ABERCROMBIE & FITCH CO /DE/
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C. 20549
Washington, D. C. 20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended January 29, 2011 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number
1-12107
ABERCROMBIE &
FITCH CO.
(Exact name of registrant as
specified in its charter)
| Delaware | 31-1469076 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer Identification No.) | |
|
6301 Fitch Path, New Albany, Ohio
(Address of principal executive offices) |
43054
(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
|
|
| Class A Common Stock, $.01 Par Value | New York Stock Exchange | |
|
Series A Participating Cumulative Preferred
Stock Purchase Rights |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such
files).) Yes
þ
No
o
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.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
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 (for this
purpose, executive officers and directors of the Registrant are
considered affiliates) as of July 30, 2010: $3,259,819,246.
Number of shares outstanding of the Registrant’s common
stock as of March 18, 2011: 87,228,538 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 June 16,
2011, are incorporated by reference into Part III of this
Annual Report on
Form 10-K.
ABERCROMBIE &
FITCH CO.
TABLE OF
CONTENTS
Table of Contents
PART I
| ITEM 1. | BUSINESS. |
General.
Abercrombie & Fitch Co. (“A&F”), a
company incorporated in Delaware in 1996, through its
subsidiaries (collectively, A&F and its subsidiaries are
referred to as “Abercrombie & Fitch” or the
“Company”), is a specialty retailer that operates
stores and
direct-to-consumer
operations. Through these channels, the Company sells: casual
sportswear apparel, including knit and woven shirts, graphic
t-shirts, fleece, jeans and woven pants, shorts, sweaters, and
outerwear; personal care products; and accessories for men,
women and kids under the Abercrombie & Fitch,
abercrombie kids, and Hollister brands. The Company also
operates stores and
direct-to-consumer
operations offering bras, underwear, personal care products,
sleepwear and at-home products for women under the Gilly Hicks
brand. As of January 29, 2011, the Company operated 1,069
stores in North America, Europe and Japan.
The Company’s fiscal year ends on the Saturday closest to
January 31, typically resulting in a fifty-two week year,
but occasionally giving rise to an additional week, resulting in
a fifty-three week year. Fiscal years are designated in the
consolidated financial statements and notes by the calendar year
in which the fiscal year commences. All references herein to
“Fiscal 2010” represent the 52-week fiscal year ended
January 29, 2011; to “Fiscal 2009” represent the
52-week fiscal year ended January 30, 2010; and to
“Fiscal 2008” represent the 52-week fiscal year ended
January 31, 2009. In addition, all references herein to
“Fiscal 2011” represent the 52-week fiscal year that
will end on January 28, 2012.
A&F makes available free of charge on its Internet website,
www.abercrombie.com, under “Investors, SEC Filings,”
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 amended (the “Exchange Act”), as well as
A&F’s definitive proxy materials filed pursuant to
Section 14 of the Exchange Act, as soon as reasonably
practicable after A&F electronically files such material
with, or furnishes it to, the Securities and Exchange Commission
(“SEC”). The SEC maintains a website that contains
electronic filings by A&F and other issuers at www.sec.gov.
In addition, the public may read and copy any materials A&F
files with the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The Company has included its Internet website addresses
throughout this filing as textual references only. The
information contained within these Internet websites is not
incorporated into this Annual Report on
Form 10-K.
Description
of Operations.
Brands.
Abercrombie & Fitch.
Rooted in East
Coast traditions and Ivy League heritage,
Abercrombie & Fitch is the essence of privilege and
casual luxury. The Adirondacks supply a clean and rugged
inspiration to this youthful
All-American
lifestyle. A combination of classic and sexy creates a charged
atmosphere that is confident and just a bit provocative.
Idolized and respected, Abercrombie & Fitch is
timeless and always cool.
abercrombie kids.
The essence of privilege and
prestigious East Coast prep schools, abercrombie kids directly
follows in the footsteps of Abercrombie & Fitch. With
a flirtatious and energetic attitude,
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abercrombie kids is popular, wholesome and athletic. Rugged and
casual with a vintage-inspired style, abercrombie kids aspires
to be like its older sibling, Abercrombie & Fitch. The
perfect combination of maturity and mischief, abercrombie kids
is the signature of
All-American
cool.
Hollister.
Hollister is the fantasy of
Southern California. It is the feeling of chilling on the beach
with your friends. Young, spirited, and with a sense of humor,
Hollister never takes itself too seriously. The laidback
lifestyle and wholesome image combine to give Hollister an
energy that’s effortlessly cool. Hollister brings Southern
California to the world.
Gilly Hicks.
Gilly Hicks is the cheeky cousin
of Abercrombie & Fitch. Inspired by the free spirit of
Sydney, Australia, Gilly Hicks makes cute Push ‘Em Up bras
and Down Undies for the young, naturally beautiful and always
confident girl; flirty and carefree, with a little tomboy
sexiness. Gilly Hicks is the
All-American
brand with a Sydney sensibility.
Though each of the Company’s brands embodies its own
heritage and handwriting, they share common elements and
characteristics. The brands are classic, casual, confident,
intelligent, privileged and possess a sense of humor.
Refer to the “FINANCIAL SUMMARY” in “ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS” of this Annual Report on
Form 10-K
for information regarding net sales and other financial and
operational data by brand.
In-Store
Experience and Store Operations.
The Company views the customer’s in-store experience as the
primary vehicle for communicating the spirit of each brand. The
Company emphasizes the senses of sight, sound, smell, touch and
energy by utilizing visual presentation of merchandise, in-store
marketing, music, fragrances, rich fabrics and its sales
associates to reinforce the aspirational lifestyles represented
by the brands.
The Company’s in-store marketing is 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 reflects
the Abercrombie & Fitch, abercrombie kids, Hollister
or Gilly Hicks lifestyle.
The Company’s sales associates and managers are a central
element in creating the atmosphere of the stores. In addition to
providing a high level of customer service, sales associates and
managers reflect the casual, energetic and aspirational attitude
of the brands.
Every brand displays merchandise to ensure a consistent in-store
experience, regardless of location. Store managers receive
detailed plans designating fixture and merchandise placement to
ensure coordinated execution of the Company-wide merchandising
strategy. In addition, standardization of each brand’s
store design and merchandise presentation enables the Company to
open new stores efficiently.
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At the end of Fiscal 2010, the Company operated 1,069 stores.
The following table details the number of retail stores operated
by the Company for the past two fiscal years:
|
Abercrombie
|
||||||||||||||||||||
| & Fitch | abercrombie | Hollister | Gilly Hicks | Total | ||||||||||||||||
|
Fiscal 2009
|
||||||||||||||||||||
|
Beginning of the Year
|
356 | 212 | 515 | 14 | 1,097 | |||||||||||||||
|
New
|
2 | 5 | 14 | 2 | 23 | |||||||||||||||
|
Remodels/Conversions (net activity as of year-end)
|
— | — | — | — | — | |||||||||||||||
|
Closed
|
(12 | ) | (8 | ) | (4 | ) | — | (24 | ) | |||||||||||
|
End of Year
|
346 | 209 | 525 | 16 | 1,096 | |||||||||||||||
|
Fiscal 2010
|
||||||||||||||||||||
|
Beginning of the Year
|
346 | 209 | 525 | 16 | 1,096 | |||||||||||||||
|
New
|
7 | 2 | 25 | 2 | 36 | |||||||||||||||
|
Remodels/Conversions (net activity as of year-end)
|
(1 | ) | 1 | — | 1 | 1 | ||||||||||||||
|
Closed
|
(27 | ) | (27 | ) | (10 | ) | — | (64 | ) | |||||||||||
|
End of Year
|
325 | 185 | 540 | 19 | 1,069 | |||||||||||||||
At the end of Fiscal 2010, the Company operated 316
Abercrombie & Fitch stores, 181 abercrombie kids
stores, 502 Hollister stores and 18 Gilly Hicks stores
domestically. The Company also operated nine
Abercrombie & Fitch stores, four abercrombie kids
stores, 38 Hollister stores and one Gilly Hicks store
internationally. At the end of Fiscal 2009, the Company operated
340 Abercrombie & Fitch stores, 205 abercrombie kids
stores, 507 Hollister stores and 16 Gilly Hicks stores
domestically. The Company also operated six
Abercrombie & Fitch stores, four abercrombie kids
stores and 18 Hollister stores internationally.
Direct-to-Consumer
Business.
During Fiscal 2010, the Company operated, and continues to
operate, four websites, including: www.abercrombie.com;
www.abercrombiekids.com; www.hollisterco.com; and
www.gillyhicks.com. Each of the four websites reinforces the
particular brand’s lifestyle and is designed to complement
the in-store experience. Aggregate total net sales through
direct-to-consumer
operations, including shipping and handling revenue, was
$405.0 million for Fiscal 2010, representing 11.7% of total
net sales. The Company believes its
direct-to-consumer
operations have broadened its market and brand recognition
worldwide.
Marketing
and Advertising.
The Company considers the in-store experience to be its primary
marketing vehicle. The Company’s marketing strategy
emphasizes the senses to reinforce the aspirational lifestyles
represented by the brands. The Company’s flagship stores
represent the pinnacle of the Company’s in-store branding
efforts. The Company also engages its customers through social
media and mobile commerce in ways that reinforce the
aspirational lifestyle of the brands. Flagship stores and social
media both attract a substantial number of international
consumers and have significantly contributed to the worldwide
status of the Company’s iconic brands.
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Merchandise
Suppliers.
During Fiscal 2010, the Company purchased merchandise from
approximately 191 vendors located throughout the world;
primarily in Asia and Central and South America. The Company did
not source more than 5% of its merchandise from any single
factory or supplier during Fiscal 2010. The Company pursues a
global sourcing strategy that includes relationships with
vendors in 27 countries as well as the United States (the
“U.S.”). The Company’s foreign purchases of
merchandise are negotiated and settled in U.S. dollars.
All product sources, including independent manufacturers and
suppliers, must achieve and maintain the Company’s high
quality standards, which are an integral part of the
Company’s identity. The Company has established supplier
product quality standards to ensure the high quality of fabrics
and other materials used in the Company’s products. The
Company utilizes both home office and field employees to help
monitor compliance with the Company’s product quality
standards.
Distribution
and Merchandise Inventory.
In Fiscal 2010, a majority of the Company’s merchandise and
related materials were shipped to the Company’s two
distribution centers (“DCs”) in New Albany, Ohio where
they were received and inspected. The Company is in the process
of consolidating the operations of its two DCs in New Albany
into one, with an expected completion in mid-2012. The Company
also uses a third-party DC in the Netherlands for the
distribution of merchandise to stores located in Europe and
Asia. The Company utilizes one contract carrier to ship
merchandise and related materials to its North American stores
and all
direct-to-consumer
customers, and a separate contract carrier for its European and
Asian stores. The Company also plans to open an additional
third-party DC to support Asian operations in Fiscal 2011.
The Company strives to maintain sufficient quantities of
inventory in its retail stores and DCs to offer customers a full
selection of current merchandise. The Company attempts to
balance in-stock levels and inventory turnover, and to take
markdowns when required to keep merchandise fresh and current
with fashion trends.
Information
Systems.
The Company’s management information systems consist of a
full range of retail, financial and merchandising systems. The
systems include applications related to
point-of-sale,
direct-to-consumer,
inventory management, supply chain, planning, sourcing,
merchandising and financial reporting. The Company continues to
invest in technology to upgrade core systems to make the Company
scalable, efficient and more accurate, including in support of
its international expansion.
Seasonal
Business.
The retail apparel market has two principal selling seasons: the
Spring season which includes the first and second fiscal
quarters (“Spring”); and the Fall season which
includes the third and fourth fiscal quarters
(“Fall”). As is typical in the apparel industry, the
Company experiences its greatest sales activity during the Fall
season due to the
Back-to-School
(August) and Holiday (November and December) selling periods.
Trademarks.
The Abercrombie &
Fitch
®
,
abercrombie
®
,
Hollister
Co.
®
,
Gilly
Hicks
®
,
Gilly Hicks
Sydney
®
and the “Moose,” “Seagull,” and
“Koala” trademarks have been registered with the
U.S. Patent and Trademark Office
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and the registries of countries where stores are located or
likely to be located in the future. These trademarks are either
registered, or the Company has applications for registration
pending, with the registries of many of the foreign countries in
which the manufacturers of the Company’s products are
located. The Company has also registered, or has applied to
register, certain other trademarks in the U.S. and around
the world. The Company believes that its products are identified
by its trademarks and, therefore, its trademarks are of
significant value. Each registered trademark has a duration of
ten to 20 years, depending on the date it was registered,
and the country in which it is registered, and is subject to an
indefinite number of renewals for a like period upon continued
use and appropriate application. The Company intends to continue
using its core trademarks and to renew each of its registered
trademarks that remain in use.
Financial
Information about Segments.
The Company determines its operating segments on the same basis
that it uses to evaluate performance internally. The Company
believes its operating segments may be aggregated and reported
as one reportable segment for financial reporting purposes
because they are similar in each of the following areas: class
of consumer, economic characteristics, nature of products,
nature of production processes, and distribution methods. Refer
to Note 1, “
Basis of Presentation
” of the
Notes to Consolidated Financial Statements included in
“ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA” of this Annual Report on
Form 10-K
for further discussion, including the break-out of geographic
information for net sales and long-lived assets.
Other
Information.
Additional information about the Company’s business,
including its revenues and profits for the last three fiscal
years and gross square footage of stores, is set forth under
“ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this
Annual Report on
Form 10-K.
Competition.
The sale of apparel and personal care products through
“brick-and-mortar”
stores and
direct-to-consumer
channels is a highly competitive business with numerous
participants, including individual and chain fashion specialty
stores, as well as regional and national department stores. As
the Company continues expanding internationally, it also faces
competition in local markets from established chains, as well as
local specialty stores. Brand recognition, fashion, price,
service, store location, selection and quality are the principal
competitive factors in retail store and
direct-to-consumer
sales.
The competitive challenges facing the Company include
anticipating and quickly responding to changing fashion trends;
and maintaining the aspirational positioning of its brands so it
can sustain its premium pricing position. Furthermore, the
Company faces additional competitive challenges as many
retailers continue promotional activities regardless of economic
conditions. In response to these conditions, the Company has
increased its promotional activity while continuing to focus on
preserving the value of its brands.
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Table of Contents
Associate
Relations.
As of March 18, 2011, the Company employed approximately
85,000 associates, only 855 of whom were party to a collective
bargaining agreement in Italy. Approximately 76,000 of these
associates were part-time associates.
On average, the Company employed approximately
25,000 full-time equivalents during Fiscal 2010 which
included approximately 16,000 full-time equivalents
comprised of part-time associates, including temporary
associates hired during peak periods, such as the
Back-to-School
and Holiday seasons.
The Company believes it maintains a good relationship with its
associates. However, in the normal course of business, the
Company is party to lawsuits involving former and current
associates. Please see the discussion in “ITEM 3.
LEGAL PROCEEDINGS” in this Annual Report on
Form 10-K.
Environmental
Matters
.
Compliance with domestic and international regulations related
to environmental matters has not had, nor is it expected to
have, any material effect on capital expenditures, earnings, or
the Company’s competitive position based on information and
circumstances known to us at this time.
Discontinued
Operations
On June 16, 2009, A&F’s Board of Directors
approved the closure of the Company’s 29 RUEHL branded
stores and related
direct-to-consumer
operations. The Company completed the closure of the RUEHL
branded stores and related
direct-to-consumer
operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in
Loss from Discontinued Operations, Net of Tax on the
Consolidated Statements of Operations and Comprehensive Income
included in “ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA” of this Annual Report on
Form 10-K,
for all periods presented. Results from discontinued operations
were immaterial for the fifty-two weeks ended January 29,
2011.
| ITEM 1A. | RISK FACTORS |
Forward-Looking
Statements And Risk Factors.
We caution that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of
1995) contained in this Annual Report on
Form 10-K
or made by us, our management or our spokespeople involve risks
and uncertainties and are subject to change based on various
factors, many of which may be beyond our control. Words such as
“estimate,” “project,” “plan,”
“believe,” “expect,” “anticipate,”
“intend” and similar expressions may identify
forward-looking statements. Except as may be required by
applicable law, we assume no obligation to publicly update or
revise our forward-looking statements.
The following factors could affect our financial performance and
could cause actual results to differ materially from those
expressed or implied in any of the forward-looking statements:
| • | changes in economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, could have a material adverse effect on our business, results of operations and liquidity; |
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| • | if we are unable to anticipate, identify and respond to changing fashion trends and consumer preferences in a timely manner, and manage our inventory commensurate with customer demand, our sales levels and profitability may decline; | |
| • | fluctuations in the cost, availability and quality of raw materials, labor and transportation, could cause manufacturing delays and increase our costs; | |
| • | equity-based compensation awarded under the employment agreement with our Chief Executive Officer could adversely impact our cash flows, financial position or results of operations and could have a dilutive effect on our outstanding Common Stock; | |
| • | our growth strategy relies significantly on international expansion, which adds complexity to our operations and may strain our resources and adversely impact current store performance; | |
| • | our international expansion plan is dependent on a number of factors, any of which could delay or prevent successful penetration into new markets or could adversely affect the profitability of our international operations; | |
| • | our direct-to-consumer sales are subject to numerous risks that could adversely impact sales; | |
| • | we have incurred, and may continue to incur, significant costs related to store closures; | |
| • | our development of a new brand concept such as Gilly Hicks could have a material adverse effect on our financial condition or results of operations; | |
| • | fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations; | |
| • | our business could suffer if our information technology systems are disrupted or cease to operate effectively; | |
| • | comparable store sales will continue to fluctuate on a regular basis and impact the volatility of the price of our Common Stock; | |
| • | our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours; | |
| • | our ability to attract customers to our stores depends, in part, on the success of the shopping malls in which most of our stores are located; | |
| • | our net sales fluctuate on a seasonal basis, causing our results of operations to be susceptible to changes in Back-to-School and Holiday shopping patterns; | |
| • | our inability to accurately plan for product demand and allocate merchandise effectively could have a material adverse effect on our results; | |
| • | our failure to protect our reputation could have a material adverse effect on our brands; | |
| • | we rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business; | |
| • | interruption in the flow of merchandise from our key vendors and international manufacturers could disrupt our supply chain, which could result in lost sales and could increase our costs; |
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| • | we do not own or operate any manufacturing facilities and, therefore, depend upon independent third parties for the manufacture of all our merchandise; | |
| • | our reliance on two distribution centers domestically and one third-party distribution center internationally makes us susceptible to disruptions or adverse conditions affecting our distribution centers; | |
| • | our reliance on third parties to deliver merchandise from our distribution centers to our stores and direct-to-consumer customers could result in disruptions to our business; | |
| • | we may be exposed to risks and costs associated with credit card fraud and identity theft that would cause us to incur unexpected expenses and loss of revenues; | |
| • | modifications and/or upgrades to our information technology systems may disrupt our operations; | |
| • | our facilities, systems and stores as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters and other unexpected events, any of which could result in an interruption in our business and adversely affect our operating results; | |
| • | our litigation exposure could exceed expectations, having a material adverse effect on our financial condition and results of operations; | |
| • | our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets; | |
| • | fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results; | |
| • | the effects of war or acts of terrorism could have a material adverse effect on our operating results and financial condition; | |
| • | our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-insured exposures might increase our expenses and adversely impact our financial results; | |
| • | reduced operating results and cash flows at the store level may cause us to incur impairment charges; | |
| • | we are subject to customs, advertising, consumer protection, privacy, zoning and occupancy and labor and employment laws that could require us to modify our current business practices, incur increased costs or harm our reputation if we do not comply; | |
| • | changes in the regulatory or compliance landscape could adversely affect our business and results of operations; | |
| • | our unsecured credit agreement includes financial and other covenants that impose restrictions on our financial and business operations; and | |
| • | our operations may be affected by regulatory changes related to climate change and greenhouse gas emissions. |
The following sets forth a description of certain risk factors
that we believe may be relevant to an understanding of our
business. These risk factors could cause actual results to
differ materially from those expressed or implied in any of our
forward-looking statements.
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Changes
in Economic and Financial Conditions, and the Resulting Impact
on Consumer Confidence and Consumer Spending, Could Have a
Material Adverse Effect on Our Business, Results of Operations
and Liquidity.
Our business depends on consumer demand for our merchandise.
Consumer purchases of discretionary items, including our
merchandise, generally decline during recessionary periods and
other periods where disposable income is adversely affected. Our
performance is subject to factors that affect worldwide economic
conditions including unemployment, consumer credit availability,
consumer debt levels, reductions in net worth based on declines
in the financial, residential real estate and mortgage markets,
sales tax rates and rate increases, fuel and energy prices,
interest rates, consumer confidence in future economic and
political conditions, consumer perceptions of personal
well-being and security, the value of the U.S. dollar
versus foreign currencies and other macroeconomic factors.
During Fiscal 2008 and Fiscal 2009, the combination of these
factors caused consumer spending to deteriorate significantly.
While consumer spending began to improve in Fiscal 2010, these
factors may cause levels of spending to remain depressed
relative to historical levels for the foreseeable future. In
addition, these factors may cause consumers to purchase products
from lower-priced competitors or to defer purchases of apparel
and personal care products altogether. One of the factors that
we consider important to our ability to achieve the operating
income goals we have set for ourselves is a return of the
productivity of our domestic stores toward historical levels.
The economic conditions and factors described above could
adversely affect the anticipated increase in productivity of our
domestic stores, as well as adversely affect the pace of opening
new international stores, or their productivity once opened.
Economic uncertainty could have a material adverse effect on our
results of operations and our liquidity and capital resources if
reduced consumer demand for our merchandise should occur. It
could also impact our ability to fund growth
and/or
result in becoming reliant on external financing, the
availability of which may be uncertain.
In addition, the economic environment may exacerbate some of the
risks noted below, including consumer demand, strain on
available resources, international growth strategy, store
growth, interruption of the flow of merchandise from key vendors
and manufacturers, and foreign currency exchange rate
fluctuations. The risks could be exacerbated individually or
collectively.
If
We are Unable to Anticipate, Identify and Respond to Changing
Fashion Trends and Consumer Preferences in a Timely Manner, and
Manage Our Inventory Commensurate with Customer Demand, Our
Sales Levels and Profitability May Decline.
Our success largely depends on our ability to anticipate and
gauge the fashion preferences of our customers and provide
merchandise that satisfies constantly shifting demands in a
timely manner. Our 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. We must translate market trends into appropriate,
saleable merchandise far in advance of its sale in our stores or
on our Internet websites. Because we enter into agreements for
the manufacture and purchase of merchandise well in advance of
the applicable selling season, we are vulnerable to changes in
consumer preference and demand, pricing shifts, and the
sub-optimal
selection and timing of merchandise purchases. We attempt to
reduce the risks of changing fashion trends and product
acceptance in part by devoting a portion of our merchandise for
each brand to basic styles that are not significantly modified
from
year-to-year.
However, there can be no assurance that we will continue to
anticipate consumer demands successfully in the future. To the
extent that we fail to anticipate, identify and respond
effectively to changing consumer preferences and fashion trends,
our sales will be
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adversely affected. Inventory levels for certain merchandise
styles no longer considered to be “on trend” may
increase, leading to higher markdowns to reduce excess inventory
or increases in inventory valuation reserves. A distressed
economic and retail environment, in which many of our
competitors continue to engage in aggressive promotional
activities, increases the importance of reacting appropriately
to changing consumer preferences and fashion trends. Conversely,
if we underestimate consumer demand for our merchandise or if
our manufacturers fail to supply quality products in a timely
manner, we may experience inventory shortages, which may
negatively impact customer relationships, diminish brand loyalty
and result in lost sales. Any of these events could
significantly harm our operating results and financial condition.
Fluctuations
in the Cost, Availability and Quality of Raw Materials, Labor
and Transportation, Could Cause Manufacturing Delays and
Increase Our
Costs
.
Fluctuations in the cost, availability and quality of the
fabrics or other raw materials used to manufacture our
merchandise could have a material adverse effect on our cost of
goods, or our ability to meet customer demand. The prices for
such fabrics depend largely on the market prices for the raw
materials used to produce them, particularly cotton. During the
past 12 months alone, the price of cotton has nearly
tripled based on Index A. The price and availability of such raw
materials may fluctuate significantly, depending on many
factors, including crop yields and weather patterns. Such
factors may be exacerbated by legislation and regulations
associated with global climate change.
In addition, the cost of labor at many of our third-party
manufacturers has been increasing significantly and, as the
middle class in developing countries continues to grow, it is
unlikely that such cost pressure will abate. The cost of
transportation has been increasing as well, and, if the price of
oil continues to increase, and as there continues to be
significant unrest in the Middle East, it is unlikely that such
cost pressure will abate.
In the future, we may not be able to pass all or a portion of
higher raw materials prices or labor or transportation costs on
to our customers. These increasing costs of production could
also adversely affect our ability to achieve the gross margin
objectives we have established for ourselves as one component of
our roadmap.
Equity-Based
Compensation Awarded Under the Employment Agreement with Our
Chief Executive Officer Could Adversely Impact Our Cash Flows,
Financial Position or Results of Operations and Could have a
Dilutive Effect on Our Outstanding Common
Stock.
Under the Employment Agreement, entered into as of
December 19, 2008, between Abercrombie & Fitch
Co. and Michael S. Jeffries, our Chairman and Chief Executive
Officer (the “Employment Agreement”),
Mr. Jeffries received grants (the “Retention
Grants”) of stock appreciation rights. In addition to the
Retention Grants, Mr. Jeffries is also eligible to receive
two equity-based grants during each fiscal year of the term of
the Employment Agreement starting with Fiscal 2009 (each, a
“Semi-Annual Grant”). The value of a Semi-Annual Grant
is uncertain and dependent on the future market price of our
Common Stock and our financial performance. To date,
Mr. Jeffries has received Semi-Annual Grants, in aggregate,
of 3,463,972 stock appreciation rights.
In connection with the Semi-Annual Grants contemplated by the
Employment Agreement, the related compensation expense could
significantly impact our results of operations. In addition, the
significant number of shares of Common Stock which could be
issued to settle the Retention Grants and the Semi-Annual Grants
is uncertain and dependent on the future market price of our
Common Stock and our financial
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performance and would, if issued, have a dilutive effect with
respect to our outstanding shares of Common Stock, which may
adversely affect the market price of our Common Stock.
In the event that there are not sufficient shares of Common
Stock available to be issued under our 2007 Long-Term Incentive
Plan (the “2007 LTIP”), or under a successor or
replacement plan at the time these equity-based awards are
ultimately settled, we will be required to settle some portion
of the awards in cash, which could have an adverse impact on our
cash flow from operations, financial position or results of
operations. Furthermore, the awards may not be deductible
pursuant to Internal Revenue Code Section 162(m). In
addition, under applicable accounting rules, if our stock price
increases to a point where, as of any measurement date, we would
be unable to settle outstanding equity-based awards in shares of
Common Stock from our existing plans, we will be required to
classify and account for all or a portion of the equity-based
awards as liabilities. This could further adversely impact our
results of operations.
Given the number of shares of Common Stock which could be issued
under the Retention Grants and the Semi-Annual Grants, we intend
to seek stockholder approval of additional long-term incentive
compensation plans in order to be able to continue to settle the
awards in Common Stock. In the event that we are unable to
obtain such approval, the risk of cash settlement
and/or
liability accounting would be increased.
Our
Growth Strategy Relies Significantly on International Expansion,
Which Adds Complexity to Our Operations and May Strain Our
Resources and Adversely Impact Current Store
Performance.
Our growth strategy largely depends on the opening of new
international stores. This international expansion has placed,
and will continue to place, increased demands on our
operational, managerial and administrative resources at all
levels of the Company. These increased demands may cause us to
operate our business less efficiently, which in turn could cause
deterioration in the performance of our existing stores or could
adversely affect our inventory levels. Furthermore, our ability
to conduct business in international markets may be adversely
affected by legal, regulatory, political and economic risks. Our
international expansion strategy and success could also be
adversely impacted by the global economy. Failure to properly
implement our growth strategy could have a material adverse
effect on our financial condition and results of operations or
could otherwise adversely affect our ability to achieve our
roadmap objectives.
In addition, as we continue to expand our overseas operations,
we are subject to certain U.S. laws, including the Foreign
Corrupt Practices Act, in addition to the laws of the foreign
countries in which we operate. We must use all commercially
reasonable efforts to ensure our employees comply with these
laws. If any of our overseas operations, or our employees or
agents, violate such laws, we could become subject to sanctions
or other penalties that could negatively affect our reputation,
business and operating results.
Our
International Expansion Plan is Dependent on a Number of
Factors, Any of Which Could Delay or Prevent Successful
Penetration into New Markets or Could Adversely Affect the
Profitability of Our International Operations.
As we expand internationally, we may incur significant costs
related to starting up and maintaining foreign operations. Costs
may include, but are not limited to, obtaining prime locations
for stores, setting up foreign offices and distribution centers,
as well as hiring experienced management. We may be unable to
open and operate new stores successfully, or we may face
operational issues that delay our intended pace of international
store openings, and, in any such case, our growth may be
limited, unless we can:
| • | identify suitable markets and sites for store locations; |
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| • | address the different operational characteristics present in each country to which we expand, including employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements; | |
| • | negotiate acceptable lease terms, in some cases in locations in which the relative rights and obligations of landlords and tenants differ significantly from the customs and practices in the United States; | |
| • | hire, train and retain competent store personnel; | |
| • | gain and retain acceptance from foreign customers; | |
| • | manage inventory effectively to meet the needs of new and existing stores on a timely basis; | |
| • | expand infrastructure to accommodate growth; | |
| • | foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise; | |
| • | generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund our expansion plan; | |
| • | manage foreign currency exchange risks effectively; and | |
| • | achieve acceptable operating margins from new stores. |
Failure to implement our international expansion plan consistent
with our internal expectations, whether as a result of one or
more of the factors listed above or other factors, would
adversely affect our ability to achieve the roadmap objectives
that we have established for ourselves.
Our
Direct-to-Consumer
Sales are Subject to Numerous Risks that Could Adversely Impact
Sales.
We sell merchandise over the Internet through our websites:
www.abercrombie.com; www.abercrombiekids.com;
www.hollisterco.com; and www.gillyhicks.com. Our Internet
operations are subject to numerous risks, including:
| • | reliance on third-party computer hardware/software providers; | |
| • | rapid technological change and the implementation of new systems and platforms; | |
| • | diversions of sales from our stores; | |
| • | liability for online content; | |
| • | violations of state, federal or international laws, including those relating to online privacy; | |
| • | credit card fraud; | |
| • | the failure of the computer systems that operate our websites and their related support systems, including computer viruses; | |
| • | telecommunication failures and electronic break-ins and similar disruptions; and | |
| • | disruption of Internet service, whether for technical reasons or as a result of state-sponsored censorship. |
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Our failure to successfully respond to these risks might
adversely affect sales in our Internet business, as well as
damage our reputation and brands.
We
Have Incurred, and May Continue to Incur, Significant Costs
Related to Store Closures.
We may incur costs associated with store closures resulting
from, among other things, lease termination agreements
associated with closing stores prior to the stores’ lease
expiration date. These costs could be significant and could have
a material adverse effect on our financial condition and results
of operations. We previously announced our intention to close
underperforming domestic stores as part of our efforts to
increase domestic store productivity toward our roadmap goals.
In Fiscal 2010, we incurred $4.4 million of expenses in
connection with the closings of 64 domestic stores.
Our
Development of a New Brand Concept Such as Gilly Hicks Could
Have a Material Adverse Effect on Our Financial Condition or
Results of Operations.
Historically, we have internally developed and launched new
brands that have contributed to our sales growth. Our most
recently added brand is Gilly Hicks, which offers bras,
underwear, personal care products, sleepwear and at-home
products for girls. The development of new brand concepts such
as Gilly Hicks requires management’s focus and attention,
as well as significant capital investments. Furthermore, a new
brand concept is susceptible to risks that include lack of
customer acceptance, competition from existing or new retailers,
product differentiation, production and distribution
inefficiencies and unanticipated operating issues. There is no
assurance that a new brand concept, including Gilly Hicks, will
achieve successful results. The failure of Gilly Hicks to be
successfully launched and to achieve profitability could have a
material adverse effect on our financial condition and results
of operations. The costs of exiting a brand are significant. In
Fiscal 2009, we incurred pre-tax exit costs of
$56.1 million and pre-tax impairment charges of
$51.5 million associated with the closure of RUEHL. In
addition, the ongoing development of new concepts may place a
strain on available resources.
Fluctuations
in Foreign Currency Exchange Rates Could Adversely Impact Our
Financial Condition and Results of Operations.
The functional currency of our international subsidiaries is
generally the local currency in which each operates, which
includes Euros, Canadian Dollars, Japanese Yen, Danish Kroner,
Hong Kong Dollars and British Pounds. Our consolidated financial
statements are presented in U.S. dollars. Therefore, we
must translate revenues, expenses, assets and liabilities from
functional currencies into U.S. dollars at exchange rates
in effect during, or at the end of, the reporting period. In
addition, our international subsidiaries transact in currencies
other than their functional currency, including intercompany
transactions, which could result in foreign currency transaction
gains or losses. The fluctuation in the value of the
U.S. dollar against other currencies could impact our
financial results.
Furthermore, we purchase substantially all of our inventory in
U.S. dollars. As a result, our gross margin rate from
international operations is subject to volatility from movements
in exchange rates over time, which could have an adverse effect
on our financial condition and results of operations and
profitability of the growth desired from international
operations.
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Our
Business Could Suffer if Our Information Technology Systems are
Disrupted or Cease to Operate Effectively.
We rely heavily on our information technology systems to operate
our websites, record and process transactions, respond to
customer inquiries, manage inventory, purchase, sell and ship
merchandise on a timely basis and maintain cost-efficient
operations. Given the significant number of transactions that
are completed annually, it is vital to maintain constant
operation of our computer hardware and software systems. Despite
efforts to prevent such an occurrence, our information
technology systems are vulnerable from
time-to-time
to damage or interruption from computer viruses, power outages,
third-party intrusions and other technical malfunctions. If our
systems are damaged or fail to function properly, we may have to
make monetary investments to repair or replace the systems and
we could endure delays in our operations. Any material
disruption or slowdown of our systems, including a disruption or
slowdown caused by our failure to successfully upgrade our
systems, could cause information, including data related to
customer orders, to be lost or delayed. Such a loss or delay
could – especially if the disruption or slowdown
occurred during our peak selling seasons – result in
delays of merchandise to our stores and customers, which could
reduce demand for our merchandise and cause our sales to decline.
