UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-12107
ABERCROMBIE & FITCH CO.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1469076
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 Fitch Path, New Albany, OH 43054
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614)283-6500
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at September 3, 2004
-------------------- --------------------------------
$.01 Par Value 94,557,496 Shares
EXPLANATORY NOTE
This Amendment No. 1 to this Quarterly Report on Form 10-Q/A ("Form 10-Q/A") is
being filed in order to correct the previously issued condensed consolidated
financial statements of Abercrombie & Fitch Co. (the "Company") for the
quarterly period ended July 31, 2004, initially filed with the Securities and
Exchange Commission (the "SEC") on September 9, 2004 (the "Original Filing").
The corrections are to properly account for landlord construction allowances in
accordance with Statement of Financial Accounting Standards No.13, "Accounting
for Leases" and Financial Accounting Standards Board Technical Bulletin No.
88-1, "Issues Relating to Accounting for Leases"; and rent holidays in
accordance with Financial Accounting Standards Board Technical Bulletin No.
85-3, "Accounting for Operating Leases with Scheduled Rent Increases." See Note
2: "Restatement and Reclassification of Financial Statements" under Notes to
Condensed Consolidated Financial Statements included in Item 1, "Financial
Statements" of this Form 10-Q/A for additional discussion and a summary of the
effect of these changes on the Company's condensed consolidated financial
statements as of July 31, 2004 and January 31, 2004 and for the interim periods
ended July 31, 2004 and August 2, 2003.
This Form 10-Q/A amends and restates only Items 1, 2 and 4 of Part I and Item 6
of Part II of the Original Filing to reflect the effects of this restatement of
our financial statements for the period presented or as deemed necessary in
connection with the completion of restated financial statements. The remaining
Items contained within this Amendment No. 1 on Form 10-Q/A consist of all other
Items originally contained on Form 10-Q for the fiscal quarter ended July 31,
2004. These remaining Items are not amended hereby, but are included for the
convenience of the reader. Except for the forgoing amended information, this
Form 10-Q/A continues to describe conditions as of the date of the Original
Filing, and we have not updated the disclosures contained herein to reflect
events that occurred at a later date.
In connection with the preparation of this Form 10-Q/A, the Company concluded
that it was appropriate to classify our investments in auction rate securities
as marketable securities. Previously, such investments had been classified as
cash and equivalents. Accordingly, we have revised the classification to report
these investments as marketable securities on the consolidated balance sheets as
of July 31, 2004 and January 31, 2004. The Company has also made corresponding
adjustments to the consolidated statements of cash flows for the twenty-six
weeks ended July 31, 2004 and August 2, 2003, to reflect the gross purchases and
sales of these investments as investing activities rather than as a component of
cash and equivalents. See Note 2: "Restatement and Reclassification of Financial
Statements" under Notes to Condensed Consolidated Financial Statements included
in Item 1, "Financial Statements" of this Form 10-Q/A for additional discussion
on the effects of the change in classification.
2
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income - (Restated)
Thirteen and Twenty-Six Weeks Ended
July 31, 2004 and August 2, 2003..................................... 4
Condensed Consolidated Balance Sheets - (Restated)
July 31, 2004 and January 31, 2004................................... 5
Condensed Consolidated Statements of Cash Flows - (Restated)
Twenty-Six Weeks Ended
July 31, 2004 and August 2, 2003..................................... 6
Notes to Condensed Consolidated Financial Statements - (Restated) ......... 7
Report of Independent Registered Public Accounting Firm.................... 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......... 32
Item 4. Controls and Procedures............................................. 33
Part II. Other Information
Item 1. Legal Proceedings................................................... 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........ 38
Item 6. Exhibits and Reports on Form 8-K.................................... 39
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
--------- --------- --------- ---------
(Restated, See Note 2)
NET SALES
$ 401,346 $ 355,719 $ 813,276 $ 702,442
Cost of Goods Sold, Occupancy and Buying
Costs 219,703 211,869 466,642 430,014
--------- --------- --------- ---------
GROSS INCOME 181,643 143,850 346,634 272,428
General, Administrative and Store
Operating Expenses 112,881 88,716 231,150 176,614
--------- --------- --------- ---------
OPERATING INCOME 68,762 55,134 115,484 95,814
Interest Income, Net (1,358) (861) (2,343) (1,852)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 70,120 55,995 117,827 97,666
Provision for Income Taxes 27,232 21,467 45,622 37,353
--------- --------- --------- ---------
NET INCOME $ 42,888 $ 34,528 $ 72,205 $ 60,313
========= ========= ========= =========
NET INCOME PER SHARE:
BASIC $ 0.45 $ 0.36 $ 0.76 $ 0.62
========= ========= ========= =========
DILUTED $ 0.44 $ 0.34 $ 0.74 $ 0.60
========= ========= ========= =========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 95,306 97,186 95,010 97,410
========= ========= ========= =========
DILUTED 97,590 100,128 97,118 100,542
========= ========= ========= =========
DIVIDENDS PER SHARE $ 0.25 $ 0.00 $ 0.38 $ 0.00
--------- --------- --------- ---------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
July 31, January 31,
2004 2004
----------- -----------
(Restated, See Note 2)
ASSETS
CURRENT ASSETS:
Cash and Equivalents $ 66,448 $ 56,373
Marketable Securities 515,700 464,700
Receivables 16,083 7,197
Inventories 199,055 170,703
Store Supplies 32,964 29,993
Other 24,953 23,689
----------- -----------
TOTAL CURRENT ASSETS 855,203 752,655
PROPERTY AND EQUIPMENT, NET 646,198 630,022
OTHER ASSETS 444 552
----------- -----------
TOTAL ASSETS $ 1,501,845 $ 1,383,229
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable & Outstanding Checks $ 137,429 $ 91,364
Accrued Expenses 180,438 163,389
Deferred Lease Credits 30,088 26,627
Income Taxes Payable 12,698 29,692
----------- -----------
TOTAL CURRENT LIABILITIES 360,653 311,072
DEFERRED INCOME TAXES 38,809 31,236
LONG-TERM DEFERRED LEASE CREDITS 152,581 154,768
OTHER LONG-TERM LIABILITIES 27,526 28,388
SHAREHOLDERS' EQUITY:
Class A Common Stock - $.01 par value:
150,000,000 shares authorized,
103,300,000 shares outstanding at
July 31, 2004 and January 31, 2004,
respectively 1,033 1,033
Paid-In Capital 141,977 139,139
Retained Earnings 942,593 906,085
----------- -----------
1,085,603 1,046,257
Less: Treasury Stock, at Average Cost,
7,526,754 and 8,692,501 shares at July 31,
2004 and January 31, 2004, respectively (163,327) (188,492)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 922,276 857,765
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,501,845 $ 1,383,229
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Twenty-Six Weeks Ended
--------------------------
July 31, August 2,
2004 2003
------------- -----------
(Restated, See Note 2)
OPERATING ACTIVITIES:
Net Income $ 72,205 $ 60,313
Impact of Other Operating Activities on Cash
Flows:
Depreciation and Amortization 51,534 42,246
Amortization of Deferred Lease Credits (14,750) (11,506)
Loss on Retirement of Property and Equipment 518 -
Noncash Charge for Deferred Compensation 5,224 2,669
Deferred Taxes 3,641 12,156
Lessor Construction Allowances 16,883 17,210
Changes in Assets and Liabilities:
Inventories (21,839) (37,868)
Accounts Payable and Accrued Expenses 50,355 17,503
Income Taxes (1,950) (13,766)
Other Assets and Liabilities (13,993) (209)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 147,828 88,748
----------- -----------
INVESTING ACTIVITIES:
Capital Expenditures (83,345) (66,533)
Purchases of Marketable Securities (2,472,870) (1,812,745)
Proceeds from Sale of Marketable Securities 2,421,870 1,862,445
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (134,345) (16,833)
----------- -----------
FINANCING ACTIVITIES:
Change in Cash Overdraft 8,326 2,937
Purchases of Treasury Stock (18,634) (51,246)
Dividends Paid (23,726) -
Stock Option Exercises and Other 30,626 13,183
----------- -----------
NET CASH USED FOR FINANCING ACTIVITIES (3,408) (35,126)
----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 10,075 36,789
Cash and Equivalents, Beginning of Year 56,373 43,355
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 66,448 $ 80,144
=========== ===========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Change in Accrual for Construction in Progress $ 859 ($ 772)
=========== ===========
SIGNIFICANT NONCASH FINANCING ACTIVITIES:
Declaration of Cash Dividend to be Paid $ 11,972 -
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
ABERCROMBIE & FITCH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. ("A&F"), through its subsidiaries (collectively,
A&F and its subsidiaries are referred to as "Abercrombie & Fitch" or the
"Company"), is a specialty retailer of high quality, casual apparel for
men, women and kids with an active, youthful lifestyle.
The condensed consolidated financial statements include the accounts of
A&F and all significant subsidiaries that are more than 50 percent owned
and controlled. All significant intercompany balances and transactions
have been eliminated in consolidation.
Certain amounts have been reclassified to conform with the current year
presentation. The amounts reclassified did not have an effect on the
Company's results of operations or shareholders' equity.
The condensed consolidated financial statements as of July 31, 2004 and
for the thirteen and twenty-six week periods ended July 31, 2004 and
August 2, 2003 are unaudited and are presented pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in
A&F's Annual Report on Form 10-K/A for the fiscal year ended January 31,
2004 (the "2003 fiscal year"). In the opinion of management, the
accompanying condensed consolidated financial statements reflect all
adjustments (which are of a normal recurring nature) necessary to present
fairly 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 the fiscal year ending January 29, 2005
(the "2004 fiscal year").
The condensed consolidated financial statements as of July 31, 2004 and
for the thirteen and twenty-six week periods ended July 31, 2004 and
August 2, 2003 included herein have been reviewed by the independent
registered public accounting firm of PricewaterhouseCoopers LLP and the
report of such firm follows the notes to the condensed consolidated
financial statements. PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the
"Act") for its report on the condensed consolidated financial statements
because that report is not a "report" within the meaning of Sections 7 and
11 of the Act.
7
2. RESTATEMENT AND RECLASSIFICATION OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's fiscal 2003 consolidated
financial statements, the Company reviewed its accounting practices with
respect to leasing transactions and determined that its then-current
method of accounting for construction allowances was not in accordance
with Statement of Financial Accounting Standards No.13, "Accounting for
Leases" and Financial Accounting Standards Board Technical Bulletin No.
88-1, "Issues Relating to Accounting for Leases"; and its then-current
method of accounting for rent holidays was not in accordance with
Financial Accounting Standards Board Technical Bulletin No. 85-3,
"Accounting for Operating Leases with Scheduled Rent Increases." As a
result, the Company restated its consolidated financial statements as of
January 31, 2004 and February 1, 2003 and for the fiscal years ended
January 31, 2004, February 1, 2003 and February 2, 2002; and its
consolidated financial statements as of and for the interim periods ended
October 30, 2004, July 31, 2004, May 1, 2004, November 1, 2003, August 2,
2003 and May 3, 2003.
Historically, the Company's consolidated balance sheets have reflected the
unamortized portion of construction allowances received from landlords of
properties leased by the Company for its stores as a reduction of property
and equipment instead of as a deferred lease credit. Excluding tax
impacts, the effect of the revised accounting for construction allowances
requires the Company to increase property and equipment and establish a
corresponding deferred lease credit. Further, historically, the Company's
consolidated statements of cash flows have reflected construction
allowances as a reduction of capital expenditures within investing
activities rather than as an increase in deferred lease credits within
operating activities. The impact of the revised accounting is to increase
both net cash provided by operating activities and net cash used for
investing activities by equal amounts.
In addition, the Company has historically recognized the straight line
rent expense for leases beginning on the commencement date of the lease
rather than on the date when the Company takes possession. This approach
had the effect of excluding the build-out period of the Company's stores
from the calculation of the period over which it expenses rent. The
build-out period is generally three to four months prior to store opening
date. Excluding tax impacts, the effect of the revised accounting for rent
holidays requires the Company to increase accrued expenses and adjust
retained earnings on the consolidated balance sheets, as well as correct
amortization in cost of goods sold, occupancy and buying costs in the
consolidated statements of income.
The cumulative effect of these accounting changes is a reduction of
retained earnings of $11.0 million as of the beginning of fiscal 2001 and
decreases to retained earnings of $2.1 million, $181 thousand and $272
thousand as of the end of the fiscal years 2001, 2002 and 2003,
respectively.
The following is a summary of the effects of these changes on the
Company's consolidated balance sheets as of July 31, 2004 and January 31,
2004, as well as the effect of these changes on the Company's consolidated
statements of income and cash flows for the fiscal quarter ended July 31,
2004 and August 2, 2003 (thousands, except per share amounts):
8
Consolidated Statements of Income
As Previously
Reported Adjustments As Restated
------------- ----------- -----------
Thirteen weeks ended July 31, 2004
Cost of Goods Sold, Occupancy and Buying Costs $219,758 $ (55) $219,703
Gross Income 181,588 55 181,643
Operating Income 68,707 55 68,762
Income Before Income Taxes 70,065 55 70,120
Provision for Income Taxes 27,210 22 27,232
Net Income 42,855 33 42,888
Net Income Per Share - Basic $ 0.45 $ - $ 0.45
Net Income Per Share - Diluted $ 0.44 $ - $ 0.44
Twenty-six weeks ended July 31, 2004
Cost of Goods Sold, Occupancy and Buying Costs $466,098 $ 544 $466,642
Gross Income 347,178 (544) 346,634
Operating Income 116,028 (544) 115,484
Income Before Income Taxes 118,371 (544) 117,827
Provision for Income Taxes 45,840 (218) 45,622
Net Income 72,531 (326) 72,205
Net Income Per Share - Basic $ 0.76 $ - $ 0.76
Net Income Per Share - Diluted $ 0.75 $(0.01) $ 0.74
Thirteen weeks ended August 2, 2003
Cost of Goods Sold, Occupancy and Buying Costs $211,386 $ 483 $211,869
Gross Income 144,333 (483) 143,850
Operating Income 55,617 (483) 55,134
Income Before Income Taxes 56,478 (483) 55,995
Provision for Income Taxes 21,660 (193) 21,467
Net Income 34,818 (290) 34,528
Net Income Per Share - Basic $ 0.36 $ - $ 0.36
Net Income Per Share - Diluted $ 0.35 $(0.01) $ 0.34
Twenty-six weeks ended August 2, 2003
Cost of Goods Sold, Occupancy and Buying Costs $429,921 $ 93 $430,014
Gross Income 272,521 (93) 272,428
Operating Income 95,907 (93) 95,814
Income Before Income Taxes 97,759 (93) 97,666
Provision for Income Taxes 37,390 (37) 37,353
Net Income 60,369 (56) 60,313
Net Income Per Share - Basic $ 0.62 $ - $ 0.62
Net Income Per Share - Diluted $ 0.60 $ - $ 0.60
9
Consolidated Balance Sheets
As Previously
Reported Adjustments As Restated
------------- ----------- -----------
July 31, 2004
Property and Equipment, Net $ 460,254 $ 185,944 $ 646,198
Total Assets 1,315,901 185,944 1,501,845
Accrued Expenses 154,133 26,305 180,438
Deferred Lease Credits - 30,088 30,088
Income Taxes Payable 35,255 (22,557) 12,698
Total Current Liabilities 326,817 33,836 360,653
Deferred Income Taxes 25,464 13,345 38,809
Long-Term Deferred Lease Credits - 152,581 152,581
Retained Earnings 956,411 (13,818) 942,593
Total Shareholders' Equity 936,094 (13,818) 922,276
Total Liabilities and Shareholders' Equity 1,315,901 185,944 1,501,845
January 31, 2004
Property and Equipment, Net $ 445,956 $ 184,066 $ 630,022
Total Assets 1,199,163 184,066 1,383,229
Accrued Expenses 138,232 25,157 163,389
Deferred Lease Credits - 26,627 26,627
Income Taxes Payable 50,406 (20,714) 29,692
Total Current Liabilities 280,002 31,070 311,072
Deferred Income Taxes 19,516 11,720 31,236
Long-Term Deferred Lease Credits - 154,768 154,768
Retained Earnings 919,577 (13,492) 906,085
Total Shareholders' Equity 871,257 (13,492) 857,765
Total Liabilities and Shareholders' Equity 1,199,163 184,066 1,383,229
Consolidated Statements of Cash Flows
As Previously
Reported (1) Adjustments As Restated
------------- ----------- -----------
Twenty-six weeks ended July 31, 2004
Net Cash Provided by Operating Activites $ 130,945 $ 16,883 $ 147,828
Net Cash Used for Investing Activites (117,462) (16,883) (134,345)
Twenty-six weeks ended August 2, 2003
Net Cash Provided by Operating Activites $ 71,538 $ 17,210 $ 88,748
Net Cash Provided by (Used for) Investing Activites 377 (17,210) (16,833)
(1) The "As Previously Reported" amounts for "Net Cash Used for Investing
Activities" have been adjusted to account for the effects of
reclassification of certain securities, as discussed below.
10
Further, the Company concluded that it was appropriate to classify our
investments in auction rate municipal bonds as marketable securities.
Previously, such investments had been classified as cash and equivalents.
Accordingly, we have revised the classification to report these
investments as marketable securities on the consolidated balance sheets as
of July 31, 2004 and January 31, 2004. The Company has also made
corresponding adjustments to the consolidated statements of cash flows for
the twenty-six weeks ended July 31, 2004 and August 2, 2003, to reflect
the gross purchases and sales of these investments as investing activities
rather than as a component of cash and equivalents.
As of July 31, 2004 and January 31, 2004, $505.7 million and $454.7
million, respectively, of these investments were classified as cash and
equivalents on the consolidated balance sheets. These balances are in
addition to the marketable securities balances previously reported.
For the twenty-six weeks ended July 31, 2004 and August 2, 2003, net cash
(used for) provided by investing activities related to these investments
of ($51.0) million and $39.7 million, respectively, were included in cash
and equivalents in our consolidated statements of cash flows. These
investing activities related to marketable securities are in addition to
those previously reported.
11
3. STOCK-BASED COMPENSATION
The Company reports stock-based compensation through the disclosure-only
requirements of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
Amendment of FASB Statement No. 123," but elects to measure compensation
expense using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense for options has been
recognized as all options are granted at fair market value at the grant
date. The Company recognizes compensation expense related to restricted
share and stock unit awards. If compensation expense related to options
for the thirteen and twenty-six week periods ended July 31, 2004, and
August 2, 2003 had been determined based on the estimated fair value of
options granted, consistent with the methodology in SFAS No. 123, the pro
forma effect on net income and net income per basic and diluted share
would have been as follows:
(Thousands except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------ ------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income:
As reported $ 42,888 $ 34,528 $ 72,205 $ 60,313
Stock-based compensation expense
included in reported net income,
net of tax 1,807 854 2,971 1,650
Stock-based compensation expense
determined under fair value
based method, net of tax(1) (6,878) (7,037) (13,049) (13,923)
---------- ---------- ---------- ----------
Pro forma $ 37,817 $ 28,345 $ 62,127 $ 48,040
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.45 $ 0.36 $ 0.76 $ 0.62
Pro forma $ 0.40 $ 0.29 $ 0.65 $ 0.49
Diluted earnings per share:
As reported $ 0.44 $ 0.34 $ 0.74 $ 0.60
Pro forma $ 0.39 $ 0.29 $ 0.64 $ 0.48
(1) Includes stock-based compensation expense related to restricted
share and stock unit awards actually recognized in earnings in each
period presented.
The weighted-average fair value of all options granted during the second
quarter of fiscal 2004 and fiscal 2003 were $15.03 and $13.98,
respectively. The fair value of each option, which is included in the pro
forma results above, was estimated using the Black-Scholes option-pricing
model. For purposes of the valuation, the following weighted-average
assumptions were used: a 1.36% dividend yield in 2004 and no expected
dividends in 2003; price volatility of 58% in 2004 and 63% in 2003;
risk-free interest rates of 3.5% in 2004 and 2.9% in 2003; assumed
forfeiture rates of 28% in 2004 and 23% in 2003, respectively and expected
lives of 4 years in 2004 and 2003.
