10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number 1-12107
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
     
Delaware   31-1469076
     
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
6301 Fitch Path, New Albany, Ohio 43054
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).) þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class A Common Stock   Outstanding at December 2, 2011
     
$.01 Par Value   85,960,568 Shares
 
 

 

 


 

ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
         
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 Exhibit 3.2
 Exhibit 15
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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PART I. FINANCIAL INFORMATION
ITEM 1.  
FINANCIAL STATEMENTS
ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Thousands, except share and per share amounts)
(Unaudited)
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    October 29, 2011     October 30, 2010     October 29, 2011     October 30, 2010  
NET SALES
  $ 1,075,856     $ 885,778     $ 2,829,292     $ 2,319,381  
Cost of Goods Sold
    429,334       321,346       1,056,067       838,186  
 
                       
GROSS PROFIT
    646,522       564,432       1,773,225       1,481,195  
Stores and Distribution Expense
    461,683       385,135       1,286,108       1,104,027  
Marketing, General and Administrative Expense
    107,844       102,612       325,493       294,450  
Other Operating Income, Net
    (2,855 )     (1,692 )     (4,146 )     (4,507 )
 
                       
OPERATING INCOME
    79,850       78,377       165,770       87,225  
Interest Expense, Net
    533       671       2,469       2,303  
 
                       
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
    79,317       77,706       163,301       84,922  
Tax Expense from Continuing Operations
    28,412       27,666       56,019       27,232  
 
                       
NET INCOME FROM CONTINUING OPERATIONS
  $ 50,905     $ 50,040     $ 107,282     $ 57,690  
 
                       
INCOME FROM DISCONTINUED OPERATIONS, Net of Tax
  $     $     $ 796     $  
 
                       
NET INCOME
  $ 50,905     $ 50,040     $ 108,078     $ 57,690  
 
                       
NET INCOME PER SHARE FROM CONTINUING OPERATIONS:
                               
BASIC
  $ 0.59     $ 0.57     $ 1.23     $ 0.65  
 
                       
DILUTED
  $ 0.57     $ 0.56     $ 1.19     $ 0.64  
 
                       
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS:
                               
BASIC
  $     $     $ 0.01     $  
 
                       
DILUTED
  $     $     $ 0.01     $  
 
                       
NET INCOME PER SHARE:
                               
BASIC
  $ 0.59     $ 0.57     $ 1.24     $ 0.65  
 
                       
DILUTED
  $ 0.57     $ 0.56     $ 1.20     $ 0.64  
 
                       
WEIGHTED-AVERAGE SHARES OUTSTANDING:
                               
BASIC
    86,962       88,236       87,170       88,184  
DILUTED
    89,707       90,069       90,167       89,731  
 
                       
DIVIDENDS DECLARED PER SHARE
  $ 0.175     $ 0.175     $ 0.525     $ 0.525  
 
                       
OTHER COMPREHENSIVE INCOME
                               
Foreign Currency Translation Adjustments
  $ (6,012 )   $ 8,866     $ 10,492     $ 6,631  
Gain (Loss) on Marketable Securities, net of taxes of $513 and $543 for the thirteen-week periods ended October 29, 2011 and October 30, 2010, respectively, and $(444) and $(1,422) for the thirty-nine week periods ended October 29, 2011 and October 30, 2010, respectively
    (873 )     (925 )     757       2,421  
Unrealized gain (loss) on derivative financial instruments, net of taxes of $(589) and $1,170 for the thirteen-week periods ended October 29, 2011 and October 30, 2010, respectively and $(326) and $846 for the thirty-nine week periods ended October 29, 2011 and October 30, 2010
    2,914       (1,991 )     2,467       (1,438 )
 
                               
Other Comprehensive Income (Loss)
  $ (3,971 )   $ 5,950     $ 13,716     $ 7,614  
 
                       
COMPREHENSIVE INCOME
  $ 46,934     $ 55,990     $ 121,794     $ 65,304  
 
                       
The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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ABERCROMBIE & FITCH CO.
CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
(Unaudited)
                 
    October 29, 2011     January 29, 2011  
ASSETS
               
 
               
CURRENT ASSETS:
               
Cash and Equivalents
  $ 488,341     $ 826,353  
Receivables
    89,622       81,264  
Inventories
    679,341       385,857  
Deferred Income Taxes
    55,059       60,405  
Other Current Assets
    86,518       79,389  
 
           
TOTAL CURRENT ASSETS
    1,398,881       1,433,268  
 
               
PROPERTY AND EQUIPMENT, NET
    1,237,430       1,144,940  
 
               
NON-CURRENT MARKETABLE SECURITIES
    100,334       100,534  
 
               
OTHER ASSETS
    344,876       269,160  
 
           
 
               
TOTAL ASSETS
  $ 3,081,521     $ 2,947,902  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
CURRENT LIABILITIES:
               
Accounts Payable
  $ 281,775     $ 137,235  
Accrued Expenses
    311,693       306,587  
Deferred Lease Credits
    43,181       41,538  
Income Taxes Payable
    43,301       73,491  
 
           
TOTAL CURRENT LIABILITIES
    679,950       558,851  
 
               
LONG-TERM LIABILITIES:
               
Deferred Income Taxes
    34,833       33,515  
Deferred Lease Credits
    192,130       192,619  
Long-Term Debt
    26,321       68,566  
Other Liabilities
    217,057       203,567  
 
           
TOTAL LONG-TERM LIABILITIES
    470,341       498,267  
 
               
STOCKHOLDERS’ EQUITY:
               
Class A Common Stock — $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of October 29, 2011 and January 29, 2011
    1,033       1,033  
Paid-In Capital
    357,593       349,258  
Retained Earnings
    2,325,452       2,272,317  
Accumulated Other Comprehensive Income (Loss), net of tax
    7,200       (6,516 )
Treasury Stock, at Average Cost - 16,142 and 16,054 shares at October 29, 2011 and January 29, 2011, respectively
    (760,048 )     (725,308 )
 
           
TOTAL STOCKHOLDERS’ EQUITY
    1,931,230       1,890,784  
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 3,081,521     $ 2,947,902  
 
           
The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
                 
    Thirty-Nine Weeks Ended  
    October 29, 2011     October 30, 2010  
 
               
OPERATING ACTIVITIES:
               
Net Income
  $ 108,078     $ 57,690  
 
               
Impact of Other Operating Activities on Cash Flows:
               
Lessor Construction Allowances
    30,976       26,769  
Depreciation and Amortization
    173,569       167,756  
Loss on Disposal / Write-off of Assets
    5,128       2,702  
Amortization of Deferred Lease Credits
    (33,019 )     (34,744 )
Share-Based Compensation
    38,089       30,136  
Tax Benefit (Deficiency) from Share-Based Compensation
    3,031       (1,770 )
Deferred Taxes
    6,623       (23,135 )
Non-Cash Charge for Asset Impairment
          2,247  
Changes in Assets and Liabilities:
               
Inventories
    (292,839 )     (200,362 )
Accounts Payable and Accrued Expenses
    102,741       28,877  
Income Taxes
    (30,209 )     47,731  
Other Assets and Liabilities
    (47,712 )     (51,375 )
 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES
    64,457       52,522  
 
               
INVESTING ACTIVITIES:
               
Capital Expenditures
    (227,574 )     (116,965 )
Purchase of Trust-Owned Life Insurance Policies
          (11,583 )
Proceeds from Sales of Marketable Securities
    1,700       64,917  
Other Investing
    (22,267 )      
 
           
NET CASH USED FOR INVESTING ACTIVITIES
    (248,141 )     (63,631 )
 
           
 
               
FINANCING ACTIVITIES:
               
Proceeds from Share-Based Compensation
    33,779       5,985  
Purchase of Treasury Stock
    (98,703 )     (29,207 )
Repayments of Borrowings Under the Credit Agreement
    (45,002 )      
Change in Outstanding Checks and Other
    (1,083 )     (7,356 )
Dividends Paid
    (45,847 )     (46,285 )
 
           
NET CASH USED FOR FINANCING ACTIVITIES
    (156,856 )     (76,863 )
 
               
EFFECT OF EXCHANGE RATES ON CASH
    2,528       1,150  
 
           
 
               
NET DECREASE IN CASH AND EQUIVALENTS:
    (338,012 )     (86,822 )
Cash and Equivalents, Beginning of Period
    826,353       680,113  
 
           
 
               
CASH AND EQUIVALENTS, END OF PERIOD
  $ 488,341       593,291  
 
           
 
               
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
               
Change in Accrual for Construction in Progress
  $ 31,593       17,479  
 
           
The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. (“A&F”), through its wholly-owned subsidiaries (collectively, A&F and its wholly-owned subsidiaries are referred to as the “Company”), is a specialty retailer of high-quality, casual apparel for men, women and kids with an active, youthful lifestyle.
The accompanying Consolidated Financial Statements include the historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2011” represent the 52-week fiscal year that will end on January 28, 2012, and to “Fiscal 2010” represent the 52-week fiscal year that ended January 29, 2011.
The Consolidated Financial Statements as of October 29, 2011 and for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2010 filed on March 29, 2011. The January 29, 2011 consolidated balance sheet data were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly, in all material respects, the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2011.
Certain prior period amounts have been reclassified to conform to the current year presentation.
The Consolidated Financial Statements as of October 29, 2011 and for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010 included herein have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of such firm follows the notes to the consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the consolidated financial statements because their report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
2. SEGMENT REPORTING
The Company determines its operating segments on the same basis that it uses to evaluate performance internally. Operating segments have been aggregated and are reported as one reportable segment because they have similar economic characteristics and meet the required aggregation criteria. The Company believes its operating segments may be aggregated for financial reporting purposes because they are similar in each of the following areas: class of consumer, economic characteristics, nature of products, nature of production processes, and distribution methods.

 

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Geographic Information
Financial information relating to the Company’s operations by geographic area is as follows:
Net Sales:
Net sales includes net merchandise sales through stores and direct-to-consumer operations, including shipping and handling revenue. Net sales are reported by geographic area based on the location of the customer.
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
(in thousands):   October 29, 2011     October 30, 2010     October 29, 2011     October 30, 2010  
United States
  $ 820,188     $ 721,950     $ 2,146,029     $ 1,903,329  
Europe
    193,566       110,044       528,429       278,142  
Other
    62,102       53,785       154,833       137,910  
 
                       
Total
  $ 1,075,856     $ 885,778     $ 2,829,292     $ 2,319,381  
 
                       
Long-Lived Assets:
                 
(in thousands):   October 29, 2011     January 29, 2011  
United States
  $ 883,731     $ 959,777  
Europe
    335,652       169,313  
Other
    163,324       127,741  
 
           
Total
  $ 1,382,707     $ 1,256,831  
 
           
Long-lived assets in the table above include primarily property and equipment (net), store supplies and lease deposits.
3. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of $13.7 million and $38.1 million for the thirteen and thirty-nine week periods ended October 29, 2011, respectively, and $10.2 million and $30.1 million for the thirteen and thirty-nine week periods ended October 30, 2010, respectively. The Company also recognized $5.1 million and $14.3 million in tax benefits related to share-based compensation expense for the thirteen and thirty-nine week periods ended October 29, 2011, respectively, and $3.7 million and $10.8 million for the thirteen and thirty-nine week periods ended October 30, 2010, respectively.
The fair value of share-based compensation awards is recognized as compensation expense on a straight-line basis over the awards’ requisite service period, net of forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock units or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged to additional paid-in capital, to the extent of the pool of “windfall tax benefits,” with any remainder recognized as tax expense. The amount of the Company’s pool of “windfall tax benefits” was approximately $83.9 million as of October 29, 2011, which is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.