Comparable
Store Sales Will Continue to Fluctuate on a Regular Basis and
Impact the Volatility of the Price of Our Common
Stock.
Our comparable store sales, defined as
year-over-year
sales for a store that has been open as the same brand at least
one year and the square footage of which has not been expanded
or reduced by more than 20%, have fluctuated significantly in
the past on an annual and quarterly basis and are expected to
continue to fluctuate in the future. During the past three
fiscal years, comparable sales results have fluctuated as
follows: (a) from 7% to (23)% for annual results and
(b) from 13% to (30)% for quarterly results. We believe
that a variety of factors affect comparable store sales results
including, but not limited to, fashion trends, actions by
competitors or mall anchor tenants, changes in economic
conditions and consumer spending patterns, weather conditions,
opening
and/or
closing of our stores near each other, the timing of the release
of new merchandise and promotional events, changes in our
merchandise mix and the calendar shifts of tax free and holiday
periods.
Comparable store sales fluctuations may impact our ability to
leverage fixed direct expenses, including store rent and store
asset depreciation, which may adversely affect our financial
condition or results of operations.
In addition, comparable store sales fluctuations may have been
an important factor in the volatility of the price of our Common
Stock in the past, and it is likely that future comparable store
sales fluctuations will contribute to stock price volatility in
the future.
Our
Market Share May be Negatively Impacted by Increasing
Competition and Pricing Pressures from Companies with Brands or
Merchandise Competitive with Ours.
The sale of apparel and personal care products through
brick-and-mortar
stores and
direct-to-consumer
channels is a highly competitive business with numerous
participants, including individual and chain fashion specialty
stores, as well as regional, national and international
department stores. The substantial sales growth in the
direct-to-consumer
channel within the last few years has encouraged the entry of
many new competitors
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and an increase in competition from established companies. We
face a variety of competitive challenges, including:
| • | anticipating and quickly responding to changing consumer demands or preferences better than our competitors; | |
| • | maintaining favorable brand recognition and effectively marketing our products to consumers in several diverse demographic markets; | |
| • | sourcing merchandise efficiently; | |
| • | developing innovative, high-quality merchandise in styles that appeal to our consumers and in ways that favorably distinguish us from our competitors; and | |
| • | countering the aggressive promotional activities of many of our competitors without diminishing the aspirational nature of our brands and brand equity. |
In light of the competitive challenges we face, we may not be
able to compete successfully in the future. Further, increases
in competition could reduce our sales and harm our operating
results and business.
Our
Ability to Attract Customers to Our Stores Depends, in Part, on
the Success of the Shopping Malls in Which Most of Our Stores
are Located.
In order to generate customer traffic, we locate many of our
stores in prominent locations within successful shopping malls.
Our stores benefit from the ability of the malls’
“anchor” tenants, generally large department stores
and other area attractions, to generate consumer traffic in the
vicinity of our stores and the continuing popularity of malls in
the United States and, increasingly, in many international
locations as shopping destinations. We cannot control the
development of new shopping malls in the United States or around
the world; the availability or cost of appropriate locations
within existing or new shopping malls; competition with other
retailers for prominent locations; or the success of individual
shopping malls. All of these factors may impact our ability to
meet our productivity targets for our domestic stores and our
growth objectives for our international Hollister Co. stores,
which are primarily mall-based, and could have a material
adverse effect on our financial condition or results of
operations. Unfavorable economic conditions, particularly in
certain regions, have affected mall traffic and resulted in the
closing of certain anchor stores. The viability of certain
commercial and real estate firms which operate major shopping
malls has also been threatened. In addition, some malls that
were in prominent locations when we opened stores may cease to
be viewed as prominent. If this trend continues or if the
popularity of mall shopping continues to decline generally among
our customers, our sales may decline, or we may fail to achieve
our roadmap goals for domestic productivity, which would impact
our gross profits, net income or ability to achieve our roadmap
goal for operating margin by Fiscal 2012.
Part of our future growth is dependent on our ability to operate
stores in desirable locations with capital investment and lease
costs providing the opportunity to earn a reasonable return. We
cannot be sure as to when or whether such desirable locations
will become available at reasonable costs.
Our
Net Sales Fluctuate on a Seasonal Basis, Causing Our Results of
Operations to be Susceptible to Changes in
Back-to-School
and Holiday Shopping Patterns.
Historically, our operations have been seasonal, with a
significant amount of net sales and net income occurring in the
fourth fiscal quarter, due to the increased sales during the
Holiday selling season and, to a
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lesser extent, the third fiscal quarter, reflecting increased
sales during the
Back-to-School
selling season in the United States. Our net sales and net
income during the first and second fiscal quarters are typically
lower due, in part, to the traditional slowdown in retail sales
immediately following the Holiday selling season. As a result of
this seasonality, net sales and net income during any fiscal
quarter cannot be used as an accurate indicator of our annual
results. Any factors negatively affecting us during the third
and fourth fiscal quarters of any year, including inclement
weather or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results
of operations for the entire year.
Our
Inability to Accurately Plan for Product Demand and Allocate
Merchandise Effectively Could Have a Material Adverse Effect on
Our Results.
We must order and keep appropriate merchandise in stock to meet
demand. As a result, the inability to accurately plan for
product demand and allocate merchandise effectively could have a
material adverse effect on our financial condition and results
of operations. High inventory levels due to unanticipated
decreases in demand for our products, misidentification of
fashion trends, or excess inventory purchases could require us
to sell merchandise at a substantial markdown, which could
reduce our net sales and gross margins and negatively impact our
profitability. Low levels of inventory due to conservative
planning could also affect product offerings in our stores and
on our websites and negatively impact net sales and
profitability.
Our
Failure to Protect Our Reputation Could Have a Material Adverse
Effect on Our Brands.
Our ability to maintain our reputation is critical to our
brands. Our reputation could be jeopardized if we fail to
maintain high standards for merchandise quality and integrity.
Any negative publicity about these types of concerns may reduce
demand for our merchandise. Failure to comply with ethical,
social, product, labor, health and safety or environmental
standards, or related political considerations, could also
jeopardize our reputation and potentially lead to various
adverse consumer actions, including boycotts. Public perception
about our products or our stores, whether justified or not,
could impair our reputation, involve us in litigation, damage
our brands and have a material adverse effect on our business.
Failure to comply with local laws and regulations, to maintain
an effective system of internal controls or to provide accurate
and timely financial statement information could also hurt our
reputation. Damage to our reputation or loss of consumer
confidence for any of these or other reasons could have a
material adverse effect on our results of operations and
financial condition, as well as require additional resources to
rebuild our reputation.
We
Rely on the Experience and Skills of Our Senior Executive
Officers, the Loss of Whom Could Have a Material Adverse Effect
on Our Business.
Our senior executive officers closely supervise all aspects of
our business — in particular, the design of our
merchandise and the operation of our stores. Our senior
executive officers have substantial experience and expertise in
the retail business and have made significant contributions to
the growth and success of our brands. If we were to lose the
benefit of their involvement — in particular the
services of any one or more of Michael S. Jeffries, Chairman and
Chief Executive Officer; Diane Chang, Executive Vice
President — Sourcing; Leslee K. Herro, Executive Vice
President — Planning and Allocation; Jonathan E.
Ramsden, Executive Vice President and Chief Financial Officer;
and Ronald A. Robins, Jr., Senior Vice President, General
Counsel and Secretary — without adequate succession
plans, our business could be adversely affected. Competition for
such senior executive officers is intense, and we cannot be sure
we will be able to attract, retain and develop a sufficient
number of qualified senior executive officers in future periods.
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Interruption
in the Flow of Merchandise from Our Key Vendors and
International Manufacturers Could Disrupt Our Supply Chain,
Which Could Result in Lost Sales and Could Increase Our
Costs.
We purchase the majority of our merchandise outside of the
U.S. through arrangements with approximately 190 vendors
which includes foreign manufacturers located throughout the
world, primarily in Asia and Central and South America. In
addition, many of our domestic manufacturers maintain production
facilities overseas. Political, social or economic instability
in Asia, Central or South America, or in other regions in which
our manufacturers are located, could cause disruptions in trade,
including exports to the U.S. Other events that could also
cause disruptions to exports to the U.S. include:
| • | the imposition of additional trade law provisions or regulations; | |
| • | reliance on a limited number of shipping and air carriers who may experience capacity issues that adversely affect our ability to ship inventory in a timely manner or for an acceptable cost; | |
| • | the imposition of additional duties, tariffs and other charges on imports and exports; | |
| • | quotas imposed by bilateral textile agreements; | |
| • | economic uncertainties and adverse economic conditions (including inflation and recession); | |
| • | fluctuations in the value of the U.S. dollar against foreign currencies; | |
| • | restrictions on the transfer of funds; | |
| • | the potential of manufacturer financial instability, inability to access needed liquidity or bankruptcy; | |
| • | significant labor disputes, such as dock strikes; | |
| • | significant delays in the delivery of cargo due to port security considerations; | |
| • | financial or political instability in any of the counties in which our merchandise is manufactured; | |
| • | natural disasters; and | |
| • | regulations to address climate change. |
In addition, we cannot predict whether the countries in which
our merchandise is manufactured, or may be manufactured in the
future, will be subject to new or additional trade restrictions
imposed by the U.S. or other foreign governments, including
the likelihood, type or effect of any such restrictions. Trade
restrictions, including new or increased tariffs or quotas,
embargoes, safeguards and customs restrictions against apparel
items, as well as U.S. or foreign labor strikes and work
stoppages or boycotts, could increase the cost or reduce the
supply of apparel available to us and adversely affect our
business, financial condition or results of operations.
We
do not Own or Operate any Manufacturing Facilities and,
Therefore, Depend Upon Independent Third Parties for the
Manufacture of all Our Merchandise.
We do not own or operate any manufacturing facilities. As a
result, the continued success of our operations is tied to our
timely receipt of quality merchandise from third-party
manufacturers. Our products are manufactured to our
specifications primarily by foreign manufacturers. We cannot
control all of the various factors, which include inclement
weather, natural disasters, political and financial instability,
strikes, health concerns regarding infectious diseases in
countries in which our merchandise is produced, and acts of
terrorism, that might affect a manufacturer’s ability to
ship orders of our merchandise in a timely manner or to
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meet our quality standards. A manufacturer’s inability to
ship orders in a timely manner or meet our quality standards
could cause delays in responding to consumer demands and
negatively affect consumer confidence in the quality and value
of our brands or negatively impact our competitive position, any
of which could have a material adverse effect on our financial
condition and results of operations. We are also susceptible to
increases in sourcing costs from our manufacturers which we may
not be able to pass on to our customers and could adversely
affect our financial condition or results of operations.
Additionally, while we utilize third-party compliance auditors
to visit and monitor the operations of our manufacturers, we do
not have control of the independent manufacturers or their labor
practices. As a result, the risk remains that one or more of our
manufacturers will not adhere to our global compliance standards
and violate labor laws or other laws, including consumer and
product safety laws. Non-governmental organizations might
attempt to create an unfavorable impression of our sourcing
practices or the practices of some of our vendors or
manufacturers that could harm our image. If either of these
events occur, we could lose customer goodwill and favorable
brand recognition.
Our
Reliance on Two Distribution Centers Domestically and One
Third-Party Distribution Center Internationally Makes us
Susceptible to Disruptions or Adverse Conditions Affecting Our
Distribution Centers.
Our two distribution centers located in New Albany, Ohio, manage
the receipt, storage, sorting, packing and distribution of
merchandise to our stores and
direct-to-consumer
customers, both regionally and internationally. We also use a
third-party distribution center in the Netherlands for the
distribution of merchandise delivered to our stores located
outside of North America. As a result, our operations are
susceptible to local and regional factors, such as system
failures, accidents, economic and weather conditions, natural
disasters, and demographic and population changes, as well as
other unforeseen events and circumstances. If our distribution
operations were disrupted, our ability to replace inventory in
our stores and process
direct-to-consumer
orders could be interrupted and sales could be negatively
impacted.
We are in the process of consolidating our two distribution
centers in New Albany into one, with an expected completion date
in mid-2012. This consolidation requires management’s focus
and attention, as well as significant capital investments. We
believe that this consolidation will result in operational
efficiencies and that one distribution center in New Albany is
adequate. However, if we are unable to operate effectively with
one distribution center, our distribution operations could be
disrupted. Further, consolidation into one distribution center
increases our susceptibility to risks associated with system
failures, accidents, weather conditions, national disasters, and
other unforeseen circumstances. If our operations are disrupted,
our ability to replace inventory in our stores and process
direct-to-consumer
orders could be interrupted and sales could be negatively
impacted.
Our
Reliance on Third Parties to Deliver Merchandise From Our
Distribution Centers to Our Stores and
Direct-to-Consumer
Customers Could Result in Disruptions to Our
Business.
The efficient operations of our stores and
direct-to-consumer
operations depend on the timely receipt of merchandise from our
distribution centers. We deliver our merchandise to our stores
and
direct-to-consumer
customers using independent third parties. We use primarily one
contract carrier for domestic store deliveries and all
direct-to-consumer
deliveries and a separate contract carrier for international
store deliveries. The independent third parties employ personnel
that may be represented by labor unions. Disruptions in the
delivery of merchandise or work stoppages by employees or
contractors of any of these third parties could delay the timely
receipt of merchandise. There can be no assurance that such
stoppages or disruptions will not
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occur in the future. Any failure by a third party to respond
adequately to our distribution needs would disrupt our
operations and could have a material adverse effect on our
financial condition or results of operations. Furthermore, we
are susceptible to increases in fuel costs which may increase
the cost of distribution. If we are not able to pass this cost
on to our customers, our financial condition and results of
operations could be adversely affected.
We
May be Exposed to Risks and Costs Associated With Credit Card
Fraud and Identity Theft That Would Cause us to Incur Unexpected
Expenses and Loss of Revenues.
A significant portion of our customer orders are placed through
our websites. In addition, a significant portion of sales made
through our retail stores require the collection of certain
customer data, such as credit card information. In order for our
sales channels to function and develop successfully, we and
other parties involved in processing customer transactions must
be able to transmit confidential information, including credit
card information, securely over public networks. Third parties
may have the technology or knowledge to breach the security of
customer transaction data. Although we have security measures
related to our systems and the privacy of our customers, we
cannot guarantee these measures will effectively prevent others
from obtaining unauthorized access to our information and our
customers’ information. Any person who circumvents our
security measures could destroy or steal valuable information or
disrupt our operations. A security breach could cause customers
to lose confidence in the security of our websites or stores and
choose not to purchase from us. Any security breach could also
expose us to risks of data loss, litigation and liability and
could seriously disrupt operations and harm our reputation, any
of which could adversely affect our financial condition and
results of operations.
In addition, states and the federal government are increasingly
enacting laws and regulations to protect consumers against
identity theft. These laws and regulations will likely increase
the costs of doing business and if we fail to implement
appropriate security measures, or to detect and provide prompt
notice of unauthorized access as required by some of these laws
and regulations, we could be subject to potential claims for
damages and other remedies, which could adversely affect our
business and results of operations.
Modifications
and/or Upgrades to Our Information Technology Systems May
Disrupt Our Operations.
We regularly evaluate our information technology systems and
requirements and are currently implementing modifications
and/or
upgrades to the information technology systems that support our
business. Modifications include replacing legacy systems with
successor systems, making changes to legacy systems, or
acquiring new systems with new functionality. We are aware of
the inherent risks associated with replacing and modifying these
systems, including inaccurate system information, system
disruptions and user acceptance and understanding. We believe we
are taking appropriate action to mitigate the risks through
disciplined adherence to methodology, program management,
testing and user involvement, as well as securing appropriate
commercial contracts with third-party vendors supplying the
replacement technologies. Information technology system
disruptions and inaccurate system information, if not
anticipated and appropriately mitigated, could have a material
adverse effect on our financial condition and results of
operations. Additionally, there is no assurance that a
successfully implemented system will deliver the anticipated
value to us.
19
Table of Contents
Our
Facilities, Systems and Stores as Well as the Facilities and
Systems of Our Vendors and Manufacturers, are Vulnerable to
Natural Disasters and Other Unexpected Events, any of Which
Could Result in an Interruption in Our Business and Adversely
Affect Our Operating Results.
Our retail stores, corporate offices, distribution centers,
infrastructure projects and
direct-to-consumer
operations, as well as the operations of our vendors and
manufacturers, are vulnerable to damage from earthquakes,
tornadoes, hurricanes, fires, floods, power losses,
telecommunications failures, hardware and software failures,
computer viruses and similar events. If any of these events
result in damage to our facilities, systems or stores, or the
facilities or systems of our vendors or manufacturers, we may
experience interruptions in our business until the damage is
repaired, resulting in the potential loss of customers and
revenues. In addition, we may incur costs in repairing any
damage which exceeds our applicable insurance coverage.
There is great uncertainty related to the earthquakes and the
status of nuclear power plants in Japan. A continued
interruption in business in Japan could have an adverse impact
on our financial position or results of operations.
Our
Litigation Exposure Could Exceed Expectations, Having a Material
Adverse Effect on Our Financial Condition and Results of
Operations.
We are involved, from
time-to-time,
in litigation incidental to our business, such as litigation
regarding overtime compensation and other employment or wage and
hour related matters. Management is unable to assess the
potential exposure of the aforesaid matters. Our current
exposure could change in the event of the discovery of damaging
facts with respect to legal matters pending against us or
determinations by judges, juries or other finders of fact that
are not in accordance with management’s evaluation of the
claims. Should management’s evaluation prove incorrect, our
exposure could greatly exceed expectations and have a material
adverse effect on our financial condition, results of operations
or cash flows.
Our
Inability or Failure to Adequately Protect Our Trademarks Could
Have a Negative Impact on Our Brand Image and Limit Our Ability
to Penetrate New Markets.
We believe our trademarks, Abercrombie &
Fitch
®
,
abercrombie
®
,
Hollister
Co.
®
,
Gilly
Hicks
®
,
Gilly Hicks
Sydney
®
and the “Moose,” “Seagull” and
“Koala” logos, are an essential element of our
strategy. We have obtained or applied for federal registration
of these trademarks with the U.S. Patent and Trademark
Office and the registries of countries where stores are located
or likely to be located in the future. In addition, we own
registrations and pending applications for other trademarks in
the U.S. and have applied for or obtained registrations
from the registries in many foreign countries in which our
stores or our manufacturers are located. There can be no
assurance that we will obtain registrations that have been
applied for or that the registrations we obtain will prevent the
imitation of our products or infringement of our intellectual
property rights by others. If any third party copies our
products in a manner that projects lesser quality or carries a
negative connotation, our brand image could be materially
adversely affected.
Because we have not yet registered all of our trademarks in all
categories, or in all foreign countries in which we source or
offer our merchandise now, or may in the future, our
international expansion and our merchandising of products using
these marks could be limited. For example, we cannot ensure that
others will not try to block the manufacture, export or sale of
our products as a violation of their trademarks or other
proprietary rights. The pending applications for international
registration of various trademarks could be challenged or
rejected in those countries because third parties of whom we are
not currently aware have
20
Table of Contents
already registered similar marks in those countries.
Accordingly, it may be possible, in those foreign countries
where the status of various applications is pending or unclear,
for a third-party owner of the national trademark registration
for a similar mark to prohibit the manufacture, sale or
exportation of branded goods in or from that country. If we are
unable to reach an arrangement with any such party, our
manufacturers may be unable to manufacture our products, and we
may be unable to sell in those countries. Our inability to
register our trademarks or purchase or license the right to use
our trademarks or logos in these jurisdictions could limit our
ability to obtain supplies from, or manufacture in, less costly
markets or penetrate new markets should our business plan
include selling our merchandise in those
non-U.S. jurisdictions.
We have an anti-counterfeiting program, under the auspices of
the Abercrombie & Fitch Brand Protection Team, whose
goal is to eliminate the supply of illegal pieces of our
products. The Brand Protection Team interacts with
investigators, customs officials and law enforcement entities
throughout the world to combat the illegal use of our
trademarks. Although brand security initiatives are being taken,
we cannot guarantee that our efforts against the counterfeiting
of our brands will be successful.
Fluctuations
in Our Tax Obligations and Effective Tax Rate May Result in
Volatility in Our Operating Results.
We are subject to income taxes in many U.S. and certain
foreign jurisdictions. In addition, our products are subject to
import and excise duties
and/or
sales, consumption or value-added taxes (or “VAT”) in
many jurisdictions. We record tax expense based on our estimates
of future payments, which include reserves for estimates of
probable settlements of foreign and domestic tax audits. At any
one time, many tax years are subject to audit by various taxing
jurisdictions. The results of these audits and negotiations with
taxing authorities may affect the ultimate settlement of these
issues. As a result, we expect that throughout the year there
could be ongoing variability in our quarterly tax rates as
taxable events occur and exposures are evaluated. In addition,
our effective tax rate in any given financial statement period
may be materially impacted by changes in the mix and level of
earnings or by changes to existing accounting rules or
regulations. Fluctuations in duties could also have a material
impact on our financial condition, results of operations or cash
flows. In some international markets, we are required to hold
and submit VAT to the appropriate local tax authorities. Failure
to correctly calculate or submit the appropriate amounts could
subject us to substantial fines and penalties that could have an
adverse effect on our financial condition, results of operations
or cash flows. In addition, tax legislation may be enacted in
the future, domestically or abroad, that impacts our current or
future tax structure and effective tax rate.
The
Effects of War or Acts of Terrorism Could Have a Material
Adverse Effect on Our Operating Results and Financial
Condition.
The continued threat of terrorism and the associated heightened
security measures and military actions in response to acts of
terrorism have disrupted commerce and have intensified
uncertainties in the U.S. economy. Any further acts of
terrorism or a future war may disrupt commerce and undermine
consumer confidence, which could negatively impact our sales
revenue by causing consumer spending
and/or
mall
traffic to decline. Furthermore, an act of terrorism or war, or
the threat thereof, or any other unforeseen interruption of
commerce, could negatively impact our business by interfering
with our ability to obtain merchandise from foreign
manufacturers. Our inability to obtain merchandise from our
foreign manufacturers or substitute other manufacturers, at
similar costs and in a timely manner, could adversely affect our
operating results and financial condition.
21
Table of Contents
Our
Inability to Obtain Commercial Insurance at Acceptable Prices or
Our Failure to Adequately Reserve For Self-Insured Exposures
Might Increase Our Expenses and Adversely Impact Our Financial
Results.
We believe that commercial insurance coverage is prudent for
risk management in certain areas of our business. Insurance
costs may increase substantially in the future and may be
affected by natural catastrophes, fear of terrorism, financial
irregularities and other fraud at publicly-held companies,
intervention by the government and a decrease in the number of
insurance carriers. In addition, the carriers with which we hold
our policies may go out of business, or may be otherwise unable
to fulfill their contractual obligations. Furthermore, for
certain types or levels of risk, such as risks associated with
earthquakes, hurricanes or terrorist attacks, we may determine
that we cannot obtain commercial insurance at acceptable prices,
if at all. Therefore, we may choose to forego or limit our
purchase of relevant commercial insurance, choosing instead to
self-insure one or more types or levels of risk. We are
primarily self-insured for workers’ compensation and
employee health benefits. If we suffer a substantial loss that
is not covered by commercial insurance or our self-insurance
reserves, the loss and attendant expenses could harm our
business and operating results. In addition, exposures exist for
which no insurance may be available and for which we have not
reserved.
Reduced
Operating Results and Cash Flows at the Store Level May Cause us
to Incur Impairment Charges.
Long-lived assets, primarily property and equipment, are
reviewed at the store level at least annually for impairment, or
whenever changes in circumstances indicate that a full recovery
of net asset values through future cash flows is in question.
The review could result in significant charges related to
underperforming stores which could impact our results of
operations. Futhermore, our impairment review requires us to
make estimates and projections regarding, but not limited to,
future cash flows.
We make certain estimates and projections in connection with
impairment analyses for our store locations and other property
and equipment. If these estimates or projections change or prove
incorrect, we may be, and have been, required to record
impairment charges on certain store locations and other property
and equipment. We have recognized significant impairment charges
in the past and may do so in the future. In Fiscal 2008 and
Fiscal 2009, we recognized approximately $13.6 million and
$31.4 million, respectively, in after-tax charges
associated with the impairment of RUEHL-related stores assets;
and we subsequently discontinued our RUEHL operations. In Fiscal
2010, we recorded an after-tax charge of $30.9 million
associated with Gilly Hicks stores, as well as certain other
store-related assets. The Gilly Hicks charge relates to the
stores constructed using the original large format store of
approximately 10,000 gross square feet, and does not affect
our operating plans for Gilly Hicks. In Fiscal 2008 and Fiscal
2009, we recognized $5.4 million and $20.4 million,
respectively, in after-tax charges associated with the
impairment of store-related assets unrelated to RUEHL. As a
result of these charges, our operating results have been, and in
the future may be, adversely affected.
We
are Subject to Customs, Advertising, Consumer Protection,
Privacy, Zoning and Occupancy and Labor and Employment Laws That
Could Require us to Modify Our Current Business Practices, Incur
Increased Costs or Harm Our Reputation if We do not
Comply.
We are subject to numerous laws and regulations, including
customs,
truth-in-advertising,
consumer protection, general privacy, health information
privacy, identity theft, online privacy, unsolicited commercial
communication and zoning and occupancy laws and ordinances that
regulate retailers generally
and/or
govern the importation, promotion and sale of merchandise and
the operation of retail stores and distribution centers. As our
business becomes more international in scope and we enter more
countries internationally, the number of
22
Table of Contents
laws and regulations that we are subject to, as well as their
scope and reach, increases significantly and heightens our
risks. If these laws and regulations were to change, or were
violated by our management, employees, suppliers, vendors or
other parties with whom we do business, the costs of certain
merchandise could increase, or we could experience delays in
shipments of our merchandise, be subject to fines or penalties,
or suffer reputational harm, which could reduce demand for our
merchandise and adversely affect our business and results of
operations. Failure to protect personally identifiable
information of our customers or associates could subject us to
considerable reputational harm as well as significant fines,
penalties and sanctions both domestically and abroad. In
addition, changes in federal, state and international minimum
wage laws and other laws relating to employee benefits could
cause us to incur additional wage and benefits costs, which
could hurt our profitability. We are also subject to
U.S. securities laws and regulations as well as stock
exchange rules which could subject us to enforcement actions,
de-listing and adverse legal sanctions for non-compliance.
Changes
in the Regulatory or Compliance Landscape Could Adversely Affect
Our Business and Results of Operations.
Laws and regulations at the state, federal and international
levels frequently change, and the ultimate cost of compliance
cannot be precisely estimated. In addition, we cannot predict
the impact that may result from changes in the regulatory
landscape. Any changes in regulations, the imposition of
additional regulations, or the enactment of any new or more
stringent legislation including those related to health care,
taxes, transportation and logistics, privacy, environmental
issues, trade, product safety or employment and labor, could
adversely affect our business and results of operations.
Our
Unsecured Credit Agreement Includes Financial and Other
Covenants That Impose Restrictions on Our Financial and Business
Operations.
Our unsecured credit agreement expires on April 12, 2013
and market conditions could potentially impact the size and
terms of a replacement facility.
In addition, our unsecured credit agreement contains financial
covenants that require us to maintain a minimum coverage ratio
and a maximum leverage ratio. If we fail to comply with the
covenants and are unable to obtain a waiver or amendment, an
event of default would result, and the lenders could declare
outstanding borrowings immediately due and payable. If that
should occur, we cannot guarantee that we would have sufficient
liquidity at that time to repay or refinance borrowings under
the unsecured credit agreement.
The inability to obtain credit on commercially reasonable terms,
or a default under the current unsecured credit agreement, could
adversely impact our liquidity and results of operations.
Our
Operations may be Affected by Regulatory Changes Related to
Climate Change and Greenhouse Gas Emissions.
Our operations may be affected by regulatory changes related to
climate change and greenhouse gas emissions. We are uncertain
how the U.S. and international economies will be affected
by potential legislation and public reactions. As a result, the
effect this could have on our operations is presently unknown.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
23
Table of Contents
| ITEM 2. | PROPERTIES. |
The Company’s headquarters and support functions occupy
491 acres, consisting of the home office, distribution and
shipping facilities centralized on a campus-like setting in New
Albany, Ohio and an additional small distribution and shipping
facility located in the Columbus, Ohio area, all of which are
owned by the Company. Additionally, the Company leases small
facilities to house its design and sourcing support centers in
Hong Kong, New York City and Los Angeles, California, as well as
offices in the United Kingdom, Japan and Switzerland.
All of the retail stores operated by the Company, as of
March 18, 2011, are located in leased facilities, primarily
in shopping centers in North America, Europe and Asia. The
leases expire at various dates, between 2011 and 2028.
The Company’s home office, distribution and shipping
facilities, design support centers and stores are currently
suitable and adequate.
As of March 18, 2011, the Company’s 1,070 stores were
located in North America, Europe and Asia as follows:
|
Alabama
|
9 | Kentucky | 10 | North Dakota | 2 | |||||||||||
|
Alaska
|
1 | Louisiana | 14 | Ohio | 36 | |||||||||||
|
Arizona
|
16 | Maine | 4 | Oklahoma | 7 | |||||||||||
|
Arkansas
|
7 | Maryland | 19 | Oregon | 13 | |||||||||||
|
California
|
134 | Massachusetts | 34 | Pennsylvania | 45 | |||||||||||
|
Colorado
|
10 | Michigan | 31 | Rhode Island | 3 | |||||||||||
|
Connecticut
|
22 | Minnesota | 21 | South Carolina | 14 | |||||||||||
|
Delaware
|
5 | Mississippi | 2 | South Dakota | 2 | |||||||||||
|
District Of Columbia
|
1 | Missouri | 17 | Tennessee | 24 | |||||||||||
|
Florida
|
74 | Montana | 2 | Texas | 89 | |||||||||||
|
Georgia
|
23 | Nebraska | 5 | Utah | 8 | |||||||||||
|
Hawaii
|
5 | Nevada | 13 | Vermont | 2 | |||||||||||
|
Idaho
|
4 | New Hampshire | 10 | Virginia | 28 | |||||||||||
|
Illinois
|
46 | New Jersey | 40 | Washington | 23 | |||||||||||
|
Indiana
|
25 | New Mexico | 3 | West Virginia | 5 | |||||||||||
|
Iowa
|
8 | New York | 55 | Wisconsin | 13 | |||||||||||
|
Kansas
|
5 | North Carolina | 27 | |||||||||||||
|
Canada
|
16 | |||||||||||||||
|
Denmark
|
1 | |||||||||||||||
|
Germany
|
5 | |||||||||||||||
|
Italy
|
5 | |||||||||||||||
|
Japan
|
2 | |||||||||||||||
|
Puerto Rico
|
1 | |||||||||||||||
|
Spain
|
3 | |||||||||||||||
|
United Kingdom
|
21 |
24
Table of Contents
| ITEM 3. | LEGAL PROCEEDINGS |
A&F is a defendant in lawsuits and other adversary
proceedings arising in the ordinary course of business. Legal
costs incurred in connection with the resolution of claims and
lawsuits are generally expensed as incurred, and the Company
establishes reserves for the outcome of litigation where it
deems appropriate to do so under applicable accounting rules.
Actual liabilities may exceed the amounts reserved, and there
can be no assurance that final resolution of these matters will
not have a material adverse effect on the Company’s
financial condition, results of operations or cash flows. The
Company’s identified contingencies include the following
matters:
On June 23, 2006, Lisa Hashimoto, et al. v.
Abercrombie & Fitch Co. and Abercrombie &
Fitch Stores, Inc., was filed in the Superior Court of the State
of California for the County of Los Angeles. In that action,
plaintiffs alleged, on behalf of a putative class of California
store managers employed in Hollister and abercrombie kids
stores, that they were entitled to receive overtime pay as
“non-exempt” employees under California wage and hour
laws. The complaint sought injunctive relief, equitable relief,
unpaid overtime compensation, unpaid benefits, penalties,
interest and attorneys’ fees and costs. The defendants
answered the complaint on August 21, 2006, denying
liability. On June 23, 2008, the defendants settled all
claims of Hollister and abercrombie kids store managers who
served in stores from June 23, 2002 through April 30,
2004, but continued to oppose the plaintiffs’ remaining
claims. On January 29, 2009, the Court certified a class
consisting of all store managers who served at Hollister and
abercrombie kids stores in California from May 1, 2004
through the future date upon which the action concludes. The
parties then continued to litigate the claims of that putative
class. On May 24, 2010, plaintiffs filed a notice that they
did not intend to continue to pursue their claim that members of
the class did not exercise independent managerial judgment and
discretion. They also asked the Court to vacate the
August 9, 2010 trial date previously set by the Court. On
July 20, 2010, the trial court vacated the trial date and
the defendants then moved to decertify the putative class.
On September 16, 2005, a derivative action, styled The
Booth Family Trust v. Michael S. Jeffries, et al., was
filed in the United States District Court for the Southern
District of Ohio, naming A&F as a nominal defendant and
seeking to assert claims for unspecified damages against nine of
A&F’s present and former directors, alleging various
breaches of the directors’ fiduciary duty and seeking
equitable and monetary relief. In the following three months,
four similar derivative actions were filed (three in the United
States District Court for the Southern District of Ohio and one
in the Court of Common Pleas for Franklin County, Ohio) against
present and former directors of A&F alleging various
breaches of the directors’ fiduciary duty allegedly arising
out of antecedent employment law and securities class actions
brought against the Company. A consolidated amended derivative
complaint was filed in the federal proceeding on July 10,
2006. On February 16, 2007, A&F announced that its
Board of Directors had received a report of the Special
Litigation Committee established by the Board to investigate and
act with respect to claims asserted in the derivative cases,
which concluded that there was no evidence to support the
asserted claims and directed the Company to seek dismissal of
the derivative cases. On September 10, 2007, the Company
moved to dismiss the federal derivative cases on the authority
of the Special Litigation Committee Report. On March 12,
2009, the Company’s motion was granted and, on
April 10, 2009, plaintiffs filed an appeal from the order
of dismissal in the United States Court of Appeals for the Sixth
Circuit. Plaintiff’s appeal has been fully briefed and
argued and is awaiting decision. The state court has stayed
further proceedings in the state-court derivative action until
resolution of the consolidated federal derivative cases.
