UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 3, 2001 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- -------------------- Commission file number 1-12107 ------- ABERCROMBIE & FITCH CO. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 31-1469076 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6301 Fitch Path, New Albany, OH 43054 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 283-6500 -------------- Not Applicable ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate 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 11, 2001 - -------------------- -------------------------------- $.01 Par Value 98,870,455 Shares
ABERCROMBIE & FITCH CO. TABLE OF CONTENTS Page No. -------- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income Thirteen and Thirty-nine Weeks Ended November 3, 2001 and October 28, 2000.................................3 Condensed Consolidated Balance Sheets November 3, 2001 and February 3, 2001.................................4 Condensed Consolidated Statements of Cash Flows Thirty-nine Weeks Ended November 3, 2001 and October 28, 2000.................................5 Notes to Condensed Consolidated Financial Statements......................6 Report of Independent Accountants........................................10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition......................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........16 Part II. Other Information Item 1. Legal Proceedings..................................................17 Item 6. Exhibits and Reports on Form 8-K...................................19 2
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ABERCROMBIE & FITCH CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-nine Weeks Ended ------------------------------- ------------------------------ November 3, October 28, November 3, October 28, 2001 2000 2001 2000 -------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> NET SALES $354,473 $364,122 $898,269 $798,159 Cost of Goods Sold, Occupancy and Buying Costs 211,070 220,839 548,699 491,708 -------------- ------------- ------------- ------------- GROSS INCOME 143,403 143,283 349,570 306,451 General, Administrative and Store Operating Expenses 72,511 72,100 206,685 176,893 -------------- ------------- ------------- ------------- OPERATING INCOME 70,892 71,183 142,885 129,558 Interest Income, Net 1,001 1,469 3,849 5,300 -------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 71,893 72,652 146,734 134,858 Provision for Income Taxes 28,030 29,060 57,230 53,940 -------------- ------------- ------------- ------------- NET INCOME $43,863 $43,592 $89,504 $80,918 ============== ============= ============= ============= NET INCOME PER SHARE: Basic $0.44 $0.44 $0.90 $0.81 ============== ============= ============= ============= Diluted $0.43 $0.43 $0.87 $0.79 ============== ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 99,201 98,969 99,178 100,491 ============== ============= ============= ============= Diluted 101,692 101,548 102,866 102,375 ============== ============= ============= ============= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3
ABERCROMBIE & FITCH CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands) <TABLE> <CAPTION> November 3, February 3, 2001 2001 ----------- ----------- (Unaudited) ASSETS ------ <S> <C> <C> CURRENT ASSETS: Cash and Equivalents $ 71,481 $ 137,581 Marketable Securities 31,486 -- Receivables 26,439 15,829 Inventories 153,204 120,997 Store Supplies 23,968 17,817 Other 14,396 11,338 --------- --------- TOTAL CURRENT ASSETS 320,974 303,562 PROPERTY AND EQUIPMENT, NET 369,902 278,785 DEFERRED INCOME TAXES 4,788 4,788 OTHER ASSETS 273 381 --------- --------- TOTAL ASSETS $ 695,937 $ 587,516 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 36,422 $ 33,942 Accrued Expenses 127,469 101,302 Income Taxes Payable 11,399 19,318 --------- --------- TOTAL CURRENT LIABILITIES 175,290 154,562 OTHER LONG-TERM LIABILITIES 10,327 10,254 SHAREHOLDERS' EQUITY: Common Stock 1,033 1,033 Paid-In Capital 136,350 136,490 Retained Earnings 440,372 350,868 --------- --------- 577,755 488,391 Less: Treasury Stock, at Average Cost (67,435) (65,691) --------- --------- TOTAL SHAREHOLDERS' EQUITY 510,320 422,700 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 695,937 $ 587,516 ========= ========= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