 

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The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures during the thirty-nine weeks ended October 29, 2011 was an expense of $1.3 million. The effect of adjustments for forfeitures during the thirty-nine weeks ended October 30, 2010 was income of $4.1 million.
Pursuant to an employment agreement, the Chairman and Chief Executive Officer (“CEO”) is eligible to receive “semi-annual grants,” as defined in the agreement. The semi-annual grants vest in equal annual installments over the four-year period following the grant date with the condition that each award becomes fully vested no later than February 1, 2014, except for the final semi-annual grant, which will become fully vested on the date of the grant.
A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units. As of October 29, 2011, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and restricted stock units outstanding. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in stockholder-approved plans at the applicable time.
In the event, at any reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the 2005 Long-Term Incentive Plan (the “2005 LTIP”) and the Amended and Restated 2007 Long-Term Incentive Plan (the “Amended and Restated 2007 LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards.
Plans
As of October 29, 2011, A&F had two primary share-based compensation plans: the 2005 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors, and the Amended and Restated 2007 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company. A&F also has four other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors in prior years.
The Amended and Restated 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 2.0 million of underlying shares of A&F’s Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 250,000 of underlying shares of A&F’s Common Stock for each award type to any associate of the Company (other than the CEO) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. In addition, any non-associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans, stock options, stock appreciation rights and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP, restricted stock units typically vest after approximately one year for non-associate directors of A&F. Awards granted to the CEO have a vesting period defined as the shorter of four years or the award date through the end of the employment agreement. Under both plans, stock options have a ten-year term and stock appreciation rights have up to a ten-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control as defined in the plans.

 

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Fair Value Estimates
The Company estimates the fair value of stock options and stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock options and stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock options and stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of A&F’s Common Stock price for the most recent historical period equal to the expected term of the stock option or stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.
In the case of restricted stock units, the Company calculates the fair value of the restricted stock units granted using the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period.
Stock Options
The Company did not grant any stock options during the thirty-nine weeks ended October 29, 2011 or October 30, 2010.
Below is a summary of stock option activity for the thirty-nine weeks ended October 29, 2011:
                                 
    Number of     Weighted-             Weighted-Average  
    Underlying     Average     Aggregate     Remaining  
Stock Options   Shares     Exercise Price     Intrinsic Value     Contractual Life  
Outstanding at January 29, 2011
    2,316,648     $ 39.51                  
Granted
                           
Exercised
    (1,094,103 )     30.94                  
Forfeited or cancelled
    (27,100 )     52.71                  
 
                           
Outstanding at October 29, 2011
    1,195,445     $ 47.06     $ 36,048,435       3.1  
 
                       
 
                               
Stock options exercisable at October 29, 2011
    1,102,395     $ 46.10     $ 34,241,480       2.8  
 
                       
 
                               
Stock options expected to become exercisable in the future as of October 29, 2011
    90,358     $ 58.54     $ 1,746,708       6.6  
 
                       
The total intrinsic value of stock options which were exercised during the thirty-nine weeks ended October 29, 2011 was $38.6 million. The total intrinsic value of stock options exercised during the thirty-nine weeks ended October 30, 2010 was $2.7 million.
The grant date fair value of stock options which vested during the thirty-nine weeks ended October 29, 2011 and October 30, 2010 was $2.3 million and $3.8 million, respectively.

 

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As of October 29, 2011, there was $0.6 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.3 years.
Stock Appreciation Rights
The weighted-average estimated fair value of stock appreciation rights granted during the thirty-nine weeks ended October 29, 2011 and October 30, 2010, and the weighted-average assumptions used in calculating such fair value, on the date of grant, were as follows:
                                                 
    Thirty-Nine Weeks Ended  
    Chairman and Chief Executive              
    Officer     Other Executive Officers     All Other Associates  
    October 29,     October 30,     October 29,     October 30,     October 29,     October 30,  
    2011     2010     2011     2010     2011     2010  
Grant date market price
  $ 56.86     $ 44.86     $ 54.87     $ 44.86     $ 54.93     $ 44.28  
Exercise price
  $ 56.86     $ 44.86     $ 54.87     $ 44.86     $ 54.93     $ 44.28  
Fair value
  $ 22.99     $ 16.96     $ 22.29     $ 16.99     $ 21.89     $ 16.49  
Assumptions:
                                               
Price volatility
    53 %     50 %     53 %     51 %     55 %     53 %
Expected term (Years)
    4.6       4.7       4.7       4.5       4.1       4.1  
Risk-free interest rate
    1.8 %     2.3 %     2.0 %     2.3 %     1.7 %     2.0 %
Dividend yield
    1.5 %     2.1 %     1.6 %     2.1 %     1.6 %     2.1 %
Below is a summary of stock appreciation rights activity for the thirty-nine weeks ended October 29, 2011:
                                 
    Number of                     Weighted-Average  
    Underlying     Weighted-Average     Aggregate     Remaining  
Stock Appreciation Rights   Shares     Exercise Price     Intrinsic Value     Contractual Life  
Outstanding at January 29, 2011
    7,136,189     $ 34.08                  
Granted:
                               
Chairman and Chief Executive Officer
    1,879,195       56.86                  
Other Executive Officers
    217,000       54.87                  
All Other Associates
    156,700       54.93                  
Exercised
    (287,600 )     32.99                  
Forfeited or cancelled
    (54,375 )     41.14                  
 
                           
Outstanding at October 29, 2011
    9,047,109     $ 39.66     $ 336,075,490       5.4  
 
                       
Stock appreciation rights exercisable at October 29, 2011
    853,157     $ 36.84     $ 34,103,192       5.5  
 
                       
Stock appreciation rights expected to become exercisable in the future as of October 29, 2011
    8,090,112     $ 39.89     $ 298,673,670       5.3  
 
                       
The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended October 29, 2011 was $11.0 million. The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended October 30, 2010 was immaterial.

 

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The grant date fair value of stock appreciation rights which vested during the thirty-nine weeks ended October 29, 2011 and October 30, 2010 was $11.2 million and $5.0 million, respectively.
As of October 29, 2011, there was $73.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.1 years.
Restricted Stock Units
Below is a summary of restricted stock unit activity for the thirty-nine weeks ended October 29, 2011:
                 
    Number of Underlying     Weighted-Average Grant  
Restricted Stock Units   Shares     Date Fair Value  
Non-vested at January 29, 2011
    1,147,754     $ 49.59  
Granted
    558,450       54.38  
Vested
    (393,728 )     59.59  
Forfeited
    (94,848 )     43.26  
 
           
Non-vested at October 29, 2011
    1,217,628     $ 49.01  
 
           
The total fair value of restricted stock units granted during the thirty-nine weeks ended October 29, 2011 and October 30, 2010 was $30.4 million and $17.5 million, respectively.
The total grant date fair value of restricted stock units and restricted shares which vested during the thirty-nine weeks ended October 29, 2011 and October 30, 2010 was $23.5 million.
As of October 29, 2011, there was $39.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.1 years.
4. NET INCOME PER SHARE
Net income per basic share is computed based on the weighted-average number of outstanding shares of Common Stock. Net income per diluted share includes the weighted-average dilutive effect of stock options, stock appreciation rights and restricted stock units outstanding.
Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    October 29, 2011     October 30, 2010     October 29, 2011     October 30, 2010  
Shares of Common Stock issued
    103,300       103,300       103,300       103,300  
Treasury shares
    (16,338 )     (15,064 )     (16,130 )     (15,116 )
 
                       
Weighted-Average — Basic Shares
    86,962       88,236       87,170       88,184  
 
                               
Dilutive effect of stock options, stock appreciation rights and restricted stock units
    2,745       1,833       2,997       1,547  
 
                       
Weighted-Average — Diluted Shares
    89,707       90,069       90,167       89,731  
 
                       
 
                               
Anti-Dilutive Shares
    2,403 (1)     5,271 (1)     2,137 (1)     5,098 (1)
 
                       
 
     
(1)  
Reflects the number of stock options, stock appreciation rights and restricted stock units outstanding, but excluded from the computation of net income per diluted share because the impact would be anti-dilutive.

 

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5. CASH AND EQUIVALENTS
Cash and equivalents consisted of (in thousands):
                 
    October 29, 2011     January 29, 2011  
 
               
Cash and equivalents:
               
Cash
  $ 317,603     $ 300,624  
Cash equivalents
    170,738       525,729  
 
           
Total cash and equivalents
  $ 488,341     $ 826,353  
 
           
Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, with original maturities of less than three months. Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $31.7 million on October 29, 2011 and $26.3 million on January 29, 2011. Restricted cash includes various cash deposits with international banks that are used as collateralization for customary non-debt banking commitments and deposits into trust accounts to conform with standard insurance security requirements.
6. INVESTMENTS
Investments consisted of (in thousands):
                 
    October 29, 2011     January 29, 2011  
Marketable securities — Non-Current:
               
Available-for-sale securities:
               
Auction rate securities — student loan backed
  $ 84,897     $ 85,732  
Auction rate securities — municipal authority bonds
    15,437       14,802  
 
           
Total available-for-sale securities
    100,334       100,534  
 
               
Rabbi Trust assets: (1)
               
Money market funds
    774       343  
Municipal notes and bonds
    11,572       11,870  
Trust-owned life insurance policies (at cash surrender value)
    72,472       70,288  
 
           
Total Rabbi Trust assets
    84,818       82,501  
 
           
Total Investments
  $ 185,152     $ 183,035  
 
           
 
     
(1)  
Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use.
At October 29, 2011, the Company’s investment grade auction rate securities (“ARS”) consisted of insured student loan backed securities and municipal authority bonds, with maturities ranging from 17 to 32 years. Each investment in student loans is insured by (1) the U.S. government under the Federal Family Education Loan Program, (2) a private insurer or (3) a combination of both. The percentage of insurance coverage of the outstanding principal and interest of the ARS varies by security.

 

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The par and carrying values, and related cumulative temporary impairment charges for the Company’s available-for-sale marketable securities as of October 29, 2011 were as follows:
                         
            Temporary     Carrying  
(in thousands)   Par Value     Impairment     Value  
 
                       
Available-for-sale securities:
                       
Auction rate securities — student loan backed
  $ 93,925     $ (9,028 )   $ 84,897  
Auction rate securities — municipal authority bonds
    19,975       (4,538 )     15,437  
 
                 
Total available-for-sale securities
  $ 113,900     $ (13,566 )   $ 100,334  
 
                 
See Note 7, “Fair Value,” for further discussion on the valuation of the ARS.
An impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis, even if there is no intent to sell the security. The Company has not incurred any credit-related losses on available-for-sale ARS and, furthermore, the issuers continued to perform under their respective obligations, including making scheduled interest payments, and the Company expects that this will continue going forward.
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement Plan. The Rabbi Trust assets are consolidated and recorded at fair value, with the exception of the trust-owned life insurance policies which are recorded at cash surrender value. The Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use as noted above. Net unrealized gains and losses related to the municipal notes and bonds held in the Rabbi Trust were not material for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in a realized gain of $0.7 million for both the thirteen weeks ended October 29, 2011 and October 30, 2010 and realized gains of $2.2 million and $1.8 million for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively, recorded as part of Interest Expense, Net on the Consolidated Statements of Operations and Comprehensive Income.
7. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
   
Level 1 — inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets.
   
Level 2 — inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
   
Level 3 — inputs to the valuation methodology are unobservable.