On December 21, 2007 Spencer de la Cruz, a former employee,
filed an action against Abercrombie & Fitch Co. and
Abercrombie & Fitch Stores, Inc. (collectively, the
“Defendants”) in the Superior Court of
25
Table of Contents
Orange County, California. He sought to allege, on behalf of
himself and a putative class of past and present employees in
the period beginning on December 19, 2003, claims for
failure to provide meal breaks, for waiting time penalties, for
failure to keep accurate employment records, and for unfair
business practices. By successive amendments, plaintiff added 10
additional plaintiffs and additional claims seeking injunctive
relief, unpaid wages, penalties, interest, and attorney’s
fees and costs. Defendants have denied the material allegations
of plaintiffs’ complaints throughout the litigation and
have asserted numerous affirmative defenses. On July 23,
2010, plaintiffs moved for class certification in the action. On
December 9, 2010, after briefing and argument, the trial
court granted in part, and denied in part, plaintiffs’
motion, certifying
sub-classes
to pursue meal break claims, meal premium pay claims, work
related travel claims, travel expense claims, termination pay
claims, reporting time claims, bag check claims, pay record
claims, and minimum wage claims. The parties are continuing to
litigate questions relating to the Court’s certification
order and to the merits of plaintiffs’ claims.
The Company intends to defend the aforesaid pending matters
vigorously, as appropriate. The Company is unable to quantify
the potential exposure of the aforesaid pending matters.
However, the Company’s assessment of the current exposure
could change in the event of the discovery of additional facts
with respect to legal matters pending against the Company or
determinations by judges, juries, administrative agencies or
other finders of fact that are not in accordance with the
Company’s evaluation of the claims.
26
Table of Contents
| ITEM 4. | [Reserved] |
Set forth below is certain information regarding the executive
officers of A&F as of March 18, 2011:
Michael S. Jeffries,
66, has been Chairman of A&F
since May 1998. Mr. Jeffries has been Chief Executive
Officer of A&F since February 1992. From February 1992 to
May 1998, Mr. Jeffries held the title of President of
A&F. Under the terms of the Employment Agreement, entered
into as of December 19, 2008, between A&F and
Mr. Jeffries, A&F is obligated to cause
Mr. Jeffries to be nominated as a director of A&F
during his employment term.
Diane Chang, 55,
has been Executive Vice
President — Sourcing of A&F since May 2004. Prior
thereto, Ms. Chang held the position of Senior Vice
President — Sourcing of A&F from February 2000 to
May 2004 and the position of Vice President — Sourcing
of A&F from May 1998 to February 2000.
Leslee K. Herro, 50,
has been Executive Vice
President — Planning and Allocation of A&F since
May 2004. Prior thereto, Ms. Herro held the position of
Senior Vice President — Planning and Allocation of
A&F from February 2000 to May 2004 and the position of Vice
President — Planning & Allocation of
A&F from February 1994 to February 2000.
Jonathan E. Ramsden, 46,
has been Executive Vice
President and Chief Financial Officer of A&F since December
2008. From December 1998 to December 2008, Mr. Ramsden
served as Chief Financial Officer and a member of the Executive
Committee of TBWA Worldwide, a large advertising agency network
and a division of Omnicom Group Inc. Prior to becoming Chief
Financial Officer of TWBA Worldwide, he served as Controller and
Principal Accounting Officer of Omnicom Group Inc. from June
1996 to December 1998.
Ronald A. Robins, Jr., 47,
has been Senior Vice
President, General Counsel and Secretary of A&F since
August 2010. Mr. Robins joined A&F in November 2009 as
Deputy General Counsel after spending 16 years at Vorys,
Sater, Seymour and Pease LLP, 13 years as a partner in the
firm’s corporate and finance practice group.
Mr. Robins clerked for The Honorable Milton Pollack of the
United States District Court for the Southern District of New
York from 1989 to 1990. Before joining Vorys, Mr. Robins
practiced for several years as an associate at Davis
Polk & Wardwell in New York City.
The executive officers serve at the pleasure of the Board of
Directors of A&F and, in the case of Mr. Jeffries,
pursuant to an employment agreement.
27
Table of Contents
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 table below sets forth the high and
low sales prices of A&F’s Common Stock on the New York
Stock Exchange for Fiscal 2010 and Fiscal 2009:
| Sales Price | ||||||||
| High | Low | |||||||
|
Fiscal 2010
|
||||||||
|
4th Quarter
|
$ | 58.50 | $ | 41.55 | ||||
|
3rd Quarter
|
$ | 45.75 | $ | 33.97 | ||||
|
2nd Quarter
|
$ | 45.71 | $ | 29.94 | ||||
|
1st Quarter
|
$ | 51.12 | $ | 31.31 | ||||
|
Fiscal 2009
|
||||||||
|
4th Quarter
|
$ | 42.31 | $ | 29.88 | ||||
|
3rd Quarter
|
$ | 37.80 | $ | 28.76 | ||||
|
2nd Quarter
|
$ | 32.83 | $ | 22.70 | ||||
|
1st Quarter
|
$ | 28.06 | $ | 16.95 | ||||
A quarterly dividend, of $0.175 per share, was paid in each of
March, June, September and December in each of Fiscal 2008,
Fiscal 2009 and Fiscal 2010. A&F expects to continue to pay
a quarterly dividend, subject to the Board of Directors’
review of the Company’s cash position and results of
operations.
As of March 18, 2011, there were approximately 4,350
stockholders of record. However, when including investors
holding shares in broker accounts under street name, active
associates of the Company who participate in A&F’s
stock purchase plan, and associates of the Company who own
shares through A&F-sponsored retirement plans, A&F
estimates that there are approximately 44,372 stockholders.
The following table provides information regarding the purchase
of shares of the Common Stock of A&F made by or on behalf
of A&F or any “affiliated purchaser” as defined
in
Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934, as amended, during
each fiscal month of the quarterly period ended January 29,
2011:
|
Total Number of
|
Maximum Number of
|
|||||||||||||||
|
Shares Purchased as
|
Shares that May Yet
|
|||||||||||||||
|
Total Number
|
Average
|
Part of Publicly
|
be Purchased under
|
|||||||||||||
|
of Shares
|
Price Paid
|
Announced Plans or
|
the Plans or
|
|||||||||||||
|
Period (Fiscal Month)
|
Purchased(1) | per Share(2) | Programs(3) | Programs(4) | ||||||||||||
|
October 31, 2010 through November 27, 2010
|
129,580 | $ | 42.52 | 112,600 | 10,565,200 | |||||||||||
|
November 28, 2010 through January 1, 2011
|
91,954 | $ | 54.09 | 89,200 | 10,476,000 | |||||||||||
|
January 2, 2011 through January 29, 2011
|
710,800 | $ | 52.45 | 710,800 | 9,765,200 | |||||||||||
|
Total
|
932,334 | $ | 51.23 | 912,600 | 9,765,200 | |||||||||||
28
Table of Contents
| (1) | An aggregate of 19,734 shares of Common Stock were deemed purchased during the quarterly period (thirteen-week period) ended January 29, 2011 representing shares which were withheld for tax payments due upon the vesting of employee restricted stock unit and restricted stock awards and exercise of employee stock appreciation rights. All other shares of A&F’s Common Stock purchased during the quarterly period were purchased pursuant to A&F’s publicly announced stock repurchase authorizations described in footnote 3 below. | |
| (2) | The average price paid per share includes broker commissions, as applicable. | |
| (3) | The reported shares were purchased pursuant to A&F’s publicly announced stock repurchase authorizations. On August 16, 2005, A&F announced the August 15, 2005 authorization by A&F’s Board of Directors to repurchase 6.0 million shares of A&F’s Common Stock. On November 21, 2007, A&F announced the November 20, 2007 authorization by A&F’s Board of Directors to repurchase 10.0 million shares of A&F’s Common Stock, in addition to the approximately 2.0 million shares of A&F’s Common Stock which remained available under the August 2005 authorization as of November 20, 2007. As of January 29, 2011, all of the shares authorized for repurchase under the August 2005 authorization had been repurchased. | |
| (4) | The number shown represents, as of the end of each period, the maximum number of shares of A&F’s Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorizations described in footnote 3 above. As of January 29, 2011, shares may only be repurchased under the November 20, 2007 authorization described in footnote 3 above. The shares may be purchased, from time-to-time, depending on market conditions. |
During Fiscal 2010, A&F repurchased approximately
1.6 million shares of A&F’s Common Stock in the
open market with a cost of approximately $76.2 million.
A&F did not repurchase any shares of A&F’s Common
Stock in the open market during Fiscal 2009. During Fiscal 2008,
A&F repurchased approximately 0.7 million shares of
A&F’s Common Stock in the open market with a cost of
approximately $50.0 million. Both the Fiscal 2010 and the
Fiscal 2008 repurchases were pursuant to authorizations of
A&F’s Board of Directors.
29
Table of Contents
The following graph shows the changes, over the five-year period
ended January 29, 2011 (the last day of A&F’s
Fiscal 2010), in the value of $100 invested in (i) shares
of A&F’s Common Stock; (ii) the
Standard & Poor’s 500 Stock Index (the
“S&P 500 Index”) and (iii) the
Standard & Poor’s Apparel Retail Composite Index
(the “S&P Apparel Retail Index”), including
reinvestment of dividends. The plotted points represent the
closing price on the last trading day of the fiscal year
indicated.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index
Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index
| * | $100 invested on 1/28/06 in stock or 1/31/06 in index, including reinvestment of dividends. | |
| Indexes calculated on month-end basis. | ||
| Copyright © 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. |
1
This
graph shall not be deemed to be “soliciting material”
or to be “filed” with the SEC or subject to SEC
Regulation 14A or to the liabilities of Section 18 of
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), except to the extent that A&F
specifically requests that the graph be treated as soliciting
material or specifically incorporates it by reference into a
filing under the Securities Act of 1933, as amended, or the
Exchange Act.
30
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA. |
ABERCROMBIE &
FITCH CO.
FINANCIAL SUMMARY
FINANCIAL SUMMARY
Summary
of Operations
(Information below excludes amounts related to discontinued
operations, except where otherwise noted)
| 2010 | 2009 | 2008 | 2007 | 2006(1) | ||||||||||||||||
| (Thousands, except per share and per square foot amounts, ratios and store and associate data) | ||||||||||||||||||||
|
Net Sales
|
$ | 3,468,777 | $ | 2,928,626 | $ | 3,484,058 | $ | 3,699,656 | $ | 3,284,176 | ||||||||||
|
Gross Profit
|
$ | 2,212,181 | $ | 1,883,598 | $ | 2,331,095 | $ | 2,488,166 | $ | 2,200,668 | ||||||||||
|
Operating Income
|
$ | 231,932 | $ | 117,912 | $ | 498,262 | $ | 778,909 | $ | 697,990 | ||||||||||
|
Net Income from Continuing Operations
|
$ | 150,283 | $ | 78,953 | $ | 308,169 | $ | 499,127 | $ | 446,525 | ||||||||||
|
Loss from Discontinued Operations, Net of
Tax
(2)
|
$ | — | $ | (78,699 | ) | $ | (35,914 | ) | $ | (23,430 | ) | $ | (24,339 | ) | ||||||
|
Net
Income
(2)
|
$ | 150,283 | $ | 254 | $ | 272,255 | $ | 475,697 | $ | 422,186 | ||||||||||
|
Dividends Declared Per Share
|
$ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.70 | ||||||||||
|
Net Income Per Share from Continuing Operations
|
||||||||||||||||||||
|
Basic
|
$ | 1.71 | $ | 0.90 | $ | 3.55 | $ | 5.72 | $ | 5.07 | ||||||||||
|
Diluted
|
$ | 1.67 | $ | 0.89 | $ | 3.45 | $ | 5.45 | $ | 4.85 | ||||||||||
|
Loss Per Share from Discontinued
Operations
(2)
|
||||||||||||||||||||
|
Basic
|
$ | — | $ | (0.90 | ) | $ | (0.41 | ) | $ | (0.27 | ) | $ | (0.28 | ) | ||||||
|
Diluted
|
$ | — | $ | (0.89 | ) | $ | (0.40 | ) | $ | (0.26 | ) | $ | (0.26 | ) | ||||||
|
Net Income Per
Share
(2)
|
||||||||||||||||||||
|
Basic
|
$ | 1.71 | $ | 0.00 | $ | 3.14 | $ | 5.45 | $ | 4.79 | ||||||||||
|
Diluted
|
$ | 1.67 | $ | 0.00 | $ | 3.05 | $ | 5.20 | $ | 4.59 | ||||||||||
|
Basic Weighted-Average Shares Outstanding
|
88,061 | 87,874 | 86,816 | 87,248 | 88,052 | |||||||||||||||
|
Diluted Weighted-Average Shares Outstanding
|
89,851 | 88,609 | 89,291 | 91,523 | 92,010 | |||||||||||||||
|
Other Financial Information
|
||||||||||||||||||||
|
Total Assets (including discontinued operations)
|
$ | 2,947,902 | $ | 2,821,866 | $ | 2,848,181 | $ | 2,567,598 | $ | 2,248,067 | ||||||||||
|
Return on Average
Assets
(3)
|
5 | % | 0 | % | 10 | % | 20 | % | 21 | % | ||||||||||
|
Working
Capital
(4)
|
$ | 874,417 | $ | 776,311 | $ | 622,213 | $ | 585,575 | $ | 571,089 | ||||||||||
|
Current
Ratio
(5)
|
2.56 | 2.73 | 2.38 | 2.08 | 2.12 | |||||||||||||||
|
Net Cash Provided by Operating
Activities
(2)
|
$ | 391,789 | $ | 395,487 | $ | 491,031 | $ | 817,524 | $ | 582,171 | ||||||||||
|
Capital Expenditures
|
$ | 160,935 | $ | 175,472 | $ | 367,602 | $ | 403,345 | $ | 403,476 | ||||||||||
|
Long-Term Debt
|
$ | 68,566 | $ | 71,213 | $ | 100,000 | — | — | ||||||||||||
|
Stockholders’ Equity (including discontinued operations)
|
$ | 1,890,784 | $ | 1,827,917 | $ | 1,845,578 | $ | 1,618,313 | $ | 1,405,297 | ||||||||||
|
Return on Average Stockholders’
Equity
(6)
|
8 | % | 0 | % | 16 | % | 31 | % | 35 | % | ||||||||||
|
Comparable Store
Sales
(7)
|
7 | % | (23 | )% | (13 | )% | (1 | )% | 1 | % | ||||||||||
|
Net Retail Sales Per Average Gross Square Foot
|
$ | 390 | $ | 339 | $ | 432 | $ | 503 | $ | 509 | ||||||||||
|
Stores at End of Year and Average Associates
|
||||||||||||||||||||
|
Total Number of Stores Open
|
1,069 | 1,096 | 1,097 | 1,013 | 930 | |||||||||||||||
|
Gross Square Feet
|
7,756 | 7,848 | 7,760 | 7,133 | 6,563 | |||||||||||||||
|
Average Number of
Associates
(8)
|
83,000 | 83,000 | 96,200 | 94,600 | 80,100 | |||||||||||||||
| (1) | Fiscal 2006 was a fifty-three week year. | |
| (2) | Includes results of operations from RUEHL branded stores and related direct-to-consumer operations. Results from discontinued operations were immaterial in Fiscal 2010. |
31
Table of Contents
| (3) | Return on Average Assets is computed by dividing net income (including discontinued operations) by the average asset balance (including discontinued operations). | |
| (4) | Working Capital is computed by subtracting current liabilities (including discontinued operations) from current assets (including discontinued operations). | |
| (5) | Current Ratio is computed by dividing current assets (including discontinued operations) by current liabilities (including discontinued operations). | |
| (6) | Return on Average Stockholders’ Equity is computed by dividing net income (including discontinued operations) by the average stockholders’ equity balance (including discontinued operations). | |
| (7) | A store is included in comparable store sales when it has been open as the same brand at least one year and its square footage has not been expanded or reduced by more than 20% within the past year. Note Fiscal 2006 comparable store sales are compared to store sales for the comparable fifty-three weeks ended February 4, 2006. | |
| (8) | Includes employees from RUEHL operations. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The Company’s fiscal year ends on the Saturday closest to
January 31, typically resulting in a fifty-two week year,
but occasionally giving rise to an additional week, resulting in
a fifty-three week year. A store is included in comparable store
sales when it has been open as the same brand at least one year
and its square footage has not been expanded or reduced by more
than 20% within the past year.
For purposes of this “ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS,” the fifty-two week period ended
January 29, 2011 is compared to the fifty-two week period
ended January 30, 2010 and the fifty-two week period ended
January 30, 2010 is compared to the fifty-two week period
ended January 31, 2009.
The Company had net sales of $3.469 billion for the
fifty-two weeks ended January 29, 2011, up 18.4% from
$2.929 billion for the fifty-two weeks ended
January 30, 2010. Operating income for Fiscal 2010 was
$231.9 million, which was up from $117.9 million in
Fiscal 2009. Net income from continuing operations was
$150.3 million and net income per diluted share from
continuing operations was $1.67 in Fiscal 2010, compared to net
income from continuing operations of $79.0 million and net
income per diluted share from continuing operations of $0.89 in
Fiscal 2009.
Net income was $150.3 million and net income per diluted
share was $1.67 in Fiscal 2010, compared to net income of
$0.3 million and net income per diluted share of $0.00 in
Fiscal 2009.
Excluding store-related asset impairment charges and exit
charges associated with domestic store closures, the Company
reported non-GAAP net income per diluted share of $2.05 for the
fifty-two weeks ended January 29, 2011. Excluding the net
loss from discontinued operations and store-related asset
impairment charges, the Company reported non-GAAP net income per
diluted share of $1.12 for the fifty-two weeks ended
January 30, 2010.
The Company believes that the non-GAAP financial measures are
useful to investors as they provide the ability to measure the
Company’s operating performance and compare it against that
of prior periods without reference to the Consolidated
Statements of Operations and Comprehensive Income impact of
non-cash
32
Table of Contents
store-related asset impairment charges, exit charges associated
with domestic store closures and the loss from discontinued
operations, net of tax. These non-GAAP financial measures should
not be used as alternatives to net income per diluted share or
as indicators of the ongoing operating performance of the
Company and are also not intended to supersede or replace the
Company’s GAAP financial measures. The table below
reconciles the GAAP financial measures to the non-GAAP financial
measures discussed above.
|
Fifty-Two Weeks Ended
|
January 29, 2011 | January 30, 2010 | January 31, 2009 | |||||||||
|
Net income per diluted share on a GAAP basis
|
$ | 1.67 | $ | 0.00 | $ | 3.05 | ||||||
|
Plus: Loss from discontinued operations, net of
tax
(1)
|
— | $ | 0.89 | $ | 0.40 | |||||||
|
Plus: Store-related asset impairment
charges
(2)
|
$ | 0.34 | $ | 0.23 | $ | 0.06 | ||||||
|
Plus: Store closure
charges
(3)
|
$ | 0.03 | — | — | ||||||||
|
Net income per diluted share on a non-GAAP basis
|
$ | 2.05 | $ | 1.12 | $ | 3.51 | ||||||
| (1) | Loss from discontinued operations, net of tax, per diluted share, includes operating loss of $0.12 and $0.24, exit charges of $0.40 and $0.00, and impairment charges of $0.37 and $0.16 for the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively. Loss from discontinued operations, net of tax, per diluted share relate to Ruehl, which ceased operations during the fourth quarter of 2009. | |
| (2) | Store-related asset impairment charges relate to stores whose asset carrying value exceeded the fair value. For the fifty-two week period ended January 29, 2011, the charges were associated with two Abercrombie & Fitch, two abercrombie kids, nine Hollister and 13 Gilly Hicks stores. For the fifty-two week period ended January 30, 2010, the charges were associated with 34 Abercrombie & Fitch, 46 abercrombie kids and 19 Hollister stores. For the fifty-two week period ended January 31, 2009, the charges were associated with 11 Abercrombie & Fitch, six abercrombie kids and three Hollister stores. | |
| (3) | For the fifty-two week period ended January 29, 2011, store closure charges were associated with the closure of 64 stores, primarily related to lease obligations. |
Net cash provided by operating activities, the Company’s
primary source of liquidity, was $391.8 million for Fiscal
2010. This source of cash was primarily driven by results from
operations adjusted for non-cash items including depreciation
and amortization and asset impairment charges. The Company used
$160.9 million of cash for capital expenditures and had
proceeds from the sale of marketable securities of
$84.5 million during Fiscal 2010. The Company also
repurchased $76.2 million of Common Stock and paid
dividends totaling $61.7 million during Fiscal 2010. As of
January 29, 2011, the Company had $826.4 million in
cash and equivalents, and outstanding Japanese Yen-denominated
debt of $43.8 million and stand-by letters of credit of
$3.0 million.
33
Table of Contents
The following data represents the amounts shown in the
Company’s Consolidated Statements of Operations and
Comprehensive Income for the last three fiscal years, expressed
as a percentage of net sales:
| 2010 | 2009 | 2008 | ||||||||||
|
NET SALES
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of Goods Sold
|
36.2 | 35.7 | 33.1 | |||||||||
|
GROSS PROFIT
|
63.8 | 64.3 | 66.9 | |||||||||
|
Stores and Distribution Expense
|
45.8 | 48.7 | 41.2 | |||||||||
|
Marketing, General and Administrative Expense
|
11.6 | 12.1 | 11.6 | |||||||||
|
Other Operating Income, Net
|
(0.3 | ) | (0.5 | ) | (0.3 | ) | ||||||
|
OPERATING INCOME
|
6.7 | 4.0 | 14.3 | |||||||||
|
Interest Expense (Income), Net
|
0.1 | (0.1 | ) | (0.3 | ) | |||||||
|
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
|
6.6 | 4.1 | 14.6 | |||||||||
|
Tax Expense from Continuing Operations
|
2.3 | 1.4 | 5.8 | |||||||||
|
Net Income from Continuing Operations
|
4.3 | 2.7 | 8.8 | |||||||||
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
|
— | (2.7 | ) | (1.0 | ) | |||||||
|
NET INCOME
|
4.3 | % | 0.0 | % | 7.8 | % | ||||||
34
Table of Contents
FINANCIAL
SUMMARY
The following summarized financial and statistical data compares
Fiscal 2010 to Fiscal 2009 and Fiscal 2009 to Fiscal 2008:
| 2010 | 2009 | 2008 | ||||||||||||||||||
|
Net sales by brand (thousands)
|
$ | 3,468,777 | $ | 2,928,626 | $ | 3,484,058 | ||||||||||||||
|
Abercrombie & Fitch
|
$ | 1,493,101 | $ | 1,272,287 | $ | 1,531,480 | ||||||||||||||
|
abercrombie
|
$ | 382,579 | $ | 343,164 | $ | 420,518 | ||||||||||||||
|
Hollister
|
$ | 1,552,814 | $ | 1,287,241 | $ | 1,514,204 | ||||||||||||||
|
Gilly Hicks**
|
$ | 40,283 | $ | 25,934 | $ | 17,856 | ||||||||||||||
|
Increase (decrease) in net sales from prior year
|
18 | % | (16 | )% | (6 | )% | ||||||||||||||
|
Abercrombie & Fitch
|
17 | % | (17 | )% | (7 | )% | ||||||||||||||
|
abercrombie
|
11 | % | (18 | )% | (11 | )% | ||||||||||||||
|
Hollister
|
21 | % | (15 | )% | (5 | )% | ||||||||||||||
|
Gilly Hicks
|
55 | % | 45 | % | NM | |||||||||||||||
|
Increase (decrease) in comparable store sales*
|
7 | % | (23 | )% | (13 | )% | ||||||||||||||
|
Abercrombie & Fitch
|
9 | % | (19 | )% | (8 | )% | ||||||||||||||
|
abercrombie
|
5 | % | (23 | )% | (19 | )% | ||||||||||||||
|
Hollister
|
6 | % | (27 | )% | (17 | )% | ||||||||||||||
|
Net store sales per average store (in thousands)
|
$ | 2,796 | $ | 2,412 | $ | 3,041 | ||||||||||||||
|
Abercrombie & Fitch
|
$ | 3,772 | $ | 3,193 | $ | 3,878 | ||||||||||||||
|
abercrombie
|
$ | 1,616 | $ | 1,453 | $ | 1,823 | ||||||||||||||
|
Hollister
|
$ | 2,638 | $ | 2,299 | $ | 2,962 | ||||||||||||||
|
Net store sales per average gross square foot
|
$ | 390 | $ | 339 | $ | 432 | ||||||||||||||
|
Abercrombie & Fitch
|
$ | 419 | $ | 359 | $ | 438 | ||||||||||||||
|
abercrombie
|
$ | 342 | $ | 313 | $ | 397 | ||||||||||||||
|
Hollister
|
$ | 384 | $ | 338 | $ | 442 | ||||||||||||||
|
Change in transactions per average store
|
17 | % | (14 | )% | (16 | )% | ||||||||||||||
|
Abercrombie & Fitch
|
15 | % | (14 | )% | (11 | )% | ||||||||||||||
|
abercrombie
|
13 | % | (14 | )% | (20 | )% | ||||||||||||||
|
Hollister
|
17 | % | (16 | )% | (18 | )% | ||||||||||||||
|
Change in average store transaction value
|
(1 | )% | (7 | )% | 2 | % | ||||||||||||||
|
Abercrombie & Fitch
|
3 | % | (4 | )% | 5 | % | ||||||||||||||
|
abercrombie
|
(1 | )% | (7 | )% | 1 | % | ||||||||||||||
|
Hollister
|
(2 | )% | (8 | )% | 1 | % | ||||||||||||||
|
Change in average units per store transaction
|
8 | % | 0 | % | 0 | % | ||||||||||||||
|
Abercrombie & Fitch
|
7 | % | (2 | )% | 0 | % | ||||||||||||||
|
abercrombie
|
11 | % | (1 | )% | (2 | )% | ||||||||||||||
|
Hollister
|
7 | % | 0 | % | (1 | )% | ||||||||||||||
|
Change in average unit retail sold, including DTC
|
(9 | )% | (7 | )% | 2 | % | ||||||||||||||
|
Abercrombie & Fitch
|
(5 | )% | (2 | )% | 5 | % | ||||||||||||||
|
abercrombie
|
(12 | )% | (7 | )% | 3 | % | ||||||||||||||
|
Hollister
|
(9 | )% | (8 | )% | 1 | % | ||||||||||||||
| * | A store is included in comparable store sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year. | |
| ** | Net sales for the fifty-two week periods ended January 29, 2011, January 30, 2010 and January 31, 2009 reflect the activity of 19, 16 and 14 stores, respectively. Operational data was deemed immaterial for inclusion in the table above. |
35
Table of Contents
CURRENT
TRENDS AND OUTLOOK
During Fiscal 2010, we exceeded our objectives in terms of
sales, operating income and net income per share, and did this
while continuing to focus on the long-term drivers of the
business.
We have a stated objective of increasing our operating margin
back to historical levels of around 15% by Fiscal 2012, and have
identified previously a number of factors comprising our
“roadmap” to achieving this goal.
First, as one of these factors, we had an original objective of
returning our gross margin to our peak level of around 67% by
2012. Due to significant sourcing cost pressures, we no longer
believe this objective is realistic. The Company expects to
offset an element of the sourcing cost pressure through
increased ticket prices, and the gross margin rate should also
benefit from continued international growth; however, there is
significant uncertainty about consumer reaction to price
increases, and ongoing cost increases are likely to continue to
put downward pressure on the Company’s gross margin rate.
As we manage through this issue, the Company will continue to
take a long-term approach, and will not sacrifice quality to
achieve cost reductions.
Second, improving average domestic store productivity levels,
both through same store sales growth and as a result of the
closure of underperforming stores. During 2010, we achieved same
store sales growth of 7%, and the Company is targeting same
store sales increases at this level or greater in each of 2011
and 2012. In addition, during 2010, we closed 64 domestic
stores, predominantly at the end of the year, and expect
approximately a further 50 closings during 2011, predominantly
at the end of the year.
Third, achieving significantly profitable international growth.
In Fiscal 2011, we are seeking to accelerate international
growth. We expect to open up to 40 international mall-based
Hollister stores, including our first stores in mainland China
and Hong Kong. We also plan to open five Abercrombie &
Fitch flagship stores in Paris, Madrid, Dusseldorf, Brussels and
Singapore. The Company’s flagship store in Dublin is now
expected to open in 2012.
Fourth, sustaining strong growth rates in our
direct-to-consumer
business, which should benefit from multiple investments we are
making in the business and from our growing international
presence.
Fifth, improving the productivity of the Gilly Hicks brand,
which the Company believes is a necessary precursor to expanding
the store count for the brand and having a path to profitability.
Finally, maintaining tight control over expenses and seeking
greater efficiencies, an example of which is our plan to
consolidate our two domestic distribution centers. The
consolidation is expected to be completed by mid-2012 and is
expected to facilitate the sale of the second distribution
center and result in reduced operational costs.
All of these factors interplay, so that over-achievement with
respect to one or more factors may offset or counterbalance a
shortfall or under-achievement on other objectives. However, in
the event of a significant shortfall against one objective, such
as gross margin, it is unlikely that the overall roadmap
objective will be achieved.
During Fiscal 2011, based on new store opening plans and other
capital expenditures, the Company expects total capital
expenditures to be approximately $300 million to
$350 million, with the upper end of the range being subject
to the Company achieving the higher end of its range of
potential new store openings, including commitments for 2012
openings.
36
Table of Contents
The following measurements are among the key business indicators
reviewed by various members of management to gauge the
Company’s results:
| • | Comparable store sales by brand, by product, and by store, defined as year-over-year sales for a store that has been open as the same brand at least one year and its square footage has not been expanded or reduced by more than 20% within the past year; | |
| • | Direct-to-consumer sales growth; | |
| • | International, and domestic and flagship store performance; | |
| • | Store productivity; | |
| • | Initial Mark Up (“IMU”); | |
| • | Markdown rate; | |
| • | Gross profit rate; | |
| • | Selling margin, defined as sales price less original cost, by brand and by product category; | |
| • | Stores and distribution expense as a percentage of net sales; | |
| • | Marketing, general and administrative expense as a percentage of net sales; | |
| • | Operating income and operating income as a percentage of net sales; | |
| • | Net income; | |
| • | Inventory per gross square foot; | |
| • | Cash flow and liquidity determined by the Company’s current ratio and cash provided by operations; and | |
| • | Store metrics such as sales per gross square foot, sales per selling square foot, average unit retail, average number of transactions per store, average transaction values, store contribution (defined as store sales less direct costs of running the store), and average units per transaction. |
While not all of these metrics are disclosed publicly by the
Company due to the proprietary nature of the information, the
Company publicly discloses and discusses many of these metrics
as part of its “Financial Summary” and in several
sections within this Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
FISCAL
2010 COMPARED TO FISCAL 2009
Net
Sales
Net sales for Fiscal 2010 were $3.469 billion, an increase
of 18% from Fiscal 2009 net sales of $2.929 billion.
The net sales increase was attributable to a 7% increase in
comparable store sales, a 40% increase in the
direct-to-consumer
business, including shipping and handling revenue, and new
stores, primarily international. The impact of foreign currency
on sales for Fiscal 2010 and Fiscal 2009 was less than 1% of net
sales.
Comparable store sales by brand for Fiscal 2010 were as follows:
Abercrombie & Fitch increased 9%, with women’s
increasing by a high single digit percent and men’s
increasing by a low double digit.
37
Table of Contents
abercrombie kids increased 5%, with each of girls and guys
increasing by a mid single digit. Hollister increased 6%, with
bettys increasing by a mid single digit and dudes increasing by
a high single digit.
On a comparable store sales basis, Europe was the strongest
performing region, while Canada and Japan were the weakest.
Within the U.S., flagship and tourist stores outperformed
non-tourist stores, though all store categories experienced
positive comparable store sales.
For Fiscal 2010, total Company international net sales,
including
direct-to-consumer
net sales, increased 79% to $646.8 million.
Direct-to-consumer
net merchandise sales in Fiscal 2010 were $352.5 million,
an increase of 41% from Fiscal 2009
direct-to-consumer
net merchandise sales of $249.4 million. Shipping and
handling revenue for the corresponding periods was
$52.5 million in Fiscal 2010 and $40.7 million in
Fiscal 2009. The
direct-to-consumer
business, including shipping and handling revenue, accounted for
11.7% of total net sales in Fiscal 2010 compared to 9.9% in
Fiscal 2009.
For Fiscal 2010, from a comparable store sales perspective
across all brands, the masculine categories out-paced the
feminine categories. From a merchandise classification
standpoint, woven shirts, fleece, and outerwear were stronger
performing categories for the male business while jeans and
graphics were the weaker performing categories. In the female
business, woven shirts, dresses, and fleece were stronger
performing categories, while knit tops and jeans were weaker
performing categories.
Gross
Profit
Gross profit during Fiscal 2010 was $2.212 billion compared
to $1.884 billion during Fiscal 2009. The gross profit rate
(gross profit divided by net sales) for Fiscal 2010 was 63.8%,
down 50 basis points from the Fiscal 2009 rate of 64.3%.
The decrease in the gross profit rate for Fiscal 2010 was
primarily driven by a 9% decrease in average unit retail, which
was partially offset by a reduction in average unit cost.
Stores
and Distribution Expense
Stores and distribution expense for Fiscal 2010 was
$1.590 billion compared to $1.426 billion in Fiscal
2009. The stores and distribution expense rate (stores and
distribution expense divided by net sales) for Fiscal 2010 was
45.8% compared to 48.7% in Fiscal 2009.
Stores and distribution expense for the fifty-two week period
ended January 29, 2011 included store-related asset
impairment charges associated with 26 stores of
$50.6 million, or 1.5% of net sales, and store exit charges
of $4.4 million, or 0.1% of net sales, associated with the
closure of 64 domestic stores during the year. For the fifty-two
weeks ended January 30, 2010, stores and distribution
expense included store-related asset impairment charges
associated with 99 stores of $33.2 million, or 1.1% of net
sales.
The decrease in stores and distribution expense rate for Fiscal
2010 was primarily driven by lower store occupancy and payroll
costs as a percentage of net sales.
Total
direct-to-consumer
expense included in stores and distribution expense were
$64.8 million for Fiscal 2010, compared to
$50.1 million in Fiscal 2009.
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Table of Contents
Marketing,
General and Administrative Expense
Marketing, general and administrative expense during Fiscal 2010
was $400.8 million compared to $353.3 million in
Fiscal 2009. For Fiscal 2010, the marketing, general and
administrative expense rate (marketing, general and
administrative expense divided by net sales) was 11.6%, compared
to 12.1% for Fiscal 2009.