ABERCROMBIE & FITCH CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited) Thirty-nine Weeks Ended ------------------------ November 3, October 28, 2001 2000 ----------- ----------- OPERATING ACTIVITIES: Net Income $ 89,504 $ 80,918 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 29,196 21,112 Noncash Charge for Deferred Compensation 3,110 3,386 Changes in Assets and Liabilities: Inventories (32,207) (47,112) Accounts Payable and Accrued Expenses 10,745 34,496 Income Taxes (7,919) (25,352) Other Assets and Liabilities (19,321) 2,195 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 73,108 69,643 --------- --------- INVESTING ACTIVITIES: Capital Expenditures (102,411) (114,190) Purchases of Marketable Securities (31,486) -- Proceeds from Maturities of Marketable Securities -- 45,601 Notes Receivable (317) (3,000) --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (134,214) (71,589) --------- --------- FINANCING ACTIVITIES: Stock Option Exercises and Other 6,075 (7,871) Purchases of Treasury Stock (11,069) (43,929) --------- --------- NET CASH USED FOR FINANCING ACTIVITIES (4,994) (51,800) --------- --------- NET DECREASE IN CASH AND EQUIVALENTS (66,100) (53,746) Cash and Equivalents, Beginning of Year 137,581 147,908 --------- --------- CASH AND EQUIVALENTS, END OF PERIOD $ 71,481 $ 94,162 ========= ========= SIGNIFICANT NONCASH INVESTING ACTIVITIES: Accrual for Construction in Progress $ 17,902 $ 29,126 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 5
ABERCROMBIE & FITCH NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Abercrombie & Fitch Co. ("A&F"), through its subsidiaries (collectively, A&F and its subsidiaries are referred to as "Abercrombie & Fitch" or the "Company"), is a specialty retailer of high quality, casual apparel for men, women and kids with an active, youthful lifestyle. The condensed consolidated financial statements include the accounts of A&F and all significant subsidiaries that are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements as of November 3, 2001 and for the thirteen and thirty-nine week periods ended November 3, 2001 and October 28, 2000 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in A&F's Annual Report on Form 10-K for the fiscal year ended February 3, 2001 (the "2000 fiscal year"). In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. The condensed consolidated financial statements as of November 3, 2001 and for the thirteen and thirty-nine week periods ended November 3, 2001 and October 28, 2000 included herein have been reviewed by the independent accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the notes to condensed consolidated financial statements. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for its report on the condensed consolidated financial statements because that report is not a "report" within the meaning of Sections 7 and 11 of the Act. 2. ADOPTION OF ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The standard is effective starting with fiscal years beginning after December 15, 2001 (February 3, 2002 for the Company). SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Management of A&F anticipates that the adoption of SFAS 6
No. 142 will not have an impact on the Company's results of operations or its financial position. SFAS No. 143, "Accounting for Asset Retirement Obligations," will be effective for fiscal years beginning after June 15, 2002 (February 2, 2003 for the Company). The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related obligation for its recorded amount or the entity incurs a gain or loss upon settlement. Because costs associated with exiting leased properties at the end of lease terms are minimal, management of A&F anticipates that the adoption of SFAS No. 143 will not have a significant effect on the Company's results of operations or its financial position. SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," will be effective for fiscal years beginning after December 15, 2001 (February 3, 2002 for the Company), and interim periods within those fiscal years. The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Management of A&F anticipates that the adoption of SFAS No. 144 will not have an impact on the Company's results of operations or its financial position. 3. EARNINGS PER SHARE Weighted Average Shares Outstanding (in thousands): Thirteen Weeks Ended ------------------------ November 3, October 28, 2001 2000 ----------- ----------- Shares of Class A Common Stock issued 103,300 103,300 Treasury shares (4,099) (4,331) ------- ------- Basic shares 99,201 98,969 Dilutive effect of options and restricted shares 2,491 2,579 ------- ------- Diluted shares 101,692 101,548 ======= ======= Thirty-nine Weeks Ended ------------------------- November 3, October 28, 2001 2000 ----------- ----------- Shares of Class A Common Stock issued 103,300 103,300 Treasury shares (4,122) (2,809) ------- ------- Basic shares 99,178 100,491 Dilutive effect of options and restricted shares 3,688 1,884 ------- ------- Diluted shares 102,866 102,375 ======= ======= Options to purchase 6,388,000 and 5,599,000 shares of Class A Common Stock during the thirteen and thirty-nine weeks ended November 3, 2001, respectively, and 8,798,000 7