 

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The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities, measured at fair value, within it were as follows:
                                 
    Assets and Liabilities at Fair Value as of October 29, 2011  
    (in thousands)  
    Level 1     Level 2     Level 3     Total  
ASSETS:
                               
Money market funds(1)
  $ 171,513     $     $     $ 171,513  
ARS — available-for-sale — student loan backed
                84,897       84,897  
ARS — available-for-sale — municipal authority bonds
                15,437       15,437  
Municipal notes and bonds held in the Rabbi Trust
    11,572                   11,572  
Derivative financial instruments
          1,457             1,457  
 
                       
Total assets measured at fair value
  $ 183,085     $ 1,457     $ 100,334     $ 284,876  
 
                       
LIABILITIES:
                               
Derivative financial instruments
          922             922  
 
                       
Total liabilities measured at fair value
  $     $ 922     $     $ 922  
 
                       
 
     
(1)  
Includes $170.7 million of money market funds included in Cash and Equivalents and $0.8 million of money market funds held in the Rabbi Trust included in Other Assets on the Consolidated Balance Sheet.
The level 2 liabilities consist of derivative financial instruments, primarily forward foreign exchange contracts. The fair value of forward foreign exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
The level 3 assets include investments in insured student loan backed ARS and insured municipal authority bond ARS which are available-for-sale.
The Company measures the fair value of its ARS primarily using a discounted cash flow model as well as a comparison to similar securities in the market. Certain significant inputs into the model are unobservable in the market including the periodic coupon rate, market rate of return and expected term.
As of October 29, 2011, approximately 47% of the Company’s ARS were “AAA” rated, approximately 20% were “AA” rated, and approximately 33% were “A-” rated, in each case as rated by one or more of the major credit rating agencies.
The table below includes a roll-forward of the Company’s level 3 assets and liabilities from January 29, 2011 to October 29, 2011. When a determination is made to classify an asset or liability within level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for level 3 financial assets and liabilities may include observable components.
                         
    Available-for-sale              
    ARS - Student     Available-for-sale        
(in thousands)   Loans     ARS - Muni Bonds     Total  
Fair value, January 29, 2011
  $ 85,732     $ 14,802     $ 100,534  
Redemptions
    (1,700 )             (1,700 )
Gains and (losses), net:
                       
Reported in Other Comprehensive Income
    865       635       1,500  
 
                 
Fair value, October 29, 2011
  $ 84,897     $ 15,437     $ 100,334  
 
                 

 

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8. INVENTORIES
Inventories are principally valued at the lower of average cost or market utilizing the retail method. The Company determines market value as the anticipated future selling price of the merchandise less a normal margin. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost components of inventory on-hand so as to maintain the already established cost-to-retail relationship. At first and third fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the expected future markdowns on current season inventory. At second and fourth fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the expected future markdowns on any remaining carryover inventory from the season then ending. The valuation reserve was $38.1 million, $24.4 million and $34.3 million at October 29, 2011, January 29, 2011 and October 30, 2010, respectively.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. The shrink reserve was $4.4 million, $7.6 million and $2.9 million at October 29, 2011, January 29, 2011 and October 30, 2010, respectively.
The inventory balance, net of the above mentioned reserves, was $679.3 million, $385.9 million and $511.8 million at October 29, 2011, January 29, 2011 and October 30, 2010, respectively.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
                 
    October 29, 2011     January 29, 2011  
Property and equipment, at cost
  $ 2,649,636     $ 2,451,414  
Accumulated depreciation and amortization
    (1,412,206 )     (1,306,474 )
 
           
 
               
Property and equipment, net
  $ 1,237,430     $ 1,144,940  
 
           
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows.
Store-related assets are considered level 3 assets in the fair value hierarchy and the fair values were determined at the store level, primarily using a discounted cash flow model. The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales, gross margin performance and operating expenses. In instances where the discounted cash flow analysis indicated a negative value at the store level, the market exit price based on historical experience was used to determine the fair value by asset type. Included in property and equipment, net, are store-related assets previously impaired and measured at fair value of $10.7 million and $14.6 million, net of accumulated depreciation, as of October 29, 2011 and January 29, 2011, respectively.

 

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10. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective lives of the related leases, consisted of the following (in thousands):
                 
    October 29, 2011     January 29, 2011  
Deferred lease credits
  $ 577,064     $ 544,223  
Amortized deferred lease credits
    (341,753 )     (310,066 )
 
           
Total deferred lease credits, net
  $ 235,311     $ 234,157  
 
           
11. INCOME TAXES
The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the impact of items discrete to the thirteen weeks ended October 29, 2011. The effective tax rate from continuing operations for the thirteen weeks ended October 29, 2011 was 35.8% compared to 35.6% for the thirteen weeks ended October 30, 2010. The effective tax rate from continuing operations for the thirty-nine weeks ended October 29, 2011 was 34.3% compared to 32.1% for the thirty-nine weeks ended October 30, 2010.
Cash payments of income taxes made during the thirteen weeks ended October 29, 2011 and October 30, 2010 were approximately $6.2 million and $11.8 million, respectively. Cash payments of income taxes made during the thirty-nine weeks ended October 29, 2011 and October 30, 2010 were approximately $107.8 million and $29.7 million, respectively.
12. LONG-TERM DEBT
On July 28, 2011, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) under which up to $350 million is available. This Amended and Restated Credit Agreement serves to amend and restate in its entirety the syndicated unsecured credit agreement dated April 15, 2008 as previously amended (the “Prior Credit Agreement”). The primary reasons for entering into this agreement are to extend the termination date from April 12, 2013 to July 27, 2016 and to reduce fees and interest rates. As stated in the Amended and Restated Credit Agreement, the primary purposes of the agreement are for trade and stand-by letters of credit in the ordinary course of business, as well as to fund working capital, capital expenditures, acquisitions and investments, and other general corporate purposes.
The facility fees payable under the Amended and Restated Credit Agreement are based on the Company’s Leverage Ratio (i.e., the ratio, on a consolidated basis, of (a) the sum of total debt (excluding trade letters of credit) plus 600% of forward minimum rent commitments to (b) consolidated earnings, as adjusted, before interest, taxes, depreciation, amortization and rent (“Consolidated EBITDAR”) for the trailing four-consecutive-fiscal-quarter periods. The facility fees accrue at a rate of 0.125% to 0.30% per annum based on the Leverage Ratio for the most recent determination date. The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement also requires that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination and (z) the sum of minimum rent and contingent store rent, not be less than 2.00 to 1.00. The Company was in compliance with the applicable ratio requirements and other covenants at October 29, 2011. Interest rates on borrowings under the Amended and Restated Credit Agreement are generally based upon market rates plus a margin based on the Leverage Ratio.

 

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The terms of the Amended and Restated Credit Agreement include customary events of default such as payment defaults, cross-defaults to other material indebtedness, undischarged material judgments, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation and conduct of the business of A&F and its subsidiaries. Upon an event of default, the lenders will not be obligated to make loans or other extensions of credit and may, among other things, terminate their commitments to the Company, and declare any then outstanding loans due and payable immediately.
The Amended and Restated Credit Agreement will mature on July 27, 2016. The Company had no trade letters of credit outstanding at October 29, 2011 and January 29, 2011. Stand-by letters of credit outstanding, under either the Amended and Restated Credit Agreement or Prior Credit Agreement as applicable, on October 29, 2011 and January 29, 2011 were immaterial.
As of October 29, 2011 the Company did not have any borrowing under the Amended and Restated Credit Agreement and had $43.8 million outstanding under the Prior Credit Agreement as of January 29, 2011. The amounts outstanding under the Prior Credit Agreement were denominated in Japanese Yen and were fully repaid during the thirty-nine weeks ended October 29, 2011.
As of October 29, 2011 and January 29, 2011, the Company also had $26.3 million and $24.8 million, respectively, of long-term debt related to the landlord financing obligation for certain leases where the Company is deemed the owner of the project for accounting purposes, as substantially all of the risk of ownership during construction of a leased property is held by the Company. The landlord financing obligation is amortized over the life of the related lease.
As of October 29, 2011, the carrying value of the Company’s long-term debt approximated fair value. Total interest expense was $1.8 million and $1.9 million for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively, and $6.2 million and $5.7 million for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively. There was no long-term debt recorded under the Amended & Restated Credit Agreement for the thirteen weeks ended October 29, 2011. The average interest rate for the long-term debt that has been previously outstanding under the Prior Credit Agreement was 2.4% for the thirty-nine weeks ended October 29, 2011.
13. DERIVATIVES
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivatives, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
In order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative is not highly effective.

 

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For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded as a component of Other Comprehensive Income (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative’s time value are recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative contract related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated inter-company receivable. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or losses on the foreign exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. As of October 29, 2011, the maximum length of time over which forecasted foreign-currency-denominated inter-company inventory sales were hedged was twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in Accumulated Other Comprehensive Income (Loss). Substantially all of the remaining unrealized gains or losses related to foreign-currency-denominated inter-company inventory sales that have occurred as of October 29, 2011 will be recognized in costs of goods sold over the following two months at the values at the date the inventory was sold to the respective subsidiary.
The Company nets derivative assets and liabilities on the Consolidated Balance Sheets to the extent that master netting arrangements meet the specific accounting requirements set forth by U.S. GAAP.
As of October 29, 2011, the Company had the following outstanding foreign exchange forward contracts that were entered to hedge either a portion or all of forecasted foreign-currency-denominated inter-company inventory sales, the resulting settlement of the foreign-currency-denominated inter-company accounts receivable, or both:
         
    Notional Amount(1)  
Euro
  $ 53,699  
British Pound
  $ 34,001  
Canadian Dollar
  $ 14,853  
 
     
(1)  
Amounts are reported in thousands and in U.S. Dollars equivalent as of October 29, 2011.
The Company also uses foreign exchange forward contracts to hedge certain foreign currency denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables, payables, and debt. Fluctuations in exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instrument and the hedged item.

 

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As of October 29, 2011, the Company had the following outstanding currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:
         
    Notional Amount(1)  
Japanese Yen
  $ 16,921  
Euro
  $ 9,584  
British Pound
  $ 4,706  
 
     
(1)  
Amounts are reported in thousands and in U.S. Dollars equivalent as of October 29, 2011.
The location and amounts of derivative fair values on the Consolidated Balance Sheets as of October 29, 2011 and January 29, 2011 were as follows:
                                         
    Balance Sheet   Asset Derivatives     Balance Sheet   Liability Derivatives  
(in thousands)   Location   October 29, 2011     January 29, 2011     Location   October 29, 2011     January 29, 2011  
Derivatives Designated as Hedging Instruments:
                                       
Foreign Exchange Forward Contracts
  Other Current Assets   $ 1,457     $ 727     Other Liabilities   $ 227     $ 763  
 
                               
 
                                       
Derivates Not Designated as Hedging Instruments:
                                       
Foreign Exchange Forward Contracts
  Other Current Assets   $     $     Other Liabilities   $ 695     $ 380  
 
                               
 
                                       
Total
  Other Current Assets   $ 1,457     $ 727     Other Liabilities   $ 922     $ 1,143  
 
                               
Refer to Note 7, “Fair Value,” for further discussion of the determination of the fair value of derivatives.
The location and amounts of derivative gains and losses for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010 on the Consolidated Statements of Operations and Comprehensive Income were as follows:
                                   
        Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
        October 29,     October 30,     October 29,   October 30,  
        2011     2010     2011   2010  
(in thousands)   Location   Gain/(Loss)     Gain/(Loss)     Gain/(Loss)   Gain/(Loss)  
Derivatives not designated as Hedging Instruments:
                               
Foreign Exchange Forward Contracts
  Other Operating Income, Net   $ (150 )   $ (801 ) $ (1,529)   $ (1,368 )
 
                       

 

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                                        Location of      
                                        Gain (Loss)      
                                        Recognized in      
                    Location of                   Earnings on      
                    Gain (Loss)                   Derivative      
                    Reclassified                   Contracts      
                    from                   (Ineffective      
                    Accumulated                   Portion and   Amount of Gain (Loss)  
    Amount of Gain (Loss)     OCI into   Amount of Gain (Loss)     Amount   Recognized in Earnings on  
    Recognized in OCI on     Earnings   Reclassified from     Excluded from   Derivative Contracts (Ineffective  
    Derivative Contracts     (Effective   Accumulated OCI into     Effectiveness   Portion and Amount Excluded  
    (Effective Portion)     Portion)   Earnings (Effective Portion)     Testing)   from Effectiveness Testing)  
    (a)         (b)         (c)  
    Thirteen Weeks Ended  
    October 29,     October 30,         October 29,     October 30,         October 29,     October 30,  
(in thousands)   2011     2010         2011     2010         2011     2010  
Derivatives in Cash Flow Hedging Relationships
                                                       
 
                                                       
Foreign Exchange Forward Contracts
  $ 2,907     $ (1,574 )   Cost of Goods Sold   $ (596 )   $ 1,587     Other Operating Expense (Income), Net   $ (331 )   $ 27  
 
                                           
                                                         
    Thirty-Nine Weeks Ended  
    October 29,     October 30,         October 29,     October 30,         October 29,     October 30,  
(in thousands)   2011     2010         2011     2010         2011     2010  
Derivatives in Cash Flow Hedging Relationships
                                                       
Foreign Exchange Forward Contracts
  $ 805     $ (94 )   Cost of Goods Sold   $ (1,988 )   $ 2,190     Other Operating Expense (Income), Net   $ (830 )   $ 155  
 
                                           
 
     
(a)  
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
 
(b)  
The amount represents reclassification from OCI into earnings that occurs when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
 
(c)  
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.
14.  
DISCONTINUED OPERATIONS
On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the results of operations of RUEHL are reflected in Income from Discontinued Operations, Net of Tax on the Consolidated Statements of Operations and Comprehensive Income for the thirty-nine weeks ended October 29, 2011 and October 30, 2010. Net income for the thirty-nine weeks ended October 29, 2011, included net income per diluted share of $0.01 from discontinued operations related to the settlement of outstanding lease obligations. Results from discontinued operations for the thirty-nine weeks ended October 30, 2010, were immaterial.