The increase in marketing, general and administrative expense
for Fiscal 2010 was primarily due to increases in compensation
and benefits, including incentive and equity compensation, and
net legal expense.
Other
Operating Income, Net
Other operating income, net for Fiscal 2010 was
$10.0 million compared to $13.5 million for Fiscal
2009.
The decrease for Fiscal 2010 was driven primarily by lower net
gains from foreign currency denominated transactions compared to
Fiscal 2009. In Fiscal 2009, other operating income also
benefited from a reduction of an
other-than-temporary
impairment of $9.2 million related to the Company’s
trading auction rate securities, partially offset by a reduction
of a related put option of $7.7 million.
Interest
Expense (Income), Net and Tax Expense from Continuing
Operations
Fiscal 2010 interest expense was $7.8 million, offset by
interest income of $4.4 million, compared to interest
income of $8.2 million, offset by interest expense of
$6.6 million for Fiscal 2009. The decrease in interest
income was primarily the result of a lower average rate of
return on investments. The increase in interest expense was due
primarily to imputed interest expense related to certain store
lease transactions and higher fees associated with the unsecured
amended credit agreement.
The effective tax rate from continuing operations for Fiscal
2010 was 34.3% compared to 33.9% for Fiscal 2009, in each year
benefiting from foreign operations.
Loss
from Discontinued Operations, Net of Tax
The Company completed the closure of its RUEHL branded stores
and related
direct-to-consumer
operations in the fourth quarter of Fiscal 2009. Accordingly,
the after-tax operating results appear in Loss from Discontinued
Operations, Net of Tax on the Consolidated Statements of
Operations and Comprehensive Income for all years presented.
Results from discontinued operations, net of tax, were
immaterial for Fiscal 2010. Loss from discontinued operations,
net of tax, was $78.7 million for Fiscal 2009.
Refer to Note 16, “
Discontinued
Operations,
” of the Notes to Consolidated Financial
Statements included in “ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA” of this Annual Report on
Form 10-K
for further discussion.
Net
Income and Net Income per Diluted Share
Net income for Fiscal 2010 was $150.3 million compared to
$0.3 million for Fiscal 2009. Net income per diluted share
for Fiscal 2010 was $1.67 compared to $0.00 for Fiscal 2009. Net
income per diluted share for Fiscal 2010 included store-related
asset impairment charges of approximately $0.34 per diluted
share associated with 26 stores and store exit charges of
approximately $0.03 per diluted share associated with the
closure of 64 domestic stores. Net income per diluted share for
Fiscal 2009 included store-related asset
39
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impairment charges of approximately $0.23 per diluted share
associated with 99 stores and a loss per diluted share from
discontinued operations, net of tax of approximately $0.89.
Refer to GAAP reconciliation table in “ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS” of this Annual Report on
Form 10-K
for a reconciliation of net income per diluted share on a GAAP
basis to net income per diluted share on a non-GAAP basis,
excluding store-related asset impairment charges, store closure
charges and loss from discontinued operations, net of tax.
FISCAL
2009 COMPARED TO FISCAL 2008
Net
Sales
Net sales for Fiscal 2009 were $2.929 billion, a decrease
of 15.9% from Fiscal 2008 net sales of $3.484 billion.
The net sales decrease was attributed primarily to a 23%
decrease in comparable store sales and a 5.6% decrease in net
direct-to-consumer
sales, including shipping and handling revenue.
Comparable store sales by brand for Fiscal 2009 were as follows:
Abercrombie & Fitch decreased 19% with men’s
decreasing by a low double-digit percent and women’s
decreasing by a mid twenty; abercrombie kids decreased 23% with
boys’ decreasing by a mid teen and girls’ decreasing
by a mid twenty; and Hollister decreased 27% with dudes’
decreasing by a high teen and bettys’ decreasing by a low
thirty.
For Fiscal 2009, total Company international net sales,
including
direct-to-consumer
net sales, increased 37% to $362.5 million.
Direct-to-consumer
net merchandise sales in Fiscal 2009 were $249.4 million, a
decrease of 5.6% from Fiscal 2008 net merchandise sales of
$264.3 million. Shipping and handling revenue was
$40.7 million in Fiscal 2009 and $42.9 million in
Fiscal 2008. The
direct-to-consumer
business, including shipping and handling revenue, accounted for
9.9% of total net sales in Fiscal 2009 compared to 8.8% of total
net sales in Fiscal 2008.
On a regional basis for Fiscal 2009, comparable store sales were
down in all U.S. regions and Canada. Comparable store sales
were positive in the United Kingdom.
For Fiscal 2009, from a comparable store sales perspective
across all brands, the masculine categories out-paced the
feminine categories. From a merchandise classification
standpoint, across all brands, for the male business, fragrance
and sweaters were stronger performing categories, while knit
tops and graphic tees were the weaker performing categories. For
the female business, woven shirts and dresses were stronger
performing categories, while sweaters and knit tops were weaker
categories.
Gross
Profit
Gross profit during Fiscal 2009 decreased to $1.884 billion
from $2.331 billion in Fiscal 2008. The gross profit rate
for Fiscal 2009 was 64.3% versus 66.9% the previous year, a
decrease of 260 basis points.
The decrease in the gross profit rate was primarily driven by a
lower average unit retail, partially offset by a reduction in
average unit cost.
Stores
and Distribution Expense
Stores and distribution expense for Fiscal 2009 was
$1.426 billion compared to $1.436 billion in Fiscal
2008. For Fiscal 2009, the stores and distribution expense rate
was 48.7% compared to 41.2% for Fiscal 2008.
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Stores and distribution expense included store-related asset
impairment charges associated with 99 stores of
$33.2 million, or 1.1% of net sales, for the fifty-two
weeks ended January 30, 2010 and store-related asset
impairment charges associated with 20 stores of
$8.3 million, or 0.2% of net sales for the fifty-two weeks
ended January 31, 2009. Excluding the effect of impairment
charges, the increase in the stores and distribution expense
rate was primarily attributable to higher store occupancy costs,
including rent, depreciation and other occupancy costs.
Variable
direct-to-consumer
expenses included in stores and distribution expense were
$50.1 million for Fiscal 2009, compared to
$60.0 million in Fiscal 2008.
Marketing,
General and Administrative Expense
Marketing, general and administrative expense for Fiscal 2009
decreased 12.8% to $353.3 million compared to
$405.2 million in Fiscal 2008.
The decrease in expense was related to reductions in employee
compensation and benefits, travel, and outside services. The
marketing, general and administrative expense rate was 12.1% for
Fiscal 2009, an increase of 50 basis points compared to
11.6% for Fiscal 2008.
Other
Operating Income, Net
Other operating income for Fiscal 2009 was $13.5 million
compared to $8.8 million for Fiscal 2008.
The increase was primarily driven by gains on foreign currency
transactions for Fiscal 2009 compared to losses on foreign
currency transactions for Fiscal 2008, as well as an increase in
income related to gift cards for which the Company has
determined the likelihood of redemption to be remote. In Fiscal
2009, other operating income also benefited from a reduction of
other-than-temporary
impairments of $9.2 million related to the Company’s
trading auction rate securities, partially offset by a reduction
of a related put option of $7.7 million as compared to an
other-than-temporary
impairment charge of $14.0 million related to the
Company’s trading auction rate securities, partially offset
by a gain on a related put option of $12.3 million in
Fiscal 2008.
Interest
Income, Net and Income Tax Expense
Fiscal 2009 interest income was $8.2 million and interest
expense was $6.6 million compared to interest income of
$14.8 million and interest expense was $3.4 million
for Fiscal 2008. The decrease in interest income was due
primarily to a lower average rate of return on investments. The
increase in interest expense was due primarily to imputed
interest expense related to certain store lease transactions.
The income tax expense rate for continuing operations for Fiscal
2009 was 33.9% compared to 39.5% for Fiscal 2008. The Fiscal
2009 rate benefited from foreign operations. Additionally,
Fiscal 2008 included a $9.9 million charge related to the
execution of the Chairman and Chief Executive Officer’s new
employment agreement, which resulted in certain non-deductible
amounts pursuant to Section 162(m) of the Internal Revenue
Code.
Loss
from Discontinued Operations, Net of Tax
The Company completed the closure of its RUEHL branded stores
and related
direct-to-consumer
operations in the fourth quarter of Fiscal 2009. Accordingly,
the after-tax operating results appear in Loss from Discontinued
Operations, Net of Tax on the Consolidated Statements of
Operations and Comprehensive
41
Table of Contents
Income for all fiscal years presented. Loss from discontinued
operations, net of tax, was $78.7 million and
$35.9 million for Fiscal 2009 and Fiscal 2008,
respectively. Loss from discontinued operations, net of tax
included after-tax charges of $34.2 million associated with
the closure of the RUEHL business for Fiscal 2009, and after-tax
charges of $31.4 million and $13.6 million associated
with the impairment of RUEHL-related store assets for Fiscal
2009 and Fiscal 2008, respectively.
Refer to Note 16, “
Discontinued
Operations
” of the Notes to Consolidated Financial
Statements included in “ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA” of this Annual Report on
Form 10-K
for further discussion.
Net
Income and Net Income per Diluted Share
Net income for Fiscal 2009 was $0.3 million compared to
$272.3 million for Fiscal 2008. Net income per diluted
share was $0.00 in Fiscal 2009 versus $3.05 in Fiscal 2008. Net
income per diluted share included $0.89 of net loss per diluted
share from discontinued operations and an after-tax charge of
approximately $0.23 per diluted share associated with the
impairment of store-related assets for Fiscal 2009 and $0.40 of
net loss per diluted share from discontinued operations and an
after-tax charge of approximately $0.06 per diluted share
associated with the impairment of store-related assets for
Fiscal 2008. Refer to GAAP reconciliation table in
“ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this
Annual Report on
Form 10-K
for a reconciliation of net income per diluted share on a GAAP
basis to net income per diluted share on a non-GAAP basis,
excluding store-related asset impairment charges, store closure
charges and loss from discontinued operations, net of tax.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
Historical
Sources and Uses of Cash
Seasonality
of Cash Flows
The retail business has two principal selling seasons: the
Spring season which includes the first and second fiscal
quarters (“Spring”) and the Fall season which includes
the third and fourth fiscal quarters (“Fall”). As is
typical in the apparel industry, the Company experiences its
greatest sales activity during the Fall season due to
Back-to-School
and Holiday sales periods, particularly in the United States.
The Company relies on excess operating cash flows, which are
largely generated in the Fall season, to fund operating expenses
and to reinvest in the business to support future growth
throughout the year. The Company also has available a credit
facility as a source for additional funding.
Credit
Agreement
As of March 18, 2011, the Company had $305.6 million
available (less outstanding letters of credit of
$2.9 million) under its unsecured Amended Credit Agreement
(as amended in June 2009). The Company had $43.8 million
and $50.9 million outstanding under its unsecured Amended
Credit Agreement on January 29, 2011 and January 30,
2010, respectively, denominated in Japanese Yen. The average
interest rate for Fiscal 2010 was 2.7%. The average interest
rate for Fiscal 2009 was 2.0%.
The Amended Credit Agreement requires that the Leverage Ratio
not be greater than 3.75 to 1.00 at the end of each testing
period. The Company’s Leverage Ratio was 2.43 as of
January 29, 2011. The Amended Credit Agreement also
requires that the Coverage Ratio for A&F and its
subsidiaries on a consolidated basis
42
Table of Contents
of (i) Consolidated EBITDAR for the trailing
four-consecutive-fiscal-quarter period to (ii) the sum of,
without duplication, (x) net interest expense for such
period, (y) scheduled payments of long-term debt due within
twelve months of the date of determination and (z) the sum
of minimum rent and contingent store rent, not be less than 1.75
to 1.00 at January 29, 2011. The minimum Coverage Ratio
varies over time based on the terms set forth in the Amended
Credit Agreement. The Amended Credit Agreement provides an add
back to Consolidated EBITDAR for the following items, among
others, (a) recognized losses arising from investments in
certain auction rate securities to the extent such losses do not
exceed a defined level of impairments for those investments,
(b) non-cash charges in an amount not to exceed
$50 million related to the closure of RUEHL branded stores
and related
direct-to-consumer
operations, (c) non-recurring cash charges in an aggregate
amount not to exceed $61 million related to the closure of
RUEHL branded stores and related
direct-to-consumer
operations, (d) additional non-recurring non-cash charges
in an amount not to exceed $20 million in the aggregate
over the trailing four-consecutive-fiscal-quarter period and
(e) other non-recurring cash charges in an amount not to
exceed $10 million in the aggregate over the trailing
four-consecutive-fiscal-quarter periods. The Company’s
Coverage Ratio was 2.51 as of January 29, 2011. The Amended
Credit Agreement also limited the Company’s consolidated
capital expenditures to $325 million in Fiscal 2010 plus
$99.5 million representing the unused portion of the
allowable capital expenditures from Fiscal 2009. There is no
limit for capital expenditures in Fiscal 2011. The Company was
in compliance with the applicable ratio requirements and other
covenants at January 29, 2011.
The unsecured Amended Credit Agreement is described in
Note 14, “
Long-Term Debt
” of the Notes to
Consolidated Financial Statements included in “ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual
Report on
Form 10-K.
As a result of adjustments to vendor payment terms, there were
no trade letters of credit outstanding at January 29, 2011.
Trade letters of credit totaling approximately
$35.9 million were outstanding on January 30, 2010.
Stand-by letters of credit totaling approximately
$3.0 million and $14.1 million were outstanding on
January 29, 2011 and January 30, 2010, respectively.
The stand-by letters of credit are set to expire primarily
during the third quarter of Fiscal 2011. To date, no beneficiary
has drawn upon the stand-by letters of credit.
If circumstances occur that would lead to the Company failing to
meet the covenants under the Amended Credit Agreement and the
Company is unable to obtain a waiver or amendment, an event of
default would result and the lenders could declare outstanding
borrowings immediately due and payable. The Company believes it
is likely that it would either obtain a waiver or amendment in
advance of a default, or would have sufficient cash available to
repay borrowings in the event a waiver was not obtained.
Operating
Activities
Net cash provided by operating activities, the Company’s
primary source of liquidity, was $391.8 million for Fiscal
2010 compared to $395.5 million for Fiscal 2009. In Fiscal
2010, an increase in net income was off-set by an increase in
inventory to support increased sales in Fiscal 2010 as compared
to a reduction in inventory in Fiscal 2009 in response to
declining sales. The timing of income tax payments and Ruehl
exit payments in 2010 also contributed to the decrease in cash
provided by operating activities.
Net cash provided by operating activities was
$395.5 million for Fiscal 2009 compared to
$491.0 million for Fiscal 2008. The decrease in cash
provided by operating activities was primarily driven by a
reduction in net income for Fiscal 2009 compared to Fiscal 2008,
adjusted for non-cash impairment charges. Operating cash flows
for Fiscal 2009 included payments of approximately
$22.6 million related primarily to lease termination
agreements associated with the closure of RUEHL branded stores
and related
direct-to-consumer
43
Table of Contents
operations. Additionally, Fiscal 2009 operating cash flows
benefited from a reduction in inventory in reaction to the
declining sales trend, partially offset by an increase in lease
related assets, including lease deposits and prepaid rent
associated with new flagship stores.
Investing
Activities
Cash outflows from investing activities in Fiscal 2010, Fiscal
2009 and Fiscal 2008 were used primarily for capital
expenditures related to new store construction and information
technology investments. Fiscal 2010 cash outflows for capital
expenditures were comparable to Fiscal 2009. The decrease in
Fiscal 2009 capital expenditures compared to Fiscal 2008 related
primarily to a reduction in new domestic mall-based store
openings in Fiscal 2009. The Company also had cash outflows for
the purchase of trust-owned life insurance policies and cash
inflows from the sale of marketable securities.
Financing
Activities
In Fiscal 2010, financing activities consisted primarily of the
repurchase of A&F’s Common Stock, the payments of
dividends, proceeds associated with the exercise of share-based
compensation awards and repayment of borrowings denominated in
Japanese Yen under the Company’s unsecured credit
agreement. In Fiscal 2009, financing activities consisted of
repayment of $100.0 million borrowed under the
Company’s unsecured credit agreement, denominated in
U.S. Dollars, and separate borrowings of $48.0 million
denominated in Japanese Yen under the Company’s unsecured
Amended Credit Agreement, and payment of dividends. In Fiscal
2008, financing activities consisted primarily of the repurchase
of the A&F’s Common Stock, the payment of dividends,
proceeds from share-based compensation, and proceeds from
borrowing under the Company’s unsecured credit agreement.
A&F’s Board of Directors’ will review the
Company’s cash position and results of operations and
address the appropriateness of future dividend amounts.
During Fiscal 2010, A&F repurchased approximately
1.6 million shares of A&F’s Common Stock in the
open market with a market value of approximately
$76.2 million. A&F did not repurchase any shares of
A&F’s Common Stock in the open market during Fiscal
2009. During Fiscal 2008, A&F repurchased approximately
0.7 million shares of A&F’s Common Stock in the
open market with a value of approximately $50.0 million.
Both the Fiscal 2010 and Fiscal 2008 repurchases were pursuant
to A&F Board of Directors’ authorizations.
As of January 29, 2011, A&F had approximately
9.8 million remaining shares available for repurchase as
part of the November 20, 2007 A&F Board of
Directors’ authorization to repurchase 10.0 million
shares of A&F’s Common Stock.
FUTURE
CASH REQUIREMENTS AND SOURCES OF CASH
Over the next twelve months, the Company’s primary cash
requirements will be funding operating activities, including
inventory, compensation, rent, taxes and other operating
expenses, as well as capital expenditures and quarterly dividend
payments to stockholders subject to A&F Board of Directors
approval. Subject to the availability of cash and suitable
market conditions, A&F expects to continue to repurchase
shares of its Common Stock. The Company anticipates funding
these cash requirements with cash generated from operations. The
Company also has availability under the Amended Credit Facility
as a source of additional funding.
44
Table of Contents
OFF-BALANCE
SHEET ARRANGEMENTS
As of January 29, 2011, the Company did not have any
off-balance sheet arrangements.
CONTRACTUAL
OBLIGATIONS
| Payments Due by Period (Thousands) | ||||||||||||||||||||
|
Operating Activities:
|
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
|
Operating Lease Obligations
|
$ | 2,618,629 | $ | 334,030 | $ | 626,062 | $ | 547,939 | $ | 1,110,598 | ||||||||||
|
Purchase Obligations
|
87,707 | 87,707 | — | — | — | |||||||||||||||
|
Other Obligations
|
47,094 | 21,067 | 6,900 | 2,908 | 16,219 | |||||||||||||||
|
Interest Related to Total Debt
|
2,720 | 1,151 | 1,569 | — | — | |||||||||||||||
|
Totals
|
$ | 2,756,149 | $ | 443,955 | $ | 634,531 | $ | 550,847 | $ | 1,126,817 | ||||||||||
|
Financing Activities:
|
||||||||||||||||||||
|
Total Debt
|
43,805 | 43,805 | ||||||||||||||||||
|
Dividends
|
— | — | — | — | — | |||||||||||||||
|
Totals
|
$ | 43,805 | $ | — | $ | 43,805 | $ | — | $ | — | ||||||||||
Obligations
for Operating Activities
Operating lease obligations consist primarily of future minimum
lease commitments related to store operating leases. See
Note 10, “
Leased Facilities
” of the Notes
to Consolidated Financial Statements included in
“ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA” of this Annual Report on
Form 10-K,
for further discussion. Operating lease obligations do not
include common area maintenance (“CAM”), insurance,
marketing or tax payments for which the Company is also
obligated. Total expense related to CAM, insurance, marketing
and taxes was $166.2 million in Fiscal 2010.
The purchase obligations category represents purchase orders for
merchandise to be delivered during Fiscal 2011 and commitments
for fabric expected to be used during upcoming seasons.
Other obligations are primarily stand-by letters of credit
outstanding as of January 29, 2011, lease termination costs
related to the closure of stores, construction debt, capital
leases, asset retirement obligations, and information technology
contracts for Fiscal 2010. See Note 14, “
Long-Term
Debt
” of Notes to the Consolidated Financial Statements
included in “ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA” of this Annual Report on
Form 10-K,
for further discussion on the letters of credit.
Interest related to total debt is based on interest rates in
effect as of January 29, 2011 and is calculated on debt
with maturities that extend to April 12, 2013. As the
contractual interest rates on the debt are variable, actual cash
payments may differ from the estimates provided in the preceding
table.
Due to uncertainty as to amounts and timing of future payments,
the obligations table above does not include tax (including
accrued interest and penalties) of $21.0 million related to
unrecognized tax benefits at January 29, 2011. Deferred
taxes are also not included in the preceding table. For further
discussion, see Note 13, “
Income Taxes
” of
the Notes to Consolidated Financial Statements included in
“ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA” of this Annual Report on
Form 10-K.
The table above does not include estimated future retirement
payments under the Chief Executive Officer Supplemental
Executive Retirement Plan (the “SERP”) for the
Company’s Chief Executive Officer with a present value of
$13.3 million at January 29, 2011. See Note 17,
“
Retirement Benefits
” of the Notes to
Consolidated Financial Statements included in “ITEM 8.
FINANCIAL STATEMENTS AND
45
Table of Contents
SUPPLEMENTARY DATA” of this Annual Report on
Form 10-K
and the description of the SERP to be included in the text under
the caption “EXECUTIVE OFFICER COMPENSATION” in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011,
incorporated by reference in “ITEM 11. EXECUTIVE
COMPENSATION” of this Annual Report on
Form 10-K.
Obligations
for Financing Activities
Total debt reflects the payment of principal with respect to the
outstanding long-term debt under the Company’s unsecured
Amended Credit Agreement on April 12, 2013, the expiration
date of the unsecured Amended Credit Agreement. The Company may
make payments on the principal at any time and, therefore,
actual cash payments may differ from the estimates provided in
the preceding table.
A&F has historically paid quarterly dividends on its Common
Stock. There are no amounts included in the above table related
to dividends due to the fact that dividends are subject to
determination and approval by A&F’s Board of Directors.
STORE
COUNT AND GROSS SQUARE FEET
Store count and gross square footage by brand for the fifty-two
weeks ended January 29, 2011 and January 30, 2010,
respectively, were as follows:
|
Store Activity
|
Abercrombie & Fitch | abercrombie | Hollister | Gilly Hicks | Total | |||||||||||||||
|
January 30, 2010
|
346 | 209 | 525 | 16 | 1,096 | |||||||||||||||
|
New
|
7 | 2 | 25 | 2 | 36 | |||||||||||||||
|
Remodels/Conversions (net activity)
|
(1 | ) | 1 | — | 1 | 1 | ||||||||||||||
|
Closed
|
(27 | ) | (27 | ) | (10 | ) | — | (64 | ) | |||||||||||
|
January 29, 2011
|
325 | 185 | 540 | 19 | 1,069 | |||||||||||||||
|
Gross Square Feet (thousands)
|
||||||||||||||||||||
|
January 30, 2010
|
3,110 | 979 | 3,597 | 161 | 7,847 | |||||||||||||||
|
New
|
72 | 19 | 210 | 12 | 313 | |||||||||||||||
|
Remodels/Conversions (net activity)
|
(4 | ) | 7 | (3 | ) | 10 | 10 | |||||||||||||
|
Closed
|
(223 | ) | (126 | ) | (65 | ) | — | (414 | ) | |||||||||||
|
January 29, 2011
|
2,955 | 879 | 3,739 | 183 | 7,756 | |||||||||||||||
|
Average Store Size
|
9,092 | 4,751 | 6,924 | 9,632 | 7,255 | |||||||||||||||
46
Table of Contents
|
Store Activity
|
Abercrombie & Fitch | abercrombie | Hollister | Gilly Hicks | Total | |||||||||||||||
|
January 31, 2009
|
356 | 212 | 515 | 14 | 1,097 | |||||||||||||||
|
New
|
2 | 5 | 14 | 2 | 23 | |||||||||||||||
|
Remodels/Conversions (net activity)
|
— | — | — | — | — | |||||||||||||||
|
Closed
|
(12 | ) | (8 | ) | (4 | ) | — | (24 | ) | |||||||||||
|
January 30, 2010
|
346 | 209 | 525 | 16 | 1,096 | |||||||||||||||
|
Gross Square Feet (thousands)
|
||||||||||||||||||||
|
January 31, 2009
|
3,164 | 976 | 3,474 | 146 | 7,760 | |||||||||||||||
|
New
|
49 | 40 | 152 | 15 | 256 | |||||||||||||||
|
Remodels/Conversions (net activity)
|
— | — | (2 | ) | — | (2 | ) | |||||||||||||
|
Closed
|
(103 | ) | (37 | ) | (27 | ) | — | (167 | ) | |||||||||||
|
January 30, 2010
|
3,110 | 979 | 3,597 | 161 | 7,847 | |||||||||||||||
|
Average Store Size
|
8,988 | 4,684 | 6,851 | 10,063 | 7,160 | |||||||||||||||
CAPITAL
EXPENDITURES
Capital expenditures totaled $160.9 million,
$175.5 million and $367.6 million for Fiscal 2010,
Fiscal 2009 and Fiscal 2008, respectively. A summary of capital
expenditures is as follows:
|
Capital Expenditures
|
2010 | 2009 | 2008 | |||||||||
| (In millions) | ||||||||||||
|
New Store Construction, Store Refreshes and Remodels
|
$ | 118.0 | $ | 137.0 | $ | 286.4 | ||||||
|
Home Office, Distribution Centers and Information Technology
|
42.9 | 38.5 | 81.2 | |||||||||
|
Total Capital Expenditures
|
$ | 160.9 | $ | 175.5 | $ | 367.6 | ||||||
During Fiscal 2011, based on new store opening plans and other
capital expenditures, the Company anticipates total capital
expenditures to be approximately $300 million to $350
million, with the upper end of the range being subject to the
Company achieving the higher end of its range of potential new
store openings, including commitments for 2012 openings.
CLOSURE
OF RUEHL BRANDED STORES AND RELATED
DIRECT-TO-CONSUMER
OPERATIONS
On June 16, 2009, A&F’s Board of Directors
approved the closure of the Company’s 29 RUEHL branded
stores and related
direct-to-consumer
operations. The Company completed the closure of the RUEHL
branded stores and related
direct-to-consumer
operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in
Loss from Discontinued Operations, Net of Tax on the
Consolidated Statements of Operations and Comprehensive Income
for all periods presented. Results from discontinued operations
were immaterial for the fifty-two weeks ended January 29,
2011.
47
Table of Contents
Costs associated with exit or disposal activities are recorded
when the liability is incurred. As of January 29, 2011, the
Company expected to make gross cash payments of approximately
$11.8 million in Fiscal 2011, and an aggregate of
$7.4 million in fiscal years thereafter, related primarily
to lease termination agreements associated with the closure of
RUEHL branded stores.
Below is a roll forward of the present value of liabilities
recognized on the Consolidated Balance Sheet as of
January 29, 2011 related to the closure of the RUEHL
branded stores and related
direct-to-consumer
operations (in millions):
|
Fifty-Two
|
||||
|
Weeks Ended
|
||||
| January 29, 2011 | ||||
|
Beginning Balance
|
$ | 46.1 | ||
|
Interest Accretion / Other, Net
|
0.2 | |||
|
Cash Payments
|
(29.1 | ) | ||
|
Ending
Balance
(1)
|
$ | 17.2 | ||
| (1) | Ending balance primarily reflects the net present value of obligations due under signed lease termination agreements and obligations due under a lease, for which no termination agreement existed at January 29, 2011, less estimated sublease income. As of January 29, 2011, there were $11.8 million of lease termination charges recorded as a current liability in Accrued Expenses and $5.4 million of lease termination charges recorded as a long-term liability in Other Liabilities on the Consolidated Balance Sheet. |
Below is a summary of charges related to the closure of the
RUEHL branded stores and related
direct-to-consumer
operations in Fiscal 2009. There were no material RUEHL related
charges in Fiscal 2010.
|
Fifty-Two
|
||||
|
Weeks Ended
|
||||
| January 30, 2010 | ||||
| (In thousands) | ||||
|
Asset
Impairments
(1)
|
$ | 51.5 | ||
|
Lease Terminations,
net
(2)
|
53.9 | |||
|
Severance and
Other
(3)
|
2.2 | |||
|
Total Charges
|
$ | 107.6 | ||
| (1) | Asset impairment charges primarily related to store furniture, fixtures and leasehold improvements. | |
| (2) | Lease terminations reflect the net present value of obligations due under signed lease termination agreements and obligations due under a lease, for which no agreement exists, less estimated sublease income. The charges are presented net of any reversal of non-cash credits. | |
| (3) | Severance and other reflects charges primarily related to severance, merchandise and store supply inventory. |
48
Table of Contents
The table below presents the significant components of
RUEHL’s results included in Loss from Discontinued
Operations, Net of Tax on the Consolidated Statements of
Operations and Comprehensive Income for fiscal years ended
January 30, 2010 and January 31, 2009.
| 2009 | 2008 | |||||||
|
NET SALES
|
$ | 48,393 | $ | 56,218 | ||||
|
Cost of Goods Sold
|
22,037 | 25,621 | ||||||
|
GROSS PROFIT
|
26,356 | 30,597 | ||||||
|
Stores and Distribution Expense
|
146,826 | 75,148 | ||||||
|
Marketing, General and Administrative Expense
|
8,556 | 14,411 | ||||||
|
Other Operating Income, Net
|
(11 | ) | (86 | ) | ||||
|
NET LOSS BEFORE INCOME
TAXES
(1)
|
$ | (129,016 | ) | $ | (58,876 | ) | ||
|
Income Tax Benefit
|
(50,316 | ) | (22,962 | ) | ||||
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
|
$ | (78,699 | ) | $ | (35,914 | ) | ||
|
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
|
||||||||
|
BASIC
|
$ | (0.90 | ) | $ | (0.41 | ) | ||
|
DILUTED
|
$ | (0.89 | ) | $ | (0.40 | ) | ||
| (1) | Includes non-cash pre-tax asset impairment charges of approximately $51.5 million and $22.3 million during the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively, and net costs associated with the closure of the RUEHL business, primarily net lease termination costs of approximately $53.9 million and severance and other charges of $2.2 million during the fifty-two weeks ended January 30, 2010. |
CRITICAL
ACCOUNTING 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 of America. The preparation of
these consolidated financial statements requires the Company to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. Since actual
results may differ from those estimates, the Company revises its
estimates and assumptions as new information becomes available.
The Company believes the following policies are the most
critical to the portrayal of the Company’s financial
condition and results of operations.
49
Table of Contents
|
Policy
|
Effect if Actual Results Differ from Assumptions | |
|
Revenue Recognition
|
||
|
The Company recognizes retail sales at the time the customer takes possession of the merchandise. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable. The value of point of sale coupons that result in a reduction of the price paid by the customer are recorded as a reduction of sales.
The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. The liability remains on the Company’s books until the earlier of redemption (recognized as revenue) or when the Company determines the likelihood of redemption is remote, known as breakage (recognized as other operating income), based on historical redemption patterns. |
The Company has not made any material changes in the accounting methodology used to determine the sales return reserve and revenue recognition for gift cards over the past three fiscal years.
The Company does not expect material changes in the near term to the underlying assumptions used to measure the sales return reserve or to measure the timing and amount of future gift card redemptions as of January 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material. A 10% change in the sales return reserve as of January 29, 2011 would have affected pre-tax income by approximately $1.7 million for Fiscal 2010. A 10% change in the assumption of the redemption pattern for gift cards as of January 29, 2011 would have been immaterial to pre-tax income for Fiscal 2010. |
|
|
Auction Rate Securities (“ARS”)
|
||
| As a result of the market failure and lack of liquidity in the current ARS market, the Company measured the fair value of its ARS primarily using a discounted cash flow model as well as a comparison to similar securities in the market. Certain significant inputs into the model are unobservable in the market including the periodic coupon rate adjusted for the marketability discount, market required rate of return and expected term. |
The Company has not made any material changes in the accounting methodology used to determine the fair value of the ARS.
The Company does not expect material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of January 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material. Assuming all other assumptions disclosed in Note 6, “Fair Value” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, being equal, a 50 basis point increase in the market required rate of return will yield approximately a 14% increase in impairment and a 50 basis point decrease in the market required rate of return will yield a 14% decrease in impairment. |
50
Table of Contents
|
Policy
|
Effect if Actual Results Differ from Assumptions | |
|
Inventory Valuation
|
||
|
Inventories are principally valued at the lower of average cost or market utilizing the retail method.
The Company reduces inventory value by recording a valuation reserve that represents estimated future permanent markdowns necessary to sell-through the inventory. Additionally, as part of inventory valuation, an inventory shrink estimate is made each period that reduces the value of inventory for lost or stolen items. |
The Company has not made any material changes in the accounting methodology used to determine the shrink reserve or the valuation reserve over the past three fiscal years.
The Company does not expect material changes in the near term to the underlying assumptions used to determine the shrink reserve or valuation reserve as of January 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, they could significantly impact the ending inventory valuation at cost, as well as the resulting gross margin(s). An increase or decrease in the valuation reserve of 10% would have affected pre-tax income by approximately $2.4 million for Fiscal 2010. An increase or decrease in the inventory shrink accrual of 10% would have been immaterial to pre-tax income for Fiscal 2010. |
|
|
Property and Equipment
|
||
|
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question.
The Company’s impairment calculation requires management to make assumptions and judgments related to factors used in the evaluation for impairment, including, but not limited to, management’s expectations for future operations and projected cash flows. |
The Company has not made any material changes in the accounting methodology used to determine impairment loss over the past three fiscal years.
The Company does not expect material changes in the near term to the assumptions underlying its impairment calculations as of January 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, they could have a material impact on the Company’s determination of whether or not there has been an impairment. |
51
Table of Contents
|
Policy
|
Effect if Actual Results Differ from Assumptions | |
|
Income Taxes
|
||
|
The provision for income taxes is determined using the asset and liability approach. Tax laws often require items to be included in tax filings at different times than the items are being reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
A provision for U.S. income tax has not been recorded on undistributed profits of non-U.S. subsidiaries that the Company has determined to be indefinitely reinvested outside the U.S. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation. |
The Company does not expect material changes in the judgments, assumptions or interpretations used to calculate the tax provision for Fiscal 2010. However, changes in these assumptions may occur and should those changes be significant, they could have a material impact on the Company’s income tax provision.