and 9,015,000 shares during the thirteen and thirty-nine weeks ended October 28, 2000, respectively, were outstanding, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares. 4. INVENTORIES The fiscal year of A&F and its subsidiaries is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Valuation of finished goods inventories is based principally upon the lower of average cost or market determined on a first-in, first-out basis utilizing the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. 5. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (in thousands): November 3, February 3, 2001 2001 ----------- ----------- Property and equipment, at cost $ 494,154 $ 384,196 Accumulated depreciation and amortization (124,252) (105,411) --------- --------- Property and equipment, net $ 369,902 $ 278,785 ========= ========= 6. INCOME TAXES The provision for income taxes is based on the current estimate of the annual effective tax rate. Income taxes paid during the thirty-nine weeks ended November 3, 2001 and October 28, 2000 approximated $64.7 million and $80.0 million, respectively. 7. LONG-TERM DEBT The Company entered into a $150 million syndicated unsecured credit agreement (the "Agreement") on April 30, 1998. Borrowings outstanding under the Agreement are due April 30, 2003. The Agreement has several borrowing options, including interest rates that are based on the bank agent's "Alternate Base Rate," a LIBO Rate or a rate submitted under a bidding process. Facility fees payable under the Agreement are based on the Company's ratio (the "leverage ratio") of the sum of total debt plus 800% of forward minimum rent commitments to trailing four-quarters EBITDAR and currently accrues at .225% of the committed amount per annum. The Agreement contains limitations on debt, liens, restricted payments (including dividends), mergers and acquisitions, sale-leaseback transactions, investments, acquisitions, hedging transactions, and transactions with affiliates. It also contains financial covenants requiring a minimum ratio of EBITDAR to interest expense and minimum rent and a maximum leverage ratio. No amounts were outstanding under the Agreement at November 3, 2001 or February 3, 2001. 8
8. RELATED PARTY TRANSACTIONS Shahid & Company, Inc. has provided advertising and design services to the Company since 1995. Sam N. Shahid, Jr., who serves on A&F's Board of Directors, has been President and Creative Director of Shahid & Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided during the thirty-nine weeks ended November 3, 2001 and October 28, 2000 were approximately $1.3 million for each period. On May 18, 2001, A&F loaned the amount of $4,817,146 to its Chairman of the Board, a major shareholder of A&F, pursuant to the terms of a replacement promissory note, which provides that such amount is due and payable on December 31, 2001. The outstanding principal under the note bears interest at the rate of 4.5% per annum. This note constitutes a replacement of, and substitute for, the replacement promissory note dated as of August 28, 2000 in the amount of $4.5 million, which has been cancelled. 9. CONTINGENCIES The Company is involved in a number of legal proceedings. Although it is not possible to predict with any certainty the eventual outcome of any legal proceedings, it is the opinion of management that the ultimate resolution of these matters will not have a material impact on the Company's results of operations, cash flows or financial position. 9
REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of Abercrombie & Fitch We have reviewed the accompanying condensed consolidated balance sheets of Abercrombie & Fitch (the "Company") and its subsidiaries as of November 3, 2001 and October 28, 2000, and the related condensed consolidated statements of income for each of the thirteen and thirty-nine week periods ended November 3, 2001 and October 28, 2000 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended November 3, 2001 and October 28, 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of February 3, 2001 and the related consolidated statements of income, shareholders' equity, and of cash flows for the year then ended (not presented herein) and in our report dated February 20, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 3, 2001 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Columbus, Ohio November 9, 2001 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the third quarter of the 2001 fiscal year, net sales decreased 3% to $354.5 million from $364.1 million a year ago. Operating income declined to $70.9 million in the third quarter of 2001 from $71.2 million in the third quarter of 2000. Earnings per diluted share were $.43 in the third quarter of both 2001 and 2000. Year-to-date earnings per diluted share were $.87 in 2001 compared to $.79 in 2000. Financial Summary The following summarized financial and statistical data compares the thirteen and thirty-nine week periods ended November 3, 2001 to the comparable fiscal 2000 periods: <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-nine Weeks Ended ------------------------------------------- ------------------------------------------- November 3, October 28, November 3, October 28, 2001 2000 Change 2001 2000 Change ------------ ----------- ----------- ------------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Comparable store sales (15)% (3)% (8)% (5)% Retail sales increase 12% 31% 21% 24% attributable to new and remodeled stores, magazine, catalogue and Web sites Retail sales per average gross $104 $138 (25)% $274 $320 (14)% square foot Retail sales per average store $797 $1,143 (30)% $2,134 $2,691 (21)% (thousands) Average store size at end of 7,594 8,178 (7)% quarter (gross square feet) Gross square feet at end of 3,448 2,658 30% quarter (thousands) Number of stores: Beginning of period 405 294 354 250 Opened 49 31 101 75 Closed - - 1 - ----- ------ ------ ------ End of period 454 325 454 325 ===== ====== ====== ====== </TABLE> Net Sales - --------- Net sales for the third quarter of 2001 decreased 3% to $354.5 million from $364.1 million in 2000. The decrease was due to a 15% decline in comparable store sales as compared with last year's thirteen-week period ended November 4, 2000, which more than offset the sales increase attributable to the addition of new stores. The decrease in comparable store sales was primarily due to continued weakness in the men's business. Women's had a negative single-digit comparable store sales decrease for the quarter. Stronger performing categories were in denim, gymwear, skirts and women's accessories. The quarter was affected by an unusual interest in "wear-now" merchandise at the expense of traditionally strong back-to-school categories such as 11
sweaters, sweats and outerwear. The Company's catalogue, the A&F Quarterly (a catalogue/magazine), and the Company's Web sites accounted for 3.4% of net sales in the third quarter of 2001 as compared to 2.9% last year. Operating improvements in e-commerce fulfillment helped reduce the number of backorders, increasing sales by improving in-stocks. Year-to-date net sales were $898.3 million, an increase of 13% from $798.2 million for the same period in 2000. Sales growth resulted from the addition of new stores offset by an 8% decline in comparable store sales. The decrease in comparable store sales was primarily due to continued weakness in the men's business. Comparable store sales were positive in the women's business with strong performances in denim, knits, sweaters, skirts and gymwear. The Company's catalogue, the A&F Quarterly and the Company's Web sites represented 4.0% of 2001 year-to-date net sales as compared to 3.1% last year. Gross Income - ------------ Gross income, expressed as a percentage of net sales, increased to 40.5% during the third quarter of 2001 from 39.4% for the same period in 2000. The increase was primarily attributable to higher merchandise margins (representing gross income before the deduction of buying and occupancy costs) due to higher initial markup (IMU), a lower markdown rate and lower inventory shrinkage. The increase in IMU was a result of continued improvement in the sourcing of merchandise, which allowed for increased markup while maintaining similar retail prices as compared to last year. Merchandise margins also increased because of a cautious investment in back-to-school inventory, which led to a lower level of inventory per square foot. The reduced level of inventory allowed for a reduction in markdowns, expressed as a percentage of net sales, as compared to last year. Additionally, the Company continues to emphasize its in-store operational controls to improve inventory shrinkage. Partially offsetting these improvements was an increase in buying and occupancy costs, expressed as a percentage of net sales, as a result of the inability to leverage fixed expenses with lower sales volume per average store. The 2001 year-to-date gross income, expressed as a percentage of net sales, increased to 38.9% from 38.4% for the comparable period in 2000. The increase was attributable to higher IMU as a result of the improved sourcing of merchandise, a lower markdown rate and lower inventory shrinkage. Partially offsetting these improvements was an increase in buying and occupancy costs, expressed as a percentage of net sales, as a result of the inability to leverage fixed expenses with lower sales volume per average store. General, Administrative and Store Operating Expenses - ---------------------------------------------------- General, administrative and store operating expenses, expressed as a percentage of net sales, were 20.5% and 19.8% in the third quarter of 2001 and 2000, respectively. The Company continues to tightly control expenses in both the stores and the home office. These cost controls include limiting headcount additions, reducing home office travel and store payroll hours, and decreasing outside services expenses as a percentage of net sales. The savings from these cost controls were offset by the inability to leverage fixed expenses as a result of the decrease in sales volume per average store. Also offsetting the cost savings were higher depreciation and occupancy expenses related to the new home office complex and distribution center. General, administrative and store operating expenses were also negatively impacted by a significant 12
increase in charitable contributions. All profits from "freedom" t-shirts and savings from the cancellation of the Christmas magazine were donated to help victims of the September 11th attack. These contributions totaled approximately $1.6 million for the quarter. General, administrative and store operating expenses, expressed as a percentage of net sales, were 23.0% and 22.2% for the year-to-date periods in 2001 and 2000, respectively. The percentage increase resulted primarily from the inability to leverage fixed expenses as a result of the decrease in sales volume per average store. Operating Income - ---------------- Operating income, expressed as a percentage of net sales, increased to 20.0% during the third quarter of 2001 from 19.5% for the comparable period of 2000. The increase is a result of a higher gross income percentage. The increase was partially offset by higher general, administrative and store operating expenses, expressed as a percentage of net sales. Operating income, expressed as a percentage of net sales, declined to 15.9% for the year-to-date period in 2001 from 16.2% for the comparable period in 2000. The decline in the operating income percentage is a result of higher general, administrative and store operating expenses, expressed as a percentage of net sales, which were partially offset by the increased gross income percentage. Interest Income - --------------- Third quarter and year-to-date net interest income were $1.0 and $3.8 million in 2001 as compared with net interest income of $1.5 and $5.3 million for the third quarter and year-to-date periods last year. Net interest income in 2001 and 2000 was primarily from short-term investments. FINANCIAL CONDITION Liquidity and Capital Resources - ------------------------------- Cash provided by operating activities provides the resources to support operations, including projected growth, seasonal requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (thousands): November 3, February 3, 2001 2001 ----------- ----------- Working capital $145,684 $149,000 ======== ======== Capitalization: Shareholders' equity $510,320 $422,700 ======== ======== Net cash provided by operating activities totaled $73.1 million for the thirty-nine weeks ended November 3, 2001 versus $69.6 million in the comparable period of 2000. Cash was provided primarily by current year net income adjusted for depreciation and amortization. Additionally, cash was provided from an increase in both accounts payable and accrued expenses as a result of 13
the continued growth of the business. Cash was used primarily to fund inventory and store supplies required to support the addition of new stores and for tax payments on earnings in the fourth quarter of 2000 and estimated tax payments for fiscal year 2001 earnings. In addition, receivables increased primarily as a result of higher construction allowances related to the timing of new store openings. Abercrombie & Fitch's operations are seasonal in nature and typically peak during the back-to-school and Christmas selling periods. Accordingly, cash requirements for inventory expenditures are highest during these periods. Cash outflows for investing activities were for capital expenditures related to new and remodeled stores (net of construction allowances) and the construction costs of the new home office and distribution center. In 2001, cash outflows for investing activities also consisted of the purchase of short-term marketable securities. In 2000, capital expenditures were offset by maturities of marketable securities. Financing activities during 2001 and 2000 consisted primarily of the repurchase of 600,000 and 3,550,000 shares of A&F's Class A Common Stock pursuant to previously authorized stock repurchase programs. As of November 3, 2001, A&F was authorized to repurchase up to an additional 1,850,000 shares under the current repurchase program. Financing activities also consisted of stock option exercises. Capital Expenditures - -------------------- Capital expenditures, primarily for new and remodeled stores and the construction of the new home office and distribution center, totaled $102.4 million and $114.2 million for the thirty-nine weeks ended November 3, 2001 and October 28, 2000, respectively. Additionally, the noncash accrual for construction in progress increased by $17.9 million in 2001 and by $29.1 million in 2000. The Company anticipates spending $125 to $135 million in 2001 for capital expenditures, of which $100 to $110 million will be for new stores, remodeling and/or expansion of existing stores and related improvements. The balance of capital expenditures will chiefly be related to the new home office and distribution center, which were completed in April 2001 and February 2001, respectively, as well as to the decision to in-source IT data center operations and e-commerce fulfillment. The Company intends to add approximately 820,000 gross square feet in 2001, which will represent a 29% increase over year-end 2000. It is anticipated the increase will result from the net addition of approximately 44 new Abercrombie & Fitch stores, 63 abercrombie stores and 29 Hollister Co. stores. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for Abercrombie & Fitch stores to be opened in 2001 will approximate $600,000 per store, after giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $300,000 per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for abercrombie stores to be opened in 2001 will approximate $500,000 per store, after 14
giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $150,000 per store. The Company is in the early stages of developing Hollister Co. As a result, current average costs for leasehold improvements, furniture and fixtures and inventory purchases are not representative of future costs. The Company expects that substantially all future capital expenditures will be funded with cash from operations. In addition, the Company has available a $150 million credit agreement to support operations. Relationship with The Limited - ----------------------------- Effective May 19, 1998, The Limited, Inc. ("The Limited") completed a tax-free exchange offer to establish A&F as an independent company. Subsequent to the exchange offer, A&F and The Limited entered into various service agreements for terms ranging from one to three years. A&F hired associates with the appropriate expertise or contracted with outside parties to replace those services which expired in May 1999. Service agreements were also entered into for the continued use by the Company of its distribution and home office space and transportation and logistic services. The distribution space agreement terminated in April 2001. The home office space and transportation and logistic services agreements expired in May 2001. The cost of these services generally was equal to The Limited's cost in providing the relevant services plus 5% of such costs. Costs incurred to replace the services formerly provided by The Limited did not have a material adverse impact nor are they expected to have a material adverse impact on the Company's financial condition. Recently Issued Accounting Pronouncements - ----------------------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The standard is effective starting with fiscal years beginning after December 15, 2001 (February 3, 2002 for the Company). SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Management of A&F anticipates that the adoption of SFAS No. 142 will not have an impact on the Company's results of operations or its financial position. SFAS No. 143, "Accounting for Asset Retirement Obligations," will be effective for fiscal years beginning after June 15, 2002 (February 2, 2003 for the Company). The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related obligation for its recorded amount or the entity incurs a gain or loss upon settlement. Because costs associated with exiting leased properties at the end of lease 15
terms are minimal, management of A&F anticipates that the adoption of SFAS No. 143 will not have a significant effect on the Company's results of operations or its financial position. SFAS No.144, "Accounting for Impairment or Disposal of Long-Lived Assets," will be effective for fiscal years beginning after December 15, 2001 (February 3, 2002 for the Company), and interim periods within those fiscal years. The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Management of A&F anticipates that the adoption of SFAS No. 144 will not have an impact on the Company's results of operations or its financial position. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- A&F cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Report or made by management of A&F involve risks and uncertainties and are subject to change based on various important factors. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results for 2001 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this Form 10-Q or otherwise made by management: changes in consumer spending patterns and consumer preferences, the effects of political and economic events and conditions domestically and in foreign jurisdictions in which the Company operates, including, but not limited to, acts of terrorism or war, the impact of competition and pricing, changes in weather patterns, political stability, currency and exchange risks and changes in existing or potential duties, tariffs or quotas, availability of suitable store locations at appropriate terms, ability to develop new merchandise and ability to hire and train associates. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk of A&F's financial instruments as of November 3, 2001 has not significantly changed since February 3, 2001. A&F's market risk profile as of February 3, 2001 is disclosed in A&F's Annual Report on Form 10-K. 16
PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in lawsuits arising in the ordinary course of business. On January 13, 1999, a complaint was filed against many national retailers in the United States District Court for the Central District of California. The complaint (1) purported to be filed on behalf of a class of unnamed garment workers, (2) related to labor practices allegedly employed on the island of Saipan, Commonwealth of the Northern Mariana Islands, by apparel manufacturers unrelated to the Company, some of which have sold goods to the Company, and (3) sought injunctive, unspecified monetary and other relief. On September 29, 1999, the action was transferred to the United States District Court for the District of Hawaii. Thereafter, the plaintiffs moved for leave to amend their complaint to add A&F and others as additional defendants. That motion was granted and, on April 28, 2000, an amended complaint was filed which adds A&F and others as defendants, but does not otherwise significantly alter either the claims alleged or the relief sought by the plaintiffs. A&F moved to dismiss the amended complaint. Certain of the other defendants also moved to transfer the action to Saipan. On June 23, 2000, the District Court of Hawaii ordered the case to be transferred to the United States District Court for the District of the Northern Mariana Islands. Plaintiffs filed a Petition for Writ of Mandamus challenging the transfer and on March 22, 2001, the Ninth Circuit Court of Appeals issued an order denying the Petition for Writ of Mandamus, thus allowing the case to be transferred to the United States District Court for the Northern Mariana Islands. The motion to dismiss was denied in part and granted in part on November 26, 2001. As to the partial granting of the motion, the Court also granted the plaintiffs leave to amend to cure any pleading defects. Plaintiffs filed their motion for class certification on December 13, 2001 and their second amended complaint on December 17, 2001. The Court has set a hearing for class certification for February 14, 2002 and class certification discovery has commenced. The motion for preliminary approval of the other defendants' settlement is also set for hearing on February 28, 2002. On June 2, 1998, A&F filed suit against American Eagle Outfitters, Inc. alleging an intentional and systematic copying of the "Abercrombie & Fitch" brand, its images and business practices, including the design and look of the Company's merchandise, marketing and catalogue/magazine. The lawsuit, filed in Federal District Court in Columbus, Ohio, sought to enjoin American Eagle's practices, recover lost profits and obtain punitive damages. In July 1999, the District Court granted a summary judgment dismissing the lawsuit against American Eagle. A&F filed a motion for reconsideration of the District Court judgment which was subsequently denied by court order dated September 10, 1999. In October 1999, A&F filed an appeal in the United States Court of Appeals for the Sixth Circuit (the "Sixth Circuit") regarding the decisions of the District Court on the motions for summary judgment and reconsideration. The appeal has been fully briefed and oral arguments were held before the Sixth Circuit on December 7, 2000. A&F is awaiting a written decision. A&F is aware of 20 actions that have been filed against A&F and certain of its officers and directors on behalf of a purported, but as yet uncertified, class of shareholders who purchased A&F's Class A Common Stock between October 8, 1999 and October 13, 1999. These 20 actions have been filed in the United States District Courts for the Southern District of New York and the Southern District of Ohio, Eastern Division alleging violations of the federal securities laws and seeking unspecified damages. On 17
April 12, 2000, the Judicial Panel on Multidistrict Litigation issued a Transfer Order transferring the 20 pending actions to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities Litigation. On November 16, 2000, the Court signed an Order appointing the Hicks Group, a group of seven unrelated investors in A&F's securities, as lead plaintiff, and appointing lead counsel in the consolidated action. On December 14, 2000, plaintiffs filed a Consolidated Amended Class Action Complaint (the "Amended Complaint") in which they did not name as defendants Lazard Freres & Co. and Todd Slater, who had formerly been named as defendants in certain of the 20 complaints. A&F and other defendants filed motions to dismiss the Amended Complaint on February 14, 2001. A&F believes that the actions against it are without merit and intends to defend vigorously against them. However, A&F does not believe it is feasible to predict the outcome of these proceedings. The timing of the final resolution of these proceedings is also uncertain. In addition, the United States Securities and Exchange Commission initiated a formal investigation regarding trading in the securities of A&F and the disclosure of sales forecasts in October 1999, and the Ohio Division of Securities requested information from A&F regarding these same matters. A&F has cooperated in the investigations. 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3. Certificate of Incorporation and Bylaws. 3.1 Amended and Restated Certificate of Incorporation of A&F as filed with the Delaware Secretary of State on August 27, 1996, incorporated by reference to Exhibit 3.1 to A&F's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. (File No. 1-12107) 3.2 Certificate of Designation of Series A Participating Cumulative Preferred Stock of A&F as filed with the Delaware Secretary of State on July 21, 1998, incorporated by reference to Exhibit 3.2 to A&F's Annual Report on Form 10-K for the year ended January 30, 1999. (File No. 1-12107) 3.3 Certificate of Decrease of Shares Designated as Class B Common Stock as filed with the Delaware Secretary of State on July 30, 1999, incorporated by reference to Exhibit 3.3 to A&F's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999. (File No. 1-12107) 3.4 Amended and Restated Bylaws of A&F, incorporated by reference to Exhibit 3.2 to A&F's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. (File No. 1-12107) 3.5 Certificate regarding adoption of amendment to Subsection 1.10(c) of Amended and Restated Bylaws of A&F by Board of Directors on April 4, 2000, incorporated by reference to Exhibit 3.5 to A&F's Annual Report on Form 10-K for the year ended January 29, 2000. (File No. 1-12107) 3.6 Amended and Restated Bylaws of A&F (reflecting amendments through April 4, 2000) (for SEC reporting compliance purposes only), incorporated by reference to Exhibit 3.6 to A&F's Annual Report on Form 10-K for the year ended January 29, 2000. (File No. 1-12107) 4. Instruments Defining the Rights of Security Holders. 