 

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Costs associated with exit or disposal activities are recorded when the liability is incurred. Below is a roll forward from January 29, 2011 of the liabilities recognized on the Consolidated Balance Sheet as of October 29, 2011 related to the closure of RUEHL branded stores and related direct-to-consumer operations (in millions):
         
    Thirty-Nine Weeks Ended  
    October 29, 2011  
Beginning Balance
  $ 17.2  
Interest Accretion / Other, Net(1)
    (1.3 )
Cash Payments
    (15.7 )
 
     
Ending Balance(2)
  $ 0.2  
 
     
 
     
(1)  
Other includes an accrual adjustment related to the settlement of outstanding lease obligations.
 
(2)  
Ending balance reflects the obligations due under signed lease termination agreements. As of October 29, 2011, the entire amount is recorded as a current liability in Accrued Expenses on the Consolidated Balance Sheet.
15. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental Executive Retirement Plan (the “SERP”) to provide additional retirement income to its Chairman and Chief Executive Officer (“CEO”). Subject to service requirements, the CEO will receive a monthly benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final average compensation used for the calculation is based on actual compensation, base salary and cash incentive compensation, averaged over the last 36 consecutive full calendar months ending before the CEO’s retirement. The Company recorded expense of $0.1 million and $1.6 million for the thirteen and thirty-nine weeks ended October 29, 2011, respectively, associated with the SERP. The Company recorded expense of $0.5 million and $2.4 million for the thirteen and thirty-nine weeks ended October 30, 2010, respectively, associated with the SERP.
The expense for the thirty-nine weeks ended October 30, 2010, included an expense of $2.1 million to correct a cumulative under accrual of the SERP relating to prior periods, primarily Fiscal 2008. The Company does not believe this correction was material to the periods affected.
16. CONTINGENCIES
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
The Company intends to defend the following pending matters vigorously, as appropriate. The Company is unable to quantify the potential exposure of the following pending matters. However, the Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of the claims. The Company’s identified contingencies include the following matters:
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In that action, plaintiffs alleged, on behalf of a putative class of California store managers employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaint sought injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The defendants answered the complaint on August 21, 2006, denying liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to oppose the plaintiffs’ remaining claims. On January 29, 2009, the Court certified a class consisting of all store managers who served at Hollister and abercrombie kids stores in California from May 1, 2004 through the future date upon which the action concludes. The parties then continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a notice that they did not intend to continue to pursue their claim that members of the class did not exercise independent managerial judgment and discretion. They also asked the Court to vacate the August 9, 2010 trial date previously set by the Court. On July 20, 2010, the trial court vacated the trial date and the defendants then moved to decertify the putative class. On April 7, 2011, the trial court granted defendants’ motion and decertified the putative class. The parties continued to litigate the claims of the individual plaintiffs until November of 2011, when all of those claims were settled for an immaterial amount and released.

 

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On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries, et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&F’s present and former directors, alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. In the following three months, four similar derivative actions were filed (three in the United States District Court for the Southern District of Ohio and one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F alleging various breaches of the directors’ fiduciary duty allegedly arising out of antecedent employment law and securities class actions brought against the Company. A consolidated amended derivative complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, A&F announced that its Board of Directors had received a report of the Special Litigation Committee established by the Board to investigate and act with respect to claims asserted in the derivative cases, which concluded that there was no evidence to support the asserted claims and directed the Company to seek dismissal of the derivative cases. On September 10, 2007, the Company moved to dismiss the federal derivative cases on the authority of the Special Litigation Committee Report. On March 12, 2009, the Company’s motion was granted and, on April 10, 2009, plaintiffs filed an appeal from the order of dismissal in the United States Court of Appeals for the Sixth Circuit. On April 5, 2011, a panel of the United States Court of Appeals for the Sixth Circuit reversed the decision of the District Court and remanded the action for further proceedings. The state court has stayed further proceedings in the state-court derivative action until resolution of the consolidated federal derivative cases. On November 1, 2011, the District Court entered an order which gave preliminary approval to a proposed settlement of the consolidated derivative litigation. The District Court also set a hearing (the “Fairness Hearing”) for December 13, 2011 to determine whether the proposed settlement, which provides for revisions to certain of the Company’s corporate governance regulations, should be finally approved and to consider an award of fees and expenses to plaintiffs’ counsel. The District Court also directed that notice be given to the Company’s stockholders concerning the proposed settlement and their right to be heard in connection with the Fairness Hearing.
On December 21, 2007, Spencer de la Cruz, a former employee, filed an action against Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc. (collectively, the “Defendants”) in the Superior Court of Orange County, California. He sought to allege, on behalf of himself and a putative class of past and present employees in the period beginning on December 19, 2003, claims for failure to provide meal breaks, for waiting time penalties, for failure to keep accurate employment records, and for unfair business practices. By successive amendments, plaintiff added 10 additional plaintiffs and additional claims seeking injunctive relief, unpaid wages, penalties, interest, and attorney’s fees and costs. Defendants have denied the material allegations of plaintiffs’ complaints throughout the litigation and have asserted numerous affirmative defenses. On July 23, 2010, plaintiffs moved for class certification in the action. On December 9, 2010, after briefing and argument, the trial court granted in part and denied in part plaintiffs’ motion, certifying sub-classes to pursue meal break claims, meal premium pay claims, work related travel claims, travel expense claims, termination pay claims, reporting time claims, bag check claims, pay record claims, and minimum wage claims. The parties are continuing to litigate questions relating to the Court’s certification order and to the merits of plaintiffs’ claims.

 

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17. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Codification 820-10 “Fair Value Measurements and Disclosures,” (“ASC 820-10”) was amended in January 2010 to require additional disclosures related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Levels 1 and 2 of the fair value hierarchy, including the reasons and the timing of the transfers; and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value hierarchy. The guidance was effective for the Company beginning on January 31, 2010. The disclosure guidance adopted on January 31, 2010, did not have a material impact on our consolidated financial statements.
In May 2011, ASC 820-10 was further amended to clarify certain disclosure requirements and improve consistency with international reporting standards. This amendment is to be applied prospectively and is effective for the Company beginning January 28, 2012. The Company does not expect its adoption to have a material effect on its consolidated financial statements.
Accounting Standards Codification Topic 220, “Comprehensive Income,” was amended in June 2011 to require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income under current GAAP. This guidance is effective for the Company’s fiscal year and interim periods beginning January 29, 2012. The Company does not expect its adoption to have a material effect on its consolidated financial statements.

 

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Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying consolidated balance sheet of Abercrombie & Fitch Co. and its subsidiaries as of October 29, 2011 and the related consolidated statements of operations and comprehensive income for each of the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010 and the consolidated statements of cash flows for the thirty-nine week periods ended October 29, 2011 and October 30, 2010. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of January 29, 2011, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated March 29, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 29, 2011, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
Columbus, Ohio
December 6, 2011

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2011” represent the 52-week fiscal year that will end on January 28, 2012, and to “Fiscal 2010” represent the 52-week fiscal year that ended January 29, 2011.
The Company is a specialty retailer that operates stores and direct-to-consumer operations in North America, Europe, and Asia. The Company sells casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. In addition, the Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering bras, underwear, personal care products, sleepwear and at-home products for women.
Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an atmosphere that is confident and just a bit provocative. abercrombie kids directly follows in the footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids has an energetic attitude and is popular, wholesome and athletic — the signature of All-American cool. Hollister is young, spirited, with a sense of humor and brings Southern California to the world. Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney sensibility.
RESULTS OF OPERATIONS
During the third quarter of Fiscal 2011, net sales increased 21% to $1.076 million from $885.8 million for the third quarter of Fiscal 2010. The impact of foreign currency on sales (based on converting prior year sales at current year exchange rates) for the thirteen weeks ended October 29, 2011 was a benefit of approximately 0.6% of sales. The gross profit rate for the third quarter of Fiscal 2011 was 60.1% compared to 63.7% for the third quarter of Fiscal 2010. Operating income was $79.9 million for the third quarter of Fiscal 2011 compared to $78.4 million for the third quarter of Fiscal 2010. The Company had net income of $50.9 million for the third quarter of Fiscal 2011 compared to net income of $50.0 million for the third quarter of Fiscal 2010. Net income per diluted share was $0.57 for the third quarter of Fiscal 2011 compared to $0.56 for the third quarter of Fiscal 2010. Results from discontinued operations were immaterial for the thirteen weeks ended October 29, 2011 and October 30, 2010.
During the Fiscal 2011 year-to-date period, net sales increased 22% to $2.829 billion from $2.319 billion in Fiscal 2010. The impact of foreign currency on sales for the thirty-nine weeks ended October 29, 2011 was a benefit of approximately 1.0% of sales. The gross profit rate for the Fiscal 2011 year-to-date period was 62.7% compared to 63.9% for the comparable year-to-date period for Fiscal 2010. Operating income was $165.8 million in the Fiscal 2011 year-to-date period, compared to $87.2 million in Fiscal 2010. The Company had net income of $108.1 million in the Fiscal 2011 year-to-date period compared to net income of $57.7 million in Fiscal 2010. Net income per diluted share was $1.20 in the Fiscal 2011 year-to-date period compared to $0.64 in Fiscal 2010. Fiscal 2010 year-to-date net income per share included a charge of $0.02 per diluted share associated with store closures. Fiscal 2011 year-to-date net income per share included a benefit of $0.01 per diluted share from discontinued operations. Results from discontinued operations were immaterial for the Fiscal 2010 year-to-date period.