If the Company’s intention or U.S. tax law changes in the future, there may be a significant negative impact on the provision for income taxes to record an incremental tax liability in the period the change occurs. |
|
|
Equity Compensation Expense
|
||
| The Company’s equity compensation expense related to stock options and stock appreciation rights is estimated using the Black-Scholes option-pricing model to determine the fair value of the stock option and stock appreciation right grants, which requires the Company to estimate the expected term of the stock option and stock appreciation right grants and expected future stock price volatility over the expected term. |
The Company does not expect material changes in the near term to the underlying assumptions used to calculate equity compensation expense for Fiscal 2010. However, changes in these assumptions do occur, and, should those changes be significant, they could have a material impact on the Company’s equity compensation expense.
During Fiscal 2010, the Company issued stock-appreciation rights and no stock options. A 10% increase in term would yield a 3% increase in the Black-Scholes valuation for stock appreciation rights issued during the year, while a 10% increase in volatility would yield a 9% increase in the Black-Scholes valuation for stock appreciation rights issued during the year. |
52
Table of Contents
|
Policy
|
Effect if Actual Results Differ from Assumptions | |
|
Supplemental Executive Retirement Plan
|
||
|
Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental Executive Retirement Plan to provide additional retirement income to its Chairman and Chief Executive Officer. Subject to service requirements, the CEO will receive a monthly benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final average compensation used for the calculation is based on actual compensation (base salary and cash incentive compensation) averaged over the last 36 consecutive full calendar months ending before the CEO’s retirement.
The Company’s accrual for the SERP requires management to make assumptions and judgments related to the CEO’s final average compensation, life expectancy and discount rate. |
The Company does not expect material changes in the near term to the underlying assumptions used to determine the accrual for the SERP as of January 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.
A 10% increase in final average compensation as of January 29, 2011 would increase the SERP accrual by approximately $1.3 million. A 50 basis point increase in the discount rate as of January 29, 2011 would decrease the SERP accrual by an immaterial amount. |
|
|
Legal Contingencies
|
||
| The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. | Actual liabilities may exceed or be less than the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Investment
Securities
The Company maintains its cash equivalents in financial
instruments, primarily money market funds and United States
treasury bills, with original maturities of three months or less.
The Company also holds investments in investment grade auction
rate securities (“ARS”) that have maturities ranging
from 17 to 32 years. The par and carrying values, and
related cumulative temporary impairment charges for the
Company’s
available-for-sale
marketable securities as of January 29, 2011 were as
follows:
|
Par
|
Temporary
|
Carrying
|
||||||||||
|
|
Value | Impairment | Value | |||||||||
| (In thousands) | ||||||||||||
|
Available-for-sale
securities:
|
||||||||||||
|
Auction rate securities — student loan backed
|
$ | 95,625 | $ | (9,893 | ) | $ | 85,732 | |||||
|
Auction rate securities — municipal authority bonds
|
19,975 | (5,173 | ) | 14,802 | ||||||||
|
Total
available-for-sale
securities
|
$ | 115,600 | $ | (15,066 | ) | $ | 100,534 | |||||
53
Table of Contents
As of January 29, 2011, approximately 73% of the
Company’s ARS were “AAA” rated, approximately 12%
of the Company’s ARS were “AA” rated, and
approximately 15% were “A−” rated, in each case
as rated by one or more of the major credit rating agencies. The
ratings take into account insurance policies guaranteeing both
the principal and accrued interest. Each investment in student
loans is insured by (1) the U.S. government under the
Federal Family Education Loan Program, (2) a private
insurer or (3) a combination of both. The percentage
coverage of the outstanding principal and interest of the ARS
varies by security. The credit ratings may change over time and
would be an indicator of the default risk associated with the
ARS and could have a material effect on the value of the ARS. If
the Company expects that it will not recover the entire cost
basis of the
available-for-sale
ARS, intends to sell the
available-for-sale
ARS, or it becomes more than likely that the Company will be
required to sell the
available-for-sale
ARS before recovery of their cost basis, which may be at
maturity, the Company may be required to record an
other-than-temporary
impairment or additional temporary impairment to write down the
assets’ fair value. The Company has not incurred any credit
losses on
available-for-sale
ARS, and furthermore, the issuers continued to perform under the
obligations, including making scheduled interest payments, and
the Company expects that this will continue in the future.
The irrevocable rabbi trust (the “Rabbi Trust”) is
intended to be used as a source of funds to match respective
funding obligations to participants in the
Abercrombie & Fitch Co. Nonqualified Savings and
Supplemental Retirement Plan I, the Abercrombie &
Fitch Co. Nonqualified Savings and Supplemental Retirement
Plan II and the Chief Executive Officer Supplemental
Executive Retirement Plan. As of January 29, 2011, total
assets held in the Rabbi Trust were $82.5 million, which
included $11.9 million of municipal notes and bonds with
maturities that ranged from 11 months to three years,
trust-owned life insurance policies with a cash surrender value
of $70.3 million and $0.3 million held in money market
funds. The Rabbi Trust assets are consolidated and recorded at
fair value, with the exception of the trust-owned life insurance
policies which are recorded at cash surrender value in Other
Assets on the Consolidated Balance Sheet and are restricted as
to their use as noted above. Net unrealized gains or losses
related to the municipal notes and bonds held in the Rabbi Trust
were not material for the fifty-two weeks ended January 29,
2011 and January 30, 2010. The change in cash surrender
value of the trust-owned life insurance policies held in the
Rabbi Trust resulted in realized gains of $2.3 million and
$5.3 million for the fifty-two weeks ended January 29,
2011 and January 30, 2010, respectively.
Interest
Rate Risks
As of January 29, 2011, the Company had $43.8 million
in long-term debt outstanding under the unsecured Amended Credit
Agreement. This borrowing and any future borrowings will bear
interest at negotiated rates and would be subject to interest
rate risk. The unsecured Amended Credit Agreement has several
borrowing options, including interest rates that are based on:
(i) a defined Base Rate, plus a margin based on a defined
Leverage Ratio, payable quarterly; (ii) an Adjusted
Eurodollar Rate (as defined in the unsecured Amended Credit
Agreement) plus a margin based on the Leverage Ratio, payable at
the end of the applicable interest period for the borrowing and,
for interest periods in excess of three months, on the date that
is three months after the commencement of the interest period;
or (iii) an Adjusted Foreign Currency Rate (as defined in
the Amended Credit Agreement) plus a margin based on the
Leverage Ratio, payable at the end of the applicable interest
period for the borrowing and, for interest periods in excess of
three months, on the date that is three months after the
commencement of the interest period. The Base Rate represents a
rate per annum equal to the higher of (a) PNC Bank’s
then publicly announced prime rate or (b) the Federal Funds
Effective Rate (as defined in the unsecured Amended Credit
Agreement) as then in effect plus
1
/
2
of 1.0%. The average interest rate was 2.7% for the fifty-two
weeks ended January 29, 2011. Additionally, as of
January 29, 2011,
54
Table of Contents
the Company had $306.2 million available, less outstanding
letters of credit, under its unsecured Amended Credit Agreement.
Assuming no changes in the Company’s financial structure as
it stood at January 29, 2011, if market interest rates
average an increase of 100 basis points over the fifty-two
week period for Fiscal 2011 compared to the interest rates
incurred during the fifty-two week period ended January 29,
2011, there would be an immaterial change in interest expense.
This amount was determined by calculating the effect of the
average hypothetical interest rate increase on the
Company’s variable rate unsecured Amended Credit Agreement.
This hypothetical increase in interest rate from the fifty-two
week period ended January 29, 2011 may be different
from the actual change in interest expense due to varying
interest rate reset dates under the Company’s unsecured
Amended Credit Agreement.
Foreign
Exchange Rate Risk
A&F’s international subsidiaries generally operate
with functional currencies other than the U.S. dollar. The
Company’s Consolidated Financial Statements are presented
in U.S. dollars. Therefore, the Company must translate
revenues, expenses, assets and liabilities from functional
currencies into U.S. dollars at exchange rates in effect
during, or at the end of, the reporting period. The fluctuation
in the value of the U.S. dollar against other currencies
affects the reported amounts of revenues, expenses, assets and
liabilities.
A&F and its subsidiaries have exposure to changes in
currency exchange rates associated with foreign currency
transactions and forecasted foreign currency transactions,
including the sale of inventory between subsidiaries and foreign
denominated assets and liabilities. Such transactions are
denominated primarily in U.S. dollars, Euros, Canadian
Dollars, Japanese Yen, Danish Kroner and British Pounds. The
Company has established a program that primarily utilizes
foreign currency forward contracts to partially offset the risks
associated with the effects of certain foreign currency
transactions and forecasted transactions. Under this program,
increases or decreases in foreign currency exposures are
partially offset by gains or losses on forward contracts, to
mitigate the impact of foreign currency gains or losses. The
Company does not use forward contracts to engage in currency
speculation. All outstanding foreign currency forward contracts
are recorded at fair value at the end of each fiscal period.
55
Table of Contents
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ABERCROMBIE &
FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| 2010 | 2009 | 2008 | ||||||||||
| (Thousands, except share and per share amounts) | ||||||||||||
|
NET SALES
|
$ | 3,468,777 | $ | 2,928,626 | $ | 3,484,058 | ||||||
|
Cost of Goods Sold
|
1,256,596 | 1,045,028 | 1,152,963 | |||||||||
|
GROSS PROFIT
|
2,212,181 | 1,883,598 | 2,331,095 | |||||||||
|
Stores and Distribution Expense
|
1,589,501 | 1,425,950 | 1,436,363 | |||||||||
|
Marketing, General and Administrative Expense
|
400,804 | 353,269 | 405,248 | |||||||||
|
Other Operating Income, Net
|
(10,056 | ) | (13,533 | ) | (8,778 | ) | ||||||
|
OPERATING INCOME
|
231,932 | 117,912 | 498,262 | |||||||||
|
Interest Expense (Income), Net
|
3,362 | (1,598 | ) | (11,382 | ) | |||||||
|
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
|
228,570 | 119,510 | 509,644 | |||||||||
|
Tax Expense from Continuing Operations
|
78,287 | 40,557 | 201,475 | |||||||||
|
NET INCOME FROM CONTINUING OPERATIONS
|
$ | 150,283 | $ | 78,953 | $ | 308,169 | ||||||
|
LOSS FROM DISCONTINUED OPERATIONS, Net of Tax
|
$ | — | $ | (78,699 | ) | $ | (35,914 | ) | ||||
|
NET INCOME
|
$ | 150,283 | $ | 254 | $ | 272,255 | ||||||
|
NET INCOME PER SHARE FROM CONTINUING OPERATIONS:
|
||||||||||||
|
BASIC
|
$ | 1.71 | $ | 0.90 | $ | 3.55 | ||||||
|
DILUTED
|
$ | 1.67 | $ | 0.89 | $ | 3.45 | ||||||
|
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
|
||||||||||||
|
BASIC
|
$ | — | $ | (0.90 | ) | $ | (0.41 | ) | ||||
|
DILUTED
|
$ | — | $ | (0.89 | ) | $ | (0.40 | ) | ||||
|
NET INCOME PER SHARE:
|
||||||||||||
|
BASIC
|
$ | 1.71 | $ | 0.00 | $ | 3.14 | ||||||
|
DILUTED
|
$ | 1.67 | $ | 0.00 | $ | 3.05 | ||||||
|
WEIGHTED-AVERAGE SHARES OUTSTANDING:
|
||||||||||||
|
BASIC
|
88,061 | 87,874 | 86,816 | |||||||||
|
DILUTED
|
89,851 | 88,609 | 89,291 | |||||||||
|
DIVIDENDS DECLARED PER SHARE
|
$ | 0.70 | $ | 0.70 | $ | 0.70 | ||||||
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
|
Foreign Currency Translation Adjustments
|
$ | 3,399 | $ | 5,942 | $ | (13,173 | ) | |||||
|
(Losses) Gains on Marketable Securities, net of taxes of $366,
$(4,826) and $10,312 for Fiscal 2010, Fiscal 2009 and Fiscal
2008, respectively
|
(622 | ) | 8,217 | (17,518 | ) | |||||||
|
Unrealized (Loss) Gain on Derivative Financial Instruments, net
of taxes of $188, $265 and $(621) for Fiscal 2010, Fiscal 2009
and Fiscal 2008, respectively
|
(320 | ) | (451 | ) | 892 | |||||||
|
Other Comprehensive Income (Loss)
|
$ | 2,457 | $ | 13,708 | $ | (29,799 | ) | |||||
|
COMPREHENSIVE INCOME
|
$ | 152,740 | $ | 13,962 | $ | 242,456 | ||||||
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
56
Table of Contents
ABERCROMBIE &
FITCH CO.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (Thousands, except par value amounts) | ||||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and Equivalents
|
$ | 826,353 | $ | 669,950 | ||||
|
Marketable Securities
|
— | 32,356 | ||||||
|
Receivables
|
81,264 | 90,865 | ||||||
|
Inventories
|
385,857 | 310,645 | ||||||
|
Deferred Income Taxes
|
60,405 | 44,570 | ||||||
|
Other Current Assets
|
79,389 | 77,297 | ||||||
|
TOTAL CURRENT ASSETS
|
1,433,268 | 1,225,683 | ||||||
|
PROPERTY AND EQUIPMENT, NET
|
1,149,583 | 1,244,019 | ||||||
|
NON-CURRENT MARKETABLE SECURITIES
|
100,534 | 141,794 | ||||||
|
OTHER ASSETS
|
264,517 | 210,370 | ||||||
|
TOTAL ASSETS
|
$ | 2,947,902 | $ | 2,821,866 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Accounts Payable
|
$ | 137,235 | $ | 150,134 | ||||
|
Accrued Expenses
|
306,587 | 246,289 | ||||||
|
Deferred Lease Credits
|
41,538 | 43,597 | ||||||
|
Income Taxes Payable
|
73,491 | 9,352 | ||||||
|
TOTAL CURRENT LIABILITIES
|
558,851 | 449,372 | ||||||
|
LONG-TERM LIABILITIES:
|
||||||||
|
Deferred Income Taxes
|
33,515 | 47,142 | ||||||
|
Deferred Lease Credits
|
192,619 | 212,052 | ||||||
|
Long-Term Debt
|
68,566 | 71,213 | ||||||
|
Other Liabilities
|
203,567 | 214,170 | ||||||
|
TOTAL LONG-TERM LIABILITIES
|
498,267 | 544,577 | ||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Class A Common Stock — $0.01 par value:
150,000 shares authorized and 103,300 shares issued at each
of January 29, 2011 and January 30, 2010
|
1,033 | 1,033 | ||||||
|
Paid-In Capital
|
349,258 | 339,453 | ||||||
|
Retained Earnings
|
2,272,317 | 2,183,690 | ||||||
|
Accumulated Other Comprehensive Loss, net of tax
|
(6,516 | ) | (8,973 | ) | ||||
|
Treasury Stock, at Average Cost — 16,054 and
15,314 shares at January 29, 2011 and January 30,
2010, respectively
|
(725,308 | ) | (687,286 | ) | ||||
|
TOTAL STOCKHOLDERS’ EQUITY
|
1,890,784 | 1,827,917 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 2,947,902 | $ | 2,821,866 | ||||
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
57
Table of Contents
ABERCROMBIE &
FITCH CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock |
Other
|
Treasury Stock |
Total
|
|||||||||||||||||||||||||||||
|
Shares
|
Par
|
Paid-In
|
Retained
|
Comprehensive
|
At Average
|
Stockholders’
|
||||||||||||||||||||||||||
| (Thousands, except per share amounts) |
Outstanding
|
Value | Capital | Earnings | (Loss) Income | Shares | Cost | Equity | ||||||||||||||||||||||||
|
Balance, February 2, 2008
|
86,159 | $ | 1,033 | $ | 319,451 | $ | 2,051,463 | $ | 7,118 | 17,141 | $ | (760,752 | ) | $ | 1,618,313 | |||||||||||||||||
|
Net Income
|
— | — | — | 272,255 | — | — | — | 272,255 | ||||||||||||||||||||||||
|
Purchase of Common Stock
|
(682 | ) | — | — | — | — | 682 | (50,000 | ) | (50,000 | ) | |||||||||||||||||||||
|
Dividends ($0.70 per share)
|
— | — | — | (60,769 | ) | — | — | — | (60,769 | ) | ||||||||||||||||||||||
|
Share-based Compensation Issuances and Exercises
|
2,159 | — | (49,844 | ) | (18,013 | ) | — | (2,159 | ) | 104,554 | 36,697 | |||||||||||||||||||||
|
Tax Benefit from Share-based Compensation Issuances and Exercises
|
— | — | 16,839 | — | — | — | — | 16,839 | ||||||||||||||||||||||||
|
Share-based Compensation Expense
|
— | — | 42,042 | — | — | — | — | 42,042 | ||||||||||||||||||||||||
|
Unrealized Losses on Marketable Securities
|
— | — | — | — | (17,518 | ) | — | — | (17,518 | ) | ||||||||||||||||||||||
|
Net Change in Unrealized Gains or Losses on Derivative Financial
Instruments
|
— | — | — | — | 892 | — | — | 892 | ||||||||||||||||||||||||
|
Foreign Currency Translation Adjustments
|
— | — | — | — | (13,173 | ) | — | — | (13,173 | ) | ||||||||||||||||||||||
|
Balance, January 31, 2009
|
87,636 | $ | 1,033 | $ | 328,488 | $ | 2,244,936 | $ | (22,681 | ) | 15,664 | $ | (706,198 | ) | $ | 1,845,578 | ||||||||||||||||
|
Net Income
|
— | — | — | 254 | — | — | — | 254 | ||||||||||||||||||||||||
|
Dividends ($0.70 per share)
|
— | — | — | (61,500 | ) | — | — | — | (61,500 | ) | ||||||||||||||||||||||
|
Share-based Compensation Issuances and Exercises
|
350 | — | (19,690 | ) | — | — | (350 | ) | 18,912 | (778 | ) | |||||||||||||||||||||
|
Tax Deficiency from Share-based Compensation Issuances and
Exercises
|
— | — | (5,454 | ) | — | — | — | — | (5,454 | ) | ||||||||||||||||||||||
|
Share-based Compensation Expense
|
— | — | 36,109 | — | — | — | — | 36,109 | ||||||||||||||||||||||||
|
Unrealized Gains on Marketable Securities
|
— | — | — | — | 8,217 | — | 8,217 | |||||||||||||||||||||||||
|
Net Change in Unrealized Gains or Losses on Derivative Financial
Instruments
|
— | — | — | — | (451 | ) | — | (451 | ) | |||||||||||||||||||||||
|
Foreign Currency Translation Adjustments
|
— | — | — | — | 5,942 | — | 5,942 | |||||||||||||||||||||||||
|
Balance, January 30, 2010
|
87,986 | $ | 1,033 | $ | 339,453 | $ | 2,183,690 | $ | (8,973 | ) | 15,314 | $ | (687,286 | ) | $ | 1,827,917 | ||||||||||||||||
|
Net Income
|
— | — | — | 150,283 | — | — | — | 150,283 | ||||||||||||||||||||||||
|
Purchase of Common Stock
|
(1,582 | ) | — | — | — | — | 1,582 | (76,158 | ) | (76,158 | ) | |||||||||||||||||||||
|
Dividends ($0.70 per share)
|
— | — | — | (61,656 | ) | — | — | — | (61,656 | ) | ||||||||||||||||||||||
|
Share-based Compensation Issuances and Exercises
|
842 | — | (29,741 | ) | — | — | (842 | ) | 38,136 | 8,395 | ||||||||||||||||||||||
|
Tax Deficiency from Share-based Compensation Issuances and
Exercises
|
— | — | (1,053 | ) | — | — | — | — | (1,053 | ) | ||||||||||||||||||||||
|
Share-based Compensation Expense
|
— | — | 40,599 | — | — | — | — | 40,599 | ||||||||||||||||||||||||
|
Unrealized Losses on Marketable Securities
|
— | — | — | — | (622 | ) | — | (622 | ) | |||||||||||||||||||||||
|
Net Change in Unrealized Gains or Losses on Derivative Financial
Instruments
|
— | — | — | — | (320 | ) | — | (320 | ) | |||||||||||||||||||||||
|
Foreign Currency Translation Adjustments
|
— | — | — | — | 3,399 | — | 3,399 | |||||||||||||||||||||||||
|
Balance, January 29, 2011
|
87,246 | $ | 1,033 | $ | 349,258 | $ | 2,272,317 | $ | (6,516 | ) | 16,054 | $ | (725,308 | ) | $ | 1,890,784 | ||||||||||||||||
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
58
Table of Contents
ABERCROMBIE &
FITCH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2010 | 2009 | 2008 | ||||||||||
| (Thousands) | ||||||||||||
|
OPERATING ACTIVITIES:
|
||||||||||||
|
Net Income
|
$ | 150,283 | $ | 254 | $ | 272,255 | ||||||
|
Impact of Other Operating Activities on Cash Flows:
|
||||||||||||
|
Depreciation and Amortization
|
229,153 | 238,752 | 225,334 | |||||||||
|
Non-Cash Charge for Asset Impairment
|
50,631 | 84,754 | 30,574 | |||||||||
|
Share-Based Compensation
|
40,599 | 36,109 | 42,042 | |||||||||
|
Lessor Construction Allowances
|
35,281 | 47,329 | 55,415 | |||||||||
|
Loss on Disposal / Write-off of Assets
|
7,064 | 10,646 | 7,607 | |||||||||
|
Amortization of Deferred Lease Credits
|
(48,373 | ) | (47,182 | ) | (43,194 | ) | ||||||
|
Deferred Taxes
|
(27,823 | ) | 7,605 | 14,005 | ||||||||
|
Tax (Deficiency) Benefit from Share-Based Compensation
|
(1,053 | ) | (5,454 | ) | 16,839 | |||||||
|
Excess Tax Benefit from Share-Based Compensation
|
— | — | (5,791 | ) | ||||||||
|
Changes in Assets and Liabilities:
|
||||||||||||
|
Inventories
|
(74,689 | ) | 62,720 | (40,521 | ) | |||||||
|
Accounts Payable and Accrued Expenses
|
29,365 | 39,394 | (23,875 | ) | ||||||||
|
Income Taxes
|
63,807 | (7,386 | ) | (55,565 | ) | |||||||
|
Other Assets and Liabilities
|
(62,456 | ) | (72,054 | ) | (4,094 | ) | ||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
391,789 | 395,487 | 491,031 | |||||||||
|
INVESTING ACTIVITIES:
|
||||||||||||
|
Capital Expenditures
|
(160,935 | ) | (175,472 | ) | (367,602 | ) | ||||||
|
Purchase of Trust-Owned Life Insurance Policies
|
(16,583 | ) | (13,539 | ) | (4,877 | ) | ||||||
|
Purchases of Marketable Securities
|
— | — | (49,411 | ) | ||||||||
|
Proceeds from Sales of Marketable Securities
|
84,542 | 77,450 | 308,673 | |||||||||
|
NET CASH USED FOR INVESTING ACTIVITIES
|
(92,976 | ) | (111,561 | ) | (113,217 | ) | ||||||
|
FINANCING ACTIVITIES:
|
||||||||||||
|
Proceeds from Share-Based Compensation
|
13,941 | 2,048 | 55,194 | |||||||||
|
Excess Tax Benefit from Share-Based Compensation
|
— | — | 5,791 | |||||||||
|
Proceeds from Borrowings under Credit Agreement
|
— | 48,056 | 100,000 | |||||||||
|
Purchase of Common Stock
|
(76,158 | ) | — | (50,000 | ) | |||||||
|
Dividends Paid
|
(61,656 | ) | (61,500 | ) | (60,769 | ) | ||||||
|
Repayment of Borrowings under Credit Agreement
|
(12,093 | ) | (100,000 | ) | — | |||||||
|
Change in Outstanding Checks and Other
|
(9,367 | ) | (24,654 | ) | (19,747 | ) | ||||||
|
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
|
(145,333 | ) | (136,050 | ) | 30,469 | |||||||
|
EFFECT OF EXCHANGE RATES ON CASH
|
2,923 | 3,402 | (4,010 | ) | ||||||||
|
NET INCREASE IN CASH AND EQUIVALENTS:
|
156,403 | 151,278 | 404,273 | |||||||||
|
Cash and Equivalents, Beginning of Period
|
669,950 | 518,672 | 114,399 | |||||||||
|
CASH AND EQUIVALENTS, END OF PERIOD
|
$ | 826,353 | 669,950 | 518,672 | ||||||||
|
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
|
||||||||||||
|
Change in Accrual for Construction in Progress
|
$ | 18,741 | (21,882 | ) | (27,913 | ) | ||||||
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
59
Table of Contents
ABERCROMBIE &
FITCH CO.
| 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 accompanying consolidated financial statements include the
historical financial statements of, and transactions applicable
to, the Company and reflect its assets, liabilities, results of
operations and cash flows.
On June 16, 2009, A&F’s Board of Directors
approved the closure of the Company’s 29 RUEHL branded
stores and related
direct-to-consumer
operations. The Company completed the closure of the RUEHL
branded stores and related
direct-to-consumer
operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in
Loss from Discontinued Operations, Net of Tax for all periods
presented on the Consolidated Statements of Operations and
Comprehensive Income. Results from discontinued operations were
immaterial for the fifty-two weeks ended January 29, 2011.
FISCAL
YEAR
The Company’s fiscal year ends on the Saturday closest to
January 31, typically resulting in a fifty-two week year,
but occasionally giving rise to an additional week, resulting in
a fifty-three week year. Fiscal years are designated in the
consolidated financial statements and notes by the calendar year
in which the fiscal year commences. All references herein to
“Fiscal 2010” represent the 52-week fiscal year ended
January 29, 2011; to “Fiscal 2009” represent the
52-week fiscal year ended January 30, 2010; and to
“Fiscal 2008” represent the 52-week fiscal year ended
January 31, 2009. In addition, all references herein to
“Fiscal 2011” represent the 52-week fiscal year that
will end on January 28, 2012.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform
to the current year presentation. Restricted cash of
$10.2 million for Fiscal 2009 was reclassified from Cash
and Cash Equivalents to Other Assets.
SEGMENT
REPORTING
The Company determines its operating segments on the same basis
that it uses to evaluate performance internally. The operating
segments have been aggregated and are reported as one reportable
segment because they have similar economic characteristics and
meet the required aggregation criteria. The Company believes its
operating segments may be aggregated for financial reporting
purposes because they are similar in each of the following
areas: class of consumer, economic characteristics, nature of
products, nature of production processes, and distribution
methods.
60
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Geographic
Information
Financial information relating to the Company’s operations
by geographic area is as follows:
Net
Sales
:
Net sales includes net merchandise sales through stores and
direct-to-consumer
operations, including shipping and handling revenue. Net sales
are reported by geographic area based on the location of the
customer.
| Fifty-Two Weeks Ended | ||||||||
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands): | ||||||||
|
United States
|
$ | 2,821,993 | $ | 2,567,141 | ||||
|
Europe
|
443,836 | 229,446 | ||||||
|
Other
|
202,948 | 132,039 | ||||||
|
Total
|
$ | 3,468,777 | $ | 2,928,626 | ||||
Long-Lived
Assets:
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands): | ||||||||
|
United States
|
$ | 959,777 | $ | 1,140,405 | ||||
|
Europe
|
169,313 | 86,941 | ||||||
|
Other
|
127,741 | 104,215 | ||||||
|
Total
|
$ | 1,256,831 | $ | 1,331,561 | ||||
Long-lived assets included in the table above include primarily
property and equipment (net), store supplies and lease deposits.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
PRINCIPLES
OF CONSOLIDATION
The consolidated financial statements include the accounts of
A&F and its subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
CASH
AND CASH EQUIVALENTS
See Note 4,
“Cash and Cash Equivalents.”
INVESTMENTS
See Note 5, “
Investments.
”
61
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
RECEIVABLES
Receivables primarily includes credit card receivables,
construction allowances, value added tax (“VAT”)
receivables and other tax credits or refunds.
As part of the normal course of business, the Company has
approximately three to four days of sales transactions
outstanding with its third-party credit card vendors at any
point. The Company classifies these outstanding balances as
credit card receivables. Construction allowances are recorded
for certain store lease agreements for improvements completed by
the Company. VAT receivables are payments the Company has made
on purchases of goods and services that will be recovered as
sales are made to customers.
INVENTORIES
Inventories are principally valued at the lower of average cost
or market utilizing the retail method. The Company determines
market value as the anticipated future selling price of
merchandise less a normal margin. An initial markup is applied
to inventory at cost in order to establish a
cost-to-retail
ratio. Permanent markdowns, when taken, reduce both the retail
and cost components of inventory on hand so as to maintain the
already established
cost-to-retail
relationship. At first and third fiscal quarter end, the Company
reduces inventory value by recording a valuation reserve that
represents the estimated future anticipated selling price
decreases necessary to sell-through the current season
inventory. At second and fourth fiscal quarter end, the Company
reduces inventory value by recording a valuation reserve that
represents the estimated future selling price decreases
necessary to sell-through any remaining carryover inventory from
the season then ending. The valuation reserve was
$24.4 million, $11.4 million and $9.1 million at
January 29, 2011, January 30, 2010 and
January 31, 2009, respectively.
Additionally, as part of inventory valuation, inventory
shrinkage estimates based on historical trends from actual
physical inventories are made each period that reduce the
inventory value for lost or stolen items. The Company performs
physical inventories on a periodic basis and adjusts the shrink
reserve accordingly. The shrink reserve was $7.6 million,
$8.1 million and $10.8 million at January 29,
2011, January 30, 2010 and January 31, 2009,
respectively.
Ending inventory balances were $385.9 million,
$310.6 million and $372.4 million at January 29,
2011, January 30, 2010 and January 31, 2009,
respectively. These balances included inventory in transit
balances of $55.0 million, $39.9 million and
$23.5 million at January 29, 2011, January 30,
2010 and January 31, 2009, respectively. Inventory in
transit is considered to be all merchandise owned by
Abercrombie & Fitch that has not yet been received at
an Abercrombie & Fitch distribution center.
OTHER
CURRENT ASSETS
Other current assets include prepaid rent, current supplies, and
other prepaids.
STORE
SUPPLIES
Store supplies include in-store supplies and packaging, as well
as replenishment inventory held on the Company’s behalf by
a third party. The initial inventory of supplies for new stores
including, but not limited to, hangers, frames, security tags
and
point-of-sale
supplies are capitalized at the store opening date. In lieu of
62
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amortizing the initial balances over their estimated useful
lives, the Company expenses all subsequent replacements and
adjusts the initial balance, as appropriate, for changes in
store quantities or replacement cost. The Company believes this
policy approximates the expense that would have been recognized
under accounting principles generally accepted in the United
States of America (“GAAP”). Packaging and consumable
store supplies are expensed as used. Current store supplies,
including packaging and consumable store supplies held at a
third-party replenishment center, were $20.6 million and
$11.1 million at January 29, 2011 and January 30,
2010, respectively, and were classified as Other Current Assets
on the Consolidated Balance Sheets. Non-current store supplies
were $32.3 million and $32.4 million at
January 29, 2011 and January 30, 2010, respectively,
and were classified as Other Assets on the Consolidated Balance
Sheets.
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; from three to 15 years for
leasehold improvements and furniture and fixtures; from three to
seven years for information technology; and from three to
20 years for other property and equipment. 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 remodels and improvements
that extend service lives of the assets are capitalized.
Long-lived assets, primarily comprised of property and
equipment, are reviewed periodically for impairment or whenever
events or changes in circumstances indicate that full
recoverability of net asset balances through future cash flows
is in question. Factors used in the evaluation include, but are
not limited to, management’s plans for future operations,
recent operating results and projected cash flows.
The Company expenses all internal-use software costs incurred in
the preliminary project stage and capitalizes certain direct
costs associated with the development and purchase of
internal-use software within property and equipment. Capitalized
costs are amortized on a straight-line basis over the estimated
useful lives of the software, generally not exceeding seven
years.
INCOME
TAXES
Income taxes are calculated using 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 current enacted tax rates in effect for the years in which
those temporary differences are expected to reverse. Inherent in
the measurement of deferred balances are certain judgments and
interpretations of enacted tax law and published guidance with
respect to applicability to the Company’s operations. A
valuation allowance is established against deferred tax assets
when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Currently there is no
valuation allowance provided for deferred tax assets.
The effective tax rate utilized by the Company reflects
management’s judgment of expected tax liabilities within
the various tax jurisdictions. The Company records tax expense
or benefit that does not relate to ordinary income in the
current fiscal year discretely in the period in which it occurs.
Examples of
63
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
such types of discrete items include, but are not limited to,
changes in estimates of the outcome of tax matters related to
prior years,
provision-to-return
adjustments, tax-exempt income and the settlement of tax audits.
See Note 13, “
Income Taxes
” for a
discussion regarding the Company’s policies for uncertain
tax positions.
FOREIGN
CURRENCY TRANSLATION
The majority of the Company’s international operations use
local currencies as the functional currency. Assets and
liabilities denominated in foreign currencies were translated
into U.S. dollars (the reporting currency) at the exchange
rate prevailing at the balance sheet date. Equity accounts
denominated in foreign currencies were translated into
U.S. dollars at historical exchange rates. Revenues and
expenses denominated in foreign currencies were translated into
U.S. dollars at the monthly average exchange rate for the
period. Gains and losses resulting from foreign currency
transactions are included in the results of operations; whereas,
translation adjustments and inter-company loans of a long-term
investment nature are reported as an element of Other
Comprehensive Income. Foreign currency translations resulted in
a loss of $3.3 million for the fifty-two weeks ended
January 29, 2011 and an immaterial gain for the fifty-two
weeks ended January 30, 2010.
DERIVATIVES
See Note 15, “
Derivatives
” for further
discussion.
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.
STOCKHOLDERS’
EQUITY
At January 29, 2011 and January 30, 2010, there were
150.0 million shares of A&F’s $.01 par value
Class A Common Stock authorized, of which 87.2 million
and 88.0 million shares were outstanding at
January 29, 2011 and January 30, 2010, respectively,
and 106.4 million shares of $.01 par value
Class B Common Stock authorized, none of which were
outstanding at January 29, 2011 and January 30, 2010.
In addition, 15.0 million shares of A&F’s
$.01 par value Preferred Stock were authorized, none of
which have been issued. See Note 19, “
Preferred
Stock Purchase Rights
” 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 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
stockholders.
64
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
REVENUE
RECOGNITION
The Company recognizes retail sales at the time the customer
takes possession of the merchandise.