4.1 Credit Agreement, dated as of April 30, 1998, among Abercrombie & Fitch Stores, Inc., as Borrower, A&F, as Guarantor, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, and Chase Securities, Inc., as Arranger, incorporated by reference to Exhibit 4.1 to A&F's Current Report on Form 8-K dated May 7, 1998. (File No. 1-12107) 4.2 First Amendment and Waiver, dated as of July 30, 1999, to the Credit Agreement, dated as of April 30, 1998, among Abercrombie & Fitch Stores, Inc., A&F, the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent, incorporated by reference to Exhibit 4.3 to A&F's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999. (File No. 1-12107) 4.3 Rights Agreement, dated as of July 16, 1998, between A&F and First Chicago Trust Company of New York, as Rights Agent, incorporated by reference to Exhibit 1 to A&F's Registration Statement on Form 8-A dated July 21, 1998. (File No. 1-12107) 4.4 Amendment No. 1 to Rights Agreement, dated as of April 21, 1999, between A&F and First Chicago Trust Company of New York, as Rights 19
Agent, incorporated by reference to Exhibit 2 to A&F's Amendment No. 1 to Form 8-A dated April 23, 1999. (File No. 1-12107) 4.5 Certificate of adjustment of number of Rights associated with each share of Class A Common Stock, dated May 27, 1999, incorporated by reference to Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999. (File No. 1-12107) 4.6 Appointment and Acceptance of Successor Rights Agent, effective as of the opening of business on October 8, 2001, between A&F and National City Bank, incorporated by reference to Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q for the quarter ended August 4, 2001. (File No. 1-12107) 10. Material Contracts. 10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan, incorporated by reference to Exhibit A to A&F's Proxy Statement dated April 14, 1997. (File No. 1-12107) 10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Option and Performance Incentive Plan (reflects amendments through December 7, 1999 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999), incorporated by reference to Exhibit 10.2 to A&F's Annual Report on Form 10-K for the year ended January 29, 2000. (File No. 1-12107) 10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors (reflects amendments through November 1, 2001 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999). 10.4 Employment Agreement by and between A&F and Michael S. Jeffries dated as of May 13, 1997 with exhibits and amendment, incorporated by reference to Exhibit 10.4 to A&F's Quarterly Report on Form 10-Q for the quarter ended November 1, 1997. (File No. 1-12107) 10.5 Employment Agreement by and between A&F and Seth R. Johnson dated as of December 5, 1997, incorporated by reference to Exhibit 10.10 to A&F's Amendment No. 4 to Form S-4 Registration Statement filed on April 14, 1998 (Registration No. 333-46423). 10.6 Tax Disaffiliation Agreement dated as of May 19, 1998 between The Limited, Inc. and A&F, incorporated by reference to Exhibit 10.7 to A&F's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. (File No. 1-12107) 10.7 Abercrombie & Fitch, Inc. Directors' Deferred Compensation Plan, incorporated by reference to Exhibit 10.14 to A&F's Annual Report on Form 10-K for the year ended January 30, 1999. (File No. 1-12107) 10.8 Replacement Promissory Note, dated May 18, 2001, issued by Michael S. Jeffries to A&F, incorporated by reference to Exhibit 10.11 to A&F's Quarterly Report on Form 10-Q for the quarter ended May 5, 2001. (File No. 1-12107) 20
15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Inclusion of Report of Independent Accountants. (b) Reports on Form 8-K. -------------------- No reports on Form 8-K were filed during the fiscal quarter ended November 3, 2001. 21
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. (Registrant) By /S/ Seth R. Johnson ----------------------------------- Seth R. Johnson, Executive Vice President and Chief Operating Officer* Date: December 17, 2001 * Mr. Johnson has been duly authorized to sign on behalf of the Registrant as its principal financial officer. 22
EXHIBIT INDEX ------------- Exhibit No. Document - ----------- -------- 10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors (reflects amendments through November 1, 2001 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999). 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Inclusion of Report of Independent Accountants.