UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

 

 

 

 

Form 10-K

 

 

Commission file number 1-12107

ABERCROMBIE & FITCH CO.

(Exact name of registrant as specified in its charter)

 

 

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

 

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

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

Aggregate market value of the Registrant’s Class A Common Stock (the only outstanding common equity of the Registrant) held by non-affiliates of the Registrant (for this purpose, executive officers and directors of the Registrant are considered affiliates) as of August 1, 2008: $4,805,849,894.

 

Number of shares outstanding of the Registrant’s common stock as of March 20, 2009: 87,836,222 shares of Class A Common Stock.

 

DOCUMENT INCORPORATED BY REFERENCE:

 

Portions of the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders, to be held on June 10, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

PART I

 

 

General.

 

Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer that operates stores and websites selling casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie, Hollister and RUEHL brands. In addition, the Company operates stores and a website offering bras, underwear, personal care products, sleepwear and at-home products for women under the Gilly Hicks brand. As of January 31, 2009, the Company operated 1,125 stores in the United States, Canada and the United Kingdom.

 

The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2008” represent the results of the 52-week fiscal year ended January 31, 2009; to “Fiscal 2007” represent the results of the 52-week fiscal year ended February 2, 2008; and to “Fiscal 2006” represent the results of the 53-week fiscal year ended February 3, 2007. In addition, all references herein to “Fiscal 2009” represent the 52-week fiscal year that will end on January 30, 2010.

 

A&F makes available free of charge on its website, www.Abercrombie.com, under “Investors, SEC Filings”, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as A&F’s definitive annual meeting proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains electronic filings at www.sec.gov. In addition, the public may read and copy any materials A&F files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

The Company has included its website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.

 

Description of Operations.

 

Brands.

 

Abercrombie & Fitch.  Rooted in East Coast traditions and Ivy League heritage, Abercrombie & Fitch is the essence of privilege and casual luxury. The Adirondacks supply a clean and rugged inspiration to this youthful All-American lifestyle. A combination of classic and sexy creates a charged atmosphere that is confident and just a bit provocative. Idolized and respected, Abercrombie & Fitch is timeless, and always cool.

 

abercrombie.  The essence of privilege and prestigious East Coast prep schools, abercrombie directly follows in the footsteps of Abercrombie & Fitch. With a flirtatious and energetic attitude, abercrombie is popular, wholesome and athletic. Rugged and casual with a vintage inspired style, abercrombie aspires to be

like its older sibling, Abercrombie & Fitch. The perfect combination of maturity and mischief, abercrombie is the signature of All-American cool.

 

Hollister.  Hollister is the fantasy of Southern California. It is the feeling of chilling on the beach with your friends. Young, spirited, with a sense of humor, Hollister never takes itself too seriously. The laidback lifestyle and wholesome image combine to give Hollister an energy that’s effortlessly cool. Hollister brings Southern California to the world.

 

RUEHL.  RUEHL is the post-grad that has arrived in Greenwich Village, New York City to live the dream. Embracing its culture and artistic nature, RUEHL personifies a style that is inherently cool. Rooted in quality and tradition, RUEHL remains casual, authentic and sexy. Coupled with sophistication, there is an intelligence that offers wit. RUEHL defines the aspirational New York City lifestyle.

 

Gilly Hicks.  Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly makes cute bras and underwear for the young, naturally beautiful and always confident girl. Classic and vibrant with a little tomboy sexiness, Gilly never takes herself too seriously. It’s the wholesome, All-American brand with a Sydney sensibility.

 

Though each of the Company’s brands embodies its own heritage and handwriting, they share common elements and characteristics. The brands are classic, casual, confident, intelligent, privileged and possess a sense of humor.

 

Refer to the “Financial Summary” in “ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K for information regarding net sales and other financial and operational data by brand.

 

In-Store Experience and Store Operations.

 

The Company views the customer’s in-store experience as the primary vehicle for communicating the spirit of each brand. The Company emphasizes the senses of sight, sound, smell, touch and energy by utilizing visual presentation of merchandise, in-store marketing, music, fragrances, rich fabrics and its sales associates to reinforce the aspirational lifestyles represented by the brands.

 

The Company’s in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a shopping experience that reflects the Abercrombie & Fitch, abercrombie, Hollister, RUEHL or Gilly Hicks lifestyle.

 

The Company’s sales associates and managers are a central element in creating the atmosphere of the stores. In addition to providing a high level of customer service, sales associates and managers reflect the casual, energetic and aspirational attitude of the brands.

 

Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure coordinated execution of the Company-wide merchandising strategy. In addition, standardization of each brand’s store design and merchandise presentation enables the Company to open new stores efficiently.

At the end of Fiscal 2008, the Company operated 1,125 stores. The following table details the number of retail stores operated by the Company for the past two fiscal years:

 

 

 

 

Direct-to-Consumer Business.

 

During Fiscal 2008, the Company operated and continues to operate web-based stores for the Abercrombie & Fitch, abercrombie, Hollister and RUEHL brands located at: www.Abercrombie.com; www.abercrombiekids.com; www.hollisterco.com; and www.RUEHL.com, respectively. In late January 2009, the Company also launched a web-based store for Gilly Hicks located at www.gillyhicks.com. Products offered at individual stores can be purchased through the respective websites. Each of the five websites reinforces the particular brand’s lifestyle and is designed to complement the in-store experience. Aggregate total net sales, including shipping and handling revenue, through the direct-to-consumer business, was $315.0 million for Fiscal 2008, representing 8.9% of total net sales. The Company believes its websites have broadened its market and brand recognition worldwide.

 

Marketing and Advertising.

 

The Company considers the in-store experience to be its main form of marketing. The Company emphasizes the senses to reinforce the aspirational lifestyles represented by the brands. Additionally, the Company advertises on billboards and in select national publications. The stand-alone Abercrombie & Fitch flagships on Fifth Avenue in New York and on Savile Row in London represent the pinnacle of the Company’s in-store branding efforts. The stores attract a substantial number of international tourists, and have significantly contributed to A&F’s worldwide status as an iconic brand.

Merchandise Suppliers.

 

During Fiscal 2008, the Company purchased merchandise from approximately 210 vendors located throughout the world; primarily in Asia and Central and South America. In Fiscal 2008, the Company sourced approximately 6% of its apparel and personal care products from one single factory. Besides that one factory, the Company did not source more than 5% of its apparel and personal care products from any other single factory or supplier. The Company pursues a global sourcing strategy that includes relationships with vendors in 37 countries and the United States (the “U.S.”). Any event causing a sudden disruption, either political or financial, in these sourcing locations could have a material adverse effect on the Company’s operations. The Company’s foreign purchases of merchandise are negotiated and settled in U.S. dollars.

 

All product sources, including independent manufacturers and suppliers, must achieve and maintain the Company’s high quality standards, which are an integral part of the Company’s identity. The Company has established supplier product quality standards to ensure the high quality of fabrics and other materials used in the Company’s products. The Company utilizes both home office and field employees to help monitor compliance with the Company’s product quality standards.

 

Distribution and Merchandise Inventory.

 

A majority of the Company’s merchandise and related materials are shipped to the Company’s two distribution centers (“DCs”) in New Albany, Ohio where they are received and inspected. Merchandise and related materials are then distributed to the Company’s stores and direct-to-consumer customers primarily using one contract carrier. Any event causing a sudden disruption in the operations of the DCs or in carrier operations could have a material adverse effect on the Company’s operations.

 

The Company’s practice is to maintain sufficient quantities of inventory on hand in its retail stores and DCs to offer customers a full selection of current merchandise. The Company attempts to balance in-stock levels and inventory turnover, and to take markdowns when required to keep merchandise fresh and current with fashion trends.

 

Information Systems.

 

The Company’s management information systems consist of a full range of retail, financial and merchandising systems. The systems include applications related to point-of-sale, inventory management, supply chain, planning, sourcing, merchandising and financial reporting. The Company continues to invest in technology to upgrade core systems to make the Company scalable, efficient and more accurate in the production and delivery of merchandise to stores. In addition, the Company invests in best practice technologies that are expected to provide a clear competitive advantage.

 

Seasonal Business.

 

The retail apparel market has two principal selling seasons, the Spring season which includes the first and second fiscal quarters (“Spring”) and the Fall season which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to the Back-to-School (August) and Holiday (November and December) selling seasons.

 

During Spring of Fiscal 2008, the highest level of inventory, approximately $470.7 million at cost, was reached at the end of July 2008, due to the upcoming Back-to-School selling season. The lowest level of inventory, approximately $326.7 million at cost, was reached at the end of March 2008. During Fall of Fiscal

2008, the highest level of inventory, approximately $504.9 million at cost, was reached at the end of October 2008 in anticipation of the Holiday selling season beginning in November. The lowest level of inventory, approximately $352.2 million at cost, was reached at the end of December 2008.

 

Trademarks.

 

The Abercrombie & Fitch^®, abercrombie^®, Hollister Co.^® and Ruehl No. 925^® trademarks have been registered with the U.S. Patent and Trademark Office and the registries of countries where stores are located or likely to be located in the future. An application for the Gilly Hicks trademark has been filed with the U.S. Patent and Trademark Office and the registries of countries where stores are located or likely to be located in the future. An application for the Gilly Hicks Sydney^® trademark has been approved for registration by the U.S. Patent and Trademark Office and the registries of countries where stores are located or may be located in the future. These trademarks are either registered or have applications pending with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered or has applied to register certain other trademarks in the U.S. and around the world. The Company believes that its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of ten to 20 years, depending on the date it was registered and the country in which it is registered, and is subject to an infinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to renew each of its registered trademarks that remain in use.

 

Financial Information about Segments.