12
4. EARNINGS PER SHARE
Weighted-Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
-----------------------------
July 31, 2004 August 2,2003
------------- -------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (7,994) (6,114)
------- -------
Basic shares 95,306 97,186
Dilutive effect of options and restricted shares 2,284 2,942
------- -------
Diluted shares 97,590 100,128
======= =======
Twenty-Six Weeks Ended
-----------------------------
July 31, 2004 August 2,2003
------------- -------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (8,290) (5,890)
------- -------
Basic shares 95,010 97,410
Dilutive effect of options and restricted shares 2,108 3,132
------- -------
Diluted shares 97,118 100,542
======= =======
Options to purchase 5,481,984 and 5,631,984 shares of Class A Common Stock
during the thirteen and twenty-six week periods ended July 31, 2004,
respectively, and 6,035,217 and 5,760,715 shares of Class A Common Stock
during the thirteen and twenty-six week periods ended August 2, 2003,
respectively, were outstanding but were not included in the computation of
net income per diluted share because the options' exercise prices were
greater than the average market price of the underlying shares.
5. INVENTORIES
Inventories are principally valued at the lower of average cost or market,
on a first-in-first-out basis, utilizing the retail method. An initial
markup is applied to inventory at cost in order to establish a
cost-to-retail ratio. Permanent markdowns, when taken, reduce both the
retail and cost components of inventory on hand so as to maintain the
already established cost-to-retail relationship.
The fiscal year is comprised of two principal selling seasons: spring (the
first and second quarters) and fall (the third and fourth quarters). The
Company further reduces inventory at season end by recording an additional
markdown reserve using the retail carrying value of inventory from the
season just passed. Markdowns on this carryover inventory represent
estimated future anticipated selling price declines. Additionally,
inventory valuation at the end of the first and third quarters reflects
adjustments for inventory markdowns for the total season. Further, as part
of inventory valuation, inventory shrinkage estimates are made based on
historical trends, which reduce the inventory value for lost or stolen
items.
13
The inventory reserve for markdowns and valuations was $8.5 million, $5.5
million and $8.2 million at July 31, 2004, January 31, 2004 and August 2,
2003, respectively. The shrink reserve was $4.3 million, $3.3 million and
$6.6 million at July 31, 2004, January 31, 2004 and August 2, 2003,
respectively. The inventory valuations at July 31, 2004, January 31, 2004
and August 2, 2003 reflect adjustments for inventory markdowns for the end
of the season.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
July 31, January 31,
2004 2004
----------- -----------
Property and equipment, at cost $ 1,012,947 $ 961,817
Accumulated depreciation and amortization (366,749) (331,795)
----------- ---------
Property and equipment, net $ 646,198 $ 630,022
=========== =========
7. INCOME TAXES
The provision for income taxes is based on the current estimate of the
annual effective tax rate. Income taxes paid during the twenty-six weeks
ended July 31, 2004 and August 2, 2003, approximated $44.0 million and
$39.6 million, respectively.
8. LONG-TERM DEBT
The Company entered into a $250 million syndicated unsecured credit
agreement (the "Credit Agreement") on November 14, 2002. The primary
purposes of the Credit Agreement are for trade and stand-by letters of
credit and working capital. The Credit Agreement is due to expire on
November 14, 2005. The Credit Agreement has several borrowing options,
including interest rates that are based on the agent bank's "Alternate
Base Rate," or a LIBO Rate. Facility fees payable under the Credit
Agreement are based on the Company's ratio (the "leverage ratio") of the
sum of total debt plus 800% of forward minimum rent commitments to
consolidated EBITDAR for the trailing four-fiscal-quarter period and
currently accrues at .225% of the committed amounts per annum. The Credit
Agreement contains limitations on indebtedness, liens, sale-leaseback
transactions, significant corporate changes including mergers and
acquisitions with third parties, investments, restricted payments
(including dividends and stock repurchases), hedging transactions and
transactions with affiliates. The Credit Agreement also contains financial
covenants requiring a minimum ratio, on a consolidated basis, of EBITDAR
for the trailing four-fiscal-quarter period to the sum of interest expense
and minimum rent for such period, as well as a maximum leverage ratio.
Letters of credit totaling approximately $58.0 million and $56.0 million
were outstanding under the Credit Agreement at July 31, 2004 and at August
2, 2003, respectively. No borrowings were outstanding under the Credit
Agreement at July 31, 2004 or at August 2, 2003.
14
9. RELATED PARTY TRANSACTIONS
Shahid & Company, Inc. has provided advertising and design services for
the Company since 1995. Sam N. Shahid, Jr., who serves on A&F's Board of
Directors, has been President and Creative Director of Shahid & Company,
Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided
during the thirteen and twenty-six week periods ended July 31, 2004 were
approximately $0.6 million and $1.2 million, respectively. For services
provided during the thirteen and twenty-six week periods ended August 2,
2003, the fees paid to Shahid & Company, Inc. were approximately $0.5
million and $1.0 million, respectively. The amounts do not include
reimbursements to Shahid & Company, Inc. for expenses incurred while
performing these services.
10. CONTINGENCIES
The Company is involved in a number of legal proceedings that arise out
of, and are incidental to, the conduct of its business.
In 2003, five actions were filed under various states' laws on behalf of
purported classes of employees and former employees of the Company
alleging that the Company required its associates to wear and pay for a
"uniform" in violation of applicable law. Two of the actions have been
ordered coordinated. In each case, the plaintiff, on behalf of his or her
purported class, seeks injunctive relief and unspecified amounts of
economic and liquidated damages. For certain of the cases, the parties are
in the process of discovery. In one case, the Company has filed a motion
to dismiss; while in all other cases, answers have been filed. Two of
those cases have been stayed, and the plaintiffs in those cases have been
joined in the action described immediately below.
In 2003, an action was filed in which the plaintiff alleges that the
"uniform," when purchased, drove associates' wages below the federal
minimum wage. The complaint purports to state a collective action on
behalf of part-time associates under the Fair Labor Standards Act.
Recently, the plaintiff amended the complaint and added new named
plaintiffs, asserting claims under the laws of six states as well as the
Fair Labor Standards Act. The parties are in the process of settling this
case and two of the five state court cases described in the immediately
preceding paragraph. The Company does not expect the settlement to be
material to the consolidated financial statements.
In each of 2003 and 2002, one action was filed against the Company
involving overtime compensation. In each action, the plaintiffs, on behalf
of their respective purported class, seek injunctive relief and
unspecified amounts of economic and liquidated damages. The Company has
filed a motion to dismiss in one of the cases. In the other case, the
parties are in the process of discovery, and the plaintiff has filed, and
the Company has opposed, a motion to certify a class of California store
managers. That motion is pending.
As previously mentioned, three of the above-described cases are in the
process of being settled. The Company does not believe it is feasible to
predict the outcome of the other legal proceedings described above and
intends to vigorously defend against each of them. The timing of the final
resolution of each of these proceedings is also uncertain. Accordingly,
the Company cannot estimate a range of potential loss, if any, for any of
these legal proceedings.
15
In 2003, one action was filed on behalf of a purported class alleged to be
discriminated against in hiring or employment decisions due to race and/or
national origin. The plaintiffs in the action seek, on behalf of their
purported class, injunctive relief and unspecified amounts of economic,
compensatory and punitive damages. The parties are in the process of
discovery. Additionally, the EEOC is conducting nationwide investigations
relating to allegations of discrimination based on race, national origin
and gender.
The Company accrues amounts related to legal matters if reasonably
estimable and reviews these amounts at least quarterly. During the first
quarter of fiscal 2004, the Company recorded an $8.0 million charge (net
of expected proceeds of $10 million from insurance) resulting from an
increase in expected defense costs related to the purported class action
employment discrimination suit. The Company does not believe it is
feasible to predict the outcome of this proceeding and intends to
vigorously defend against it. However, if judgment is rendered in this
proceeding which is unfavorable to the Company, the amount could
potentially be material to the consolidated financial statements.
The Company has standby letters of credit in the amount of $4.7 million
that are set to expire during the fourth quarter of fiscal 2005. The
beneficiary, a merchandise supplier, has the right to draw upon the
standby letters of credit if the Company has authorized or filed a
voluntary petition in bankruptcy. To date, the beneficiary has not drawn
upon the standby letters of credit.
The Company enters into agreements with professional services firms, in
the ordinary course of business and, in most agreements, indemnifies these
firms from any harm. There is no financial impact on the Company related
to these indemnification agreements.
16
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying restated condensed consolidated balance sheet
of Abercrombie & Fitch Co. and its subsidiaries as of July 31, 2004, and the
related restated condensed consolidated statements of income for each of the
thirteen and twenty-six week periods ended July 31, 2004 and August 2, 2003 and
the restated condensed consolidated statements of cash flows for the twenty-six
week periods ended July 31, 2004 and August 2, 2003. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 condensed 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 31, 2004, and the related consolidated statements of income, of
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 17, 2004, except for Note 2, as to
which the date is April 4, 2005 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of January 31, 2004, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PricewaterhouseCoopers
Columbus, Ohio
August 10, 2004, except for Note 2, as to which
the date is April 4, 2005
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESTATEMENT AND RECLASSIFICATION OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's fiscal 2003 consolidated financial
statements, the Company reviewed its accounting practices with respect to
leasing transactions and determined that its then-current method of accounting
for construction allowances was not in accordance with Statement of Financial
Accounting Standards No.13, "Accounting for Leases" and Financial Accounting
Standards Board Technical Bulletin No. 88-1, "Issues Relating to Accounting for
Leases"; and its then-current method of accounting for rent holidays was not in
accordance with Financial Accounting Standards Board Technical Bulletin No.
85-3, "Accounting for Operating Leases with Scheduled Rent Increases." As a
result, the Company restated its consolidated financial statements as of January
31, 2004 and February 1, 2003 and for the fiscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002; and its consolidated financial statements
as of and for the interim periods ended October 30, 2004, July 31, 2004, May 1,
2004, November 1, 2003, August 2, 2003 and May 3, 2003.
Historically, the Company's consolidated balance sheets have reflected the
unamortized portion of construction allowances received from landlords of
properties leased by the Company for its stores as a reduction of property and
equipment instead of as a deferred lease credit. Excluding tax impacts, the
effect of the revised accounting for construction allowances requires the
Company to increase property and equipment and establish a corresponding
deferred lease credit. Further, historically, the Company's consolidated
statements of cash flows have reflected construction allowances as a reduction
of capital expenditures within investing activities rather than as an increase
in deferred lease credits within operating activities. The impact of the revised
accounting is to increase both net cash provided by operating activities and net
cash used for investing activities by equal amounts.
In addition, the Company has historically recognized the straight line rent
expense for leases beginning on the commencement date of the lease rather than
on the date the Company takes possession. This approach had the effect of
excluding the build-out period of its stores from the calculation of the period
over which it expenses rent. The build-out period is generally three to four
months prior to store opening date. Excluding tax impacts, the effect of the
revised accounting for rent holidays requires the Company to increase accrued
expenses and adjust retained earnings on the consolidated balance sheets, as
well as correct amortization in cost of goods sold, occupancy and buying costs
in the consolidated statements of income.
The cumulative effect of these accounting changes is a reduction of retained
earnings of $11.0 million as of the beginning of fiscal 2001 and decreases to
retained earnings of $2.1 million, $181 thousand and $272 thousand as of the end
of the fiscal years 2001, 2002 and 2003, respectively.
See Note 2: "Restatement and Reclassification of Financial Statements" under
Notes to Condensed Consolidated Financial Statements included in Item 1,
"Financial Statements" of this Form 10-Q/A for a summary of the effect of these
changes on the Company's consolidated financial statements as of July 31, 2004
and January 31, 2004 and for the fiscal quarters ended July 31, 2004 and August
2, 2003. The accompanying Management's Discussion and Analysis gives effect to
these corrections.
In addition, the Company concluded that it was appropriate to classify our
investments in auction rate securities as marketable securities. Previously,
such investments had been classified as cash and equivalents. Accordingly, we
have revised the classification to report these investments as marketable
securities on the consolidated balance sheets as of July 31, 2004 and
January 31, 2004. The Company has also made corresponding adjustments to the
consolidated statements of cash flows for the twenty-six weeks ended
July 31, 2004 and August 2, 2003, to reflect the gross purchases and sales
of these investments as investing activities rather than as a component of cash
and equivalents. See Note 2: "Restatement and Reclassification of Financial
Statements" under Notes to Condensed Consolidated Financial Statements included
in Item 1, "Financial Statements" of this Form 10-Q/A for additional discussion
on the effects of the change in classification.
18
OVERVIEW
The Company operates three brands: Abercrombie & Fitch, a fashion-oriented
casual apparel business directed at men and women with a youthful lifestyle,
targeted at 18 to 22 year-old college students; abercrombie, a fashion-oriented
casual apparel brand in the tradition of Abercrombie & Fitch style and quality,
targeted at 7 to 14 year-old boys and girls; and Hollister, a West Coast
oriented lifestyle brand targeted at 14 to 17 year-old high school guys and
girls, at lower price points than Abercrombie & Fitch. In addition to
predominantly mall based store locations, all three brands also offer Web sites
where products comparable to those carried at the corresponding stores can be
purchased.
RESULTS OF OPERATIONS
During the second quarter of the 2004 fiscal year, net sales increased 13% to
$401.3 million from $355.7 million in the second quarter of the 2003 fiscal
year. Operating income improved to $68.8 million in the second quarter of 2004
from $55.1 million in the second quarter of 2003. Net income increased to $42.9
million in the second quarter of 2004 compared to $34.5 million in the second
quarter of 2003. Net income per diluted share was $.44 in the second quarter of
2004 compared to $.34 in the second quarter of 2003.
The following data represent the amounts shown in the Company's condensed
consolidated statements of income for the thirteen and twenty-six week periods
ended July 31, 2004, and August 2, 2003, expressed as a percentage of net sales:
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- -------- ---------
NET SALES 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold,
Occupancy and Buying Costs 54.7 59.6 57.4 61.2
----- ----- ----- -----
GROSS INCOME 45.3 40.4 42.6 38.8
General, Administrative
and Store Operating Expenses 28.1 24.9 28.4 25.1
----- ----- ----- -----
OPERATING INCOME 17.2 15.5 14.2 13.7
Interest Income, Net (0.3) (0.2) (0.3) (0.3)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 17.5 15.7 14.5 14.0
Provision for Income Taxes 6.8 6.0 5.6 5.3
----- ----- ----- -----
NET INCOME 10.7% 9.7% 8.9% 8.7%
===== ===== ===== =====
19
Financial Summary
The following summarized financial and statistical data compares the thirteen
and twenty-six week periods ended July 31, 2004 to the comparable period of the
2003 fiscal year:
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
July 31, August 2, % July 31, August 2, %
2004 2003 Change 2004 2003 Change
-------- --------- ------ -------- --------- ------
Net sales (millions) $ 401 $ 356 13% $ 813 $ 702 16%
Decrease in comparable
store sales (5)% (8)% (3)% (7)%
Retail sales increase
attributable to new
and remodeled stores,
magazine, catalogue and
Web sites 18% 16% 19% 16%
Retail sales per average
gross square foot $ 74 $ 76 (3)% $ 150 $ 151 (1)%
Retail sales per average
store (thousands) $ 528 $ 554 (5)% $ 1,071 $1,097 (2)%
Average store size at
period-end (gross square feet) 7,142 7,261 (2)%
Gross square feet at
period-end (thousands) 5,192 4,538 14%
Number of stores and
gross square feet by brand
Abercrombie & Fitch:
Stores at beginning of period 359 342 357 340
Opened 1 6 5 9
Closed (1) (2) (3) (3)
------- ------- ------- ------
Stores at end of period 359 346 359 346
======= ======= ======= ======
Gross square feet
(thousands) 3,164 3,082
======= =======
abercrombie:
Stores at beginning of period 170 165 171 164
Opened 1 2 2 3
Closed - - (2) -
------- ------- ------- ------
Stores at end of period 171 167 171 167
======= ======= ======= ======
Gross square feet
(thousands) 754 739
Hollister:
Stores at beginning of period 177 95 172 93
Opened 20 17 25 19
Closed - - - -
------- ------- ------- ------
Stores at end of period 197 112 197 112
------- ------- ------- ------
Gross square feet
(thousands) 1,274 717
======= =======
20
Current Trends and Outlook
Although the Company strives for improvement in comparable store sales, defined
as sales in stores that have been open for at least one year, the strategy of
maintaining a non-promotional look in-store and maintaining aspirational
lifestyle brands has, at times, negatively impacted comparable store sales. The
Company's focus is on building, maintaining and controlling its brands because
they express a lifestyle to which their customer aspires. This strategy allows
the Company to maintain high margins over the long term while driving the
Company's growth in sales and profits through the development of new brands. As
a result, comparable store sales may decline in the Company's more mature
business as the Company strives to maintain its brands' aspirational qualities
and high margins.
In order to achieve and maintain the aspirational quality of the brands, the
Company is increasing its expenditures to maintain and enhance the current store
base. Additionally, the Company is increasing its store based personnel to
provide better customer service. Depending on the sales performance of the
Company during the fall season, the initiatives may have a short-term impact on
the operating margin.
SECOND QUARTER RESULTS
Net Sales
Net sales for the second quarter of 2004 were $401.3 million, an increase of 13%
over last year's second quarter net sales of $355.7 million. The net sales
increase was attributable to the net addition of 102 stores, offset by a 5%
comparable store sales decrease.
By merchandise brand, comparable store sales for the quarter versus the same
quarter last year were as follows: Abercrombie & Fitch declined 6% with mens
comparable store sales declining by a low-single digit percentage and womens
declining by a high-single digit percentage. In abercrombie, comparable store
sales decreased 9% with girls comparable store sales declining by a high-single
digit percentage and boys declining in the low-teens. In Hollister, comparable
store sales increased by 4% with guys achieving a high-single digit increase and
girls a low-single digit increase for the quarter.
On a regional basis, comparable store sales results were strongest in the
Northeast and weakest in the Southwest. Stores located in Florida and the New
York metropolitan area had the best comparable store sales performance.
In Abercrombie & Fitch, the decrease in mens comparable store sales was driven
by decreases in shorts and graphic t-shirts that were not offset by strong
increases during the quarter in polos and woven knits. Womens had comparable
store sales increases in polos, denim and skirts which were more than offset by
decreases in pants, graphic knits and shorts for the quarter when compared to
second quarter 2003.
In the kids' business, girls comparable store sales decreased during the second
quarter of 2004 compared to the same quarter last year in graphic tees, pants
and shorts. These decreases were somewhat offset by increases in knits, skirts
and denim. Boys had comparable store sales decreases in graphic tees, shorts and
active wear. Increases in knits, denim and woven shirts were not sufficient to
offset the weaker performing categories.
21
In Hollister, guys achieved stronger comparable store sales than girls. In guys,
decreases in conversation tees and shorts were offset by strong increases during
the quarter in sport shirts, knits and denim. In girls, knits, skirts and denim
had comparable store sales increases; however, graphic knits and pants declined.
Sales in the e-commerce business grew by approximately 44% during the second
quarter of the 2004 fiscal year compared to the same period during the 2003
fiscal year. The direct to consumer business (which includes the Company's
catalogue and the Company's Web sites) accounted for 5.7% of net sales in the
second quarter of the 2004 fiscal year compared to 4.5% in the second quarter of
fiscal 2003. The second quarter 2004 results include sales from the Hollister
Web site that was launched during July 2003.
Gross Income
The Company's gross income may not be comparable to that of other retailers
since all significant costs related to the Company's distribution network,
excluding direct shipping costs related to the e-commerce and catalogue sales,
are included in general, administrative and store operating expenses (see
"General, Administrative and Store Operating Expenses" section below).
Gross income for the second quarter of the 2004 fiscal year was $181.6 million
compared to $143.9 million in the comparable period during the 2003 fiscal year.
The gross income rate (gross income divided by net sales) for the second quarter
of the 2004 fiscal year was 45.3%, up 490 basis points from last year's rate of
40.4%. The increase in gross income rate resulted largely from an increase in
initial markup (IMU), partially offset by a higher markdown rate as a percent of
net sales. The improved IMU reflects continued progress in sourcing across all
businesses, coupled with higher unit retail pricing in Abercrombie & Fitch and
abercrombie. The increased markdown rate reflects the Company's strategy to
clear merchandise quickly in order to add more items to the selling floor. All
three brands had IMU improvements compared to the second quarter of 2003 and are
operating at similar margins.
The Company ended the second quarter of the 2004 fiscal year with inventories,
at cost, down 12% per gross square foot versus the second quarter of the 2003
fiscal year. The inventory decrease reflects a conservative spring merchandising
plan and reduced costs in the ending inventory.
22
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses during the second quarter
of the 2004 fiscal year were $112.9 million compared to $88.7 million during the
same period in the 2003 fiscal year. The second quarter of the 2004 fiscal year
general, administrative and store operating expense rate (general,
administrative and store operating expenses divided by net sales) was 28.1%
compared to 24.9% in the second quarter of the 2003 fiscal year. The increase in
rate versus the 2003 comparable period was primarily due to the following:
higher store expenses due to an increase in aggregate payroll; higher home
office expenses, largely due to higher payroll; higher bonus accruals resulting
from improved financial performance and expenses related to the retirement of an
executive officer. Wage levels, in all three brands, decreased slightly or held
flat compared to the second quarter of 2003.
The distribution center continued to achieve record levels of productivity
during the second quarter of the 2004 fiscal year. Productivity, as measured in
units processed per labor hour, was 15% higher than the second quarter of the
2003 fiscal year. Costs related to the distribution center, excluding direct
shipping costs related to the e-commerce and catalogue sales, included in
general, administrative and store operating expenses were $4.4 million for the
second quarter of the 2004 fiscal year compared to $4.5 million for the second
quarter of the 2003 fiscal year.
Operating Income
Operating income for the second quarter of the 2004 fiscal year increased to
$68.8 million from $55.1 million in the 2003 fiscal year second quarter, an
increase of 24.9%. The operating income rate (operating income divided by net
sales) was 17.2% for the second quarter of the 2004 fiscal year compared to
15.5% for the second quarter of the 2003 fiscal year. The increase in the
operating income during the second quarter of fiscal 2004 was a result of higher
merchandise margins and higher unit retail pricing in Abercrombie & Fitch and
abercrombie, partially offset by higher general, administrative and store
operating expenses during the quarter.
Interest Income and Income Tax Expense
Second quarter net interest income was $1.4 million in 2004 compared to $861
thousand last year. The Company continued to invest in tax-free securities. The
effective tax rate for the second quarter was 38.8% compared to 38.4% for the
2003 comparable period.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company does not have any off-balance sheet arrangements or debt
obligations. The contractual obligations of the Company as of July 31, 2004 have
not significantly changed from the ones disclosed in A&F's Annual Report on Form
10-K/A for the fiscal year ended January 31, 2004. There have been changes in
the ordinary course of the Company's business during the quarterly period ended
July 31, 2004 in the Company's contractual obligations included within both the
"operating leases" category and the "purchase obligations and other" category.
23
YEAR-TO-DATE RESULTS
Net Sales
Year-to-date net sales in 2004 were $813.3 million, an increase of 16% over last
year's net sales of $702.4 million for the same period. The net sales increase
was attributable to the net addition of 102 stores, offset by a 3% comparable
store sales decrease.
Year-to-date comparable store sales by merchandise concept were as follows:
Abercrombie & Fitch comparable store sales declined 4%, abercrombie comparable
stores sales declined 5% and Hollister achieved a 6% comparable store sales
increase. The women's business in each concept continued to be more significant
than mens. Year-to-date, womens and girls represented over 60% of net sales for
each of the brands. Womens had a mid-single digit decline in comparable store
sales year-to-date, while girls was relatively flat. Hollister girls achieved a
mid-single digit comparable store sales increase on a year-to-date basis.
For the year-to-date period, Hollister continued to gain in productivity
relative to Abercrombie & Fitch. For the 2004 year-to-date period, sales per
square foot in Hollister stores were approximately 133% of the sales per square
foot of Abercrombie & Fitch stores in the same malls compared to 113% for the
2003 year-to-date period.
Sales in the e-commerce business grew by approximately 53% during the
year-to-date period as compared to the same period last year. The direct to
consumer business (which includes the Company's catalogue and the Company's Web
sites) accounted for 6.0% of net sales compared to 4.6% for the year-to-date
period ended July 31, 2004 and August 2, 2003, respectively. The year-to-date
2004 results include sales from the Hollister Web site that was launched during
July 2003.
Gross Income
The Company's gross income may not be comparable to that of other retailers
since all significant costs related to the Company's distribution network,
excluding direct shipping costs related to the e-commerce and catalogue sales,
are included in general, administrative and store operating expenses (see
"General, Administrative and Store Operating Expenses" section below).
Year-to-date gross income increased to $346.6 million for the 2004 fiscal year
from $272.4 million in the comparable period during the 2003 fiscal year. The
gross income rate (gross income divided by net sales) for the period was 42.6%,
up 380 basis points from last year's rate of 38.8%. The increase was driven by
improvements in IMU across all three brands and increases in average unit retail
pricing in Abercrombie & Fitch and abercrombie that were partially offset by
increased markdowns, as a percentage of net sales.
As previously mentioned, improved sourcing has been an important factor in
improving the IMU in all three concepts. Improvement was most dramatic in
Hollister and Abercrombie & Fitch. The markdown rate was higher for the 2004
year-to-date period than the comparable period in 2003 due to the Company's
strategy to clear merchandise quickly in order to add more items to the selling
floor.
24
General, Administrative and Store Operating Expenses
Year-to-date general, administrative and store operating expenses as of the end
of the second quarter of the 2004 fiscal year were $231.2 million versus $176.6
million for the same time period the previous year. The general, administrative
and store operating expense rate in 2004 was 28.4% versus 25.1% in 2003. The
increased rate in the 2004 year-to-date period was primarily due to higher home
office and store expenses. Home office expenses increased largely due to higher
payroll, higher bonus accruals resulting from improved financial performance,
higher legal expense due to a charge taken during the first quarter of the 2004
fiscal year related to expected defense costs in a legal proceeding and expenses
related to the retirement of an executive officer. Store expenses increased due
to an increase in aggregate payroll. Wage levels, in all three brands, decreased
slightly or held flat compared to the comparable period last year.
Costs related to the distribution center, excluding direct shipping costs
related to the e-commerce and catalogue sales, included in general,
administrative and store operating expenses were $8.9 million and $8.8 million
for the year-to-date periods ended July 31, 2004 and August 2, 2003,
respectively.
Operating Income
Year-to-date operating income for the 2004 fiscal year increased to $115.5
million from $95.8 million in the 2003 fiscal year comparable period, an
increase of 20.6%. The operating income rate (operating income divided by net
sales) was 14.2% for the 2004 year-to-date period compared to 13.7% for the
comparable period in the 2003 fiscal year. The increase was primarily due to
sales increases due to new stores, higher gross margin and increases in average
unit retail pricing in Abercrombie & Fitch and abercrombie, partially offset by
higher home office expenses and store expenses.
Interest Income and Income Tax Expense
Year-to-date net interest income for the 2004 fiscal year was $2.3 million
compared to $1.9 million for the comparable period in 2003. The Company
continued to invest in tax-free securities. The effective tax rate for the 2004
year-to-date period was 38.7% compared to 38.2% for the 2003 comparable period.
25
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (in thousands):
July 31, January 31,
2004 2004
-------- -----------
Working capital $494,550 $441,583
======== ========
Capitalization:
Shareholders' equity $922,276 $857,765
======== ========
Net cash provided by operating activities, the Company's primary source of
liquidity, totaled $147.8 million for the twenty-six weeks ended July 31, 2004
versus $88.7 million in the comparable period of 2003. Cash was provided
primarily by current year net income adjusted for depreciation and amortization
and by increases in lessor construction allowances and accounts payable and
accrued expenses. Uses of cash primarily consisted of increases in inventories
and other assets and liabilities.
Accounts payable increased to support the cost of growth in the number of new
stores and the timing of payments. Accrued expenses also increased for items
such as higher payroll, higher bonus accruals resulting from improved financial
performance, higher legal accruals related to expected defense costs in a legal
proceeding, accruals related to the retirement of an executive officer and
property taxes.
Inventories increased as a result of preparation for the back-to-school season
as well as the growth in the store base during the first two quarters of 2004.
Other assets and liabilities increased primarily as a result of an increase in
accounts receivables related to expected proceeds from an insurance claim
pertaining to legal expenses and an increase in supplies as result of the growth
in the store base.
The Company's operations are seasonal in nature and typically peak during the
back-to-school and Christmas selling periods. Accordingly, cash requirements for
inventory expenditures are highest during these periods.
Cash outflows for investing activities were for capital expenditures (see the
discussion in the "Capital Expenditures" section below) related primarily to new
stores and construction in process and purchases of marketable securities in
2004. Cash inflows from investing activities consisted of proceeds from the sale
of marketable securities. As of July 31, 2004, the Company held $515.7 million
of marketable securities with original maturities of greater than 90 days.
Financing activities, for the twenty-six week period ended July 31, 2004,
consisted of $30.6 million received in connection with stock option exercises,
$23.7 million for the payment of the quarterly $0.125 dividends on March 30,
2004 and June 22, 2004, $18.6 million for the repurchase of A&F's Class A Common
Stock and $8.3 million for cash overdrafts which are outstanding checks
reclassified from cash to accounts payable.
26
During the first quarter of 2004, the Company repurchased 599 thousand shares of
A&F's Class A Common Stock at an average cost of $31.11 for a total of $18.6
million pursuant to a previously authorized stock repurchase program. The
repurchase completed the 5 million share repurchase authorized by the Board of
Directors on August 8, 2002. On July 29, 2004, the Company's Board of Directors
authorized the repurchase of an additional 6 million shares of A&F's Class A
Common Stock.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has $250 million
available (less outstanding letters of credit) under its Credit Agreement to
support operations.
Letters of credit totaling approximately $58.0 million and $56.0 million were
outstanding under the Credit Agreement at July 31, 2004 and August 2, 2003,
respectively. No borrowings were outstanding under the Credit Agreement at July
31, 2004 and August 2, 2003.
The Company has standby letters of credit in the amount of $4.7 million that are
set to expire during the fourth quarter of fiscal 2005. The beneficiary, a
merchandise supplier, has the right to draw upon the standby letters of credit
if the Company has authorized or filed a voluntary petition in bankruptcy. To
date, the beneficiary has not drawn upon the standby letters of credit.
Store Count and Gross Square Feet
Store count and gross square footage by brand were as follows:
July 31, 2004 August 2, 2003
----------------------------- ----------------------------
Number Gross Square Number Gross Square
of Stores Feet (thousands) of Stores Feet (thousands)
--------- ---------------- --------- ----------------
Abercrombie & Fitch 359 3,164 346 3,082
abercrombie 171 754 167 739
Hollister 197 1,274 112 717
--- ----- --- -----
Total 727 5,192 625 4,538
=== ===== === =====
27
Capital Expenditures and Landlord Construction Allowances
Capital expenditures totaled $83.3 million and $66.5 million for the twenty-six
weeks ended July 31, 2004 and August 2, 2003, respectively. Additionally, the
non-cash accrual for construction in progress decreased $14.4 million in the
first half of 2004 and increased $16.5 million in the first half of 2003.
Capital expenditures related primarily to new store construction, including the
non-cash accrual for construction in progress. The balance of capital
expenditures related primarily to miscellaneous store remodeling projects.
Construction allowances are an integral part of the decision making process for
assessing the viability of new store leases. In making the decision whether to
invest in a store location, the Company calculates the estimated future return
on its investment based on the cost of construction, less any construction
allowances to be received from the landlord. During the twenty-six weeks ended
July 31, 2004 and August 2, 2003, the Company received $16.9 million and $17.2
million in construction allowances, respectively. For accounting purposes, the
Company treats construction allowances as a deferred lease credit which reduces
rent expense in accordance with Statement of Financial Accounting Standards
No.13, "Accounting for Leases" and Financial Accounting Standards Board
Technical Bulletin No. 88-1, "Issues Relating to Accounting for Leases".
The Company anticipates spending $175.0 million to $185.0 million in the 2004
fiscal year for capital expenditures, of which $135.0 million to $145.0 million
will be for new/remodel store construction. The balance of the capital
expenditures will primarily relate to home office and distribution center
projects and other miscellaneous projects.
The Company intends to add approximately 700,000 gross square feet of store
space in the 2004 fiscal year, which will represent a 14% increase over year-end
2003. It is anticipated the increase will result from the addition of
approximately 12 new Abercrombie & Fitch stores, 9 new abercrombie stores and 85
new Hollister stores. In addition, earlier in the year the Company announced
plans for a new lifestyle brand that will target an older customer than its
current brands. The Company expects to open four test stores by the end of
September 2004. Additionally, the Company plans to remodel 10 to 15 Abercrombie
& Fitch stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores opened during the 2004
fiscal year will approximate $605,000 per store, net of construction allowances.
In addition, initial inventory purchases are expected to average approximately
$270,000 per store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for abercrombie stores opened during the 2004 fiscal year
will approximate $510,000 per store, net of construction allowances. In
addition, initial inventory purchases are expected to average approximately
$130,000 per store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Hollister stores opened during the 2004 fiscal year
will approximate $587,000 per store, net of construction allowances. In
addition, initial inventory purchases are expected to average approximately
$190,000 per store.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has $250 million
available (less outstanding letters of credit) under its Credit Agreement to
support operations.
28
Critical Accounting Policies and Estimates
The Company's significant and critical accounting policies and estimates can be
found in the Notes to Consolidated Financial Statements contained in Item 8 of
A&F's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004
(Note 3). Additionally, the Company believes that the following policies are
critical to the portrayal of the Company's financial condition and results of
operations for interim periods.
Revenue Recognition - The Company recognizes retail sales at the time the
customer takes possession of the merchandise and purchases are paid for,
primarily with either cash or credit card. Catalogue and e-commerce sales are
recorded upon customer receipt of merchandise. Amounts relating to shipping and
handling billed to customers in a sale transaction are classified as revenue and
the direct shipping costs are classified as cost of goods sold. Employee
discounts are classified as a reduction of revenue. The Company reserves for
sales returns through estimates based on historical experience and various other
assumptions that management believes to be reasonable.
Inventory Valuation - Inventories are principally valued at the lower of average
cost or market, on a first-in first-out basis, utilizing the retail method. The
retail method of inventory valuation is an averaging technique applied to
different categories of inventory. At the Company, the averaging is determined
at the stock keeping unit ("SKU") level by averaging all costs for each SKU. An
initial markup is applied to inventory at cost in order to establish a
cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail
and cost components of inventory on hand so as to maintain the already
established cost-to-retail relationship. The use of the retail method and the
recording of markdowns effectively values inventory at the lower of cost or
market. The Company further reduces inventory by recording an additional
markdown reserve using the retail carrying value of inventory from the season
just passed. Markdowns on this carryover inventory represent estimated future
anticipated selling price declines.
Additionally, as part of inventory valuation, an inventory shrinkage estimate is
made each period that reduces the value of inventory for lost or stolen items.
Inherent in the retail method calculation are certain significant judgments and
estimates including, among others, initial markup, markdowns and shrinkage,
which could significantly impact the ending inventory valuation at cost as well
as the resulting gross margins. Management believes that this inventory
valuation method is appropriate since it preserves the cost-to-retail
relationship in ending inventory.
Income Taxes - Income taxes are calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method.
Deferred tax assets and liabilities are recognized based on the difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Inherent in the measurement of
deferred balances are certain judgments and interpretations of enacted tax law
and published guidance with respect to applicability to the Company's
operations. Significant examples of this concept include capitalization policies
for various tangible and intangible costs, income and expense recognition and
inventory valuation methods. No valuation allowance has been provided for
deferred tax assets because management believes the full amount of the net
deferred tax assets will be realized in the future. The effective tax rate
utilized by the Company reflects management's judgment of the expected tax
liabilities within the various taxing jurisdictions.
29
Contingencies - In the normal course of business, the Company must make
continuing estimates of potential future legal obligations and liabilities,
which requires the use of management's judgment on the outcome of various
issues. Management may also use outside legal advice to assist in the estimating
process. However, the ultimate outcome of various legal issues could be
different than management estimates, and adjustments may be required.
30
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
A&F cautions that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Quarterly
Report on Form 10-Q/A or made by management of A&F involve risks and
uncertainties and are subject to change based on various important factors, many
of which may be beyond the Company's control. Words such as "estimate,"
"project," "plan," "believe," "expect," "anticipate," "intend," and similar
expressions may identify forward-looking statements. The following factors, in
addition to those included in the disclosure under the heading "RISK FACTORS" in
"ITEM 1. BUSINESS" of A&F's Annual Report on Form 10-K/A for the fiscal year
ended January 31, 2004, in some cases have affected and in the future could
affect the Company's financial performance and could cause actual results for
the 2004 fiscal year and beyond to differ materially from those expressed or
implied in any of the forward-looking statements included in this Quarterly
Report on Form 10-Q/A or otherwise made by management:
- changes in consumer spending patterns and consumer
preferences;
- the effects of political and economic events and conditions
domestically and in foreign jurisdictions in which the Company
operates, including, but not limited to, acts of terrorism or
war;
- the impact of competition and pricing;
- changes in weather patterns;
- postal rate increases and changes;
- paper and printing costs;
- market price of key raw materials;
- ability to source product from its global supplier base;
- political stability;
- currency and exchange risks and changes in existing or
potential duties, tariffs or quotas;
- availability of suitable store locations at appropriate terms;
- ability to develop new merchandise; and
- ability to hire, train and retain associates.
Future economic and industry trends that could potentially impact revenue and
profitability are difficult to predict. Therefore, there can be no assurance
that the forward-looking statements included in this Quarterly Report on Form
10-Q/A will prove to be accurate. In light of the significant uncertainties in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives of the Company will be achieved. The
forward-looking statements herein are based on information presently available
to the management of the Company. Except as may be required by applicable law,
the Company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of July 31, 2004 has
not significantly changed since January 31, 2004. The Company's market risk
profile as of January 31, 2004 is disclosed in "Item 7A - Quantitative and
Qualitative Disclosures about Market Risk" of A&F's Annual Report on Form 10-K/A
for the fiscal year ended January 31, 2004.
32
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company 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 the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated to
the Company's management, including the Chairman and Chief Executive Officer and
the Senior Vice President - Chief Financial Officer, as appropriate, to allow
timely decisions regarding required financial disclosures. Because of inherent
limitations, disclosure controls and procedures, no matter how well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of disclosure controls and procedures are met.
The Company's management, with the participation of the Chairman and Chief
Executive Officer and the Senior Vice President - Chief Financial Officer,
conducted an evaluation of the effectiveness of the Company's design and
operation of its disclosure controls and procedures as of the end of the period
covered by this Form 10-Q/A. The evaluation included consideration of facts and
circumstances surrounding corrections of the Company's lease accounting
practices. These corrections resulted in the restatement of the Company's
consolidated financial statements as of July 31, 2004 and January 31, 2004 and
for the interim periods ended July 31, 2004 and August 2, 2003, as described in
Note 2: "Restatement and Reclassification of Financial Statements" under Notes
to Condensed Consolidated Financial Statements included in Item 1, "Financial
Statements" of this Form 10-Q/A. As a result of the restatements and the
related material weakness discussed below, the Chief Executive Officer and the
Chief Financial Officer concluded that, as of July 31, 2004, the Company's
disclosure controls and procedures were not effective at a reasonable level of
assurance. Notwithstanding this material weakness discussed below, the Company's
management has concluded that the restated consolidated financial statements
included in this report present fairly, in all material respects the Company's
financial position and results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of July 31, 2004, the Company's controls over the selection and
application of its lease accounting policies related to construction allowances
and the recording of rent between the date the Company takes possession of the
property and the commencement date of the lease were ineffective to ensure that
such leasing transactions were recorded in accordance with generally accepted
accounting principles. Specifically, because of the deficiency in the Company's
controls over the selection and application of its lease accounting policies,
the Company failed to identify and properly classify and account for property
and equipment, deferred lease credits from landlords, rent expense, depreciation
33
expense and the related impact of these items on cash provided by operating
activities and cash used for investing activities in the consolidated statements
of cash flows, which resulted in restatements of the Company's consolidated
financial statements as of July 31, 2004 and January 31, 2004. Additionally, if
the control deficiency is not remediated it could result in a misstatement of
the aforementioned financial statement accounts and disclosures that would
result in a material misstatement to annual or interim financial statements that
would not be prevented or detected. Accordingly, management of the Company has
concluded that this control deficiency constitutes a material weakness and
that internal control over financial reporting was not effective as of
July 31, 2004.
Changes in Internal Control Over Financial Reporting
In the first quarter of 2005, the Company remediated the material weakness in
internal control over financial reporting by correcting its method of accounting
for construction allowances and recording of rent between the date Company takes
possession of the property and the commencement date of the lease. The Company
implemented controls to ensure that all future leases are reviewed and accounted
for in accordance with Statement of Financial Accounting Standards No.13,
"Accounting for Leases" and Financial Accounting Standards Board Technical
Bulletin No. 88-1, "Issues Relating to Accounting for Leases"; and Financial
Accounting Standards Board Technical Bulletin No. 85-3, "Accounting for
Operating Leases with Scheduled Rent Increases."
Other than the foregoing, there have been no changes in the Company's internal
control over financial reporting that occurred since July 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits arising in the ordinary course of
business.
A&F is aware of 20 actions that have been filed against A&F and certain of its
officers and directors on behalf of a purported, but as yet uncertified, class
of shareholders who purchased A&F's Class A Common Stock between October 8, 1999
and October 13, 1999. These 20 actions have been filed in the United States
District Courts for the Southern District of New York and the Southern District
of Ohio, Eastern Division, alleging violations of the federal securities laws
and seeking unspecified damages. On April 12, 2000, the Judicial Panel on
Multidistrict Litigation issued a Transfer Order transferring the 20 pending
actions to the Southern District of New York for consolidated pretrial
proceedings under the caption In re Abercrombie & Fitch Securities Litigation.
On November 16, 2000, the Court signed an Order appointing the Hicks Group, a
group of seven unrelated investors in A&F's securities, as lead plaintiff, and
appointing lead counsel in the consolidated action. On December 14, 2000,
plaintiffs filed a Consolidated Amended Class Action Complaint (the "Amended
Complaint") in which they did not name as defendants Lazard Freres & Co. and
Todd Slater, who had formerly been named as defendants in certain of the 20
complaints. A&F and other defendants filed motions to dismiss the Amended
Complaint on February 14, 2001. On November 14, 2003, the motions to dismiss the
Amended Complaint were denied. On December 2, 2003, A&F moved for
reconsideration or reargument of the November 14, 2003 order denying the motions
to dismiss. The motions for reconsideration or reargument were fully briefed and
submitted to the Court on January 9, 2004. The motions were denied on February
23, 2004.
A&F is aware of six actions that have been filed on behalf of purported classes
of employees and former employees of the Company alleging that the Company
required its associates to wear and pay for a "uniform" in violation of
applicable law. In each case, the plaintiff, on behalf of his or her purported
class, seeks injunctive relief and unspecified amounts of economic and
liquidated damages. Two of these cases, Jennifer M. Solis v. Abercrombie & Fitch
Stores, Inc. and A&F California, LLC and Sarah Stevenson v. Abercrombie & Fitch
Co., allege violations of California law and were filed on February 10, 2003 and
February 4, 2003 in the California Superior Courts for Los Angeles County and
San Francisco County, respectively. An answer was filed in the Solis case on
March 26, 2003. Pursuant to a Petition for Coordination, the Solis and the
Stevenson cases were coordinated by order issued November 17, 2003. Shelby Port
v. Abercrombie & Fitch Stores, Inc., which alleges violations of Washington law,
was filed on or about July 18, 2003 in the Washington Superior Court of King
County. The defendant filed a motion to dismiss the complaint in the Port case
on September 5, 2003. Plaintiff since filed an amended complaint on or about
August 9, 2004, adding three new named plaintiffs. The defendant intends to
re-file its motion to dismiss. The Company does not believe it is feasible to
predict the outcome of the legal proceedings identified in this paragraph and
intends to defend vigorously against them. The timing of the final resolution of
each of these proceedings is also uncertain. Accordingly, the Company cannot
estimate a range of potential loss, if any, for any of these legal proceedings.
35
Jadii Mohme v. Abercrombie & Fitch, which alleges violations of Illinois law,
was filed on July 18, 2003 in the Illinois Circuit Court of St. Clair County. A
first amended complaint was filed in the Mohme case on September 10, 2003 to
change the defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie &
Fitch." An answer to the first amended complaint was filed in the Mohme case on
September 26, 2003. Holly Zemany v. Abercrombie & Fitch, which alleges
violations of Pennsylvania law, was filed on July 18, 2003 in the Pennsylvania
Court of Common Pleas of Allegheny County. A first amended complaint was filed
in the Zemany case on September 9, 2003 to change the defendant to "Abercrombie
& Fitch Stores, Inc." from "Abercrombie & Fitch." A second amended complaint was
filed November 10, 2003, adding some factual allegations. Defendant filed an
answer to the second amended complaint on January 22, 2004. In Michael Gualano
v. Abercrombie & Fitch, which was filed in the United States District Court for
the Western District of Pennsylvania on March 14, 2003, the plaintiff alleges
that the "uniform," when purchased, drove associates' wages below the federal
minimum wage. The complaint purports to state a collective action on behalf of
part-time associates under the Fair Labor Standards Act. A first amended
complaint was filed in the Gualano case on September 9, 2003, to change the
defendant to "Abercrombie & Fitch Stores, Inc." from "Abercrombie & Fitch." An
answer to the first amended complaint was filed in the Gualano case on or about
September 24, 2003. Jadii Mohme and Holly Zemany have stayed their claims in
state court and joined their claims with Michael Gualano along with four other
named plaintiffs in four other states in a second amended complaint, which the
defendant has answered. The parties are in the process of settling these claims.
The Company does not expect the settlement to be material to the consolidated
financial statements.
A&F is aware of two actions that have been filed against the Company involving
overtime compensation. In each action, the plaintiffs, on behalf of their
respective purported class, seek injunctive relief and unspecified amounts of
economic and liquidated damages. In Bryan T. Kimbell, Individually and on Behalf
of All Others Similarly Situated and on Behalf of the Public v. Abercrombie &
Fitch Stores, Inc., which was filed on July 10, 2002 in the California Superior
Court for Los Angeles County, the plaintiffs allege that California general and
store managers were entitled to receive overtime pay as "non-exempt" employees
under California wage and hour laws. An answer was filed in the Kimbell case on
September 4, 2002 and the parties are in the process of discovery. Plaintiff has
filed, and the defendant has opposed, a motion to certify a class of store
managers in California. That motion is pending. In Melissa Mitchell, et al. v.
Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., which was filed on
June 13, 2003 in the United States District Court for the Southern District of
Ohio, the plaintiffs allege that assistant managers and store managers were not
paid overtime compensation in violation of the Fair Labor Standards Act and Ohio
law. The defendants filed a motion to dismiss the Mitchell case on July 28,
2003. The case was transferred from the Western Division to the Eastern Division
of the Southern District of Ohio on April 21, 2004. The defendants subsequently
renewed their motion to dismiss, which is pending.
The Company does not believe it is feasible to predict the outcome of the legal
proceedings described in the immediately preceding paragraph and intends to
defend vigorously against them. The timing of the final resolution of each of
these proceedings is also uncertain. Accordingly, the Company cannot estimate a
range of potential loss, if any, for any of these legal proceedings.
36
A&F is aware of one action that has been filed on behalf of a purported class
alleged to be discriminated against in hiring or employment decisions due to
race and/or national origin. Eduardo Gonzalez, et al. v. Abercrombie & Fitch Co.
was filed on June 16, 2003 in the United States District Court for the Northern
District of California. The plaintiffs subsequently amended their complaint to
add A&F California, LLC, Abercrombie & Fitch Stores, Inc. and A&F Ohio, Inc. as
defendants. The plaintiffs allege, on behalf of their purported class, that they
were discriminated against in hiring and employment decisions due to their race
and/or national origin. The plaintiffs seek, on behalf of their purported class,
injunctive relief and unspecified amounts of economic, compensatory and punitive
damages. A second amended complaint, which added two additional plaintiffs, was
filed on or about January 9, 2004. Defendants filed an answer to the second
amended complaint on or about January 26, 2004. A third amended complaint was
filed June 10, 2004, restating the original claims and adding two individual,
but not class, claims of gender discrimination. The defendants filed an answer
on or about June 21, 2004. During the first quarter of fiscal 2004, the Company
recorded an $8.0 million charge (net of expected proceeds of $10 million from
insurance) resulting from an increase in expected defense costs related to this
purported class action employment discrimination suit. The Company does not
believe it is feasible to predict the outcome of this proceeding and intends to
vigorously defend against it. However, if judgment is rendered in this
proceeding which is unfavorable to the Company, the amount could potentially be
material to the Company's financial statements. The parties are in the process
of discovery. In addition, the EEOC is conducting nationwide investigations
relating to allegations of discrimination based on race, national origin and
gender.
37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) The following table provides information regarding A&F's purchase of its
Class A Common Stock during each fiscal month of the quarterly period ended July
31, 2004:
Shares Purchased Maximum Number
Total as Part of of Shares that May
Number of Average Publicly Yet be Purchased
Shares Price Paid Announced Plans under the Plans or
Period Purchased per Share or Program Programs (1)
------------------- --------- ---------- ---------------- ------------------
May 2 through May
29, 2004 $ - -
May 30 through July
3, 2004 113 (2) $ 37.12 (2) - -
July 4 through July
31, 2004 - $ - 6,000,000
--------- ---------- ---------------- -------------------
Total 113 (2) $ 37.12 (2) - 6,000,000
========= ========== ================ ==================
(1) The number shown represents, as of the end of each period, the maximum
number of shares of Class A Common Stock that may yet be purchased under
A&F's publicly announced stock purchase authorizations. As disclosed in
A&F's Quarterly Report on Form 10-Q/A for the quarterly period ended May
1, 2004, during the quarterly period ended May 1, 2004, A&F had
repurchased all of the shares of Class A Common Stock which had remained
available at that time under the stock repurchase authorization announced
on August 8, 2002, and, as a result, that authorization had expired. On
July 29, 2004, A&F announced the authorization of the repurchase of
6,000,000 shares of Class A Common Stock. The shares may be purchased from
time-to-time, depending on market conditions.