Direct-to-consumer
sales are recorded based on an estimated date for 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 and
handling costs are classified as Stores and Distribution
Expense. Associate 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 sales
return reserve was $16.8 million, $11.7 million and
$9.1 million at January 29, 2011, January 30,
2010 and January 31, 2009, respectively.
The Company sells gift cards in its stores and through
direct-to-consumer
operations. The Company accounts for gift cards sold to
customers by recognizing a liability at the time of sale. Gift
cards sold to customers do not expire or lose value over periods
of inactivity. The liability remains on the Company’s books
until the earlier of redemption (recognized as revenue) or when
the Company determines the likelihood of redemption is remote
(recognized as other operating income). The Company determines
the probability of the gift card being redeemed to be remote
based on historical redemption patterns. At January 29,
2011 and January 30, 2010, the gift card liabilities on the
Company’s Consolidated Balance Sheets were
$47.1 million and $49.8 million, respectively.
The Company is not required by law to escheat the value of
unredeemed gift cards to the states in which it operates. During
Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company recognized
other operating income for adjustments to the gift card
liability of $7.8 million, $9.0 million and
$8.2 million, respectively.
The Company does not include tax amounts collected as part of
the sales transaction in its net sales results.
COST
OF GOODS SOLD
Cost of goods sold is primarily comprised of the following: cost
of merchandise, markdowns, inventory shrink, valuation reserves
and freight expenses.
STORES
AND DISTRIBUTION EXPENSE
Stores and distribution expense includes store payroll, store
management, rent, utilities and other landlord expenses,
depreciation and amortization, repairs and maintenance and other
store support functions, as well as
Direct-to-Consumer
expense and Distribution Center (“DC”) expense.
Direct-to-Consumer
expense was $64.8 million, $50.1 million and
$60.0 million for Fiscal 2010, Fiscal 2009, and Fiscal
2008, respectively.
MARKETING,
GENERAL & ADMINISTRATIVE EXPENSE
Marketing, general and administrative expense includes
photography and media ads; store marketing; home office payroll,
except for those departments included in stores and distribution
expense; information
65
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
technology; outside services such as legal and consulting;
relocation, as well as recruiting; samples and travel expenses.
OTHER
OPERATING INCOME, NET
Other operating income consists primarily of: income related to
gift card balances whose likelihood of redemption has been
determined to be remote; gains and losses on foreign currency
transactions; and the net impact of the change in valuation
associated with the
other-than-temporary
gains and losses on auction rate securities. See Note 5,
“
Investments
.”
WEBSITE
AND ADVERTISING COSTS
Website and advertising costs are expensed as incurred as a
component of Stores and Distribution Expense on the Consolidated
Statements of Operations and Comprehensive Income.
LEASES
The Company leases property for its stores under operating
leases. Lease agreements may 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 Sheets and amortizes
the deferred lease credit as a reduction of rent expense on the
Consolidated Statements of Operations and Comprehensive Income
over the terms of the leases. For scheduled rent escalation
clauses during the lease terms, the Company records minimum
rental expenses on a straight-line basis over the terms of the
leases on the Consolidated Statements of Operations and
Comprehensive 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.
Certain leases provide for contingent rents, which are
determined as a percentage of gross sales. The Company records a
contingent rent liability in accrued expenses on the
Consolidated Balance Sheets and the corresponding rent expense
on the Consolidated Statements of Operations and Comprehensive
Income when management determines that achieving the specified
levels during the fiscal year is probable.
Under GAAP, the Company is considered to be the owner of certain
store locations, primarily related to flagships, in which the
Company is deemed to be involved in structural construction and
has substantially all of the risks of ownership during
construction of the leased property. Accordingly, the Company
records a
construction-in-progress
asset which is included in Property and Equipment, Net and a
related lease financing obligation which is included in
Long-Term Debt on the Consolidated Balance Sheets. Once
construction is complete, the Company determines if the asset
qualifies for sale-leaseback accounting treatment. If the
arrangement does not qualify for sale-leaseback treatment, the
Company continues to amortize the obligation over the lease term
and depreciates the asset over its useful life.
STORE
PRE-OPENING EXPENSES
Pre-opening expenses related to new store openings are charged
to operations as incurred.
66
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
DESIGN
AND DEVELOPMENT COSTS
Costs to design and develop the Company’s merchandise are
expensed as incurred and are reflected as a component of
“Marketing, General and Administrative Expense.”
NET
INCOME PER SHARE
Net income per basic share is computed based on the
weighted-average number of outstanding shares of Class A
Common Stock (“Common Stock”). Net income per diluted
share includes the weighted-average effect of dilutive stock
options, stock appreciation rights and restricted stock units.
Weighted-Average Shares Outstanding and Anti-Dilutive
Shares (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Shares of Common Stock issued
|
103,300 | 103,300 | 103,300 | |||||||||
|
Treasury shares
|
(15,239 | ) | (15,426 | ) | (16,484 | ) | ||||||
|
Weighted-Average — basic shares
|
88,061 | 87,874 | 86,816 | |||||||||
|
Dilutive effect of stock options, stock appreciation rights and
restricted stock units
|
1,790 | 735 | 2,475 | |||||||||
|
Weighted-Average — diluted shares
|
89,851 | 88,609 | 89,291 | |||||||||
|
Anti-Dilutive shares
|
6,019 | (1) | 6,698 | (1) | 3,746 | (1) | ||||||
| (1) | Reflects the number of stock options, stock appreciation rights and restricted stock units outstanding, but excluded from the computation of net income per diluted share because the impact would be anti-dilutive. |
SHARE-BASED
COMPENSATION
See Note 3, “
Share-Based Compensation
.”
USE OF
ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The preparation of financial statements in accordance with 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.
| 3. | SHARE-BASED COMPENSATION |
Financial
Statement Impact
The Company recognized share-based compensation expense of
$40.6 million, $36.1 million and $42.0 million
for the fifty-two week periods ended January 29, 2011,
January 30, 2010 and January 31, 2009, respectively.
The Company also recognized $14.7 million,
$12.8 million and $15.4 million in tax benefits
67
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
related to share-based compensation for the fifty-two week
periods ended January 29, 2011, January 30, 2010 and
January 31, 2009, respectively.
A deferred tax asset is recorded for the compensation expense
required to be accrued under the accounting rules. A current
income tax deduction arises at the time the restricted stock
unit vests or stock option/stock appreciation right is
exercised. In the event the current income tax deduction is
greater or less than the associated deferred tax asset, the
difference is required under the accounting rules to be charged
first to the “windfall tax benefit” account. In the
event there is not a balance in the “windfall tax
benefit” account, the shortfall is charged to tax expense.
The amount of the Company’s “windfall tax
benefit” account, which is recorded as a component of
additional paid-in capital, was approximately $83.8 million
as of January 29, 2011. Based upon outstanding awards, the
“windfall tax benefit” account is sufficient to fully
absorb any shortfall which may develop.
Additionally, during Fiscal 2008, the Company recognized
$9.9 million of non-deductible tax expense as a result of
the execution of the Chairman and Chief Executive Officer’s
employment agreement effective December 19, 2008, which
pursuant to Section 162(m) of the Internal Revenue Code
resulted in the exclusion of previously recognized tax benefits
on share-based compensation.
Share-based compensation expense is recognized, net of estimated
forfeitures, over the requisite service period on a
straight-line basis. The Company adjusts share-based
compensation expense on a quarterly basis for actual forfeitures
and for changes to the estimate of expected award forfeitures
based on actual forfeiture experience. The effect of adjusting
the forfeiture rate is recognized in the period the forfeiture
estimate is changed. The effect of adjustments for forfeitures
during the fifty-two week period ended January 29, 2011 was
$4.5 million. The effect of adjustments for forfeitures
during the fifty-two week period ended January 30, 2010 was
$6.7 million.
A&F issues shares of Common Stock for stock option and
stock appreciation right exercises and restricted stock unit
vestings from treasury stock. As of January 29, 2011,
A&F had sufficient treasury stock available to settle stock
options, stock appreciation rights and restricted stock units
outstanding without having to repurchase additional shares of
Common Stock. Settlement of stock awards in Common Stock also
requires that the Company has sufficient shares available in
stockholder-approved plans at the applicable time.
In the event, at each reporting date during which share-based
compensation awards remain outstanding, there are not sufficient
shares of Common Stock available to be issued under the 2007
Long-Term Incentive Plan (the “2007 LTIP”), or under a
successor or replacement plan, the Company may be required to
designate some portion of the outstanding awards to be settled
in cash, which would result in liability classification of such
awards. The fair value of liability-classified awards is
re-measured each reporting date until such awards no longer
remain outstanding or until sufficient shares of Common Stock
become available to be issued under the 2007 LTIP, or under a
successor or replacement plan. As long as the awards are
required to be classified as a liability, the change in fair
value would be recognized in current period expense based on the
requisite service period rendered.
68
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Plans
As of January 29, 2011, A&F had two primary
share-based compensation plans: the 2005 Long-Term Incentive
Plan (the “2005 LTIP”), under which A&F grants
stock options, stock appreciation rights and restricted stock
units to associates of the Company and non-associate members of
the A&F Board of Directors, and the 2007 Long-Term
Incentive Plan (the “2007 LTIP”), under which A&F
grants stock options, stock appreciation rights and restricted
stock units to associates of the Company. A&F also has four
other share-based compensation plans under which it granted
stock options and restricted stock units to associates of the
Company and non-associate members of the A&F Board of
Directors in prior years.
The 2007 LTIP, a stockholder-approved plan, permits A&F to
grant awards of each type covering up to 2.0 million shares
annually, plus any unused annual limit from prior years, for the
type of award of A&F’s Common Stock to any associate
of the Company eligible to receive awards under the 2007 LTIP.
The 2005 LTIP, a stockholder-approved plan, permits A&F to
annually grant awards covering up to 250,000 shares of
A&F’s Common Stock, plus any unused annual limit from
prior years, for the type of award to any associate of the
Company (other than Michael S. Jeffries) who is subject to
Section 16 of the Securities Exchange Act of 1934, as
amended, at the time of the grant. In addition, any
non-associate director of A&F is eligible to receive awards
under the 2005 LTIP. Under both plans, stock options, stock
appreciation rights and restricted stock units vest primarily
over four years for associates. Under the 2005 LTIP, restricted
stock units typically vest over one year for non-associate
directors of A&F. Stock options have a ten-year term and
stock appreciation rights have up to a ten-year term, subject to
forfeiture under the terms of the plans. The plans provide for
accelerated vesting if there is a change of control as defined
in the plans.
Fair
Value Estimates
The Company estimates the fair value of stock options and stock
appreciation rights granted using the Black-Scholes
option-pricing model, which requires the Company to estimate the
expected term of the stock options and stock appreciation rights
and expected future stock price volatility over the expected
term. Estimates of expected terms, which represent the expected
periods of time the Company believes stock options and stock
appreciation rights will be outstanding, are based on historical
experience. Estimates of expected future stock price volatility
are based on the volatility of A&F’s Common Stock
price for the most recent historical period equal to the
expected term of the stock option or stock appreciation right,
as appropriate. The Company calculates the volatility as the
annualized standard deviation of the differences in the natural
logarithms of the weekly stock closing price, adjusted for stock
splits and dividends.
In the case of restricted stock units, the Company calculates
the fair value of the restricted stock units granted using the
market price of the underlying Common Stock on the date of grant
adjusted for anticipated dividend payments during the vesting
period.
Stock
Options
The Company did not grant any stock options during the fifty-two
weeks ended January 29, 2011. The weighted-average
estimated fair value of stock options granted during the
fifty-two weeks ended January 30,
69
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2010 and the fifty-two weeks ended January 31, 2009, and
the weighted-average assumptions used in calculating such fair
value, on the date of grant, were as follows:
| Fiscal Year | ||||||||
| Fiscal 2009 | Fiscal 2008 | |||||||
|
Grant date market price
|
$ | 22.87 | $ | 67.63 | ||||
|
Exercise price
|
$ | 22.87 | $ | 67.63 | ||||
|
Fair value
|
$ | 8.26 | $ | 18.03 | ||||
|
Assumptions:
|
||||||||
|
Price volatility
|
50 | % | 33 | % | ||||
|
Expected term (Years)
|
4.1 | 4.0 | ||||||
|
Risk-free interest rate
|
1.6 | % | 2.3 | % | ||||
|
Dividend yield
|
1.7 | % | 1.0 | % | ||||
Below is a summary of stock option activity for the fifty-two
weeks ended January 29, 2011:
|
Aggregate
|
Weighted-Average
|
|||||||||||||||
|
Number of
|
Weighted-Average
|
Intrinsic
|
Remaining
|
|||||||||||||
|
Stock Options
|
Shares | Exercise Price | Value | Contractual Life | ||||||||||||
|
Outstanding at January 30, 2010
|
2,969,861 | $ | 38.36 | |||||||||||||
|
Granted
|
— | — | ||||||||||||||
|
Exercised
|
(539,863 | ) | 27.19 | |||||||||||||
|
Forfeited or cancelled
|
(113,350 | ) | 68.04 | |||||||||||||
|
Outstanding at January 29, 2011
|
2,316,648 | $ | 39.51 | $ | 35,444,964 | 2.8 | ||||||||||
|
Stock options exercisable at January 29, 2011
|
2,101,035 | $ | 36.83 | $ | 34,201,294 | 2.4 | ||||||||||
|
Stock options expected to become exercisable at January 29,
2011
|
205,707 | $ | 66.14 | $ | 1,137,928 | 7.0 | ||||||||||
The total intrinsic value of stock options exercised during the
fifty-two weeks ended January 29, 2011, January 30,
2010 and January 31, 2009 was $10.7 million,
$0.6 million and $40.3 million, respectively.
The grant date fair value of stock options vested during the
fifty-two weeks ended January 29, 2011, January 30,
2010 and January 31, 2009 was $4.0 million,
$5.0 million and $5.1 million, respectively.
As of January 29, 2011, there was $1.8 million of
total unrecognized compensation cost, net of estimated
forfeitures, related to stock options. The unrecognized
compensation cost is expected to be recognized over a
weighted-average period of 0.6 years.
70
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Appreciation Rights
The weighted-average estimated fair value of stock appreciation
rights granted during the fifty-two weeks ended January 29,
2011, January 30, 2010 and January 31, 2009, and the
weighted-average assumptions used in calculating such fair
value, on the date of grant, were as follows:
| Fiscal Year | ||||||||||||||||||||||||||||
|
Chairman and Chief Executive
|
||||||||||||||||||||||||||||
| Officer | Other Executive Officers | All Other Associates | ||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||
|
Grant date market price
|
$ | 44.86 | $ | 28.42 | $ | 22.84 | $ | 44.86 | $ | 25.77 | $ | 44.32 | $ | 26.43 | ||||||||||||||
|
Exercise price
|
$ | 44.86 | $ | 32.99 | $ | 28.55 | $ | 44.86 | $ | 25.77 | $ | 44.32 | $ | 26.43 | ||||||||||||||
|
Fair value
|
$ | 16.96 | $ | 9.67 | $ | 8.06 | $ | 16.99 | $ | 10.06 | $ | 16.51 | $ | 10.00 | ||||||||||||||
|
Assumptions:
|
||||||||||||||||||||||||||||
|
Price volatility
|
50 | % | 47 | % | 45 | % | 51 | % | 52 | % | 53 | % | 53 | % | ||||||||||||||
|
Expected term (Years)
|
4.7 | 5.6 | 6.4 | 4.5 | 4.5 | 4.1 | 4.1 | |||||||||||||||||||||
|
Risk-free interest rate
|
2.3 | % | 2.5 | % | 1.6 | % | 2.3 | % | 1.6 | % | 2.0 | % | 1.6 | % | ||||||||||||||
|
Dividend yield
|
2.1 | % | 2.4 | % | 1.3 | % | 2.1 | % | 1.7 | % | 2.1 | % | 1.7 | % | ||||||||||||||
Below is a summary of stock appreciation rights activity for the
fifty-two weeks ended January 29, 2011:
|
Weighted-Average
|
||||||||||||||||
|
Number of
|
Weighted-Average
|
Aggregate
|
Remaining
|
|||||||||||||
|
Stock Appreciation Rights
|
Shares | Exercise Price | Intrinsic Value | Contractual Life | ||||||||||||
|
Outstanding at January 30, 2010
|
5,788,867 | $ | 30.88 | |||||||||||||
|
Granted:
|
||||||||||||||||
|
Chairman and Chief Executive Officer
|
829,697 | 44.86 | ||||||||||||||
|
Other Executive Officers
|
435,000 | 44.86 | ||||||||||||||
|
All Other Associates
|
306,500 | 44.32 | ||||||||||||||
|
Exercised
|
(100,400 | ) | 25.68 | |||||||||||||
|
Forfeited or cancelled
|
(123,475 | ) | 26.31 | |||||||||||||
|
Outstanding at January 29, 2011
|
7,136,189 | $ | 34.08 | $ | 103,568,853 | 5.8 | ||||||||||
|
Stock appreciation rights exercisable at January 29, 2011
|
347,816 | $ | 31.81 | $ | 5,757,482 | 6.3 | ||||||||||
|
Stock appreciation rights expected to become exercisable at
January 29, 2011
|
6,669,714 | $ | 34.00 | $ | 96,670,417 | 5.8 | ||||||||||
During Fiscal 2008, stock appreciation rights were only granted
to the Chairman and Chief Executive Officer.
71
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The total intrinsic value of stock appreciation rights exercised
during the fifty-two weeks ended January 29, 2011 was
$1.8 million.
The grant date fair value of stock appreciation rights vested
during the fifty-two weeks ended January 29, 2011 was
$5.0 million.
As of January 29, 2011, there was $53.5 million of
total unrecognized compensation cost, net of estimated
forfeitures, related to stock appreciation rights. The
unrecognized compensation cost is expected to be recognized over
a weighted-average period of 1.5 years.
Restricted
Stock Units
Below is a summary of restricted stock unit activity for the
fifty-two weeks ended January 29, 2011:
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
|
Restricted Stock Units
|
Number of Shares | Fair Value | ||||||
|
Non-vested at January 30, 2010
|
1,331,048 | $ | 55.45 | |||||
|
Granted
|
431,286 | 41.45 | ||||||
|
Vested
|
(410,092 | ) | 59.33 | |||||
|
Forfeited
|
(204,488 | ) | 50.70 | |||||
|
Non-vested at January 29, 2011
|
1,147,754 | $ | 49.59 | |||||
The total fair value of restricted stock units granted during
the fifty-two weeks ended January 29, 2011,
January 30, 2010 and January 31, 2009 was
$17.9 million, $11.5 million and $51.3 million,
respectively.
The total grant date fair value of restricted stock units and
restricted shares vested during the fifty-two weeks ended
January 29, 2011, January 30, 2010 and
January 31, 2009 was $24.3 million, $26.4 million
and $54.8 million, respectively.
As of January 29, 2011, there was $28.4 million of
total unrecognized compensation cost, net of estimated
forfeitures, related to non-vested restricted stock units. The
unrecognized compensation cost is expected to be recognized over
a weighted-average period of 1.1 years.
| 4. | CASH AND EQUIVALENTS |
Cash and equivalents consisted of (in thousands):
| January 29, 2011 | January 30, 2010 | |||||||
|
Cash and equivalents:
|
||||||||
|
Cash
|
$ | 300,624 | $ | 186,333 | ||||
|
Cash equivalents
|
525,729 | 483,617 | ||||||
|
Total cash and equivalents
|
$ | 826,353 | $ | 669,950 | ||||
72
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash and equivalents include amounts on deposit with financial
institutions, United States treasury bills, and other
investments, primarily held in money market accounts, with
original maturities of less than 3 months.
Any cash that is legally restricted from use is recorded in
Other Assets in the Consolidated Balance Sheet. Restricted cash
of $10.2 million was reclassified from Cash and Equivalents
to Other Assets for Fiscal 2009.
5. INVESTMENTS
Investments consisted of (in thousands):
| January 29, 2011 | January 30, 2010 | |||||||
|
Marketable securities — Current:
|
||||||||
|
Trading securities:
|
||||||||
|
Auction rate securities — UBS — student loan
backed
|
$ | — | $ | 20,049 | ||||
|
Auction rate securities — UBS — municipal
authority bonds
|
— | 12,307 | ||||||
|
Total trading securities
|
— | 32,356 | ||||||
|
Marketable securities — Non-Current:
|
||||||||
|
Available-for-sale
securities:
|
||||||||
|
Auction rate securities — student loan backed
|
85,732 | 118,390 | ||||||
|
Auction rate securities — municipal authority bonds
|
14,802 | 23,404 | ||||||
|
Total
available-for-sale
securities
|
100,534 | 141,794 | ||||||
|
Rabbi Trust
assets:
(1)
|
||||||||
|
Money market funds
|
343 | 1,317 | ||||||
|
Municipal notes and bonds
|
11,870 | 18,537 | ||||||
|
Trust-owned life insurance policies (at cash surrender value)
|
70,288 | 51,391 | ||||||
|
Total Rabbi Trust assets
|
82,501 | 71,245 | ||||||
|
Total investments
|
$ | 183,035 | $ | 245,395 | ||||
| (1) | Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use. |
At January 29, 2011 and January 30, 2010, the
Company’s investment grade auction rate securities
(“ARS”) consisted of insured student loan backed
securities and municipal authority bonds, with maturities
ranging from 17 to 32 years. Each investment in student
loans is insured by (1) the U.S. government under the
Federal Family Education Loan Program, (2) a private
insurer or (3) a combination of both. The percentage of
insurance coverage of the outstanding principal and interest of
the ARS varies by security.
73
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The par and carrying values, and related cumulative temporary
impairment charges for the Company’s
available-for-sale
marketable securities as of January 29, 2011 were as
follows:
|
Temporary
|
Carrying
|
|||||||||||
| Par Value | Impairment | Value | ||||||||||
| (In thousands) | ||||||||||||
|
Available-for-sale
securities:
|
||||||||||||
|
Auction rate securities — student loan backed
|
$ | 95,625 | $ | (9,893 | ) | $ | 85,732 | |||||
|
Auction rate securities — municipal authority bonds
|
19,975 | (5,173 | ) | 14,802 | ||||||||
|
Total
available-for-sale
securities
|
$ | 115,600 | $ | (15,066 | ) | $ | 100,534 | |||||
See Note 6, “
Fair Value
” for further
discussion on the valuation of the ARS.
An impairment is considered to be
other-than-temporary
if an entity (i) intends to sell the security,
(ii) more likely than not will be required to sell the
security before recovering its amortized cost basis, or
(iii) does not expect to recover the security’s entire
amortized cost basis, even if there is no intent to sell the
security. The Company has not incurred any credit-related losses
on
available-for-sale
ARS and furthermore, the issuers continued to perform under the
obligations, including making scheduled interest payments, and
the Company expects that this will continue going forward.
On November 13, 2008, the Company entered into an agreement
(the “UBS Agreement”) with UBS AG (“UBS”), a
Swiss corporation, relating to ARS with a par value of
$76.5 million. By entering into the UBS Agreement, UBS
received the right to purchase these ARS at par, at any time,
commencing on November 13, 2008 and the Company reserved
the right to sell (“Put Option”) these ARS back to UBS
at par, commencing on June 30, 2010. Upon acceptance of the
UBS Agreement, the Company no longer had the intent to hold the
UBS ARS until maturity. Therefore, the impairment could no
longer be considered temporary and the UBS ARS were classified
as trading securities. In addition, and simultaneously, the
Company elected to apply fair value accounting for the related
Put Option. Pursuant to the UBS Agreement, the Company exercised
the Put Option and the remaining ARS covered by the UBS
Agreement, $37.1 million at par, were acquired by UBS
during the fifty-two weeks ended January 29, 2011.
The irrevocable rabbi trust (the “Rabbi Trust”) is
intended to be used as a source of funds to match respective
funding obligations to participants in the
Abercrombie & Fitch Co. Nonqualified Savings and
Supplemental Retirement Plan I, the Abercrombie &
Fitch Co. Nonqualified Savings and Supplemental Retirement
Plan II and the Chief Executive Officer Supplemental
Executive Retirement Plan. The Rabbi Trust assets are
consolidated and recorded at fair value, with the exception of
the trust-owned life insurance policies which are recorded at
cash surrender value. The Rabbi Trust assets are included in
Other Assets on the Consolidated Balance Sheets and are
restricted as to their use as noted above. Net unrealized gains
and losses related to the municipal notes and bonds held in the
Rabbi Trust were not material for the fifty-two week periods
ended January 29, 2011 and January 30, 2010. The
change in cash surrender value of the trust-owned life insurance
policies held in the Rabbi Trust resulted in realized gains of
$2.3 million and $5.3 million for the fifty-two weeks
ended January 29, 2011 and January 30, 2010,
respectively, recorded as Interest Expense (Income), Net on the
Consolidated Statements of Operations and Comprehensive Income.
74
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | FAIR VALUE |
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The inputs
used to measure fair value are prioritized based on a
three-level hierarchy. The three levels of inputs to measure
fair value are as follows:
| • | Level 1 — inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets. | |
| • | Level 2 — inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. | |
| • | Level 3 — inputs to the valuation methodology are unobservable. |
The lowest level of significant input determines the placement
of the entire fair value measurement in the hierarchy. The three
levels of the hierarchy and the distribution of the
Company’s assets and liabilities, measured at fair value,
within it were as follows:
| Assets at Fair Value as of January 29, 2011 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
ASSETS:
|
||||||||||||||||
|
Money market
funds
(1)
|
$ | 401,102 | $ | — | $ | — | $ | 401,102 | ||||||||
|
Treasury Bills
|
124,968 | — | — | 124,968 | ||||||||||||
|
ARS —
available-for-sale —
student loan backed
|
— | — | 85,732 | 85,732 | ||||||||||||
|
ARS —
available-for-sale —
municipal authority bonds
|
— | — | 14,802 | 14,802 | ||||||||||||
|
Municipal notes and bonds held in the Rabbi Trust
|
11,870 | — | — | 11,870 | ||||||||||||
|
Derivative financial instruments
|
— | 727 | — | 727 | ||||||||||||
|
Total assets measured at fair value
|
$ | 537,940 | $ | 727 | $ | 100,534 | $ | 639,201 | ||||||||
|
LIABILITIES:
|
||||||||||||||||
|
Derivative financial instruments
|
— | 1,143 | — | 1,143 | ||||||||||||
|
Total liabilities measured at fair value
|
$ | — | $ | 1,143 | $ | — | $ | 1,143 | ||||||||
| (1) | Includes $400.8 million of money market funds included in Cash and Equivalents and $0.3 million of money market funds held in the Rabbi Trust included in Other Assets on the Consolidated Balance Sheet. |
The level 2 assets consist of derivative financial
instruments, primarily forward foreign exchange contracts. The
fair value of forward foreign exchange contracts is determined
by using quoted market prices of the same or similar
instruments, adjusted for counterparty risk.
The level 3 assets include investments in insured student
loan backed ARS and insured municipal authority bond ARS which
are
available-for-sale.
75
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As a result of a lack of liquidity in the current ARS market,
the Company measures the fair value of its ARS primarily using a
discounted cash flow model as well as a comparison to similar
securities in the market. Certain significant inputs into the
model are unobservable in the market including the periodic
coupon rate, market rate of return and expected term.
As of January 29, 2011, approximately 73% of the
Company’s ARS were “AAA” rated, approximately 12%
were “AA” rated, and approximately 15% were
“A−” rated, in each case as rated by one or more
of the major credit rating agencies.
The table below includes a roll-forward of the Company’s
level 3 assets and liabilities from January 30, 2010
to January 29, 2011. When a determination is made to
classify an asset or liability within level 3, the
determination is based upon the lack of significance of the
observable parameters to the overall fair value measurement.
However, the fair value determination for level 3 financial
assets and liabilities may include observable components.
|
Trading ARS -
|
Trading ARS -
|
Available-for-sale
|
Available-for-sale
|
Put
|
||||||||||||||||||||
| Student Loans | Muni Bonds | ARS - Student Loans | ARS - Muni Bonds | Option | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fair value, January 30, 2010
|
$ | 20,049 | $ | 12,307 | $ | 118,390 | $ | 23,404 | $ | 4,640 | $ | 178,790 | ||||||||||||
|
Redemptions
|
(22,100 | ) | (15,000 | ) | (32,475 | ) | (8,600 | ) | (4,640 | ) | (82,815 | ) | ||||||||||||
|
Transfers (out)/in
|
— | — | — | — | — | — | ||||||||||||||||||
|
Gains and (losses), net:
|
||||||||||||||||||||||||
|
Reported in Net Income
|
2,051 | 2,693 | — | — | 4,744 | |||||||||||||||||||
|
Reported in Other Comprehensive Income
|
— | — | (183 | ) | (2 | ) | — | (185 | ) | |||||||||||||||
|
Fair value, January 29, 2011
|
$ | — | $ | — | $ | 85,732 | $ | 14,802 | $ | — | $ | 100,534 | ||||||||||||
76
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 7. | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net, consisted of (in thousands):
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
|
Land
|
$ | 36,885 | $ | 32,877 | ||||
|
Building
|
223,520 | 223,532 | ||||||
|
Furniture, fixtures and equipment
|
602,885 | 593,984 | ||||||
|
Information technology
|
233,867 | 211,461 | ||||||
|
Leasehold improvements
|
1,247,493 | 1,205,276 | ||||||
|
Construction in progress
|
64,401 | 48,352 | ||||||
|
Other
|
47,006 | 47,010 | ||||||
|
Total
|
$ | 2,456,057 | $ | 2,362,492 | ||||
|
Less: Accumulated depreciation and amortization
|
(1,306,474 | ) | (1,118,473 | ) | ||||
|
Property and equipment, net
|
$ | 1,149,583 | $ | 1,244,019 | ||||
Long-lived assets, primarily comprised of property and
equipment, are reviewed periodically for impairment or whenever
events or changes in circumstances indicate that full
recoverability of net asset balances through future cash flows
is in question. Factors used in the evaluation include, but are
not limited to, management’s plans for future operations,
recent operating results, and projected cash flows.
In the second quarter of Fiscal 2010, as a result of a strategic
review of under-performing stores, the Company determined that a
number of stores were likely to be closed prior to lease
expiration, which caused a triggering event requiring the
Company to evaluate the related long-lived assets for
impairment. Associated with these expected closures, the Company
incurred a non-cash, pre-tax asset impairment charge of
$2.2 million, included in Stores and Distribution Expense
on the Consolidated Statement of Operations and Comprehensive
Income for the fifty-two weeks ended January 29, 2011. The
charge was associated with one Abercrombie & Fitch,
one abercrombie kids and three Hollister stores.
In the fourth quarter of Fiscal 2010, as a result of the fiscal
year-end review of long-lived store-related assets, the Company
incurred store-related asset impairment charges of
$48.4 million, included in Stores and Distribution Expense
on the Consolidated Statement of Operations and Comprehensive
Income for the fifty-two weeks ended January 29, 2011. The
asset impairment charge was primarily related to 13 Gilly Hicks
stores constructed using the original large format store of
approximately 10,000 gross square feet which has been
revised to a smaller format of 5,000 gross square feet for
new stores. The charge also included one Abercrombie &
Fitch, one Abercrombie kids and six Hollister stores.
In the fourth quarter of Fiscal 2009, as a part of the
Company’s year-end review for impairment of long-lived
store-related assets, the Company incurred a non-cash, pre-tax
impairment charge of $33.2 million, reported in Stores and
Distribution Expense on the Consolidated Statement of Operations
and Comprehensive Income for the fifty-two weeks ended
January 30, 2010. The charge was associated with 34
Abercrombie & Fitch stores, 46 abercrombie kids stores
and 19 Hollister stores.
77
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During Fiscal 2009, as a result of a strategic review of the
RUEHL business, the Company determined that a triggering event
occurred. As a result of that assessment, the Company incurred
non-cash, pre-tax impairment charges of $51.5 million,
reported in Loss from Discontinued Operations, Net of Tax on the
Consolidated Statement of Operations and Comprehensive Income
for the fifty-two weeks ended January 30, 2010. There was
no remaining fair value of RUEHL long-lived assets as of
January 30, 2010.
Store-related assets are considered level 3 assets in the
fair value hierarchy and the fair values were determined at the
store level, primarily using a discounted cash flow model. The
estimation of future cash flows from operating activities
requires significant estimates of factors that include future
sales, gross margin performance and operating expenses. In
instances where the discounted cash flow analysis indicated a
negative value at the store level, the market exit price based
on historical experience was used to determine the fair value by
asset type. The Company had store-related assets measured at
fair value of $14.6 million and $19.3 million on the
Consolidated Balance Sheets at January 29, 2011 and
January 30, 2010, respectively.
| 8. | OTHER ASSETS |
Other assets consisted of (in thousands):
| 2010 | 2009 | |||||||
|
Rabbi Trust
|
$ | 82,501 | $ | 71,245 | ||||
|
Lease deposits
|
61,658 | 54,051 | ||||||
|
Store supplies
|
32,275 | 32,441 | ||||||
|
Restricted cash
|
26,322 | 10,163 | ||||||
|
Non-current deferred tax asset
|
16,764 | 1,516 | ||||||
|
Prepaid income tax on intercompany items
|
13,709 | 12,694 | ||||||
|
Other
|
31,288 | 28,260 | ||||||
|
Other assets
|
$ | 264,517 | $ | 210,370 | ||||
Restricted cash includes various cash deposits with
international banks that are used as collateralization for
customary non-debt banking commitments and deposits into trust
accounts to conform with standard insurance security
requirements. Store supplies include, but are not limited to,
hangers, frames, sign holders, security tags and back-room
supplies. Other includes intangible intellectual property,
prepaid leases, and various other assets.
| 9. | DEFERRED LEASE CREDITS |
Deferred lease credits are derived from payments received from
landlords to wholly or partially offset store construction costs
and are classified between current and long-term liabilities.
The amounts, which are amortized over the respective lives of
the related leases, consisted of the following (in thousands):
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
|
Deferred lease credits
|
$ | 544,223 | $ | 546,191 | ||||
|
Amortized deferred lease credits
|
(310,066 | ) | (290,542 | ) | ||||
|
Total deferred lease credits, net
|
$ | 234,157 | $ | 255,649 | ||||
78
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | LEASED FACILITIES |
Annual store rent is comprised of a fixed minimum amount
and/or
contingent rent based on a percentage of sales. For scheduled
rent escalation clauses during the lease terms, the Company
records minimum rental expenses on a straight-line basis over
the terms of the leases on the Consolidated Statements of
Operations and Comprehensive 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.
