EXHIBIT 13
----------
Abercrombie & Fitch Co.
FINANCIAL SUMMARY
(Thousands except per share and per square foot amounts, ratios and store and associate data)
Fiscal Year 1996 1995* 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
Summary of Operations
Net Sales $ 335,372 $235,659 $165,463 $110,952 $ 85,301 $ 62,583
- ---------------------------------------------------------------------------------------------------------------
Gross Income $ 123,766 $ 79,794 $ 56,820 $ 30,562 $ 13,413 $ 9,665
- ---------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ 45,993 $ 23,798 $ 13,751 $ (4,064) $(10,190) $(11,603)
- ---------------------------------------------------------------------------------------------------------------
Operating Income (Loss) as a
Percentage of Sales 13.7% 10.1% 8.3% (3.7%) (11.9%) (18.5%)
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 24,674 $ 14,298 $ 8,251 $ (2,464) $ (6,090) $ (7,003)
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) as a
Percentage of Sales 7.4% 6.1% 5.0% (2.2%) (7.1%) (11.2%)
- ---------------------------------------------------------------------------------------------------------------
Per Share Results
Net Income (Loss) $ 0.54 $ 0.33 $ 0.19 $ (0.06) $ (0.14) $ (0.16)
- ---------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 45,760 43,000 43,000 43,000 43,000 43,000
- ---------------------------------------------------------------------------------------------------------------
Other Financial Information
Total Assets $ 105,761 $ 87,693 $ 58,018 $ 48,882 $ 61,626 $ 47,967
- ---------------------------------------------------------------------------------------------------------------
Return on Average Assets 26% 20% 15% (4%) (11%) -
- ---------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 24,323 $ 24,526 $ 12,603 $ 4,694 $ 10,351 $ 7,931
- ---------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 50,000 - - - - -
- ---------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Deficit) $ 11,238 $(22,622) $(37,070) $(45,341) $(42,877) $(36,787)
- ---------------------------------------------------------------------------------------------------------------
Comparable Store Sales Increase 13% 5% 15% 6% 8% 10%
- ---------------------------------------------------------------------------------------------------------------
Sales per Selling Square Foot $ 373 $ 354 $ 350 $ 301 $ 276 $ 261
- ---------------------------------------------------------------------------------------------------------------
Stores and Associates at End of Year
Total Number of Stores Open 127 100 67 49 40 36
- ---------------------------------------------------------------------------------------------------------------
Selling Square Feet 1,006,000 792,000 541,000 405,000 332,000 287,000
- ---------------------------------------------------------------------------------------------------------------
Number of Associates 4,900 3,000 2,300 1,300 900 700
- ---------------------------------------------------------------------------------------------------------------
*Fifty-three week fiscal year.
Abercrombie & Fitch Co.
MANAGEMENT'S DISCUSSION AND ANALYSIS
[BAR CHART APPEARS HERE]
92 93 94 95 96
Comparable Store Sales Increase 8% 6% 15% 5% 13%
92 93 94 95 96
Sales Per Average Store ($ in Thousands) $2,245 $2,493 $2,853 $2,823 $2,955
RESULTS OF OPERATIONS Net sales for the thirteen-week fourth quarter were
$139.2 million, an increase of 31% from $106.4 million for the fourteen-week
fourth quarter a year ago. Operating income was $35.3 million, up 68% compared
to $21.0 million last year. Earnings per share were $0.40, up 74%, from $0.23 on
an adjusted basis last year.
Net sales for the fiscal year ended February 1, 1997, increased 42% to $335.4
million from $235.7 million last year. Operating income for the year increased
93% to $46.0 million from $23.8 million in 1995. Earnings per share on an
adjusted basis were $0.48 compared to $0.21 a year ago, an increase of 129%.
The adjusted results presented below reflect: 1) 51.05 million post initial
public offering ("IPO") shares outstanding; 2) interest expense on the Company's
seasonal borrowing; and 3) interest expense on the Company's ongoing capital
structure, which excludes interest expense on the Company's $150 million credit
agreement. All of the borrowings under the credit agreement were repaid in the
fourth quarter of 1996. The adjusted income data is presented below (thousands
except per share amounts):
Fourth Quarter
--------------------------------------------------
Adjusted Adjusted Actual Actual
February 1, February 3, February 1, February 3,
1997 1996 1997 1996
- --------------------------------------------------------------------------------
Operating income $35,342 $21,034 $35,342 $21,034
Interest expense 1,125 1,488 1,125 -
- --------------------------------------------------------------------------------
Income before income taxes 34,217 19,546 34,217 21,034
Provision for income taxes 13,700 7,820 13,700 8,400
- --------------------------------------------------------------------------------
Net income $20,517 $11,726 $20,517 $12,634
================================================================================
Net income per share $ 0.40 $ 0.23 $ 0.40 $ 0.29
================================================================================
Weighted average shares
outstanding 51,050 51,050 51,084 43,000
================================================================================
Year-to-Date
------------------------------------------------
Adjusted Adjusted Actual Actual
February 1, February 3, February 1, February 3,
1997 1996 1997 1996
- --------------------------------------------------------------------------------
Operating income $45,993 $23,798 $45,993 $23,798
Interest expense 5,016 5,729 4,919 -
- --------------------------------------------------------------------------------
Income before income taxes 40,977 18,069 41,074 23,798
Provision for income taxes 16,400 7,230 16,400 9,500
- --------------------------------------------------------------------------------
Net income $24,577 $10,839 $24,674 $14,298
================================================================================
Net income per share $ 0.48 $ 0.21 $ 0.54 $ 0.33
================================================================================
Weighted average shares
outstanding 51,050 51,050 45,760 43,000
================================================================================
16
Abercrombie & Fitch Co.
NET SALES Thirteen-week fourth quarter 1996 net sales as compared to net sales
for the fourteen-week fourth quarter 1995 increased 31% to $139.2 million, due
to an 8% increase in comparable store sales and sales attributable to new and
remodeled stores. Comparable store sales increases were strong in both the men's
and women's businesses. Sweaters were the best performing category in each
business.
In the fourteen-week fourth quarter 1995, net sales increased 43% to $106.4
million over the thirteen-week fourth quarter 1994. The increase was primarily
attributable to sales from new and remodeled stores (34% of the total increase),
a 5% increase in comparable store sales and the extra week in 1995.
Net sales for 1996 increased 42% to $335.4 million over the fifty-three week
1995 fiscal year. The sales increase was attributable to the net addition of 27
stores and a 13% comparable store sales increase. Consistent with the Company's
strategy, the women's business continued to increase as a proportion of the
total business, with sweaters and pants the strongest performing categories. The
men's business also achieved significant growth with its strongest categories
being sweaters, pants and denim. Net sales per selling square foot for the total
Company increased 5%.
For the fifty-three week year 1995, net sales were $235.7 million, an increase
of 42% from $165.5 million in 1994. Sales growth came primarily from the
addition of 33 new stores, with a comparable store sales increase of 5%.
Management believes that comparable store sales were negatively affected by
overall softness in the retail industry. The fifty-third week accounted for 2%
of the total sales increase. During 1995, the Company allocated more selling
square footage per store to women's apparel, resulting in a significant increase
in sales of women's apparel. Significant growth was achieved in women's shirts,
knits and shorts. The total volume of the men's business increased, but to a
lesser extent than the women's business, due to this reallocation of square
footage. A very strong increase in men's outerwear was partially offset by a
continuing de-emphasis of dress shirts and ties. The Company previously decided
such merchandise was not consistent with the Company's focus on casual apparel.
Net sales per selling square foot for the total Company increased 1%.
FINANCIAL SUMMARY
The following summarized financial data compares 1996 to the comparable periods
for 1995 and 1994:
% Change
--------------
1996- 1995-
--------------
1996 1995 1994 1995 1994
-----------------------------------------
Net sales (millions) $335.4 $235.7 $165.5 42% 42%
- ---------------------------------------------------------------------------
Increase in comparable
store sales 13% 5% 15%
- -------------------------------------------------------------
Sales increase attributable to
new and remodeled stores 29% 37% 34%
- -------------------------------------------------------------
Sales per selling
square foot $ 373 $ 354 $ 350 5% 1%
- ---------------------------------------------------------------------------
Sales per average store
(thousands) $2,955 $2,823 $2,853 5% (1%)
- ---------------------------------------------------------------------------
Average store size at
year end (selling
square feet) 7,921 7,920 8,075 0% (2%)
- ---------------------------------------------------------------------------
Selling square feet at
year end
(thousands) 1,006 792 541 27% 46%
- ---------------------------------------------------------------------------
Number of Stores
Beginning of year 100 67 49
Opened 29 33 20
Closed (2) - (2)
- -------------------------------------------------------------
End of year 127 100 67
===========================================================================
17
Abercrombie & Fitch Co.
Sales per Selling Square Foot
[BAR GRAPH APPEARS HERE]
92 93 94 95 96
- ----------------------------------------------------------------
$276 $301 $350 $354 $373
GROSS INCOME Gross income increased, as a percentage of net sales, to 43.0% for
the fourth quarter of 1996 from 37.4% for the same period in 1995. The increase
was due to a significant increase in merchandise margins (representing gross
income before the deduction of buying and occupancy costs) and a reduction in
buying and occupancy costs, as a percentage of net sales. The increase in
merchandise margins was the result of higher initial markups (IMU). The decrease
in buying and occupancy costs is primarily attributable to higher sales
productivity associated with the 8% increase in comparable store sales.
Gross income decreased as a percentage of net sales to 37.4% for the fourth
quarter 1995 from 41.8% for the same period in 1994. Merchandise margins,
expressed as a percentage of net sales, decreased, due principally to higher
markdowns in 1995 as the retail environment during the 1995 Holiday season was
very promotional. Buying and occupancy costs rose as a percentage of net sales.
For the year, the gross income rate increased to 36.9% in 1996 from 33.9% in
1995. Merchandise margins, expressed as a percentage of net sales, improved due
to a higher IMU in both the men's and women's businesses. Buying and occupancy
costs, expressed as a percentage of net sales, declined due to a 13% increase in
comparable store sales, including a 5% increase in net sales per selling square
foot.
In 1995, gross income, expressed as a percentage of net sales, was 33.9%,
which represented a 0.4% decrease from the 34.3% level in 1994. The decrease was
primarily attributable to an increase in buying and occupancy costs. Merchandise
margins were up slightly for the period.
18
Abercrombie & Fitch Co.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES General, administrative and
store operating expenses, expressed as a percentage of net sales, were 17.6% in
the fourth quarter of 1996 and 17.7% in the comparable period in 1995. The
improvement resulted primarily from the favorable leveraging of expenses over
higher sales volume.
For the year, general, administrative and store operating expenses, expressed
as a percentage of net sales, were 23.2%, 23.8% and 26.0% for 1996, 1995 and
1994, respectively. The improvement during the three-year period resulted from
management's continued emphasis on expense control and the favorable leveraging
of store and home office expenses.
OPERATING INCOME Operating income, as a percentage of net sales, was 13.7%,
10.1% and 8.3% for 1996, 1995 and 1994. The improvement was the result of higher
merchandise margins coupled with lower general, administrative and store
operating expenses, as a percentage of net sales. Sales volume and gross income
have increased at a faster rate than general, administrative and store operating
expenses as the Company continues to emphasize cost controls.
INTEREST EXPENSE In 1996, the Company incurred $1.1 million and $4.9 million in
net interest expense for the fourth quarter and year, whereas no expense was
recognized for the comparable periods in 1995 and 1994. Interest expense for
1996 is comprised of $2.3 million on the $50 million long-term debt. The balance
was primarily from interest on short-term borrowings.
FINANCIAL CONDITION The Company's continuing growth in operating income
provides evidence of financial strength and flexibility. A more detailed
discussion of liquidity, capital resources and capital requirements follows.
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities and cash
funding from The Limited, Inc.'s centralized cash management system provided the
resources to support operations, including seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (thousands):
1996 1995 1994
- -----------------------------------------------------------------------------
Cash provided by operating activities $46,836 $ 12,714 $ 20,155
- -----------------------------------------------------------------------------
Working capital $ 1,288 $(70,940) $ 4,882
- -----------------------------------------------------------------------------
Capitalization:
Long-term debt $50,000 $ - $ -
Shareholders' equity (deficit) 11,238 $(22,622) $(37,070)
- -----------------------------------------------------------------------------
Total capitalization $61,238 $(22,622) $(37,070)
=============================================================================
The Company considers the following to be measures of liquidity and capital
resources:
1996 1995 1994
- ------------------------------------------------------------------------------
Debt-to-capitalization ratio
(long-term debt divided by
total capitalization) 82% n/m n/m
- ------------------------------------------------------------------------------
Cash flow to capital investment
(net cash provided by operating
activities divided by capital
expenditures) 193% 52% 160%
==============================================================================
n/m=not meaningful
Net cash provided by operating activities totaled $46.8 million, $12.7 million
and $20.2 million for 1996, 1995 and 1994.
The Company has consistently improved its financial performance as evidenced
by the past three years' net income growth. Cash requirements for inventory
increased over the three-year period, supporting the sales growth. In 1996,
accounts payable and accrued expenses increased principally as a result of
increases of $1.8 million of accrued rent, $2.0 million of merchandise payables
and $2.2 million of accrued interest. Prior to 1996, the Company had no direct
debt and paid no interest. Also in 1996, cash provided by income taxes was $4.2
million due to the timing of tax payments in relation to fourth quarter
earnings.
19
Abercrombie & Fitch Co.
Investing activities were all for capital expenditures, which were primarily
for new stores.
Financing activities in 1996 include $150 million in proceeds from borrowings
under a bank credit agreement, which along with the $8.6 million working capital
note, were later repaid, with funds made available from the IPO and cash flow
from operations. Proceeds of the $150 million bank credit agreement were used to
repay $91 million of intercompany debt and $32 million of trademark obligations
and fund a $27 million dividend to The Limited, Inc. Other financing activities
were due to intercompany and cash management account activity (see Note 8).
CAPITAL EXPENDITURES Capital expenditures, primarily for new and remodeled
stores, amounted to $24.3 million, $24.5 million and $12.6 million for 1996,
1995 and 1994.
The Company anticipates spending $26 to $31 million in 1997 for capital
expenditures, of which $24 to $28 million will be for new stores, the remodel
and/or expansion of existing stores and related improvements. The Company
intends to add approximately 220,000 selling square feet in 1997, which will
represent a 22% increase over year-end 1996. It is anticipated the increase will
result from the addition of 28 new stores and the remodeling and/or expansion of
three stores. The Company expects that substantially all future capital
expenditures will be funded by net cash provided by operating activities.
IMPACT OF INFLATION The Company's results of operations and financial condition
are presented based upon historical cost. While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of the estimates
required, the Company believes that the effects of inflation, if any, on its
results of operations and financial condition have been minor.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report, the Company's Form 10-K or made by management of the Company
involves 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 1997 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: changes in consumer spending patterns, consumer preferences and
overall economic conditions, 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.
20
Abercrombie & Fitch Co.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Net Sales $335,372 $235,659 $165,463
Cost of Goods Sold, Occupancy and Buying Costs 211,606 155,865 108,643
- -----------------------------------------------------------------------------------------------------------------
Gross Income 123,766 79,794 56,820
General, Administrative and Store Operating Expenses 77,773 55,996 43,069
- -----------------------------------------------------------------------------------------------------------------
Operating Income 45,993 23,798 13,751
Interest Expense, Net 4,919 - -
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 41,074 23,798 13,751
Provision for Income Taxes 16,400 9,500 5,500
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 24,674 $ 14,298 $ 8,251
=================================================================================================================
Net Income Per Share $ .54 $ .33 $ .19
=================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Net Sales ($ in Millions)
[BAR GRAPH APPEARS HERE]
Abercrombie & Fitch Co.
CONSOLIDATED BALANCE SHEETS
(Thousands) February 1, 1997 February 3, 1996
- ------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 1,945 $ 874
Accounts Receivable 2,102 3,617
Inventories 34,943 30,388
Store Supplies 5,300 3,529
Other 588 448
- ------------------------------------------------------------------------------
Total Current Assets 44,878 38,856
- ------------------------------------------------------------------------------
Property and Equipment, Net 58,992 47,203
- ------------------------------------------------------------------------------
Deferred Income Taxes 1,885 1,624
- ------------------------------------------------------------------------------
Other Assets 6 10
- ------------------------------------------------------------------------------
Total Assets $ 105,761 $ 87,693
==============================================================================
Liabilities and Shareholders' Equity
(Deficit)
Current Liabilities
Accounts Payable $ 6,414 $ 4,359
Accrued Expenses 22,388 14,500
Intercompany Payable 5,417 86,045
Income Taxes Payable 9,371 4,892
- ------------------------------------------------------------------------------
Total Current Liabilities 43,590 109,796
- ------------------------------------------------------------------------------
Long-Term Debt 50,000 -
- ------------------------------------------------------------------------------
Other Long-Term Liabilities 933 519
- ------------------------------------------------------------------------------
Shareholders' Equity (Deficit)
Common Stock 511 -
Paid-In Capital 117,980 305
Retained Earnings (Deficit) (107,253) (22,927)
- ------------------------------------------------------------------------------
Total Shareholders' Equity (Deficit) 11,238 (22,622)
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity (Deficit) $ 105,761 $ 87,693
==============================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
22
Abercrombie & Fitch Co.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
--------------------
Retained Total
Shares Par Paid-In Earnings Shareholders'
(Thousands) Outstanding Value Capital (Deficit) Equity (Deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 1994 43,000 - $ 135 $ (45,476) $(45,341)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income - - - 8,251 8,251
Other - - 20 - 20
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 28, 1995 43,000 - $ 155 $ (37,225) $(37,070)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income - - - 14,298 14,298
Other - - 150 - 150
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 1996 43,000 - $ 305 $ (22,927) $(22,622)
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer of Equity to Debt ($50,000 Long-Term Debt
and $32,000 Short-Term Borrowings) - - - (82,000) (82,000)
Cash Dividend to Parent Prior
to Initial Public Offering - - - (27,000) (27,000)
Sale of Common Stock in Initial Public Offering 8,050 $511 117,667 - 118,178
Net Income - - - 24,674 24,674
Other - - 8 - 8
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, February 1, 1997 51,050 $511 $117,980 $(107,253) $ 11,238
==================================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Abercrombie & Fitch Co.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 24,674 $ 14,298 $ 8,251
Impact of Other Operating Activities on
Cash Flows
Depreciation and Amortization 11,759 9,104 7,799
Change in Assets and Liabilities
Accounts Receivable 1,515 15 (2,058)
Inventories (4,555) (13,837) (6,499)
Accounts Payable and Accrued Expenses 9,943 4,069 4,117
Income Taxes 4,218 (2,525) 6,391
Other Assets and Liabilities (718) 1,590 2,154
- ----------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 46,836 12,714 20,155
Cash Used for Investing Activities
- ----------------------------------------------------------------------------------
Capital Expenditures (24,323) (24,526) (12,603)
- ----------------------------------------------------------------------------------
Financing Activities
Increase (Decrease) in Intercompany Payable 18,988 11,944 (7,387)
Dividend Paid to Parent (27,000) - -
Net Proceeds from Issuance of Common Stock 118,178 - -
Proceeds from Credit Agreement 150,000 - -
Repayment of Credit Agreement (150,000) - -
Repayment of Trademark Obligations (32,000) - -
Repayment of Intercompany Debt (91,000) - -
Repayment of Working Capital Note (8,616) - -
Other Changes in Shareholders' Equity
(Deficit) 8 150 20
- ----------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities (21,442) 12,094 (7,367)
- ----------------------------------------------------------------------------------
Net Increase in Cash 1,071 282 185
Cash, Beginning of Year 874 592 407
- ----------------------------------------------------------------------------------
Cash, End of Year $ 1,945 $ 874 $ 592
==================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Abercrombie & Fitch Co.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION Abercrombie & Fitch Co. (the "Company") was
incorporated on June 26, 1996, and on July 15, 1996 acquired the stock of
Abercrombie & Fitch Holdings, the parent company of the Abercrombie & Fitch
Business, and A&F Trademark, Inc., in exchange for 43 million shares of Class B
Common Stock issued to The Limited, Inc. ("The Limited"). The Company is a
specialty retailer of high quality, casual apparel for men and women with an
active, youthful lifestyle. The business was established in 1892 and
subsequently acquired by The Limited in 1988.
An initial public offering (the "Offering") of 8.05 million shares of the
Company's Class A Common Stock, including the sale of 1.05 million shares
pursuant to the exercise by the underwriters of their options to purchase
additional shares, was consummated on October 1, 1996. As a result of the
Offering, 84.2% of the outstanding common stock of the Company is owned by The
Limited.
The net proceeds received by the Company from the Offering, approximating
$118.2 million, and cash from operations were used to repay the borrowings under
a $150 million credit agreement.
The accompanying consolidated financial statements include the historical
financial statements of, and transactions applicable to the Company and its
subsidiaries and reflect the assets, liabilities, results of operations and cash
flows on a historical cost basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and all significant subsidiaries which are more than 50%
owned and controlled. All significant intercompany balances and transactions
have been eliminated in consolidation.
FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January
31. Fiscal years are designated in the financial statements and notes by the
calendar year in which the fiscal year commences. The results for fiscal years
1996 and 1994 represent the fifty-two week periods ended February 1, 1997 and
January 28, 1995. The results for fiscal year 1995 represent the fifty-three
week period ended February 3, 1996.
STORE SUPPLIES The initial inventory of supplies for new stores including, but
not limited to, hangers, signage, security tags and point-of-sale supplies are
capitalized at the store opening date. Subsequent shipments are expensed except
for new merchandise presentation programs which are capitalized.
INVENTORY Inventories are principally valued at the lower of average cost or
market, on a first-in first-out basis, utilizing the retail method.
PROPERTY & EQUIPMENT Depreciation and amortization of property and equipment are
computed for financial reporting purposes on a straight-line basis, using
service lives ranging principally from 10-15 years for building improvements and
3-10 years for other property and equipment. Beneficial leaseholds represent the
present value of the excess of fair market rent over contractual rent of
existing stores at the 1988 purchase of the Company by The Limited and are being
amortized over the lives of the related leases. The cost of assets sold or
retired and the related accumulated depreciation or amortization are removed
from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments that extend service lives are capitalized. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that full recoverability is questionable. Factors used in the valuation include,
but are not limited to, management's plans for future operations, recent
operating results and projected cash flows.
SHAREHOLDERS' EQUITY At February 1, 1997, there were 150 million of $.01 par
value class A shares and 150 million of $.01 par value of class B shares
authorized, of which 8.05 million shares and 43 million shares, respectively,
were issued and outstanding. In addition there were 15 million of $.01 par value
preferred shares authorized, none of which have been issued.
Holders of Class A Common Stock generally have identical rights to holders of
Class B Common Stock, except that holders of Class A Common Stock are entitled
to one vote per share while holders of Class B Common Stock are entitled to
three votes per share on all matters submitted to a vote of shareholders. Each
share of Class B Common Stock is convertible while held by The
Abercrombie & Fitch Co.
Limited or any of its subsidiaries into one share of Class A Common Stock.
REVENUE RECOGNITION Sales are recorded upon purchase by customers.
INCOME TAXES Income taxes are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method. Deferred tax assets and
liabilities are recognized based on the difference between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect in the years in which those temporary differences are expected to
reverse. Under SFAS 109, the effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
The Company is included in The Limited's consolidated federal and certain
state income tax groups for income tax reporting purposes and is responsible for
its proportionate share of income taxes calculated upon its federal taxable
income at a current estimate of the annual effective tax rate.
ADVERTISING Advertising costs consist of in-store photographs and advertising in
selected national publications and are expensed when the photographs or
publications first appear. Advertising costs amounted to $4.1 million in 1996,
$3.1 million in 1995 and $1.2 million in 1994.
STORE PRE-OPENING EXPENSES Pre-opening expenses related to new store openings
are charged to operations as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded values of current assets and
current liabilities, including accounts receivable and accounts payable,
approximate fair value due to the short maturity and because the average
interest rate approximates current market origination rates.
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturity. The estimated
fair value of the Company's long-term debt at February 1, 1997 was $50.6
million.
NET INCOME PER SHARE Net income per share is computed based upon the weighted
average number of outstanding common shares, including the effect of stock
options. The common stock issued to The Limited (43 million Class B shares) in
connection with the incorporation of the Company is assumed to have been
outstanding for all periods presented. There were 45.8 million weighted average
shares outstanding for 1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Since
actual results may differ from those estimates, the Company revises its
estimates and assumptions as new information becomes available.
3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consisted of
(thousands):
1996 1995
- --------------------------------------------------------------------
Furniture, fixtures and equipment $ 88,248 $71,590
- --------------------------------------------------------------------
Beneficial leaseholds 7,925 7,925
- --------------------------------------------------------------------
Building improvements and leaseholds 5,565 1,267
- --------------------------------------------------------------------
Construction in progress 181 85
- --------------------------------------------------------------------
Total $101,919 $80,867
- --------------------------------------------------------------------
Less: accumulated depreciation and amortization 42,927 33,664
- --------------------------------------------------------------------
Property and equipment, net $ 58,992 $47,203
====================================================================
4. LEASED FACILITIES AND COMMITMENTS Annual store rent is comprised of a fixed
minimum amount, plus contingent rent based upon a percentage of sales exceeding
a stipulated amount. Store lease terms generally require additional payments
covering taxes, common area costs and certain other expenses.
Abercrombie & Fitch Co.
A summary of rent expense for 1996, 1995 and 1994 follows (thousands):
1996 1995 1994
- ---------------------------------------------------------------
Store rent:
Fixed minimum $24,599 $17,465 $11,308
Contingent 1,620 1,322 1,475
- ---------------------------------------------------------------
Total store rent $26,219 $18,787 $12,783
Buildings, equipment and other 1,229 1,058 613
- ---------------------------------------------------------------
Total rent expense $27,448 $19,845 $13,396
===============================================================
Rent expense includes charges from The Limited and other divisions of The
Limited for space under formal agreements, which approximate market rates. At
February 1, 1997, the Company was committed to noncancelable leases with
remaining terms of one to fifteen years. These commitments include store leases
with initial terms ranging from ten to fifteen years and offices and a
distribution center leased from an affiliate of The Limited with an initial term
of 15 years. A majority of the Company's store leases are guaranteed by The
Limited. A summary of minimum rent commitments under noncancelable leases
follows (thousands):
1997 $ 29,655
1998 29,684
1999 30,029
2000 30,149
2001 30,331
Thereafter 156,428
5. ACCRUED EXPENSES Accrued expenses consisted of the
following (thousands):
1996 1995
- ---------------------------------------------------------------------------
Accrued rent $ 4,639 $ 2,872
Accrued compensation 4,260 3,025
Accrued interest 2,162 -
Accrued taxes, other than income 1,689 1,882
Other 9,638 6,721
- ---------------------------------------------------------------------------
Total $ 22,388 $14,500
===========================================================================
6. INCOME TAXES The provision for income taxes consisted of (thousands):
1996 1995 1994
- ------------------------------------------------------------------------------
Currently payable:
Federal $13,800 $6,900 $4,300
State 1,300 1,700 1,100
- ------------------------------------------------------------------------------
$15,100 $8,600 $5,400
- ------------------------------------------------------------------------------
Deferred:
Federal (400) 700 100
State 1,700 200 -
- ------------------------------------------------------------------------------
$ 1,300 $ 900 $ 100
- ------------------------------------------------------------------------------
Total provision $16,400 $9,500 $5,500
==============================================================================
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate follows:
1996 1995 1994
- ------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal
income tax effect 4.7 5.2 5.2
Other items, net 0.2 (0.3) (0.2)
- ------------------------------------------------------------------------------
39.9% 39.9% 40.0%
==============================================================================
Income taxes payable included current deferred tax assets of $1.2 million at
February 1, 1997 and February 3, 1996.
Current income tax obligations are treated as having been settled through the
intercompany accounts as if the Company were filing its income tax returns on a
separate company basis. Such amounts were $10.6 million and $7.5 million in 1996
and 1995.
The effect of temporary differences which give rise to deferred income tax
assets was as follows (thousands):
1996 1995
- ---------------------------------------------
Fixed assets $1,480 $1,159
Accrued expenses 1,343 1,504
Other, net 270 169
- ---------------------------------------------
Total deferred income taxes $3,093 $2,832
=============================================
Abercrombie & Fitch Co.
No valuation allowance has been provided for deferred tax assets because
management believes that it is more likely than not that the full amount of the
net deferred tax assets will be realized in the future.
The Internal Revenue Service has assessed The Limited for additional taxes
and interest for years 1989-1992. The portion of the assessment relating to the
Company was based on treatment of construction allowances. The Limited has made
deposits to mitigate further interest being assessed, and management believes
these deposits are sufficient to mitigate any further exposure. The Limited has
allocated a portion of the deposit to the Company which is included in deferred
tax assets.
7. LONG-TERM DEBT Long-term debt consists of a 7.80% unsecured note in the
amount of $50 million that matures May 15, 2002, and represents the Company's
proportionate share of certain long-term debt of The Limited. The interest rate
and maturity of the note parallels that of corresponding debt of The Limited.
The note is to be automatically prepaid concurrently with any prepayment of the
corresponding debt of The Limited. The note is not subject to early redemption
by The Limited.
8. RELATED PARTY TRANSACTIONS Transactions between the Company, The Limited, and
its subsidiaries and affiliates commonly occur in the normal course of business
and principally consist of the following:
Merchandise purchases
Real estate leasing
Capital expenditures
Inbound and outbound transportation
Corporate services
Information with regard to these transactions is as follows: Significant
purchases are made from Mast, a wholly-owned subsidiary of The Limited.
Purchases are also made from Gryphon, an indirect subsidiary of The Limited.
Mast is a contract manufacturer and apparel importer while Gryphon is a
developer of fragrance and personal care products and also a contract
manufacturer. Prices are negotiated on a competitive basis by merchants of the
Company with Mast, Gryphon and the manufacturers.
The Company's real estate operations, including all aspects of lease
negotiations and ongoing dealings with landlords and developers, are handled
centrally by the Real Estate Division of The Limited ("Real Estate Division").
Real Estate Division expenses are allocated to the Company based on a
combination of new and remodeled store construction projects and open selling
square feet.
The Company's store design and construction operations are coordinated
centrally by the Store Planning Division of The Limited ("Store Planning
Division"). The Store Planning Division facilitates the design and construction
of the stores and upon completion transfers the stores to the Company at actual
cost. Store Planning Division expenses are charged to the Company based on a
combination of new and remodeled store construction projects and open selling
square feet.
The Company's inbound and outbound transportation expenses are managed
centrally by Limited Distribution Services ("LDS"), a wholly-owned subsidiary of
The Limited. Inbound freight is charged to the Company based on actual receipts,
while outbound freight is charged on a percentage of cartons shipped basis.
The Limited provides certain services to the Company including, among other
things, aircraft, tax, treasury, legal, corporate secretary, accounting,
auditing, corporate development, risk management, associate benefit plan
administration, human resource and compensation, government affairs and public
relation services. Identifiable costs are charged directly to the Company. All
other services-related costs not specifically attributable to the Company
business have been allocated to the Company based upon a percentage of sales.
The Company participates in The Limited's centralized cash management system.
Under this system, cash received from the Company's operations is transferred to
The Limited's centralized cash accounts and cash disbursements are funded from
the centralized cash accounts on a daily basis. For all periods presented,
intercompany transactions have been reported as financing activities in the
accompanying consolidated statements of cash flows. Effective July 11, 1996, the
intercompany accounts became an interest bearing liability or an interest
earning asset. Interest on the intercompany account is calculated based on the
Federal Reserve AA Composite 30-day rate.
The Company is charged rent expense, common area maintenance charges and
utilities for stores shared with other consolidated subsidiaries of The Limited.
The charges are based on
28
Abercrombie & Fitch Co.
square footage and represent the proportionate share of the underlying leases
with third parties.
The Company is also charged rent expense and utilities for the distribution
and home office space occupied (which approximates fair market value).
The Company and The Limited have entered into intercompany agreements which
establish the provision of services in accordance with the terms described
above. The prices charged to the Company for services provided under these
agreements may be higher or lower than prices that may be charged by third
parties. It is not practicable, therefore, to estimate what these costs would be
if The Limited were not providing these services and the Company was required to
purchase these services from outsiders or develop internal expertise. Management
believes the charges and allocations described above are fair and reasonable.
The following table summarizes the related party transactions between the
Company and The Limited and its subsidiaries, for the years indicated
(thousands):
1996 1995 1994
- -------------------------------------------------------------------------------
Mast and Gryphon purchases $61,776 $35,167 $25,325
Capital expenditures 20,839 20,280 10,519
Inbound and outbound transportation 3,326 2,869 2,153
Corporate charges 3,989 4,019 2,865
Store leases and other occupancy 1,509 1,397 380
Distribution center, MIS and home
office expenses 2,696 2,564 1,676
Centrally managed benefits 1,722 2,417 1,289
Interest charges 2,190 - -
- -------------------------------------------------------------------------------
$98,047 $68,713 $44,207
===============================================================================
The Company has no arrangements with The Limited which result in the
Company's guarantee, pledge of assets or stock to provide security for The
Limited's debt obligations.
9. STOCK OPTIONS AND RESTRICTED STOCK The Company has established a stock plan
for officers and key associates. The stock plan provides for awards with respect
to a maximum of 3,500,000 shares of Class A Common Stock during the term of the
stock plan. No associate may be granted in any calendar year awards covering
more than 400,000 shares of Class A Common Stock.
In 1996, certain executive officers and key associates received options, with
a maximum term of ten years, to purchase an aggregate of up to 240,000 shares of
the Company's Class A Common Stock under the stock plan. Options generally vest
in annual increments of 25% commencing on various dates beginning with the first
anniversary of the grant date. The exercise price of these options is equal to
the IPO price of $16 per share.
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective with the 1996 financial statements, but elected to
continue to measure compensation expense in accordance with APB Opinion No. 25.
Accordingly, no compensation expense for stock options has been recognized. If
compensation expense had been determined based on the estimated fair value of
options granted in 1996, consistent with the methodology in SFAS 123, the pro-
forma effects on the Company's net income and net income per share for the four
months the options were outstanding would have been immaterial.
Certain officers and key associates were granted restricted stock under The
Limited's stock plans, of which approximately 61,000 shares remain outstanding.
An additional 36,000 restricted shares of the Company's Class A Common Stock
were granted based on the Company's performance in the Fall season of 1996.
These restricted shares generally vest on a graduated scale over four years.
Additionally, in consideration for the cancellation of certain previously
granted restricted shares of The Limited's common stock, certain executive
officers and key associates were granted an aggregate of 49,500 restricted
shares of the Company's Class A Common Stock under the stock plan. These
restricted shares vest on the fifth anniversary of their original issuance.
Compensation expense related to restricted awards has been reflected in the
financial statements and amounted to $547 thousand in 1996, $437 thousand in
1995 and $224 thousand in 1994.
Abercrombie & Fitch Co.
10. RETIREMENT BENEFITS The Company participates in a defined contribution
retirement plan sponsored by The Limited. Participation in this plan is
available to all associates who have completed 1,000 or more hours of service
with the Company during certain 12-month periods and attained the age of 21. The
Company's contributions to this plan are based on a percentage of associates'
annual compensation. The cost of this plan was $706 thousand in 1996, $549
thousand in 1995 and $343 thousand in 1994.
11. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial results
for 1996 and 1995 follow (thousands except per share amounts):
1996 Quarter First Second Third Fourth
- --------------------------------------------------------------------------------
Net sales $51,020 $57,431 $87,688 $139,233
- --------------------------------------------------------------------------------
Gross income 14,894 18,052 30,957 59,863
- --------------------------------------------------------------------------------
Net income (loss) (199) 374 3,982 20,517
- --------------------------------------------------------------------------------
Net income (loss) per share $ .00 $ .01 $ .09 $ .40
- --------------------------------------------------------------------------------
1995 Quarter
- --------------------------------------------------------------------------------
Net sales $33,377 $38,668 $57,222 $106,392
- --------------------------------------------------------------------------------
Gross income 8,428 12,023 19,503 39,840
- --------------------------------------------------------------------------------
Net income (loss) (1,169) 250 2,583 12,634
- --------------------------------------------------------------------------------
Net income (loss) per share $ (.03) $ .01 $ .06 $ .29
- --------------------------------------------------------------------------------
MARKET PRICE INFORMATION The following is a summary of market price since the
Company was originally listed on the New York Stock Exchange ("ANF") on
September 26, 1996:
Market Price
------------------------------------------------
High Low
------------------------------------------------
Fiscal Year End 1996
- --------------------------------------------------------------------------------
4th Quarter $23 3/4 $12 5/8
3rd Quarter $26 1/4 $21 3/4
On February 1, 1997, there were approximately 1,000 shareholders of record.
Abercrombie & Fitch Co.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF ABERCROMBIE & FITCH CO.
We have audited the accompanying consolidated balance sheets of Abercrombie and
Fitch Co. and subsidiaries as of February 1, 1997 and February 3, 1996 and the
related consolidated statements of income, shareholders' equity (deficit) and
cash flows for each of the three fiscal years in the period ended February 1,
1997 (appearing on pages 21 through 30). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Abercrombie &
Fitch Co. and subsidiaries as of February 1, 1997 and February 3, 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Columbus, Ohio
February 24, 1997
COMPANY INFORMATION
COMPANY INFORMATION
Abercrombie & Fitch
Four Limited Parkway East
Reynoldsburg, Ohio 43068
(614) 577-6500
www.abercrombie.com
ANNUAL MEETING
The First Annual Meeting of Shareholders is scheduled for
9:30 A.M., Tuesday, May 20, 1997 at Abercrombie & Fitch,
Four Limited Parkway East, Reynoldsburg, Ohio 43068.
STOCK EXCHANGE LISTING
New York Stock Exchange (Trading Symbol "ANF"),
commonly listed in newspapers as AberFit.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., Columbus, Ohio
10-K REPORT
A copy of form 10-K is available without charge upon written
request to Tom Katzenmeyer, Director of Investor Relations,
Abercrombie & Fitch, Four Limited Parkway East,
Reynoldsburg, Ohio 43068.
STOCK TRANSFER AGENT, REGISTRAR AND
DIVIDEND AGENT
First Chicago Trust Company of New York
P.O. Box 2500, Jersey City, New Jersey 07303-2500
INFORMATION REQUESTS
Please call (614) 577-6500 or write Tom Katzenmeyer at the
Company Offices address listed above.
ABERCROMBIE & FITCH
Initial Public Offering: September 26, 1996
Number of Associates: 4,900
Approximate Shareholder Base: 1,000