(2) Reflects shares of Class A Common Stock withheld from employees for
payment of taxes due upon the vesting of restricted share awards.
38
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Certificate of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation of A&F as
filed with the Delaware Secretary of State on August 27, 1996,
incorporated herein by reference to Exhibit 3.1 to A&F's
Quarterly Report on Form 10-Q for the quarterly period ended
November 2, 1996. (File No. 1-12107)
3.2 Certificate of Designation of Series A Participating
Cumulative Preferred Stock of A&F as filed with the Delaware
Secretary of State on July 21, 1998, incorporated herein by
reference to Exhibit 3.2 to A&F's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999. (File No. 1-12107)
3.3 Certificate of Decrease of Shares Designated as Class B Common
Stock of A&F as filed with the Delaware Secretary of State on
July 30, 1999, incorporated herein by reference to Exhibit 3.3
to A&F's Quarterly Report on Form 10-Q for the quarterly
period ended July 31, 1999. (File No. 1-12107)
3.4 Amended and Restated Bylaws of A&F, effective January 31,
2002, incorporated herein by reference to Exhibit 3.4 to A&F's
Annual Report on Form 10-K for the fiscal year ended February
2, 2002. (File No. 1-12107)
3.5 Certificate regarding adoption of amendment to Section 2.02 of
Amended and Restated Bylaws of A&F by Board of Directors on
July 10, 2003, incorporated herein by reference to Exhibit 3.5
to A&F's Quarterly Report on Form 10-Q for the quarterly
period ended November 1, 2003 (File No. 1-12107)
3.6 Certificate regarding adoption of amendments to Sections 1.02,
1.06, 3.01, 3.05, 4.02, 4.03, 4.04, 4.05, 4.06, 6.01 and 6.02
of Amended and Restated Bylaws of A&F by Board of Directors on
May 20, 2004, incorporated herein by reference to Exhibit 3.6
to A&F's Quarterly Report on Form 10-Q/A for the quarterly
period ended May 1, 2004 (File No. 1-12107)
3.7 Amended and Restated Bylaws of A&F (reflecting amendments
through May 20, 2004) [for SEC reporting compliance purposes
only], incorporated herein by reference to Exhibit 3.7 to
A&F's Quarterly Report on Form 10-Q/A for the quarterly period
ended May 1, 2004 (File No. 1-12107)
4. Instruments Defining the Rights of Security Holders.
4.1 Credit Agreement, dated as of November 14, 2002, among
Abercrombie & Fitch Management Co., as Borrower, A&F, as
Guarantor, the Lenders party thereto, and National City Bank,
as Administrative Agent and Lead Arranger (the "Credit
Agreement"), incorporated herein by reference to Exhibit 4.1
to A&F's Current Report on Form 8-K dated November 26, 2002.
(File No. 1-12107)
4.2 Guarantee Agreement, dated as of November 14, 2002, among A&F,
each direct and indirect domestic subsidiary of A&F other than
Abercrombie & Fitch Management Co., and National City Bank, as
Administrative Agent for the Lenders party to the Credit
Agreement, incorporated herein by reference to Exhibit 4.2 to
A&F's Current Report on Form 8-K dated
39
November 26, 2002. (File No. 1-12107)
4.3 First Amendment and Waiver, dated as of January 26, 2004, to
the Credit Agreement, dated as of November 14, 2002, among
Abercrombie & Fitch Management Co., A&F, the Lenders party
thereto and National City Bank, as Administrative Agent,
incorporated herein by reference to Exhibit 4.3 to A&F's
Annual Report on Form 10-K/A for the fiscal year ended January
31, 2004 (File No. 1-12107)
4.4 Rights Agreement, dated as of July 16, 1998, between A&F and
First Chicago Trust Company of New York, as Rights Agent,
incorporated herein by reference to Exhibit 1 to A&F's
Registration Statement on Form 8-A dated July 21, 1998. (File
No. 1-12107)
4.5 Amendment No. 1 to Rights Agreement, dated as of April 21,
1999, between A&F and First Chicago Trust Company of New York,
as Rights Agent, incorporated herein by reference to Exhibit 2
to A&F's Amendment No. 1 to Form 8-A dated April 23, 1999.
(File No. 1-12107)
4.6 Certificate of adjustment of number of Rights associated with
each share of Class A Common Stock, dated May 27, 1999,
incorporated herein by reference to Exhibit 4.6 to A&F's
Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 1999. (File No. 1-12107)
4.7 Appointment and Acceptance of Successor Rights Agent,
effective as of the opening of business on October 8, 2001,
between A&F and National City Bank, incorporated herein by
reference to Exhibit 4.6 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended August 4, 2001. (File No.
1-12107)
10. Material Contracts.
10.1 Abercrombie & Fitch Co. Incentive Compensation Performance
Plan, incorporated herein by reference to Exhibit 10.1 to
A&F's Quarterly Report on Form 10-Q for the quarterly period
ended May 4, 2002. (File No. 1-12107)
10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock
Option and Performance Incentive Plan (reflects amendments
through December 7, 1999 and the two-for-one stock split
distributed June 15, 1999 to stockholders of record on May 25,
1999), incorporated herein by reference to Exhibit 10.2 to
A&F's Annual Report on Form 10-K for the fiscal year ended
January 29, 2000. (File No. 1-12107)
10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock
Plan for Non-Associate Directors (reflects amendments through
January 30, 2003 and the two-for-one stock split distributed
June 15, 1999 to stockholders of record on May 25, 1999),
incorporated herein by reference to Exhibit 10.3 to A&F's
Annual Report on Form 10-K for the fiscal year ended February
1, 2003. (File No. 1-12107)
10.4 Abercrombie & Fitch Co. 2002 Stock Plan for Associates (as
amended and restated May 22, 2003), incorporated herein by
reference to Exhibit 10.4 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended May 3, 2003. (File No.
1-12107)
10.5 Amended and Restated Employment Agreement, dated as of January
30, 2003, by and between A&F and Michael S. Jeffries,
including as Exhibit A
40
thereto the Supplemental Executive Retirement Plan (Michael S.
Jeffries), effective February 2, 2003, incorporated herein by
reference to Exhibit 10.1 to A&F's Current Report on Form 8-K
dated February 11, 2003. (File No. 1-12107)
10.6 Abercrombie & Fitch Co. Directors' Deferred Compensation Plan
(as amended and restated May 22, 2003), incorporated herein by
reference to Exhibit 10.7 to A&F's Quarterly Report on Form
10-Q for the quarterly period ended May 3, 2003. (File No.
1-12107)
10.7 Abercrombie & Fitch Nonqualified Savings and Supplemental
Retirement Plan (formerly known as the Abercrombie & Fitch Co.
Supplemental Retirement Plan), as amended and restated
effective January 1, 2001, incorporated herein by reference to
Exhibit 10.9 to A&F's Annual Report on Form 10-K for the
fiscal year ended February 1, 2003. (File No. 1-12107)
10.8 Abercrombie & Fitch Co. 2003 Stock Plan for Non-Associate
Directors, incorporated herein by reference to Exhibit 10.9 to
A&F's Quarterly Report on Form 10-Q for the quarterly period
ended May 3, 2003. (File No. 1-12107)
10.9 Retirement Agreement, executed on May 20, 2004, by and between
Seth R. Johnson and A&F, incorporated herein by reference to
Exhibit 10.9 to A&F's Quarterly Report on Form 10-Q/A for the
quarterly period ended May 1, 2004 (File No. 1-12107)
10.10 Employment Agreement, entered into as of May 17, 2004, by and
between A&F and Robert S. Singer, including as Exhibit A
thereto the Supplemental Executive Retirement Plan II (Robert
S. Singer), effective May 17, 2004, incorporated herein by
reference to Exhibit 10.10 to A&F's Quarterly Report on Form
10-Q/A for the quarterly period ended May 1, 2004 (File No.
1-12107)
15. Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Inclusion of Report of Independent Registered
Public Accounting Firm.
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
32 Section 1350 Certifications (Principal Executive Officer and Principal
Financial Officer)
41
(b) Reports on Form 8-K.
On May 20, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on May 18, 2004 announcing the retirement of Seth R. Johnson
from A&F effective June 18, 2004 and the issuance of a second news release
on May 18, 2004 announcing that Robert S. Singer had been named President
and Chief Operating Officer of A&F.
On May 21, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on May 20, 2004 announcing the declaration of a quarterly
cash dividend of $0.125 per share, payable June 22, 2004 to A&F
shareholders of record on June 1, 2004 and the issuance of a second news
release on May 20, 2004 announcing the election of Robert S. Singer to the
A&F Board of Directors.
On May 28, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on May 28, 2004 announcing the resignation of Seth R. Johnson
from the A&F Board of Directors, effective July 26, 2004.
On July 29, 2004, A&F filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure," the issuance of a
news release on July 29, 2004 announcing the declaration of a quarterly
cash dividend of $0.125 per share, payable September 21, 2004 to A&F
shareholders of record on August 31, 2004 and the issuance of a second
news release on July 29, 2004 announcing that the A&F Board of Directors
had authorized a stock repurchase program to repurchase up to 6 million
shares of A&F's Class A Common Stock.
42
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: April 11, 2005 By /s/ Susan J. Riley
-------------------------------------------------
Susan J. Riley,
Senior Vice President - Chief Financial Officer
* Ms. Riley has been duly authorized to sign on behalf of the Registrant as its
principal financial officer.
43
EXHIBIT INDEX
Exhibit No. Document
----------- ----------------------------------------------------------------------
15 Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Inclusion of Report of Independent Registered
Public Accounting Firm
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
32 Section 1350 Certifications (Principal Executive Officer and Principal
Financial Officer)
44