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 May 4, 2002 ----------- 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 May 28, 2002 - ------------------------------- --------------------------------- $.01 Par Value 99,073,347 Shares
ABERCROMBIE & FITCH CO. TABLE OF CONTENTS <TABLE> <CAPTION> Page No. -------- <S> <C> Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income Thirteen Weeks Ended May 4, 2002 and May 5, 2001 .................................... 3 Condensed Consolidated Balance Sheets May 4, 2002 and February 2, 2002 ................................ 4 Condensed Consolidated Statements of Cash Flows Thirteen Weeks Ended May 4, 2002 and May 5, 2001 ..................................... 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 ........... 17 Part II. Other Information Item 1. Legal Proceedings .................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders .................. 19 Item 6. Exhibits and Reports on Form 8-K ..................................... 21 </TABLE> 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 ----------------------- May 4, May 5, 2002 2001 -------- -------- <S> <C> <C> NET SALES $312,792 $263,680 Cost of Goods Sold, Occupancy and Buying Costs 198,363 165,840 -------- -------- GROSS INCOME 114,429 97,840 General, Administrative and Store Operating Expenses 77,442 65,777 -------- -------- OPERATING INCOME 36,987 32,063 Interest Income, Net (872) (1,720) -------- -------- INCOME BEFORE INCOME TAXES 37,859 33,783 Provision for Income Taxes 14,570 13,180 -------- -------- NET INCOME $ 23,289 $ 20,603 ======== ======== NET INCOME PER SHARE: Basic $ 0.24 $ 0.21 ======== ======== Diluted $ 0.23 $ 0.20 ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 99,023 99,011 ======== ======== Diluted 102,130 102,885 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3
ABERCROMBIE & FITCH CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands) <TABLE> <CAPTION> May 4, February 2, 2002 2002 ------------ ----------- (Unaudited) ASSETS ------ <S> <C> <C> CURRENT ASSETS: Cash and Equivalents $ 225,977 $ 167,664 Marketable Securities 15,000 71,220 Receivables 16,245 20,456 Inventories 117,166 108,876 Store Supplies 22,280 21,524 Other 15,343 15,455 ------------ ----------- TOTAL CURRENT ASSETS 412,011 405,195 PROPERTY AND EQUIPMENT, NET 382,762 365,112 OTHER ASSETS 203 239 ------------ ----------- TOTAL ASSETS $ 794,976 $ 770,546 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 29,666 $ 31,897 Accrued Expenses 120,440 109,586 Income Taxes Payable 10,314 22,096 ------------ ----------- TOTAL CURRENT LIABILITIES 160,420 163,579 DEFERRED INCOME TAXES 7,401 1,165 OTHER LONG-TERM LIABILITIES 9,609 10,368 SHAREHOLDERS' EQUITY: Common Stock 1,033 1,033 Paid-In Capital 142,516 141,394 Retained Earnings 542,829 519,540 ------------ ----------- 686,378 661,967 Less: Treasury Stock, at Average Cost (68,832) (66,533) ------------ ----------- TOTAL SHAREHOLDERS' EQUITY 617,546 595,434 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 794,976 $ 770,546 ============ =========== </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) <TABLE> <CAPTION> Thirteen Weeks Ended ------------------------ May 4, May 5, 2002 2001 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES: Net Income $ 23,289 $ 20,603 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 12,389 8,777 Noncash Charge for Deferred Compensation 580 1,229 Changes in Assets and Liabilities: Inventories (8,290) 11,701 Accounts Payable and Accrued Expenses 3,849 (11,439) Income Taxes (5,599) (13,920) Other Assets and Liabilities 2,844 1,705 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,062 18,656 ---------- ---------- INVESTING ACTIVITIES: Capital Expenditures (25,265) (34,739) Proceeds from Maturities of Marketable Securities 56,220 - ---------- ---------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 30,955 (34,739) ---------- ---------- FINANCING ACTIVITIES: Stock Option Exercises and Other (1,704) 1,761 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 58,313 (14,322) Cash and Equivalents, Beginning of Period 167,664 137,581 ---------- ---------- CASH AND EQUIVALENTS, END OF PERIOD $ 225,977 $ 123,259 ========== ========== SIGNIFICANT NONCASH INVESTING ACTIVITIES: Accrual for Construction in Progress $ 4,774 $ 8,470 ========== ========== </TABLE> 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 May 4, 2002 and for the thirteen week periods ended May 4, 2002 and May 5, 2001 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 2, 2002 (the "2001 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 May 4, 2002 and for the thirteen week periods ended May 4, 2002 and May 5, 2001 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 for the Company's 2002 fiscal year. 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. The adoption of SFAS No. 142 had no impact on the Company's results of operations or its financial position. 6
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," is effective for the Company's 2002 fiscal year. The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of this standard had no impact on the Company's results of operations or its financial position. 3. ISSUANCE OF ACCOUNTING STANDARDS 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 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. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," will be effective for fiscal years beginning after May 15, 2002 (February 2, 2003 for the Company). The standard rescinds FASB statements No. 4 and 64 that deal with issues relating to the extinguishment of debt. The standard also rescinds FASB Statement No. 44 that deals with intangible assets of motor carriers. The standard modifies SFAS No. 13, "Accounting for Leases," so that certain capital lease modifications must be accounted for by lessees as sale-leaseback transactions. Additionally, the standard identifies amendments that should have been made to previously existing pronouncements and formally amends the appropriate pronouncements. Management anticipates that the adoption of SFAS No. 145 will not have a significant effect on the Company's results of operations or its financial position. 4. EARNINGS PER SHARE Weighted Average Shares Outstanding (in thousands): <TABLE> <CAPTION> Thirteen Weeks Ended --------------------------- May 4, May 5, 2002 2001 ----------- ---------- <S> <C> <C> Shares of Class A Common Stock issued 103,300 103,300 Treasury shares (4,277) (4,289) ----------- ---------- Basic shares 99,023 99,011 Dilutive effect of options and restricted shares 3,107 3,874 ----------- ---------- Diluted shares 102,130 102,885 =========== ========== </TABLE> 7
Options to purchase 6,102,000 and 5,582,000 shares of Class A Common Stock were outstanding at May 4, 2002 and May 5, 2001, respectively, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares. 5. INVENTORIES 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. 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (in thousands): <TABLE> <CAPTION> May 4, February 2, 2002 2002 ---------- ----------- <S> <C> <C> Property and equipment, at cost $ 531,362 $ 501,323 Accumulated depreciation and amortization (148,600) (136,211) ---------- ----------- Property and equipment, net $ 382,762 $ 365,112 ========== =========== </TABLE> 7. INCOME TAXES The provision for income taxes is based on the current estimate of the annual effective tax rate. Income taxes paid during the thirteen weeks ended May 4, 2002 and May 5, 2001 approximated $20.2 million and $26.5 million, respectively. 8. 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. 8
No amounts were outstanding under the Agreement at May 4, 2002 or February 2, 2002. 9. RELATED PARTY TRANSACTIONS Shahid & Company, Inc. has provided advertising and design services for the Company since 1995. Sam N. Shahid, Jr., who serves on A&F's Board of Directors, has been President and Creative Director of Shahid & Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided during the thirteen weeks ended May 4, 2002 and May 5, 2001 were approximately $.5 million and $.4 million, respectively. On January 1, 2002, A&F loaned the amount of $4,953,833 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, 2002. If A&F records net sales of at least $1,156,100,000 during the period from February 3, 2002 through November 30, 2002, the outstanding principal under the note will not bear interest. If A&F does not record net sales exceeding that threshold, the outstanding principal under the note will bear interest from January 1, 2002 at the rate of 4.5% per annum. This note constitutes a replacement of, and substitute for, the replacement promissory note dated as of May 18, 2001 in the amount of $4,817,146, which has been cancelled. The replacement promissory note dated May 18, 2001 constituted a replacement of, and substitute for, the replacement promissory note dated as of August 28, 2000 in the amount of $4.5 million. The replacement promissory note dated August 28, 2000 constituted a replacement of, and substitute for, the promissory note dated March 1, 2000 and the replacement promissory note dated May 19, 2000 in the amounts of $1.5 million and $3.0 million, respectively. The replacement promissory note dated May 19, 2000 constituted a replacement of, and substitute for, the promissory note dated as of November 17, 1999 in the amount of $1.5 million. 10. 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 sheet of Abercrombie & Fitch (the "Company") and its subsidiaries as of May 4, 2002 and the related condensed consolidated statements of income for each of the thirteen-week periods ended May 4, 2002 and May 5, 2001 and the condensed consolidated statements of cash flows for the thirteen-week periods ended May 4, 2002 and May 5, 2001. 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 2, 2002 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated February 19, 2002 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 2, 2002 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Columbus, Ohio May 14, 2002 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the first quarter of the 2002 fiscal year, net sales increased 19% to $312.8 million from $263.7 million a year ago. Operating income improved to $37.0 million in the first quarter of 2002 from $32.1 million in the first quarter of 2001. A&F recorded its 39th consecutive comparative quarter of record earnings as net income increased to $23.3 million in the first quarter of 2002 as compared to $20.6 million last year. Earnings per diluted share were $.23 in the first quarter of 2002 compared to $.20 a year ago. The following data represents the amounts shown in the Company's condensed consolidated statements of income for the first quarter of the 2002 and 2001 fiscal years expressed as a percentage of net sales: Thirteen Weeks Ended ------------------------------- May 4, 2002 May 5, 2001 ----------- ----------- NET SALES 100.0% 100.0% Cost of Goods Sold, Occupancy and Buying Costs 63.4 62.9 ----- ----- GROSS INCOME 36.6 37.1 General, Administrative and Store Operating Expenses 24.8 24.9 ----- ----- OPERATING INCOME 11.8 12.2 Interest Income, Net (0.3) (0.7) ----- ----- INCOME BEFORE INCOME TAXES 12.1 12.8 Provision for Income Taxes 4.7 5.0 ----- ----- NET INCOME 7.4% 7.8% ===== ===== 11
Financial Summary - ----------------- The following summarized financial and statistical data compares the thirteen week period ended May 4, 2002 to the comparable fiscal 2001 period: Thirteen Thirteen Weeks Ended Weeks Ended May 4, 2002 May 5, 2001 % Change ------------- ------------- ------------ Increase (decrease) in comparable store sales (6)% 2% Retail sales increase attributable to new and remodeled stores, magazine, catalogue and Web sites 25% 27% Retail sales per average gross square foot $ 80 $ 88 (9)% Retail sales per average store (thousands) $ 593 $ 707 (16)% Average store size at end of quarter (gross square feet) 7,440 8,045 (8)% Gross square feet at end of quarter (thousands) 3,772 2,856 32% Number of stores: Beginning of year 491 354 Opened 19 2 Closed (3) (1) ------- ------- End of period 507 355 ======= ======= Net Sales - --------- Net sales for the first quarter of 2002 increased 19% to $312.8 million from $263.7 million in 2001. The increase was due to the addition of new stores offset by a 6% decline in comparable store sales. The Company continued to utilize certain promotional strategies during the first quarter of 2002 that had been implemented in the fourth quarter of 2001. Although total Company comparable store sales remained negative, the addition of new and noncomparable store sales resulted in an addition to net sales of $60.6 million. The decrease in comparable store sales amounted to a $14.3 million decrease in net sales. Comparable store sales were down in the low-single digits in the women's business for the quarter. Stronger performing categories were skirts, shirts, denim, knits and women's accessories. Men's comparable store sales decreased in the high-single digits for the quarter; however, denim, activewear, underwear and knits performed well. Overall, the women's business accounted for 57% of the total adult business. The kids' business had a comparable store sales decrease in the high-single digits with girls' much stronger than boys'. The newest business, Hollister Co., continues to demonstrate strong customer acceptance. Sales per square foot in the Hollister stores were approximately 80% of the Abercrombie & Fitch adult stores in the same mall. The adult and kids e-commerce business continues to become a larger part of the business as Internet sales grew by over 60% during the first quarter compared to last year. The Company's catalogue, the A&F Quarterly (a 12
catalogue/magazine), and the Company's Web sites accounted for 5.3% of net sales in the first quarter of 2002 as compared to 4.9% last year. Gross Income - ------------ The gross income rate (gross income divided by net sales) decreased to 36.6% during the first quarter of 2002 from 37.1% for the same period in 2001. The decrease was primarily attributable to higher buying and occupancy costs as a percentage of net sales due to the inability to leverage fixed expenses with lower sales volume per average store. Additionally, the markdown rate was slightly higher due to the impact of promotional strategies. The average unit retail price for the quarter was 8% lower than last year in the adult business and 12% lower in kids. These decreases were partially offset by higher initial markup (IMU) and tight control of inventory. The increase in IMU was a result of continued improvement in the sourcing of merchandise. The continued tight control of inventory resulted in inventories being down 19% per gross square foot at quarter-end as compared with last year. General, Administrative and Store Operating Expenses - ---------------------------------------------------- The general, administrative and store operating expenses rate (general, administrative and store operating expenses divided by net sales) was 24.8% and 24.9% in the first quarter of 2002 and 2001, respectively. The Company continues to tightly control expenses in both the home office and the stores, including limiting headcount additions and reducing store payroll hours. Savings were also recognized in the new distribution center and in the direct business. During the first quarter, productivity in the distribution center, as measured in units processed per labor hour, was over 50% higher than last year. Last year's productivity was somewhat hindered by the move into the new facility last February, and smaller productivity improvement is expected for the balance of the year. In the direct business, fulfillment costs per order were down from last year. During the first quarter of 2002, the transition of the entire direct business to in-house fulfillment was completed. With all e-commerce and retail inventories now located and processed at A&F's own distribution center, orders should be filled more efficiently. As a result, it is expected that costs per order and backorder rates will continue to improve. These savings in general, administrative and store operating expenses were partially offset by marketing costs incurred as part of the Company's promotional strategy. Operating Income - ---------------- The first quarter operating income rate (operating income divided by net sales) was 11.8% in 2002, down from 12.2% for the comparable period in 2001. The decline in operating income rate was the result of a lower gross income rate. Interest Income/Expense - ----------------------- First quarter 2002 net interest income was $.9 million as compared with net interest income of $1.7 million for the first quarter last year. The decrease in net interest income was primarily due to a decline in interest rates. Additionally, in the first quarter of 2002, cash was primarily invested in tax-free securities bearing a lower interest rate versus last year's commercial paper investments. The tax-free investments lowered the effective tax rate in the first quarter to 38.5%. 13
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): May 4, February 2, 2002 2002 ---------- ---------- Working capital $251,591 $241,616 ========== ========== Capitalization: Shareholders' equity $617,546 $595,434 ========== ========== Net cash provided by operating activities, the Company's primary resource of liquidity, totaled $29.1 million for the thirteen weeks ended May 4, 2002 versus $18.7 million in the comparable period of 2001. Cash was provided primarily by current year net income adjusted for depreciation and amortization. Additionally, cash was provided from increases in accrued expenses and collections of construction allowance receivables. Accrued expenses, primarily compensation and benefits and taxes, other than income, increased as a result of the continued growth and development of the business. Uses of cash primarily consisted of increases in inventories and decreases in income taxes payable. Although inventories were down by 19% per gross square foot at quarter-end, the total inventory balance has increased as a result of a 32% increase in gross square feet. The decrease in income taxes is due to the impact of deferred income taxes during the quarter as differences in tax and book depreciation methods continue to increase. The Company's operations are seasonal in nature and typically peak during the back-to-school and Christmas selling periods. Accordingly, cash requirements for inventory expenditures are highest during these periods. Cash outflows for investing activities were for capital expenditures (see the discussion in the "Captial Expenditures" section below) related primarily to new stores. Cash inflows from investing activities consisted of maturities of marketable securities. As of May 4, 2002, the Company held marketable securities with original maturities of three to four months. Financing activities consisted primarily of stock option exercises and restricted stock issuances. No shares were repurchased during the first quarters of 2002 and 2001. As of May 4, 2002, A&F was authorized to repurchase up to an additional 1,850,000 shares under the current stock repurchase program. The Company has available a $150 million syndicated unsecured credit agreement. No amounts are currently outstanding. Additional details regarding the credit agreement can be found in the 14
Notes to Condensed Consolidated Financial Statements (Note 8). The Company also has a $75 million facility for trade letters of credit. The trade letters of credit are issued to numerous overseas suppliers and serve as guarantees to the suppliers. As of May 4, 2002, $34.8 million was outstanding under this trade letter of credit facility. The Company also has standby letters of credit in the aggregate amount of $8.5 million. The beneficiaries, two of the Company's suppliers, have the right to draw upon the standby letters of credit if the Company has authorized or filed a voluntary petition in bankruptcy. To date, the beneficiaries have not drawn upon the standby letters of credit. Store Count and Gross Square Feet - --------------------------------- Store count and gross square footage by division were as follows: May 4, 2002 May 5, 2001 ----------- ----------- Number of Gross Square Number of Gross Square Stores Feet (thousands) Stores Feet (thousands) ------ ---------------- --------- ---------------- Abercrombie & Fitch 311 2,815 265 2,445 abercrombie 153 683 85 380 Hollister Co. 43 274 5 31 ----- ----- ----- ----- Total 507 3,772 355 2,856 ===== ===== ===== ===== Capital Expenditures - -------------------- Capital expenditures, net of construction allowances, totaled $25.3 million and $34.7 million for the thirteen weeks ended May 4, 2002 and May 5, 2001, respectively. Additionally, the noncash