Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-12107
ABERCROMBIE
& FITCH CO.
(Exact name of Registrant as specified in its charter)
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Delaware
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31-1469076 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
6301 Fitch Path, New Albany, Ohio 43054
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code (614) 283-6500_
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes 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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).)
þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes
þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class A Common Stock
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Outstanding at September 2, 2011 |
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$.01 Par Value
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86,940,167 Shares |
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Thousands, except share and per share amounts)
(Unaudited)
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Thirteen Weeks Ended |
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Twenty-Six Weeks Ended |
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July 30, 2011 |
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July 31, 2010 |
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July 30, 2011 |
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July 31, 2010 |
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NET SALES |
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$ |
916,763 |
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$ |
745,798 |
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$ |
1,753,437 |
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$ |
1,433,602 |
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Cost of Goods Sold |
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333,721 |
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260,450 |
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626,734 |
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516,838 |
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GROSS PROFIT |
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583,042 |
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485,348 |
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1,126,703 |
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916,764 |
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Stores and Distribution Expense |
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425,325 |
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364,482 |
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824,426 |
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718,892 |
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Marketing, General and Administrative Expense |
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109,999 |
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95,206 |
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217,650 |
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191,838 |
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Other Operating Expense (Income), Net |
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544 |
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(1,900 |
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(1,292 |
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(2,814 |
) |
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OPERATING INCOME |
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47,174 |
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27,560 |
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85,919 |
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8,848 |
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Interest Expense, Net |
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985 |
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807 |
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1,935 |
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1,632 |
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INCOME FROM CONTINUING OPERATIONS BEFORE TAXES |
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46,189 |
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26,753 |
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83,984 |
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7,216 |
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Tax Expense (Benefit) from Continuing Operations |
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14,158 |
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7,274 |
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27,608 |
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(435 |
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NET INCOME FROM CONTINUING OPERATIONS |
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$ |
32,031 |
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$ |
19,479 |
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$ |
56,376 |
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$ |
7,651 |
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INCOME FROM DISCONTINUED OPERATIONS, Net of Tax |
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$ |
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$ |
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$ |
796 |
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$ |
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NET INCOME |
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$ |
32,031 |
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$ |
19,479 |
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$ |
57,172 |
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$ |
7,651 |
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NET INCOME PER SHARE FROM CONTINUING OPERATIONS: |
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BASIC |
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$ |
0.37 |
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$ |
0.22 |
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$ |
0.65 |
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$ |
0.09 |
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DILUTED |
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$ |
0.35 |
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$ |
0.22 |
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$ |
0.62 |
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$ |
0.09 |
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NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS: |
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BASIC |
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$ |
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$ |
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$ |
0.01 |
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$ |
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DILUTED |
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$ |
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$ |
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$ |
0.01 |
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$ |
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NET INCOME PER SHARE: |
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BASIC |
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$ |
0.37 |
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$ |
0.22 |
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$ |
0.66 |
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$ |
0.09 |
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DILUTED |
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$ |
0.35 |
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$ |
0.22 |
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$ |
0.63 |
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$ |
0.09 |
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WEIGHTED-AVERAGE SHARES OUTSTANDING: |
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BASIC |
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87,267 |
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88,220 |
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87,274 |
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88,157 |
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DILUTED |
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90,353 |
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89,386 |
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90,397 |
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89,561 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.175 |
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$ |
0.175 |
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$ |
0.35 |
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$ |
0.35 |
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OTHER COMPREHENSIVE INCOME |
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Foreign Currency Translation Adjustments |
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$ |
(1,982 |
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$ |
2,448 |
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$ |
16,504 |
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$ |
(2,235 |
) |
Gain on Marketable Securities, net of
taxes of $(566) and $(2,128) for the
thirteen-week periods ended July 30,
2011 and July 31, 2010, respectively,
and $(957) and $(1,965) for the
twenty-six week periods ended July 30,
2011 and July 31, 2010, respectively |
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965 |
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3,624 |
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1,630 |
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3,346 |
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Unrealized gain (loss) on derivative
financial instruments, net of taxes of
$(1,644) and $397 for the thirteen-week
periods ended July 30, 2011 and July
31, 2010, respectively and $263 and
$(324) for the twenty-six week periods
ended July 30, 2011 and July 31, 2010 |
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2,799 |
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(676 |
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(447 |
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553 |
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Other Comprehensive Income |
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$ |
1,782 |
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$ |
5,396 |
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$ |
17,687 |
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$ |
1,664 |
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COMPREHENSIVE INCOME |
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$ |
33,813 |
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$ |
24,875 |
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$ |
74,859 |
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$ |
9,315 |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
ABERCROMBIE & FITCH CO.
CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)
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July 30, 2011 |
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January 29, 2011 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and Equivalents |
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$ |
539,613 |
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$ |
826,353 |
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Receivables |
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96,863 |
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81,264 |
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Inventories |
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516,128 |
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385,857 |
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Deferred Income Taxes |
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47,884 |
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60,405 |
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Other Current Assets |
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96,967 |
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79,389 |
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TOTAL CURRENT ASSETS |
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1,297,455 |
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1,433,268 |
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PROPERTY AND EQUIPMENT, NET |
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1,196,585 |
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1,144,940 |
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NON-CURRENT MARKETABLE SECURITIES |
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101,923 |
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100,534 |
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OTHER ASSETS |
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330,084 |
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269,160 |
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TOTAL ASSETS |
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$ |
2,926,047 |
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$ |
2,947,902 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts Payable |
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$ |
221,004 |
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$ |
137,235 |
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Accrued Expenses |
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300,648 |
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306,587 |
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Deferred Lease Credits |
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42,244 |
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41,538 |
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Income Taxes Payable |
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16,951 |
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73,491 |
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TOTAL CURRENT LIABILITIES |
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580,847 |
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558,851 |
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LONG-TERM LIABILITIES: |
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Deferred Income Taxes |
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23,519 |
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33,515 |
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Deferred Lease Credits |
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194,586 |
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192,619 |
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Long-Term Debt |
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26,288 |
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68,566 |
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Other Liabilities |
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213,937 |
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203,567 |
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TOTAL LONG-TERM LIABILITIES |
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458,330 |
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498,267 |
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STOCKHOLDERS EQUITY: |
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Class A Common Stock $0.01 par value: 150,000 shares
authorized and 103,300 shares issued at each of July 30,
2011 and January 29, 2011 |
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1,033 |
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1,033 |
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Paid-In Capital |
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347,101 |
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349,258 |
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Retained Earnings |
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2,294,867 |
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2,272,317 |
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Accumulated Other Comprehensive Income (Loss), net of tax |
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11,171 |
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(6,516 |
) |
Treasury
Stock, at Average Cost 16,334 and 16,054
shares at July 30, 2011 and January 29, 2011,
respectively |
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(767,302 |
) |
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(725,308 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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1,886,870 |
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1,890,784 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
2,926,047 |
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$ |
2,947,902 |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
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Twenty-Six Weeks Ended |
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July 30, 2011 |
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July 31, 2010 |
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OPERATING ACTIVITIES: |
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Net Income |
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$ |
57,172 |
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$ |
7,651 |
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Impact of Other Operating Activities on Cash Flows: |
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Depreciation and Amortization |
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116,397 |
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112,403 |
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Loss on Disposal / Write-off of Assets |
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3,156 |
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1,835 |
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Amortization of Deferred Lease Credits |
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(21,609 |
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(23,173 |
) |
Share-Based Compensation |
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24,396 |
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19,919 |
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Tax Benefit (Deficiency) from Share-Based Compensation |
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2,939 |
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(2,236 |
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Deferred Taxes |
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1,802 |
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(12,784 |
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Lessor Construction Allowances |
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19,244 |
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18,227 |
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Non-Cash Charge for Asset Impairment |
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2,247 |
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Changes in Assets and Liabilities: |
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Inventories |
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(129,142 |
) |
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(169,453 |
) |
Accounts Payable and Accrued Expenses |
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38,682 |
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33,628 |
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Income Taxes |
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(56,488 |
) |
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|
22,233 |
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Other Assets and Liabilities |
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(57,110 |
) |
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(49,361 |
) |
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NET CASH USED FOR OPERATING ACTIVITIES |
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(561 |
) |
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(38,864 |
) |
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INVESTING ACTIVITIES: |
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Capital Expenditures |
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(133,022 |
) |
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(59,754 |
) |
Purchase of Trust-Owned Life Insurance Policies |
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(11,583 |
) |
Proceeds from Sales of Marketable Securities |
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|
1,375 |
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63,567 |
|
Other Investing |
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(19,757 |
) |
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NET CASH USED FOR INVESTING ACTIVITIES |
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(151,404 |
) |
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(7,770 |
) |
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FINANCING ACTIVITIES: |
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Proceeds from Share-Based Compensation |
|
|
25,066 |
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|
494 |
|
Purchase of Treasury Stock |
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(89,868 |
) |
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Repayments of Borrowings Under the Credit Agreement |
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(45,002 |
) |
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Change in Outstanding Checks and Other |
|
|
1,629 |
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(6,302 |
) |
Dividends Paid |
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(30,633 |
) |
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(30,836 |
) |
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NET CASH USED FOR FINANCING ACTIVITIES |
|
|
(138,808 |
) |
|
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(36,644 |
) |
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EFFECT OF EXCHANGE RATES ON CASH |
|
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4,033 |
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(344 |
) |
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NET DECREASE IN CASH AND EQUIVALENTS: |
|
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(286,740 |
) |
|
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(83,622 |
) |
Cash and Equivalents, Beginning of Period |
|
|
826,353 |
|
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|
680,113 |
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CASH AND EQUIVALENTS, END OF PERIOD |
|
$ |
539,613 |
|
|
|
596,491 |
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SIGNIFICANT NON-CASH INVESTING ACTIVITIES: |
|
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|
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|
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Change in Accrual for Construction in Progress |
|
$ |
22,997 |
|
|
|
13,512 |
|
|
|
|
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|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. (A&F), through its wholly-owned subsidiaries (collectively, A&F and its
wholly-owned subsidiaries are referred to as the Company), is a specialty retailer of
high-quality, casual apparel for men, women and kids with an active, youthful lifestyle.
The accompanying Consolidated Financial Statements include the historical financial statements of,
and transactions applicable to, the Company and reflect its assets, liabilities, results of
operations and cash flows.
The Companys fiscal year ends on the Saturday closest to January 31. Fiscal years are designated
in the consolidated financial statements and notes by the calendar year in which the fiscal year
commences. All references herein to Fiscal 2011 represent the 52-week fiscal year that will end
on January 28, 2012, and to Fiscal 2010 represent the 52-week fiscal year that ended January 29,
2011.
The Consolidated Financial Statements as of July 30, 2011 and for the thirteen and twenty-six week
periods ended July 30, 2011 and July 31, 2010 are unaudited and are presented pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Accordingly, these Consolidated
Financial Statements should be read in conjunction with the Consolidated Financial Statements and
notes thereto contained in A&Fs Annual Report on Form 10-K for Fiscal 2010 filed on March 29,
2011. The January 29, 2011 consolidated balance sheet data were derived from audited consolidated
financial statements, but do not include all disclosures required by accounting principles
generally accepted in the United States of America (U.S. GAAP).
In the opinion of management, the accompanying Consolidated Financial Statements reflect all
adjustments (which are of a normal recurring nature) necessary to present fairly, in all material
respects, the financial position and results of operations and cash flows for the interim periods,
but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2011.
Certain prior period amounts have been reclassified to conform to the current year presentation.
The Consolidated Financial Statements as of July 30, 2011 and for the thirteen and twenty-six week
periods ended July 30, 2011 and July 31, 2010 included herein have been reviewed by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of
such firm follows the notes to the consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the
Securities Act of 1933 (the Act) for their report on the consolidated financial statements
because their report is not a report or a part of a registration statement prepared or
certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
2. SEGMENT REPORTING
The Company determines its operating segments on the same basis that it uses to evaluate
performance internally. 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.
6
Geographic Information
Financial information relating to the Companys operations by geographic area is as follows:
Net Sales:
Net sales includes net merchandise sales through stores and direct-to-consumer operations,
including shipping and handling revenue. Net sales are reported by geographic area based on the
location of the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
(in thousands): |
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
United States |
|
$ |
684,892 |
|
|
$ |
612,588 |
|
|
$ |
1,325,841 |
|
|
$ |
1,181,379 |
|
Europe |
|
|
182,432 |
|
|
|
88,452 |
|
|
|
334,864 |
|
|
|
168,099 |
|
Other |
|
|
49,439 |
|
|
|
44,758 |
|
|
|
92,732 |
|
|
|
84,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
916,763 |
|
|
$ |
745,798 |
|
|
$ |
1,753,437 |
|
|
$ |
1,433,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
(in thousands): |
|
July 30, 2011 |
|
|
January 29, 2011 |
|
United States |
|
$ |
914,393 |
|
|
$ |
959,777 |
|
Europe |
|
|
253,482 |
|
|
|
169,313 |
|
Other |
|
|
151,054 |
|
|
|
127,741 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,318,929 |
|
|
$ |
1,256,831 |
|
|
|
|
|
|
|
|
Long-lived assets in the table above include primarily property and equipment (net), store
supplies and lease deposits.
3. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of $13.5 million and $24.4 million for the
thirteen and twenty-six week periods ended July 30, 2011, respectively, and $10.4 million and $19.9
million for the thirteen and twenty-six week periods ended July 31, 2010, respectively. The
Company also recognized $5.1 million and $9.2 million in tax benefits related to share-based
compensation expense for the thirteen and twenty-six week periods ended July 30, 2011,
respectively, and $3.8 million and $7.1 million for the thirteen and twenty-six week periods ended
July 31, 2010, respectively.
The fair value of share-based compensation awards is recognized as compensation expense on a
straight-line basis over the awards requisite service period, net of forfeitures. For awards that
are expected to result in a tax deduction, a deferred tax asset is recorded in the
period in which share-based compensation expense is recognized. If
the tax deduction, which arises upon the vesting of restricted stock units
or the exercise of stock options/stock appreciation rights, which is
principally measured at the awards intrinsic value, is greater than the recorded deferred tax
asset, the tax benefit associated with any excess deduction is considered a windfall tax
benefit and is recognized as additional paid-in capital. If the tax deduction is less than the
recorded deferred tax asset, the resulting difference, or shortfall, is first charged first to
additional paid-in capital, to the extent of the pool of windfall tax benefits, with any
remainder recognized as tax expense. The amount of the Companys pool of windfall tax benefits
was approximately $83.8 million as of July 30, 2011, which is sufficient to fully absorb any
shortfall which may develop associated with awards currently outstanding.
7
The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures
and for changes to the estimate of expected award forfeitures. The effect of adjusting the
forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of
adjustments for forfeitures during the twenty-six weeks ended July 30, 2011 was an expense of $1.5
million. The effect of adjustments for forfeitures during the twenty-six weeks ended July 31, 2010
was income of $3.2 million.
Pursuant to an employment agreement, the Chairman and Chief Executive Officer (CEO) is eligible
to receive semi-annual grants, as defined in the
agreement. The semi-annual grants vest in equal
annual installments over the four year period following the grant
date, with the condition that each award becomes fully
vested no later than February 1, 2014, except for the final semi-annual grant, which
will become fully vested on the date of the grant.
A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock
appreciation rights and vesting of restricted stock units. As of July 30, 2011, A&F had sufficient
treasury stock available to settle stock options, stock appreciation rights and restricted stock
units outstanding. Settlement of stock awards in Common Stock also requires that the Company has
sufficient shares available in stockholder-approved plans at the applicable time.
In the event, at any reporting date during which share-based compensation awards remain
outstanding, there are not sufficient shares of Common Stock available to be issued under the 2005
Long-Term Incentive Plan (the 2005 LTIP) and the Amended and Restated 2007 Long-Term Incentive
Plan (the Amended and Restated 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.
Plans
As of July 30, 2011, A&F had two primary share-based compensation plans: 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 Amended and Restated 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 Amended and Restated 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant
awards of up to 2.0 million underlying shares of A&Fs Common Stock for each type of award, per
eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a
stockholder-approved plan, permits A&F to annually grant awards of up to 250,000 underlying shares
of A&Fs Common Stock for each award type to any associate of the Company (other than the CEO) who
is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the
grant, plus any unused annual limit from prior years. In addition, any non-
associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans,
stock 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. Awards for Michael S. Jeffries have a vesting period defined as
the shorter of four years or the award date through the end of the employment agreement. Under
both plans, 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.
8
Fair Value Estimates
The Company estimates the fair value of stock options and stock appreciation rights granted using
the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of
the stock options and stock appreciation rights and expected future stock price volatility over the
expected term. Estimates of expected terms, which represent the expected periods of time the
Company believes stock options and stock appreciation rights will be outstanding, are based on
historical experience. Estimates of expected future stock price volatility are based on the
volatility of A&Fs Common Stock price for the most recent historical period equal to the expected
term of the stock option or stock appreciation right, as appropriate. The Company calculates the
volatility as the annualized standard deviation of the differences in the natural logarithms of the
weekly stock closing price, adjusted for stock splits and dividends.
In the case of restricted stock units, the Company calculates the fair value of the restricted
stock units granted using the market price of the underlying Common Stock on the date of grant
adjusted for anticipated dividend payments during the vesting period.
Stock Options
The Company did not grant any stock options during the twenty-six weeks ended July 30, 2011 or July
31, 2010.
Below is a summary of stock option activity for the twenty-six weeks ended July 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Average |
|
|
Aggregate |
|
|
Remaining |
|
Stock Options |
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
|
Contractual Life |
|
Outstanding at January 29, 2011 |
|
|
2,316,648 |
|
|
$ |
39.51 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(776,328 |
) |
|
|
32.22 |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(19,600 |
) |
|
|
42.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 30, 2011 |
|
|
1,520,720 |
|
|
$ |
43.20 |
|
|
$ |
47,009,327 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at July 30, 2011 |
|
|
1,427,670 |
|
|
$ |
42.20 |
|
|
$ |
45,328,427 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options expected to become
exercisable in the future as of July 30,
2011 |
|
|
88,757 |
|
|
$ |
58.46 |
|
|
$ |
1,602,972 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the twenty-six weeks ended July
30, 2011 was $27.0 million. The total intrinsic value of stock options exercised during the
twenty-six weeks ended July 31, 2010 was immaterial.
9
The grant date fair value of stock options vested during the twenty-six weeks ended July 30, 2011
and July 31, 2010 was $2.3 million and $3.7 million, respectively.
As of July 30, 2011, there was $0.9 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 0.4 years.
Stock Appreciation Rights
The weighted-average estimated fair value of stock appreciation rights granted during the
twenty-six weeks ended July 30, 2011 and July 31, 2010, and the weighted-average assumptions used
in calculating such fair value, on the date of grant, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
Chairman and Chief Executive |
|
|
|
|
|
|
|
|
|
Officer |
|
|
Other Executive Officers |
|
|
All Other Associates |
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
Grant date market
price |
|
$ |
54.87 |
|
|
$ |
44.86 |
|
|
$ |
54.87 |
|
|
$ |
44.86 |
|
|
$ |
54.87 |
|
|
$ |
44.86 |
|
Exercise price |
|
$ |
54.87 |
|
|
$ |
44.86 |
|
|
$ |
54.87 |
|
|
$ |
44.86 |
|
|
$ |
54.87 |
|
|
$ |
44.86 |
|
Fair value |
|
$ |
22.09 |
|
|
$ |
16.96 |
|
|
$ |
22.29 |
|
|
$ |
16.99 |
|
|
$ |
21.86 |
|
|
$ |
16.68 |
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price volatility |
|
|
53 |
% |
|
|
50 |
% |
|
|
53 |
% |
|
|
51 |
% |
|
|
55 |
% |
|
|
52 |
% |
Expected term
(Years) |
|
|
4.6 |
|
|
|
4.7 |
|
|
|
4.7 |
|
|
|
4.5 |
|
|
|
4.1 |
|
|
|
4.1 |
|
Risk-free
interest rate |
|
|
1.9 |
% |
|
|
2.3 |
% |
|
|
2.0 |
% |
|
|
2.3 |
% |
|
|
1.7 |
% |
|
|
2.1 |
% |
Dividend yield |
|
|
1.6 |
% |
|
|
2.1 |
% |
|
|
1.6 |
% |
|
|
2.1 |
% |
|
|
1.6 |
% |
|
|
2.1 |
% |
Below is a summary of stock appreciation rights activity for the twenty-six weeks ended July
30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Aggregate |
|
|
Remaining |
|
Stock Appreciation Rights |
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
|
Contractual Life |
|
Outstanding at January 29, 2011 |
|
|
7,136,189 |
|
|
$ |
34.08 |
|
|
|
|
|
|
|
|
|
Granted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman and Chief
Executive Officer |
|
|
1,590,908 |
|
|
|
54.87 |
|
|
|
|
|
|
|
|
|
Other Executive Officers |
|
|
217,000 |
|
|
|
54.87 |
|
|
|
|
|
|
|
|
|
All Other Associates |
|
|
153,500 |
|
|
|
54.87 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(278,800 |
) |
|
|
33.02 |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(50,750 |
) |
|
|
40.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 30, 2011 |
|
|
8,768,047 |
|
|
$ |
38.72 |
|
|
$ |
301,595,096 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
exercisable at July 30, 2011 |
|
|
595,640 |
|
|
$ |
38.23 |
|
|
$ |
20,784,081 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
expected to become exercisable
in the future as of July 30,
2011 |
|
|
8,053,097 |
|
|
$ |
38.68 |
|
|
$ |
277,351,867 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The total intrinsic value of stock appreciation rights exercised during the twenty-six weeks
ended July 30, 2011 was $10.7 million and was immaterial for the twenty-six weeks ended July 31,
2010.
The grant date fair value of stock appreciation rights vested during the twenty-six weeks ended
July 30, 2011 was $20.4 million.
As of July 30, 2011, there was $81.8 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 1.3 years.
Restricted Stock Units
Below is a summary of restricted stock unit activity for the twenty-six weeks ended July 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
Restricted Stock Units |
|
Number of Shares |
|
|
Value |
|
Non-vested at January 29, 2011 |
|
|
1,147,754 |
|
|
$ |
49.59 |
|
Granted |
|
|
550,000 |
|
|
|
54.24 |
|
Vested |
|
|
(353,817 |
) |
|
|
58.66 |
|
Forfeited |
|
|
(73,233 |
) |
|
|
42.59 |
|
|
|
|
|
|
|
|
Non-vested at July 30, 2011 |
|
|
1,270,704 |
|
|
$ |
49.45 |
|
|
|
|
|
|
|
|
The total fair value of restricted stock units granted during the twenty-six weeks ended July
30, 2011 and July 31, 2010 was $29.8 million and $16.6 million, respectively.
The total grant date fair value of restricted stock units and restricted shares vested during the
twenty-six weeks ended July 30, 2011 and July 31, 2010 was $20.8 million and $21.1 million,
respectively.
As of July 30, 2011, there was $45.2 million of total unrecognized compensation cost, net of
estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation
cost is expected to be recognized over a weighted-average period of 1.1 years.
4. NET INCOME PER SHARE
Net income per basic share is computed based on the weighted-average number of outstanding shares
of Common Stock. Net income per diluted share includes the weighted-average dilutive effect of
stock options, stock appreciation rights and restricted stock units outstanding.
Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
Shares of Common Stock issued |
|
|
103,300 |
|
|
|
103,300 |
|
|
|
103,300 |
|
|
|
103,300 |
|
Treasury shares |
|
|
(16,033 |
) |
|
|
(15,080 |
) |
|
|
(16,026 |
) |
|
|
(15,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Basic Shares |
|
|
87,267 |
|
|
|
88,220 |
|
|
|
87,274 |
|
|
|
88,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, stock
appreciation rights and restricted stock
units |
|
|
3,086 |
|
|
|
1,166 |
|
|
|
3,123 |
|
|
|
1,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Diluted Shares |
|
|
90,353 |
|
|
|
89,386 |
|
|
|
90,397 |
|
|
|
89,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-Dilutive Shares |
|
|
2,394 |
(1) |
|
|
5,871 |
(1) |
|
|
2,004 |
(1) |
|
|
4,812 |
(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. |
11
5. CASH AND EQUIVALENTS
Cash and equivalents consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
January 29, 2011 |
|
Cash and equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
378,633 |
|
|
$ |
300,624 |
|
Cash equivalents |
|
|
160,980 |
|
|
|
525,729 |
|
|
|
|
|
|
|
|
Total cash and equivalents |
|
$ |
539,613 |
|
|
$ |
826,353 |
|
|
|
|
|
|
|
|
Cash and equivalents include amounts on deposit with financial institutions, United States
treasury bills, and other investments, primarily held in money market accounts, with original
maturities of less than three months. Any cash that is legally restricted from use is recorded in
Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $30.9 million on
July 30, 2011 and $26.3 million on January 29, 2011. 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.
6. INVESTMENTS
Investments consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
January 29, 2011 |
|
Marketable securities Non-Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Auction rate securities student loan backed |
|
$ |
86,318 |
|
|
$ |
85,732 |
|
Auction rate securities municipal authority bonds |
|
|
15,605 |
|
|
|
14,802 |
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
101,923 |
|
|
|
100,534 |
|
|
|
|
|
|
|
|
|
|
Rabbi Trust assets: (1) |
|
|
|
|
|
|
|
|
Money market funds |
|
|
634 |
|
|
|
343 |
|
Municipal notes and bonds |
|
|
11,690 |
|
|
|
11,870 |
|
Trust-owned life insurance policies (at cash
surrender value) |
|
|
71,736 |
|
|
|
70,288 |
|
|
|
|
|
|
|
|
Total Rabbi Trust assets |
|
|
84,060 |
|
|
|
82,501 |
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
185,983 |
|
|
$ |
183,035 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to
their use. |
12
At July 30, 2011, the Companys 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.