 

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As of October 29, 2011, the Company had $488.3 million in cash and equivalents, no borrowings under the credit agreement and immaterial outstanding letters of credit, compared to $593.3 million in cash and equivalents, borrowings under the credit agreement of $57.2 million and outstanding letters of credit of $10.6 million as of October 30, 2010. The decrease in letters of credit outstanding is related to an adjustment to vendor payment terms.
Net cash provided by operating activities was $64.5 million for the thirty-nine weeks ended October 29, 2011. In addition, the Company used cash of $227.6 million for capital expenditures, $45.0 million for the repayment of the outstanding balance under the credit agreement, $45.8 million for dividends, and $98.7 million to repurchase 1.5 million shares of A&F’s Common Stock during the thirty-nine weeks ended October 29, 2011.
Total inventory, at cost, was $679.3 million as of October 29, 2011, compared to $511.8 million as of October 30, 2010, an 33% increase.
Due to seasonal variations in the retail industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.
The following data represents the amounts shown in the Company’s Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010, expressed as a percentage of net sales:
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    October 29,     October 30,     October 29,     October 30,  
    2011     2010     2011     2010  
NET SALES
    100.0 %     100.0 %     100.0 %     100.0 %
 
                       
Cost of Goods Sold
    39.9 %     36.3 %     37.3 %     36.1 %
 
                       
GROSS PROFIT
    60.1 %     63.7 %     62.7 %     63.9 %
Stores and Distribution Expense
    42.9 %     43.5 %     45.5 %     47.6 %
Marketing, General and Administrative Expense
    10.0 %     11.6 %     11.5 %     12.7 %
Other Operating Income, Net
    (0.3 )%     (0.2 )%     (0.1 )%     (0.2 )%
 
                       
OPERATING INCOME
    7.4 %     8.8 %     5.9 %     3.8 %
Interest Expense, Net
    0.0 %     0.1 %     0.1 %     0.1 %
 
                       
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
    7.4 %     8.8 %     5.8 %     3.7 %
Tax Expense from Continuing Operations
    2.6 %     3.1 %     2.0 %     1.2 %
 
                       
NET INCOME FROM CONTINUING OPERATIONS
    4.7 %     5.6 %     3.8 %     2.5 %
 
                       
INCOME FROM DISCONTINUED OPERATIONS, Net of Tax
                0.0 %      
 
                       
NET INCOME
    4.7 %     5.6 %     3.8 %     2.5 %
 
                       

 

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Financial Summary
The following summarized financial and statistical data compare the thirteen and thirty-nine week periods ended October 29, 2011 to the thirteen and thirty-nine week periods ended October 30, 2010:
                                 
    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    October 29, 2011     October 30, 2010     October 29, 2011     October 30, 2010  
 
                               
Net sales by brand (millions)
  $ 1,075.9     $ 885.8     $ 2,829.3     $ 2,319.4  
Abercrombie & Fitch
  $ 436.1     $ 384.1     $ 1,161.1     $ 1,023.4  
abercrombie
  $ 104.2     $ 99.9     $ 274.1     $ 257.7  
Hollister
  $ 518.0     $ 392.5     $ 1,346.7     $ 1,012.9  
Gilly Hicks*
  $ 17.6     $ 9.3     $ 47.4     $ 25.4  
 
                               
Increase in net sales from prior year
    21 %     18 %     22 %     16 %
Abercrombie & Fitch
    14 %     18 %     13 %     17 %
abercrombie
    4 %     10 %     6 %     11 %
Hollister
    32 %     18 %     33 %     16 %
Gilly Hicks
    89 %     79 %     87 %     50 %
 
                               
Increase in comparable store sales**
    7 %     7 %     8 %     5 %
Abercrombie & Fitch
    4 %     8 %     5 %     7 %
abercrombie
    6 %     2 %     8 %     3 %
Hollister
    8 %     7 %     10 %     3 %
 
                               
Increase in net sales from prior year
    21 %     18 %     22 %     16 %
U.S.***
    14 %     8 %     13 %     7 %
International***
    56 %     87 %     64 %     90 %
Direct-to-consumer sales (including shipping & handling)
    41 %     31 %     34 %     39 %
     
*   Net sales for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010, reflect the activity of 19 and 17 stores, respectively. Other operational data was deemed immaterial for inclusion in the table.
 
**   A store is included in comparable store sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year.
 
***   Includes direct-to-consumer

 

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CURRENT TRENDS AND OUTLOOK
During the third quarter of Fiscal 2011, our results were adversely affected by a number of factors, including a significant escalation in sourcing costs, a slowing sales trend in our highly profitable European business, and continued underperformance in Japan and Canada. However, we remain focused on the long-term drivers of the business and our strategy and stated financial objectives are unchanged.
We have a long-term strategic objective to leverage the global power of our brands to build a highly profitable, sustainable global business. We have identified a number of growth vehicles that will support our strategic objective over the next few years and our focus remains on execution against our strategy and the key roadmap components. We believe maintaining a long-term outlook is even more critical today, given the continuing uncertainty in the macro-economic environment.
We plan to continue opening Abercrombie & Fitch international flagship stores in key locations around the world. We expect to open four additional international Abercrombie & Fitch flagship locations in the fourth quarter of Fiscal 2011, which will bring us to a total of ten locations by the end of the fiscal year. The additional four international flagship locations will be in Madrid, Dusseldorf, Brussels and Singapore. We now have four confirmed flagship location openings in 2012, comprising Hamburg, Hong Kong, Amsterdam and Munich.
We continue to expect to open up to 40 international mall-based Hollister stores during Fiscal 2011, of which 25 had opened as of the end of the third quarter. The majority of the stores will be opened in Europe and the total also includes our first stores in mainland China and Hong Kong. We expect a similar or greater number of openings in 2012.
Recognizing the profitable growth potential of the direct-to-consumer business, we have a number of initiatives that we are working on to drive this business and increase the share of our business mix it represents. In addition, we expect the direct-to-consumer business to benefit from our growing international presence.
Improving average U.S. store productivity levels, both through same store sales growth and as a result of the closure of underperforming stores, remains an important objective. We are targeting a return to around 90% of 2007 U.S. store productivity levels by 2012. We expect to close approximately 55 to 60 U.S. stores during Fiscal 2011 through natural lease expirations, and this figure may increase somewhat as a result of buyouts or other early closures. During the fourth quarter of Fiscal 2011, we will review underperforming real estate and conduct our annual analysis of long-lived asset impairment. The real estate review and impairment analysis could result in fourth quarter charges.
In addition to our established brands, we continue to believe that Gilly Hicks has significant potential as a long-term growth vehicle.
From a margin standpoint, we see an improvement in the sourcing environment during 2012 as a result of lower raw material costs.
In general, we continue to expect macroeconomic uncertainty to affect our business. However, we expect that continued sales growth, coupled with disciplined control of expenses, will enable us to continue growing our operating income. We continue to believe that our diluted earnings per share target of $4.75 for Fiscal 2012 is a realistic objective.

 

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THIRD QUARTER AND YEAR-TO-DATE RESULTS
Net Sales
Net sales for the third quarter of Fiscal 2011 were $1.076 billion, an increase of 21% from net sales of $885.8 million during the third quarter of Fiscal 2010. The net sales increase was attributable to a 7% increase in total comparable store sales, a 41% increase in the direct-to-consumer business, including shipping and handling revenue, and new stores, primarily international. The impact of foreign currency on sales (based on converting prior year sales at current year exchange rates) for the thirteen weeks ended October 29, 2011 was a benefit of approximately $4.9 million. Including direct-to-consumer sales, U.S. sales increased 14% to $820.2 million and international sales increased 56% to $255.7 million.
Year-to-date net sales in Fiscal 2011 were $2.829 billion, an increase of 22% from net sales of $2.319 billion during the comparable period in Fiscal 2010. The net sales increase was attributable to an 8% increase in total comparable store sales, a 34% increase in the direct-to-consumer business, including shipping and handling revenue, and new stores, primarily international. The impact of foreign currency on sales for the thirty-nine weeks ended October 29, 2011 was a benefit of approximately $22.5 million. Including direct-to-consumer sales, U.S. sales increased 13% to $2.146 billion and international sales increased 64% to $683.3 million.
Comparable store sales by brand for the third quarter of Fiscal 2011 were as follows: Abercrombie & Fitch increased 4%, abercrombie kids increased 6% and Hollister increased 8%. Female comparable store sales increased by a high single digit, while male comparable store sales increased by a mid single digit.
Comparable same store sales for the third quarter reflected an acceleration in the trend for U.S. chain stores, particularly in the Southern and Western regions, which was more than offset by a slowing trend in Europe, including negative comps for flagship stores. Canada, and more significantly Japan, had negative comparative store sales.
Direct-to-consumer net merchandise sales for the third quarter of Fiscal 2011 were $119.6 million, an increase of 47% from Fiscal 2010 third quarter direct-to-consumer net merchandise sales of $81.4 million. Shipping and handling revenue for the corresponding periods was $12.8 million in Fiscal 2011 and $12.6 million in Fiscal 2010. The direct-to-consumer business, including shipping and handling revenue, accounted for 12.3% of total net sales in the third quarter of Fiscal 2011 compared to 10.6% in the third quarter of Fiscal 2010.
Direct-to-consumer net merchandise sales for the Fiscal 2011 year-to-date period were $302.4 million, an increase of 38% from Fiscal 2010 year-to-date direct-to-consumer net merchandise sales of $219.1 million. Shipping and handling revenue for the corresponding periods was $37.9 million in Fiscal 2011 and $34.9 million in Fiscal 2010. The direct-to-consumer business, including shipping and handling revenue, accounted for 12.0% of total net sales for the year-to-date Fiscal 2011 compared to 11.0% in the Fiscal 2010 year-to-date period.
From a merchandise classification standpoint, for the male business, fleece, active wear and sweaters were stronger performing categories; while woven shirts was a weaker performing category. In the female business, sweaters, pants and knit tops were stronger performing categories; while graphics was a weaker performing category.
Gross Profit
Gross profit for the third quarter of Fiscal 2011 was $646.5 million compared to $564.4 million for the comparable period in Fiscal 2010. The gross profit rate (gross profit divided by net sales) for the third quarter of Fiscal 2011 was 60.1%, down 360 basis points from the third quarter of Fiscal 2010 rate of 63.7%.

 

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The decrease in the gross profit rate for the third quarter of Fiscal 2011 was primarily driven by an increase in average unit cost, due to increased raw materials cost, combined with an approximately flat average unit retail.
Year-to date gross profit for Fiscal 2011 was $1.773 billion compared to $1.481 billion for the comparable period in Fiscal 2010. The gross profit rate for the year-to-date period of Fiscal 2011 was 62.7%, down 120 basis points from the year-to-date Fiscal 2010 rate of 63.9%.
The decrease in the gross profit rate for Fiscal 2011 year-to-date period was primarily driven by an increase in average unit cost combined with an approximately flat average unit retail, partially offset by favorable foreign currency impact, and benefits from other gross margin items, such as freight.
Stores and Distribution Expense
Stores and distribution expense for the third quarter of Fiscal 2011 was $461.7 million compared to $385.1 million for the comparable period in Fiscal 2010. The stores and distribution expense rate (stores and distribution expense divided by net sales) for the third quarter of Fiscal 2011 was 42.9% compared to 43.5% in the third quarter of Fiscal 2010.
Stores and distribution expense for the Fiscal 2011 year-to-date period was $1.286 billion compared to $1.104 billion for the comparable period in Fiscal 2010. The stores and distribution expense rate for the year-to-date period of Fiscal 2011 was 45.5% compared to 47.6% for the Fiscal 2010 year-to-date period.
The decrease in the stores and distribution expense rate for the third quarter and the Fiscal 2011 year-to-date period was primarily driven by lower store occupancy costs as a percentage of net sales.
Total direct-to-consumer expense included in stores and distribution expense was $22.4 million and $57.9 million for the thirteen and thirty-nine weeks ended October 29, 2011, respectively, compared to $16.8 million and $42.5 million for the thirteen and thirty-nine weeks ended October 30, 2010, respectively.
Marketing, General and Administrative Expense
Marketing, general and administrative expense during the third quarter of Fiscal 2011 was $107.8 million compared to $102.6 million during the same period in Fiscal 2010, a 5% increase. For the third quarter of Fiscal 2011, the marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 10.0% compared to 11.6% for the third quarter of Fiscal 2010.
The increase in marketing, general and administrative expense for the thirteen weeks ended October 29, 2011 was due to increases in compensation, including equity compensation, and outside services, partially offset by a decrease in incentive compensation expense.
Marketing, general, and administrative expense during the Fiscal 2011 year-to-date period was $325.5 million compared to $294.5 million during the same period in Fiscal 2010, a 11% increase. For the year-to-date period of Fiscal 2011, the marketing, general and administrative expense rate was 11.5% compared to 12.7% for the Fiscal 2010 year-to-date period.
The increase in marketing, general and administrative expense for the thirty-nine weeks ended October 29, 2011 was primarily due to increases in compensation and benefits, including incentive and equity compensation, marketing and other expenses, and the net effect of prior year favorable legal settlements, partially offset by a prior year charge to correct an under accrual of the supplemental executive retirement plan.

 

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Other Operating Expense (Income), Net
Third quarter other operating income, net for Fiscal 2011 was $2.9 million compared to other operating income, net, of $1.7 million for the third quarter of Fiscal 2010.
Year-to-date other operating income, net for Fiscal 2011 was $4.1 million compared to $4.5 million for the year-to-date period of Fiscal 2010.
Interest Expense, Net and Tax Expense (Benefit) from Continuing Operations
Third quarter interest expense was $1.8 million in Fiscal 2011, offset by interest income of $1.2 million, compared to interest expense of $1.9 million, offset by interest income of $1.2 million in the third quarter of Fiscal 2010.
Year-to-date interest expense was $6.2 million in Fiscal 2011, offset by interest income of $3.7 million, compared to interest expense of $5.7 million in Fiscal 2010, offset by interest income of $3.4 million.
The effective tax rate for continuing operations for the third quarter of Fiscal 2011 was 35.8% compared to 35.6% for the Fiscal 2010 comparable period.
The effective tax rate for continuing operations for the thirty-nine weeks ended October 29, 2011 was 34.3% compared to 32.1% for the thirty nine weeks ended October 30, 2010.
On a full-year basis, the Company expects the effective tax rate to be approximately 35%. The rate remains sensitive to the domestic/international profit mix, including the effect of foreign currencies. In addition, the rate does not include the potential valuation allowances related to net operating loss carry forwards.
Net Income from Discontinued Operations
The Company completed the closure of its RUEHL branded stores and related direct-to-consumer operations in the fourth quarter of Fiscal 2009. Accordingly, the after-tax operating results of RUEHL appear in Income from Discontinued Operations, Net of Tax on the Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010. Net income from discontinued operations for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010 was immaterial.
Refer to Note 14, “Discontinued Operations,” of the Notes to Consolidated Financial Statements for further discussion.
Net Income and Net Income per Share
Net income for the third quarter of Fiscal 2011 was $50.9 million compared to $50.0 million for the third quarter of Fiscal 2010. Net income per diluted share for the third quarter of Fiscal 2011 was $0.57 compared to $0.56 for the same period of Fiscal 2010.
Net income for the year-to-date period of Fiscal 2011 was $108.1 million compared to net income of $57.7 million for the year-to-date period of Fiscal 2010. Net income per diluted share for the year-to-date period of Fiscal 2011 was $1.20 compared to $0.64 for the same period of Fiscal 2010. Net income per diluted share for the year-to-date period of Fiscal 2011 included net income of $0.01 per diluted share from discontinued operations related to the settlement of outstanding lease obligations. Net income for the Fiscal 2010 year-to-date period included a charge of $0.02 per diluted share associated with store closures.

 

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FINANCIAL CONDITION
Liquidity and Capital Resources
Historical Sources and Uses of Cash
Seasonality of Cash Flows
The retail business has two principal selling seasons: the Spring season which includes the first and second fiscal quarters (“Spring”) and the Fall season which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Holiday sales periods, particularly in the United States. The Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operating expenses and to reinvest in the business to support future growth throughout the year. The Company also has available a credit facility as a source for additional funding.
Credit Agreement
On July 28, 2011, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) under which up to $350 million will be available. The Amended and Restated Credit Agreement serves to amend and restate in its entirety the credit agreement dated April 15, 2008 as previously amended (the “Prior Credit Agreement”). The primary reasons for entering into the Amended and Restated Credit Agreement were to extend the termination date from April 12, 2013 to July 27, 2016 and to reduce fees and interest rates.
As of December 2, 2011, the Company had approximately $350.0 million available under its unsecured Amended and Restated Credit Agreement. The Company had no borrowings outstanding under its Amended and Restated Credit Agreement on October 29, 2011. The Company had $43.8 million outstanding under the Prior Credit Agreement on January 29, 2011 denominated in Japanese Yen. There was no long-term debt recorded under the Amended & Restated Credit Agreement for the thirteen weeks ended October 29, 2011. The average interest rate for the thirty-nine weeks ended October 29, 2011 was 2.4%.
The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement also requires that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination and (z) the sum of minimum rent and contingent store rent, not be less than 2.00 to 1.00. The Company was in compliance with the applicable ratio requirements and other covenants at October 29, 2011.
The Amended and Restated Credit Agreement is described in Note 12, “Long-Term Debt,” of the Notes to Consolidated Financial Statements.
Stand-by letters of credit outstanding on October 29, 2011 and January 29, 2011 were immaterial.
Operating Activities
Net cash provided by operating activities was $64.5 million for the thirty-nine weeks ended October 29, 2011 compared to $52.5 million for thirty-nine weeks ended October 30, 2010. The change in cash provided by operating activities was primarily driven by an increase in net income, an increase in accounts payable and accrued expenses, partially off-set by an increase in inventories and cash outflows due to the timing of tax payments. The increases in accounts payable and inventories were primarily due to an increase in average unit cost.

 

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Investing Activities
Cash outflows for investing activities for the thirty-nine weeks ended October 29, 2011 and October 30, 2010 were used primarily for capital expenditures related to new store construction and information technology investments, as well as the acquisition of intangible assets. Cash outflows for capital expenditures were higher in Fiscal 2011 than in Fiscal 2010, due to an increase in the number of international retail locations, as well as IT and Home Office infrastructure projects. Cash inflows from investing activities were less in Fiscal 2011 due to a reduction in proceeds from sales of marketable securities.
Financing Activities
For the thirty-nine weeks ended October 29, 2011, cash outflows for financing activities consisted primarily of the repurchase of A&F’s Common Stock, the payment of dividends, repayments of outstanding borrowings under the Prior Credit Agreement, partially off-set by cash inflows from the receipt of proceeds associated with the exercise of share-based compensation awards. For the thirty-nine weeks ended October 30, 2010, financing activities consisted mainly of the payment of dividends and the repurchase of A&F’s Common Stock.
During the thirty-nine weeks ended October 29, 2011, A&F repurchased approximately 1.5 million shares of A&F’s Common Stock in the open market with a market value of approximately $98.7 million. A&F repurchased 669,100 shares of A&F’s Common Stock in the open market with a market value of $29.2 million during the thirty-nine weeks ended October 30, 2010. Both the Fiscal 2011 and Fiscal 2010 repurchases were pursuant to the A&F Board of Directors’ November 20, 2007 authorization.
As of October 29, 2011, A&F had approximately 8.2 million remaining shares available for repurchase as part of the November 20, 2007 A&F Board of Directors’ authorization to repurchase 10.0 million shares of A&F’s Common Stock.
Future Cash Requirements and Sources of Cash
Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, rent, taxes and other operating activities, as well as increasing capital expenditures and paying of quarterly dividend payments to stockholders subject to A&F Board of Directors approval. In addition, subject to the availability of cash and suitable market conditions, A&F expects to continue to repurchase shares of its Common Stock. The Company anticipates funding these cash requirements with cash generated from operations. The Company also has availability under the Amended and Restated Credit Agreement as a source of additional funding.
Off-Balance Sheet Arrangements
As of October 29, 2011, the Company did not have any off-balance sheet arrangements.
Contractual Obligations
The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short- and long-term liquidity and capital resource needs.
During the thirty-nine weeks ended October 29, 2011, changes to the contractual obligations from those as of January 29, 2011 included the repayment of the outstanding balance of the Prior Credit Agreement and the payment of $15.7 million in previously accrued charges related to the closure of RUEHL branded stores and related direct-to-consumer operations. There were no other material changes in contractual obligations as of October 29, 2011, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

 

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Third Quarter Store Count and Gross Square Feet
Store count and gross square footage by brand for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively, were as follows:
                                         
    Abercrombie & Fitch     abercrombie     Hollister     Gilly Hicks     Total  
Store Activity
                                       
July 30, 2011
    326       183       545       19       1,073  
New
                19             19  
Closed
                             
 
                             
October 29, 2011
    326       183       564       19       1,092  
 
                             
Gross Square Feet (thousands)
                                       
July 30, 2011
    2,970       870       3,778       183       7,801  
New
                166               166  
Remodels/Conversions (net activity)
                             
Closed
                             
 
                             
October 29, 2011
    2,970       870       3,944       183       7,967  
 
                             
Average Store Size
    9,110       4,754       6,993       9,632       7,296  
                                         
    Abercrombie & Fitch     abercrombie     Hollister     Gilly Hicks     Total  
Store Activity
                                       
July 31, 2010
    345       206       530       17       1,098  
New
    2       1       7             10  
Remodels/Conversions (net activity)
          (2 )                 (2 )
Closed
                             
 
                             
October 30, 2010
    347       205       537       17       1,106  
 
                             
Gross Square Feet (thousands)
                                       
July 31, 2010
    3,097       976       3,629       166       7,868  
New
    15       6       54             75  
Remodels/Conversions (net activity)
    6       (10 )     1             (3 )
Closed
                             
 
                             
October 30, 2010
    3,118       972       3,684       166       7,940  
 
                             
Average Store Size
    8,986       4,741       6,860       9,765       7,179  

 

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Year-To-Date Store Count and Gross Square Feet
Store count and gross square footage by brand for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively, were as follows:
                                         
    Abercrombie & Fitch     abercrombie     Hollister     Gilly Hicks     Total  
Store Activity
                                       
January 29, 2011
    325       185       540       19       1,069  
New
    1             25             26  
Remodels/Conversions (net activity)
                             
Closed
          (2 )     (1 )           (3 )
 
                             
October 29, 2011
    326       183       564       19       1,092  
 
                             
Gross Square Feet (thousands)
                                       
January 29, 2011
    2,955       879       3,739       183       7,756  
New
    22             212             234  
Remodels/Conversions (net activity)
    (7 )     (1 )                 (8 )
Closed
          (8 )     (7 )           (15 )
 
                             
October 29, 2011
    2,970       870       3,944       183       7,967  
 
                             
Average Store Size
    9,110       4,754       6,993       9,632       7,296  
                                         
    Abercrombie & Fitch     abercrombie     Hollister     Gilly Hicks     Total  
Store Activity
                                       
January 30, 2010
    346       209       525       16       1,096  
New
    5       3       13       1       22  
Remodels/Conversions (net activity)
    1       (2 )                 (1 )
Closed
    (5 )     (5 )     (1 )           (11 )
 
                             
October 30, 2010
    347       205       537       17       1,106  
 
                             
Gross Square Feet (thousands)
                                       
January 30, 2010
    3,110       979       3,597       161       7,847  
New
    41       25       97       5       168  
Remodels/Conversions (net activity)
    9       (9 )     (3 )           (3 )
Closed
    (42 )     (23 )     (7 )           (72 )
 
                             
October 30, 2010
    3,118       972       3,684       166       7,940  
 
                             
Average Store Size
    8,986       4,741       6,860       9,765       7,179  

 

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CAPITAL EXPENDITURES
During the third quarter of Fiscal 2011, the Company opened 19 international Hollister stores. During Fiscal 2011, the Company expects to open four additional international Abercrombie & Fitch flagship locations, as well as a total of up to 40 international mall-based Hollister stores, of which 25 had opened as of October 29, 2011. The majority of the stores will open in Europe.
The Company also expects to close approximately 55 to 60 domestic stores during Fiscal 2011, primarily at the end of the year through natural lease expirations. The Company expects total capital expenditures for 2011 to be approximately $350 million, predominately related to new stores, store refreshes, and remodels.
Capital expenditures totaled $227.6 million and $117.0 million for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively. A summary of capital expenditures is as follows:
                 
Capital Expenditures (in millions)   October 29, 2011     October 30, 2010  
New Store Construction, Store Refreshes and Remodels
  $ 183.7     $ 86.6  
Home Office, Distribution Centers and Information Technology
    43.9       30.4  
 
           
Total Capital Expenditures
  $ 227.6     $ 117.0  
 
           
CLOSURE OF RUEHL BRANDED STORES AND RELATED DIRECT-TO-CONSUMER OPERATIONS
On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009.
Costs associated with exit or disposal activities are recorded when the liability is incurred. As of October 29, 2011, the Company expected to make gross cash payments totaling approximately $15.9 million in Fiscal 2011, related primarily to the final lease termination agreements associated with the closure of RUEHL branded stores. $15.7 million of the $15.9 million was paid during the thirty-nine weeks ended October 29, 2011.
Recent Accounting Pronouncements
Accounting Standards Codification 820-10 “Fair Value Measurements and Disclosures,” (“ASC 820-10”) was amended in January 2010 to require additional disclosures related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Levels 1 and 2 of the fair value hierarchy, including the reasons and the timing of the transfer; and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value hierarchy. The guidance was effective for the Company beginning on January 31, 2010. The disclosure guidance adopted on January 31, 2010, did not have a material impact on our consolidated financial statements.
In May 2011, ASC 820-10 was further amended to clarify certain disclosure requirements and improve consistency with international reporting standards. This amendment is to be applied prospectively and is effective for the Company beginning January 28, 2012. The Company does not expect its adoption to have a material effect on its consolidated financial statements.
Accounting Standards Codification Topic 220, “Comprehensive Income,” was amended in June 2011 to require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income under current GAAP. This guidance is effective for the Company’s fiscal year and interim periods beginning January 29, 2012. The Company does not expect its adoption to have a material effect on its consolidated financial statements.