accrual for construction in progress increased $4.8 million in 2002 and $8.5 million in 2001. Capital expenditures related to new stores, including the noncash accrual for construction in progress, accounted for approximately $28 million during the first quarter of 2002. The balance of capital expenditures related primarily to improvements in the distribution center. The Company anticipates spending $95 to $105 million in 2002 for capital expenditures, of which $80 to $90 million will be for new stores construction. The balance of capital expenditures primarily relates to improving the in-store information technology structure and improvements in the distribution center. The Company intends to add approximately 731,000 gross square feet in 2002, which will represent a 20% increase over year-end 2001. It is anticipated the increase will result from the addition of approximately 38 new "Abercrombie & Fitch" stores, 20 "abercrombie" stores and 60 "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 2002 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 2002 will approximate $500,000 per store, after 15
giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $125,000 per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for Hollister Co. stores to be opened in 2002 will approximate $750,000 per store, after giving effect to landlord allowances. However, the Company is in the early stages of developing Hollister Co. and, as a result, current average costs for leasehold improvements and furniture and fixtures are not representative of future costs. In addition, inventory purchases are expected to average approximately $200,000 per store. The Company expects that substantially all future capital expenditures will be funded with cash from operations. In addition, the Company has available the $150 million credit agreement to support operations. Critical Accounting Policies and Estimates - ------------------------------------------ The Company's significant and critical accounting policies and estimates can be found in the Notes to Consolidated Financial Statements contained in A&F's Annual Report on Form 10-K for the fiscal year ended February 2, 2002 (Note 2). Additionally, the Company believes that the following policies are critical to the portrayal of the Company's financial condition and results of operations for interim periods. Inventory Valuation - Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. Income Taxes - At the end of each interim period, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used in providing for income taxes on a current year-to-date basis. Recently Adopted 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 for the Company's 2002 fiscal year. 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. The adoption of SFAS No. 142 had no impact on the Company's results of operations or its financial position. SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," is effective for the Company's 2002 fiscal year. The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of this standard had no impact on the Company's results of operations or its financial position. Recently Issued Accounting Pronouncements - ----------------------------------------- SFAS No. 143, "Accounting for Asset Retirement Obligations," will be effective for fiscal years 16
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 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. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," will be effective for fiscal years beginning after May 15, 2002 (February 2, 2003 for the Company). The standard rescinds FASB statements No. 4 and 64 that deal with issues relating to the extinguishment of debt. The standard also rescinds FASB Statement No. 44 that deals with intangible assets of motor carriers. The standard modifies SFAS No. 13, "Accounting for Leases," so that certain capital lease modifications must be accounted for by lessees as sale-leaseback transactions. Additionally, the standard identifies amendments that should have been made to previously existing pronouncements and formally amends the appropriate pronouncements. Management anticipates that the adoption of SFAS No. 145 will not have a significant effect 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 Form 10-Q 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 2002 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, train and retain associates. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk of A&F's financial instruments as of May 4, 2002 has not significantly changed since February 2, 2002. A&F's market risk profile as of February 2, 2002 is disclosed in A&F's Annual Report on Form 10-K. 17