The par and carrying values, and related cumulative temporary impairment charges for the Companys
available-for-sale marketable securities as of July 30, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary |
|
|
Carrying |
|
(in thousands) |
|
Par Value |
|
|
Impairment |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities student loan backed |
|
$ |
94,250 |
|
|
$ |
(7,932 |
) |
|
$ |
86,318 |
|
Auction rate securities municipal authority bonds |
|
|
19,975 |
|
|
|
(4,370 |
) |
|
|
15,605 |
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
114,225 |
|
|
$ |
(12,302 |
) |
|
$ |
101,923 |
|
|
|
|
|
|
|
|
|
|
|
See Note 7, Fair Value, for further discussion on the valuation of the ARS.
An impairment is considered to be other-than-temporary if an entity (i) intends to sell the
security, (ii) more likely than not will be required to sell the security before recovering its
amortized cost basis, or (iii) does not expect to recover the securitys entire amortized cost
basis, even if there is no intent to sell the security. The Company has not incurred any
credit-related losses on available-for-sale ARS and furthermore, the issuers continued to perform
under the obligations, including making scheduled interest payments, and the Company expects that
this will continue going forward.
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 thirteen and twenty-six week periods ended
July 30, 2011 and July 31, 2010. The change in cash surrender value of the trust-owned life
insurance policies held in the Rabbi Trust resulted in realized gains of $0.7 million and $0.6
million for the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively, and realized
gains of $1.4 million and $1.1 million for the twenty-six weeks ended July 30, 2011 and July 31,
2010, respectively, recorded as part of Interest Expense, Net on the Consolidated Statements of
Operations and Comprehensive Income.
13
7. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The inputs used to
measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to
measure fair value are as follows:
|
|
|
Level 1 inputs are unadjusted quoted prices for identical assets or
liabilities that are available in active markets. |
|
|
|
Level 2 inputs are other than quoted market prices included within Level 1
that are observable for assets or liabilities, directly or indirectly. |
|
|
|
Level 3 inputs to the valuation methodology are unobservable. |
The lowest level of significant input determines the placement of the entire fair value measurement
in the hierarchy. The three levels of the hierarchy and the distribution of the Companys assets
and liabilities, measured at fair value, within it were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities at Fair Value as of July 30, 2011 |
|
|
|
(in thousands) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1) |
|
$ |
161,614 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
161,614 |
|
ARS available-for-sale student loan backed |
|
|
|
|
|
|
|
|
|
|
86,318 |
|
|
|
86,318 |
|
ARS available-for-sale municipal authority bonds
|
|
|
|
|
|
|
|
|
|
|
15,605 |
|
|
|
15,605 |
|
Municipal notes and bonds held in the Rabbi Trust |
|
|
11,690 |
|
|
|
|
|
|
|
|
|
|
|
11,690 |
|
Derivative financial instruments |
|
|
|
|
|
|
819 |
|
|
|
|
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
173,304 |
|
|
$ |
819 |
|
|
$ |
101,923 |
|
|
$ |
276,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
|
|
|
|
|
|
1,863 |
|
|
|
|
|
|
|
1,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
|
|
|
$ |
1,863 |
|
|
$ |
|
|
|
$ |
1,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $161.0 million of money market funds included in Cash and Equivalents and
$0.6 million of money market funds held in the Rabbi Trust included in Other Assets on the
Consolidated Balance Sheet. |
The level 2 liabilities 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.
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 July 30, 2011, approximately 45% of the Companys ARS were AAA rated,
approximately 20% were AA rated, and approximately 35% were A- rated, in each case as rated by
one or more of the major credit rating agencies.
14
The table below includes a roll-forward of the Companys level 3 assets and liabilities from
January 29, 2011 to July 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
ARS - Student |
|
|
Available-for-sale |
|
|
|
|
(in thousands) |
|
Loans |
|
|
ARS - Muni Bonds |
|
|
Total |
|
Fair value, January 29, 2011 |
|
$ |
85,732 |
|
|
$ |
14,802 |
|
|
$ |
100,534 |
|
Redemptions |
|
|
(1,375 |
) |
|
|
|
|
|
|
(1,375 |
) |
Gains and (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Comprehensive Income |
|
|
1,961 |
|
|
|
803 |
|
|
|
2,764 |
|
|
|
|
|
|
|
|
|
|
|
Fair value, July 30, 2011 |
|
$ |
86,318 |
|
|
$ |
15,605 |
|
|
$ |
101,923 |
|
|
|
|
|
|
|
|
|
|
|
8. INVENTORIES
Inventories are principally valued at the lower of average cost or market utilizing the retail
method. The Company determines market value as the anticipated future selling price of the
merchandise less a normal margin. An initial markup is applied to inventory at cost in order to
establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost
components of inventory on-hand so as to maintain the already established cost-to-retail
relationship. At first and third fiscal quarter end, the Company reduces inventory value by
recording a valuation reserve that represents the expected future permanent markdowns necessary to
sell through the current season inventory. At second and fourth fiscal quarter end, the Company
reduces inventory value by recording a valuation reserve that represents the expected future
permanent markdowns necessary to sell through any remaining carryover inventory from the season
then ending. The valuation reserve was $17.4 million, $24.4 million and $20.6 million at July 30,
2011, January 29, 2011 and July 31, 2010, respectively.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical
trends from actual physical inventories are made that reduce the inventory value for lost or stolen
items. The Company performs physical inventories on a periodic basis and adjusts the shrink
reserve accordingly. The shrink reserve was $9.1 million, $7.6 million and $7.9 million
at July 30, 2011, January 29, 2011 and July 31, 2010, respectively.
The inventory balance, net of the above mentioned reserves, was $516.1 million, $385.9 million and
$480.1 million at July 30, 2011, January 29, 2011 and July 31, 2010, respectively.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
January 29, 2011 |
|
Property and equipment, at cost |
|
$ |
2,607,711 |
|
|
$ |
2,451,414 |
|
Accumulated depreciation and amortization |
|
|
(1,411,126 |
) |
|
|
(1,306,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
1,196,585 |
|
|
$ |
1,144,940 |
|
|
|
|
|
|
|
|
15
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically
for impairment or
whenever events or changes in circumstances indicate that full recoverability of net asset balances
through future cash flows is in question. Factors used in the evaluation include, but are not
limited to, managements plans for future operations, recent operating results, and projected cash
flows.
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. Included in
property and equipment, net, are store-related assets previously impaired and measured at fair
value of $11.9 million and $14.6 million, net of accumulated depreciation, as of July 30, 2011 and
January 29, 2011, respectively.
10. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially
offset store construction costs and are classified between current and long-term liabilities. The
amounts, which are amortized over the respective lives of the related leases, consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
January 29, 2011 |
|
Deferred lease credits |
|
$ |
567,405 |
|
|
$ |
544,223 |
|
Amortized deferred lease credits |
|
|
(330,575 |
) |
|
|
(310,066 |
) |
|
|
|
|
|
|
|
Total deferred lease credits, net |
|
$ |
236,830 |
|
|
$ |
234,157 |
|
|
|
|
|
|
|
|
11. INCOME TAXES
The provision for income taxes is based on the current estimate of the annual effective tax rate
adjusted to reflect the impact of items discrete to the thirteen weeks ended July 30, 2011. The
effective tax rate for continuing operations for the thirteen weeks ended July 30, 2011 was an
expense of 30.7% as compared to an expense of 27.2% for the Fiscal 2010 comparable period. The
effective tax rate for continuing operations for the twenty-six weeks ended July 30, 2011 was an
expense of 33.0% compared to a benefit of 6.0% for the twenty-six weeks ended July 31, 2010. The
second quarter 2010 rate was favorably impacted by the provision-to-return adjustments for certain
jurisdictions and the resolution of tax controversies including the Companys Advanced Pricing
Agreement negotiation that was before the U.S. Competent Authority.
Cash payments of income taxes made during the thirteen weeks ended July 30, 2011 and July 31, 2010
were approximately $34.3 million and $14.3 million,
respectively. Cash payments of income taxes made during the
twenty-six weeks ended July 30, 2011 and July 31, 2010 were
approximately $101.6 million and $17.9 million respectively.
12. LONG-TERM DEBT
On July 28, 2011, the Company entered into an Amended and Restated Credit Agreement (the Amended
and Restated Credit Agreement) under which up to $350 million is available. This Amended and
Restated Credit Agreement serves to amend and restate in its entirety the syndicated unsecured
credit agreement dated April 15, 2008 as previously amended (the Prior Credit Agreement). The
primary reasons for entering into this agreement are to extend the termination date from April 12,
2013 to July 27, 2016 and to reduce fees and interest rates. As stated in the Amended and Restated
Credit Agreement, the primary purposes of the agreement are for trade and stand-by letters of
credit in the ordinary course of business, as well as to fund working capital, capital
expenditures, acquisitions and investments, and other general corporate purposes.
16
The facility fees payable under the Amended and Restated Credit Agreement are based on the
Companys
Leverage Ratio (i.e., the ratio, on a consolidated basis, of (a) the sum of total debt (excluding
trade letters of credit) plus 600% of forward minimum rent commitments to (b) consolidated
earnings, as adjusted, before interest, taxes, depreciation, amortization and rent (Consolidated
EBITDAR) for the trailing four-consecutive-fiscal-quarter periods. The facility fees accrue at a
rate of 0.125% to 0.30% per annum based on the Leverage Ratio for the most recent determination
date. The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater
than 3.75 to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement
also requires that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i)
Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of,
without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term
debt due within twelve months of the date of determination and (z) the sum of minimum rent and
contingent store rent, not be less than 2.00 to 1.00. The Company was in compliance with the
applicable ratio requirements and other covenants at July 30, 2011. Interest rates on borrowings
under the Amended and Restated Credit Agreement are generally based upon market rates plus a margin
based on the Leverage Ratio.
The terms of the Amended and Restated Credit Agreement include customary events of default such as
payment defaults, cross-defaults to other material indebtedness, undischarged material judgments,
bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe
the negative covenants and other covenants related to the operation and conduct of the business of
A&F and its subsidiaries. Upon an event of default, 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 and Restated Credit Agreement will mature on July 27, 2016. The Company had no trade
letters of credit outstanding at July 30, 2011 and January 29, 2011. Stand-by letters of credit
outstanding, under either the Amended and Restated Credit Agreement or Prior Credit Agreement as
applicable, on July 30, 2011 and January 29, 2011 were immaterial.
As of July 30, 2011 the Company did not have any borrowing under the Amended and Restated Credit
Agreement and had $43.8 million outstanding under the Prior Credit Agreement as of January 29,
2011. The amounts outstanding under the Prior Credit Agreement were denominated in Japanese Yen and
were fully repaid during the thirteen weeks ended July 30, 2011.
As of July 30, 2011 and January 29, 2011, the Company also had $26.3 million and $24.8 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 July 30, 2011, the carrying value of the Companys long-term debt approximated fair value.
Total interest expense was $2.2 million and $1.9 million for the thirteen weeks ended July 30, 2011
and July 31, 2010, respectively, and $4.4 million and $3.8 million for the twenty-six weeks ended
July 30, 2011 and July 31, 2010, respectively. The average interest rate for the long-term debt
recorded under the Prior Credit Agreement was 2.2% and 2.4% for the thirteen and twenty-six weeks
ended July 30, 2011, respectively.
13. DERIVATIVES
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses
derivatives, primarily forward contracts, to manage the financial impacts of these exposures. The
Company does not use forward contracts to engage in currency speculation and does not enter into
derivative financial instruments for trading purposes.
17
In order to qualify for hedge accounting treatment, a derivative must be considered highly
effective at offsetting changes in either the hedged items cash flows or fair value.
Additionally, the hedge relationship must be documented to include the risk management objective
and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge
effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging
instrument has been and is expected to continue to be effective at achieving offsetting changes in
fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness
is reported in current period earnings and hedge accounting is discontinued if it is determined
that the derivative is not highly effective.
For derivatives that either do not qualify for hedge accounting or are not designated as hedges,
all changes in the fair value of the derivative are recognized in earnings. For qualifying cash
flow hedges, the effective portion of the change in the fair value of the derivative is recorded as
a component of Other Comprehensive Income (OCI) and recognized in earnings when the hedged cash
flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes
in the fair value of the derivatives time value are recognized in current period earnings. The
effectiveness of the hedge is assessed based on changes in the fair value attributable to changes
in spot prices. The changes in the fair value of the derivative contract related to the changes in
the difference between the spot price and the forward price are excluded from the assessment of
hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge
relationship is terminated, the derivative gains or losses that are deferred in OCI will be
recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are
terminated because the forecasted transaction is not expected to occur in the original specified
time period, or a two-month period thereafter, the derivative gains or losses are immediately
recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow
hedges, to hedge the foreign currency exposure associated with forecasted
foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related
settlement of the foreign-currency-denominated inter-company receivable. Fluctuations in exchange
rates will either increase or decrease the Companys U.S. dollar equivalent cash flows and affect
the Companys U.S. dollar earnings. Gains or losses on the foreign exchange forward contracts that
are used to hedge these exposures are expected to partially offset this variability. Foreign
exchange forward contracts represent agreements to exchange the currency of one country for the
currency of another country at an agreed-upon settlement date. As of July 30, 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 Companys 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 July 30,
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 July 30, 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 inventory sales, the resulting settlement of the foreign-currency-denominated
inter-company accounts receivable, or both:
|
|
|
|
|
|
|
Notional Amount(1) |
|
Canadian Dollar |
|
$ |
15,998 |
|
British Pound |
|
$ |
42,984 |
|
Euro |
|
$ |
48,614 |
|
|
|
|
(1) |
|
Amounts are reported in thousands and in U.S. Dollars equivalent as of July 30, 2011. |
18
The Company also uses foreign exchange forward contracts to hedge certain foreign currency
denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash
balances, receivables, payables, and debt. Fluctuations in exchange rates result in transaction
gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be
remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not
to apply hedge accounting to these instruments because there are no differences in the timing of
gain or loss recognition on the hedging instrument and the hedged item.
As of July 30, 2011, the Company had the following outstanding currency forward contracts that were
entered into to hedge foreign currency denominated net monetary assets/liabilities:
|
|
|
|
|
|
|
Notional Amount(1) |
|
Euro |
|
$ |
8,586 |
|
Japanese Yen |
|
$ |
7,449 |
|
|
|
|
(1) |
|
Amounts are reported in thousands and in U.S. Dollars equivalent as of July 30, 2011. |
The location and amounts of derivative fair values on the Consolidated Balance Sheets as of
July 30, 2011 and January 29, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
Asset Derivatives |
|
|
Balance Sheet |
|
Liability Derivatives |
|
(in thousands) |
|
Location |
|
July 30, 2011 |
|
|
January 29, 2011 |
|
|
Location |
|
July 30, 2011 |
|
|
January 29, 2011 |
|
Derivatives Designated as Hedging
Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Forward Contracts |
|
Other Current Assets |
|
$ |
819 |
|
|
$ |
727 |
|
|
Other Liabilities |
|
$ |
1,496 |
|
|
$ |
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivates Not Designated as
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Forward Contracts |
|
Other Current Assets |
|
$ |
|
|
|
$ |
|
|
|
Other Liabilities |
|
$ |
367 |
|
|
$ |
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Other Current Assets |
|
$ |
819 |
|
|
$ |
727 |
|
|
Other Liabilities |
|
$ |
1,863 |
|
|
$ |
1,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 7, Fair Value, for further discussion of the determination of the fair value
of derivatives.
19
The location and amounts of derivative gains and losses for the thirteen and twenty-six weeks ended
July 30, 2011 and July 31, 2010 on the Consolidated Statements of Operations and Comprehensive
Income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
Twenty-Six Weeks Ended |
|
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
July 30, 2011 |
|
|
July 31, 2010 |
(in thousands) |
|
Location |
|
Gain/(Loss) |
|
|
Gain/(Loss) |
|
Gain/(Loss) |
|
|
Gain/(Loss) |
Derivatives not designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Forward Contracts
|
|
Other Operating
Expense (Income),
Net
|
|
$ |
(209 |
) |
|
$ |
|
|
|
(949 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
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|
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|
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|
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|
|
|
|
|
|
|
|
Location of |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of |
|
|
|
|
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
Earnings on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified |
|
|
|
|
|
|
|
|
|
|
Derivative Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from |
|
|
|
|
|
|
|
|
|
|
(Ineffective |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Portion and |
|
|
Amount of Gain (Loss) |
|
|
|
Amount of Gain (Loss) |
|
|
OCI into |
|
|
Amount of Gain (Loss) |
|
|
Amount |
|
|
Recognized in Earnings on |
|
|
|
Recognized in OCI on |
|
|
Earnings |
|
|
Reclassified from Accumulated |
|
|
Excluded from |
|
|
Derivative Contracts (Ineffective Portion |
|
|
|
Derivative Contracts (Effective |
|
|
(Effective |
|
|
OCI into Earnings (Effective |
|
|
Effectiveness |
|
|
and Amount Excluded from |
|
|
|
Portion) |
|
|
Portion) |
|
|
Portion) |
|
|
Testing) |
|
|
Effectiveness Testing) |
|
|
|
(a) |
|
|
|
|
|
|
(b) |
|
|
|
|
|
|
(c) |
|
|
|
Thirteen Weeks Ended |
|
(in thousands) |
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
|
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
|
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Forward Contracts |
|
$ |
3,195 |
|
|
$ |
386 |
|
|
Cost of Goods Sold |
|
$ |
(1,248 |
) |
|
$ |
1,459 |
|
|
Other Operating Expense (Income), Net |
|
$ |
(426 |
) |
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
(in thousands) |
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
|
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
|
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Forward Contracts |
|
$ |
(2,102 |
) |
|
$ |
1,480 |
|
|
Cost of Goods Sold |
|
$ |
(1,392 |
) |
|
$ |
603 |
|
|
Other Operating Expense (Income), Net |
|
$ |
(499 |
) |
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Companys customers. |
|
(c) |
|
The amount represents the change in fair value of derivative contracts due to changes in
the difference between the spot price and forward price that is excluded from the assessment of
hedge effectiveness and, therefore, recognized in earnings. |
14. DISCONTINUED OPERATIONS
On June 16, 2009, A&Fs Board of Directors approved the closure of the Companys 29 RUEHL branded
stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL
branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009.
Accordingly, the results of operations of RUEHL are reflected in Income from Discontinued
Operations, Net of Tax on the Consolidated Statements of Operations and Comprehensive Income for
the twenty-six weeks ended July 30, 2011 and July 31, 2010. Net income for the twenty-six weeks
ended July 30, 2011, included net income per diluted share of $0.01 from discontinued operations
related to the settlement of outstanding lease obligations. Results from discontinued
operations for the twenty-six weeks ended July 31, 2010, were immaterial.
20
Costs associated with exit or disposal activities are recorded when the liability is incurred.
Below is a roll forward from January 29, 2011 of the liabilities recognized on the Consolidated
Balance Sheet as of July 30, 2011 related to the closure of RUEHL branded stores and related
direct-to-consumer operations (in millions):
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, 2011 |
|
Beginning Balance |
|
$ |
17.2 |
|
Interest Accretion / Other, Net(1) |
|
|
(1.3 |
) |
Cash Payments |
|
|
(15.3 |
) |
|
|
|
|
Ending Balance(2) |
|
$ |
0.6 |
|
|
|
|
|
|
|
|
(1) |
|
Other includes an accrual adjustment related to the settlement of
outstanding lease obligations. |
|
(2) |
|
Ending balance reflects the net present value of obligations due under
signed lease termination agreements. As of July 30, 2011, the entire amount is recorded as a
current liability in Accrued Expenses on the Consolidated Balance Sheet. |
15. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental
Executive Retirement Plan (the SERP) to provide additional retirement income to its Chairman and
Chief Executive Officer (CEO). Subject to service requirements, the CEO will receive a monthly
benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final
average compensation used for the calculation is based on actual compensation, base salary and cash
incentive compensation, averaged over the last 36 consecutive full calendar months ending before
the CEOs retirement. The Company recorded expense of $0.9 million and $1.5 million for the
thirteen and twenty-six weeks ended July 30, 2011, respectively, associated with the SERP. The
Company recorded expense of $2.0 million and $1.9 million for the thirteen and twenty-six weeks
ended July 31, 2010, respectively, associated with the SERP.
The expense for the thirteen weeks ended July 31, 2010, included an expense of $2.1 million to
correct a cumulative under accrual of the SERP relating to prior periods, primarily Fiscal 2008.
The Company does not believe this correction was material to the periods affected.
16. CONTINGENCIES
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of
business. Legal costs incurred in connection with the resolution of claims and lawsuits are
generally expensed as incurred, and the Company establishes reserves for the outcome of litigation
where it deems appropriate to do so under applicable accounting rules. Actual liabilities may
exceed the amounts reserved, and there can be no assurance that final resolution of these matters
will not have a material adverse effect on the Companys financial condition, results of operations
or cash flows. The Companys identified contingencies include the following matters:
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores,
Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In
that action, plaintiffs alleged, on behalf of a putative class of California store managers
employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay
as non-exempt employees under California wage and hour laws. The complaint sought injunctive
relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and
attorneys fees and costs. The defendants answered the complaint on August 21, 2006, denying
liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids
store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to
oppose the plaintiffs remaining claims. On January 29, 2009, the Court certified a class
consisting of all store managers who served at Hollister and abercrombie kids stores in California
from May 1, 2004 through the future date upon which the action concludes. The parties then
continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a
notice that they did not intend to continue to pursue
their claim that members of the class did not exercise independent managerial judgment and
discretion. They also asked the Court to vacate the August 9, 2010 trial date previously set by
the Court. On July 20, 2010, the trial court vacated the trial date and the defendants then moved
to decertify the putative class. On April 7, 2011, the trial court granted defendants motion and
decertified the putative class. The parties are continuing to litigate the claims of the
individual plaintiffs.
21
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries,
et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F
as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&Fs
present and former directors, alleging various breaches of the directors fiduciary duty and
seeking equitable and monetary relief. In the following three months, four similar derivative
actions were filed (three in the United States District Court for the Southern District of Ohio and
one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of
A&F alleging various breaches of the directors fiduciary duty allegedly arising out of 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 Companys motion was granted and, on April 10, 2009, plaintiffs filed an
appeal from the order of dismissal in the United States Court of Appeals for the Sixth Circuit. On
April 5, 2011, a panel of the United States Court of Appeals for the Sixth Circuit reversed the
decision of the District Court and remanded the action for further proceedings. The state court has
stayed further proceedings in the state-court derivative action until resolution of the
consolidated federal derivative cases.
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
attorneys 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
Courts 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 Companys assessment of the current exposure could change in the event of the discovery of
additional facts with respect to legal matters pending against the Company or determinations by
judges, juries, administrative agencies or other finders of fact that are not in accordance with
the Companys evaluation of the claims.
22
17. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Codification 820-10 Fair Value Measurements and Disclosures, (ASC 820-10)
was amended in January 2010 to require additional disclosures related to recurring and nonrecurring
fair value measurements. The guidance requires disclosure of transfers of assets and liabilities
between Levels 1 and 2 of
the fair value hierarchy, including the reasons and the timing of the transfers; and information on
purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets
and liabilities measured under Level 3 of the fair value hierarchy. The guidance was effective for
the Company beginning on January 31, 2010. The disclosure guidance adopted on January 31, 2010
did not have a material impact on our consolidated financial statements.
In May 2011, ASC 820-10 was further amended to clarify certain disclosure requirements and improve
consistency with international reporting standards. This amendment is to be applied prospectively
and is effective for the Company beginning January 28, 2012. The Company does not expect its
adoption to have a material effect on its consolidated financial statements.
Accounting Standards Codification Topic 220, Comprehensive Income, was amended in June 2011 to
require entities to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The amendment does not change
the items that must be reported in other comprehensive income or when an item of other
comprehensive income must be reclassified to net income under current GAAP. This guidance is
effective for the Companys fiscal year and interim periods beginning January 29, 2012. The Company
does not expect its adoption to have a material effect on its consolidated financial statements.
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying consolidated balance sheet of Abercrombie & Fitch Co. and its
subsidiaries as of July 30, 2011 and the related consolidated statements of operations and
comprehensive income for each of the thirteen and twenty-six week periods ended July 30, 2011 and
July 31, 2010 and the consolidated statements of cash flows for the twenty-six week periods ended
July 30, 2011 and July 31, 2010. These interim financial statements are the responsibility of the
Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of which
is the expression of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of January 29, 2011, and the related
consolidated statements of operations and comprehensive income, of stockholders equity and of cash
flows for the year then ended (not presented herein), and in our report dated March 29, 2011, we
expressed an unqualified opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of January 29, 2011, is
fairly stated in all material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
September 7, 2011
24
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
OVERVIEW
The Companys fiscal year ends on the Saturday closest to January 31. Fiscal years are designated
in the consolidated financial statements and notes by the calendar year in which the fiscal year
commences. All references herein to Fiscal 2011 represent the 52-week fiscal year that will end
on January 28, 2012, and to Fiscal 2010 represent the 52-week fiscal year that ended January 29,
2011.
The Company is a specialty retailer that operates stores and direct-to-consumer operations selling
casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans
and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women
and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. In addition, the
Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering
bras, underwear, personal care products, sleepwear and at-home products for women.
Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of
privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an
atmosphere that is confident and just a bit provocative. abercrombie kids directly follows in the
footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids has an energetic attitude
and is popular, wholesome and athletic the signature of All-American cool. Hollister is young,
spirited, with a sense of humor and brings Southern California to the world. Gilly Hicks is the
cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly
Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney
sensibility.
RESULTS OF OPERATIONS
During the second quarter of Fiscal 2011, net sales increased 23% to $916.8 million from
$745.8 million for the second quarter of Fiscal 2010. The impact of foreign currency on
sales (based on converting prior year sales at current year exchange
rates) for the thirteen weeks ended July 30, 2011 was a benefit of approximately
1.6% of sales. The gross profit rate for the second quarter of Fiscal 2011 was 63.6% compared to
65.1% for the second quarter of Fiscal 2010. Operating income was $47.2 million for the second
quarter of Fiscal 2011 compared to $27.6 million for the second quarter of Fiscal 2010. The
Company had net income of $32.0 million for the second quarter of Fiscal 2011 compared to a net
income of $19.5 million for the second quarter of Fiscal 2010. Net income per diluted share was
$0.35 for the second quarter of Fiscal 2011 compared to $0.22 for the second quarter of Fiscal
2010. Net income for the second quarter of Fiscal 2010 included a charge of $0.02 per diluted
share associated with store closures. Results from discontinued operations were immaterial for the
thirteen weeks ended July 30, 2011 and July 31, 2010.
During the Fiscal 2011 year-to-date period, net sales increased 22% to $1.753 billion from $1.434
billion in Fiscal 2010. The impact of foreign currency on sales for the twenty-six weeks ended
July 30, 2011 was a benefit of approximately 1.2% of sales. The gross profit
rate for the Fiscal 2011 year-to-date period was 64.3% compared to 63.9% for the comparable
year-to-date period for Fiscal 2010. Operating income was $85.9 million in the Fiscal 2011
year-to-date period, compared to $8.8 million in Fiscal 2010. The Company had net income of $57.2
million in the Fiscal 2011 year-to-date period compared to $7.7 million in Fiscal 2010. Net income
per diluted share was $0.63 in the Fiscal 2011 year-to-date period compared to $0.09 in Fiscal
2010. Net income for the second quarter of Fiscal 2010 included a charge of $0.02 per diluted
share associated with store closures. Fiscal 2011 year-to-date net income per share included a
benefit of $0.01 per diluted share from discontinued operations. Results from discontinued
operations were immaterial for the Fiscal 2010 year-to-date period.
25
Total inventory, at cost, was $516.1 million as of July 30, 2011, compared to $480.1 million as of
July 31, 2010, an 8% increase. The increase in inventory was attributable to higher sales levels,
but increased at a rate lower than the sales trend.
Net cash used for operating activities was $0.6 million for the twenty-six weeks ended July 30,
2011. In addition, the Company used cash of $133.0 million for capital expenditures, $43.8 million for the
repayment of the outstanding balance under the credit agreement, $30.6 million for dividends, and
$89.9 million to repurchase 1.4 million shares of A&Fs Common Stock during the twenty-six weeks
ended July 30, 2011. As of July 30, 2011, the Company had $539.6 million in cash and equivalents,
no borrowings under the credit agreement and immaterial outstanding letters of credit, compared to
$596.5 million in cash and equivalents, borrowings under the credit agreement of $53.2 million and
outstanding letters of credit of $24.4 million as of July 31, 2010. The decrease in letters of
credit outstanding is related to an adjustment to vendor payment terms.
Due to seasonal variations in the retail industry, the results of operations for any current period
are not necessarily indicative of the results expected for the full fiscal year. The seasonality
of the Companys operations may also lead to significant fluctuations in certain asset and
liability accounts.
The following data represents the amounts shown in the Companys Consolidated Statements of
Operations and Comprehensive Income for the thirteen and twenty-six week periods ended July 30,
2011 and July 31, 2010, expressed as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
NET SALES |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of Goods Sold |
|
|
36.4 |
% |
|
|
34.9 |
% |
|
|
35.7 |
% |
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
63.6 |
% |
|
|
65.1 |
% |
|
|
64.3 |
% |
|
|
63.9 |
% |
Stores and Distribution Expense |
|
|
46.4 |
% |
|
|
48.9 |
% |
|
|
47.0 |
% |
|
|
50.1 |
% |
Marketing, General and
Administrative Expense |
|
|
12.0 |
% |
|
|
12.8 |
% |
|
|
12.4 |
% |
|
|
13.4 |
% |
Other Operating Expense (Income), Net |
|
|
0.1 |
% |
|
|
(0.3 |
)% |
|
|
(0.1 |
)% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
5.1 |
% |
|
|
3.7 |
% |
|
|
4.9 |
% |
|
|
0.6 |
% |
Interest Expense, Net |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES |
|
|
5.0 |
% |
|
|
3.6 |
% |
|
|
4.8 |
% |
|
|
0.5 |
% |
Tax Expense (Benefit) from
Continuing Operations |
|
|
1.5 |
% |
|
|
1.0 |
% |
|
|
1.6 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING OPERATIONS |
|
|
3.5 |
% |
|
|
2.6 |
% |
|
|
3.2 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS,
Net of Tax |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
3.5 |
% |
|
|
2.6 |
% |
|
|
3.3 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Financial Summary
The following summarized financial and statistical data compare the thirteen and twenty-six week
periods ended July 30, 2011 to the thirteen and twenty-six week periods ended July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
July 30, 2011 |
|
|
July 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by brand (millions) |
|
$ |
916.8 |
|
|
$ |
745.8 |
|
|
$ |
1,753.4 |
|
|
$ |
1,433.6 |
|
Abercrombie & Fitch |
|
$ |
383.4 |
|
|
$ |
335.6 |
|
|
$ |
725.0 |
|
|
$ |
639.3 |
|
abercrombie |
|
$ |
83.3 |
|
|
$ |
79.1 |
|
|
$ |
169.9 |
|
|
$ |
157.8 |
|
Hollister |
|
$ |
434.2 |
|
|
$ |
322.2 |
|
|
$ |
828.7 |
|
|
$ |
620.4 |
|
Gilly Hicks* |
|
$ |
15.9 |
|
|
$ |
8.9 |
|
|
$ |
29.8 |
|
|
$ |
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net sales from prior year |
|
|
23 |
% |
|
|
17 |
% |
|
|
22 |
% |
|
|
16 |
% |
Abercrombie & Fitch |
|
|
14 |
% |
|
|
18 |
% |
|
|
13 |
% |
|
|
16 |
% |
abercrombie |
|
|
5 |
% |
|
|
11 |
% |
|
|
8 |
% |
|
|
12 |
% |
Hollister |
|
|
35 |
% |
|
|
17 |
% |
|
|
34 |
% |
|
|
16 |
% |
Gilly Hicks |
|
|
79 |
% |
|
|
44 |
% |
|
|
85 |
% |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in comparable store sales** |
|
|
9 |
% |
|
|
5 |
% |
|
|
9 |
% |
|
|
3 |
% |
Abercrombie & Fitch |
|
|
5 |
% |
|
|
8 |
% |
|
|
6 |
% |
|
|
6 |
% |
abercrombie |
|
|
7 |
% |
|
|
3 |
% |
|
|
9 |
% |
|
|
4 |
% |
Hollister |
|
|
12 |
% |
|
|
2 |
% |
|
|
12 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net sales from prior year |
|
|
23 |
% |
|
|
17 |
% |
|
|
22 |
% |
|
|
16 |
% |
U.S.*** |
|
|
12 |
% |
|
|
8 |
% |
|
|
12 |
% |
|
|
7 |
% |
International*** |
|
|
74 |
% |
|
|
85 |
% |
|
|
70 |
% |
|
|
93 |
% |
Direct-to-consumer
sales (including
shipping & handling) |
|
|
28 |
% |
|
|
50 |
% |
|
|
30 |
% |
|
|
48 |
% |
|
|
|
* |
|
Net sales for the thirteen and twenty-six week periods ended July 30, 2011, and July 31, 2011, reflect the activity of 19 and 16
stores, respectively. Other operational data was deemed immaterial for inclusion in the table. |
|
** |
|
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. |
|
*** |
|
Includes direct-to-consumer sales. |
27
CURRENT TRENDS AND OUTLOOK
During the second quarter of Fiscal 2011, we exceeded our internal 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 long-term strategic objective to leverage the global power of our brands to build a
highly profitable, sustainable global business. Our second quarter marks the midpoint of the
three-year roadmap we have previously set out. We have identified a number of growth vehicles
that will support our strategic objective over the next few years and our focus remains on
execution against our strategy and the key roadmap components. We believe maintaining a long-term
outlook is even more critical today, given the uncertainty in the macro-economic environment.
First, we
plan to continue opening Abercrombie & Fitch international flagship stores in key locations
around the world. During the second quarter, we opened an Abercrombie & Fitch flagship store in
Paris, and we expect to open four additional international Abercrombie & Fitch flagship locations
in Fiscal 2011, which will bring us to a total of ten locations by the end of the fiscal year. The
additional four international flagship locations will be in Madrid, Dusseldorf, Brussels and
Singapore.
Second, we continue to expect to open up to 40 international mall-based Hollister stores during
Fiscal 2011, of which six had opened as of the end of the second quarter. The majority of the
stores will be opened in Europe and the total also includes our first stores in mainland China and
Hong Kong.
Third, recognizing the profitable growth potential of the direct-to-consumer business, we have a
number of initiatives that we are working on to drive this business and increase the share of our
business mix it represents. One of the initiatives completed during the quarter was the redesign
and relaunch of our web sites. In addition, we expect the direct-to-consumer business to continue
to benefit from our growing international presence.
Fourth, improving average U.S. store productivity levels, both through same store sales growth and
as a result of the closure of underperforming stores. The Company is targeting to return to 90% or
greater of 2007 U.S. store productivity levels by 2012. The U.S. chain stores, particularly
Hollister, performed well during the second quarter of Fiscal 2011 fueled by what we believe is a
compelling assortment and effective pricing and promotional strategies. The Company expects to
close approximately 60 to 65 U.S. stores during Fiscal 2011, predominantly at the end of the year
through natural lease expirations.
Finally, we believe that Gilly Hicks has significant potential as an additional long-term growth
vehicle.
From a
margin standpoint, the greatest challenge the Company faces remains
the impact of increases
in raw material costs, particularly cotton, and other input costs. The consumer response to price
increases to offset these cost increases remains unclear. In addition, the global macroeconomic
environment and possible exchange rate volatility add to this uncertainty.
However, the Company expects that continued sales growth, coupled with disciplined control of
expenses, will enable it to continue growing its operating income. The Company continues to believe
that its diluted earnings per share target of $4.75 for Fiscal 2012 is a realistic objective.
28
SECOND QUARTER AND YEAR-TO-DATE RESULTS
Net Sales
Net sales for the second quarter of Fiscal 2011 were $916.8 million, an increase of 23% from net
sales of $745.8 million during the second quarter of Fiscal 2010. The net sales increase was
attributable to a 9% increase in total comparable store sales, a 28% increase in the
direct-to-consumer business, including shipping and handling revenue, and 31 new stores, primarily
international, net of store closures. The impact of foreign currency
on sales (based on converting prior year sales at current year
exchange rates) for the thirteen
weeks ended July 30, 2011 was a benefit of approximately $11.7 million.
Including direct-to-consumer sales, U.S. sales increased 12% to $684.9 million and international
sales increased 74% to $231.9 million.
Year-to-date net sales in Fiscal 2011 were $1.753 billion, an increase of 22% from net sales of
$1.434 billion during the comparable period in Fiscal 2010. The net sales increase was
attributable to a 9% increase in total comparable store sales, a 30% 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 the twenty-six weeks ended July 30,
2011 was approximately a benefit of $17.6 million. Including direct-to-consumer
sales, U.S. sales increased 12% to $1.326 billion and international sales increased 70% to $427.6
million.
Comparable store sales by brand for the second quarter of Fiscal 2011 were as follows:
Abercrombie & Fitch increased 5%, abercrombie kids increased 7% and Hollister increased 12%.
Male and female comparable store sales both increased by a high single digit.
On a comparable store sales basis, Europe was the strongest performing region while Canada, and
more significantly Japan, had negative comparative store sales. U.S. comparable store sales were
approximately in-line with overall Company same store sales.
Direct-to-consumer net merchandise sales for the second quarter of Fiscal 2011 were $90.4 million,
an increase of 31% from Fiscal 2010 second quarter direct-to-consumer net merchandise sales of
$69.0 million. Shipping and handling revenue for the corresponding periods was $11.6 million in
Fiscal 2011 and $11.0 million in Fiscal 2010. The direct-to-consumer business, including shipping
and handling revenue, accounted for 11.1% of total net sales in the second quarter of Fiscal 2011
compared to 10.7% in the second quarter of Fiscal 2010.
Direct-to-consumer net merchandise sales for the Fiscal 2011 year-to-date period were $182.8
million, an increase of 33% from Fiscal 2010 year-to-date direct-to-consumer net merchandise sales
of $137.7 million. Shipping and handling revenue for the corresponding periods was $25.1 million
in Fiscal 2011 and $22.3 million in Fiscal 2010. The direct-to-consumer business, including
shipping and handling revenue, accounted for 11.9% of total net sales for the year-to-date Fiscal
2011 compared to 11.2% in the Fiscal 2010 year-to-date period.
From a merchandise classification standpoint, for the male business, knit tops and fleece were
stronger performing categories; while graphics was a weaker performing category. In the female
business, woven shirts, sweaters, fleece and knit tops were stronger performing categories; while
graphics and dresses were weaker performing categories.
Gross Profit
Gross profit for the second quarter of Fiscal 2011 was $583.0 million compared to $485.3 million
for the comparable period in Fiscal 2010. The gross profit rate (gross profit divided by net
sales) for the second quarter of Fiscal 2011 was 63.6%, down 150 basis points from the second
quarter of Fiscal 2010 rate of 65.1%.
29
The decrease in the gross profit rate for the second quarter of Fiscal 2011 was primarily driven by
an increase in average unit cost partially offset by a higher average unit retail and an
international mix benefit.
Year-to date gross profit for Fiscal 2011 was $1.127 billion compared to $916.8 million for the
comparable period in Fiscal 2010. The gross profit rate for the year-to-date period of Fiscal 2011
was 64.3%, up 40 basis points from the year-to-date Fiscal 2010 rate of 63.9%.
The increase in the gross profit rate for the Fiscal 2011 year-to-date period was primarily driven
by favorable international mix, including foreign currency impact, higher average unit retail, and
benefits from other gross margin items, such as freight.
Stores and Distribution Expense
Stores and distribution expense for the second quarter of Fiscal 2011 was $425.3 million compared
to $364.5 million for the comparable period in Fiscal 2010. The stores and distribution expense
rate (stores and distribution expense divided by net sales) for the second quarter of Fiscal 2011
was 46.4% compared to 48.9% in the second quarter of Fiscal 2010.
Stores and distribution expense for the Fiscal 2011 year-to-date period was $824.4 million compared
to $718.9 million for the comparable period in Fiscal 2010. The stores and distribution expense
rate for the year-to-date period of Fiscal 2011 was 47.0% compared to 50.1% for the Fiscal 2010
year-to-date period.
The decrease in the stores and distribution expense rate for the second quarter and the Fiscal 2011
year-to-date period was primarily driven by lower store occupancy costs as a percentage of net
sales.
Total direct-to-consumer expense included in stores and distribution expense was $17.8 million and
$35.4 million for the thirteen and twenty-six weeks ended July 30, 2011, respectively, compared to
$12.9 million and $25.7 million for the thirteen and twenty-six weeks ended July 31, 2010,
respectively.
Marketing, General and Administrative Expense
Marketing, general and administrative expense during the second quarter of Fiscal 2011 was $110.0
million compared to $95.2 million during the same period in Fiscal 2010, a 16% increase. For the
second quarter of Fiscal 2011, the marketing, general and administrative expense rate (marketing,
general and administrative expense divided by net sales) was 12.0% compared to 12.8% for the second
quarter of Fiscal 2010.
Marketing, general, and administrative expense during the Fiscal 2011 year-to-date period was
$217.7 million compared to $191.8 million during the same period in Fiscal 2010, a 14% increase.
For the year-to-date period of Fiscal 2011, the marketing, general and administrative expense rate
was 12.4% compared to 13.4% for the Fiscal 2010 year-to-date period.
The increase in marketing, general and administrative expense for the thirteen and twenty-six weeks
ended Fiscal 2011 was primarily due to increases in compensation and benefits, including incentive
and equity compensation, marketing and other expenses, and the net
effect of prior year favorable legal
settlements, partially offset by a prior year charge to correct an under accrual of the supplemental executive
retirement plan.
Other Operating Expense (Income), Net
Second quarter other operating expense, net for Fiscal 2011 was $0.5 million compared to other
operating income, net, of $1.9 million for the second quarter of Fiscal 2010.
30
Other operating expense, net for the thirteen weeks ended July 30, 2011 was adversely impacted by losses related to foreign currency transactions and derivative contracts, while other operating income, net for the thirteen weeks ended July 31, 2010 benefitted from gains related to foreign currency translations and a favorable insurance reimbursement.
Year-to-date other operating income, net for Fiscal 2011 was $1.3 million compared to $2.8 million
for the year-to-date period of Fiscal 2010.
Other operating income, net for Fiscal 2011 was impacted by losses from derivative contracts, while other operating income, net for Fiscal 2010 benefitted from favorable insurance reimbursement.
Interest Expense, Net and Tax Expense (Benefit) from Continuing Operations
Second quarter interest expense was $2.2 million in Fiscal 2011, offset by interest income of $1.2
million, compared to interest expense of $1.9 million, offset by interest income of $1.1 million in
the second quarter of Fiscal 2010.
Year-to-date interest expense was $4.4 million in Fiscal 2011, offset by interest income of $2.5
million, compared to interest expense of $3.8 million in Fiscal 2010, offset by interest income of
$2.2 million.
The increase in interest expense for the thirteen and twenty-six weeks ended July 30, 2011 was due
to the increase in imputed interest related to certain store lease transactions, partially offset
by lower letter of credit fees.
The effective tax rate for continuing operations for the second quarter of Fiscal 2011 was an
expense of 30.7% compared to an expense of 27.2% for the Fiscal 2010 comparable period. The
current rate reflects a lower than anticipated full year rate as a result of an increased share of
the Companys pre-tax income coming from international operations which have a lower effective tax
rate. The tax rate for the thirteen weeks ended July 31, 2010 was favorably impacted by the
provision-to-return adjustments for certain jurisdictions and the resolution of tax controversies
including the Companys Advanced Pricing Agreement negotiation that was before the U.S. Competent
Authority.
The effective tax rate for continuing operations for the twenty-six weeks ended July 30, 2011 was a
33.0% expense compared to a 6.0% benefit for the twenty-six weeks ended July 31, 2010.
On a full-year basis, the Company expects the effective tax rate to be in the low to mid 30% range.
The rate remains sensitive to the domestic/international profit mix, including the effect of
foreign currencies. In addition, the rate does not include the potential valuation allowances
related to net operating loss carry forwards.
Net Income from Discontinued Operations
The Company completed the closure of its RUEHL branded stores and related direct-to-consumer
operations in the fourth quarter of Fiscal 2009. Accordingly, the after-tax operating results of
RUEHL appear in Income from Discontinued Operations, Net of Tax on the Consolidated Statements of
Operations and Comprehensive Income for the thirteen and twenty-six weeks ended July 30, 2011 and
July 31, 2010. Net income from discontinued operations for the thirteen and twenty-six weeks ended
July 30, 2011 and July 31, 2010 was immaterial.
Refer to Note 14, Discontinued Operations, of the Notes to Consolidated Financial Statements for
further discussion.
31
Net Income and Net Income per Share
Net income for the second quarter of Fiscal 2011 was $32.0 million compared to $19.5 million for
the second quarter of Fiscal 2010. Net income per diluted share for the second quarter of Fiscal
2011 was $0.35 compared to $0.22 for the same period of Fiscal 2010. Net income for the second
quarter of Fiscal 2010 included a charge of $0.02 per diluted share associated with store closures.
Net income for the year-to-date period of Fiscal 2011 was $57.2 million compared to net income of
$7.7 million for the year-to-date period of Fiscal 2010. Net income per diluted share for the
year-to-date period of Fiscal 2011 was $0.63 compared to $0.09 for the same period of Fiscal 2010.
Net income per diluted share for the year-to-date period of Fiscal 2011 included net income of
$0.01 per diluted share from discontinued operations related to the settlement of outstanding lease
obligations.
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
On July 28, 2011, the Company entered into an amended and restated credit agreement (the Amended
and Restated Credit Agreement) under which up to $350 million will be available. The Amended and
Restated Credit Agreement serves to amend and restate in its entirety the credit agreement dated
April 25, 2008 as previously amended (the Prior Credit Agreement). The primary reasons for
entering into the Amended and Restated Credit Agreement were to extend the termination date from
April 12, 2013 to July 27, 2016 and to reduce fees and interest rates.
As of
September 2, 2011, the Company had approximately $350 million available under its unsecured Amended and
Restated Credit Agreement. The Company had no borrowings outstanding
under its Amended and Restated Credit Agreement on July 30, 2011. The Company had $43.8 million
outstanding under the Prior Credit Agreement on January 29, 2011 denominated in Japanese Yen. The
average interest rate for the thirteen weeks ended July 30, 2011 was 2.2%. The average interest
rate for the twenty-six weeks ended July 30, 2011 was 2.4%.
The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75
to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement also requires
that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i) Consolidated
EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without
duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due
within twelve months of the date of determination and (z) the
sum of minimum rent and contingent store rent, not be less than 2.00 to 1.00. The Company was in
compliance with the applicable ratio requirements and other covenants at July 30, 2011.
32
The Amended and Restated Credit Agreement is described in Note 12, Long-Term Debt, of the Notes
to Consolidated Financial Statements.
Stand-by letters of credit outstanding on July 30, 2011 and January 29, 2011 were immaterial.
Operating Activities
Net cash used for operating activities was $0.6 million for the twenty-six weeks ended July 30,
2011 compared to cash used of $38.9 million for twenty-six weeks ended July 31, 2010. The change in
cash used for operating activities was primarily driven by the increase in net income and a
reduction in the increase of inventory from year end due higher inventory turnover, partially
off-set by a reduction in taxes payable due to the timing of tax payments.
Investing Activities
Cash outflows for investing activities for the twenty-six weeks ended July 30, 2011 and July 31,
2010 were used primarily for capital expenditures related to new store construction and information
technology investments, as well as the acquisition of intangible assets. Cash outflows for capital
expenditures were higher in Fiscal 2011 than in Fiscal 2010, due to an increase in the number of
international retail locations, as well as IT and Home Office infrastructure projects. Cash
inflows from investing activities were less in Fiscal 2011 due to a reduction in proceeds from the
sales of marketable securities.
Financing Activities
For the twenty-six weeks ended July 30, 2011, financing activities consisted primarily of the
repurchase of A&Fs Common Stock, the payment of dividends, repayments of outstanding borrowings
under the Prior Credit Agreement and the receipt of proceeds associated with the exercise of
share-based compensation awards. For the twenty-six weeks ended July 31, 2010, financing
activities consisted mainly of the payment of dividends.
During the twenty-six weeks ended July 30, 2011, A&F repurchased approximately 1.4 million shares
of A&Fs Common Stock in the open market with a market value of approximately $89.9 million. A&F
did not repurchase any shares of A&Fs Common Stock in the open market during the twenty-six weeks
ended July 31, 2010. The Fiscal 2011 repurchases were pursuant to the A&F Board of Directors
November 20, 2007 authorization.
As of July 30, 2011, A&F had approximately 8.4 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&Fs Common Stock.
Future Cash Requirements and Sources of Cash
Over the next twelve months, the Companys primary cash requirements will be to fund operating
activities, including the acquisition of inventory, and obligations related to compensation, rent,
taxes and other operating activities, as well as increasing 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 and Restated Credit Facility
as a source of additional funding.
33
Off-Balance Sheet Arrangements
As of July 30, 2011, the Company did not have any off-balance sheet arrangements.
Contractual Obligations
The Companys contractual obligations consist primarily of operating leases, purchase orders for
merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits
and other agreements to purchase goods and services that are legally binding and that require
minimum quantities to be purchased. These contractual obligations impact the Companys short- and
long-term liquidity and capital resource needs. During the twenty-six weeks ended July 30, 2011,
changes to the contractual obligations from those as of January 29, 2011 included the repayment of
the outstanding balance of the credit facility and the payment of $15.0 million in previously
accrued charges related to the closure of RUEHL branded stores and related direct-to-consumer
operations. There were no other material changes in contractual obligations as of July 30, 2011,
with the exception of those obligations which occurred in the normal course of business (primarily
changes in the Companys merchandise inventory-related purchases and lease obligations, which
fluctuate throughout the year as a result of the seasonal nature of the Companys operations).
34
Second Quarter Store Count and Gross Square Feet
Store count and gross square footage by brand for the thirteen weeks ended July 30, 2011 and July
31, 2010, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2011 |
|
|
325 |
|
|
|
185 |
|
|
|
542 |
|
|
|
19 |
|
|
|
1,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
1 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
|
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
326 |
|
|
|
183 |
|
|
|
545 |
|
|
|
19 |
|
|
|
1,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2011 |
|
|
2,952 |
|
|
|
879 |
|
|
|
3,755 |
|
|
|
183 |
|
|
|
7,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
22 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remodels/Conversions (net activity) |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
|
|
|
|
(8 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
2,970 |
|
|
|
870 |
|
|
|
3,778 |
|
|
|
183 |
|
|
|
7,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
9,110 |
|
|
|
4,754 |
|
|
|
6,932 |
|
|
|
9,632 |
|
|
|
7,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2010 |
|
|
347 |
|
|
|
209 |
|
|
|
528 |
|
|
|
16 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remodels/Conversions (net activity) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
345 |
|
|
|
206 |
|
|
|
530 |
|
|
|
17 |
|
|
|
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2010 |
|
|
3,111 |
|
|
|
988 |
|
|
|
3,615 |
|
|
|
161 |
|
|
|
7,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
12 |
|
|
|
6 |
|
|
|
14 |
|
|
|
5 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remodels/Conversions (net activity) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(34 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
3,097 |
|
|
|
976 |
|
|
|
3,629 |
|
|
|
166 |
|
|
|
7,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
8,977 |
|
|
|
4,738 |
|
|
|
6,847 |
|
|
|
9,765 |
|
|
|
7,166 |
|
35
Year-To-Date Store Count and Gross Square Feet
Store count and gross square footage by brand for the twenty-six weeks ended July 30, 2011 and July
31, 2010, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2011 |
|
|
325 |
|
|
|
185 |
|
|
|
540 |
|
|
|
19 |
|
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
|
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
326 |
|
|
|
183 |
|
|
|
545 |
|
|
|
19 |
|
|
|
1,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2011 |
|
|
2,955 |
|
|
|
879 |
|
|
|
3,739 |
|
|
|
183 |
|
|
|
7,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
22 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remodels/Conversions (net activity) |
|
|
(7 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
|
|
|
|
(8 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2011 |
|
|
2,970 |
|
|
|
870 |
|
|
|
3,778 |
|
|
|
183 |
|
|
|
7,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
9,110 |
|
|
|
4,754 |
|
|
|
6,932 |
|
|
|
9,632 |
|
|
|
7,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Activity |
|
Abercrombie & Fitch |
|
|
abercrombie |
|
|
Hollister |
|
|
Gilly Hicks |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2010 |
|
|
346 |
|
|
|
209 |
|
|
|
525 |
|
|
|
16 |
|
|
|
1,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
3 |
|
|
|
2 |
|
|
|
6 |
|
|
|
1 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remodels/Conversions (net activity) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
345 |
|
|
|
206 |
|
|
|
530 |
|
|
|
17 |
|
|
|
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Square Feet (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2010 |
|
|
3,110 |
|
|
|
979 |
|
|
|
3,597 |
|
|
|
161 |
|
|
|
7,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
|
25 |
|
|
|
19 |
|
|
|
43 |
|
|
|
5 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remodels/Conversions (net activity) |
|
|
4 |
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed |
|
|
(42 |
) |
|
|
(22 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
3,097 |
|
|
|
976 |
|
|
|
3,629 |
|
|
|
166 |
|
|
|
7,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Store Size |
|
|
8,977 |
|
|
|
4,738 |
|
|
|
6,847 |
|
|
|
9,765 |
|
|
|
7,166 |
|
36
CAPITAL EXPENDITURES
During the second quarter of Fiscal 2011, the Company opened four Hollister stores and an
Abercrombie & Fitch flagship store in Paris in May. During Fiscal 2011, the Company expects to
open four additional international Abercrombie & Fitch flagship locations, as well as a total of up
to 40 international mall-based Hollister stores, of which 6 have opened as of July 30, 2011. The
majority of the stores will be opened in Europe. The Company also expects to close approximately 60
to 65 domestic stores during Fiscal 2011, primarily at the end of the year through natural lease
expirations. The Company expects total capital expenditures for 2011 to be approximately $350
million, predominately related to new stores, store refreshes, and remodels.
Capital expenditures totaled $133.0 million and $59.8 million for the twenty-six weeks ended July
30, 2011 and July 31, 2010, respectively. A summary of capital expenditures is as follows:
|
|
|
|
|
|
|
|
|
Capital Expenditures (in millions) |
|
July 30, 2011 |
|
|
July 31, 2010 |
|
New Store Construction, Store Refreshes and Remodels |
|
$ |
102.2 |
|
|
$ |
45.3 |
|
Home Office, Distribution Centers and Information
Technology |
|
|
30.8 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
Total Capital Expenditures |
|
$ |
133.0 |
|
|
$ |
59.8 |
|
|
|
|
|
|
|
|
CLOSURE OF RUEHL BRANDED STORES AND RELATED DIRECT-TO-CONSUMER OPERATIONS
On June 16, 2009, A&Fs Board of Directors approved the closure of the Companys 29 RUEHL branded
stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL
branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009.
Costs associated with exit or disposal activities are recorded when the liability is incurred. As
of July 30, 2011, the Company expected to make gross cash payments totaling approximately $15.9
million in Fiscal 2011, related primarily to the final lease termination agreements associated with
the closure of RUEHL branded stores. $15.3 million of the $15.9 million was paid during the
twenty-six weeks ended July 30, 2011.
Recent Accounting Pronouncements
Accounting Standards Codification 820-10 Fair Value Measurements and Disclosures, (ASC 820-10)
was amended in January 2010 to require additional disclosures related to recurring and nonrecurring
fair value measurements. The guidance requires disclosure of transfers of assets and liabilities
between Levels 1 and 2 of the fair value hierarchy, including the reasons and the timing of the
transfer; and information on purchases, sales, issuances, and settlements on a gross basis in the
reconciliation of the assets and liabilities measured under Level 3 of the fair value hierarchy.
The guidance was effective for the Company beginning on January 31, 2010. The disclosure guidance
adopted on January 31, 2010, did not have a material impact on our consolidated financial
statements.
In May 2011, ASC 820-10 was further amended to clarify certain disclosure requirements and improve
consistency with international reporting standards. This amendment is to be applied prospectively
and is effective for the Company beginning January 28, 2012. The Company does not expect its
adoption to have a material effect on its consolidated financial statements.
Accounting Standards Codification Topic 220, Comprehensive Income, was amended in June 2011 to
require entities to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The amendment does not change
the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net
income under current GAAP. This guidance is effective for the Companys fiscal year and interim
periods beginning January 29, 2012. The Company does not expect its adoption to have a material
effect on its consolidated financial statements.
37
Critical Accounting Estimates
The Companys discussion and analysis of its financial condition and results of operations are
based upon the Companys 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 Companys significant accounting policies can be found in Note 2, Summary of Significant
Accounting Policies of the Notes to Consolidated Financial Statements contained in ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of A&Fs Annual Report on Form 10-K for Fiscal 2010
filed on March 29, 2011. The Company believes the following policies are the most critical to the
portrayal of the Companys financial condition and results of operations.
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Revenue Recognition |
|
|
|
|
|
The Company recognizes retail
sales at the time the customer
takes possession of the
merchandise. The Company
reserves for sales returns
through estimates based on
historical experience and
various other assumptions that
management believes to be
reasonable. The value of
point of sale coupons that
result in a reduction of the
price paid by the customer is
recorded as a reduction of
sales.
The Company sells gift cards
in its stores and through
direct-to-consumer operations.
The Company accounts for gift
cards sold to customers by
recognizing a liability at the
time of sale. The liability
remains on the Companys books
until the earlier of
redemption (recognized as
revenue) or when the Company
determines the likelihood of
redemption is remote, known as
breakage (recognized as other
operating income), based on
historical redemption
patterns.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
the sales return reserve and revenue
recognition for gift cards over the past three
fiscal years.
The Company does not expect material changes in
the near term to the underlying assumptions
used to measure the sales return reserve or to
measure the timing and amount of future gift
card redemptions as of July 30, 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
July 30, 2011 would have affected pre-tax
income by approximately $1.2 million.
A 10% change in the assumption of the
redemption pattern for gift cards as of July
30, 2011 would have affected pre-tax income by
an immaterial amount. |
38
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Auction Rate Securities (ARS) |
|
|
|
|
|
As a result of the market
failure and lack of liquidity
in the current ARS market, the
Company 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 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
July 30, 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 7, Fair Value, being equal, a 50 basis
point increase in the market required rate of
return will yield approximately a 16% increase
in impairment and a 50 basis point decrease in
the market required rate of return will yield
approximately a 17% decrease in impairment. |
|
|
|
Inventory Valuation |
|
|
|
|
|
Inventories are principally
valued at the lower of average
cost or market utilizing the
retail method.
The Company reduces inventory
value by recording a valuation
reserve that represents
estimated future permanent
markdowns necessary to
sell-through the inventory.
Additionally, as part of
inventory valuation, an
inventory shrink estimate is
made each period that reduces
the value of inventory for
lost or stolen items.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
the shrink reserve or 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 July 30, 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 $1.7 million for the
second quarter of Fiscal 2011.
An increase or decrease in the inventory shrink
accrual of 10% would have been immaterial to
pre-tax income for the second quarter of Fiscal
2011. |
39
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Property and Equipment |
|
|
|
|
|
Long-lived assets, primarily
comprised of property and
equipment, are reviewed
periodically for impairment or
whenever events or changes in
circumstances indicate that
full recoverability of net
asset balances through future
cash flows is in question.
The Companys impairment
calculation requires
management to make assumptions
and judgments related to
factors used in the evaluation
for impairment, including, but
not limited to, managements
expectations for future
operations and projected cash
flows.
|
|
The Company has not made any material changes
in the accounting methodology used to determine
impairment loss over the past three fiscal
years.
The Company does not expect material changes in
the near term to the assumptions underlying its
impairment calculations as of July 30, 2011.
However, changes in these assumptions do occur,
and, should those changes be significant, they
could have a material impact on the Companys
determination of whether or not there has been
an impairment. |
|
|
|
Income Taxes |
|
|
|
|
|
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 the
thirteen and twenty-six weeks ended July 30,
2011. However, changes in these assumptions
may occur and should those changes be
significant, they could have a material impact
on the Companys income tax provision.
If the Companys 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. |
40
|
|
|
Policy |
|
Effect if Actual Results Differ from Assumptions |
|
|
|
Equity Compensation Expense |
|
|
|
|
|
The Companys equity
compensation expense related
to stock options and stock
appreciation rights is
estimated using the
Black-Scholes option-pricing
model to determine the fair
value of the stock option and
stock appreciation right
grants, which requires the
Company to estimate the
expected term of the stock
option and stock appreciation
right grants and expected
future stock price volatility
over the expected term.
|
|
The Company does not expect material changes in
the near term to the underlying assumptions
used to calculate equity compensation expense
for the twenty-six weeks ended July 30, 2011.
However, changes in these assumptions do occur,
and, should those changes be significant, they
could have a material impact on the Companys
equity compensation expense.
During the twenty-six weeks ended July 30,
2011, the Company granted stock appreciation
rights covering an aggregate of 1,961,408
shares and no stock options. A 10% increase in
the expected term would yield a 4% increase in
the Black-Scholes valuation for stock
appreciation rights granted during the year,
while a 10% increase in stock price volatility
would yield a 9% increase in the Black-Scholes
valuation for stock appreciation rights granted
during the year. |
|
|
|
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 actual annual
cash incentive compensation)
averaged over the last 36
consecutive full calendar
months ending before the CEOs
retirement.
The Companys accrual for the
SERP requires management to
make assumptions and judgments
related to the CEOs final
average compensation, life
expectancy and discount rate.
|
|
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 July 30, 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 July 30, 2011 would increase the SERP
accrual by approximately $1.4 million. A 50
basis point increase in the discount rate as of
July 30, 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 Companys financial condition, results
of operations or cash flows. |
41
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The Company cautions that any forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made
by the Company, its management or spokespeople involve risks and uncertainties and are subject to
change based on various important factors, many of which may be beyond the Companys control.
Words such as estimate, project, plan, believe, expect, anticipate, intend, and
similar expressions may identify forward-looking statements.
The following factors, included in the disclosure under the heading FORWARD-LOOKING STATEMENTS AND
RISK FACTORS in ITEM 1A. RISK FACTORS of A&Fs Annual Report on Form 10-K for Fiscal 2010 filed
on March 29, 2011, in some cases have affected and in the future could affect the Companys
financial performance and could cause actual results for Fiscal 2011 and beyond to differ
materially from those expressed or implied in any of the forward-looking statements included in
this Quarterly Report on Form 10-Q or otherwise made by management:
|
|
|
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; |
|
|
|
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; |
|
|
|
fluctuations in foreign currency exchange rates could adversely impact our financial
condition and results of operations; |
|
|
|
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; |
|
|
|
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 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; |
|
|
|
the costs associated with 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;
|
42
|
|
|
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; |
|
|
|
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 two 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;
|
43
|
|
|
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. |
Future economic and industry trends that could potentially impact revenue and profitability are
difficult to predict. Therefore, there can be no assurance that the forward-looking statements
included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the
significant uncertainties in the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company, or any other person, that
the objectives of the Company will be achieved. The forward-looking statements included herein are
based on information presently available to the management of the Company. Except as may be
required by applicable law, the Company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
44
|
|
|
ITEM 3. |
|
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 Companys available-for-sale marketable securities as of July
30, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary |
|
|
Carrying |
|
(in thousands) |
|
Par Value |
|
|
Impairment |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities student loan backed |
|
$ |
94,250 |
|
|
$ |
(7,932 |
) |
|
$ |
86,318 |
|
Auction rate securities municipal authority bonds |
|
|
19,975 |
|
|
|
(4,370 |
) |
|
|
15,605 |
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
114,225 |
|
|
$ |
(12,302 |
) |
|
$ |
101,923 |
|
|
|
|
|
|
|
|
|
|
|
As of July 30, 2011, approximately 45% of the Companys ARS were AAA rated, approximately
20% of the Companys ARS were AA rated, and approximately 35% of the Companys ARS 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 of
insurance 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 July 30, 2011, total assets held in the Rabbi Trust were $84.1 million, which included
$11.7 million of municipal notes and bonds with maturities that ranged from five months to two
years, trust-owned life insurance policies with a cash surrender value of $71.7 million and $0.6
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 thirteen and twenty-six week periods ended July 30,
2011 and July 31, 2010. The change in cash surrender value of the trust-owned life insurance
policies held in the Rabbi Trust resulted in realized gains of $0.7 million and $0.6 million for
the thirteen weeks ended July 30, 2011 and July 31, 2010,
respectively. The change in cash surrender value of the trust-owned life insurance policies held in
the Rabbi Trust resulted in realized gains of $1.4 million and $1.1 million for the twenty-six
weeks ended July 30, 2011 and July 31, 2010, respectively.