Certain leases provide for contingent rents, which are primarily
determined as a percentage of sales in excess of a predetermined
level. The Company records a contingent rent liability in
accrued expenses on the Consolidated Balance Sheets and the
corresponding rent expense on the Consolidated Statements of
Operations and Comprehensive Income when the Company determines
that it is probable that the expense has been incurred and the
amount can be reasonably estimated.
Store lease terms may also require additional payments covering
taxes, common area costs and certain other expenses.
A summary of rent expense follows (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Store rent:
|
||||||||||||
|
Fixed minimum
|
$ | 333,419 | $ | 301,138 | $ | 267,108 | ||||||
|
Contingent
|
9,306 | 6,136 | 14,289 | |||||||||
|
Total store rent
|
342,725 | 307,274 | 281,397 | |||||||||
|
Buildings, equipment and other
|
4,988 | 5,071 | 5,905 | |||||||||
|
Total rent expense
|
$ | 347,713 | $ | 312,345 | $ | 287,302 | ||||||
At January 29, 2011, the Company was committed to
non-cancelable leases with remaining terms of one to
17 years. A summary of operating lease commitments under
non-cancelable leases follows (thousands):
|
Fiscal 2011
|
$ | 331,151 | ||
|
Fiscal 2012
|
$ | 319,982 | ||
|
Fiscal 2013
|
$ | 303,531 | ||
|
Fiscal 2014
|
$ | 285,337 | ||
|
Fiscal 2015
|
$ | 262,586 | ||
|
Thereafter
|
$ | 1,110,598 |
79
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 11. | ACCRUED EXPENSES |
Accrued expense consisted of (in thousands):
| 2010 | 2009 | |||||||
|
Accrued payroll and related costs
|
$ | 71,456 | $ | 45,476 | ||||
|
Gift card liability
|
47,098 | 49,778 | ||||||
|
Accrued taxes
|
40,562 | 32,784 | ||||||
|
Construction in progress
|
24,915 | 5,838 | ||||||
|
Accrued rent
|
23,247 | 15,356 | ||||||
|
Return reserve
|
16,764 | 11,665 | ||||||
|
Other
|
82,545 | 85,392 | ||||||
|
Accrued expenses
|
$ | 306,587 | $ | 246,289 | ||||
Accrued payroll and related costs include salaries, benefits,
withholdings and other payroll related costs. Other accrued
expenses include expenses incurred but not yet paid related to
outside services associated with store,
direct-to-consumer
and home office operations.
| 12. | OTHER LIABILITIES |
Other liabilities consisted of (in thousands):
| 2010 | 2009 | |||||||
|
Accrued straight-line rent
|
$ | 95,838 | $ | 87,147 | ||||
|
Deferred compensation
|
76,198 | 66,053 | ||||||
|
Unrecognized tax benefits, including interest and penalties
|
20,994 | 39,314 | ||||||
|
Other
|
10,537 | 21,656 | ||||||
|
Other liabilities
|
$ | 203,567 | $ | 214,170 | ||||
Deferred compensation includes the Chief Executive Officer
Supplemental Executive Retirement Plan (the “SERP”),
the Abercrombie & Fitch Co. Savings and Retirement
Plan and the Abercrombie & Fitch Nonqualified Savings
and Supplemental Retirement Plan, all further discussed in
Note 17, “
Retirement Benefits
” as well as
deferred Board of Directors compensation and other accrued
retirement benefits.
| 13. | INCOME TAXES |
Earnings from continuing operations before taxes (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Domestic
|
$ | 190,570 | $ | 119,358 | $ | 501,125 | ||||||
|
Foreign
|
38,000 | 152 | 8,519 | |||||||||
|
Total
|
$ | 228,570 | $ | 119,510 | $ | 509,644 | ||||||
80
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The provision for income taxes from continuing operations
consisted of (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 94,922 | $ | 33,212 | $ | 166,327 | ||||||
|
State
|
16,126 | 4,003 | 17,467 | |||||||||
|
Foreign
|
11,395 | 5,086 | 8,112 | |||||||||
| $ | 122,443 | $ | 42,301 | $ | 191,906 | |||||||
|
Deferred:
|
||||||||||||
|
Federal
|
$ | (32,669 | ) | $ | 10,055 | $ | 14,028 | |||||
|
State
|
(7,229 | ) | (147 | ) | 2,480 | |||||||
|
Foreign
|
(4,258 | ) | (11,652 | ) | (6,939 | ) | ||||||
| $ | (44,156 | ) | $ | (1,744 | ) | $ | 9,569 | |||||
|
Total provision
|
$ | 78,287 | $ | 40,557 | $ | 201,475 | ||||||
Reconciliation between the statutory federal income tax rate and
the effective tax rate for continuing operations is as follows:
| 2010 | 2009 | 2008 | ||||||||||||||
|
Federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||||||
|
State income tax, net of federal income tax effect
|
2.5 | 2.1 | 2.5 | |||||||||||||
|
Tax effect of foreign earnings
|
(2.9 | ) | (4.4 | ) | (0.1 | ) | ||||||||||
|
Internal Revenue Code (“IRC”) Section 162(m)
|
0.5 | 1.5 | 2.5 | |||||||||||||
|
Other items, net
|
(0.8 | ) | (0.3 | ) | (0.4 | ) | ||||||||||
|
Total
|
34.3 | % | 33.9 | % | 39.5 | % | ||||||||||
Amounts paid directly to taxing authorities were
$85.1 million, $27.1 million, and $198.2 million
in Fiscal 2010, Fiscal 2009, and Fiscal 2008, respectively.
81
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effect of temporary differences which give rise to deferred
income tax assets (liabilities) were as follows (thousands):
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Deferred compensation
|
$ | 59,027 | $ | 48,476 | ||||
|
Rent
|
26,158 | 40,585 | ||||||
|
Accrued expenses
|
22,920 | 15,464 | ||||||
|
Foreign net operating losses
|
11,510 | 11,329 | ||||||
|
Reserves
|
8,666 | 8,757 | ||||||
|
Inventory
|
13,683 | 7,829 | ||||||
|
Other
|
2,476 | 2,223 | ||||||
|
Realized and unrealized investment losses
|
592 | 1,152 | ||||||
|
Valuation allowance
|
— | (1,369 | ) | |||||
|
Total deferred tax assets
|
$ | 145,032 | $ | 134,446 | ||||
|
Deferred tax liabilities:
|
||||||||
|
Store supplies
|
(11,911 | ) | (12,128 | ) | ||||
|
Property and equipment
|
(94,630 | ) | (127,983 | ) | ||||
|
Total deferred tax liabilities
|
$ | (106,541 | ) | $ | (140,111 | ) | ||
|
Net deferred income tax assets (liabilities)
|
$ | 38,491 | $ | (5,665 | ) | |||
Accumulated other comprehensive income is shown net of deferred
tax assets and deferred tax liabilities, resulting in a deferred
tax asset of $5.2 million and of $4.6 million for
Fiscal 2010 and Fiscal 2009, respectively. Accordingly, these
deferred taxes are not reflected in the table above.
As of January 29, 2011 and January 30, 2010, the net
operating foreign subsidiaries’ valuation allowance totaled
$0 and $0.2 million, respectively.
As of January 29, 2011 and January 30, 2010, the
valuation allowance for realized and unrealized investment
losses totaled $0 and $1.1 million, respectively.
No other valuation allowances have been provided for deferred
tax assets because management believes that it is more likely
than not that the full amount of the net deferred tax assets
will be realized in the future.
82
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Unrecognized tax benefits, beginning of the year
|
$ | 29,437 | $ | 43,684 | $ | 38,894 | ||||||
|
Gross addition for tax positions of the current year
|
562 | 222 | 5,539 | |||||||||
|
Gross addition for tax positions of prior years
|
1,734 | 2,167 | 8,754 | |||||||||
|
Reductions of tax positions of prior years for:
|
||||||||||||
|
Changes in judgment/excess reserve
|
(412 | ) | (10,744 | ) | (4,206 | ) | ||||||
|
Settlements during the period
|
(14,166 | ) | (5,444 | ) | (1,608 | ) | ||||||
|
Lapses of applicable statutes of limitations
|
(2,328 | ) | (448 | ) | (3,689 | ) | ||||||
|
Unrecognized tax benefits, end of year
|
$ | 14,827 | $ | 29,437 | $ | 43,684 | ||||||
The amount of the above unrecognized tax benefits at
January 29, 2011, January 30, 2010 and
January 31, 2009 which would impact the Company’s
effective tax rate, if recognized, was $14.8 million,
$29.4 million and $43.7 million, respectively.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
Tax expense for Fiscal 2010 included a $3.4 million
reversal of net accrued interest, compared to $1.2 million
of net accrued interest as of the end of Fiscal 2009. Interest
and penalties of $6.2 million had been accrued as of the
end of Fiscal 2010, compared to $9.9 million accrued as of
the end of Fiscal 2009.
The Internal Revenue Service (“IRS”) is currently
conducting an examination of the Company’s
U.S. federal income tax return for Fiscal 2010 as part of
the IRS’s Compliance Assurance Process program. IRS
examinations for Fiscal 2009 and prior years have been completed
and settled. State and foreign returns are generally subject to
examination for a period of 3-5 years after the filing of
the respective return. The Company has various state and foreign
income tax returns in the process of examination or
administrative appeals.
The Company does not expect material adjustments to the total
amount of unrecognized tax benefits within the next
12 months, but the outcome of tax matters is uncertain and
unforeseen results can occur.
As of January 29, 2011, U.S. taxes had not been
provided on approximately $44.5 million of unremitted
earnings of subsidiaries operating outside of the
U.S. These earnings, which are considered to be invested
indefinitely, would become subject to income tax if they were
remitted as dividends or were lent to A&F or a
U.S. affiliate, or if A&F were to sell its stock in
the subsidiaries. Determination of the amount of unrecognized
deferred U.S. income tax liability on these unremitted
earnings is not practicable because of the complexities
associated with this hypothetical calculation.
| 14. | LONG-TERM DEBT |
On April 15, 2008, the Company entered into a syndicated
unsecured credit agreement (as previously amended by Amendment
No. 1 to Credit Agreement made as of December 29,
2008, the “Credit Agreement”) under which up to
$450 million was available. On June 16, 2009, the
Company amended the Credit
83
Table of Contents
ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Agreement and, as a result, revised the ratio requirements, as
further discussed below, and also reduced the amount available
from $450 million to $350 million (as amended, the
“Amended Credit Agreement”). As stated in the Amended
Credit Agreement, the primary purposes of the agreement are for
trade and stand-by letters of credit in the ordinary course of
business, as well as to fund working capital, capital
expenditures, acquisitions and investments, and other general
corporate purposes.
The Amended Credit Agreement has several borrowing options,
including interest rates that are based on: (i) a defined
Base Rate, plus a margin based on the defined Leverage Ratio,
payable quarterly; (ii) an Adjusted Eurodollar Rate (as
defined in the Amended Credit Agreement) plus a margin based on
the Leverage Ratio, payable at the end of the applicable
interest period for the borrowing and, for interest periods in
excess of three months, on the date that is three months after
the commencement of the interest period; or (iii) an
Adjusted Foreign Currency Rate (as defined in the Amended Credit
Agreement) plus a margin based on the Leverage Ratio, payable at
the end of the applicable interest period for the borrowing and,
for interest periods in excess of three months, on the date that
is three months after the commencement of the interest period.
The Base Rate represents a rate per annum equal to the higher of
(a) PNC Bank’s then publicly announced prime rate or
(b) the Federal Funds Effective Rate (as defined in the
Amended Credit Agreement) as then in effect plus
1
/
2
of 1.0%. The facility fees payable under the Amended Credit
Agreement are based on the Company’s Leverage Ratio (i.e.,
the ratio, on a consolidated basis, of (a) the sum of total
debt (excluding trade letters of credit) plus 600% of forward
minimum rent commitments to (b) consolidated earnings
before interest, taxes, depreciation, amortization and rent with
the further adjustments to be discussed in the following
paragraphs (“Consolidated EBITDAR”) for the trailing
four-consecutive-fiscal-quarter periods. The facility fees
accrue at a rate of 0.25% to 0.625% per annum based on the
Leverage Ratio for the most recent determination date. The
Amended Credit Agreement did not have a utilization fee as of
January 29, 2011. The Amended Credit Agreement requires
that the Leverage Ratio not be greater than 3.75 to 1.00 at the
end of each testing period. The Company’s Leverage Ratio
was 2.43 as of January 29, 2011. The Amended Credit
Agreement also required that the Coverage Ratio for A&F and
its subsidiaries on a consolidated basis of
(i) Consolidated EBITDAR for the trailing
four-consecutive-fiscal-quarter period to (ii) the sum of,
without duplication, (x) net interest expense for such
period, (y) scheduled payments of long-term debt due within
twelve months of the date of determination and (z) the sum
of minimum rent and contingent store rent, not be less than 1.75
to 1.00 at January 29, 2011. The minimum Coverage Ratio
varies over time based on the terms set forth in the Amended
Credit Agreement. The Amended Credit Agreement amended the
definition of Consolidated EBITDAR to add back the following
items, among others: (a) recognized losses arising from
investments in certain ARS to the extent such losses do not
exceed a defined level of impairments for those investments;
(b) non-cash charges in an amount not to exceed
$50 million related to the closure of RUEHL branded stores
and related
direct-to-consumer
operations; (c) non-recurring cash charges in an aggregate
amount not to exceed $61 million related to the closure of
RUEHL branded stores and related
direct-to-consumer
operations; (d) additional non-recurring non-cash charges
in an amount not to exceed $20 million in the aggregate
over the trailing four-consecutive-fiscal-quarter period; and
(e) other non-recurring cash charges in an amount not to
exceed $10 million in the aggregate over the trailing
four-consecutive-fiscal-quarter period. The Company’s
Coverage Ratio was 2.51 as of January 29, 2011. The Amended
Credit Agreement also limited the Company’s consolidated
capital expenditures to $325 million in Fiscal 2010, plus
$99.5 million representing the unused portion of the
allowable capital expenditures from Fiscal 2009. The Company was
in compliance with the applicable ratio requirements and other
covenants at January 29, 2011.
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The terms of the Amended Credit Agreement include customary
events of default such as payment defaults, cross-defaults to
other material indebtedness, bankruptcy and insolvency, the
occurrence of a defined change in control, or the failure to
observe the negative covenants and other covenants related to
the operation and conduct of the business of A&F and its
subsidiaries. Upon an event of default, the lenders will not be
obligated to make loans or other extensions of credit and may,
among other things, terminate their commitments to the Company,
and declare any then outstanding loans due and payable
immediately.
The Amended Credit Agreement will mature on April 12, 2013.
There were no trade letters of credit outstanding at
January 29, 2011. Trade letters of credit totaling
approximately $35.9 million were outstanding on
January 30, 2010. Stand-by letters of credit totaling
approximately $3.0 million and $14.1 million were
outstanding on January 29, 2011 and January 30, 2010,
respectively. The stand-by letters of credit are set to expire
primarily during the third quarter of Fiscal 2011. To date, no
beneficiary has drawn upon the stand-by letters of credit.
The Company had $43.8 million and $50.9 million
outstanding under the Amended Credit Agreement as of
January 29, 2011, and January 30, 2010, respectively.
The amounts outstanding under the Amended Credit Agreement as of
January 29, 2011 and January 30, 2010 were denominated
in Japanese Yen. As of January 29, 2011 and
January 30, 2010, the Company also had $24.8 million
and $20.3 million, respectively, of long-term debt related
to the landlord financing obligation for certain leases where
the Company is deemed the owner of the project for accounting
purposes, as substantially all of the risk of ownership during
construction of a leased property is held by the Company. The
landlord financing obligation is amortized over the life of the
related lease.
As of January 29, 2011, the carrying value of the
Company’s long-term debt approximated fair value. Total
interest expense was $7.8 million, $6.6 million and
$3.4 million for Fiscal 2010, Fiscal 2009 and Fiscal 2008,
respectively. The average interest rate for the long-term debt
recorded under the Amended Credit Agreement was 2.7% for the
fifty-two weeks ended January 29, 2011.
On March 6, 2009, the Company entered a secured,
uncommitted demand line of credit (the “UBS Credit
Line”). The amount available under the UBS Credit Line was
subject to adjustment from
time-to-time
based on the market value of the Company’s UBS ARS as
determined by UBS. As a result of UBS acquiring the remaining
UBS ARS originally purchased by the Company through UBS and
described further in Note 5,
“
Investments
”, the UBS Credit Line was
terminated during the fifty-two weeks ended January 29,
2011.
| 15. | DERIVATIVES |
The Company is exposed to risks associated with changes in
foreign currency exchange rates and uses derivatives, primarily
forward contracts, to manage the financial impacts of these
exposures. The Company does not use forward contracts to engage
in currency speculation and does not enter into derivative
financial instruments for trading purposes.
In order to qualify for hedge accounting treatment, a derivative
must be considered highly effective at offsetting changes in
either the hedged item’s cash flows or fair value.
Additionally, the hedge relationship must be documented to
include the risk management objective and strategy, the hedging
instrument, the hedged item, the risk exposure, and how hedge
effectiveness will be assessed prospectively and
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
retrospectively. The extent to which a hedging instrument has
been and is expected to continue to be effective at achieving
offsetting changes in fair value or cash flows is assessed and
documented at least quarterly. Any hedge ineffectiveness is
reported in current period earnings and hedge accounting is
discontinued if it is determined that the derivative is not
highly effective.
For derivatives that either do not qualify for hedge accounting
or are not designated as hedges, all changes in the fair value
of the derivative are recognized in earnings. For qualifying
cash flow hedges, the effective portion of the change in the
fair value of the derivative is recorded as a component of Other
Comprehensive Income (“OCI”) and recognized in
earnings when the hedged cash flows affect earnings. The
ineffective portion of the derivative gain or loss, as well as
changes in the fair value of the derivative’s time value
are recognized in current period earnings. The effectiveness of
the hedge is assessed based on changes in the fair value
attributable to changes in spot prices. The changes in the fair
value of the derivative contract related to the changes in the
difference between the spot price and the forward price are
excluded from the assessment of hedge effectiveness and are also
recognized in current period earnings. If the cash flow hedge
relationship is terminated, the derivative gains or losses that
are deferred in OCI will be recognized in earnings when the
hedged cash flows occur. However, for cash flow hedges that are
terminated because the forecasted transaction is not expected to
occur in the original specified time period, or a two-month
period thereafter, the derivative gains or losses are
immediately recognized in earnings. The Company recognized a
gain of $0.7 million reclassified into earnings as a result
of the de-designation of certain cash flow hedges during the
fifty-two weeks ended January 29, 2011.
The Company uses derivative instruments, primarily forward
contracts designated as cash flow hedges, to hedge the foreign
currency exposure associated with forecasted
foreign-currency-denominated intercompany inventory sales to
foreign subsidiaries and the related settlement of the
foreign-currency-denominated inter-company receivable.
Fluctuations in exchange rates will either increase or decrease
the Company’s U.S. dollar equivalent cash flows and
affect the Company’s U.S. dollar earnings. Gains or
losses on the foreign exchange forward contracts that are used
to hedge these exposures are expected to partially offset this
variability. Foreign exchange forward contracts represent
agreements to exchange the currency of one country for the
currency of another country at an
agreed-upon
settlement date. As of January 29, 2011, the maximum length
of time over which forecasted foreign-currency-denominated
inter-company inventory sales were hedged was twelve months. The
sale of the inventory to the Company’s customers will
result in the reclassification of related derivative gains and
losses that are reported in Accumulated Other Comprehensive
Income (Loss). Substantially all of the remaining unrealized
gains or losses related to foreign-currency-denominated
inter-company inventory sales that have occurred as of
January 29, 2011 will be recognized in costs of goods sold
over the following two months at the values at the date the
inventory was sold to the respective subsidiary.
The Company nets derivative assets and liabilities on the
Consolidated Balance Sheets to the extent that master netting
arrangements meet the specific accounting requirements set forth
by U.S. GAAP.
As of January 29, 2011, the Company had the following
outstanding foreign exchange forward contracts that were entered
to hedge either a portion of forecasted
foreign-currency-denominated inter-company
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
inventory sales, the resulting settlement of the
foreign-currency-denominated inter-company accounts receivable,
or both:
| Notional Amount(1) | ||||
|
Canadian Dollar
|
$ | 12,045 | ||
|
British Pound
|
$ | 34,079 | ||
|
Euro
|
$ | 26,569 | ||
|
Japanese Yen
|
$ | 8,715 | ||
| (1) | Amounts are reported in thousands and in U.S. Dollars equivalent as of January 29, 2011. |
The location and amounts of derivative fair values on the
Consolidated Balance Sheets as of January 29, 2011 and
January 30, 2010 were as follows:
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
|
Balance Sheet
|
January 29,
|
January 30,
|
Balance Sheet
|
January 29,
|
January 30,
|
|||||||||||||||||||
| Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Derivatives Designated as Hedging Instruments:
|
||||||||||||||||||||||||
|
Foreign Exchange Forward Contracts
|
Other Current Assets | $ | 727 | $ | 1,348 | Accrued Expenses | $ | 1,143 | $ | — | ||||||||||||||
Refer to Note 6, “
Fair Value
” for further
discussion of the determination of the fair value of derivatives.
The location and amounts of derivative gains and losses for the
fifty-two weeks ended January 29, 2011 and January 30,
2010 on the Consolidated Statements of Operations and
Comprehensive Income are as follows:
|
Location of (Loss)
|
||||||||||||||||||||||||||
|
Recognized in Earnings
|
Amount of (Loss) Recognized
|
|||||||||||||||||||||||||
|
Amount of Gain (Loss)
|
Location of Gain
|
on Derivative (Ineffective
|
in Earnings on Derivative
|
|||||||||||||||||||||||
|
Recognized in OCI
|
(Loss) Reclassified
|
Amount of Gain (Loss) Reclassified from
|
Portion and Amount
|
(Ineffective Portion and
|
||||||||||||||||||||||
|
on Derivative Contracts
|
from Accumulated
|
Accumulated OCI into Earnings (Effective
|
Excluded from
|
Amount Excluded from
|
||||||||||||||||||||||
|
(Effective Portion)
|
OCI into Earnings
|
Portion)
|
Effectiveness
|
Effectiveness Testing)
|
||||||||||||||||||||||
| (a) | (Effective Portion) | (b) | Testing) | (c) | ||||||||||||||||||||||
| Fifty-Two Weeks Ended | ||||||||||||||||||||||||||
|
January 29,
|
January 30,
|
January 29,
|
January 30,
|
January 29,
|
January 30,
|
|||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
|
Derivatives in Cash Flow Hedging Relationships
|
||||||||||||||||||||||||||
|
Foreign Exchange Forward Contracts
|
$ | 1,614 | $(3,790) | Cost of Goods Sold | $ | 2,122 | $ | (3,074 | ) |
Other Operating
Income, Net |
$ | (304 | ) | $ | (74 | ) | ||||||||||
| (a) | The amount represents the change in fair value of derivative contracts due to changes in spot rates. | |
| (b) | The amount represents reclassification from OCI into earnings that occurs when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers. |
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (c) | The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings. There were no ineffective portions recorded in earnings for the fifty-two weeks ended January 29, 2011 and January 30, 2010. | |
| 16. | DISCONTINUED OPERATIONS |
On June 16, 2009, A&F’s Board of Directors
approved the closure of the Company’s 29 RUEHL branded
stores and related
direct-to-consumer
operations. The Company completed the closure of the RUEHL
branded stores and related
direct-to-consumer
operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in
Loss from Discontinued Operations, Net of Tax on the
Consolidated Statements of Operations and Comprehensive Income
for the fifty-two weeks ended January 30, 2010 and
January 31, 2009. Results from discontinued operations were
immaterial for the fifty-two weeks ended January 29, 2011.
Costs associated with exit or disposal activities are recorded
when the liability is incurred. Below is a roll forward of the
liabilities recognized on the Consolidated Balance Sheet as of
January 29, 2011 related to the closure of RUEHL branded
stores and related
direct-to-consumer
operations (in millions):
|
Fifty-Two Weeks Ended
|
||||
| January 29, 2011 | ||||
|
Beginning Balance
|
$ | 46.1 | ||
|
Interest Accretion / Other, Net
|
0.2 | |||
|
Cash Payments
|
(29.1 | ) | ||
|
Ending
Balance
(1)
|
$ | 17.2 | ||
| (1) | Ending balance primarily reflects the net present value of obligations due under signed lease termination agreements and obligations due under a lease, for which no termination agreement exists, less estimated sublease income. As of January 29, 2011, there were $11.8 million of lease termination charges recorded as a current liability in Accrued Expenses and $5.4 million of lease termination charges recorded as a long-term liability in Other Liabilities on the Consolidated Balance Sheet. |
The table below presents the significant components of
RUEHL’s results included in Loss from Discontinued
Operations, net of Tax on the Consolidated Statements of
Operations and Comprehensive Income for the fiscal years ended
January 30, 2010 and January 31, 2009.
88
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2009 | 2008 | |||||||
|
NET SALES
|
$ | 48,393 | $ | 56,218 | ||||
|
Cost of Goods Sold
|
22,037 | 25,621 | ||||||
|
GROSS PROFIT
|
26,356 | 30,597 | ||||||
|
Stores and Distribution Expense
|
146,826 | 75,148 | ||||||
|
Marketing, General and Administrative Expense
|
8,556 | 14,411 | ||||||
|
Other Operating Income, Net
|
(11 | ) | (86 | ) | ||||
|
NET LOSS BEFORE INCOME TAXES(1)
|
$ | (129,016 | ) | $ | (58,876 | ) | ||
|
Income Tax Benefit
|
(50,316 | ) | (22,962 | ) | ||||
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
|
$ | (78,699 | ) | $ | (35,914 | ) | ||
|
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
|
||||||||
|
BASIC
|
$ | (0.90 | ) | $ | (0.41 | ) | ||
|
DILUTED
|
$ | (0.89 | ) | $ | (0.40 | ) | ||
| (1) | Includes non-cash, pre-tax asset impairment charges of approximately $51.5 million and $22.3 million during the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively, and net costs associated with the closure of the RUEHL business, primarily net lease termination costs of approximately $53.9 million and severance and other charges of $2.2 million during the fifty-two weeks ended January 30, 2010. |
| 17. | RETIREMENT BENEFITS |
The Company maintains the Abercrombie & Fitch Co.
Savings & Retirement Plan, a qualified plan. All
U.S. associates are eligible to participate in this plan if
they are at least 21 years of age and have completed a year
of employment with 1,000 or more hours of service. In addition,
the Company maintains the Abercrombie & Fitch Co.
Nonqualified Savings and Supplemental Retirement, composed of
two
sub-plans
(Plan I and Plan II). Plan I contains contributions made through
December 31, 2004, while Plan II contains
contributions made on and after January 1, 2005.
Participation in these plan is based on service and
compensation. The Company’s contributions are based on a
percentage of associates’ eligible annual compensation. The
cost of the Company’s contributions to these plans was
$19.4 million in Fiscal 2010, $17.8 million in Fiscal
2009 and $24.7 million in Fiscal 2008.
Effective February 2, 2003, the Company established a Chief
Executive Officer Supplemental Executive Retirement Plan (the
“SERP”) to provide additional retirement income to its
Chairman and Chief Executive Officer (“CEO”). Subject
to service requirements, the CEO will receive a monthly benefit
equal to 50% of his final average compensation (as defined in
the SERP) for life. The final average compensation used for the
calculation is based on actual compensation, base salary and
cash incentive compensation, averaged over the last 36
consecutive full calendar months ending before the CEO’s
retirement. The Company recorded net
89
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
expense of $2.7 million and net income of $1.0 million
and $2.5 million for Fiscal 2010, Fiscal 2009 and Fiscal
2008, respectively, associated with the SERP.
The net expense for fifty-two weeks ended January 29, 2011
included $2.1 million to correct a cumulative under-accrual
of the SERP relating to prior periods, primarily Fiscal 2008.
The Company does not believe this correction was material to the
periods affected.
| 18. | CONTINGENCIES |
A&F is a defendant in lawsuits and other adversary
proceedings arising in the ordinary course of business. Legal
costs incurred in connection with the resolution of claims and
lawsuits are generally expensed as incurred, and the Company
establishes reserves for the outcome of litigation where it
deems appropriate to do so under applicable accounting rules.
Actual liabilities may exceed the amounts reserved, and there
can be no assurance that final resolution of these matters will
not have a material adverse effect on the Company’s
financial condition, results of operations or cash flows. The
Company’s identified contingencies include the following
matters:
On June 23, 2006, Lisa Hashimoto, et al. v.
Abercrombie & Fitch Co. and Abercrombie &
Fitch Stores, Inc., was filed in the Superior Court of the State
of California for the County of Los Angeles. In that action,
plaintiffs alleged, on behalf of a putative class of California
store managers employed in Hollister and abercrombie kids
stores, that they were entitled to receive overtime pay as
“non-exempt” employees under California wage and hour
laws. The complaint sought injunctive relief, equitable relief,
unpaid overtime compensation, unpaid benefits, penalties,
interest and attorneys’ fees and costs. The defendants
answered the complaint on August 21, 2006, denying
liability. On June 23, 2008, the defendants settled all
claims of Hollister and abercrombie kids store managers who
served in stores from June 23, 2002 through April 30,
2004, but continued to oppose the plaintiffs’ remaining
claims. On January 29, 2009, the Court certified a class
consisting of all store managers who served at Hollister and
abercrombie kids stores in California from May 1, 2004
through the future date upon which the action concludes. The
parties then continued to litigate the claims of that putative
class. On May 24, 2010, plaintiffs filed a notice that they
did not intend to continue to pursue their claim that members of
the class did not exercise independent managerial judgment and
discretion. They also asked the Court to vacate the
August 9, 2010 trial date previously set by the Court. On
July 20, 2010, the trial court vacated the trial date and
the defendants then moved to decertify the putative class.
On September 16, 2005, a derivative action, styled The
Booth Family Trust v. Michael S. Jeffries, et al., was
filed in the United States District Court for the Southern
District of Ohio, naming A&F as a nominal defendant and
seeking to assert claims for unspecified damages against nine of
A&F’s present and former directors, alleging various
breaches of the directors’ fiduciary duty and seeking
equitable and monetary relief. In the following three months,
four similar derivative actions were filed (three in the United
States District Court for the Southern District of Ohio and one
in the Court of Common Pleas for Franklin County, Ohio) against
present and former directors of A&F alleging various
breaches of the directors’ fiduciary duty allegedly arising
out of antecedent employment law and securities class actions
brought against the Company. A consolidated amended derivative
complaint was filed in the federal proceeding on July 10,
2006. On February 16, 2007, A&F announced that its
Board of Directors had received a report of the Special
Litigation
90
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Committee established by the Board to investigate and act with
respect to claims asserted in the derivative cases, which
concluded that there was no evidence to support the asserted
claims and directed the Company to seek dismissal of the
derivative cases. On September 10, 2007, the Company moved
to dismiss the federal derivative cases on the authority of the
Special Litigation Committee Report. On March 12, 2009, the
Company’s motion was granted and, on April 10, 2009,
plaintiffs filed an appeal from the order of dismissal in the
United States Court of Appeals for the Sixth Circuit.
Plaintiff’s appeal has been fully briefed and argued and is
awaiting decision. The state court has stayed further
proceedings in the state-court derivative action until
resolution of the consolidated federal derivative cases.
On December 21, 2007 Spencer de la Cruz, a former employee,
filed an action against Abercrombie & Fitch Co. and
Abercrombie & Fitch Stores, Inc. (collectively, the
“Defendants”) in the Superior Court of Orange County,
California. He sought to allege, on behalf of himself and a
putative class of past and present employees in the period
beginning on December 19, 2003, claims for failure to
provide meal breaks, for waiting time penalties, for failure to
keep accurate employment records, and for unfair business
practices. By successive amendments, plaintiff added 10
additional plaintiffs and additional claims seeking injunctive
relief, unpaid wages, penalties, interest, and attorney’s
fees and costs. Defendants have denied the material allegations
of plaintiffs’ complaints throughout the litigation and
have asserted numerous affirmative defenses. On July 23,
2010, plaintiffs moved for class certification in the action. On
December 9, 2010, after briefing and argument, the trial
court granted in part and denied in part plaintiffs’
motion, certifying
sub-classes
to pursue meal break claims, meal premium pay claims, work
related travel claims, travel expense claims, termination pay
claims, reporting time claims, bag check claims, pay record
claims, and minimum wage claims. The parties are continuing to
litigate questions relating to the Court’s certification
order and to the merits of plaintiffs’ claims.
The Company intends to defend the aforesaid pending matters
vigorously, as appropriate. The Company is unable to quantify
the potential exposure of the aforesaid pending matters.
However, the Company’s assessment of the current exposure
could change in the event of the discovery of additional facts
with respect to legal matters pending against the Company or
determinations by judges, juries, administrative agencies or
other finders of fact that are not in accordance with the
Company’s evaluation of the claims.
| 19. | PREFERRED STOCK PURCHASE RIGHTS |
On July 16, 1998, A&F’s Board of Directors
declared a dividend of one Series A Participating
Cumulative Preferred Stock Purchase Right (the
“Rights”) for each outstanding share of Class A
Common Stock (the “Common Stock”), par value $.01 per
share, of A&F. The dividend was paid on July 28, 1998
to stockholders of record on that date. Shares of Common Stock
issued after July 28, 1998 and prior to May 25, 1999
were issued with one Right attached. A&F’s Board of
Directors declared a
two-for-one
stock split (the “Stock Split”) on the Common Stock,
payable on June 15, 1999 to the holders of record at the
close of business on May 25, 1999. In connection with the
Stock Split, the number of Rights associated with each share of
Common Stock outstanding as of the close of business on
May 25, 1999, or issued or delivered after May 25,
1999 and prior to the “Distribution Date” (as defined
below), was proportionately adjusted from one Right to 0.50
Right. Each share of Common Stock issued after May 25, 1999
and prior to the Distribution Date has been, and will be issued,
with 0.50 Right attached so that all shares of Common Stock
outstanding prior to the Distribution Date will have 0.50 Right
attached.
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Rights are initially attached to the shares of Common Stock.