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 had 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 added A&F and others as defendants, but did not otherwise significantly alter either the claims alleged or the relief sought by the plaintiffs. A&F joined with other retailer defendants in moving 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 defendants' 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 in a second amended complaint. Plaintiffs filed their motion for class certification on December 13, 2001 and their second amended complaint on December 17, 2001. The motion for class certification was heard on February 14, 2002. The motion for preliminary approval of settlement as to certain other retailer defendants was also heard the same date. A motion to dismiss the second amended complaint was heard on March 19, 2002. On May 10, 2002, the Court granted in part and denied in part the motion to dismiss the second amended complaint as to the remaining RICO claim and granted the motion to dismiss the second amended complaint as to the Common Law Peonage claim, the Anti-Peonage statutory claim, and the Alien Tort Claims Act claim. The motions for class certification and preliminary approval of settlement as to certain other retailer defendents were also granted. 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 18
Court on the motions for summary judgment and reconsideration. Oral arguments were held before the Sixth Circuit on December 7, 2000. On February 15, 2002, the Sixth Circuit affirmed the decision of the District Court granting summary judgment in favor of American Eagle. A&F is aware of 20 actions that have been filed against A&F and certain of its officers and directors on behalf of a purported, but as yet uncertified, class of shareholders who purchased A&F's Class A Common Stock between October 8, 1999 and October 13, 1999. These 20 actions have been filed in the United States District Courts for the Southern District of New York and the Southern District of Ohio, Eastern Division alleging violations of the federal securities laws and seeking unspecified damages. On April 12, 2000, the Judicial Panel on Multidistrict Litigation issued a Transfer Order transferring the 20 pending actions to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities Litigation. On November 16, 2000, the Court signed an Order appointing the Hicks Group, a group of seven unrelated investors in A&F's securities, as lead plaintiff, and appointing lead counsel in the consolidated action. On December 14, 2000, plaintiffs filed a Consolidated Amended Class Action Complaint (the "Amended Complaint") in which they did not name as defendants Lazard Freres & Co. and Todd Slater, who had formerly been named as defendants in certain of the 20 complaints. A&F and other defendants filed motions to dismiss the Amended Complaint on February 14, 2001. 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. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 23, 2002, A&F held its annual meeting of shareholders at Abercrombie & Fitch Headquarters, New Albany, Ohio. At such meeting, Messrs. Russell M. Gertmenian, Archie M. Griffin and Sam N. Shahid, Jr. were reelected to A&F's Board of Directors, each to serve for a three-year term expiring in 2005. The vote on the election of directors was as follows: For Withheld Broker Non-Votes --- -------- ---------------- Russell M. Gertmenian 88,616,642 1,355,010 0 Archie M. Griffin 89,412,278 559,374 0 Samuel N. Shahid, Jr. 89,423,401 548,251 0 19
The following individuals also continue to serve on the Board of Directors: Messrs. John A. Golden, Michael S. Jeffries, Seth R. Johnson and John W. Kessler and Kathryn D. Sullivan, Ph.D. The proposal to re-approve the material terms of the performance goals under the Abercrombie & Fitch Co. Incentive Compensation Performance Plan was also approved by the shareholders of A&F. The vote on this proposal was as follows: For Against Abstentions Broker Non-Votes --- ------- ----------- ---------------- 86,853,280 2,905,167 213,194 11 20
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 of A&F 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, effective January 31, 2002, incorporated by reference to Exhibit 3.4 to A&F's Annual Report on Form 10-K for the year ended February 2, 2002. (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 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 21
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. 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), incorporated by reference to Exhibit 10.3 to A&F's Quarterly Report on Form 10-Q for the quarter ended November 3, 2001. (File No. 1-12107) 10.4 Abercrombie & Fitch Co. 2002 Stock Option Plan for Associates, incorporated by reference to Exhibit 10.4 to A&F's Annual Report on Form 10-K for the year ended February 2, 2002. (File No. 1-12107) 10.5 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) 10.6 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). 10.7 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 January 1, 2002, issued by Michael S. Jeffries to A&F, incorporated by reference to Exhibit 10.9 to A&F's Annual Report on Form 10-K for the year ended February 2, 2002. (File No. 1-12107) 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 May 4, 2002. 22
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: May 31, 2002 ________________________________ * Mr. Johnson has been duly authorized to sign on behalf of the Registrant as its principal financial officer. 23
EXHIBIT INDEX ------------- Exhibit No. Document - ----------- ------------------------------------ 10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Inclusion of Report of Independent Accountants.