45
Interest Rate Risks
As of July 30, 2011, the Company had no long-term debt outstanding under the Amended and Restated
Credit Agreement. The interest rate for borrowings under the Amended and Restated Credit Agreement
is generally based upon market rates plus a margin based on the Leverage Ratio. The average
interest rate was 2.2% for the thirteen weeks ended July 30, 2011. The average interest rate was
2.4% for the twenty-six weeks ended July 30, 2011. Additionally, as of July 30, 2011, the Company
had $350.0 million available, less outstanding letters of credit, under its Amended and Restated
Credit Agreement.
Foreign Exchange Rate Risk
A&Fs international subsidiaries generally operate with functional currencies other than the U.S.
dollar. The Companys Consolidated Financial Statements are presented in U.S. dollars. Therefore,
the Company must translate revenues, expenses, assets and liabilities from functional currencies
into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. The
fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts
of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation
increases as international expansion increases.
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, British Pounds, Euros, Swiss Francs, Canadian Dollars
and Japanese Yen. 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.
46
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to provide
reasonable assurance that information required to be disclosed in the reports that A&F files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to A&Fs management, including the Chairman and Chief Executive Officer of A&F (the
principal executive officer) and the Executive Vice President and Chief Financial Officer of A&F
(the principal financial officer), as appropriate to allow timely decisions regarding required
disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how
well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of disclosure controls and procedures are met.
A&Fs management, including the Chairman and Chief Executive Officer of A&F and the Executive Vice
President and Chief Financial Officer of A&F, evaluated the effectiveness of A&Fs design and
operation of its disclosure controls and procedures as of the end of the fiscal quarter ended July
30, 2011. Based upon that evaluation, the Chairman and Chief Executive Officer of A&F and the
Executive Vice President and Chief Financial Officer of A&F concluded that A&Fs disclosure
controls and procedures were effective at a reasonable level of assurance as of July 30, 2011, the
end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes in A&Fs internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during A&Fs fiscal quarter ended
July 30, 2011 that materially affected, or are reasonably likely to materially affect, A&Fs
internal control over financial reporting.
47
PART II. OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of
business. Legal costs incurred in connection with the resolution of claims and lawsuits are
generally expensed as incurred, and the Company establishes reserves for the outcome of litigation
where it deems appropriate to do so under applicable accounting rules. Actual liabilities may
exceed the amounts reserved, and there can be no assurance that final resolution of these matters
will not have a material adverse effect on the Companys financial condition, results of operations
or cash flows. The Companys identified contingencies include the following matters:
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores,
Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In
that action, plaintiffs alleged, on behalf of a putative class of California store managers
employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay
as non-exempt employees under California wage and hour laws. The complaint sought injunctive
relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and
attorneys fees and costs. The defendants answered the complaint on August 21, 2006, denying
liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids
store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to
oppose the plaintiffs remaining claims. On January 29, 2009, the Court certified a class
consisting of all store managers who served at Hollister and abercrombie kids stores in California
from May 1, 2004 through the future date upon which the action concludes. The parties then
continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a
notice that they did not intend to continue to pursue their claim that members of the class did not
exercise independent managerial judgment and discretion. They also asked the Court to vacate the
August 9, 2010 trial date previously set by the Court. On July 20, 2010, the trial court vacated
the trial date and the defendants then moved to decertify the putative class. On April 7, 2011,
the trial court granted defendants motion and decertified the putative class. The parties are
continuing to litigate the claims of the individual plaintiffs.
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries,
et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F
as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&Fs
present and former directors, alleging various breaches of the directors fiduciary duty and
seeking equitable and monetary relief. In the following three months, four similar derivative
actions were filed (three in the United States District Court for the Southern District of Ohio and
one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of
A&F alleging various breaches of the directors fiduciary duty allegedly arising out of 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 Companys motion was granted and, on April 10, 2009, plaintiffs filed an
appeal from the order of dismissal in the United States Court of Appeals for the Sixth Circuit. On
April 5, 2011, a panel of the United States Court of Appeals for the Sixth Circuit reversed the
decision of the District Court and remanded the action for further proceedings. The state court has
stayed further proceedings in the state-court derivative action until resolution of the
consolidated federal derivative cases.
48
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 attorneys 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 Courts 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 Companys assessment of the current exposure could change in the event of the discovery of
additional facts with respect to legal matters pending against the Company or determinations by
judges, juries, administrative agencies or other finders of fact that are not in accordance with
the Companys evaluation of the claims.
49
The Companys risk factors as of July 30, 2011 have not changed materially from those disclosed in
Part I, ITEM 1A. RISK FACTORS of A&Fs Annual Report on Form 10-K for Fiscal 2010 filed on March
29, 2011.
50
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no unregistered sales of equity securities during the second quarter of Fiscal 2011.
The following table provides information regarding A&Fs purchases of its Common Stock during the
thirteen-week period ended July 30, 2011:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Maximum Number of |
|
|
|
Total Number |
|
|
Average |
|
|
as Part of Publicly |
|
|
Shares that May Yet be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Purchased under the |
|
Period (Fiscal Month) |
|
Purchased (1) |
|
|
per Share (2) |
|
|
or Programs (3) |
|
|
Plans or Programs (4) |
|
May 1, 2011 through May 28, 2011 |
|
|
53,349 |
|
|
$ |
75.43 |
|
|
|
|
|
|
|
9,336,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 29, 2011 through July 2, 2011 |
|
|
785,680 |
|
|
$ |
66.50 |
|
|
|
782,242 |
|
|
|
8,554,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2011 through July 30, 2011 |
|
|
167,953 |
|
|
$ |
73.79 |
|
|
|
167,900 |
|
|
|
8,386,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,006,982 |
|
|
$ |
68.19 |
|
|
|
950,142 |
|
|
|
8,386,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
An aggregate of 56,840 of the shares of A&Fs Common Stock purchased during the
quarterly period (thirteen-week period) ended July 30, 2011 represented shares which were withheld
for tax payments due upon the vesting of employee restricted stock unit and restricted share awards
and upon the exercise of employee stock appreciation rights. All other shares of A&F Common Stock
purchased during the quarterly period were purchased pursuant to A&Fs publicly announced stock
repurchase authorization described in footnote 3 below. |
|
(2) |
|
The average price paid per share includes broker commissions, as applicable. |
|
(3) |
|
The reported shares were purchased pursuant to A&Fs publicly announced stock
repurchase authorization. On November 21, 2007, A&F announced the November 20, 2007 authorization
by A&Fs Board of Directors to repurchase 10.0 million shares of A&Fs Common Stock. |
|
(4) |
|
The number shown represents, as of the end of each period, the maximum number of
shares of Common Stock that may yet be purchased under A&Fs publicly announced stock repurchase
authorization described in footnote 3 above. The shares may be purchased, from time to time,
depending on market conditions. |
51
|
|
|
|
|
Exhibit No. |
|
Document |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of
Abercrombie & Fitch Co., as filed with the Delaware Secretary of State on June 16, 2011
(incorporated herein by reference to Exhibit 3.1 to A&Fs Current Report on Form 8-K dated and
filed June 17, 2011 (File No. 001-12107)) |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. reflecting
amendments through June 17, 2011 [This document represents the Amended and Restated
Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all
amendments. This compiled document has not been filed with the Delaware Secretary of
State.]* |
|
|
|
|
|
|
4.1 |
|
|
Amended and Restated Credit Agreement, entered into as of July 28, 2011, among Abercrombie
& Fitch Management Co.; the Foreign Subsidiary Borrowers (as defined in the Amended and
Restated Credit Agreement); Abercrombie & Fitch Co.; the Lenders (as defined in the Amended
and Restated Credit Agreement); PNC Bank, National Association, as global agent, the Swing
Line Lender and an LC Issuer; PNC Capital Markets LLC, as a co-lead arranger and a
co-bookrunner; J.P. Morgan Securities, LLC, as a co-lead arranger and a co-bookrunner;
JPMorgan Chase Bank, N.A., as syndication agent and an LC Issuer; Fifth Third Bank, as a
co-documentation agent; and The Huntington National Bank, as a co-documentation agent and an
LC Issuer (incorporated herein by reference to Exhibit 4.1 to A&Fs Current Report on Form
8-K dated and filed August 3, 2011 (File No. 001-12107)) |
|
|
|
|
|
|
4.2 |
|
|
Amended and Restated Guaranty of Payment (Domestic Credit Parties), dated as of July 28,
2011, among Abercrombie & Fitch Co.; the material Domestic Subsidiaries (as defined in the
Amended and Restated Guaranty of Payment (Domestic Credit Parties)); and PNC Bank, National
Association, as global agent (incorporated herein by reference to Exhibit 4.2 to A&Fs
Current Report on Form 8-K dated and filed August 3, 2011 (File No. 001-12107)) |
|
|
|
|
|
|
4.3 |
|
|
Supplement No. 1 to Amended and Restated Guaranty of Payment
(Domestic Credit Parties), dated as of August 31, 2011,
between NSOP, LLC, as a New Guarantor, and
PNC Bank, National Association, as global agent *
|
|
|
|
|
|
|
10.1 |
|
|
Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to A&Fs Current Report on Form 8-K dated and filed June
17, 2011 (File No. 001-12107)) |
|
|
|
|
|
|
15 |
|
|
Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: |
|
|
|
|
Inclusion of Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers
LLP.* |
|
|
|
|
|
|
31.1 |
|
|
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
|
|
|
31.2 |
|
|
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
52
|
|
|
|
|
Exhibit No. |
|
Document |
|
|
|
|
|
|
32 |
|
|
Certifications by Principal Executive Officer and Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
|
|
|
|
101 |
|
|
The following materials from Abercrombie & Fitch Co.s Quarterly Report on Form 10-Q for
the quarterly period ended July 30, 2011, formatted in XBRL (eXtensible Business Reporting
Language): (i) Consolidated Statements of Operations and Comprehensive Income for the
thirteen and twenty-six
weeks ended July 30, 2011 and July 31, 2010; (ii) Consolidated Balance Sheets at July 30,
2011 and January 29, 2011; (iii) Consolidated Statements of Cash Flows for the Twenty-Six
Weeks Ended July 30, 2011 and July 31, 2010; and (iv) Notes to Consolidated Financial
Statements*** |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
*** |
|
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as
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. |
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ABERCROMBIE & FITCH CO.
|
|
Date: September 7, 2011 |
By: |
/s/ JONATHAN E. RAMSDEN
|
|
|
|
Jonathan E. Ramsden |
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized Officer) |
|
54
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Document |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. reflecting
amendments through June 17, 2011 [This document represents the Amended and Restated
Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all
amendments. This compiled document has not been filed with the Delaware Secretary of
State.]* |
|
|
|
|
|
|
4.3 |
|
|
Supplement No. 1 to Amended and Restated Guaranty of Payment (Domestic
Credit Parties), dated as of August 31, 2011, between NSOP, LLC, as a New
Guarantor, and PNC Bank, National Association, as global agent |
|
|
|
|
|
|
15 |
|
|
Letter re: Unaudited Interim Financial Information to Securities and Exchange
Commission re: Inclusion of Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP.* |
|
|
|
|
|
|
31.1 |
|
|
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
|
|
|
31.2 |
|
|
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
|
|
|
32 |
|
|
Certifications by Principal Executive Officer and Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.** |
|
|
|
|
|
|
101 |
|
|
The following materials from Abercrombie & Fitch Co.s Quarterly Report on Form 10-Q
for the quarterly period ended July 30, 2011, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income
for the thirteen and twenty-six weeks ended July 30, 2011 and July 31, 2010; (ii)
Consolidated Balance Sheets at July 30, 2011 and January 29, 2011; (iii) Consolidated
Statements of Cash Flows for the Twenty-Six Weeks Ended July 30, 2011 and July 31, 2010;
and (iv) Notes to Consolidated Financial Statements.*** |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
*** |
|
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as
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. |
55