The Rights will separate from the Common Stock after a
Distribution Date occurs. The “Distribution Date”
generally means the earlier of (i) the close of business on
the 10th day after the date (the “Share Acquisition
Date”) of the first public announcement that a person or
group (other than A&F or any of A&F’s
subsidiaries or any employee benefit plan of A&F or of any
of A&F’s subsidiaries) has acquired beneficial
ownership of 20% or more of A&F’s outstanding shares
of Common Stock (an “Acquiring Person”), or
(ii) the close of business on the 10th business day
(or such later date as A&F’s Board of Directors may
designate before any person has become an Acquiring Person)
after the date of the commencement of a tender or exchange offer
by any person which would, if consummated, result in such person
becoming an Acquiring Person. The Rights are not exercisable
until the Distribution Date. After the Distribution Date, each
whole Right may be exercised to purchase, at an initial exercise
price of $250, one one-thousandth of a share of Series A
Participating Cumulative Preferred Stock.
At any time after any person becomes an Acquiring Person, but
before the occurrence of any of the events described in the
immediately following paragraph, 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 of twice 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 of Common Stock or the
occurrence of any of the events described in the immediately
following paragraph, 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 0.50 Right.
If, after any person has become an Acquiring Person,
(i) A&F is involved in a merger or other business
combination transaction in which A&F is not the surviving
corporation or A&F’s Common Stock is exchanged for
other securities or assets, or (ii) A&F
and/or
one
or more of A&F’s subsidiaries sell or otherwise
transfer 50% or more of the assets or earning power of A&F
and its subsidiaries, taken as a whole, each holder of a Right,
other than the Acquiring Person and certain affiliated persons,
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, or in certain circumstances, an
affiliate, which at the time of such transaction will have a
market value of twice the exercise price of the Right.
The Rights will expire on July 16, 2018, unless earlier
exchanged or redeemed. A&F may redeem all of the Rights at
a price of $.01 per whole Right at any time before any person
becomes an Acquiring Person.
Rights holders have no rights as a stockholder of A&F,
including the right to vote and to receive dividends.
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ABERCROMBIE &
FITCH CO.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 20. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
Summarized unaudited quarterly financial results for Fiscal 2010
and Fiscal 2009 follows (thousands, except per share amounts):
|
Fiscal 2010
Quarter
(1)
|
First | Second | Third | Fourth | ||||||||||||
|
Net sales
|
$ | 687,804 | $ | 745,798 | $ | 885,778 | $ | 1,149,396 | ||||||||
|
Gross profit
|
$ | 431,416 | $ | 485,348 | $ | 564,432 | $ | 730,986 | ||||||||
|
Net (loss) income
|
$ | (11,828 | ) | $ | 19,479 | $ | 50,040 | $ | 92,593 | |||||||
|
Net (loss) income per diluted
share
(2)
|
$ | (0.13 | ) | $ | 0.22 | $ | 0.56 | $ | 1.03 | |||||||
|
Fiscal 2009
Quarter
(1)
|
First | Second | Third | Fourth | ||||||||||||
|
Net sales
|
$ | 601,729 | $ | 637,221 | $ | 753,684 | $ | 935,991 | ||||||||
|
Gross profit
|
$ | 381,453 | $ | 424,516 | $ | 483,087 | $ | 594,542 | ||||||||
|
Net (loss) income from continuing operations
|
$ | (23,104 | ) | $ | (8,191 | ) | $ | 49,222 | $ | 61,025 | ||||||
|
Loss from discontinued operations, net of tax
|
$ | (36,135 | ) | $ | (18,557 | ) | $ | (10,439 | ) | $ | (13,566 | ) | ||||
|
Net (loss) income
|
$ | (59,239 | ) | $ | (26,747 | ) | $ | 38,784 | $ | 47,459 | ||||||
|
Net (loss) income per diluted share from continuing
operations
(3)
|
$ | (0.26 | ) | $ | (0.09 | ) | $ | 0.55 | $ | 0.68 | ||||||
|
Net loss per diluted share from discontinued operations
|
$ | (0.41 | ) | $ | (0.21 | ) | $ | (0.12 | ) | $ | (0.15 | ) | ||||
|
Net (loss) income per diluted share
|
$ | (0.68 | ) | $ | (0.30 | ) | $ | 0.44 | $ | 0.53 | ||||||
| (1) | Results of operations of RUEHL are reflected as discontinued operations for all periods presented. Refer to Note 16, “Discontinued Operations” for further discussion. | |
| (2) | The second quarter of Fiscal 2010 includes impairment charges of $0.02. The fourth quarter of Fiscal 2010 includes impairment charges of $0.33 and store closure charges of $0.03. | |
| (3) | The fourth quarter of Fiscal 2009 includes impairment charges of $0.23. |
93
Table of Contents
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Abercrombie & Fitch Co.
In our opinion, the consolidated financial statements listed in
the accompanying index appearing under Item 15(a)(1)
present fairly, in all material respects, the financial position
of Abercrombie & Fitch Co. and its subsidiaries at
January 29, 2011 and January 30, 2010, and the results
of their operations and their cash flows for each of the three
years in the period ended January 29, 2011 in conformity
with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of January 29, 2011, 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 these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Company’s internal
control over financial reporting based on our integrated audit.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
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. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
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.
94
Table of Contents
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.
/s/ PricewaterhouseCoopers
LLP
Columbus, Ohio
March 29, 2011
March 29, 2011
95
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Disclosure
Controls and Procedures
A&F maintains disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) that are designed to provide
reasonable assurance that information required to be disclosed
in the reports that A&F files or submits under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to
A&F’s management, including the Chairman and Chief
Executive Officer of A&F and the Executive Vice President
and Chief Financial Officer of A&F, as appropriate to allow
timely decisions regarding required disclosures. Because of
inherent limitations, disclosure controls and procedures, no
matter how well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of
disclosure controls and procedures are met.
A&F’s management, including the Chairman and Chief
Executive Officer of A&F and the Executive Vice President
and Chief Financial Officer of A&F, evaluated the
effectiveness of A&F’s design and operation of its
disclosure controls and procedures as of the end of the fiscal
year ended January 29, 2011. The Chairman and Chief
Executive Officer of A&F and the Executive Vice President
and Chief Financial Officer of A&F concluded that
A&F’s disclosure controls and procedures were
effective at a reasonable level of assurance as of
January 29, 2011, the end of the period covered by this
Annual Report on
Form 10-K.
Management’s
Annual Report on Internal Control Over Financial
Reporting
The management of A&F is responsible for establishing and
maintaining adequate internal control over financial reporting.
A&F’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 accounting principles
generally accepted in the United States of America.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluations 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.
Accordingly, even an effective system of internal control over
financial reporting will provide only reasonable assurance with
respect to financial statement preparation.
With the participation of the Chairman and Chief Executive
Officer of A&F and the Executive Vice President and Chief
Financial Officer of A&F, management evaluated the
effectiveness of A&F’s internal control over financial
reporting as of January 29, 2011 using criteria established
in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on the assessment of A&F’s
internal control over financial reporting, under the criteria
described in the preceding sentence, management has concluded
that, as of January 29, 2011, A&F’s internal
control over financial reporting was effective.
96
Table of Contents
A&F’s independent registered public accounting firm,
PricewaterhouseCoopers LLP, has issued an audit report on the
effectiveness of A&F’s internal control over financial
reporting as of January 29, 2011 as stated in their report,
which is included in “ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA” of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There were no changes in A&F’s internal control over
financial reporting during the fiscal quarter ended
January 29, 2011 that materially affected, or are
reasonably likely to materially affect, A&F’s internal
control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Information concerning directors, executive officers and persons
nominated or chosen to become directors or executive officers is
incorporated by reference from the text to be included under the
caption “ELECTION OF DIRECTORS” in A&F’s
definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 16, 2011 and from the text
under the caption “SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF
THE REGISTRANT” in PART I of this Annual Report on
Form 10-K.
Compliance
with Section 16(a) of the Exchange Act
Information concerning beneficial ownership reporting compliance
under Section 16(a) of the Securities Exchange Act of 1934,
as amended, is incorporated by reference from the text to be
included under the caption “SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT — Section 16(a)
Beneficial Ownership Reporting Compliance” in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011.
Code
of Business Conduct and Ethics
Information concerning the Abercrombie & Fitch Code of
Business Conduct and Ethics is incorporated by reference from
the text to be included under the caption “ELECTION OF
DIRECTORS — Code of Business Conduct and Ethics”
in A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011.
Audit
Committee
Information concerning A&F’s Audit Committee,
including the determination that the Audit Committee has at
least one audit committee financial expert (as defined under
applicable SEC rules) serving on the Audit Committee, is
incorporated by reference from the text to be included under the
caption “ELECTION OF DIRECTORS — Committees of
the Board — Audit Committee” in A&F’s
definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 16, 2011.
97
Table of Contents
Procedures
by which Stockholders May Recommend Nominees to A&F’s
Board of Directors
Information concerning the procedures by which stockholders of
A&F may recommend nominees to A&F’s Board of
Directors is incorporated by reference from the text to be
included under the captions “ELECTION OF
DIRECTORS — Director Qualifications and Consideration
of Director Candidates” and “ELECTION OF
DIRECTORS — Director Nominations” in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011. These
procedures have not materially changed from those described in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders held on June 9, 2010.
| ITEM 11. | EXECUTIVE COMPENSATION. |
Information regarding executive compensation is incorporated by
reference from the text to be included under the captions
“ELECTION OF DIRECTORS — Compensation of
Directors”, “ELECTION OF DIRECTORS —
Compensation Committee Interlocks and Insider
Participation”, “COMPENSATION DISCUSSION AND
ANALYSIS”, “REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION” and “EXECUTIVE OFFICER
COMPENSATION” in A&F’s definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on
June 16, 2011.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
Information concerning the security ownership of certain
beneficial owners and management is incorporated by reference
from the text to be included under the caption “SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011.
Information regarding the number of securities to be issued and
remaining available under equity compensation plans as of
January 29, 2011 is incorporated by reference from the text
to be included under the caption “EQUITY COMPENSATION
PLANS” in A&F’s definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on June 16,
2011.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Information concerning certain relationships and transactions
involving the Company and certain related persons within the
meaning of Item 404(a) of SEC
Regulation S-K
as well as information concerning A&F’s policies and
procedures for the review, approval or ratification of
transactions with related persons is incorporated by reference
from the text to be included under the captions “ELECTION
OF DIRECTORS — Compensation of Directors” and
“ELECTION OF DIRECTORS — Certain Relationships
and Related Transactions” in A&F’s definitive
Proxy Statement for the Annual Meeting of Stockholders to be
held on June 16, 2011.
Information concerning the independence of the directors of
A&F is incorporated by reference from the text to be
included under the caption “ELECTION OF
DIRECTORS — Director Independence” in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Information concerning the pre-approval policies and procedures
of A&F’s Audit Committee and fees for services
rendered by the Company’s principal independent registered
public accounting firm is
98
Table of Contents
incorporated by reference from the text to be included under
captions “AUDIT COMMITTEE MATTERS — Pre-Approval
Policy” and “AUDIT COMMITTEE MATTERS — Fees
of Independent Registered Public Accounting Firm” in
A&F’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 16, 2011.
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) The following documents are filed as a part of this
Annual Report on
Form 10-K:
(1) Consolidated Financial Statements:
|
Consolidated Statements of Operations and Comprehensive Income
for the fiscal years ended January 29, 2011,
January 30, 2010 and January 31, 2009.
|
|
Consolidated Balance Sheets as of January 29, 2011 and
January 30, 2010.
|
|
Consolidated Statements of Stockholders’ Equity for the
fiscal years ended January 29, 2011, January 30, 2010
and January 31, 2009.
|
|
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2011, January 30, 2010 and
January 31, 2009.
|
|
Notes to Consolidated Financial Statements.
|
|
Report of Independent Registered Public Accounting
Firm — PricewaterhouseCoopers LLP.
|
(2) Consolidated Financial Statement Schedules:
All financial statement schedules for which provision is made in
the applicable accounting regulations of the SEC are omitted
because the required information is either presented in the
consolidated financial statements or notes thereto, or is not
applicable, required or material.
99
Table of Contents
(3) Exhibits:
The documents listed below are filed or furnished with this
Annual Report on
Form 10-K
as exhibits or incorporated into this Annual Report on
Form 10-K
by reference as noted:
|
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. 001-12107). | |
|
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. 001-12107). | |
|
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. 001-12107). | |
|
3.4
|
Certificate regarding Approval of Amendment to Section 2.03 of Amended and Restated Bylaws of Abercrombie & Fitch Co. by Stockholders of Abercrombie & Fitch Co. at Annual Meeting of Stockholders held on June 10, 2009, incorporated herein by reference to Exhibit 3.1 to A&F’s Current Report on Form 8-K dated and filed June 16, 2009 (File No. 001-12107). | |
|
3.5
|
Certificate regarding Approval of Addition of New Article IX of Amended and Restated Bylaws by Board of Directors of Abercrombie & Fitch Co. on June 10, 2009, incorporated herein by reference to Exhibit 3.2 to A&F’s Current Report on Form 8-K dated and filed June 16, 2009 (File No. 001-12107). | |
|
3.6
|
Amended and Restated Bylaws of A&F (reflecting amendments through June 10, 2009), incorporated herein by reference to Exhibit 3.6 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 1, 2009 (File No. 001-12107). | |
|
4.1
|
Rights Agreement, dated as of July 16, 1998, between A&F and First Chicago Trust Company of New York, incorporated herein by reference to Exhibit 1 to A&F’s Registration Statement on Form 8-A dated and filed July 21, 1998 (File No. 001-12107). | |
|
4.2
|
Amendment No. 1 to Rights Agreement, dated as of April 21, 1999, between A&F and First Chicago Trust Company of New York, incorporated herein by reference to Exhibit 2 to A&F’s Form 8-A (Amendment No. 1), dated April 23, 1999 and filed April 26, 1999 (File No. 001-12107). | |
|
4.3
|
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. 001-12107). | |
|
4.4
|
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. 001-12107). | |
|
4.5
|
Amendment No. 2, dated as of June 11, 2008, to the Rights Agreement, dated as of July 16, 1998, between A&F and National City Bank (as successor to First Chicago Trust Company of New York), as Rights Agent, incorporated herein by reference to Exhibit 4.01 to A&F’s Form 8-A/A (Amendment No. 2), dated and filed June 12, 2008 (File No. 001-12107). | |
|
4.6
|
Appointment and Acceptance of Successor Rights Agent, effective as of the opening of business on November 2, 2009, between A&F and American Stock Transfer & Trust Company, LLC (as successor to National City Bank), as Rights Agent, incorporated herein by reference to Exhibit 4.6 to A&F’s Form 8-A/A (Amendment No. 5), dated and filed November 3, 2009 (File No. 001-12107). |
100
Table of Contents
|
4.7
|
Credit Agreement, dated as of April 15, 2008 (the “Credit Agreement”), among Abercrombie & Fitch Management Co.; the Foreign Subsidiary Borrowers (as defined in the Credit Agreement) from time to time party to the Credit Agreement; A&F; the Lenders (as defined in the Credit Agreement) from time to time party to the Credit Agreement; National City Bank, as a co-lead arranger, a co-bookrunner and Global Administrative Agent, as the Swing Line Lender and an LC Issuer; J.P. Morgan Securities, Inc., as a co-leader arranger, a co-bookrunner and as syndication agent; and each of Fifth Third Bank and Huntington National Bank, as a documentation agent, incorporated herein by reference to Exhibit 4.7 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2010 (File No. 001-12107). | |
|
4.8
|
Guaranty of Payment (Domestic Credit Parties), dated as of April 15, 2008, among A&F; each direct and indirect Domestic Subsidiary (as defined in the Guaranty of Payment) of A&F other than Abercrombie & Fitch Management Co.; and National City Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 4.2 to A&F’s Current Report on Form 8-K dated and filed April 18, 2008 (File No. 001-12107). | |
|
4.9
|
Joinder Agreement, dated as of May 14, 2008, between AFH Canada Stores Co., as an Additional Borrower, and National City Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 4.11 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2008 (File No. 001-12107). | |
|
4.10
|
Joinder Agreement, dated as of May 14, 2008, between Abercrombie & Fitch (UK) Limited, as an Additional Borrower, and National City Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 4.12 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2008 (File No. 001-12107). | |
|
4.11
|
Joinder Agreement, dated as of May 14, 2008, between Abercrombie & Fitch Europe S.A., as an Additional Borrower, and National City Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 4.13 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2008 (File No. 001-12107). | |
|
4.12
|
Amendment No. 1 to Credit Agreement, made as of December 29, 2008, among Abercrombie & Fitch Management Co., the Foreign Subsidiary Borrowers (as defined in the Credit Agreement), A&F, the Lenders (as defined in the Credit Agreement) and National City Bank, as the Swing Line Lender, an LC Issuer and Global Administrative Agent, incorporated herein by reference to Exhibit 4.12 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2010 (File No. 001-12107). | |
|
4.13
|
Joinder Agreement, dated as of May 22, 2009, between AFH Japan, G.K., as an Additional Borrower, and National City Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 4.12 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 2009 (File No. 001-12107). | |
|
4.14
|
Amendment No. 2 to Credit Agreement, made as of June 16, 2009, by and among Abercrombie & Fitch Management Co., as a borrower; Abercrombie & Fitch Europe SA, Abercrombie & Fitch (UK) Limited, AFH Canada Stores Co. and AFH Japan, G.K., as foreign subsidiary borrowers; Abercrombie & Fitch Co., as a guarantor; National City Bank, as a Co-Lead Arranger, Global Agent, Swing Line Lender, an LC Issuer and a Lender; JP Morgan Chase Bank, N.A., as a Co-Lead Arranger, Syndication Agent and a Lender; The Huntington National Bank, as a Lender; National City Bank, Canada Branch, as a Canadian Lender; J.P. Morgan Chase Bank, N.A. (Canada Branch), as a Lender; J.P. Morgan Europe Limited, as a Lender; Fifth Third Bank, as a Lender; Bank of America N.A., as a Lender; Citizens Bank of Pennsylvania, as a Lender; Sumitomo Mitsui Banking Corporation, as a Lender; U.S. Bank National Association, as a Lender; and PNC Bank, National Association, as a Lender, incorporated herein by reference to Exhibit 4.14 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2010 (File No. 001-12107). |
101
Table of Contents
|
4.15
|
Supplement No. 1 dated as of May 26, 2010, executed by AFH Puerto Rico LLC and PNC Bank, National Association (as successor by merger to National City Bank), as Global Agent, to the Guaranty of Payment (Domestic Credit Parties), dated as of April 15, 2008, among A&F; each direct and indirect Domestic Subsidiary (as defined in the Guaranty of Payment) of A&F other than Abercrombie & Fitch Management Co.; and PNC Bank, National Association (as successor by merger to National City Bank), as Global Agent, incorporated herein by reference to Exhibit 4.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2010 (File No. 001-12107). | |
|
*10.1
|
Abercrombie & Fitch Co. Incentive Compensation Performance Plan, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed June 18, 2007 (File No. 001-12107). | |
|
*10.2
|
1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan (reflects amendments through December 7, 1999 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999), incorporated herein by reference to Exhibit 10.2 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (File No. 001-12107). | |
|
10.3
|
1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors (reflects amendments through January 30, 2003 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999), incorporated herein by reference to Exhibit 10.3 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 001-12107). | |
|
10.4
|
Abercrombie & Fitch Co. 2002 Stock Plan for Associates (as amended and restated May 22, 2003), incorporated herein by reference to Exhibit 10.4 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2003 (File No. 001-12107). | |
|
10.5
|
Amended and Restated Employment Agreement, entered into as of August 15, 2005, by and between A&F and Michael S. Jeffries, including as Exhibit A thereto the Abercrombie & Fitch Co. Supplemental Executive Retirement Plan (Michael S. Jeffries) effective February 2, 2003, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed August 26, 2005 (File No. 001-12107). | |
|
10.6
|
Employment Agreement, entered into as of December 19, 2008, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed December 22, 2008 (File No. 001-12107). | |
|
*10.7
|
Amendment No. 1 to Michael S. Jeffries Employment Agreement, entered into on April 12, 2010, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed April 13, 2010 (File No. 001-12107). | |
|
*10.8
|
Amendment No. 2 to Michael S. Jeffries Employment Agreement, made and entered into on January 28, 2011, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed January 31, 2011 (File No. 001-12107). |
102
Table of Contents
|
*10.9
|
Aircraft Time Sharing Agreement, made and entered into to be effective as of June 1, 2010, by and between Abercrombie & Fitch Management Co., as Lessor, and Michael S. Jeffries, as Lessee, and consented to by DFZ, LLC, as Owner (the “Gulfstream Agreement”), incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2010 (File No. 001-12107). | |
|
*10.10
|
Aircraft Time Sharing Agreement, made and entered into to be effective as of November 12, 2010, by and between Abercrombie & Fitch Management Co., as Lessor, and Michael S. Jeffries, as Lessee, and consented to by NetJets Sales, Inc., NetJets Aviation, Inc. and NetJets Services, Inc. (the “NetJets Agreement”). | |
|
*10.11
|
Letter of Understanding, dated November 12, 2010, between Michael S. Jeffries and Abercrombie & Fitch Management Co. in respect of the Gulfstream Agreement and the NetJets Agreement. | |
|
*10.12
|
Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (as amended and restated May 22, 2003) — as authorized by the Board of Directors of A&F on December 17, 2007, to become one of two plans following the division of said Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (as amended and restated May 22, 2003) into two separate plans effective January 1, 2005 and to be named the Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan I) [terms to govern “amounts deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) in taxable years beginning before January 1, 2005 and any earnings thereon], 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. 001-12107). | |
|
*10.13
|
Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (January 1, 2001 Restatement) — as authorized by the Compensation Committee of the A&F Board of Directors on August 14, 2008, to become one of two sub-plans following the division of said Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (January 1, 2001 Restatement) into two sub-plans effective immediately before January 1, 2009 and to be named the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I [terms to govern amounts “deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) before January 1, 2005, and any earnings thereon], 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. 001-12107). | |
|
*10.14
|
First Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I (Plan I) (January 1, 2001 Restatement), as authorized by the Compensation Committee of the A&F Board of Directors on August 14, 2008 and executed on behalf of A&F on September 3, 2008, incorporated herein by reference to Exhibit 10.13 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2008 (File No. 001-12107). |
103
Table of Contents
|
*10.15
|
Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (II) — as authorized by the Compensation Committee of the A&F Board of Directors on August 14, 2008, to become one of two sub-plans following the division of the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (January 1, 2001 Restatement) into two sub-plans effective immediately before January 1, 2009 and to be named the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II [terms to govern amounts “deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) in taxable years beginning on or after January 1, 2005, and any earnings thereon], incorporated herein by reference to Exhibit 10.12 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2008 (File No. 001-12107). | |
|
*10.16
|
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. 001-12107). | |
|
*10.17
|
Form of Restricted Shares Award Agreement (also called Stock Unit Agreement) used for grants 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. 001-12107). | |
|
*10.18
|
Form of Restricted Shares Award Agreement (No Performance-Based Goals) used for grants 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. 001-12107). | |
|
*10.19
|
Form of Restricted Shares Award Agreement (Performance-Based Goals) used for grants 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. 001-12107). | |
|
*10.20
|
Form of Stock Option Agreement (Nonstatutory Stock Options) used for grants 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. 001-12107). | |
|
*10.21
|
Form of Stock Option Agreement (Nonstatutory Stock Options) used for grants 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 10.15 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 001-12107). | |
|
*10.22
|
Form of Stock Option Agreement used for grants 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. 001-12107). | |
|
*10.23
|
Form of Restricted Shares Award Agreement (also called Stock Unit Agreement) used for grants 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. 001-12107). |
104
Table of Contents
|
*10.24
|
Form of Restricted Shares Award Agreement used for grants under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates after November 28, 2004 and before March 6, 2006, 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. 001-12107). | |
|
*10.25
|
Form of Stock Option Agreement (Nonstatutory Stock Options) used for grants 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. 001-12107). | |
|
*10.26
|
Form of Stock Option Agreement (Nonstatutory Stock Options) used for grants under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates after November 28, 2004 and before March 6, 2006, 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. 001-12107). | |
|
*10.27
|
Form of Stock Option Agreement used for grants 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. 001-12107). | |
|
*10.28
|
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 to Exhibit 10.22 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 (File No. 001-12107). | |
|
*10.29
|
Form of Stock Unit Agreement under the Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate Directors entered into by A&F in order to evidence the automatic grants of stock units made on January 31, 2005 and to be entered into by A&F in respect of future automatic grants of stock units, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed February 3, 2005 (File No. 001-12107). | |
|
*10.30
|
Form of Restricted Shares Award Agreement used for grants under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates on or after March 6, 2006, incorporated herein by reference to Exhibit 10.35 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 (File No. 001-12107). | |
|
*10.31
|
Form of Stock Option Agreement (Nonstatutory Stock Options) used for grants under the Abercrombie & Fitch Co. 2002 Stock Plan for Associates on or after March 6, 2006, incorporated herein by reference to Exhibit 10.36 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 (File No. 001-12107). | |
|
*10.32
|
Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed June 17, 2005 (File No. 001-12107). | |
|
*10.33
|
Form of Stock Option Agreement (Nonstatutory Stock Option) used for grants under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan prior to March 6, 2006, incorporated herein by reference to Exhibit 99.4 to A&F’s Current Report on Form 8-K dated and filed August 19, 2005 (File No. 001-12107). | |
|
*10.34
|
Form of Restricted Stock Unit Award Agreement for Employees used for grants under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan prior to March 6, 2006, incorporated herein by reference to Exhibit 99.5 to A&F’s Current Report on Form 8-K dated and filed August 19, 2005 (File No. 001-12107). |
105
Table of Contents
|
*10.35
|
Summary of Terms of the Annual Restricted Stock Unit Grants to Non-Associate Directors of Abercrombie & Fitch Co., to summarize the terms of the grants to the Board of Directors of A&F under the 2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.14 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2008 (File No. 001-12107). | |
|
*10.36
|
Summary of Compensation Structure for Non-Associate Members of Board of Directors of A&F, effective February 23, 2010, incorporated herein by reference to Exhibit 10.3 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2010 (File No. 001-12107). | |
|
*10.37
|
Form of Stock Option Agreement (Nonstatutory Stock Option) for Associates used for grants under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan on or after March 6, 2006, incorporated herein by reference to Exhibit 10.33 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 (File No. 001-12107). | |
|
*10.38
|
Form of Restricted Stock Unit Award Agreement for Associates used for grants under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan on or after March 6, 2006, incorporated herein by reference to Exhibit 10.34 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 (File No. 001-12107). | |
|
*10.39
|
Trust Agreement, made as of October 16, 2006, between A&F and Wilmington Trust Company, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed October 17, 2006 (File No. 001-12107). | |
|
*10.40
|
Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed June 18, 2007 (File No. 001-12107). | |
|
*10.41
|
Form of Stock Option Agreement to be used to evidence the grant of non-statutory stock options to associates of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan after August 21, 2007, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed August 27, 2007 (File No. 001-12107). | |
|
*10.42
|
Form of Restricted Stock Unit Award Agreement to be used to evidence the grant of restricted stock units to associates of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan after August 21, 2007, incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed August 27, 2007 (File No. 001-12107). | |
|
*10.43
|
Form of Restricted Stock Unit Award Agreement to be used to evidence the grant of restricted stock units to Executive Vice Presidents of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan on and after March 4, 2008, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed March 6, 2008 (File No. 001-12107). | |
|
*10.44
|
Abercrombie & Fitch Co. Associate Stock Purchase Plan (Effective July 1, 1998), incorporated herein by reference to Exhibit 1 to the Schedule 13D filed by Michael S. Jeffries on May 2, 2006. | |
|
*10.45
|
Form of Stock Appreciation Right Agreement to be used to evidence the grant of stock appreciation rights to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan on and after February 12, 2009, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed February 17, 2009 (File No. 001-12107). | |
|
*10.46
|
Form of Stock Appreciation Right Agreement to be used to evidence the Semi-Annual Grants of stock appreciation rights to Michael S. Jeffries under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan as contemplated by the Employment Agreement, entered into as of December 19, 2008, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed February 17, 2009 (File No. 001-12107). |
106
Table of Contents
|
*10.47
|
Stock Appreciation Right Agreement [Retention Grant Tranche 1], made to be effective as of December 19, 2008, by and between A&F and Michael S. Jeffries entered into to evidence first tranche of Retention Grant covering 1,600,000 stock appreciation rights granted under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan as contemplated by the Employment Agreement, entered into as of December 19, 2008, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.3 to A&F’s Current Report on Form 8-K dated and filed February 17, 2009 (File No. 001-12107). | |
|
*10.48
|
Stock Appreciation Right Agreement [Retention Grant Tranche 2] by and between A&F and Michael S. Jeffries entered into effective as of March 2, 2009 to evidence second tranche of Retention Grant covering 1,200,000 stock appreciation rights granted under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan as contemplated by the Employment Agreement, entered into as of December 19, 2008, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.4 to A&F’s Current Report on Form 8-K dated and filed February 17, 2009 (File No. 001-12107). | |
|
*10.49
|
Stock Appreciation Right Agreement [Retention Grant Tranche 3] by and between A&F and Michael S. Jeffries entered into effective as of September 1, 2009 to evidence third tranche of Retention Grant covering 1,200,000 stock appreciation rights granted under the Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan as contemplated by the Employment Agreement, entered into as of December 19, 2008, by and between A&F and Michael S. Jeffries, incorporated herein by reference to Exhibit 10.5 to A&F’s Current Report on Form 8-K dated and filed February 17, 2009 (File No. 001-12107). | |
|
*10.50
|
Form of Stock Appreciation Right Agreement to be used to evidence the grant of stock appreciation rights to associates (employees) of Abercrombie & Fitch Co. and its subsidiaries under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan after February 12, 2009, incorporated herein by reference to Exhibit 10.6 to A&F’s Current Report on Form 8-K dated and filed February 17, 2009 (File No. 001-12107). | |
|
10.51
|
Credit Line Agreement — Borrower Agreement, effective March 6, 2009, signed on behalf of Abercrombie & Fitch Management Co., incorporated herein by reference to Exhibit 10.48 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2010 (File No. 001-12107). [Terminated on June 30, 2010] | |
|
10.52
|
Credit Line Agreement — Demand Facility, effective March 6, 2009, between Abercrombie & Fitch Management Co. and UBS Bank USA, incorporated herein by reference to Exhibit 10.1(b) to A&F’s Current Report on Form 8-K dated and filed March 11, 2009 (File No. 001-12107). [Terminated on June 30, 2010] | |
|
10.53
|
Addendum to Credit Line Account Application and Agreement, effective March 6, 2009, among Abercrombie & Fitch Management Co., UBS Bank USA and UBS Financial Services Inc., incorporated herein by reference to Exhibit 10.1(c) to A&F’s Current Report on Form 8-K dated and filed March 11, 2009 (File No. 001-12107). [Terminated on June 30, 2010] | |
|
*10.54
|
Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan II) — as authorized by the Board of Directors of A&F on December 17, 2007, to become one of two plans following the division of the Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (as amended and restated May 22, 2003) into two separate plans effective January 1, 2005 and to be named Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan II) [terms to govern “amounts deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) in taxable years beginning on or after January 1, 2005 and any earnings thereon], incorporated herein by reference to Exhibit 10.50 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (File No. 001-12107). | |
|
12.1
|
Computation of Leverage Ratio and Coverage Ratio for the fiscal year ended January 29, 2011. |
107
Table of Contents
|
14.1
|
Abercrombie & Fitch Code of Business Conduct and Ethics, as amended by the Board of Directors of A&F on August 21, 2007, incorporated herein by reference to Exhibit 14 to A&F’s Current Report on Form 8-K dated and filed August 27, 2007 (File No. 001-12107). | |
|
21.1
|
List of Subsidiaries of the Registrant | |
|
23.1
|
Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP | |
|
24.1
|
Powers of Attorney | |
|
31.1
|
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
31.2
|
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
32.1
|
Certifications by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** | |
|
101
|
The following materials from Abercrombie & Fitch Co.’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009; (ii) Consolidated Balance Sheets at January 29, 2011 and January 30, 2010; (iii) Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009; (iv) Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009; and (v) the Notes to Consolidated Financial Statements*** |
| * | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(a)(3) of this Annual Report on Form 10-K. | |
| ** | These certifications are furnished. | |
| *** | Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections. |
(b) The documents listed in Item 15(a)(3) are filed or
furnished with this Annual Report on
Form 10-K
as exhibits or incorporated into this Annual Report on
Form 10-K
by reference.
(c)
Financial Statement Schedules
None
108
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(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: March 29, 2011
|
By
/s/
JONATHAN
E.
RAMSDEN
Jonathan
E. Ramsden,
Executive Vice President and 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
March 29, 2011.
|
Signature
|
Title
|
|||
|
/s/ MICHAEL
S. JEFFRIES
|
Chairman, Chief Executive Officer and Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
|
*
|
Director | |||
| * | The undersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the above-named directors of the registrant pursuant to powers of attorney executed by such directors, which powers of attorney are filed with this Annual Report on Form 10-K as exhibits, in the capacities as indicated and on March 29, 2011. |
| By |
/s/
JONATHAN
E. RAMSDEN
|
Jonathan E. Ramsden
Attorney-in-fact
109
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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 29, 2011
ABERCROMBIE & FITCH
CO.
(Exact name of registrant as
specified in its charter)
EXHIBITS
Table of Contents
EXHIBIT INDEX
|
Exhibit
|
||
|
No.
|
Document
|
|
|
10.10
|
Aircraft Time Sharing Agreement, made and entered into to be effective as of November 12, 2010, by and between Abercrombie & Fitch Management Co., as Lessor, and Michael S. Jeffries, as Lessee, and consented to by NetJets Sales, Inc., NetJets Aviation, Inc. and NetJets Services, Inc. (the “NetJets Agreement”) | |
|
10.11
|
Letter of Understanding, dated November 12, 2010, between Michael S. Jeffries and Abercrombie & Fitch Management Co. in respect of the Gulfstream Agreement and the NetJets Agreement | |
|
12.1
|
Computation of Leverage Ratio and Coverage Ratio for the fiscal year ended January 29, 2011 | |
|
21.1
|
List of Subsidiaries of the Registrant | |
|
23.1
|
Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP | |
|
24.1
|
Powers of Attorney | |
|
31.1
|
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
31.2
|
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
32.1
|
Certifications by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
101
|
The following materials from Abercrombie & Fitch Co.’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009; (ii) Consolidated Balance Sheets at January 29, 2011 and January 30, 2010; (iii) Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009; (iv) Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009; and (v) the Notes to Consolidated Financial Statements |
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. [reserved]printPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint