may be required. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement ofIn December 2004, the Financial Accounting Standards Board ("SFAS"FASB") issued Statement No. 143,123R ("SFAS 123R"), "Share-Based Payment," a revision of FASB issued Statement No. 123 ("SFAS 123"), "Accounting for Asset Retirement Obligations,Stock-Based Compensation." was effective February 2, 2003 for the Company. The standardSFAS 123R requires entitiesan entity to recordrecognize compensation expense in an amount equal to the fair value of a liability forshare-based payments granted to employees. The pro forma disclosures previously permitted under SFAS 123 will no longer be an asset retirement obligation in the period in which it is a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accretedalternative to its present value each period, and the capitalized cost is depreciated over the useful life of the related obligation for its recorded amount or the entity incurs a gain or loss upon settlement. Because costs associated with exiting leased properties at the end of lease terms are minimal, the adoption of SFAS No. 143 had no impact on the Company's results of operations or its financial position. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in June 2002. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with the exit and disposal activities, including restructuring activities, that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.)" SFAS No. 146 also addresses accounting and reporting standards for costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement or an individual deferred compensation contract. SFAS No. 146 was effective for exit or disposal activities that were initiated after December 31, 2002. The Company adopted SFAS No. 146 in first quarter of the 2003 fiscal year and adoption did not have an impact on the Company's results of operations or its financial position. SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB No. 123," was issued on December 31, 2002. Pursuant to this standard, companies that chose to adopt the accounting provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," were permitted to select from three transition methods (prospective, modified prospective and retroactive restatement). Companies that chose not to adopt the accounting provisions of SFAS No. 123 were affected by the new disclosure requirements of SFAS No. 148. The new interim disclosure provisions were effective for the first quarter of the 2003 fiscal year and have been adopted by the Company (seestatement recognition. See Note 2 of the Notes to Consolidated Financial Statements). EITF Issue No. 03-08, "AccountingStatements for Claims-Made Insurancethe pro forma net income and Retroactive Insurance Contracts byearnings per share amounts for fiscal 2002 through fiscal 2004, as if the Insured Entity," discussesCompany had used a fair-value based method similar to the accounting implications of retroactive and prospective claims-made insurance policies.methods required under SFAS 123R to measure compensation expense for employee stock-based compensation awards. The consensus reached was that a claims-made insurance policy that contains no retroactive provisions should be accounted for on a prospective basis. However, if a claims-made insurance policy contains a retroactive provision, the retroactive and prospectiveaccounting provisions of the policy should be accounted for separately, if practicable; otherwise, the claims-made insurance policy should be accounted for entirely as a retroactive contract. This consensus wasSFAS 123R are effective for new insurance contracts entered intoreporting periods beginning with the third quarter of the 2003 fiscal year.after June 15, 2005. The Company has evaluatedis still in the process of determining the impact of this issue and concluded that there was no effect on the consolidatedresults of operations and financial statements. EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received From a Vendor." The issue provides accounting guidance on how a reseller should characterize consideration given by a vendor and when to recognize and how to measure that consideration in its income statement. EITF Issue No. 02-16 was effective 29 for fiscal years beginning after December 15, 2002. The Company has evaluatedposition upon the impact of this issue and concluded that there was no effect on the consolidated financial statements. In November 2002, the Financial Accounting Standards Board ("FASB"), issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirementsadoption of SFAS No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The Company adopted FIN 45 at the beginning of the 2003 fiscal year. The adoption did not have an effect on the consolidated financial statements.123R. 42 IMPACT OF INFLATION The Company's results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes that the effects of inflation, if any, on its results of operations and financial condition have been minor. 30 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 A&F cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Form 10-K or made by management of A&F involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and similar expressions may identify forward-looking statements. The following factors, in addition to those included in the disclosure under the heading "RISK FACTORS" in "ITEM 1. BUSINESS" of A&F's Annual Report on Form 10-K for the fiscal year ended January 31, 2004 , in some cases have affected and in the future could affect the Company's financial performance and could cause actual results for the 2004 fiscal year and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Annual Report on Form 10-K or otherwise made by management: - changes in consumer spending patterns and consumer preferences; - the effects of political and economic events and conditions domestically and in foreign jurisdictions in which the Company operates, including, but not limited to, acts of terrorism or war; - the impact of competition and pricing; - changes in weather patterns; - postal rate increases and changes; - paper and printing costs; - market price of key raw materials; - ability to source product from its global supplier base; - political stability; - currency and exchange risks and changes in existing or potential duties, tariffs or quotas; - availability of suitable store locations at appropriate terms; - ability to develop new merchandise; and - ability to hire, train and retain associates. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. 3143 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company maintains its cash equivalents in financial instruments with original maturities of 90 days or less. The Company also holds investments in marketable securities, which primarily consist of investment grade auction rate securities classified as available-for-sale. These securities are consistent with original maturities less than one year. These financial instruments bear interest at fixed ratesthe investment objectives contained within the investment policy established by the Company's Board of Directors. The basic objectives are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing net after-tax yield. Despite the long-term maturity of auction rate securities, from the investor's perspective, such securities are subject topriced and subsequently traded as short-term investments because of the interest rate risk through lost income should interestreset feature. Interest rates increase.are reset at predetermined periods ranging from 7 to 49 days. Failed auctions occur rarely. As of January 29, 2005, the Company held no auction rate securities. The Company does not enter into financial instruments for trading purposes. As of January 31, 2004,29, 2005, the Company had no long-term debt outstanding. Future borrowings would bear interest at negotiated rates and would be subject to interest rate risk. The Company does not believe that an adverse change in interest rates would have a material affect on the Company's financial condition. 3244 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ABERCROMBIE & FITCH CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts)
2004 2003 2002 2001 ----------- ----------- --------------------- ---------- ---------- NET SALES $ 1,707,810 $ 1,595,757 $ 1,364,853$2,021,253 $1,707,810 $1,595,757 Cost of Goods Sold, Occupancy and Buying Costs 990,412 939,708 806,819 ----------- ----------- -----------1,111,460 990,866 940,010 ---------- ---------- ---------- GROSS INCOME 717,398 656,049 558,034909,793 716,944 655,747 General, Administrative and Store Operating Expenses 562,158 385,764 343,432 286,576 ----------- ----------- --------------------- ---------- ---------- OPERATING INCOME 331,634 312,617 271,458347,635 331,180 312,315 Interest Income, Net (5,218) (3,708) (3,768) (5,064) ----------- ----------- --------------------- ---------- ---------- INCOME BEFORE INCOME TAXES 335,342 316,385 276,522352,853 334,888 316,083 Provision for Income Taxes 130,240 121,450 107,850 ----------- ----------- -----------136,477 130,058 121,329 ---------- ---------- ---------- NET INCOME $ 205,102216,376 $ 194,935204,830 $ 168,672 =========== =========== ===========194,754 ========== ========== ========== NET INCOME PER SHARE: BASIC $ 2.33 $ 2.12 $ 1.991.98 ========== ========== ========== DILUTED $ 1.70 =========== =========== =========== DILUTED2.28 $ 2.06 $ 1.94 ========== ========== ========== WEIGHTED-AVERAGE SHARES OUTSTANDING: BASIC 92,777 96,833 98,171 ========== ========== ========== DILUTED 95,110 99,580 100,631 ========== ========== ========== DIVIDENDS PER SHARE $ 1.650.50 $ 0.00 $ 0.00 ========== ========== ==========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 45 ABERCROMBIE & FITCH CONSOLIDATED BALANCE SHEETS (Thousands)
January 29, January 31, 2005 2004 ---------- ----------- ASSETS CURRENT ASSETS: Cash and Equivalents $ 350,368 $ 56,373 Marketable Securities - 464,700 Receivables 26,127 7,197 Inventories 211,198 170,703 Store Supplies 36,536 29,993 Other 28,048 23,689 ---------- ----------- TOTAL CURRENT ASSETS 652,277 752,655 PROPERTY AND EQUIPMENT, NET 687,011 630,022 OTHER ASSETS 8,413 552 ---------- ----------- TOTAL ASSETS $1,347,701 $ 1,383,229 ========== =========== ===========LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 83,760 $ 58,191 Outstanding Checks 53,577 $ 33,173 Accrued Expenses 234,210 163,389 Deferred Lease Credits 31,135 26,627 Income Taxes Payable 11,183 29,692 ---------- ----------- TOTAL CURRENT LIABILITIES 413,865 311,072 LONG TERM LIABILITIES: Deferred Income Taxes 55,346 31,236 Deferred Lease Credits 177,923 154,768 Other Liabilities 31,241 28,388 ---------- ----------- TOTAL LONG TERM LIABILITIES 264,510 214,392 SHAREHOLDERS' EQUITY: Class A Common Stock - $.01 par value: 150,000,000 shares authorized and 103,300,000 shares issued at January 29, 2005 and January 31, 2004, respectively 1,033 1,033 Paid-In Capital 140,251 139,139 Retained Earnings 1,076,023 906,085 Treasury Stock, at Average Cost 17,262,943 and 8,692,501 shares at January 29, 2005 and January 31, 2004, respectively (547,981) (188,492) ---------- ----------- TOTAL SHAREHOLDERS' EQUITY 669,326 857,765 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,347,701 $ 1,383,229 ========== ===========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 33 ABERCROMBIE & FITCH CONSOLIDATED BALANCE SHEETS (Thousands)
January 31, February 1, 2004 2003 ----------- ----------- ASSETS CURRENT ASSETS: Cash and Equivalents $ 511,073 $ 420,063 Marketable Securities 10,000 10,000 Receivables 7,197 10,572 Inventories 170,703 143,306 Store Supplies 29,993 25,671 Other 23,689 19,770 ----------- ----------- TOTAL CURRENT ASSETS 752,655 629,382 PROPERTY AND EQUIPMENT, NET 445,956 392,941 OTHER ASSETS 552 725 ----------- ----------- TOTAL ASSETS $ 1,199,163 $ 1,023,048 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Outstanding Checks $ 91,364 $ 79,291 Accrued Expenses 138,232 119,526 Income Taxes Payable 50,406 46,471 ----------- ----------- TOTAL CURRENT LIABILITIES 280,002 245,288 DEFERRED INCOME TAXES 19,516 15,189 OTHER LONG-TERM LIABILITIES 28,388 13,044 SHAREHOLDERS' EQUITY: Class A Common Stock - $.01 par value: 150,000,000 shares authorized, 94,607,499 and 97,268,877 shares outstanding at January 31, 2004 and February 1, 2003, respectively 1,033 1,033 Paid-In Capital 139,139 142,577 Retained Earnings 919,577 714,475 ----------- ----------- 1,059,749 858,085 Less: Treasury Stock, at Average Cost (188,492) (108,558) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 871,257 749,527 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,199,163 $ 1,023,048 =========== ===========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 3446 ABERCROMBIE & FITCH CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Thousands)
Common Stock Treasury Stock ------------------------------------------- ------------------ Total Shares Paid-In Retained At Average Shareholders' Outstanding Par Value Capital Earnings Shares Cost Equity ----------- --------- --------- ----------------- ----------- ------ ---------- ------------- Balance, February 3, 2001 98,796 $ 1,033 $ 136,490 $ 350,868 4,504 $ (65,691) $ 422,700 Purchase of Treasury Stock (600) - - - 600 (11,069) (11,069) Net Income - - - 168,672 - - 168,672 Tax Benefit from Exercise of Stock Options and Vesting of Restricted Stock - - 5,056 - - - 5,056 Stock Options, Restricted Stock and Other 677 - (152) - (678) 10,227 10,075 ----------- --------- --------- --------- ------ ---------- ------------- Balance, February 2, 2002 98,873 $ 1,033 $141,394 $ 141,394 $ 519,540506,501 4,426 $ (66,533) $ 595,434582,395 Purchase of Treasury Stock (1,850) - - - 1,850 (42,691) (42,691) Net Income - - - 194,935194,754 - - 194,935194,754 Tax Benefit from Exercise of Stock Options and Vesting of RestrictedRetricted Stock - - 164 - - - 164 Stock Options, Restricted Stock and Other 246 - 1,019 - (245) 666 1,685 ------ ------- -------- ----------- ------ --------- --------- --------- ------ ---------- ------------- Balance, February 1, 2003 97,269 $ 1,033 $142,577 $701,255 6,031 $(108,558) $ 142,577 $ 714,475 6,031 $ (108,558) $ 749,527736,307 Purchase of Treasury Stock (4,401) - - - 4,401 (115,670) (115,670) Net Income - - - 205,102204,830 - - 205,102204,830 Tax Benefit from Exercise of Stock Options and Vesting of RestrictedRetricted Stock - - 9,505 - - - 9,505 Stock Options, Restricted Stock and Other 1,739 - (12,943) - (1,740) 35,736 22,793 ------ ------- -------- ----------- ------- --------- --------- --------- ------ ---------- ------------- Balance, January 31, 2004 94,607 $ 1,033 $139,139 $ 139,139906,085 8,692 $(188,492) $ 919,577 8,692 $ (188,492) $ 871,257 =========== ========= ========= ========= ====== ========== =============
The accompanying Notes are an integral part of these Consolidated Financial Statements. 35 ABERCROMBIE & FITCH CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
2003 2002 2001 --------- --------- --------- OPERATING ACTIVITIES: Net Income $ 205,102 $ 194,935 $ 168,672 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 66,604 56,925 41,155 Non-cash Charge for Deferred Compensation 5,310 2,295 3,936 Deferred Taxes 7,308 21,213 (3,849) Non-Cash Charge for Asset Impairment - 1,251 - Changes in Assets and Liabilities: Inventories (27,397) (34,430) 11,734 Accounts Payable and Accrued Expenses 5,761 40,964 5,659 Income Taxes 10,459 17,022 17,636 Other Assets and Liabilities 8,749 (7,029) (11,741) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 281,896 293,146 233,202 --------- --------- --------- INVESTING ACTIVITIES: Capital Expenditures (99,128) (92,976) (126,515) Purchases of Marketable Securities (10,000) (10,000) (71,220) Proceeds from Maturities of Marketable Securities 10,000 71,220 - Collection (Issuances) of Notes Receivable - 4,954 (454) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (99,128) (26,802) (198,189) --------- --------- --------- FINANCING ACTIVITIES: Change in Outstanding Checks 4,145 4,047 6,765 Purchases857,765 Purchase of Treasury Stock (115,670) (42,691) (11,069)(11,151) - - - 11,151 (434,658) (434,658) Net Income - - - 216,376 - - 216,376 Dividends ($0.50 per share) - - (46,438) - - (46,438) Tax Benefit from Exercise of Stock Option ExercisesOptions and Vesting of Retricted Stock - - 17,308 - - - 17,308 Stock Options, Restricted Stock and Other 19,767 (282) 6,1392,580 - (16,196) - (2,580) 75,169 58,973 ------ ------- -------- ----------- ------ --------- --------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (91,758) (38,926) 1,835 --------- --------- --------- NET INCREASE IN CASH AND EQUIVALENTS 91,010 227,418 36,848 Cash and Equivalents, Beginning of Year 420,063 192,645 155,797 --------- --------- --------- CASH AND EQUIVALENTS, END OF PERIODBalance, January 29, 2005 86,036 $ 511,0731,033 $140,251 $ 420,0631,076,023 17,263 $(547,981) $ 192,645 ========= ========= ========= SIGNIFICANT NON-CASH INVESTING ACTIVITIES: Construction Allowance Receivables $ 5,730 $ 8,778 $ 14,030 ========= ========= ========= Accrual for Construction in Progress $ 31,269 $ 12,680 $ 25,338 =========669,326 ====== ======= ======== =========== ====== ========= =========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 3647 ABERCROMBIE & FITCH CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
2004 2003 2002 ------------ ----------- ----------- OPERATING ACTIVITIES: Net Income $ 216,376 $ 204,830 $ 194,754 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 105,814 89,539 75,951 Amortization of Deferred Lease Credits (32,794) (24,774) (21,061) Non-cash Charge for Unearned Stock Compensation 10,372 5,310 2,295 Deferred Taxes 3,942 7,126 21,092 Non-Cash Charge for Asset Impairment 1,190 - 1,251 Loss on Disposal of Assets 4,664 - - Lessor Construction Allowances 55,009 60,649 52,686 Changes in Assets and Liabilities: Inventories (34,445) (27,397) (34,430) Accounts Payable and Accrued Expenses 105,524 8,054 43,301 Income Taxes 18,967 10,459 17,022 Other Assets and Liabilities (28,494) 8,749 (7,029) ------------ ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 426,125 342,545 345,832 ------------ ----------- ----------- INVESTING ACTIVITIES: Capital Expenditures (185,065) (159,777) (145,662) Purchases of Marketable Securities (4,314,070) (3,849,077) (2,729,271) Proceeds from Sales of Marketable Securities 4,778,770 3,771,085 2,418,661 Collection of Notes Receivable - - 4,954 ------------ ----------- ----------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 279,635 (237,769) (451,318) ------------ ----------- ----------- FINANCING ACTIVITIES: Change in Outstanding Checks 20,404 4,145 4,047 Purchases of Treasury Stock (434,658) (115,670) (42,691) Stock Option Exercises and Other 48,927 19,767 (282) Dividends Paid (46,438) - - ------------ ----------- ----------- NET CASH USED FOR FINANCING ACTIVITIES (411,765) (91,758) (38,926) ------------ ----------- ----------- NET INCREASE IN CASH AND EQUIVALENTS 293,995 13,018 (144,412) Cash and Equivalents, Beginning of Year 56,373 43,355 187,767 ------------ ----------- ----------- CASH AND EQUIVALENTS, END OF PERIOD $ 350,368 $ 56,373 $ 43,355 ============ =========== =========== SIGNIFICANT NON-CASH INVESTING ACTIVITIES: Change in Accrual for Construction in Progress ($ 15,513) $ 18,589 ($ 12,658) ============ =========== ===========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 48 ABERCROMBIE & FITCH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 "Abercrombie & Fitch" or the "Company"), is a specialty retailer of high quality, casual apparel for men, women and kids with an active, youthful lifestyle. The business was established in 1892. The accompanying consolidated financial statements include the historical financial statements of, and transactions applicable to, A&F and its wholly-owned subsidiaries and reflect the assets, liabilities, results of operations and cash flows on a historical cost basis. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of A&F and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year commences. The results for fiscal years 2004, 2003 2002, and 20012002 represent the fifty-two week periods ended January 29, 2005, January 31, 2004 and February 1, 2003, and February 2, 2002, respectively. CASH AND EQUIVALENTS Cash and equivalents include amounts on deposit with financial institutions and investments with original maturities of less than 90 days. Outstanding checks at year end are reclassified in the balance sheet from cash to accounts payable to be reflected as liabilities. At fiscal year end 20032004 and 2002,2003, the outstanding checks reclassified were $33.2$53.6 million and $29.0$33.2 million, respectively. MARKETABLE SECURITIES All investments with original maturities of greater than 90 days are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company determines the appropriate classification at the time of purchase. At January 31, 2004,29, 2005, the Company heldhad no investments in marketable securities that were classified as held-to-maturity based on the Company's positive intent and ability to hold the securities to maturity. Primarily all securities held by the Company at January 31, 2004 were municipal debthad $464.7 million of investments in marketable securities. The marketable securities that mature within one year andconsisted of auction rate securities classified as available-for-sale. Investments in these securities are recorded at cost, which approximates fair value due to their variable interest rates, which reset every 7 to 49 days. Despite the long-term nature of their stated at amortized cost that approximatescontractual maturities, there is a readily liquid market value. 37for these securities. As a result, there are no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from marketable securities. All income generated from these marketable securities was recorded as interest income. 49 INVENTORIES Inventories are principally valued at the lower of average cost or market, on a first-in-first-out basis, utilizing the retail method. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost components of inventory on hand so as to maintain the already established cost-to-retail relationship. The fiscal year is comprised of two principal selling seasons: springSpring (the first and second quarters) and fallFall (the third and fourth quarters). The Company further reduces inventory at season end by recording an additional markdown reserve using the retail carrying value of inventory from the season just passed. Markdowns on this carryover inventory represent estimated future anticipated selling price declines. Additionally, inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns for the total season. Further, as part of inventory valuation, inventory shrinkage estimates are made, based on historical trends, that reduce the inventory value for lost or stolen items. The markdown reserve was $4.7$6.6 million and $6.8$5.5 million at January 29, 2005 and January 31, 2004, and February 1, 2003, respectively. The shrink reserve was $3.3$2.9 million and $11.5$3.3 million at January 29, 2005 and January 31, 2004, and February 1, 2003, respectively. STORE SUPPLIES The initial inventory of supplies for new stores including, but not limited to, hangers, signage, security tags and point-of-sale supplies are capitalized at the store opening date. Subsequent shipments are expensed except for new merchandise presentation programs, which are capitalized. PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from 30 years for buildings, the lesser of 10 to 15 years or the life of the lease for leasehold improvements and 3 to 10 years for other property and equipment. Beneficial leaseholds represent the present value of the excess of fair market rent over contractual rent of existing stores as of the 1988 purchase of the Abercrombie & Fitch business by The Limited, Inc. (now known as Limited Brands, Inc., "The Limited") and are being amortized over the lives of the related leases. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend service lives are capitalized. Long-lived assets are reviewed at the store level at least annually for impairment or whenever events or changes in circumstances indicate that full recoverability of net assets through future cash flows is in question. Factors used in the evaluation include, but are not limited to, management's plans for future operations, recent operating results and projected cash flows. 38The Company incurred impairment charges of $1.2 million and $1.3 million in fiscal 2004 and fiscal 2002, respectively. There were no impairment charges taken in fiscal 2003. 50 INCOME TAXES Income taxes are calculated in accordance with SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. CONTINGENCIES In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities, which requires the use of management's judgment on the outcome of various issues. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments may be required. SHAREHOLDERS' EQUITY At January 29, 2005 and January 31, 2004, and February 1, 2003, there were 150 million shares of $.01 par value Class A Common Stock authorized, of which 94.686.0 million and 97.394.6 million shares were outstanding at January 29, 2005 and January 31, 2004, and February 1, 2003, respectively, and 106.4 million shares of $.01 par value Class B Common Stock authorized, none of which were outstanding at January 29, 2005 and January 31, 2004, or February 1, 2003.respectively. In addition, 15 million shares of $.01 par value Preferred Stock were authorized, none of which have been issued. See Note 13 for information about Preferred Stock Purchase Rights. Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of shareholders. REVENUE RECOGNITION The Company recognizes retail sales at the time the customer takes possession of the merchandise and purchases are paid for, primarily with either cash or credit card. Catalogue and e-commerce sales are recorded upon customer receipt of merchandise. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as revenue and the related direct shipping costs are classified as cost of goods sold. Employee discounts are classified as a reduction of revenue. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable. The Company accounts for gift cards by recognizing a liability at the time when a gift card is sold. Revenue is recognized when the gift card is redeemed for merchandise. The Company reviews its gift card liability at least annually and adjusts the liability based on historical redemption patterns as required. 51 COST OF GOODS SOLD, OCCUPANCY AND BUYING COSTS The following expenses are included as part of Cost of Goods Sold, Occupancy and Buying Costs: landed cost of merchandise, freight, payroll and related costs associated with merchandise, design, procurement, inspection, costs, store rents and other real estate costs, store asset depreciation, inventory shrink and markdowns, and catalogue production and mailing costs. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES General, Administrative and Store Operating Expenses include distribution center costs including receiving and warehouse costs, store payroll and expenses, home office payroll and expenses (not related to merchandise procurement) and advertising. 39 CATALOGUE AND ADVERTISING COSTS Costs related to the A&F Quarterly, a catalogue/magazine,catalogue, primarily consist of catalogue production and mailing costs and are expensed as incurred as a component of "Cost of Goods Sold, Occupancy and Buying Costs." Advertising costs consist of in-store photographs and advertising in selected national publications and billboards and are expensed as part of "General, Administrative and Store Operating Expenses" when the photographs or publications first appear. Catalogue and advertising costs, which include photo shoot costs, amounted to $33.8 million in 2004, $33.6 million in 2003 and $33.4 million in 20022002. OPERATING LEASES The Company leases property for its stores under operating leases. Most lease agreements contain construction allowances, rent escalation clauses and/or contingent rent provisions. For construction allowances, the Company records a deferred lease credit on the consolidated balance sheet and $30.7 millionamortizes the deferred lease credit as a reduction to rent expense on the consolidated statement of income over the terms of the leases. For scheduled rent escalation clauses during the lease term, the Company records minimum rental expense on a straight-line basis over the terms of the lease on the consolidated statement of income. The term of the lease over which the Company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on the date of initial possession, which is generally when the Company enters the space and begins to make improvements in 2001.preparation of intended use. Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the consolidated balance sheet and the corresponding rent expense when management determines that achieving the specified levels during the fiscal year is probable. 52 STORE PREOPENING EXPENSES Pre-opening expenses related to new store openings are charged to operations as incurred. DESIGN AND DEVELOPMENT COSTS Costs to design and develop the Company's merchandise are expensed as incurred and are reflected as a component of "Cost of Goods Sold, Occupancy and Buying Costs." FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded values of current assets and current liabilities, including receivables, marketable securities and accounts payable, approximate fair value due to the short maturity and because the average interest rate approximates current market origination rates. 40 STOCK-BASED COMPENSATION The Company reports stock-based compensation through the disclosure-only requirements of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-TransitionCompensation - Transition and Disclosure-anDisclosure - an Amendment of FASB No. 123," but elects to measure compensation expense using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense for options has been recognized as all options are granted at fair market value at the grant date. The Company does recognize compensation expense related to restricted share awards. If compensation expense related to options had been determined based on the estimated fair value of options granted in 2004, 2003 2002 and 2001,2002, consistent with the methodology in SFAS No. 123, the pro forma effect on net income and net income per basic and diluted share would have been as follows: (Thousands except per share amounts)
2004 2003 2002 2001 ----------- ----------- -------------------- --------- --------- Net income: As reported $ 205,102216,376 $ 194,935204,830 $ 168,672194,754 Stock-based compensation expense included in reported net income, net of tax 6,358 3,250 1,414 2,401 Stock-based compensation expense determined under fair value based method, net of tax(1) (28,261) (28,184) (22,453) ----------- ----------- -----------(27,720) (27,274) (27,673) --------- --------- --------- Pro forma $ 180,091195,014 $ 168,165180,806 $ 148,620 =========== =========== ===========168,495 ========= ========= ========= Basic earnings per share: As reported $ 2.33 $ 2.12 $ 1.99 $ 1.701.98 Pro forma $ 1.862.10 $ 1.711.87 $ 1.501.72 Diluted earnings per share: As reported $ 2.28 $ 2.06 $ 1.94 $ 1.65 Pro forma $ 2.05 $ 1.83 $ 1.68 $ 1.48
(1) Includes stock-based compensation expense related to restricted share awards actually recognized in earnings in each period presented.presented using the intrinsic value method. The average weighted-average fair valuevalues of all options granted duringwere $15.05, $14.18 and $12.07 for the 2004, 2003 2002 and 20012002 fiscal years, was $14.05, $12.07 and $14.96, respectively. The fair value of each option was estimated using the Black-Scholes option-pricing model, which are included in the pro forma results above. For purposes of the valuation, the following weighted-average assumptions were used: a 1.28% dividend yield in the 2004 fiscal year and no expected dividends in the 2003 2002 and 20012002 fiscal years; average price volatility of 64% in the 2003 fiscal year,56%, 63% and 53% in the 2004, 2003 and 2002 fiscal year and 54% in the 2001 fiscal year;years, respectively; average risk-free interest rates of 2.5%3.2%, 4.3%3.0% and 4.7%4.3% in the 2004, 2003 2002 and 20012002 fiscal years, respectively; assumed average forfeiture rates of 28%, 23% in the 2003 fiscal year and 15% infor the 20022004, 2003 and 20012002 fiscal years; and vesting lives of 4 years in the 2004, 2003 and 2002 fiscal years and 5 yearsyears. For options granted to non-associates directors during 2004, the average weighted-average fair value of the options was $5.22. The fair value of each option was estimated using the Black-Scholes option-pricing model, which are included in the 2001 fiscalpro forma results above. For purposes of the valuation, the following weighted-average assumptions were used: a 1.28% dividend yield; average price volatility of 37%; average risk-free interest rate of 2.0; assumed average forfeiture rate of 12%; and vesting life of 1 year. 4154 EARNINGS PER SHARE Net income per share is computed in accordance with SFAS No. 128, "Earnings Per Share." Net income per basic share is computed based on the weighted-average number of outstanding shares of common stock. Net income per diluted share includes the weighted-average effect of dilutive stock options and restricted shares. Weighted-Average Shares Outstanding (in thousands):
2004 2003 2002 2001 -------- -------- --------------- ------- ------- Shares of Class A Common Stock issued 103,300 103,300 103,300 Treasury shares outstanding (10,523) (6,467) (5,129) (4,198) -------- -------- --------------- ------- ------- Basic shares outstanding 92,777 96,833 98,171 99,102 Dilutive effect of options and restricted shares 2,333 2,747 2,460 3,422 -------- -------- --------------- ------- ------- Diluted shares outstanding 95,110 99,580 100,631 102,524 ======== ======== =============== ======= =======
Options to purchase 5,213,000, 6,151,000, 9,218,000 and 5,630,0009,218,000 shares of Class A Common Stock were outstanding at year-end 2004, 2003 2002 and 2001,2002, respectively, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. RECLASSIFICATIONS Certain amounts have been reclassified to conform to current year presentation. The amounts reclassified did not have an effect on the Company's results of operations or shareholders' equity. 4255 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," was effective February 2, 2003 for the Company. The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related obligation for its recorded amount or the entity incurs a gain or loss upon settlement. Because costs associated with exiting leased properties at the end of lease terms are minimal, the adoption of SFAS No. 143 had no impact on the Company's results of operations or its financial position. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in June 2002. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with the exit and disposal activities, including restructuring activities, that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.)" SFAS No. 146 also addresses accounting and reporting standards for costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement or an individual deferred compensation contract. SFAS No. 146 was effective for exit or disposal activities that were initiated afterIn December 31, 2002. The Company adopted SFAS No. 146 in first quarter of the 2003 fiscal year and adoption did not have an impact on the Company's results of operations or its financial position. SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB No. 123," was issued on December 31, 2002. Pursuant to this standard, companies that chose to adopt the accounting provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," were permitted to select from three transition methods (prospective, modified prospective and retroactive restatement). Companies that chose not to adopt the accounting provisions of SFAS No. 123 were affected by the new disclosure requirements of SFAS No. 148. The new interim disclosure provisions were effective for the first quarter of 2003 and have been adopted by the Company (see Note 2). EITF Issue No. 03-08, "Accounting for Claims-Made Insurance and Retroactive Insurance Contracts by the Insured Entity," discusses the accounting implications of retroactive and prospective claims-made insurance policies. The consensus reached was that a claims-made insurance policy that contains no retroactive provisions should be accounted for on a prospective basis. However, if a claims-made insurance policy contains a retroactive provision, the retroactive and prospective provisions of the policy should be accounted for separately, if practicable; otherwise, the claims-made insurance policy should be accounted for entirely as a retroactive contract. This consensus was effective for new insurance contracts entered into beginning with the third quarter of the 2003 fiscal year. The Company has evaluated the impact of this issue and concluded that there was no effect on the financial statements. 43 EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received From a Vendor." The issue provides accounting guidance on how a reseller should characterize consideration given by a vendor and when to recognize and how to measure that consideration in its income statement. EITF Issue No. 02-16 was effective for fiscal years beginning after December 15, 2002. The Company has evaluated the impact of this issue and concluded that there was no effect on the financial statements. In November 2002,2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123R ("SFAS 123R"), "Share-Based Payment," a revision of FASB issued FASB InterpretationStatement No. 45, "Guarantor's Accounting123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123R requires an entity to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. See Note 2 of the Notes to Consolidated Financial Statements for the pro forma net income and Disclosure Requirementsearnings per share amounts for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifiesfiscal 2002 through fiscal 2004, as if the requirementsCompany had used a fair-value based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock-based compensation awards. The accounting provisions of SFAS No. 5 "Accounting123R are effective for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees.reporting periods beginning after June 15, 2005. The Company adopted FIN 45 atis still in the beginningprocess of determining the 2003 fiscal year. The adoption did not have an effectimpact on the results of operations and financial statements.position upon the adoption of SFAS 123R. 4. PROPERTY AND EQUIPMENT Property and equipment, at cost, consisted of (thousands):
2004 2003 2002 -------- ------------------- ----------- Land $ 15,985 $ 15,94915,985 Building 110,971 110,726 92,680 Furniture, fixtures and equipment 516,127 469,135 394,276 Leasehold improvements 46,586 52,293402,535 332,231 Construction in progress 27,782 27,901 23,095 Beneficial leaseholds 12 5,839 7,349 -------- ------------------- ----------- Total $676,172 $585,642$ 1,073,412 $ 961,817 Less: Accumulated depreciation and amortization 230,216 192,701 -------- --------386,401 331,795 ----------- ----------- Property and equipment, net $445,956 $392,941 ======== ========$ 687,011 $ 630,022 =========== ===========
4456 5. LEASED FACILITIES AND COMMITMENTS Annual store rent is comprised of a fixed minimum amount, plus contingent rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally require additional payments covering taxes, common area costs and certain other expenses. A summary of rent expense follows (thousands):
2004 2003 2002 2001 -------- -------- ----------------- --------- --------- Store rent: Fixed minimum $121,547 $105,751 $ 83,608141,450 $ 122,001 $ 106,053 Contingent 6,932 5,194 4,886 4,897 -------- -------- ----------------- --------- --------- Total store rent $126,741 $110,637 $ 88,505148,382 $ 127,195 $ 110,939 Buildings, equipment and other 1,663 1,219 1,133 1,566 -------- -------- ----------------- --------- --------- Total rent expense $127,960 $111,770 $ 90,071 ======== ======== ========150,045 $ 128,414 $ 112,072 ========= ========= =========
At January 31, 2004,29, 2005, the Company was committed to noncancelable leases with remaining terms of one to thirteenfifteen years. These commitments include store leases with initial terms ranging primarily from ten to fifteen years. A summary of minimum rent commitments under noncancelable leases follows (thousands): 20042005 $ 141,338 2005 142,266164,577 2006 136,151166,688 2007 122,478156,567 2008 110,150145,506 2009 137,019 Thereafter 350,337485,750
6. ACCRUED EXPENSES Accrued expenses consisted of the following (thousands):
2004 2003 2002 -------- ----------------- --------- Accrual for construction in progressLegal $ 31,26954,252 $ 12,6809,248 Rent and landlord charges 46,739 42,846 Current portion of unredeemed gift card revenue 31,283 20,417 23,454 RentAccrual for construction in progress 15,756 31,269 Employee bonuses and landlord charges 17,689 18,465 Compensation and benefits 14,589 15,857 Catalogue and advertising costs 14,183 9,701 Legal 9,248 5,136 Store accruals 6,671 10,773incentive compensation 13,959 1,742 Other 24,166 23,460 -------- --------72,221 57,867 --------- --------- Total $138,232 $119,526 ======== ========$ 234,210 $ 163,389 ========= =========
45The accrued legal expense included $49.1 million related to the settlement of three related class action employment discrimination lawsuits. 57 7. INCOME TAXES The provision for income taxes consisted of (thousands):
2004 2003 2002 2001 -------- -------- ----------------- --------- --------- Currently Payable: Federal $101,692$ 112,537 $ 101,692 $ 88,238 $ 79,691 State 19,998 18,248 13,865 15,002 -------- -------- -------- $119,940 $102,103--------- --------- --------- $ 94,693 -------- -------- --------132,535 $ 119,940 $ 102,103 --------- --------- --------- Deferred: Federal $ 8,7482,684 $ 16,7278,601 $ 11,13316,629 State 1,552 2,620 2,024 -------- -------- --------1,258 1,517 2,597 --------- --------- --------- $ 10,3003,942 $ 19,34710,118 $ 13,157 -------- -------- --------19,226 --------- --------- --------- Total provision $130,240 $121,450 $107,850 ======== ======== ========Provision $ 136,477 $ 130,058 $ 121,329 ========= ========= =========
A reconciliation between the statutory Federal income tax rate and the effective income tax rate follows:
2004 2003 2002 2001 -------- -------- ------------ ---- ---- Federal income tax rate 35.0% 35.0% 35.0% State income tax, net of Federal income tax effect 3.9 3.8 3.5 3.9 Other items, net (0.2) 0.0 (0.1) 0.1 -------- -------- ------------ ---- ---- Total 38.7% 38.8% 38.4% 39.0% ======== ======== ============ ==== ====
Income taxes payable included net current deferred tax assets of $3.5$44.4 million and $6.5$24.2 million at January 29, 2005 and January 31, 2004, and February 1, 2003, respectively. Under a tax sharing arrangement with The Limited, which owned 84.2% of the outstanding Common Stock through May 19, 1998, the Company was responsible for and paid to The Limited its proportionate share of income taxes calculated upon its separate taxable income at the estimated annual effective tax rate for periods prior to May 19, 1998. In 2002, a final tax sharing payment was made to The Limited pursuant to an agreement to terminate the tax sharing agreement. As a result, the Company has been indemnified by The Limited for any federal, state or local taxes asserted with respect to The Limited for all periods prior to May 19, 1998. Amounts paid to The Limited totaled $1.4 million and $ 20 thousand in 2002 and 2001, respectively.2002. Amounts paid directly to taxing authorities were $114.0 million, $113.0 million and $82.3 million in 2004, 2003, and $94.3 million in 2003, 2002, and 2001, respectively. 4658 The effect of temporary differences which give rise to deferred income tax assets (liabilities) was as follows (thousands):
2004 2003 2002 --------- ------------------- ---------- Deferred tax assets: Deferred compensation $ 16,205 $ 10,208 $ 8,182Rent 98,793 86,746 Accrued expenses 5,736 6,724 Rent 4,125 1,5237,194 2,502 Inventory 3,268 1,717 2,960 Other, net 0 124 --------- ---------Legal Expense 15,288 3,234 ---------- ---------- Total deferred tax assets $ 21,786140,748 $ 19,513 --------- ---------104,407 ---------- ---------- Deferred tax liabilities: Store supplies ($ 10,542) ($ 9,384) Property and equipment ($ 28,396) ($ 20,135) Store supplies (9,384) (8,061) --------- ---------(141,147) (102,022) ---------- ---------- Total deferred tax liabilities ($ 37,780)151,689) ($ 28,196) --------- ---------111,406) ---------- ---------- Net deferred income tax liabilities ($ 15,994)10,941) ($ 8,683) ========= =========6,999) ========== ==========
No valuation allowance has been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. 8. LONG-TERM DEBT TheOn December 15, 2004, the Company entered into aan amended and restated $250 million syndicated unsecured credit agreement (the "Credit Agreement") on November 14, 2002 to replace both a $150 million syndicated unsecured credit agreement and a separate $75 million facility for the issuance of trade letters of credit.. The primary purposes of the Credit Agreement areis for trade and stand-by letters of credit (Trade and stand-by) and working capital. The Credit Agreement is due to expire on November 14, 2005. The Credit Agreement has several borrowing options, including interest rates that are based on the agent bank's "Alternate Base Rate," or a LIBO Rate.Rate". Facility fees payable under the Amended Credit Agreement arewill be based on the Company's ratio (the "leverage ratio") of the sum of total debt plus 800%600% of forward minimum rent commitments to consolidated EBITDARearnings before interest, taxes, depreciation, amortization and rent ("EBITDAR") for the trailing four-fiscal-quarter period and currently accruesthe facility fees are projected to accrue at .225%.175% of the committed amounts per annum. The Credit Agreement contains limitations on indebtedness, liens, sale-leaseback transactions, significant corporate changes including mergers and acquisitions with third parties, investments, restricted payments (including dividends and stock repurchases), hedging transactions and transactions with affiliates. The Amended Credit Agreement also contains financial covenants requiring a minimum ratio,will mature on a consolidated basis, of EBITDAR for the trailing four-fiscal-quarter period to the sum of interest expense and minimum rent for such period, as well as a maximum leverage ratio.December 15, 2009. Letters of credit totaling approximately $42.8$49.6 million and $41.8$42.8 million were outstanding under the Credit Agreement at January 31, 200429, 2005 and at February 1, 2003.January 31, 2004. No borrowings were outstanding under the Credit Agreement at January 29, 2005 and at January 31, 2004 or February 1, 2003. 472004. 59 9. RELATED PARTY TRANSACTIONS Shahid & Company, Inc. has provided advertising and design services for the Company since 1995. Sam N. Shahid Jr., who serves on A&F's Board of Directors, has been President and Creative Director of Shahid & Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided during the 2004, 2003 2002 and 20012002 fiscal years were approximately $2.1 million, $2.0 million $1.9 million and $1.8$1.9 million, respectively. These amounts do not include reimbursements to Shahid & Company, Inc. for expenses incurred while performing these services. On January 1, 2002, A&F loaned $4,953,833 to its Chairman, pursuant to the terms of a replacement promissory note, which provided that such amount was due and payable on December 31, 2002. The outstanding principal under the note did not bear interest as the net sales threshold, per the terms of the note, was met. This note was paid in full by the Chairman on December 31, 2002. This note constituted a replacement of, and substitute for, several promissory notes dated from November 17, 1999 through May 18, 2001. 10. STOCK OPTIONS AND RESTRICTED SHARES Under the Company's stock plans, associates and non-associate directors may be granted up to a total of 24.0 million restricted shares and options to purchase A&F's common stock at the market price on the date of grant. In 2003,2004, associates of the Company were granted options covering approximately 552,000444,000 shares, with a vesting period of four years. Options covering a total of 84,00040,000 shares were granted to non-associate directors in 2003.2004. Options covering 64,000 of these shares vest over four years. Options coveringgranted to the remaining 20,000 sharesnon-associate directors vest on the first anniversary of the grant date. All options have a maximum term of ten years.
Options Exercisable at Options Outstanding at January 31, 200429, 2005 January 31, 200429, 2005 - --------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------ Weighted- Average Weighted- Weighted- Range of Remaining Average AverageWeighted- Exercise Number Contractual Exercise Number ExercisableAverage Prices Outstanding Life PricePrise Exercisable Exercise Price - -------- ----------- ----------- --------- ----------- ------------------------- $ 8-$23 2,691,000 4.3991,000 3.3 $ 13.50 1,618,00012.26 613,000 $ 13.8613.00 $23-$38 7,039,000 6.96,130,000 5.9 $ 26.50 3,094,00026.56 3,804,000 $ 26.1725.86 $38-$51 5,131,000 5.44,908,000 4.6 $ 43.54 1,479,00043.85 2,445,000 $ 43.2543.76 - ------- ----------- --------------------- --- ------- --------- ----------- ------------------ $ 8-$51 14,861,000 5.912,029,000 5.2 $ 30.03 6,191,00032.44 6,862,000 $ 27.0431.09 ======= =========== ===================== === ======= ========= =========== ==================
4860 A summary of option activity for fiscal 2004, 2003 2002 and 20012002 follows:
2004 2003 2002 2001 --------------------------- ----------------------------------------------------- -------------------------- --------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Option Price Shares Option Price Shares Option Price ----------- ------------ ----------- ------------ ----------- ------------ Outstanding at beginning of year 16,059,000 $ 28.31 12,961,000 $ 28.65 12,994,000 $ 28.01 Granted 636,000 27.89 3,583,000 26.53 648,000 29.38 Exercised (1,586,000) 12.39 (93,000) 16.44 (521,000) 15.00 Canceled (248,000) 27.04 (392,000) 26.31 (160,000) 24.09 ----------- ------------ ----------- ------------ ----------- ------------ Outstanding at end of year 14,861,00014,839,900 $ 30.03 16,059,000 $ 28.31 12,961,000 $ 28.65 Granted 484,000 36.48 640,000 27.89 3,583,000 26.53 Exercised (2,564,000) 19.49 (1,586,600) 12.39 (93,000) 16.44 Canceled (730,000) 31.67 (272,500) 27.04 (392,000) 26.31 ----------- ------- ----------- ------- ----------- ------- Outstanding at end of year 12,029,900 $ 32.44 14,839,900 $ 30.03 16,059,000 $ 28.31 =========== =================== =========== =================== =========== =================== Options exercisable at year-end 6,862,000 $ 31.09 6,191,000 $ 27.04 4,556,000 $ 19.10 3,065,000 $ 18.49 =========== =================== =========== =================== =========== ===================
A total of 507,500, 78,000 1,046,000 and 19,0001,046,000 restricted shares were granted in fiscal 2004, 2003 2002 and 2001,2002, respectively, with a total market value at grant date of $16.0 million, $2.1 million $28.0 million and $.6$28.0 million, respectively. Of the restricted shares granted in 2002, 1,000,000 shares were awarded to the Company's Chairman, which become vested on December 31, 2008 provided the Chairman remains continuously employed by the Company through such date. The remaining restricted share grants generallyeither vest either on a graduated scale over four years for associates or 100% atover one year for the end of a fixed vesting period, principally five years.non-associate directors. The market value of restricted shares is being amortized as compensation expense over the vesting period, which excluding the above mentioned grants to the Chairman and the non-associate directors is generally four to five years. Compensation expenses related to restricted share awards amounted to $10.4 million, $5.3 million and $2.3 million in 2004, 2003 and $3.9 million in 2003, 2002, and 2001, respectively. 11. RETIREMENT BENEFITS The Company maintains a qualified defined contribution retirement plan and a nonqualified supplemental retirement plan. Participation in the qualified plan is available to all associates who have completed 1,000 or more hours of service with the Company during certain 12-month periods and attained the age of 21. Participation in the nonqualified plan is subject to service and compensation requirements. The Company's contributions to these plans are based on a percentage of associates' eligible annual compensation. The cost of these plans was $9.1 million in 2004, $6.4 million in 2003 and $5.6 million in 2002 and $3.9 million in 2001.2002. Effective February 2, 2003, the Company established a Supplemental Executive Retirement Plan (the "SERP") to provide additional retirement income to its Chairman. Subject to service requirements, the Chairman will receive a monthly prorated sharebenefit equal to 50% of his final average compensation (as defined in the SERP) for life. The SERP has been actuarially valued by an independent third party and the expense associated with the SERP is being accrued over the stated term of the Amended and Restated Employment Agreement, dated as of January 30, 2003, between the Company and its Chairman. 4961 Effective May 17, 2004, the Company established a Supplemental Executive Retirement Plan (the "SERP") to provide additional retirement income to its President and Chief Operating Officer. Subject to service requirements, upon retirement at age 57 the President and Chief Operating Officer would receive a monthly annuity of $8,333.33 for life. The monthly amount would be actuarially increased for retirement after age 57, or reduced 20% per year for retirement prior to age 57. The SERP has been actuarially valued by an independent third party and the expense associated with the SERP is being accrued over the stated term of the Employment Agreement, dated as of May 17, 2004, between the Company and its President and Chief Operating Officer. 12. CONTINGENCIES The Company is involved in a number of legal proceedings that arise out of, and are incidental to, the conduct of its business. In 2003, five actions were filed in different state courts under various states' laws on behalf of purported classes of employees and former employees of the Company alleging that the Company required its associates to wear and pay for a "uniform" in violation of applicable law. Two of the actions have been ordered coordinated. In each case, the plaintiff, on behalf of his or her purported class, seekssought injunctive relief and unspecified amounts of economic and liquidated damages. For certainTwo of the actions were ordered coordinated in November of 2003 and on February 28, 2005, were settled and dismissed with prejudice as to the individual claims and without prejudice as to the putative class claims. Two other cases the parties arewere stayed in the processstate court proceedings and the plaintiffs in those cases joined in the action in federal court described in the immediately following paragraph. In connection with the settlement of discovery. In otherthat federal court action, the two related state court cases answers have been filed. In one case,were dismissed with prejudice. The Company has filed an answer in the remaining state court action. The plaintiffs in that action filed, and the Company opposed, a motion to certify a class of employees in the State of Washington. The Court granted the plaintiffs' motion and the Company has filedcommenced a motion to dismiss and that motion is pending.discretionary appeal thereof. In 2003, an action was filed in the United States District Court for the Western District of Pennsylvania, in which the plaintiff allegesalleged that the "uniform," when purchased, drove associates' wages below the federal minimum wage. The complaint purportspurported to state a collective action on behalf of all part-time associates nationwide under the Fair Labor Standards Act. The parties areOn November 17, 2004, the Court gave final approval of the settlement of this case and the two state court cases whose plaintiffs had joined in the process of discovery. In 2003, two actions were filed on behalf of purported classes alleged to be discriminated against in hiring or employment decisions due to race and/or national origin. Onefederal court action, and dismissal of the actionscase with prejudice was voluntarily dismissed. Additionally,entered. The settlement is not material to the EEOC has under taken an investigation into these allegations.consolidated financial statements of the Company. As previously mentioned, five of the above-described cases have been settled. The plaintiffs inCompany does not believe it is feasible to predict the action seek, on behalfoutcome of their purported class, injunctive reliefthe remaining state court legal proceeding described above and unspecified amountsintends to vigorously defend against it. The timing of economic, compensatory and punitive damages . The parties are in the processfinal resolution of discovery.that proceeding is also uncertain. Accordingly, the Company cannot estimate a range of potential loss, if any, for that legal proceeding. In each of 2004, 2003 and 2002, one action was filed against the Company involving overtime compensation. In each action, the plaintiffs, on behalf of their respective purported class, seek injunctive relief and unspecified amounts of economic and liquidated damages. TheIn the action which was filed in state court under California law in 2002, the parties are in the process of discovery, and the trial court has ordered a class of store managers in California certified for limited purposes. In the action which was filed in the United States District Court for the Southern District of Ohio in 2003, the Company has filed a motion to dismiss in onewhich was denied as to certain of the casesplaintiffs and that motion is pending.remains pending as to certain claims of a third plaintiff. The parties in this action have commenced discovery. 62 In the otherremaining case, the parties arewhich was filed on December 28, 2004 in the processUnited States District Court for the Eastern District of discovery. TheTennessee, the Company accrues amounts related to legal matters if reasonably estimable and reviews these amounts at least quarterly.has filed an answer. The Company does not believe it is feasible to predict the outcome of these proceedings.the legal proceedings described in this paragraph and intends to defend vigorously against them. The timing of the final resolution of each of these proceedings is also uncertain. Accordingly, the Company cannot estimate a range of potential loss, if any, for any of these legal proceedings. The Company has standby letters of creditIn 2003, an action was filed in the amountUnited States District Court for the Northern District of $4.7California on behalf of a purported class alleged to be discriminated against in hiring or employment decisions due to race and/or national origin. The plaintiffs in this action sought, on behalf of their purported class, injunctive relief and unspecified amounts of economic, compensatory and punitive damages. Two other purported class action employment discrimination lawsuits were subsequently filed in the United States District Court for the Northern District of California, both on November 8, 2004. One alleged gender (female) discrimination in hiring or employment decisions and sought, on behalf of the purported class, injunctive relief and unspecified amounts of economic, compensatory and punitive damages. The other was brought by the Equal Employment Opportunity Commission (the "EEOC") alleging race, ethnicity and gender (female) discrimination in hiring or employment decisions. The EEOC complaint sought injunctive relief and, on behalf of the purported class, unspecified amounts of economic, compensatory and punitive damages. On November 8, 2004, the Company signed a consent decree settling these three related class action discrimination lawsuits, subject to judicial review and approval. The monetary terms of the consent decree provided that the Company would set aside $40.0 million that are set to expire duringpay to the class, approximately $7.5 million for attorneys' fees, and approximately $2.5 million for monitoring and administrative costs to carry out the settlement. As a result, the Company accrued a non-recurring charge of $32.9 million, which was included in general, administrative and store operating expenses for the third quarter of fiscal 2004. The beneficiary, a merchandise supplier, hasThis was in addition to amounts accrued during the right to draw upon the standby lettersfirst quarter of credit iffiscal 2004 when the Company has authorized orrecorded an $8.0 million charge (net of expected proceeds of $10 million from insurance) resulting from an increase in expected defense costs related to the case filed in 2003. The preliminary approval order was signed by Judge Susan Illston of the United States District Court for the Northern District of California on November 16, 2004, and that order scheduled a voluntary petition in bankruptcy. To date, the beneficiary has not drawn upon the standby letters of credit.final fairness and approval hearing for April 14, 2005. The Company enters into agreements with professional services firms, in the ordinary course of business and, in most agreements, indemnifies these firms from any harm. There is no financial impact on the Companyaccrues amounts related to legal matters if reasonably estimable and reviews these indemnification agreements.amounts at least quarterly. 63 13. PREFERRED STOCK PURCHASE RIGHTS On July 16, 1998, A&F's Board of Directors declared a dividend of .50 of a Series A Participating Cumulative Preferred Stock Purchase Right (Right) for each outstanding share of Class A Common Stock, par value $.01 per share (Common Stock), of A&F. The dividend was paid to shareholders of record on July 28, 1998. Shares of Common Stock issued after July 28, 1998 and prior to the Distribution Date described below will be issued with a Right attached. Under certain conditions, 50 each whole Right may be exercised to purchase one one-thousandth of a share of Series A Participating Cumulative Preferred Stock at an initial exercise price of $250. The Rights initially will be attached to the shares of Common Stock. The Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of 10 business days after a public announcement that a person or group has acquired beneficial ownership of 20% or more of A&F's outstanding shares of Common Stock and become an "Acquiring Person" (Share Acquisition Date) or 10 business days (or such later date as the Board shall determine before any person has become an Acquiring Person) after the date of the commencement of a tender or exchange offer which, if consummated, would result in a person or group beneficially owning 20% or more of A&F's outstanding Common Stock. The Rights are not exercisable until the Distribution Date. In the event that any person becomes an Acquiring Person, each holder of a Right (other than the Acquiring Person and certain affiliated persons) will be entitled to purchase, upon exercise of the Right, shares of Common Stock having a market value two times the exercise price of the Right. At any time after any person becomes an Acquiring Person (but before any person becomes the beneficial owner of 50% or more of the outstanding shares), A&F's Board of Directors may exchange all or part of the Rights (other than Rights beneficially owned by an Acquiring Person and certain affiliated persons) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right. In the event that, at any time following the Share Acquisition Date, A&F is involved in a merger or other business combination transaction in which A&F is not the surviving corporation, the Common Stock is exchanged for other securities or assets or 50% or more of the assets or earning power of A&F and its subsidiaries, taken as a whole, is sold or transferred, the holder of a Right will be entitled to buy, for the exercise price of the Rights, the number of shares of common stock of the other party to the business combination or sale which at the time of such transaction will have a market value of two times the exercise price of the Right. The Rights, which do not have any voting rights, expire on July 16, 2008, and may be redeemed by A&F at a price of $.01 per whole Right at any time before a person becomes an Acquiring Person. Rights holders have no rights as a shareholder of A&F, including the right to vote and to receive dividends. 64 14. SUBSEQUENT EVENTS OnIn February 17, 2004,2005, two substantially similar actions were filed in the Company announcedCourt of Chancery of the State of Delaware by A&F stockholders challenging the compensation received by A&F's Chief Executive Officer, Michael S. Jeffries. The complaints allege, among other things, that itsthe Board of Directors votedof A&F and the members of the Compensation Committee of the Board breached their fiduciary duties in granting stock options and an increase in cash compensation to initiateMr. Jeffries in February 2002 and in approving Mr. Jeffries's current employment agreement in January 2003 (the "Amended and Restated Employment Agreement"). The complaints further assert that A&F's disclosures with respect to Mr. Jeffries' compensation were deficient. The complaints seek, among other things, to rescind the purportedly wrongful compensation and to set aside the current employment agreement. The actions have been consolidated under the caption, In re Abercrombie & Fitch Co. Shareholder Derivative Litigation., C.A. No. 1077 (the "Litigation"). A&F has formed a cash dividend,special committee of independent directors (the "Special Committee") to determine what action to take with respect to the Litigation. A&F and the defendant members of the Board of Directors have denied, and continue to deny, any liability or wrongdoing with respect to all claims alleged in the Litigation. Nevertheless, the Special Committee, A&F and the other defendants have determined that it is desirable to settle the Litigation and thereby eliminate the substantial burden, expense, inconvenience and distraction that the Litigation would entail and to dispel any uncertainty that may exist as a result of the Litigation. Pursuant to a stipulation of settlement dated April 8, 2005, and subject to the approval of the Court, the parties have agreed to settle the Litigation on the following terms: (i) Mr. Jeffries's Amended and Restated Employment Agreement will be amended to reduce his "stay bonus" from twelve million dollars to six million dollars and to condition receipt of the stay bonus on A&F's achieving defined performance criteria (except in certain circumstances), (ii) Mr. Jeffries will not receive any award of stock options during calendar years 2005 and 2006 and in subsequent years will receive stock options only in the discretion of the Compensation Committee, (iii) Mr. Jeffries will hold the Career Shares awarded under Section 4(b) of his Amended and Restated Employment Agreement for a period of one year after he ceases to be an executive officer of A&F (the "Holding Period"), and (iv) Mr. Jeffries will hold one half of the A&F shares received from the first one million stock options exercised following this settlement, net of shares equal to the amount of withholding taxes and exercise price, until the expiration of the Holding Period. Also as part of the settlement, the Special Committee has agreed to recommend to the full Board that the Board cause A&F to take, subject to the directors' fiduciary duties, and A&F has agreed to use its best efforts to take, each of the following actions, with the actions described in clauses (i) through (iv) to be achieved not later than the one year anniversary of the settlement becoming final: (i) A&F shall conduct a full review of its corporate governance practices and procedures, (ii) at least a majority of the members of the Compensation Committee shall be directors who were not members of the Compensation Committee at the time of the events giving rise to the Litigation and who have no substantial business or professional relationship with A&F other than their status as directors, (iii) the Compensation Committee shall retain independent counsel and an independent compensation expert, (iv) A&F shall adopt FAS 123 providing for the expensing of stock option compensation, (v) for a period of five years A&F shall not nominate for election to the Board any director who does not meet the New York Stock Exchange standards for director independence (provided, however, this provision shall not apply to any current member of the Board or to up to three members of A&F's senior management), (vi) one member of the Board who does not meet such standards shall not be nominated for re-election in connection with the 2005 annual ratemeeting, and (vii) the Company shall review the disclosures to appear in A&F's proxy statement for its 2005 Annual Meeting relating to executive compensation and will provide plaintiffs' counsel with an opportunity to comment on the disclosures. The stipulation of $0.50 per share.settlement provides for a release of all claims that A&F has or may have against any of the defendants relating to the matters and claims that were or could have been raised in the Litigation. The first quarterly payment,plaintiffs will apply to the Court for an award of $0.125 per share, was paid on March 30, 2004 to stockholders of record as of March 9, 2004. 51attorneys' fees. 65 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial results for 20032004 and 20022003 follow (thousands except per share amounts):
2004 Quarter First Second Third Fourth - ---------------------------- --------- --------- --------- --------- Net sales $ 411,930 $ 401,346 $ 520,724 $ 687,254 Gross income 164,991 181,643 226,537 336,624 Operating income 46,722 68,762 61,978 170,175 Net income 29,317 42,888 39,911 104,261 Net income per basic share $ 0.31 $ 0.45 $ 0.43 $ 1.19 Net income per diluted share $ 0.30 $ 0.44 $ 0.42 $ 1.15
2003 Quarter First Second Third Fourth - ---------------------------- ---------- ---------- ---------- ------------------- --------- --------- --------- Net sales $ 346,722 $ 355,719 $ 444,979 $ 560,389 Gross income 128,188 144,333 183,865 261,012128,578 143,850 182,993 261,523 Operating income 40,290 55,617 81,450 154,27840,680 55,134 80,578 154,788 Net income 25,551 34,818 50,457 94,27725,785 34,528 49,934 94,583 Net income per basic share $ 0.26 $ 0.36 $ 0.52 $ 0.98 Net income per diluted share $ 0.26 $ 0.350.34 $ 0.510.50 $ 0.960.97
2003 Quarter First Second Third Fourth - ---------------------------- ---------- ---------- ---------- ---------- Net sales $ 312,792 $ 329,154 $ 419,329 $ 534,482 Gross income 114,429 131,874 166,736 243,010 Operating income 36,987 49,570 76,432 149,628 Net income 23,289 31,141 47,687 92,818 Net income per basic share $ 0.24 $ 0.32 $ 0.49 $ 0.95 Net income per diluted share $ 0.23 $ 0.31 $ 0.48 $ 0.93
5266 REPORT OF INDEPENDENT AUDITORSReport of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Abercrombie & Fitch Co.: We have completed an integrated audit of Abercrombie & Fitch Co.'s fiscal 2004 consolidated financial statements and of its internal control over financial reporting as of January 29, 2005 and audits of its fiscal 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income,operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Abercrombie & Fitch Co. ("the Company") and its subsidiaries at January 29, 2005 and January 31, 2004, and February 1, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 200429, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; ourmanagement. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditingthe standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Internal control over financial reporting Also, we have audited management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that Abercrombie & Fitch Co. did not maintain effective internal control over financial reporting as of January 29, 2005, because the Company's controls over the selection and application of its lease accounting policies related to construction allowances and the recording of rent between the date the Company takes possession of the property and the commencement date of the lease were ineffective based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. 67 A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management's assessment. As of January 29, 2005, the Company's controls over the selection and application of its lease accounting policies related to construction allowances and the recording of rent between the date the Company takes possession of the property and the commencement date of the lease were ineffective to ensure that such leasing transactions were recorded in accordance with generally accepted accounting principles. Specifically, because of the deficiency in the Company's controls over the selection and application of its lease accounting policies, the Company failed to properly classify and account for property and equipment, deferred lease credits from landlords, rent expense, depreciation expense and the related impact of these items on cash provided by operating activities and cash used for investing activities in the consolidated statements of cash flows, which resulted in restatements of the Company's 2003, 2002 and 2001 annual financial statements and 2004 and 2003 interim consolidated financial statements. Additionally, if the control deficiency is not remediated it could result in a misstatement of the aforementioned financial statement accounts and disclosures that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management of the Company has concluded that this control deficiency constitutes a material weakness. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. In our opinion, management's assessment that Abercrombie & Fitch Co. did not maintain effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Abercrombie & Fitch Co. has not maintained effective internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. /s/ PricewaterhouseCoopers LLP Columbus, Ohio February 17, 2004 53April 11, 2005 68 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures With the participation of the Chairman and Chief Executive Officer (the principal executive officer) and the Senior Vice President - Chief Financial Officer (the principal financial officer) of Abercrombie & Fitch Co. ("A&F"), A&F's management has evaluated the effectiveness of A&F'sThe Company maintains disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, A&F's Chairman and Chief Executive Officer and A&F's Senior Vice President - Chief Financial Officer have concluded that: -are designed to provide reasonable assurance that information required to be disclosed by A&F in this Annual Report on Form 10-K would be accumulated and communicated to A&F's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; - information required to be disclosed by A&F in this Annual Report on Form 10-K would bethe reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSecurities and Exchange Commission's rules and forms;forms, and that such information is accumulated and communicated to the Company's management, including the Chairman and Chief Executive and the Senior Vice President - A&F'sChief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. The Company's management, with the participation of the Chairman and Chief Executive Officer and the Senior Vice President - Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's design and operation of its disclosure controls and procedures as of January 29, 2005. The evaluation included consideration of facts and circumstances surrounding corrections of the Company's lease accounting practices. These corrections resulted in the restatement of the Company's 2003, 2002 and 2001 annual financial statements and 2004 and 2003 interim consolidated financial statements. As a result of the restatements and the related material weakness discussed under "Management's Report on Internal Control Over Financial Reporting," the Chief Executive Officer and the Chief Financial Officer concluded that, as of January 29, 2005, the Company's disclosure controls and procedures were not effective at a reasonable level of assurance. Notwithstanding this material weakness, the Company's management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, the Company's financial position and results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. Management's Report on Internal Control Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management evaluated the effectiveness of the Company's internal control over financial reporting as of January 29, 2005 using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 69 A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of January 29, 2005, the Company's controls over the selection and application of its lease accounting policies related to construction allowances and the recording of rent between the date the Company takes possession of the property and the commencement date of the lease were ineffective to ensure that such leasing transactions were recorded in accordance with generally accepted accounting principles. Specifically, because of the deficiency in the Company's controls over the selection and application of its lease accounting policies, the Company failed to properly classify and account for property and equipment, deferred lease credits from landlords, rent expense, depreciation expense and the related impact of these items on cash provided by operating activities and cash used for investing activities in the consolidated statements of cash flows, which resulted in restatements of the Company's 2003, 2002 and 2001 annual financial statements and 2004 and 2003 interim consolidated financial statements. Additionally, if the control deficiency is not remediated it could result in a misstatement of the aforementioned financial statement accounts and disclosures that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management of the Company has concluded that this control deficiency constitutes a material weakness and that internal control over financial reporting was not effective as of January 29, 2005 based on the endcriteria established in Internal Control-Integrated Framework issued by the COSO. The Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited management's assessment of the period covered by this Annual Report on Form 10-K to ensure that material information relating to A&F and its consolidated subsidiarieseffectiveness of the Company's internal control over financial reporting as of January 29, 2005 as stated in their report, which is made known to them, particularly during the period for which the periodic reports of A&F, including this Annual Report on Form 10-K, are being prepared.included herein. Changes in Internal Control overOver Financial Reporting There were no changes in A&F'sthe Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during A&F'sthe fiscal quarter ended January 31, 2004,29, 2005, that have materially affected, or are reasonably likely to materially affect, A&F'sthe Company's internal control over financial reporting. 54In the first quarter of 2005, the Company remediated the material weakness in internal control over financial reporting by correcting its method of accounting for construction allowances and recording of rent between the date the Company takes possession of the property and the commencement date of the lease. The Company implemented controls to ensure that all leases are reviewed and accounted for in accordance with Statement of Financial Accounting Standards No.13, "Accounting for Leases" and Financial Accounting Standards Board Technical Bulletin No. 88-1, "Issues Relating to Accounting for Leases"; and Financial Accounting Standards Board Technical Bulletin No. 85-3, "Accounting for Operating Leases with Scheduled Rent Increases." 70 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regardingconcerning directors, of A&Fpersons nominated to become directors and executive officers is set forthincorporated by reference from the text under the captions "ELECTION OF DIRECTORS - Nominees and Directors," "- Security Ownershipcaption "Election of Directors and Management," "- Meetings of and Communications withDirectors" in the Board," and "- Committees of the Board" and "EXECUTIVE COMPENSATION - Employment Agreements and Other Transactions with Certain Executive Officers" in A&F's definitive proxy statementCompany's Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2004 (the "Proxy Statement")June 15, 2005 and is incorporated herein by reference. Information regarding executive officers of A&F is set forthfrom the text under the captions "ELECTION OF DIRECTORScaption "Supplemental Item - Nominees and Directors," "- Executive Officers", and "- Security OwnershipOfficers of Directors and Management" and "EXECUTIVE COMPENSATION - Employment Agreements and Other Transactions with Certain Executive Officers" in the Proxy Statement and is incorporated herein by reference. In addition, information regarding executive officers of A&F is includedRegistrant" in this Annual Report on Form 10-K under10-K. Compliance with Section 16(a) of the caption "SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I and is incorporated herein by reference.Exchange Act Information regardingconcerning beneficial ownership reporting compliance under Section 16(a) of the Securities Exchange Act of 1934 is set forthincorporated by reference from the text under the caption "PRINCIPAL HOLDERS OF SHARES -"Security Ownership of Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement and is incorporated herein by reference. Information concerning A&F's Audit Committee is set forth underfor the captions "ELECTION OF DIRECTORS - CommitteesAnnual Meeting of the Board - Audit Committee" and "- Nominees and Directors" in the Proxy Statement and is incorporated herein by reference.Stockholders to be held on June 15, 2005. Code of Business Conduct Information concerning the nomination process for director candidatesCompany's Code of Business Conduct is set forthincorporated by reference from the text under the captions "ELECTION OF DIRECTORS - Committees of the Board - Nominating and Board Governance Committee" and "ELECTION OF DIRECTORS - Nominating Procedures" in the Proxy Statement and is incorporated herein by reference. A&F's Boardcaption "Election of Directors has adopted charters for each of the Audit Committee, the Compensation Committee and the Nominating and Board Governance Committee as well as Corporate Governance Guidelines, in each case as contemplated by the applicable sections of the New York Stock Exchange Listed Company Manual. In accordance with the requirements of Section 303A(10) of the New York Stock Exchange Listed Company Manual, the Board of Directors of A&F has adopted a- Code of Business Conduct and Ethics coveringEthics" in the directors, officers and associates (employees)Company's Proxy Statement for the Annual Meeting of A&F, including A&F's Chairman and Chief Executive Officer (the principal executive officer) and Senior Vice President - Chief Financial Officer (the principal financial and accounting officer). As required by the applicable rules of the SEC and the requirements of Section 303A(10) of the New York Stock Exchange Listed Company Manual, A&F intendsStockholders to disclose the followingbe held on the "Corporate Governance" page of its Web site located at www.abercrombie.com within the required time period following their occurrence: (A) the nature of any amendment to a provision of its Code of Business Conduct and Ethics that (i) applies to A&F's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, (ii) relates to any element of the "code of ethics" definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical, administrative or other non-substantive amendment; and (B) a description of any waiver (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver), including an implicit waiver, from a provision of the Code of Business Conduct and Ethics granted to A&F's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, that relates to one or more of the items set forth in Item 406(b) of SEC Regulation S-K. 55 The text of each of the Charter of the Audit Committee, the Charter of the Compensation Committee, the Charter of the Nominating and Board Governance Committee, the Corporate Governance Guidelines and the Code of Business Conduct and Ethics is posted on the "Corporate Governance" page of A&F's Web site located at www.abercrombie.com. Interested persons may also obtain copies of the Charter of the Audit Committee, the Charter of the Compensation Committee, the Charter of the Nominating and Board Governance Committee, the Corporate Governance Guidelines and the Code of Business Conduct and Ethics, without charge, by writing to Abercrombie & Fitch Co. at 6301 Fitch Path, New Albany, Ohio 43054, Attention: Investor Relations. In addition, a copy of A&F's Code of Business Conduct and Ethics is being filed as Exhibit 14 to this Annual Report on Form 10-K.June 15, 2005. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation is set forth under the captions "EXECUTIVE COMPENSATION""Executive Compensation" and "ELECTION OF DIRECTORS"Election of Directors - Compensation Committee Interlocks and Insider Participation" and "- Security Ownership of Directors and Management"Directors" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on June 15, 2005 and is incorporated herein by reference. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of SEC Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information regardingconcerning the security ownership of certain beneficial owners and management is set forthincorporated by reference from the text under the captions "PRINCIPAL HOLDERS OF SHARES," "ELECTION OF DIRECTORS - Securitycaption "Security Ownership of DirectorsCertain Beneficial Owners and Management" and "EXECUTIVE COMPENSATION - Summary Compensation Table," "- Compensation of Directors" and "- Employment Agreements and Other Transactions with Certain Executive Officers" in the Company's Proxy Statement and is incorporated herein by reference. Abercrombie & Fitch Co. ("A&F") has fourfor the Annual Meeting of Stockholders to be held on June 15, 2005. Information concerning equity compensation plans is incorporated by reference from the text under which its shares of Class A Common Stock, $0.01 par value ("Common Stock"), are authorized for issuance to eligible directors, officers and employees in exchange for considerationthe caption "Equity Compensation Plans" in the form of goods or services: (i) the 1996 Stock Option and Performance Incentive Plan (1998 Restatement) (the "1998 Associates Plan"); (ii) the 1996 Stock Plan for Non-Associate Directors (1998 Restatement) (the "1998 Non-Associate Directors Plan"); (iii) the 2002 Stock Plan for Associates (the "2002 Associates Plan"); and (iv) the 2003 Stock Plan for Non-Associate Directors (the "2003 Non-Associate Directors Plan"). Any shares of Common Stock distributable in respect of amounts deferred by non-associate directors of A&F under the Directors' Deferred Compensation Plan (the "Deferred Compensation Plan") will be distributed under the 2003 Non-Associate Directors Plan in respect of deferred compensation allocated to non-associate directors' stock accounts under the Deferred Compensation Plan on or after May 22, 2003 and under the 1998 Non-Associate Directors Plan in respect of deferred compensation allocated to non-associate directors' stock accounts under the Deferred Compensation Plan prior to May 22, 2003. The 1998 Associates Plan and the 1998 Non-Associate Directors Plan have been approved by the stockholders of A&F while the 2002 Associate Plan, the 2003 Non-Associate Directors Plan and the Deferred Compensation Plan have not. The 1998 Non-Associate Directors Plan was terminated as of May 22, 2003 in respect of future grants pf options and issuances and distributions of shares of Common Stock other than issuances of shares of Common Stock upon exercise of options granted under the 1998 Non-Associate Directors Plan which remained outstanding as of May 21, 2003 and issuances and distributions of shares of Common Stock in respect of deferred compensation allocated to accounts under the Deferred Compensation Plan as of May 21, 2003. 56 The following table summarizes equity compensation plan informationCompany's Proxy Statement for the 1998 Associates Plan and the 1998 Non-Associate Directors Plan as a group and for the 2002 Associates Plan and the 2003 Non-Associate Directors Plan as a group, in each case asAnnual Meeting of January 31, 2004.
NUMBER OF SHARES OF COMMON STOCK REMAINING NUMBER OF SHARES AVAILABLE FOR OF COMMON STOCK WEIGHTED- FUTURE ISSUANCE TO BE ISSUED UPON AVERAGE EXERCISE UNDER EQUITY EXERCISE OF PRICE OF COMPENSATION OUTSTANDING OUTSTANDING PLANS (EXCLUDING OPTIONS, WARRANTS OPTIONS, WARRANTS SHARES REFLECTED AND RIGHTS AND RIGHTS IN COLUMN (a)) PLAN CATEGORY (a)* (b)* (c)* - ------------- ----------------- ----------------- ---------------- Equity compensation plans approved by stockholders 12,027,078 (1) $ 31.22(2) 606,787 (3) Equity compensation plans not approved by stockholders 3,958,119 (4) $ 26.71(5) 3,551,864 (6) Total 15,985,197 $ 30.02 4,158,651
- ----------------- *Reflects adjustments for changes in A&F's capitalization. (1) Includes 10,616,748 shares of Common Stock issuable upon exercise of options granted under the 1998 Associates Plan, 102,830 shares of Common Stock issuable upon vesting of awards of restricted shares of Common Stock granted under the 1998 Associates Plan, 290,000 shares of Common Stock issuable upon exercise of options granted under the 1998 Non-Associate Directors Plan and 17,500 shares of Common Stock reflecting share equivalents attributable to compensation deferred by non-associate directors participating in the Deferred Compensation Plan and distributable in the form of shares of Common Stock under the 1998 Non-Associate Directors Plan. Also includes the right of Michael S. Jeffries to receive 1,000,000 shares of Common Stock as a career share award under the 1998 Associates Plan in accordance with the terms of his Amended and Restated Employment Agreement, dated as of January 30, 2003. This award vests December 31, 2008 if Mr. Jeffries remains employed with A&F. A pro rata portion of the award may vest earlier upon Mr. Jeffries' death or permanent and total disability or termination of his employment by A&F without cause or by Mr. Jeffries with good reason and will vest in full upon a change of control of A&F. Mr. Jeffries will not receive any of the shares of Common Stock subject to the career share award until after the award has vested and the delivery date specified in the Amended and Restated Employment Agreement occurred. (2) Represents weighted-average exercise price of options outstanding under the 1998 Associates Plan and the 1998 Non-Associate Directors Plan and weighted-average price of share equivalents attributable to compensation deferred by non-associate directors participating in the Deferred Compensation Plan distributable in the form of shares of Common Stock under the 1998 Non-Associate Directors Plan. 57 (3) Includes 594,725 shares of Common Stock remaining available for future issuance under the 1998 Associates Plan (no more than 195,592 of which may be the subject of awards which are not options or stock appreciation rights) and 12,062 shares of Common Stock remaining available for future issuance under the 1998 Non-Associate Directors Plan, in each case excluding the shares of Common Stock shown in footnote (1). (4) Includes 3,914,026 shares of Common Stock issuable upon exercise of options granted under the 2002 Associates Plan, 40,000 shares of Common Stock issuable upon exercise of options granted under the 2003 Non-Associate Directors Plan and 4,093 shares of Common Stock reflecting share equivalents attributable to compensation deferred by non-associate directors participating in the Deferred Compensation Plan distributable in the form of shares of Common Stock under the 2003 Non-Associate Directors Plan. (5) Represents weighted-average exercise price of options outstanding under the 2002 Associates Plan and the 2003 Non-Associate Directors Plan and weighted-average price of share equivalents attributable to compensation deferred by non-associate directors participating in the Deferred Compensation Plan distributable in the form of shares of Common Stock under the 2003 Non-Associate Directors Plan. (6) Includes 3,045,957 shares of Common Stock remaining available for the future issuance under the 2002 Associates Plan and 505,907 shares of Common Stock remaining available for future issuance under the 2003 Non-Associate Directors Plan, in each case excluding shares of Common Stock shown in footnote (4). 2002 STOCK PLAN FOR ASSOCIATES The 2002 Associates Plan, which was adopted in January 2002 and amended and restated May 22, 2003 by the Board of Directors of A&F, is administered by the Compensation Committee of the Board. The 2002 Associates Plan permits A&F to provide equity-based awards in the form of non-qualified stock options ("NSOs"), restricted shares of Common Stock ("Restricted Shares") and stock units, each representing the right to receive one share of Common Stock ("Stock Units" and, collectively with NSOs and Restricted Shares, "Awards"). Shares Subject to the Plan The maximum number of shares of Common Stock which may be delivered to participants under the 2002 Associates Plan is 7,000,000 shares of Common Stock, subject to adjustment as described below. Shares of Common StockStockholders to be delivered under the 2002 Associates Plan will be shares currently held or subsequently acquired by A&F as treasury shares. The number of shares of Common Stock authorized for delivery under the 2002 Associates Plan, the number of shares subject to outstanding Awards, the respective exercise price, number of shares and other limitations applicable to outstanding Awards and any other factors, limits or terms affecting outstanding Awards, will be appropriately adjusted for any future stock split, stock dividend, recapitalization, merger, consolidation, combination, spin-off, distribution of assets to stockholders, exchange of shares or other similar corporate change affecting the shares of Common Stock. Shares attributable to Awards which have not been fully exercised or vested prior to termination for any reason or which have been surrendered or cancelled without the delivery of shares and Restricted Shares which have been forfeited to A&F will be available for subsequent grants under the 2002 Associates Plan. If any shares covered by an Award are not delivered because the Award is settled in cash or used to satisfy any applicable tax withholding obligation, those shares will not be deemed to have been delivered under the 2002 Associates Plan for purposes of determining the maximum number of shares of Common Stock available for delivery. If the exercise price of any NSO granted under the 2002 Associates Plan is satisfied by tendering already owned shares, only the number of shares 58on June 15, 2005. 71 issued net of the shares tendered will be deemed delivered under the 2002 Associates Plan for purposes of determining the maximum number of shares of Common Stock available for delivery. Eligibility for Participation Associates of A&F and its subsidiaries who are selected by the Compensation Committee are eligible to participate in the 2002 Associates Plan. Terms of NSOs The Compensation Committee selects the individuals to whom NSOs are granted and determines the terms and conditions of the NSOs granted. The exercise price of NSOs granted under the 2002 Associates Plan has been and will be equal to 100% of the fair market value of A&F's Common Stock on the grant date. Payment of the exercise price may be made in cash or shares of Common Stock already owned by the option holder. Each NSO has and will have a term of ten years from its grant date. The Compensation Committee will determine the vesting schedule for each NSO at the time of grant and may accelerate the exercisability of any NSO at any time. The NSOs become fully exercisable in the event of defined changes of control of A&F. If an option holder's employment is terminated by reason of total disability, the NSOs may thereafter be exercised in full for the first nine months that the option holder receives benefits under A&F's long-term disability program, subject to the stated term of the NSOs. If an option holder's employment is terminated by reason of death, the NSOs may thereafter be exercised in full for a period of one year after the date of the option holder's death or any other period which the Compensation Committee determines, subject to the stated term of the NSOs. If an option holder's employment is terminated for any other reason, any vested NSOs held by the option holder at the date of termination may be exercised for the period specified in the option agreement or as otherwise determined by the Compensation Committee, subject to the stated term of the NSOs. At the discretion of the Compensation Committee, NSOs may have a tax withholding feature. NSOs are not transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. Terms of Restricted Shares The Compensation Committee will determine the individuals to whom Restricted Shares are granted. At the time a grant of Restricted Shares is made, the Compensation Committee will determine the duration of the period (the "Restricted Period") during which, and the conditions under which, the Restricted Shares will vest. Unless the Compensation Committee determines otherwise, either at the time of grant or any time thereafter, holders of Restricted Shares will not have the right to vote the Restricted Shares or receive any dividends with respect to them. All restrictions and conditions applicable to outstanding Restricted Shares will lapse in the event of defined changes of control of A&F. If the employment of the holder of Restricted Shares is terminated by reason of total disability or death, all applicable restrictions and conditions will lapse. If the holder of Restricted Shares retires, the Compensation Committee may shorten or terminate the applicable Restricted Period or waive any other applicable restrictions or conditions. If the employment of the holder of Restricted Shares is terminated for any other reason prior to the expiration or termination of the applicable Restricted Period and the satisfaction of any other applicable conditions, unless the Compensation Committee otherwise provides, the Restricted Shares will be forfeited. At the discretion of the Compensation Committee, Restricted Shares may have a tax withholding feature. Restricted Shares are not transferable except pursuant to a qualified domestic relations order. Terms of Stock Units The Compensation Committee selects the individuals to whom Stock Units are granted under the 2002 Associates Plan. Each Stock Unit represents the right to receive one share of Common Stock, subject to the terms and conditions set by the Compensation Committee. When Stock Units are granted, the Compensation Committee will determine the conditions under which the Stock Unit will vest. Stock 59 Units are not transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. Stock Units will vest in full in the event of defined changes of control of A&F or upon the death or total disability of the holder of the Stock Units. If the employment of the holder of Stock Units is terminated for any other reason, unless the Compensation Committee otherwise provides, any unvested Stock Units will be forfeited. At the discretion of the Compensation Committee, Stock Units may have a tax withholding feature. Term of the Plan The 2002 Associates Plan will terminate on January 30, 2012, unless the Plan is terminated earlier by A&F's Board of Directors or by exhaustion of the shares of Common Stock available for delivery. 2003 STOCK PLAN FOR NON-ASSOCIATE DIRECTORS The 2003 Non-Associate Directors Plan, which was adopted by the Board of Directors of A&F on May 22, 2003, is administered by the Board of Directors. The 2003 Non-Associate Directors Plan permits A&F to provide equity-based Awards in the form of NSOs, Restricted Shares and Stock Units to directors of A&F who are not associates of A&F or any of its affiliates ("non-associate directors"). In addition, any shares of Common Stock distributable in respect of deferred compensation allocated to the stock accounts of non-associate directors under the Deferred Compensation Plan, described below, on or after May 22, 2003, will be deemed to have been delivered under the 2003 Non-Associate Directors Plan. Shares Subject to the Plan The maximum number of shares of Common Stock which may be delivered to participants under the 2003 Non-Associate Directors Plan is 550,000 shares of Common Stock, subject to adjustment as described below. Shares of Common Stock to be delivered under the 2003 Non-Associate Directors Plan will be shares currently held or subsequently acquired by A&F as treasury shares. The number of shares of Common Stock authorized for delivery under the 2003 Non-Associate Directors Plan, the number of shares subject to outstanding Awards, the respective exercise price, number of shares and other limitations applicable to outstanding or subsequently issuable Awards and any other factors, limits or terms affecting outstanding or subsequently issuable Awards, will be appropriately adjusted for any future stock split, stock dividend, recapitalization, merger, consolidation, combination, spin-off, distribution of assets to stockholders, exchange of shares or other similar corporate change affecting the shares of Common Stock. Shares attributable to Awards which have not been fully exercised or vested prior to termination for any reason or which have been surrendered or cancelled without the delivery of shares and Restricted Shares which have been forfeited to A&F will be available for subsequent grants under the 2003 Non-Associate Directors Plan. If any shares covered by an Award are not delivered because the Award is settled in cash or used to satisfy any applicable tax withholding obligation, those shares will not be deemed to have been delivered under the 2003 Non-Associate Directors Plan for purposes of determining the maximum number of shares of Common Stock available for delivery. If the exercise price of any NSO granted under the 2003 Non-Associate Directors Plan is satisfied by tendering already owned shares, only the number of shares issued net of the shares tendered will be deemed delivered under the 2003 Non-Associate Directors Plan for purposes of determining the maximum number of shares of Common Stock available for delivery. Eligibility for Participation Only non-associate directors of A&F are eligible to receive grants of Awards under the 2003 Non-Associate Directors Plan. 60 Terms of NSOs On the first business day of each of the second fiscal quarter and the fourth fiscal quarter of each fiscal year of A&F, beginning after May 22, 2003, each individual then serving as a non-associate director has been and will be automatically granted an NSO to purchase 2,500 shares of Common Stock. Each NSO so granted vests in full on the first anniversary of the grant date, subject to continued service as a director of A&F. The Board of Directors may grant NSOs to non-associate directors in addition to the automatic grants described above. The Board of Directors determines the non-associate directors to whom discretionary NSOs are granted, the grant date of each discretionary NSO, the number of shares covered by each discretionary NSO and the date(s) when each discretionary NSO will become exercisable. The exercise price of NSOs granted under the 2003 Non-Associate Directors Plan has been and will be equal to 100% of the fair market value of A&F's Common Stock on the grant date. Payment of the exercise price may be made in cash or shares of Common Stock already owned by the option holder. The NSOs become fully exercisable in the event of defined changes of control of A&F or upon the death or total disability of a non-associate director. The NSOs remain exercisable until the earlier of (a) the tenth anniversary of the grant date or (b) one year after the non-associate director ceases to be a member of A&F's Board of Directors. At the discretion of the Board of Directors, NSOs may have a tax withholding feature. NSOs are not transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. Terms of Restricted Shares The Board of Directors may grant Restricted Shares to non-associate directors subject to such restrictions, conditions and other terms as the Board determines. At the time a grant of Restricted Shares is made, the Board of Directors will determine the duration of the Restricted Period during which, and the conditions under which, the Restricted Shares will vest. Holders of Restricted Shares will not have the right to vote the Restricted Shares or receive any dividends with respect to them. All restrictions and conditions applicable to outstanding Restricted Shares will lapse in the event of defined changes of control of A&F. If a non-associate director's service as a director of A&F is terminated by reason of total disability or death, all restrictions and conditions applicable to the Restricted Shares will lapse. If a non-associate director's service as a director of A&F is terminated for any other reason prior to the expiration or termination of the applicable Restricted Period and the satisfaction of any other applicable conditions, the Restricted Shares will be forfeited. At the discretion of the Board of Directors, Restricted Shares may have a tax withholding feature. Restricted Shares are not transferable except pursuant to a qualified domestic relations order. Terms of Stock Units On the first business day of each fiscal year of A&F, beginning after May 22, 2003, each non-associate director then serving has been and will continue to be granted Stock Units representing the right to receive that number of shares of Common Stock which equals the number determined by dividing (i) $60,000 by (ii) the average of the closing sale prices of a share of Common Stock on NYSE during the 20-trading-day period immediately preceding the grant date. Each Stock Unit so granted will vest in full on the first anniversary of the grant date, subject to continued service as a director. The Board of Directors may grant Stock Units to non-associate directors in addition to the automatic grants described above and will determine the conditions under which those discretionary Stock Units will vest. Stock Units are not transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. Stock Units will vest in full in the event of defined changes of control of A&F or upon the death or total disability of the holder of the Stock Units. If a non-associate director's service as a director of A&F is terminated for any other reason, any unvested Stock Units will be forfeited. At the discretion of the Board of Directors, Stock Units may have a tax withholding feature. 61 Term of Plan The 2003 Non-Associate Directors Plan will continue in effect until May 22, 2013, unless the Plan is earlier terminated by exhaustion of the shares of Common Stock available for delivery. DIRECTORS' DEFERRED COMPENSATION PLAN A&F has maintained the Deferred Compensation Plan since October 1, 1998. The Deferred Compensation Plan was amended and restated May 22, 2003. Voluntary participation in the Deferred Compensation Plan allows a non-associate director of A&F to defer all or a part of his or her quarterly retainers, meeting fees and stock-based incentives (including NSOs, Restricted Shares and Stock Units), including federal income tax thereon. The deferred compensation is credited to a stock account where it is converted into a share equivalent. Stock-based incentives deferred pursuant to the Deferred Compensation Plan are credited as shares of Common Stock. Amounts otherwise payable in cash are converted into a share equivalent based on the fair market value of the Company's Common Stock on the date the amounts are credited to the non-associate director's stock account. Cash dividends will be credited on the shares of Common Stock credited to a non-associate director's stock account and converted into a share equivalent. Each non-associate director's only right with respect to his or her stock account (and the amounts allocated thereto) will be to receive distribution of the amount in the non-associate director's stock account in accordance with the terms of the Deferred Compensation Plan. Distribution of the deferred amount is made in the form of a single lump sum transfer of the whole shares of Common Stock represented by the share equivalent in the non-associate director's stock account (plus cash representing the value of fractional shares) or annual installments in accordance with the election made by the non-associate director. Shares of Common Stock will be distributed under the 2003 Non-Associate Directors Plan in respect of deferred compensation allocated to non-associate directors' stock accounts on or after May 22, 2003 and under the 1998 Non-Associate Directors Plan in respect of deferred compensation allocated to non-associate directors' stock accounts prior to May 22, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regardingconcerning certain relationships and related transactions involving the Company and certain others is set forthincorporated by reference from the text under the captions "ELECTION OF DIRECTORS - Nominees and Directors" and " -"Election of Directors - Compensation Committee Interlocks and Insider Participation" and "EXECUTIVE COMPENSATION"Election of Directors - Employment AgreementsCertain Relationships and Other Transactions with Certain Executive Officers"Related Transactions" in the Company's Proxy Statement and is incorporated herein by reference.for the Annual Meeting of Stockholders to be held on June 15, 2005. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding A&F'sconcerning the Company's pre-approval policy and services rendered by A&F'sthe Company's principal independent auditors is set forthincorporated by reference from the text under the captions "AUDIT COMMITTEE MATTERS"Audit Committee Matters - Pre-approval Policy" and "- Fees of Independent Auditors"Registered Public Accountants" in the Company's Proxy Statement and incorporated herein by reference. 62for the Annual Meeting of Stockholders to be held on June 15, 2005. 72 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) List of Financial Statements. The following consolidated financial statements of Abercrombie & Fitch and the related notesdocuments are filed as a part of this Annual Report on Form 10-K in ITEM 8:10-K: (1) Consolidated Financial Statements: Consolidated Statements of Income for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003 and February 2, 2002. Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004 and February 1, 2003. Consolidated Statements of Shareholders' Equity for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003 and February 2, 2002.2003. Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003 and February 2, 2002. Notes to Consolidated Financial Statements. Report of Independent Auditors. (a)(2) List ofConsolidated Financial Statement Schedules.Schedules: All schedules are omitted because the required information is either presented in the consolidated financial statements or notes thereto, or is not applicable, required or material. (a)(3) List of Exhibits. 3. Certificate of Incorporation and BylawsExhibit Index: 3.1 Amended and Restated Certificate of Incorporation of A&F as filed with the Delaware Secretary of State on August 27, 1996, incorporated herein by reference to Exhibit 3.1 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended November 2, 1996. (File No. 1-12107) 3.2 Certificate of Designation of Series A Participating Cumulative Preferred Stock of A&F as filed with the Delaware Secretary of State on July 21, 1998, incorporated herein by reference to Exhibit 3.2 to A&F's Annual Report on Form 10-K for the fiscal year ended January 30, 1999. (File No. 1-12107) 3.3 Certificate of Decrease of Shares Designated as Class B Common Stock as filed with the Delaware Secretary of State on July 30, 1999, incorporated herein by reference to Exhibit 3.3 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1999. (File No. 1-12107) 3.4 Amended and Restated Bylaws of A&F, effective January 31, 2002, incorporated herein by reference to Exhibit 3.4 to A&F's Annual Report on Form 10-K for the fiscal year ended February 2, 2002. (File No. 1-12107) 3.5 Certificate regarding adoption of amendment to Section 2.02 of Amended and Restated Bylaws of A&F by Board of Directors on July 10, 2003, incorporated herein by reference to Exhibit 3.5 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended November 1, 2003 (File No. 1-12107) 6373 3.6 Certificate regarding adoption of amendments to Sections 1.02, 1.06, 3.01, 3.05, 4.02, 4.03, 4.04, 4.05, 4.06, 6.01 and 6.02 of Amended and Restated Bylaws of A&F (reflecting amendments through July 10, 2003) [for SEC reporting compliances purposes only],by Board of Directors on May 20, 2004, incorporated herein by reference to Exhibit 3.6 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended NovemberMay 1, 20032004 (File No. 1-12107) 4. Instruments Defining3.7 Amended and Restated Bylaws of A&F (reflecting amendments through May 20, 2004), incorporated herein by reference to Exhibit 3.7 to A&F's Quarterly Report on Form 10-Q for the Rights of Security Holders.quarterly period ended May 1, 2004 (File No. 1-12107) 4.1 Credit Agreement, dated as of November 14, 2002, as amended and restated as of December 15, 2004, among Abercrombie & Fitch Management Co., as Borrower,Borrower; Abercrombie & Fitch Co., as Guarantor,Guarantor; the Lenders party thereto, andthereto; National City Bank, as Administrative AgentAgent; JPMorgan Chase Bank, N.A., as Syndication Agent; and Lead ArrangerNational City Bank and J.P. Morgan Securities Inc., as Co-Lead Arrangers and Joint Bookrunners (the "Credit"Amended Credit Agreement"), incorporated herein by reference to Exhibit 4.1 to A&F's Current Report on Form 8-K dated November 26, 2002.December 21, 2004 (File No. 1-12107) 4.2 Guarantee Agreement, dated as of November 14, 2002, as amended and restated as of December 15, 2004, among Abercrombie & Fitch Co.,; each direct and indirect domestic subsidiary of Abercrombie & Fitch Co. other than Abercrombie & Fitch Management Co.,; and National City Bank, as administrative agentAdministrative Agent for the Lenders party to the Amended Credit Agreement,Agreement"), incorporated herein by reference to Exhibit 4.2 to A&F's Current Report on Form 8-K dated November 26, 2002.December 21, 2004 (File No. 1-12107) 4.3 First Amendment and Waiver, dated as of January 26, 2004, to the Credit Agreement, dated as of November 14, 2002, among Abercrombie & Fitch Management Co., Abercrombie & Fitch Co., the Lenders party thereto and National City Bank, as Administrative Agent. 4.4 Rights Agreement, dated as of July 16, 1998, between A&F and First Chicago Trust Company of New York, as Rights Agent, incorporated herein by reference to Exhibit 1 to A&F's Registration Statement on Form 8-A dated July 21, 1998. (File No. 1-12107) 4.54.4 Amendment No. 1 to Rights Agreement, dated as of April 21, 1999, between A&F and First Chicago Trust Company of New York, as Rights Agent, incorporated herein by reference to Exhibit 2 to A&F's Amendment No. 1 to Form 8-A dated April 23, 1999. (File No. 1-12107) 4.64.5 Certificate of adjustment of number of Rights associated with each share of Class A Common Stock, dated May 27, 1999, incorporated herein by reference to Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1999. (File No. 1-12107) 4.74.6 Appointment and Acceptance of Successor Rights Agent, effective as of the opening of business on October 8, 2001, between A&F and National City Bank, incorporated herein by reference to Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended August 4, 2001. (File No. 1-12107) 10. Material Contracts. 10.1*10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan, incorporated herein by reference to Exhibit 10.1 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2002. (File No. 1-12107) 64 10.2*10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan (reflects amendments through December 7, 1999 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999), incorporated herein by reference to Exhibit 10.2 to A&F's Annual Report on Form 10-K for the fiscal year ended January 29, 2000. (File No. 1-12107) 10.374 *10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors (reflects amendments through January 30, 2003 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999), incorporated herein by reference to Exhibit 10.3 to A&F's Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 1-12107) 10.4*10.4 Abercrombie & Fitch Co. 2002 Stock Plan for Associates (as amended and restated May 22, 2003), incorporated herein by reference to Exhibit 10.4 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2003 (File No. 1-12107) 10.5*10.5 Amended and Restated Employment Agreement, dated as of January 30, 2003, by and between Abercrombie & Fitch Co. and Michael S. Jeffries, including as Exhibit A thereto the Supplemental Executive Retirement Plan effective February 2, 2003, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated February 11, 2003. (File No. 1-12107) 10.6*10.6 Abercrombie & Fitch, Inc. Directors' Deferred Compensation Plan (as amended and restated May 22, 2003), incorporated herein by reference to Exhibit 10.7 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2003 (File No. 1-12107) 10.7*10.7 Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (formerly know as the Abercrombie & Fitch Co. Supplemental Retirement Plan), as amended and restated effective January 1, 2001, incorporated herein by reference to Exhibit 10.9 to A&F's Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 1-12107) 10.8*10.8 Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate Directors, incorporated herein by reference to Exhibit 10.9 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2003 (File No. 1-12107) 14. Code of Business Conduct*10.9 Retirement Agreement, executed on May 20, 2004, by and Ethics. 21. Subsidiaries of the Registrant. 23. Consent of Independent Auditors. 24. Powers of Attorney. 31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) 31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) 32. Section 1350 Certification (Principal Executive Officerbetween Seth R. Johnson and Principal Financial Officer) 65 (b) ReportsA&F, incorporated herein by reference to Exhibit 10.9 to A&F's Quarterly Report on Form 8-K. A&F did not file any Current Reports on Form 8-K during10-Q for the quarterly period ended May 1, 2004 (File No. 1-12107) *10.10 Employment Agreement, entered into as of May 17, 2004, by and between A&F and Robert S. Singer, including as Exhibit A thereto the Supplemental Executive Retirement Plan II (Robert S. Singer), effective May 17, 2004, incorporated herein by reference to Exhibit 10.10 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2004 (File No. 1-12107) *10.11 Form of Restricted Shares Award Agreement under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan prior to November 28, 2004, incorporated herein by reference to Exhibit 10.11 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.12 Form of Restricted Shares Award Agreement (No Performance-Based Goals) under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan after November 28, 2004, incorporated herein by reference to Exhibit 10.12 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) 75 *10.13 Form of Restricted Shares Award Agreement (Performance-Based Goals) under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan after November 28, 2004, incorporated herein by reference to Exhibit 10.13 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.14 Form of Stock Option Agreement (Nonstatutory Stock Options) under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan prior to November 28, 2004, incorporated herein by reference to Exhibit 10.14 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.15 Form of Stock Option Agreement (Nonstatutory Stock Options) under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan November 28, 2004, incorporated herein by reference to Exhibit 10.15 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.16 Form of Stock Option Agreement under the 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors, incorporated herein by reference to Exhibit 10.16 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.17 Form of Restricted Shares Award Agreement under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates prior to November 28, 2004, incorporated herein by reference to Exhibit 10.17 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.18 Form of Restricted Shares Award Agreement under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates after November 28, 2004, incorporated herein by reference to Exhibit 10.18 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.19 Form of Stock Option Agreement (Nonstatutory Stock Options) under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates prior to November 28, 2004, incorporated herein by reference to Exhibit 10.19 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.20 Form of Stock Option Agreement (Nonstatutory Stock Options) under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates after November 28, 2004, incorporated herein by reference to Exhibit 10.20 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.21 Form of Stock Option Agreement under the Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate Directors prior to November 28, 2004, incorporated herein by reference to Exhibit 10.21 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.22 Form of Stock Option Agreement under the Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate Directors after November 28, 2004, incorporated herein by reference 76 to Exhibit 10.22 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 1-12107) *10.23 Letter Agreement, executed by Abercrombie & Fitch Co. on October 6, 2004 and by Seth R. Johnson on October 10, 2004, providing for Amendment to Retirement Agreement, executed on May 20, 2004, incorporated herein by reference to Exhibit 10 to A&F's Current Report on Form 8-K dated October 12, 2004 (File No. 1-12107) *10.24 Letter providing terms of offer of employment, executed by Abercrombie & Fitch Co. on October 20, 2004 and accepted by Thomas D. Mendenhall on October 22, 2004, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated October 28, 2004 (File No. 1-12107) *10.25 Form of Stock Unit Agreement under the Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate Directors entered into by Abercrombie & Fitch Co. in order to evidence the automatic grants of stock units made on January 31, 2004. On February 23, 2004,2005 and to be entered into by Abercrombie & Fitch Co. in respect of future automatic grants of stock units, incorporated herein by reference to Exhibit 10.1 to A&F filed a&F's Current Report on Form 8-K dated February 23,3, 2005 (File No. 1-12107) *10.26 Amendment to Employment Agreement, executed by Abercrombie & Fitch Co. and by Robert S. Singer as of April 11, 2005, amending the Employment Agreement, entered into as of May 17, 2004, reporting under "Item 5. Other Eventsby and Regulation FD Disclosure," that Susan J. Riley had been named Senior Vice President - Chief Financial Officerbetween A&F and Robert S. Singer *10.27 Employment Separation Agreement, executed by Abercrombie & Fitch Co. and by Carole Kerner as of A&F. (c) Exhibits. The exhibitsFebruary 17, 2005 14 Code of Business Conduct and Ethics, incorporated by reference to thisExhibit 14 to A&F's Annual Report on Form 10-K are listed infor the fiscal year ended January 31, 2004 (File No. 1-12107) 21.1 List of Significant Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP 24.1 Powers of Attorney 31.1 Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(a)(3) above. (d) Financial Statement Schedules. Not applicable. 66 of this report. 77 SIGNATURES Pursuant to the requirements of Section 13 or l5(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ABERCROMBIE & FITCH CO. Date: April 14, 20042005 By /s/ SUSAN J. RILEY ------------------------------------------------------- Susan J. Riley, Senior Vice President- ChiefPresident-Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 14, 2004.
Signature Title --------- ----- /s/ MICHAEL S. JEFFRIES11, 2005. Signature Title /s/ Michael S. Jeffries Chairman, Chief Executive Officer and Director - ------------------------ Michael S. Jeffries /s/ Robert S. Singer President, Chief Operating Officer and Director - ------------------------ Robert S. Singer * - ------------------------ Director James B. Bachmann * - ------------------------ Director Lauren J. Brisky * - ------------------------ Director Russell M. Gertmenian * - ------------------------ Director John A. Golden * - ------------------------ Director Archie M. Griffin * - ------------------------ Director John W. Kessler * - ------------------------ Director Edward F. Limato * - ------------------------ Director - ------------------------------------ Michael S. Jeffries /s/ SETH R. JOHNSON* Executive Vice President - Chief Operating Officer - ------------------------------------ and Director Seth R. Johnson /s/ JAMES B. BACHMANN* Director - ---------------------- James B. Bachmann /s/ LAUREN J. BRISKY* Director - --------------------- Lauren J. Brisky /s/ RUSSELL M. GERTMENIAN* Director - ------------------------------------ Russell M. Gertmenian /s/ JOHN A. GOLDEN* Director - ------------------------------------ John A. Golden /s/ ARCHIE M. GRIFFIN* Director - ------------------------------------ Archie M. Griffin /s/ JOHN W. KESSLER* Director - ------------------------------------ John W. Kessler /s/ EDWARD F. LIMATO* Director - ------------------------------------ Edward F. Limato /s/ SAM N. SHAHID, JR* Director - ------------------------------------ Sam N. Shahid, Jr. /s/ SUSAN J. RILEY Senior Vice President-Chief Financial Officer (Principal - ------------------------------------ Financial and Accounting Officer) Susan J. Riley
*The undersigned, by signing her name hereto, does hereby sign this report on behalf of each of the above-indicated directors and executive officers of the registrant pursuant to powers of attorney executed by such directors and executive officers. By /s/ SUSAN J. RILEY --------------------------- Susan J. Riley Attorney-in-fact 6778 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________--------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2004 ________29, 2005 --------- ABERCROMBIE & FITCH CO. (Exact name of registrant as specified in its charter) ________--------- EXHIBITS ________ - -------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- ================================================================================ 1 EXHIBIT INDEX
Exhibit No. Document - ----------- ------------------ ---------------------------------------------------------------- 4.3 First10.26 Amendment and Waiver, dated as of January 26, 2004, to the CreditEmployment Agreement, dated as of November 14, 2002, amongexecuted by Abercrombie & Fitch Management Co., and by Robert S. Singer as of April 11, 2005, amending the Employment Agreement, entered into as of May 17, 2004, by and between A&F and Robert S. Singer 10.27 Employment Separation Agreement, executed by Abercrombie & Fitch Co., the Lenders party thereto and National City Bank,by Carole Kerner as Administrative Agent 14 Code of Business Conduct and Ethics 21February 17, 2005 21.1 List of Significant Subsidiaries of the Registrant 2323.1 Consent of Independent Auditors 24Registered Public Accounting Firm - PricewaterhouseCoopers LLP 24.1 Powers of Attorney 31.1 Certification by CEO pursuant to Rule 13a-14(a)/ or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification (Principal Executive Officer) 31.2by CFO pursuant to Rule 13a-14(a)/ or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification (Principal Financial Officer) 32of CEO and CFO pursuant to 18 U.S.C. Section 1350, Certification (Principal Executive Officer and Principal Financial Officer)as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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