 

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Critical Accounting Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
The Company’s significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2010 filed on March 29, 2011. The Company believes the following policies are the most critical to the portrayal of the Company’s financial condition and results of operations.
     
Policy   Effect if Actual Results Differ from Assumptions
Revenue Recognition
   
 
   
The Company recognizes retail sales at the time the customer takes possession of the merchandise. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable. The value of point of sale coupons that result in a reduction of the price paid by the customer is recorded as a reduction of sales.

The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. The liability remains on the Company’s books until the earlier of redemption (recognized as revenue) or when the Company determines the likelihood of redemption is remote, known as breakage (recognized as other operating income), based on historical redemption patterns.
  The Company has not made any material changes in the accounting methodology used to determine the sales return reserve and revenue recognition for gift cards over the past three fiscal years.

The Company does not expect material changes in the near term to the underlying assumptions used to measure the sales return reserve or to measure the timing and amount of future gift card redemptions as of October 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.

A 10% change in the sales return reserve as of October 29, 2011 would have affected pre-tax income by approximately $1.1 million.

A 10% change in the assumption of the redemption pattern for gift cards as of October 29, 2011 would have affected pre-tax income by an immaterial amount.

 

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Policy   Effect if Actual Results Differ from Assumptions
Auction Rate Securities (“ARS”)
   
As a result of the market failure and lack of liquidity in the current ARS market, the Company measures the fair value of its ARS primarily using a discounted cash flow model as well as a comparison to similar securities in the market. Certain significant inputs into the model are unobservable in the market including the periodic coupon rate adjusted for the marketability discount, market required rate of return and expected term.
  The Company has not made any material changes in the accounting methodology used to determine the fair value of the ARS.

The Company does not expect material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of October 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.

Assuming all other assumptions disclosed in Note 7, “Fair Value,” being equal, a 50 basis point increase in the market required rate of return will yield approximately a 15% increase in impairment and a 50 basis point decrease in the market required rate of return will yield approximately a 15% decrease in impairment.
 
   
Inventory Valuation
   
 
   
Inventories are principally valued at the lower of average cost or market utilizing the retail method.

The Company reduces inventory value by recording a valuation reserve that represents estimated future permanent markdowns necessary to sell-through the inventory.

Additionally, as part of inventory valuation, an inventory shrink estimate is made each period that reduces the value of inventory for lost or stolen items.
  The Company has not made any material changes in the accounting methodology used to determine the shrink reserve or the valuation reserve over the past three fiscal years.

The Company does not expect material changes in the near term to the underlying assumptions used to determine the shrink reserve or valuation reserve as of October 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, they could significantly impact the ending inventory valuation at cost, as well as the resulting gross margin(s).

An increase or decrease in the valuation reserve of 10% would have affected pre-tax income by approximately $3.8 million for the third quarter of Fiscal 2011.

An increase or decrease in the inventory shrink accrual of 10% would have been immaterial to pre-tax income for the third quarter of Fiscal 2011.

 

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Policy   Effect if Actual Results Differ from Assumptions
Property and Equipment
   
 
   
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question.

The Company’s impairment calculation requires management to make assumptions and judgments related to factors used in the evaluation for impairment, including, but not limited to, management’s expectations for future operations and projected cash flows.
  The Company has not made any material changes in the accounting methodology used to determine impairment loss over the past three fiscal years.

The Company does not expect material changes in the near term to the assumptions underlying its impairment calculations as of October 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, they could have a material impact on the Company’s determination of whether or not there has been an impairment.
 
   
 
   
Income Taxes
   
 
   
The provision for income taxes is determined using the asset and liability approach. Tax laws often require items to be included in tax filings at different times than the items are being reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

A provision for U.S. income tax has not been recorded on undistributed profits of non-U.S. subsidiaries that the Company has determined to be indefinitely reinvested outside the U.S. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation.
  The Company does not expect material changes in the judgments, assumptions or interpretations used to calculate the tax provision for the thirteen and thirty-nine weeks ended October 29, 2011. However, changes in these assumptions may occur and should those changes be significant, they could have a material impact on the Company’s income tax provision.

If the Company’s intention or U.S. tax law changes in the future, there may be a significant negative impact on the provision for income taxes to record an incremental tax liability in the period the change occurs.

 

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Policy   Effect if Actual Results Differ from Assumptions
Equity Compensation Expense
   
 
   
The Company’s equity compensation expense related to stock options and stock appreciation rights is estimated using the Black-Scholes option-pricing model to determine the fair value of the stock option and stock appreciation right grants, which requires the Company to estimate the expected term of the stock option and stock appreciation right grants and expected future stock price volatility over the expected term.
  The Company does not expect material changes in the near term to the underlying assumptions used to calculate equity compensation expense for the thirty-nine weeks ended October 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, they could have a material impact on the Company’s equity compensation expense.

During the thirty-nine weeks ended October 29, 2011, the Company granted stock appreciation rights covering an aggregate of 2,252,895 shares and no stock options. A 10% increase in the expected term would yield a 4% increase in the Black-Scholes valuation for stock appreciation rights granted during the year, while a 10% increase in stock price volatility would yield a 9% increase in the Black-Scholes valuation for stock appreciation rights granted during the year.
 
   
Supplemental Executive Retirement Plan
   
 
   
Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental Executive Retirement Plan to provide additional retirement income to its Chairman and Chief Executive Officer. Subject to service requirements, the CEO will receive a monthly benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final average compensation used for the calculation is based on actual compensation (base salary and actual annual cash incentive compensation) averaged over the last 36 consecutive full calendar months ending before the CEO’s retirement.

The Company’s accrual for the SERP requires management to make assumptions and judgments related to the CEO’s final average compensation, life expectancy and discount rate.
  The Company does not expect material changes in the near term to the underlying assumptions used to determine the accrual for the SERP as of October 29, 2011. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.

A 10% increase in final average compensation as of October 29, 2011 would increase the SERP accrual by approximately $1.5 million. A 50 basis point increase in the discount rate as of October 29, 2011 would decrease the SERP accrual by an immaterial amount.
 
   
Legal Contingencies
   
 
   
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules.
  Actual liabilities may exceed or be less than the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements.
The following factors, included in the disclosure under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2010 filed on March 29, 2011, in some cases have affected and in the future could affect the Company’s financial performance and could cause actual results for Fiscal 2011 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Quarterly Report on Form 10-Q or otherwise made by management:
    changes in economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, could have a material adverse effect on our business, results of operations and liquidity;
    if we are unable to anticipate, identify and respond to changing fashion trends and consumer preferences in a timely manner, and manage our inventory commensurate with customer demand, our sales levels and profitability may decline;
    fluctuations in the cost, availability and quality of raw materials, labor and transportation, could cause manufacturing delays and increase our costs;
    fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations;
    our growth strategy relies significantly on international expansion, which adds complexity to our operations and may strain our resources and adversely impact current store performance;
    our international expansion plan is dependent on a number of factors, any of which could delay or prevent successful penetration into new markets or could adversely affect the profitability of our international operations;
    equity-based compensation awarded under the employment agreement with our Chief Executive Officer could adversely impact our cash flows, financial position or results of operations and could have a dilutive effect on our outstanding Common Stock;
    our direct-to-consumer sales are subject to numerous risks that could adversely impact sales;
    we have incurred, and may continue to incur, significant costs related to store closures;
    the costs associated with our development of a new brand concept such as Gilly Hicks could have a material adverse effect on our financial condition or results of operations;
    our business could suffer if our information technology systems are disrupted or cease to operate effectively;

 

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    comparable store sales will continue to fluctuate on a regular basis and impact the volatility of the price of our Common Stock;
    our market share may be negatively impacted by increasing competition and pricing pressures from companies with brands or merchandise competitive with ours;
    our ability to attract customers to our stores depends, in part, on the success of the shopping malls in which most of our stores are located;
    our net sales fluctuate on a seasonal basis, causing our results of operations to be susceptible to changes in Back-to-School and Holiday shopping patterns;
    our inability to accurately plan for product demand and allocate merchandise effectively could have a material adverse effect on our results;
    our failure to protect our reputation could have a material adverse effect on our brands;
    we rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business;
    interruption in the flow of merchandise from our key vendors and international manufacturers could disrupt our supply chain, which could result in lost sales and could increase our costs;
    we do not own or operate any manufacturing facilities and, therefore, depend upon independent third parties for the manufacture of all our merchandise;
    our reliance on two distribution centers domestically and two third-party distribution center internationally makes us susceptible to disruptions or adverse conditions affecting our distribution centers;
    our reliance on third parties to deliver merchandise from our distribution centers to our stores and direct-to-consumer customers could result in disruptions to our business;
    we may be exposed to risks and costs associated with credit card fraud and identity theft that would cause us to incur unexpected expenses and loss of revenues;
    modifications and/or upgrades to our information technology systems may disrupt our operations;
    our facilities, systems and stores as well as the facilities and systems of our vendors and manufacturers, are vulnerable to natural disasters and other unexpected events, any of which could result in an interruption in our business and adversely affect our operating results;
    our litigation exposure could exceed expectations, having a material adverse effect on our financial condition and results of operations;
    our inability or failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets;

 

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    fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results;
    the effects of war or acts of terrorism could have a material adverse effect on our operating results and financial condition;
    our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-insured exposures might increase our expenses and adversely impact our financial results;
    reduced operating results and cash flows at the store level may cause us to incur impairment charges;
    we are subject to customs, advertising, consumer protection, privacy, zoning and occupancy and labor and employment laws that could require us to modify our current business practices, incur increased costs or harm our reputation if we do not comply;
    changes in the regulatory or compliance landscape could adversely affect our business and results of operations;
    our unsecured credit agreement includes financial and other covenants that impose restrictions on our financial and business operations; and
    our operations may be affected by regulatory changes related to climate change and greenhouse gas emissions.
Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Securities
The Company maintains its cash equivalents in financial instruments, primarily money market funds and United States treasury bills, with original maturities of three months or less.
The Company also holds investments in investment grade auction rate securities (“ARS”) that have maturities ranging from 17 to 32 years. The par and carrying values, and related cumulative temporary impairment charges for the Company’s available-for-sale marketable securities as of October 29, 2011 were as follows:
                         
            Temporary     Carrying  
(in thousands)   Par Value     Impairment     Value  
 
                       
Available-for-sale securities:
                       
Auction rate securities — student loan backed
  $ 93,925     $ (9,028 )   $ 84,897  
Auction rate securities — municipal authority bonds
    19,975       (4,538 )     15,437  
 
                 
Total available-for-sale securities
  $ 113,900     $ (13,566 )   $ 100,334  
 
                 
As of October 29, 2011, approximately 47% of the Company’s ARS were “AAA” rated, approximately 20% of the Company’s ARS were “AA” rated, and approximately 33% of the Company’s ARS were “A-” rated, in each case as rated by one or more of the major credit rating agencies. The ratings take into account insurance policies guaranteeing both the principal and accrued interest. Each investment in student loans is insured by (1) the U.S. government under the Federal Family Education Loan Program, (2) a private insurer or (3) a combination of both. The percentage of insurance coverage of the outstanding principal and interest of the ARS varies by security. The credit ratings may change over time and would be an indicator of the default risk associated with the ARS and could have a material effect on the value of the ARS. If the Company expects that it will not recover the entire cost basis of the available-for-sale ARS, intends to sell the available-for-sale ARS, or it becomes more than likely that the Company will be required to sell the available-for-sale ARS before recovery of their cost basis, which may be at maturity, the Company may be required to record an other-than-temporary impairment or additional temporary impairment to write down the assets’ fair value. The Company has not incurred any credit losses on available-for-sale ARS, and furthermore, the issuers continued to perform under the obligations, including making scheduled interest payments, and the Company expects that this will continue in the future.
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement Plan. As of October 29, 2011, total assets held in the Rabbi Trust were $84.8 million, which included $11.6 million of municipal notes and bonds with maturities that ranged from two months to 18 months, trust-owned life insurance policies with a cash surrender value of $72.5 million and $0.8 million held in money market funds. The Rabbi Trust assets are consolidated and recorded at fair value, with the exception of the trust-owned life insurance policies which are recorded at cash surrender value, in Other Assets on the Consolidated Balance Sheet and are restricted as to their use as noted above. Net unrealized gains or losses related to the municipal notes and bonds held in the Rabbi Trust were not material for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in a realized gain of $0.7 million for both the thirteen weeks ended October 29, 2011 and October 30, 2010. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $2.2 million and $1.8 million for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively.

 

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Interest Rate Risks
As of October 29, 2011, the Company had no long-term debt outstanding under the Amended and Restated Credit Agreement. The interest rate for borrowings under the Amended and Restated Credit Agreement is generally based upon market rates plus a margin based on the Leverage Ratio. There was no long-term debt recorded under the Amended & Restated Credit Agreement for the thirteen weeks ended October 29, 2011. The average interest rate was 2.4% for the thirty-nine weeks ended October 29, 2011. Additionally, as of October 29, 2011, the Company had $350.0 million available, less outstanding letters of credit, under its Amended and Restated Credit Agreement.
Foreign Exchange Rate Risk
A&F’s international subsidiaries generally operate with functional currencies other than the U.S. dollar. The Company’s Consolidated Financial Statements are presented in U.S. dollars. Therefore, the Company must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation increases as international expansion increases.
A&F and its subsidiaries have exposure to changes in currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the sale of inventory between subsidiaries and foreign denominated assets and liabilities. Such transactions are denominated primarily in U.S. dollars, British Pounds, Euros, Swiss Francs, Canadian Dollars and Japanese Yen. The Company has established a program that primarily utilizes foreign currency forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exposures are partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency forward contracts are recorded at fair value at the end of each fiscal period.

 

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ITEM 4.   CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including the Chairman and Chief Executive Officer of A&F (the principal executive officer) and the Executive Vice President and Chief Financial Officer of A&F (the principal financial officer), as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
A&F’s management, including the Chairman and Chief Executive Officer of A&F and the Executive Vice President and Chief Financial Officer of A&F, evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended October 29, 2011. Based upon that evaluation, the Chairman and Chief Executive Officer of A&F and the Executive Vice President and Chief Financial Officer of A&F concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of October 29, 2011, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during A&F’s fiscal quarter ended October 29, 2011 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
The Company intends to defend the following pending matters vigorously, as appropriate. The Company is unable to quantify the potential exposure of the following pending matters. However, the Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of the claims. The Company’s identified contingencies include the following matters:
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In that action, plaintiffs alleged, on behalf of a putative class of California store managers employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaint sought injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The defendants answered the complaint on August 21, 2006, denying liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to oppose the plaintiffs’ remaining claims. On January 29, 2009, the Court certified a class consisting of all store managers who served at Hollister and abercrombie kids stores in California from May 1, 2004 through the future date upon which the action concludes. The parties then continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a notice that they did not intend to continue to pursue their claim that members of the class did not exercise independent managerial judgment and discretion. They also asked the Court to vacate the August 9, 2010 trial date previously set by the Court. On July 20, 2010, the trial court vacated the trial date and the defendants then moved to decertify the putative class. On April 7, 2011, the trial court granted defendants’ motion and decertified the putative class. The parties continued to litigate the claims of the individual plaintiffs until November of 2011, when all of those claims were settled for an immaterial amount and released.
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries, et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&F’s present and former directors, alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. In the following three months, four similar derivative actions were filed (three in the United States District Court for the Southern District of Ohio and one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F alleging various breaches of the directors’ fiduciary duty allegedly arising out of antecedent employment law and securities class actions brought against the Company. A consolidated amended derivative complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, A&F announced that its Board of Directors had received a report of the Special Litigation Committee established by the Board to investigate and act with respect to claims asserted in the derivative cases, which concluded that there was no evidence to support the asserted claims and directed the Company to seek dismissal of the derivative cases. On September 10, 2007, the Company moved to dismiss the federal derivative cases on the authority of the Special Litigation

 

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Committee Report. On March 12, 2009, the Company’s motion was granted and, on April 10, 2009, plaintiffs filed an appeal from the order of dismissal in the United States Court of Appeals for the Sixth Circuit. On April 5, 2011, a panel of the United States Court of Appeals for the Sixth Circuit reversed the decision of the District Court and remanded the action for further proceedings. The state court has stayed further proceedings in the state-court derivative action until resolution of the consolidated federal derivative cases. On November 1, 2011, the District Court entered an order which gave preliminary approval to a proposed settlement of the consolidated derivative litigation. The District Court also set a hearing (the “Fairness Hearing”) for December 13, 2011 to determine whether the proposed settlement, which provides for revisions to certain of the Company’s corporate governance regulations, should be finally approved and to consider an award of fees and expenses to plaintiffs’ counsel. The District Court also directed that notice be given to the Company’s stockholders concerning the proposed settlement and their right to be heard in connection with the Fairness Hearing.
On December 21, 2007, Spencer de la Cruz, a former employee, filed an action against Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc. (collectively, the “Defendants”) in the Superior Court of Orange County, California. He sought to allege, on behalf of himself and a putative class of past and present employees in the period beginning on December 19, 2003, claims for failure to provide meal breaks, for waiting time penalties, for failure to keep accurate employment records, and for unfair business practices. By successive amendments, plaintiff added 10 additional plaintiffs and additional claims seeking injunctive relief, unpaid wages, penalties, interest, and attorney’s fees and costs. Defendants have denied the material allegations of plaintiffs’ complaints throughout the litigation and have asserted numerous affirmative defenses. On July 23, 2010, plaintiffs moved for class certification in the action. On December 9, 2010, after briefing and argument, the trial court granted in part and denied in part plaintiffs’ motion, certifying sub-classes to pursue meal break claims, meal premium pay claims, work related travel claims, travel expense claims, termination pay claims, reporting time claims, bag check claims, pay record claims, and minimum wage claims. The parties are continuing to litigate questions relating to the Court’s certification order and to the merits of plaintiffs’ claims.
ITEM 1A.   RISK FACTORS
The Company’s risk factors as of October 29, 2011 have not changed materially from those disclosed in Part I, “ITEM 1A. RISK FACTORS” of A&F’s Annual Report on Form 10-K for Fiscal 2010 filed on March 29, 2011.

 

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ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the third quarter of Fiscal 2011.
The following table provides information regarding A&F’s purchases of its Common Stock during the thirteen-week period ended October 29, 2011:
                                 
                    Total Number of        
                  Shares Purchased     Maximum Number of  
    Total Number     Average     as Part of Publicly     Shares that May Yet be  
    of Shares     Price Paid     Announced Plans     Purchased under the  
Period (Fiscal Month)   Purchased (1)     per Share (2)     or Programs (3)     Plans or Programs (4)  
July 31, 2011 through August 27, 2011
    164,627     $ 58.94       150,000       8,236,258  
August 28, 2011 through October 1, 2011
    2,195     $ 65.46             8,236,258  
October 2, 2011 through October 29, 2011
    221     $ 53.21             8,236,258  
 
                           
Total
    167,043     $ 59.02       150,000       8,236,258  
 
                       
     
(1)   An aggregate of 17,043 of the shares of A&F’s Common Stock purchased during the quarterly period (thirteen-week period) ended October 29, 2011 represented shares which were withheld for tax payments due upon the vesting of employee restricted stock unit and restricted share awards and upon the exercise of employee stock appreciation rights. All other shares of A&F Common Stock purchased during the quarterly period were purchased pursuant to A&F’s publicly announced stock repurchase authorization described in footnote 3 below.
 
(2)   The average price paid per share includes broker commissions, as applicable.
 
(3)   The reported shares were purchased pursuant to A&F’s publicly announced stock repurchase authorization. On November 21, 2007, A&F announced the November 20, 2007 authorization by A&F’s Board of Directors to repurchase 10.0 million shares of A&F’s Common Stock.
 
(4)   The number shown represents, as of the end of each period, the maximum number of shares of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 3 above. The shares may be purchased, from time to time, depending on market conditions.

 

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ITEM 6.   EXHIBITS
         
Exhibit No.   Document
       
 
  3.1    
Certificate regarding Approval of Amendments to Sections 1.09 and 2.04 of Amended and Restated Bylaws of Abercrombie & Fitch Co. by Board of Directors of Abercrombie & Fitch Co. on November 15, 2011 (incorporated herein by reference to Exhibit 3.1 to A&F’s Current Report on Form 8-K dated and filed November 21, 2011 (File No. 001-12107))
       
 
  3.2    
Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through November 15, 2011 [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.]*
       
 
  4.1    
Supplement No. 1 to Amended and Restated Guaranty of Payment (Domestic Credit Parties), dated as of August 31, 2011, between NSOP, LLC, as a New Guarantor, and PNC Bank, National Association, as global agent (incorporated herein by reference to Exhibit 4.3 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107))
       
 
  15    
Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re:
       
Inclusion of Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP.*
       
 
  31.1    
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
       
 
  31.2    
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
       
 
  32    
Certifications by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
       
 
  101    
The following materials from Abercrombie & Fitch Co.’s Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010; (ii) Consolidated Balance Sheets at October 29, 2011 and January 29, 2011; (iii) Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2011 and October 30, 2010; and (iv) Notes to Consolidated Financial Statements***
 
     
*   Filed herewith.
 
**   Furnished herewith.
 
***   Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ABERCROMBIE & FITCH CO.
 
 
Date: December 6, 2011  By:   /s/ JONATHAN E. RAMSDEN    
    Jonathan E. Ramsden   
    Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized Officer) 
 

 

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EXHIBIT INDEX
         
Exhibit No.   Document
       
 
  3.2    
Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through November 15, 2011 [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.]*
       
 
  15    
Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Inclusion of Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP.*
       
 
  31.1    
Certifications by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
       
 
  31.2    
Certifications by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
       
 
  32    
Certifications by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
       
 
  101    
The following materials from Abercrombie & Fitch Co.’s Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010; (ii) Consolidated Balance Sheets at October 29, 2011 and January 29, 2011; (iii) Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2011 and October 30, 2010; and (iv) Notes to Consolidated Financial Statements.***
 
     
*   Filed herewith.
 
**   Furnished herewith.
 
***   Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.

 

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