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS No. 131”), the Company determines its operating segments on the same basis that it uses to evaluate performance internally. The operating segments identified by the Company are Abercrombie & Fitch, abercrombie, Hollister, RUEHL and Gilly Hicks. The operating segments have been aggregated and are reported as one reportable financial segment. RUEHL and Gilly Hicks were determined to be immaterial for segment reporting purposes, and are therefore included in the one reportable segment as they have similar economic characteristics and meet the majority of the aggregation criteria in paragraph 17 of SFAS No. 131. The Company aggregates its operating segments because they have similar economic characteristics and meet the aggregation criteria set forth in paragraph 17 of SFAS No. 131. The Company believes its operating segments may be aggregated for financial reporting purposes because they are similar in each of the following areas: class of consumer, economic characteristics, nature of products, nature of production processes and distribution methods. Revenues relating to the Company’s international operations for the fifty-two weeks ended January 31, 2009 and February 2, 2008 and long-lived assets relating to the Company’s international operations as of January 31, 2009 and February 2, 2008 were not material and were not reported separately from domestic revenues and long-lived assets.

 

Other Information.

 

Additional information about the Company’s business, including its revenues and profits for the last three fiscal years and gross square footage of stores, is set forth under “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K.

Competition.

 

The sale of apparel and personal care products through brick-and-mortar stores and direct-to-consumer channels is a highly competitive business with numerous participants, including individual and chain fashion specialty stores, as well as regional and national department stores. As the Company continues its international expansion, it will also face competition in European, Asian and other international markets from established regional and national chains, as well as specialty stores. Brand recognition, fashion, price, service, store location, selection and quality are the principal competitive factors in retail store and direct-to-consumer sales.

 

The competitive challenges facing the Company include anticipating and quickly responding to changing fashion trends; and maintaining the aspirational positioning of its brands so it can sustain its premium pricing position. Furthermore, the Company faces additional competitive challenges as many retailers increase promotional activity as a result of current economic conditions, while the Company’s policy continues to be not to engage in promotional activities that the Company believes could diminish the value of the brands.

 

Associate Relations.

 

As of March 20, 2009, the Company employed approximately 83,000 associates, none of whom were party to a collective bargaining agreement. Approximately 73,000 of these associates were part-time employees.

 

On average, the Company employed approximately 22,000 full-time equivalents during Fiscal 2008 which included approximately 13,000 full-time equivalents comprised of part-time employees, including temporary associates hired during peak periods, such as the Back-to-School and Holiday seasons.

 

The Company believes it maintains a good relationship with its associates. However, in the normal course of business, the Company is party to lawsuits involving former and current associates. Refer to “ITEM 3. LEGAL PROCEEDINGS” in this Annual Report on Form 10-K.

 

 

Forward-Looking Statements And Risk Factors.

 

The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various 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. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements.

 

The following factors could affect the Company’s financial performance and could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements:

 

 

 

The following sets forth a description of certain risk factors that the Company believes may be relevant to an understanding of the Company and its business. These risk factors, in addition to the factors set forth above, could cause actual results to differ materially from those expressed or implied in any of the Company’s forward-looking statements.

 

The Current Financial Crisis and General Economic Conditions Could Have a Material Adverse Effect on the Company’s Business, Results of Operations and Liquidity.

 

Consumer purchases of discretionary items, including the Company’s merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. The Company’s performance is subject to factors that affect worldwide economic conditions including employment, consumer debt, reductions in net worth based on recent severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the U.S. dollar versus foreign currencies and other macroeconomic factors. Recently, these factors have caused consumer spending to deteriorate significantly and may cause levels of spending to remain depressed for the foreseeable future. These factors may cause consumers to purchase products from lower priced competitors or to defer purchases of apparel and personal care products altogether.

 

The economic downturn could have a material effect on the Company’s results of operations and its liquidity and capital resources. It could also impact the Company’s ability to fund its growth and/or result in the Company becoming reliant on external financing, the availability of which may be uncertain.

 

In addition, the current economic environment may exacerbate some of the risk noted below, including consumer demand, strain on available resources, international growth strategy, store growth, interruption of the flow of merchandise from key vendors and foreign exchange rate fluctuations. The risks could be exacerbated individually or collectively.

The Loss of the Services of Skilled Senior Executive Officers Could Have a Material Adverse Effect on the Company’s Business.

 

The Company’s senior executive officers closely supervise all aspects of its business — in particular, the design of its merchandise and the operation of its stores. The Company’s senior executive officers have substantial experience and expertise in the retail business and have made significant contributions to the growth and success of the Company’s brands. If the Company were to lose the benefit of their involvement, in particular the services of any one or more of Michael S. Jeffries, Chairman and Chief Executive Officer, Diane Chang, Executive Vice President — Sourcing, Leslee K. Herro, Executive Vice President — Planning and Allocation, Jonathan E. Ramsden, Executive Vice President and Chief Financial Officer, David S. Cupps, Senior Vice President, General Counsel and Secretary and Charles “Chad” Kessler, Executive Vice President — Female Merchandising, its business could be adversely affected. Competition for such senior executive officers is intense, and the Company cannot be sure it will be able to attract and retain a sufficient number of qualified senior executive officers in future periods.

 

Equity-Based Compensation Awarded Under the Employment Agreement with the Company’s Chief Executive Officer Could Adversely Impact the Company’s Cash Flows, Financial Position or Results of Operations and Could Have a Dilutive Effect on the Company’s Outstanding Common Stock.

 

Under the Employment Agreement, entered into as of December 19, 2008, between the Company and Michael S. Jeffries, the Company’s Chairman and Chief Executive Officer (the “Jeffries Employment Agreement”), Mr. Jeffries is entitled to receive a grant (the “Retention Grant”) of stock options or stock appreciation rights (in the Company’s discretion) covering an aggregate of 4,000,000 shares of Common Stock. In addition to the Retention Grant, Mr. Jeffries is also eligible to receive two equity-based grants in respect of each fiscal year of the term of the Jeffries Employment Agreement starting with Fiscal 2009 (the “Semi-Annual Grants”). If a Semi-Annual Grant is earned, it will be awarded within 75 days following the end of the Company’s second quarter or fiscal year, as applicable, subject to Mr. Jeffries’ continuous employment with the Company (and, with respect to the final Semi-Annual Grant, continued service on the Company’s Board of Directors) through the applicable grant date. The value of the Semi-Annual Grants are uncertain and dependent on future market price of the Company’s Common Stock and the financial performance of the Company.

 

In connection with the Retention Grant and the Semi-Annual Grants contemplated by the Jeffries Employment Agreement, the related compensation expense could significantly impact the Company’s results of operations. Further, the significant number of shares of Common Stock which could be issued upon exercise and/or vesting of the Retention Grant and the Semi-Annual Grants is uncertain and dependent on the future market price of the Company’s Common Stock and the financial performance of the Company and would, if issued, have a dilutive effect with respect to the Company’s outstanding shares of Common Stock, which may adversely affect the market price of the Company’s Common Stock. Depending on the number of shares of Common Stock which could be issued under the Retention Grant and Semi-Annual Grants, the Company may deem it necessary or appropriate to seek shareholder approval of additional long-term incentive compensation plans in order to be able to settle the awards in Common Stock.

 

In the event that there are not sufficient shares of Common Stock available to be issued under the Company’s 2007 Long-Term Incentive Compensation Plan (the “2007 LTIP”) or under a successor or replacement plan at the time these equity-based awards are ultimately settled, the Company will be required to settle some portion of the awards in cash, which could have an adverse impact on the Company’s cash flow from operations, financial position and results of operations. In addition, under applicable accounting rules, if

the Company’s stock price increases to a point where, as of any measurement date, the Company would be unable to settle outstanding equity-based awards in shares of Common Stock from such plans, in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, the Company will be required to classify and account for all or a portion of the equity-based awards as liabilities. This could further adversely impact the Company’s results of operations.

 

The Failure to Anticipate, Identify and Respond to Changing Consumer Preferences and Fashion Trends in a Timely Manner Could Cause the Company’s Profitability to Decline.

 

The Company’s success largely depends on its ability to anticipate and gauge the fashion preferences of its customers and provide merchandise that satisfies constantly shifting demands in a timely manner. The merchandise must appeal to each brand’s corresponding target market of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Because the Company enters into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, it is vulnerable to changes in consumer preference and demand, pricing shifts and the sub-optimal selection and timing of merchandise purchases. There can be no assurance that the Company will be able to continue to successfully anticipate consumer demands in the future. To the extent that the Company fails to anticipate, identify and respond effectively to changing consumer preferences and fashion trends, its sales will be adversely affected. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to reduce excess inventory or increases in inventory valuation reserves. The current economic and retail environment, in which many of the Company’s competitors are engaging in aggressive promotional activities, exacerbates the importance of changing consumer preferences and fashion trends. Each of these could have a material adverse effect on the Company’s financial condition or results of operations.

 

The Company’s Market Share may be Adversely Impacted at any Time by a Significant Number of Competitors.

 

The sale of apparel and personal care products through brick-and-mortar stores and direct-to-consumer channels is a highly competitive business with numerous participants, including individual and chain fashion specialty stores, as well as regional and national department stores. The Company faces a variety of competitive challenges, including:

 

 

There can be no assurance that the Company will be able to compete successfully in the future.

 

The Interruption of the Flow of Merchandise from Key Vendors and International Manufacturers Could Disrupt the Company’s Supply Chain.

 

The Company purchases the majority of its merchandise outside of the U.S. through arrangements with approximately 210 vendors which include 314 foreign manufacturers located throughout the world, primarily in Asia and Central and South America. In addition, many of the Company’s domestic manufacturers maintain production facilities overseas. Political, social or economic instability in Asia, Central or South America, or in other regions in which the Company’s manufacturers are located, could cause disruptions in

trade, including exports to the U.S. Other events that could also cause disruptions to exports to the U.S. include:

 

 

In addition, the Company cannot predict whether the countries in which its merchandise is manufactured, or may be manufactured in the future, will be subject to new or additional trade restrictions imposed by the U.S. or other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, embargoes, safeguards and customs restrictions against apparel items, as well as U.S. or foreign labor strikes and work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to the Company and adversely affect its business, financial condition or results of operations.

 

The Company Does not Own or Operate any Manufacturing Facilities and Therefore Depends Upon Independent Third Parties for the Manufacture of all its Merchandise.

 

The Company does not own or operate any manufacturing facilities. As a result, the continued success of the Company’s operations is tied to its timely receipt of quality merchandise from third-party manufacturers. A manufacturer’s inability to ship orders in a timely manner or meet the Company’s quality standards could cause delays in responding to consumer demands and negatively affect consumer confidence in the quality and value of the Company’s brands or negatively impact the Company’s competitive position, all of which could have a material adverse effect on the Company’s financial condition or results of operations. Furthermore, the Company is susceptible to increases in sourcing costs from manufacturers which the Company may not be able to pass on to the customer and could adversely affect the Company’s financial condition or results of operations.

 

The Company’s Reliance on Two Distribution Centers Located in the Same Vicinity Makes it Susceptible to Disruptions or Adverse Conditions Affecting its Distribution Centers.

 

The Company’s two DCs, located in New Albany, Ohio, manage the receipt, storage, sorting, packing and distribution of merchandise to its stores and direct-to-consumer customers, both regionally and internationally. The Company also uses a third-party DC in the United Kingdom for the distribution of a portion of the merchandise delivered to the Abercrombie & Fitch flagship and Hollister stores located in the United Kingdom. As a result, the Company’s operations are susceptible to local and regional factors, such as system failures, accidents, economic and weather conditions, natural disasters, and demographic and population changes, as well as other unforeseen events and circumstances. If the Company’s distribution operations were disrupted, its ability to replace inventory in its stores and process direct-to-consumer orders could be interrupted and sales could be negatively impacted.

The Company’s Reliance on Third Parties to Deliver Merchandise from its Distribution Centers to its Stores and Direct-to-Consumer Customers Could Result in Disruptions to its Business.

 

The efficient operations of the Company’s stores and direct-to-consumer operations depend on the timely receipt of merchandise from the Company’s DCs. The Company delivers its merchandise to its stores and direct-to-consumer customers using independent third parties, primarily one contract carrier. The independent third parties employ personnel that may be represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees or contractors of any of these third parties could delay the timely receipt of merchandise. There can be no assurance that such stoppages or disruptions will not occur in the future. Any failure by a third party to respond adequately to the Company’s distribution needs would disrupt its operations and could have a material adverse effect on its financial condition or results of operations.

 

The Company’s Growth Strategy Relies on the Addition of New Stores, Which May Strain the Company’s Resources and Adversely Impact the Current Store Base Performance.

 

The Company’s growth strategy largely depends on the opening of new stores, particularly internationally, remodeling existing stores in a timely manner and operating them profitably. Additional factors required for the successful implementation of the Company’s growth strategy include, but are not limited to, obtaining desirable prime store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and successfully hiring and training store managers and sales associates. Additionally, the Company’s growth strategy may place increased demands on the Company’s operational, managerial and administrative resources, which could cause the Company to operate less efficiently. Furthermore, there is a possibility that new stores opened in existing markets may have an adverse effect on previously existing stores in such markets. Failure to properly implement the Company’s growth strategy could have a material adverse effect on the Company’s financial condition or results of operations.

 

The Company’s Development of New Brand Concepts Could Have a Material Adverse Effect on the Company’s Financial Condition or Results of Operations.

 

Historically, the Company has internally developed and launched new brands that have contributed to the Company’s sales growth. Each new brand concept requires management’s focus and attention, as well as significant capital investments. Furthermore, each new brand concept is susceptible to risks that include lack of customer acceptance, competition from existing or new retailers, product differentiation, production and distribution inefficiencies and unanticipated operating issues. There is no assurance that new brand concepts will achieve successful results. Any new brand concept that is not successfully launched could have a material adverse effect on the Company’s financial condition or results of operations. In addition, the ongoing development of new concepts, including Ruehl and Gilly Hicks, may place a strain on the Company’s available resources.

 

The Company’s International Expansion Plan is Dependent on a Number of Factors, any of Which Could Delay or Prevent the Successful Penetration into New Markets and Strain its Resources.

 

As the Company expands internationally, it may incur significant costs related to starting up and maintaining foreign operations. Costs may include, but are not limited to, obtaining prime locations for stores, setting up foreign offices and DCs, as well as hiring experienced management. The Company may be unable to open and operate new stores successfully, and its growth will be limited, unless it can:

 

 

 

In addition, the Company’s international expansion plan will place increased demands on its operational, managerial and administrative resources. These increased demands may cause the Company to operate its business less efficiently, which in turn could cause deterioration in the performance of its existing stores. Furthermore, the Company’s ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks. The Company’s international expansion strategy and success could be adversely impacted by the global economy.

 

Fluctuations in Foreign Currency Exchange Rates Could Adversely Impact Financial Results.

 

The Company’s international operations use local currencies as the functional currency. Such foreign currency transactions are denominated in Euros, Canadian Dollars, Japanese Yen, Danish Krones, Swiss Francs, Hong Kong Dollars and British Pounds. The Company’s Consolidated Financial Statements are presented in U.S. dollars. Therefore, the Company must translate revenues, income, expenses, assets and liabilities from local currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. dollar against other currencies will impact the Company’s financial results.

 

In order to mitigate the risk of foreign currency exchange rate exposures, the Company utilizes foreign currency forward contracts. However, the Company cannot guarantee that fluctuations in foreign currency exchange rates will not materially affect financial results.

 

The Company’s Net Sales and Inventory Levels Fluctuate on a Seasonal Basis, Causing its Results of Operations to be Particularly Susceptible to Changes in Back-to-School and Holiday Shopping Patterns.

 

Historically, the Company’s operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, due to the increased sales during the Holiday selling season and, to a lesser extent, the third fiscal quarter, reflecting increased sales during the Back-to-School selling season. The Company’s net sales and net income during the first and second fiscal quarters are typically lower, due, in part, to the traditional retail slowdown immediately following the Holiday season. As a result of this seasonality, net sales and net income during any fiscal quarter cannot be used as an accurate indicator of the Company’s annual results. Any factors negatively affecting the Company during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, such as those faced in Fiscal 2008, could have a material adverse effect on its financial condition or results of operations for the entire year.

Furthermore, in order to prepare for the Back-to-School and Holiday selling seasons, the Company must order and keep significantly more merchandise in stock than it would carry during other parts of the year. Therefore, the inability to accurately plan for product demand and merchandise allocation could have a material adverse effect on the Company’s financial condition or results of operations. High inventory levels due to unanticipated decreases in demand for the Company’s products during peak selling seasons, misidentification of fashion trends or excess inventory purchases could require the Company to sell merchandise at a substantial markdown, which could reduce its net sales and gross margins and negatively impact its profitability.

 

The Company’s Ability to Attract Customers to its Stores Depends Heavily on the Success of the Shopping Centers in Which They are Located.

 

In order to generate customer traffic, the Company locates many of its stores in prominent locations within successful shopping centers. The Company cannot control the development of new shopping centers; the availability or cost of appropriate locations within existing or new shopping centers; competition with other retailers for prominent locations; or the success of individual shopping centers. All of these factors may impact the Company’s ability to meet its growth targets and could have a material adverse effect on its financial condition or results of operations.

 

Comparable Store Sales Have Been Negatively Affected by the Economy and Will Continue to Fluctuate on a Regular Basis.

 

The Company’s comparable store sales, defined as year-over-year sales for a store that has been open as the same brand at least one year and the square footage of which has not been expanded or reduced by more than 20%, have fluctuated significantly in the past on an annual, quarterly and monthly basis and are expected to continue to fluctuate in the future. During the past three fiscal years, comparable sales results have fluctuated as follows: (a) from (13%) to 2% for annual results; (b) from (25%) to 6% for quarterly results; and (c) from (28%) to 17% for monthly results. The Company’s comparable store sales were particularly adversely affected by the economy and our competitors’ promotional activities in the fourth quarter of Fiscal 2008 and continue to be adversely affected to date in Fiscal 2009. The Company believes that a variety of factors affect comparable store sales results including, but not limited to, fashion trends, actions by competitors, economic conditions, weather conditions, opening and/or closing of Company stores near each other, and the calendar shifts of tax free and holiday periods.

 

Comparable store fluctuations may impact the Company’s ability to leverage fixed direct expenses, including store rent and store asset depreciation, which may adversely affect the Company’s financial condition or results of operations.

 

In addition, comparable store sales fluctuations may have been an important factor in the volatility of the price of the Company’s Class A Common Stock in the past, and it is likely that future comparable store sales fluctuations will contribute to stock price volatility in the future.

 

The Company’s Net Sales are Affected by Direct-to-Consumer Sales.

 

The Company sells merchandise over the Internet through its websites: www.Abercrombie.com; www.abercrombiekids.com; www.hollisterco.com; www.RUEHL.com; and www.gillyhicks.com. The Company’s Internet operations may be affected by reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems that operate the Internet business, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, the Company’s ability to conduct business on the Internet may be affected by liability for on-line content and state and federal privacy laws.

The Company’s Litigation Exposure Could Exceed Expectations, Having a Material Adverse Effect on the Company’s Financial Condition or Results of Operations.

 

The Company is involved, from time-to-time, in litigation incidental to its business, such as litigation regarding overtime compensation and other employment related matters. Additionally, the Company is involved in several purported class action lawsuits and several shareholder derivative actions alleged to have arisen out of trading in the Company’s Class A Common Stock in the summer of Fiscal 2005 (collectively, the “Securities Matters,” see “ITEM 3. LEGAL PROCEEDINGS” of this Annual Report on Form 10-K”). Management is unable to assess the potential exposure of the aforesaid matters. The Company’s current exposure could change in the event of the discovery of damaging facts with respect to legal matters pending against the Company or determinations by judges, juries or other finders of fact that are not in accordance with management’s evaluation of the claims. Should management’s evaluation prove incorrect, the Company’s exposure could greatly exceed expectations and have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

 

The Company’s Failure to Adequately Protect Its Trademarks Could Have a Negative Impact on Its Brand Image and Limit Its Ability to Penetrate New Markets.

 

The Company believes its trademarks, Abercrombie & Fitch^®, abercrombie^®, Hollister Co.^®, Ruehl No. 925^®, Gilly Hicks and the “Moose,” “Seagull,” “Bulldog” and “Koala” logos, are an essential element of the Company’s strategy. The Company has obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries where stores are located or likely to be located in the future. In addition, the Company owns registrations and pending applications for other trademarks in the U.S. and has applied for or obtained registrations from the registries in many foreign countries in which its manufacturers are located. There can be no assurance that the Company will obtain registrations that have been applied for or that the registrations the Company obtains will prevent the imitation of its products or infringement of its intellectual property rights by others. If any third party copies the Company’s products in a manner that projects lesser quality or carries a negative connotation, the Company’s brand image could be materially adversely affected.

 

Because the Company has not yet registered all of its trademarks in all categories, or in all foreign countries in which it sources or offers its merchandise now or may in the future, its international expansion and its merchandising of products using these marks could be limited. For example, the Company cannot ensure that others will not try to block the manufacture, export or sale of its products as a violation of their trademarks or other proprietary rights. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom the Company is not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. If the Company is unable to reach an arrangement with any such party, the Company’s manufacturers may be unable to manufacture its products, and the Company may be unable to sell in those countries. The Company’s inability to register its trademarks or purchase or license the right to use its trademarks or logos in these jurisdictions could limit its ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should the Company’s business plan include selling its merchandise in those non-U.S. jurisdictions.

 

The Company has an anti-counterfeiting program, under the auspices of the Abercrombie & Fitch Brand Protection Team, whose goal is to eliminate the supply of illegal pieces of the Company’s products. The Brand

Protection Team interacts with investigators, customs officials and law enforcement entities throughout the world to combat the illegal use of the Company’s trademarks. Although brand security initiatives are being taken, the Company cannot guarantee that its efforts against the counterfeiting of its brands will be successful.

 

The Company’s Unsecured Credit Agreement Includes Financial and Other Covenants that Impose Restrictions on its Financial and Business Operations.

 

The Company’s unsecured credit agreement expires on April 12, 2013 and market conditions could potentially impact the size and terms of a replacement facility.

 

In addition, the unsecured credit agreement contains financial covenants that require the Company to maintain a minimum fixed charge coverage ratio and a maximum leverage ratio. If the Company fails to comply with the covenants and is unable to obtain a waiver or amendment, an event of default would result and the lenders could declare outstanding borrowings immediately due and payable. If that should occur, the Company cannot guarantee that it would have sufficient liquidity, at that time, to repay or refinance borrowings under the unsecured credit agreement.

 

The inability to obtain credit on commercially reasonable terms or a default under the current unsecured credit agreement could adversely impact liquidity and results of operations.

 

Changes in Taxation Requirements Could Adversely Impact Financial Results.

 

The Company is subject to income tax in numerous jurisdictions, including international and domestic locations. In addition, the Company’s products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties could have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

 

Modifications and/or Upgrades to Information Technology Systems may Disrupt Operations.

 

The Company regularly evaluates its information technology systems and requirements and is currently implementing modifications and/or upgrades to the information technology systems that support the business. Modifications include replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. The Company is aware of inherent risks associated with replacing and modifying these systems, including inaccurate system information and system disruptions. The Company believes it is taking appropriate action to mitigate the risks through testing, training and staging implementation, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. Information technology system disruptions and inaccurate system information, if not anticipated and appropriately mitigated, could have a material adverse effect on the Company’s financial condition or results of operations. Additionally, there is no assurance that a successfully implemented system will deliver value to the Company.

 

Our Business Could Suffer if the Company’s Computer Systems are Disrupted or Cease to Operate Effectively.

 

The Company relies heavily on its computer systems to record and process transactions and manage and operate the Company’s operations. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of the computer hardware and software systems. Despite efforts to prevent such an occurrence, the Company’s systems are vulnerable from time-to-time to damage or interruption from computer viruses, power outages and other technical malfunctions. If our systems are

damaged or fail to function properly, the Company may have to make monetary investments to repair or replace the systems and the Company could endure delays in its operations. Any material interruption could have a material adverse effect on the Company’s business or results of operations.

 

 

None.

 

 

The Company’s headquarters and support functions occupy 474 acres, consisting of the home office and distribution and shipping facilities centralized on a campus-like setting in New Albany, Ohio and an additional small distribution and shipping facility located in the Columbus, Ohio area, all which are owned by the Company. Additionally, the Company leases small facilities to house its design and sourcing support centers in Hong Kong, New York City and Los Angeles, California, as well as offices in the United Kingdom (“U.K.”), Switzerland and Italy for its European operations.

 

All of the retail stores operated by the Company, as of March 20, 2009, are located in leased facilities, primarily in shopping centers throughout the U.S., Canada and the U.K. As of March 20, 2009, the Company operated two stand-alone flagships with one in New York, New York and one in the U.K. The leases expire at various dates, between 2009 and 2028.

 

The Company’s home office, distribution and shipping facilities, design support centers and stores are generally suitable and adequate.

 

As of March 20, 2009, the Company’s 1,127 stores were located in 49 states, the District of Columbia, Canada and the U.K., as follows:

 

 

 

A&F is a defendant in lawsuits arising in the ordinary course of business.

 

On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In that action, plaintiffs alleged, on behalf of a putative class of California store managers employed in Hollister and abercrombie stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaint seeks injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The defendants answered the complaint on August 21, 2006, denying liability. On June 23, 2008 the defendants settled all claims of Hollister and abercrombie store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to oppose the plaintiffs’ remaining claims. On July 29, 2008 the Court certified a class consisting of all store managers who served at Hollister and abercrombie stores in California from May 1, 2004 through the future date upon which the action concludes. The parties are continuing to litigate the claims of that putative class.

 

On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company, et al., was filed against A&F and certain of its officers in the United States District Court for the Southern District of Ohio on behalf of a purported class of all persons who purchased or acquired shares of A&F’s Common Stock between June 2, 2005 and August 16, 2005. In September and October of 2005, five other purported class actions were subsequently filed against A&F and other defendants in the same Court. All six securities cases allege claims under the federal securities laws related to sales of Common Stock by certain defendants and to a decline in the price of A&F’s Common Stock during the summer of 2005, allegedly as a result of misstatements attributable to A&F. Plaintiffs seek unspecified monetary damages. On November 1, 2005, a motion to consolidate all of these purported class actions into the first-filed case was filed by some of the plaintiffs. A&F joined in that motion. On March 22, 2006, the motions to consolidate were granted, and these actions (together with the federal court derivative cases described in the following paragraph) were consolidated for purposes of motion practice, discovery and pretrial proceedings. A consolidated amended securities class action complaint (the “Complaint”) was filed on August 14, 2006. On October 13, 2006, all defendants moved to dismiss that Complaint. On August 9, 2007, the Court denied the motions to dismiss. On September 14, 2007, defendants filed answers denying the material allegations of the Complaint and asserting affirmative defenses. On October 26, 2007, plaintiffs moved to certify their purported class. After briefings and argument, the motion was submitted on March 24, 2009.

 

On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries, et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&F’s present and former directors, alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. In the following three months (October, November and December of 2005), four similar derivative actions were filed (three in the United States District Court for the Southern District of Ohio and one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F alleging various breaches of the directors’ fiduciary duty allegedly arising out of the same matters alleged in the Ross case and seeking equitable and monetary relief on behalf of A&F. A&F is also a nominal defendant in each of the four later derivative actions. On November 4, 2005, a motion to consolidate all of the federal court derivative actions with the purported securities law class actions described in the preceding paragraph was filed. On March 22, 2006, the motion to consolidate was granted, and the federal court derivative actions have been consolidated with the aforesaid purported securities law class actions for purposes of motion practice,

discovery and pretrial proceedings. A consolidated amended derivative complaint was filed in the federal proceeding on July 10, 2006. A&F filed a motion to stay the consolidated federal derivative case and that motion was granted. The state court action was also stayed. On February 16, 2007, A&F announced that its Board of Directors had received a report of the Special Litigation Committee established by the Board to investigate and act with respect to claims asserted in certain previously disclosed derivative lawsuits brought against current and former directors and management, including Chairman and Chief Executive Officer Michael S. Jeffries. The Special Litigation Committee concluded that there is no evidence to support the asserted claims and directed the Company to seek dismissal of the derivative actions. On September 10, 2007, the Company moved to dismiss the federal derivative cases on the authority of the Special Litigation Committee report and on October 18, 2007, the state court stayed further proceedings until resolution of the consolidated federal derivative cases. The Company’s motion was granted on March 12, 2009.

 

Management intends to defend the aforesaid matters vigorously, as appropriate. Management is unable to quantify the potential exposure of the aforesaid matters. However, management’s assessment of the Company’s current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries or other finders of fact that are not in accordance with management’s evaluation of the claims.

 

 

None.

 

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.

 

Set forth below is certain information regarding the executive officers of A&F as of March 20, 2009.

 

Michael S. Jeffries, 64, has been Chairman of A&F since May 1998. Mr. Jeffries has been Chief Executive Officer of A&F since February 1992. From February 1992 to May 1998, Mr. Jeffries held the position of President of A&F. Under the terms of the Employment Agreement, dated as of December 19, 2008, between A&F and Mr. Jeffries, A&F is obligated to cause Mr. Jeffries to be nominated as a director of A&F during his employment term.

 

Diane Chang, 53, has been Executive Vice President — Sourcing of A&F since May 2004. Prior thereto, Ms. Chang held the position of Senior Vice President — Sourcing of A&F from February 2000 to May 2004 and the position of Vice President — Sourcing of A&F from May 1998 to February 2000.

 

Leslee K. Herro, 48, has been Executive Vice President — Planning and Allocation of A&F since May 2004. Prior thereto, Ms. Herro held the position of Senior Vice President — Planning and Allocation of A&F from February 2000 to May 2004 and the position of Vice President — Planning & Allocation of A&F from February 1994 to February 2000.

 

Jonathan E. Ramsden, 44, joined A&F in December 2008 as Executive Vice President and Chief Financial Officer. From December 1998 to December 2008, Mr. Ramsden had served as the Chief Financial Officer and member of the Executive Committee of TBWA Worldwide, a large advertising agency network and a division of Omnicom Group Inc. Prior to becoming Chief Financial Officer of TWBA Worldwide, he served as Controller and Principal Accounting Officer of Omnicom Group Inc. from June 1996 to December 1998.

David S. Cupps, 72, has been Senior Vice President, General Counsel and Secretary of A&F since April 2007. Prior thereto, he was a partner in the law firm of Vorys, Sater, Seymour and Pease LLP from January 1974 through December 2006 and Of Counsel to that law firm from January 2007 through March 2007.

 

Chad F. Kessler, 36, has been Executive Vice President — Female Merchandising since November 2008. Prior thereto, Mr. Kessler held the position of Senior Vice President — Female Merchandising from August 2007 to November 2008, the position of Senior Vice President and General Merchandise Manager, Hollister from May 2005 to August 2007 and the position of Vice President of Merchandising from May 2003 to May 2005.

 

The executive officers serve at the pleasure of the Board of Directors of A&F and, in the case of Mr. Jeffries, pursuant to an employment agreement.

 

PART II

 

 

A&F’s Class A Common Stock (the “Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.” The table below sets forth the high and low sales prices of A&F’s Common Stock on the New York Stock Exchange for Fiscal 2008 and Fiscal 2007:

 

 

A quarterly dividend, of $0.175 per share, was paid in March, June, September and December of Fiscal 2006, Fiscal 2007 and Fiscal 2008. A&F expects to continue to pay a dividend, subject to the Board of Directors’ review of the Company’s cash position and results of operations.

 

As of March 20, 2009, there were approximately 4,655 stockholders of record. However, when including investors holding shares in broker accounts under street name, active associates who participate in A&F’s stock purchase plan, and associates who own shares through A&F-sponsored retirement plans, A&F estimates that there are approximately 45,000 stockholders.

 

The following table provides information regarding the purchase of shares of the Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the quarterly period ended January 31, 2009:

 

 

 

 

During Fiscal 2008, A&F repurchased approximately 0.7 million shares of A&F’s Common Stock with a value of approximately $50.0 million. During Fiscal 2007, A&F repurchased approximately 3.6 million shares of A&F’s Common Stock with a value of approximately $287.9 million. A&F did not repurchase any shares of A&F’s Common Stock during Fiscal 2006. Both the Fiscal 2008 and the Fiscal 2007 repurchases were pursuant to A&F Board of Directors’ authorizations. As shown in the table set forth above, A&F did not repurchase any shares of A&F’s Common Stock during the fiscal quarter ended January 31, 2009 pursuant to the publicly announced stock purchase authorizations.

The following graph shows the changes, over the five-year period ended January 31, 2009 (the last day of A&F’s 2008 fiscal year), in the value of $100 invested in (i) shares of A&F’s Common Stock; (ii) the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and (iii) the Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail Index”), including reinvestment of dividends. The plotted points represent the closing price on the last day of the fiscal year indicated (and if such day was not a trading day, the closing price on the last day immediately preceding a trading day).

 

PERFORMANCE GRAPH¹

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index

 

 

 

 

¹ This graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to SEC Regulation 14A or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that A&F specifically requests that the graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.

 

 

ABERCROMBIE & FITCH CO.
FINANCIAL SUMMARY

 

 

 

 

 

OVERVIEW

 

The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year. A store is included in comparable store sales when it has been open as the same brand at least one year and its square footage has not been expanded or reduced by more than 20% within the past year.

 

Fiscal 2008 and Fiscal 2007 included fifty-two weeks and Fiscal 2006 included fifty-three weeks. For purposes of this “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” the thirteen and fifty-two week periods ended January 31, 2009 are compared to the thirteen and fifty-two week periods ended February 2, 2008. Fiscal 2008 comparable store sales compare the thirteen and fifty-two week periods ended January 31, 2009 to the thirteen and fifty-two week periods ended February 2, 2008. For Fiscal 2007, the thirteen and fifty-two week periods ended February 2, 2008 are compared to the fourteen and fifty-three week periods ended February 3, 2007. Fiscal 2007 comparable store sales compare the thirteen and fifty-two week periods ended February 2, 2008 to the thirteen and fifty-two week periods ended February 3, 2007.

 

The Company had net sales of $3.540 billion for the fifty-two weeks ended January 31, 2009, down 5.6% from $3.750 billion for the fifty-two weeks ended February 2, 2008. Operating income for Fiscal 2008 was $439.4 million, including a non-cash charge of $30.6 million associated with the impairment of store-related assets, which was down from $740.5 million in Fiscal 2007. Net income was $272.3 million in Fiscal 2008, down 42.8% from $475.7 million in Fiscal 2007. Net income per diluted share was $3.05 for Fiscal 2008, compared to $5.20 in Fiscal 2007. Fiscal 2008 net income per diluted share included a non-cash charge of approximately $0.21 per diluted share associated with the impairment of store-related assets and a charge to tax expense of approximately $0.11 per diluted share related to the execution of the Chairman and Chief Executive Officer’s (“CEO”) new employment agreement.

 

The Company generated cash from operations of $490.8 million in Fiscal 2008 down from $817.5 million in Fiscal 2007. The decrease resulted primarily from a reduction in net income, the increase in inventory on-hand in Fiscal 2008, compared to a reduction of inventory on-hand in Fiscal 2007, and a reduction of income taxes and accounts payable. During Fiscal 2008, the Company used cash from operations to finance its growth strategy, including the opening of two new Abercrombie & Fitch stores, 66 new Hollister stores, 12 new abercrombie stores, six new RUEHL stores, and 11 new Gilly Hicks stores, as well as investments in home office resources and infrastructure to support the Company’s international expansion. The Company also used cash in Fiscal 2008 to pay dividends of $0.70 per share, for a total of $60.8 million and to repurchase approximately 0.7 million shares of A&F Common Stock with a value of approximately $50.0 million. In Fiscal 2008, the Company borrowed $100.0 million under the Company’s unsecured credit agreement to supplement cash from operations.

The following data represents the Company’s Consolidated Statements of Net Income for the last three fiscal years, expressed as a percentage of net sales:

 

 

 

 

FINANCIAL SUMMARY

 

The following summarized financial and operational data compares Fiscal 2008 to Fiscal 2007 and Fiscal 2007 to Fiscal 2006:

 

 

CURRENT TRENDS AND OUTLOOK

 

The fourth quarter retail environment proved to be the most challenging in the Company’s recent history. Global economic turmoil resulted in a swift and steep decline in consumer spending and a mall landscape dominated by promotional activity. The Company reacted by managing its expenses, utilizing a season ending clearance event to clear through seasonal inventory and reducing capital expenditures by scaling back on domestic expansion, all of which allowed the Company to end the year with a strong cash position. Most importantly, the Company executed its strategy in a way that enabled it to protect its brands.

 

The Company expects that the difficult selling environment will persist throughout 2009. Therefore, the Company will continue to focus on managing the business in a seasoned, disciplined and controlled manner.

 

As always, the Company’s first priority is long-term shareholder value which requires a commitment to protecting brand equity. While the Company will take clearance markdowns as a natural rhythm of the business, the cornerstone of the Company’s long-term successful business model is to drive sales with high quality, trend right fashion and an exceptional in-store environment.

 

The Company will continue to rigorously review all operating expenses in order to achieve expense reductions and a more flexible cost base. These efforts will be ongoing in 2009 and beyond and will be responsive to overall sales trends.

 

The Company continues to be encouraged with the results of its international expansion. The Abercrombie & Fitch London flagship continues to perform well and there has been a strong initial reaction to the Hollister mall-based stores opened in the U.K. Store growth for 2009 will be focused on international opportunities as the Company moves forward with plans to bring its brands to the rest of the world.

 

In managing the business in 2009, the Company is taking a conservative view of market conditions. The Company will continue to focus on its long-term objectives while seeking to maintain flexibility to respond to market conditions.

The following measurements are among the key business indicators reviewed by various members of management to gauge the Company’s results:

 

 

While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics as part of its “Financial Summary” and in several sections within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

FISCAL 2008 COMPARED TO FISCAL 2007

 

FOURTH QUARTER RESULTS

 

Net Sales

 

Fourth quarter net sales for the thirteen week period ended January 31, 2009 were $998.0 million, down 18.8% from net sales of $1.229 billion for the thirteen week period ended February 2, 2008. The net sales decrease was attributed primarily to the 25% decrease in comparable store sales and an 11.9% decrease in direct-to-consumer business, including shipping and handling revenue, partially offset by a net addition of 90 stores.

Comparable store sales by brand for the fourth quarter of Fiscal 2008 were as follows: Abercrombie & Fitch decreased 23% with men’s comparable store sales decreasing by a high double-digit and women’s decreasing by a low thirty; abercrombie decreased 30% with boys’ decreasing by a low twenty and girls’ decreasing by a low thirty; Hollister decreased 25% with dudes’ decreasing by a low teen and bettys’ decreasing by a low thirty; and RUEHL decreased 25% with men’s decreasing by a mid teen and women’s decreasing by a low thirty.

 

Regionally, comparable store sales were down in all U.S. regions and Canada. Comparable store sales were stronger in the flagship stores, particularly in the United Kingdom.

 

From a merchandise classification standpoint across all brands, stronger performing masculine categories included denim, fragrance and knit tops, while graphic tees and fleece were weakest. In the feminine businesses, across all brands, knit tops, fleece and graphic tees were the primary drivers in the negative comparable store sales result.

 

Direct-to-consumer net merchandise sales, which are sold through the Company’s websites, for the fourth quarter of Fiscal 2008 were $95.1 million, a decrease of 12.4% from Fiscal 2007 fourth quarter net merchandise sales of $108.6 million. Shipping and handling revenue for the corresponding periods was $14.3 million in Fiscal 2008 and $15.6 million in Fiscal 2007. The direct-to-consumer business, including shipping and handling revenue, accounted for 11.0% of total net sales in the fourth quarter of Fiscal 2008 compared to 10.1% in the fourth quarter of Fiscal 2007.

 

Gross Profit

 

Gross profit during the fourth quarter of Fiscal 2008 was $642.6 million compared to $825.6 million for the comparable period in Fiscal 2007. The gross profit rate (gross profit divided by net sales) for the fourth quarter of Fiscal 2008 was 64.4%, down 280 basis points from the fourth quarter of Fiscal 2007 rate of 67.2%. The decrease in gross profit rate can be attributed to a higher IMU rate being more than offset by an increase in markdown rate versus last year. The higher markdown rate resulted from the need to clear through seasonal merchandise as a result of declining sales and the Company’ limited ability to reduce fourth quarter deliveries.

 

Stores and Distribution Expense

 

Stores and distribution expense for the fourth quarter of Fiscal 2008 was $422.5 million compared to $388.4 million for the comparable period in Fiscal 2007. The stores and distribution expense rate (stores and distribution expense divided by net sales) for the fourth quarter of Fiscal 2008 was 42.3%, up 10.7 percentage points from 31.6% in the fourth quarter of Fiscal 2007. Although the Company introduced a number of initiatives to reduce store payroll hours in response to the declining sales, the increase in rate was primarily related to the limitation on leveraging fixed expenses due to the comparable store sales decline and additional direct expenses related to flagship pre-opening rent expenses, as well as minimum wage and manager salary increases. The fourth quarter of Fiscal 2008’s stores and distribution expense also included a $30.6 million non-cash impairment charge as the Company determined that the carrying amount of assets related to 11 Abercrombie & Fitch, six abercrombie, three Hollister and nine RUEHL stores exceeded the fair value of those assets. The majority of the impairment charge was associated with the nine RUEHL stores. Long-lived assets are reviewed at the store level periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net assets through future cash flows is in question. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results and projected cash flows.

Marketing, General and Administrative Expense

 

Marketing, general and administrative expense during the fourth quarter of Fiscal 2008 decreased 2.1% to $101.0 million compared to $103.2 million during the comparable period in Fiscal 2007. The reduction in the marketing, general and administrative expense included savings in incentive compensation and benefits, travel and outside services. The marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 10.1%, up 1.7 percentage points from 8.4% in the fourth quarter of Fiscal 2007.

 

Other Operating Income, Net

 

Fourth quarter other operating income for Fiscal 2008 was $5.5 million compared to $3.0 million for the fourth quarter of Fiscal 2007. Other operating income included gift cards for which the Company has determined the likelihood of redemption to be remote for Fiscal 2008 and Fiscal 2007, as well as losses on foreign currency transactions for Fiscal 2007. In Fiscal 2008, other operating income also included an other-than-temporary loss of $14.0 million related to the Company’s trading auction rate securities, offset by a gain on the related put option of $12.3 million.

 

Operating Income

 

Operating income for the fourth quarter of Fiscal 2008 decreased to $124.6 million from $337.1 million in the comparable period in Fiscal 2007. The operating income rate (operating income divided by net sales) for the fourth quarter of Fiscal 2008 was 12.5% compared to 27.4% for the fourth quarter of Fiscal 2007.

 

Interest Income, Net and Income Tax Expense

 

Fiscal 2008 fourth quarter interest income was $2.5 million, offset by interest expense of $1.1 million compared to interest income of $6.6 million, offset by interest expense of $0.2 million in the fourth quarter of Fiscal 2007. The decrease in interest income was primarily due to a lower average rate of return on investments. The increase in interest expense was due to borrowings made under the unsecured credit agreement in Fiscal 2008.

 

The effective tax rate for the fourth quarter of Fiscal 2008 was 45.7% compared to 36.9% for the Fiscal 2007 comparable period. The fourth quarter of Fiscal 2008 tax rate reflects a charge of $9.9 million to tax expense as a result of the Chairman and Chief Executive Officer’s (“CEO”) new employment agreement, which pursuant to section 162(m) results in the exclusion of previously recognized tax benefits. Under the previous employment agreement, the Company recorded deferred tax assets based on the anticipated delivery of benefits to the CEO in the calendar year following the year of his retirement. As a result of the new employment agreement, the CEO receives the benefits during his employment; therefore the expected tax benefits are no longer available.

 

Net Income and Net Income per Share

 

Net income for the fourth quarter of Fiscal 2008 was $68.4 million versus $216.8 million for the fourth quarter of Fiscal 2007. Net income per diluted weighted-average share outstanding for the fourth quarter of Fiscal 2008 was $0.78, including a non-cash, after-tax charge of $0.21 associated with the impairment of store-related assets and a charge to tax expense of $0.11 related to the execution of the CEO’s new employment agreement, which pursuant to Section 162(m) of the Internal Revenue Code resulted in the

exclusion of previously recognized tax benefits related to the previous employee agreement, compared to $2.40 for the Fiscal 2007 comparable period.

 

FISCAL 2008 RESULTS

 

Net Sales

 

Net sales for Fiscal 2008 were $3.540 billion, a decrease of 5.6% from Fiscal 2007 net sales of $3.750 billion. The net sales decrease was attributed primarily to the 13% decrease in comparable store sales, partially offset by a net addition of 90 stores and a 5.7% increase in direct-to-consumer business, including shipping and handling revenue.

 

For Fiscal 2008, comparable store sales by brand were as follows: Abercrombie & Fitch decreased 8%; abercrombie decreased 19%; Hollister decreased 17%; and RUEHL decreased 23%.

 

Direct-to-consumer net merchandise sales in Fiscal 2008 were $271.0 million, an increase of 4.7% over Fiscal 2007 net merchandise sales of $258.9 million. Shipping and handling revenue was $44.0 million in Fiscal 2008 and $39.1 million in Fiscal 2007. The direct-to-consumer business, including shipping and handling revenue, accounted for 8.9% of total net sales in Fiscal 2008 compared to 8.0% of total net sales in Fiscal 2007.

 

Gross Profit

 

For Fiscal 2008, gross profit decreased to $2.362 billion from $2.511 billion in Fiscal 2007. The gross profit rate for Fiscal 2008 was 66.7% versus 67.0% the previous year, a decrease of 30 basis points. The decrease in the gross profit rate was driven primarily by an improved initial mark-up rate more than offset by a higher markdown rate. In the fourth quarter of Fiscal 2008, the Company took higher markdowns to clear through seasonal merchandise.

 

Stores and Distribution Expense

 

Stores and distribution expense for Fiscal 2008 was $1.512 billion compared to $1.387 billion for Fiscal 2007. For Fiscal 2008, the stores and distribution expense rate was 42.7% compared to 37.0% for Fiscal 2007. The increase in rate resulted primarily from the Company’s limited ability to leverage fixed expenses due to the negative 13% comparable store sales. Additionally, Fiscal 2008’s stores and distribution expense also included additional direct expenses related to flagship pre-opening rent expenses, as well as minimum wage and manager salary increases and a $30.6 million non-cash impairment charge associated with store-related assets.

 

Marketing, General and Administrative Expense

 

Marketing, general and administrative expense for Fiscal 2008 increased 6.0% to $419.7 million compared to $395.8 million in Fiscal 2007. The increase in expense reflects investments in home office resources necessary for flagship and international expansion, partially offset by savings in incentive compensation and benefits and other home office expenses in the second half of Fiscal 2008. The marketing, general and administrative expense rate was 11.9% for Fiscal 2008, an increase of 1.3 percentage points compared to 10.6% for Fiscal 2007.

Other Operating Income, Net

 

Other operating income for Fiscal 2008 was $8.9 million compared to $11.7 million for Fiscal 2007. The decrease was primarily driven by losses on foreign currency transactions for Fiscal 2008 compared to gains on foreign currency transactions for Fiscal 2007, as well as a decrease in income related to gift cards for which the Company has determined the likelihood of redemption to be remote.

 

Operating Income

 

Fiscal 2008 operating income was $439.4 million compared to $740.5 million for Fiscal 2007. The operating income rate for Fiscal 2008 was 12.4% compared to 19.7% for Fiscal 2007.

 

Interest Income, Net and Income Tax Expense

 

Fiscal 2008 interest income was $14.8 million, offset by interest expense of $3.4 million compared to interest income of $19.8 million, offset by interest expense of $1.0 million for Fiscal 2007. The decrease in interest income was primarily due to a lower average rate of return on investments. The increase in interest expense in Fiscal 2008 was due to borrowings made under the unsecured credit agreement in Fiscal 2008.

 

The effective tax rate for Fiscal 2008 was 39.6% compared to 37.4% for the Fiscal 2007 comparable period. The higher rate was primarily due to the non-deductibility, pursuant to Internal Revenue Code section 162(m), of certain compensation related to the execution of the CEO’s new employment agreement during the year.

 

Net Income and Net Income per Share

 

Net income for Fiscal 2008 was $272.3 million compared to $475.7 million for Fiscal 2007. Net income per diluted weighted-average share was $3.05 in Fiscal 2008 versus $5.20 in Fiscal 2007.

 

FISCAL 2007 COMPARED TO FISCAL 2006

 

FOURTH QUARTER RESULTS

 

Net Sales

 

Fourth quarter net sales for the thirteen week period ended February 2, 2008 were $1.229 billion, up 7.9% versus net sales of $1.139 billion for the fourteen week period ended February 3, 2007. The net sales increase was attributed primarily to the net addition of 91 stores and a 46.8% increase in direct-to-consumer business (including shipping and handling revenue), partially offset by an extra selling week in the fourth quarter of Fiscal 2006 and the resulting impact of the calendar shift in Fiscal 2007 due to Fiscal 2006 being a 53-week fiscal year, as well as a 1% decrease in comparable store sales.

 

Comparable store sales by brand for the fourth quarter of Fiscal 2007 were as follows: Abercrombie & Fitch increased 1% with men’s comparable store sales increasing by a low double-digit and women’s decreasing by a mid single-digit; abercrombie decreased 3% with boys’ increasing by a mid single-digit and girls’ decreasing by a mid single-digit; Hollister decreased 2% with dudes’ increasing by a high single-digit and bettys’ decreasing by a mid single-digit; and RUEHL decreased 19% with men’s decreasing by a high single-digit and women’s decreasing by the high twenties.

 

Comparable regional store sales ranged from increases in the high teens to decreases in the mid single-digits. Stores located in Canada and the Southwest and North Atlantic regions had the strongest comparable

store sales performance, while stores located in the South, Midwest and West regions had the weakest comparable store sales performance on a consolidated basis.

 

From a merchandise classification standpoint across all brands, stronger performing masculine categories included graphic tees, fragrance and fleece, while pants, jeans and knits posted negative comparable sales. In the feminine businesses, across all brands, stronger performing categories included graphics tees, jeans and sweaters, while knits and fleece posted negative comparable sales.

 

Direct-to-consumer net merchandise sales, which are sold through the Company’s websites and catalogue, in the fourth quarter of Fiscal 2007 were $108.6 million, an increase of 45.2% versus the previous year’s fourth quarter net merchandise sales of $74.8 million. Shipping and handling revenue for the corresponding periods was $15.6 million in Fiscal 2007 and $9.8 million in Fiscal 2006. The direct-to-consumer business, including shipping and handling revenue, accounted for 10.1% of total net sales in the fourth quarter of Fiscal 2007 compared to 7.4% in the fourth quarter of Fiscal 2006. The increase was driven by store expansion, both domestically and internationally, improved in-stock inventory availability, an improved targeted e-mail marketing strategy and improved website functionality.

 

Gross Profit

 

Gross profit during the fourth quarter of Fiscal 2007 was $825.6 million compared to $755.6 million for the comparable period in Fiscal 2006. The gross profit rate for the fourth quarter of Fiscal 2007 was 67.2%, up 80 basis points from the fourth quarter of Fiscal 2006 rate of 66.4%. The increase in gross profit rate can be attributed to both a higher IMU rate and a lower shrink rate compared to the fourth quarter of Fiscal 2006, partially offset by a higher markdown rate.

 

Stores and Distribution Expense

 

Stores and distribution expense for the fourth quarter of Fiscal 2007 was $388.4 million compared to $349.8 million for the comparable period in Fiscal 2006. The stores and distribution expense rate for the fourth quarter of Fiscal 2007 was 31.6%, up 90 basis points from 30.7% in the fourth quarter of Fiscal 2006. The increase in rate was primarily related to the impact of minimum wage and management salary increases and higher store fixed cost rates.

 

Marketing, General and Administrative Expense

 

Marketing, general and administrative expense during the fourth quarter of Fiscal 2007 was $103.2 million compared to $101.6 million during the same period in Fiscal 2006. For the fourth quarter of Fiscal 2007, the marketing, general and administrative expense rate was 8.4% compared to 8.9% in the fourth quarter of Fiscal 2006. The decrease in the marketing, general and administrative expense rate was a result of lower travel, samples and outside service expense rates, partially offset by an increase in the home office payroll expense rate.

 

Other Operating Income, Net

 

Fourth quarter net other operating income for Fiscal 2007 was $3.0 million compared to $4.6 million for the fourth quarter of Fiscal 2006. The decrease was driven primarily by losses on foreign currency transactions in the fourth quarter of Fiscal 2007 as compared to gains on foreign currency transactions in the fourth quarter of Fiscal 2006.

Operating Income

 

Operating income during the fourth quarter of Fiscal 2007 increased to $337.1 million from $308.8 million for the comparable period in Fiscal 2006, an increase of 9.2%. The operating income rate for the fourth quarter of Fiscal 2007 was 27.4% compared to 27.1% for the fourth quarter of Fiscal 2006.

 

Interest Income, Net and Income Taxes

 

Fourth quarter net interest income was $6.4 million in Fiscal 2007 compared to $4.7 million during the comparable period in Fiscal 2006. The increase in net interest income was due to higher interest rates and higher available investment balances during the fourth quarter of Fiscal 2007 when compared to the fourth quarter of Fiscal 2006.

 

The effective tax rate for the fourth quarter of Fiscal 2007 was 36.9% as compared to 36.8% for the Fiscal 2006 comparable period.

 

Net Income and Net Income per Share

 

Net income for the fourth quarter of Fiscal 2007 was $216.8 million versus $198.2 million for the fourth quarter of Fiscal 2006, an increase of 9.4%. Net income per diluted weighted-average share outstanding for the fourth quarter of Fiscal 2007 was $2.40, versus $2.14 for the Fiscal 2006 comparable period, an increase of 12.2%.

 

FISCAL 2007 RESULTS

 

Net Sales

 

Net sales for Fiscal 2007 were $3.750 billion, an increase of 13.0% versus Fiscal 2006 net sales of $3.318 billion. The net sales increase was attributed to the combination of the net addition of 91 stores and a 50% increase in direct-to-consumer business (including shipping and handling revenue), partially offset by a 1% comparable store sales decrease and a fifty-three week year in Fiscal 2006 versus a fifty-two week year in Fiscal 2007.

 

For Fiscal 2007, comparable store sales by brand were as follows: Abercrombie & Fitch and abercrombie comparable sales were flat; Hollister decreased 2%; and RUEHL decreased 9%. In addition, the women’s, girls’ and bettys’ businesses continued to be more significant than the men’s, boys’ and dudes’. During Fiscal 2007, women’s, girls and bettys represented at least 60% of the net sales for each of their corresponding brands.

 

Direct-to-consumer merchandise net sales in Fiscal 2007 were $258.9 million, an increase of 49% versus Fiscal 2006 net merchandise sales of $174.1 million. Shipping and handling revenue was $39.1 million in Fiscal 2007 and $24.9 million in Fiscal 2006. The direct-to-consumer business, including shipping and handling revenue, accounted for 8.0% of total net sales in Fiscal 2007 compared to 6.0% of total net sales in Fiscal 2006. The increase was driven by store expansion, both domestically and internationally, improved in-stock inventory availability, an improved targeted e-mail marketing strategy and improved website functionality.

Gross Profit

 

For Fiscal 2007, gross profit increased to $2.511 billion from $2.209 billion in Fiscal 2006. The gross profit rate for Fiscal 2007 was 67.0% versus 66.6% the previous year, an increase of 40 basis points. The increase in the gross profit rate was driven primarily by a higher IMU rate and a lower shrink rate in the fourth quarter of Fiscal 2007, partially offset by a higher markdown rate.

 

Stores and Distribution Expense

 

Stores and distribution expense for Fiscal 2007 was $1.387 billion compared to $1.187 billion for Fiscal 2006. For Fiscal 2007, the stores and distribution expense rate was 37.0% compared to 35.8% in the previous year. The increase in rate resulted primarily from store payroll, including minimum wage and store manager salary increases, higher store fixed cost rates and store packaging and supply expenses.

 

Marketing, General and Administrative Expense

 

Marketing, general and administrative expense during Fiscal 2007 was $395.8 million compared to $373.8 million in Fiscal 2006. For Fiscal 2007, the marketing, general and administrative expense rate was 10.6%, a decrease of 70 basis points compared to Fiscal 2006’s rate of 11.3%. The decrease in rate resulted from reductions in travel, samples and outside services expense rates, partially offset by the increase in payroll expense rate.

 

Other Operating Income, Net

 

Other operating income for Fiscal 2007 was $11.7 million compared to $10.0 million for Fiscal 2006. The increase was primarily related to gift cards for which the Company determined the likelihood of redemption to be remote, partially offset by decreases in gains related to foreign currency transactions. The comparable period in Fiscal 2006 included other operating income related to insurance reimbursements for a fire-damaged store and a store damaged by Hurricane Katrina.

 

Operating Income

 

Fiscal 2007 operating income was $740.5 million compared to $658.1 million for Fiscal 2006, an increase of 12.5%. The operating income rate for Fiscal 2007 was 19.7% versus 19.8% in the previous year.

 

Interest Income, Net and Income Taxes

 

Net interest income for Fiscal 2007 was $18.8 million compared to $13.9 million for Fiscal 2006. The increase in net interest income was due to higher interest rates and higher available investment balances during Fiscal 2007 compared to Fiscal 2006.

 

The effective tax rate for Fiscal 2007 was 37.4% compared to 37.2% for Fiscal 2006.

 

Net Income and Net Income per Share

 

Net income for Fiscal 2007 was $475.7 million versus $422.2 million in Fiscal 2006, an increase of 12.7%. Net income per diluted weighted-average share was $5.20 in Fiscal 2007 versus $4.59 in Fiscal 2006, an increase of 13.3%.

FINANCIAL CONDITION

 

Liquidity and Capital Resources

 

The Company had $522.1 million in cash and equivalents available as of January 31, 2009, as well as an additional $350 million available (less outstanding letters of credit) under its unsecured credit agreement, as described in Note 13, “Debt” of the Notes to Consolidated Financial Statements in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K. In addition, on March 6, 2009, the Company entered into a secured, uncommitted, demand line of credit offered under the settlement agreement entered into by the Company and UBS AG (“UBS”), a Swiss corporation, relating to Auction Rate Securities (“ARS”) with a par value of approximately $76.5 million as of January 31, 2009. As of March 6, 2009, the Company could borrow $44.3 million under this agreement. The amount available to the Company fluctuates with the fair value of the related ARS.

 

A summary of the Company’s working capital (current assets less current liabilities) and capitalization at the end of each of the last three fiscal years follows (thousands):

 

 

 

 

The increase in working capital for Fiscal 2008 as compared to Fiscal 2007 was the result of cash generated from operations and the $100.0 million borrowed under the Company’s unsecured credit agreement, partially offset by the reclassification of ARS from current assets to non-current assets and cash used to fund capital expenditures and dividends. The increase in working capital in Fiscal 2007 as compared to Fiscal 2006 was the result of higher cash and ARS, resulting primarily from cash generated from operations, partially offset by capital expenditures for expansion, share repurchases and dividends paid.

 

The ARS have maturities ranging from 10 to 34 years. Despite the underlying long-term maturity of the ARS, such securities have been historically priced and subsequently traded as short-term investments because of an interest-rate reset feature, which reset through a Dutch auction process at predetermined periods ranging from seven to 35 days. Due to the frequent nature of the reset feature, ARS were classified as current assets and reported at par, which approximated fair value. As of February 2, 2008, $530.5 million of ARS were classified as current assets on the Consolidated Balance Sheet.

 

On February 13, 2008, the Company began to experience failed auctions. Based on the failure rate of these auctions, the frequency of the failures and the overall lack of liquidity in the ARS market, the Company determined that the ARS should be classified as non-current assets on the Consolidated Balance Sheets for periods ending subsequent to February 13, 2008 and that the fair value of the ARS no longer approximated par value. As of January 31, 2009, $229.1 million of ARS were classified as non-current assets on the Consolidated Balance Sheet.

 

On November 13, 2008, the Company entered into an agreement with UBS, relating to ARS with a par value of approximately $76.5 million (“UBS ARS”) as of January 31, 2009. By entering into the agreement, UBS received the right to purchase these UBS ARS at par, commencing on November 13, 2008. The

Company received a right to sell the UBS ARS back to UBS at par (“Put Option”), at the Company’s sole discretion, commencing on June 30, 2010.

 

The Company considers the following to be measures of its liquidity and capital resources for the last three fiscal years:

 

 

 

 

Operating Activities

 

Net cash provided by operating activities, the Company’s primary source of liquidity, decreased to $490.8 million for Fiscal 2008 from $817.5 million in Fiscal 2007. In Fiscal 2008, the decrease in cash from operations compared to Fiscal 2007 was driven by a decrease in net income, as well as increased inventory on-hand at the end of the year. In Fiscal 2007, the increase in cash from operations compared to Fiscal 2006 was driven by increased net income and decreased inventory on-hand at the end of the year.

 

The Company’s operations are seasonal and typically peak during the Back-to-School and Holiday selling periods. Accordingly, cash requirements for inventory expenditures are typically highest in the second and third fiscal quarters as the Company builds inventory in anticipation of these selling periods.

 

Investing Activities

 

Cash outflows from investing activities in Fiscal 2008 were for capital expenditures related primarily to new store construction, store remodels and refreshes, information technology and purchases of marketable securities. Cash inflows from investing activities were generated by sales of marketable securities.

 

Cash outflows for Fiscal 2007 were primarily for purchases of marketable securities and trust-owned life insurance policies, and capital expenditures related primarily to new store construction; store remodels and refreshes; the purchase of an airplane; and other various store, home office and DC projects, partially offset by proceeds from the sale of marketable securities.

 

Cash outflows for Fiscal 2006 were primarily for purchases of marketable securities, the purchase of trust-owned life insurance policies and capital expenditures. Cash inflows from investing activities were generated by sales of marketable securities.

 

Financing Activities

 

Cash outflows related to financing activities consisted primarily of the repurchase of the Company’s Common Stock and the payment of dividends in Fiscal 2008 and Fiscal 2007. In Fiscal 2006, cash outflows for financing activities related primarily to the payment of dividends and a change in outstanding checks. Cash inflows in Fiscal 2008 primarily related to proceeds from the borrowing under the Company’s unsecured credit agreement and proceeds from share-based compensation and the related excess tax benefits. Fiscal 2007 and Fiscal 2006 cash inflows consisted primarily of proceeds from share-based compensation and the

related excess tax benefits. The Board of Directors will review the Company’s cash position and results of operations and address the appropriateness of future dividend amounts.

 

During Fiscal 2008, A&F repurchased approximately 0.7 million shares of A&F’s Common Stock with a value of approximately $50.0 million. During Fiscal 2007, A&F repurchased approximately 3.6 million shares of A&F’s Common Stock with a value of approximately $287.9 million. A&F did not repurchase any shares of A&F’s Common Stock during Fiscal 2006. Both the Fiscal 2008 and Fiscal 2007 repurchases were pursuant to A&F Board of Directors’ authorizations.

 

As of January 31, 2009, A&F had approximately 11.3 million shares available for repurchase as part of the August 15, 2005 and November 20, 2007 A&F Board of Directors’ authorizations to repurchase 6.0 million shares and 10.0 million shares, respectively, of A&F’s Common Stock.

 

The Company had $100.0 million outstanding under its unsecured credit agreement on January 31, 2009 and no borrowings outstanding under the credit agreement then in effect on February 2, 2008. The average interest rate for the fifty-two weeks ended January 31, 2009 was 3.1%. As of January 31, 2009, the Company had an additional $350 million available (less outstanding letters of credit) under its unsecured credit agreement. The unsecured credit agreement requires that the Leverage Ratio (as defined in the unsecured credit agreement) not be greater than 3.75 to 1.00 at any time. The Company’s Leverage Ratio was 2.13 as of January 31, 2009. The unsecured credit agreement also requires that the Coverage Ratio (as defined in the unsecured credit agreement) for A&F and its subsidiaries on a consolidated basis of (i) consolidated earnings before interest, taxes, depreciation, amortization and rent (“Consolidated EBITDAR”) for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination, and (z) the sum of minimum rent and contingent store rent, not be less than 2.00 to 1.00 at any time. The Company’s Coverage Ratio was 3.49 as of January 31, 2009. The unsecured credit agreement is more fully described in Note 13, “Debt” of the Consolidated Financial Statements in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K.

 

Trade letters of credit totaling approximately $21.1 million and $61.6 million were outstanding on January 31, 2009 and February 2, 2008, respectively. Standby letters of credit totaling approximately $16.9 million and $14.5 million were outstanding on January 31, 2009 and February 2, 2008, respectively. The standby letters of credit are set to expire primarily during the fourth quarter of Fiscal 2009. To date, no beneficiary has drawn upon the standby letters of credit.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not have any off-balance sheet arrangements or debt obligations.

CONTRACTUAL OBLIGATIONS

 

As of January 31, 2009, the Company’s contractual obligations were as follows:

 

 

Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases. See Note 9, “Leased Facilities and Commitments”, of the Notes to Consolidated Financial Statements, located in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENARY DATA” of this Annual Report on Form 10-K, for further discussion. Operating lease obligations do not include common area maintenance (“CAM”), insurance, marketing or tax payments for which the Company is also obligated. Total expense related to CAM, insurance, marketing and taxes was $146.1 million in Fiscal 2008. The purchase obligations category represents purchase orders for merchandise to be delivered during Spring 2009 and commitments for fabric expected to be used during upcoming seasons. Other obligations primarily represent letters of credit outstanding as of January 31, 2009, lease deposits and preventive maintenance and information technology contracts for Fiscal 2009. See Note 13, “Debt”, of the Notes to Consolidated Financial Statements, located in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K, for further discussion on the letters of credit.

 

The obligations in the table above do not include the payment of principal with respect to the outstanding long-term debt of $100.0 million under the Company’s unsecured credit agreement as the Company is unable to estimate the timing of the payment. The table also does not include payments of interest under the terms of the unsecured credit agreement as the Company is unable to determine the amount of these payments due to the variable interest rate and timing of the principal payment. The interest rate at January 31, 2009 was 2.70%. The payment of the $100.0 million in principal outstanding and the related interest would not extend beyond April 12, 2013, the expiration date of the unsecured credit agreement. Unrecognized tax benefits at January 31, 2009 of $44.0 million are also excluded. Additionally, the table above does not include retirement benefits for the Company’s Chief Executive Officer at January 31, 2009 of $11.5 million due under the Chief Executive Officer Supplemental Executive Retirement Plan (the “SERP”). See Note 15, “Retirement Benefits”, of the Notes to Consolidated Financial Statements, located in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENARY DATA”, of this Annual Report on Form 10-K and the description of the SERP in the text under the caption “EXECUTIVE OFFICER COMPENSATION” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 2009, incorporated by reference in “ITEM 11. EXECUTIVE COMPENSATION” of this Annual Report on Form 10-K.

STORES AND GROSS SQUARE FEET

 

Store count and gross square footage by brand were as follows for the thirteen weeks ended January 31, 2009 and February 2, 2008, respectively:

 

 

Store count and gross square footage by brand were as follows for the fifty-two weeks ended January 31, 2009 and February 2, 2008, respectively: