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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 August 4, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12107
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ABERCROMBIE & FITCH CO.
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1469076
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6301 FITCH PATH, NEW ALBANY, OH 43054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 283-6500
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NOT APPLICABLE
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(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 September 11, 2001
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$.01 Par Value 99,469,856 Shares
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ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Thirteen and Twenty-six Weeks Ended
August 4, 2001 and July 29, 2000...........................................................3
Condensed Consolidated Balance Sheets
August 4, 2001 and February 3, 2001........................................................4
Condensed Consolidated Statements of Cash Flows
Twenty-six Weeks Ended
August 4, 2001 and July 29, 2000...........................................................5
Notes to Condensed Consolidated Financial Statements................................................6
Report of Independent Accountants..................................................................10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................16
Part II. Other Information
Item 1. Legal Proceedings............................................................................17
Item 5. Other Information............................................................................18
Item 6. Exhibits and Reports on Form 8-K.............................................................19
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------ ------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
-------- -------- -------- --------
NET SALES $280,116 $229,031 $543,796 $434,037
Cost of Goods Sold, Occupancy and Buying Costs 171,789 141,266 337,629 270,869
-------- -------- -------- --------
GROSS INCOME 108,327 87,765 206,167 163,168
General, Administrative and Store Operating
Expenses 68,397 53,866 134,174 104,793
-------- -------- -------- --------
OPERATING INCOME 39,930 33,899 71,993 58,375
Interest Income, Net 1,128 1,364 2,848 3,831
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 41,058 35,263 74,841 62,206
Provision for Income Taxes 16,020 14,100 29,200 24,880
-------- -------- -------- --------
NET INCOME $ 25,038 $ 21,163 $ 45,641 $ 37,326
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.25 $ 0.21 $ 0.46 $ 0.37
======== ======== ======== ========
Diluted $ 0.24 $ 0.21 $ 0.44 $ 0.36
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 99,323 100,448 99,167 101,252
======== ======== ======== ========
Diluted 104,020 101,704 103,453 102,788
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
August 4, February 3,
2001 2001
--------- ---------
(Unaudited)
ASSETS
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CURRENT ASSETS:
Cash and Equivalents $ 97,406 $ 137,581
Receivables 18,678 15,829
Inventories 157,727 120,997
Store Supplies 20,102 17,817
Other 13,718 11,338
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TOTAL CURRENT ASSETS 307,631 303,562
PROPERTY AND EQUIPMENT, NET 344,882 278,785
DEFERRED INCOME TAXES 19,491 19,491
OTHER ASSETS 311 381
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TOTAL ASSETS $ 672,315 $ 602,219
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 46,596 $ 33,942
Accrued Expenses 126,926 101,302
Income Taxes Payable 12,191 34,021
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TOTAL CURRENT LIABILITIES 185,713 169,265
OTHER LONG-TERM LIABILITIES 9,768 10,254
SHAREHOLDERS' EQUITY:
Common Stock 1,033 1,033
Paid-In Capital 136,323 136,490
Retained Earnings 396,509 350,868
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533,865 488,391
Less: Treasury Stock, at Average Cost (57,031) (65,691)
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TOTAL SHAREHOLDERS' EQUITY 476,834 422,700
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 672,315 $ 602,219
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ABERCROMBIE & FITCH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Twenty-six Weeks Ended
---------------------------
August 4, July 29,
2001 2000
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OPERATING ACTIVITIES:
Net Income $ 45,641 $ 37,326
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 18,685 13,664
Noncash Charge for Deferred Compensation 2,466 2,246
Changes in Assets and Liabilities:
Inventories (36,730) (49,478)
Accounts Payable and Accrued Expenses 20,380 23,486
Income Taxes (21,830) (39,138)
Other Assets and Liabilities (7,613) (13,931)
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 20,999 (25,825)
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INVESTING ACTIVITIES:
Capital Expenditures (66,884) (62,066)
Proceeds from Maturities of Marketable Securities - 45,601
Notes Receivable (317) (3,000)
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NET CASH USED FOR INVESTING ACTIVITIES (67,201) (19,465)
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FINANCING ACTIVITIES:
Stock Option Exercises and Other 6,027 (7,775)
Purchase of Treasury Stock - (31,589)
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 6,027 (39,364)
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NET DECREASE IN CASH AND EQUIVALENTS (40,175) (84,654)
Cash and Equivalents, Beginning of Year 137,581 147,908
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CASH AND EQUIVALENTS, END OF PERIOD $ 97,406 $ 63,254
========= =========
SIGNIFICANT NONCASH INVESTING ACTIVITIES:
Accrual for Construction in Progress $ 17,898 $ 34,368
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 August 4, 2001
and for the thirteen and twenty-six week periods ended August 4, 2001
and July 29, 2000 are unaudited and are presented pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly,
these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto contained in A&F's Annual Report on Form 10-K for the fiscal
year ended February 3, 2001 (the "2000 fiscal year"). In the opinion of
management, the accompanying condensed consolidated financial
statements reflect all adjustments (which are of a normal recurring
nature) necessary to present fairly the financial position and results
of operations and cash flows for the interim periods, but are not
necessarily indicative of the results of operations for a full fiscal
year.
The condensed consolidated financial statements as of August 4, 2001
and for the thirteen and twenty-six week periods ended August 4, 2001
and July 29, 2000 included herein have been reviewed by the independent
accounting firm of PricewaterhouseCoopers LLP and the report of such
firm follows the notes to condensed consolidated financial statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 (the "Act") for its report
on the condensed consolidated financial statements because that report
is not a "report" within the meaning of Sections 7 and 11 of the Act.
Certain prior period amounts have been reclassified to conform with
current year presentation.
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2. EARNINGS PER SHARE
Weighted Average Shares Outstanding (in thousands):
Thirteen Weeks Ended
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August 4, 2001 July 29, 2000
--------------- ----------------
Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (3,977) (2,852)
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Basic shares 99,323 100,448
Dilutive effect of options and restricted shares 4,697 1,256
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Diluted shares 104,020 101,704
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Twenty-six Weeks Ended
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August 4, 2001 July 29, 2000
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Shares of Class A Common Stock issued 103,300 103,300
Treasury shares (4,133) (2,048)
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Basic shares 99,167 101,252
Dilutive effect of options and restricted shares 4,286 1,536
------- -------
Diluted shares 103,453 102,788
======= =======
Options to purchase 4,503,000 and 10,248,000 shares of Class A Common
Stock were outstanding at August 4, 2001 and July 29, 2000,
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.
3. 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.
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4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
August 4, February 3,
2001 2001
--------------- ---------------
Property and equipment, at cost $ 461,613 $ 384,196
Accumulated depreciation and amortization (116,731) (105,411)
--------------- ---------------
Property and equipment, net $ 344,882 $ 278,785
=============== ===============
5. INCOME TAXES
The provision for income taxes is based on the current estimate of the
annual effective tax rate. Income taxes paid during the twenty-six
weeks ended August 4, 2001 and July 29, 2000 approximated $50.5 million
and $64.1 million, respectively.
6. LONG-TERM DEBT
The Company entered into a $150 million syndicated unsecured credit
agreement (the "Agreement"), on April 30, 1998. Borrowings outstanding
under the Agreement are due April 30, 2003. The Agreement has several
borrowing options, including interest rates that are based on the bank
agent's "Alternate Base Rate," a LIBO Rate or a rate submitted under a
bidding process. Facility fees payable under the Agreement are based on
the Company's ratio (the "leverage ratio") of the sum of total debt
plus 800% of forward minimum rent commitments to trailing four-quarters
EBITDAR and currently accrues at .225% of the committed amount per
annum. The Agreement contains limitations on debt, liens, restricted
payments (including dividends), mergers and acquisitions,
sale-leaseback transactions, investments, acquisitions, hedging
transactions, and transactions with affiliates. It also contains
financial covenants requiring a minimum ratio of EBITDAR to interest
expense and minimum rent and a maximum leverage ratio. No amounts were
outstanding under the Agreement at August 4, 2001 or February 3, 2001.
7. RELATED PARTY TRANSACTIONS
Shahid & Company, Inc. has provided advertising and design services to
the Company since 1995. Sam N. Shahid, Jr., who serves on A&F's Board
of Directors, has been President and Creative Director of Shahid &
Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for
services provided during the twenty-six weeks ended August 4, 2001 and
July 29, 2000 were approximately $0.8 and $0.9 million, respectively.
On May 18, 2001, A&F loaned the amount of $4,817,146 to its Chairman of
the Board, a major shareholder of A&F, pursuant to the terms of a
replacement promissory note, which provides that such amount is due and
payable on December 31, 2001. If A&F
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records net sales of at least $652,468,000 during the period from May
6, 2001 through November 3, 2001, 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 May 18, 2001 at the rate of 4.5% per annum. This note
constitutes a replacement of, and substitute for, the replacement
promissory note dated as of August 28, 2000 in the amount of $4.5
million, which has been cancelled.
8. 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.
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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 August 4, 2001
and the related condensed consolidated statements of income for each of the
thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 and
the condensed consolidated statements of cash flows for the twenty-six week
periods ended August 4, 2001 and July 29, 2000. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of February
3, 2001 and the related consolidated statements of income, shareholders' equity,
and of cash flows for the year then ended (not presented herein) and in our
report dated February 20, 2001 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of February 3, 2001 is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
August 10, 2001
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
During the second quarter of the 2001 fiscal year, net sales increased 22% to
$280.1 million from $229.0 million a year ago. Operating income improved to
$39.9 million in the second quarter of 2001 from $33.9 million in the second
quarter of 2000. Earnings per diluted share were $.24 in the second quarter of
2001 compared to $.21 a year ago. Year-to-date earnings per diluted share were
$.44 in 2001 compared to $.36 in 2000.
FINANCIAL SUMMARY
The following summarized financial and statistical data compares the thirteen
and twenty-six week periods ended August 4, 2001 to the comparable fiscal 2000
periods:
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------------------------- -----------------------------------------
August 4, July 29, August 4, July 29,
2001 2000 Change 2001 2000 Change
----------- ----------- ----------- ----------- ----------- -----------
Comparable store sales (8)% (6)% (3)% (7)%
Retail sales increase 30% 22% 28% 20%
attributable to new and
remodeled stores, magazine,
catalogue and Web sites
Retail sales per average gross $ 90 $ 95 (5)% $ 173 $ 181 (4)%
square foot
Retail sales per average store $ 708 $ 805 (12)% $ 1,369 $ 1,544 (11)%
(thousands)
Average store size at end of 7,758 8,408 (8)%
quarter (gross square feet)
Gross square feet at end of 3,142 2,472 27%
quarter (thousands)
Number of stores:
Beginning of period 355 258 354 250
Opened 50 36 52 44
Closed - - 1 -
------- ------- ------- -------
End of period 405 294 405 294
======= ======= ======= =======
NET SALES
---------
Net sales for the second quarter of 2001 increased 22% to $280.1 million from
$229.0 million in 2000. The increase was due to the addition of new stores
offset by an 8% decline in comparable store sales as compared with last year's
thirteen-week period ended August 5, 2000. The decrease in comparable store
sales was primarily due to continued weakness in the men's business. Comparable
store sales were positive in the women's business for the quarter driven by
strong performances in denim, knits, skirts and gymwear. The Company's
catalogue, the A&F Quarterly (a catalogue/magazine), and the Company's Web sites
accounted for 4.0% of net sales in the second quarter of 2001 as compared to
3.0% last year.
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Year-to-date net sales were $543.8 million, an increase of 25%, from $434.0
million for the same period in 2000. Sales growth resulted from the addition of
new stores offset by a 3% decline in comparable store sales. The decrease in
comparable store sales was primarily due to continued weakness in the men's
business. Comparable store sales were positive in the women's business with
strong performances across most tops and bottoms categories. The Company's
catalogue, the A&F Quarterly and the Company's Web sites represented 4.4% of
2001 year-to-date net sales as compared to 3.3% last year.
GROSS INCOME
------------
Gross income, expressed as a percentage of net sales, increased to 38.7% during
the second quarter of 2001 from 38.3% for the same period in 2000. The increase
was primarily attributable to higher merchandise margins (representing gross
income before the deduction of buying and occupancy costs) due to higher initial
markup (IMU), a lower markdown rate and lower inventory shrinkage. The increase
in IMU was a result of continued improvement in the sourcing of merchandise,
which allowed for an increased gross margin rate despite the offering of lower
price points in key product classifications. Merchandise margins also increased
because of a cautious investment in summer inventory, which led to a lower level
of summer carryover merchandise in 2001. The decreased levels of carryover
merchandise allowed for a reduction in markdowns, expressed as a percentage of
net sales, as compared to last year. Additionally, the Company continues to
emphasize its in-store operational controls to better control inventory
shrinkage. Partially offsetting these improvements was an increase in buying and
occupancy costs, expressed as a percentage of net sales, as a result of the
inability to leverage fixed expenses with lower sales volume per average store.
The 2001 year-to-date gross income, expressed as a percentage of net sales,
increased to 37.9% from 37.6% for the comparable period in 2000. The increase
was attributable to higher IMU as a result of the improved sourcing of
merchandise and lower inventory shrinkage.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
----------------------------------------------------
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 24.4% and 23.5% in the second quarter of 2001 and 2000,
respectively. The Company continues to tightly control expenses in both the
stores and the home office. These cost controls include limiting headcount
additions, reducing home office travel and store payroll hours, and decreasing
information technology and outside services expenses as a percentage of net
sales. The savings from these cost controls were offset by the inability to
leverage fixed expenses as a result of the decrease in sales volume per average
store. Also offsetting the cost savings were higher costs related to management
bonuses due to improved earnings performance versus last year and increased
depreciation expense related to the new home office complex and distribution
center.
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 24.7% and 24.1% for the year-to-date periods in 2001 and
2000, respectively. The decline resulted primarily from the inability to
leverage fixed expenses as a result of the decrease in sales volume per average
store and higher costs related to management bonuses due to improved earnings
performance versus last year.
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OPERATING INCOME
----------------
Second quarter and year-to-date operating income, expressed as a percentage of
net sales, were 14.3% and 13.2% in 2001, down from 14.8% and 13.4% for the
comparable period in 2000. The decline in operating income percentages in these
periods is a result of higher general, administrative and store operating
expenses, expressed as a percentage of net sales, which were partially offset by
the increased gross income percentages.
INTEREST INCOME
---------------
Second quarter and year-to-date net interest income were $1.1 and $2.8 million
in 2001 as compared with net interest income of $1.4 and $3.8 million for the
second quarter and year-to-date last year. Net interest income in 2001 and 2000
was primarily from short-term investments.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash provided by operating activities provides the resources to support
operations, including projected growth, seasonal requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (thousands):
August 4, February 3,
2001 2001
----------------- ------------------
Working capital $121,918 $134,297
================= ==================
Capitalization:
Shareholders' equity $476,834 $422,700
================= ==================
Net cash provided by operating activities totaled $21.0 million for the
twenty-six weeks ended August 4, 2001 versus net cash used for operating
activities of $25.8 million in the comparable period of 2000. Cash was provided
primarily by current year net income adjusted for depreciation and amortization.
Additionally, cash was provided from an increase in accounts payable, to support
the growth in inventories, and from an increase in accrued expenses, principally
store payroll, to keep up with store growth. Cash was used primarily to fund
inventory purchases required to support the addition of new stores and for tax
payments on earnings in the fourth quarter of 2000 and estimated tax payments
for fiscal year 2001 earnings.
Abercrombie & Fitch's operations are seasonal in nature and typically peak
during the back-to-school and Christmas selling periods. Accordingly, cash
requirements for inventory expenditures are highest during these periods.
Cash outflows for investing activities were for capital expenditures related to
new and remodeled stores (net of construction allowances) and the construction
costs of the new home office and
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distribution center. In 2000, capital expenditures were offset by maturities of
marketable securities.
Financing activities during 2001 have consisted primarily of stock option
exercises. Financing activities during 2000 consisted primarily of the
repurchase of 3,000,000 million shares of A&F's Class A Common Stock pursuant to
previously authorized stock repurchase programs. No shares were repurchased
during 2001. As of August 4, 2001, A&F was authorized to repurchase up to an
additional 2,450,000 shares under the current repurchase program.
CAPITAL EXPENDITURES
--------------------
Capital expenditures, primarily for new and remodeled stores and the
construction of the new home office and distribution center, totaled $66.9
million and $62.1 million for the twenty-six weeks ended August 4, 2001 and July
29, 2000, respectively. Additionally, the noncash accrual for construction in
progress increased by $17.9 million in 2001 and by $34.4 million in 2000.
The Company anticipates spending $115 to $125 million in 2001 for capital
expenditures, of which $95 to $105 million will be for new stores, remodeling
and/or expansion of existing stores and related improvements. The balance of
capital expenditures will chiefly be related to the new home office and
distribution center, which were completed in April 2001 and February 2001,
respectively. The Company intends to add approximately 830,000 gross square feet
in 2001, which will represent a 29% increase over year-end 2000. It is
anticipated the increase will result from the net addition of approximately 44
new Abercrombie & Fitch stores, 64 abercrombie stores and 29 Hollister Co.
stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores to be opened in 2001 will
approximate $625,000 per store, after giving effect to landlord allowances. In
addition, inventory purchases are expected to average approximately $300,000 per
store.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for abercrombie stores to be opened in 2001 will
approximate $500,000 per store, after giving effect to landlord allowances. In
addition, inventory purchases are expected to average approximately $150,000 per
store.
The Company is in the early stages of developing Hollister Co. As a result,
current average costs for leasehold improvements, furniture and fixtures and
inventory purchases are not representative of future costs.
The Company expects that substantially all future capital expenditures will be
funded with cash from operations. In addition, the Company has available a $150
million credit agreement to support operations.
RELATIONSHIP WITH THE LIMITED
-----------------------------
Effective May 19, 1998, The Limited, Inc. ("The Limited") completed a tax-free
exchange offer to establish A&F as an independent company. Subsequent to the
exchange offer, A&F and The
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Limited entered into various service agreements for terms ranging from one to
three years. A&F hired associates with the appropriate expertise or contracted
with outside parties to replace those services which expired in May 1999.
Service agreements were also entered into for the continued use by the Company
of its distribution and home office space and transportation and logistic
services. The distribution space agreement terminated in April 2001. The home
office space and transportation and logistic services agreements expired in May
2001. The cost of these services generally was equal to The Limited's cost in
providing the relevant services plus 5% of such costs.
Costs incurred to replace the services formerly provided by The Limited did not
have a material adverse impact nor are they expected to have a material adverse
impact on the Company's financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." The standard is effective starting with fiscal years
beginning after December 15, 2001 (February 3, 2002 for the Company). SFAS No.
142 addresses how intangible assets that are acquired individually or with a
group of other assets should be accounted for in financial statements upon their
acquisition. It also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. Management of A&F anticipates that the adoption of SFAS No. 142 will
not have an impact on the Company's results of operations or its financial
position.
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be effective
for fiscal years beginning after June 15, 2002 (February 2, 2003 for the
Company). The standard requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is a cost by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related obligation for its recorded
amount or incurs a gain or loss upon settlement. Because costs associated with
exiting leased properties at the end of lease terms are minimal, management of
A&F anticipates that the adoption of SFAS No. 143 will not have a significant
effect on the Company's results of operations or its financial position.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
--------------------------------------------------------------------------------
A&F cautions that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Report or
made by management of A&F involve risks and uncertainties and are subject to
change based on various important factors. The following factors, among others,
in some cases have affected and in the future could affect the Company's
financial performance and actual results and could cause actual results for 2001
and beyond to differ materially from those expressed or implied in any of the
forward-looking statements included in this Form 10-Q or otherwise made by
management: changes in consumer spending patterns, 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
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suitable store locations at appropriate terms, ability to develop new
merchandise and ability to hire and train associates.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of A&F's financial instruments as of August 4, 2001 has not
significantly changed since February 3, 2001. A&F's market risk profile as of
February 3, 2001 is disclosed in A&F's Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits arising in the ordinary course
of business.
On January 13, 1999, a complaint was filed against many national
retailers in the United States District Court for the Central District
of California. The complaint (1) purported to be filed on behalf of a
class of unnamed garment workers, (2) related to labor practices
allegedly employed on the island of Saipan, Commonwealth of the
Northern Mariana Islands, by apparel manufacturers unrelated to the
Company, some of which have sold goods to the Company, and (3) sought
injunctive, unspecified monetary and other relief. On September 29,
1999, the action was transferred to the United States District Court
for the District of Hawaii. Thereafter, the plaintiffs moved for leave
to amend their complaint to add A&F and others as additional
defendants. That motion was granted and, on April 28, 2000, an amended
complaint was filed which adds A&F and others as defendants, but does
not otherwise significantly alter either the claims alleged or the
relief sought by the plaintiffs. A&F has moved to dismiss the amended
complaint. Certain of the other defendants also moved to transfer the
action to Saipan. On June 23, 2000, the District Court of Hawaii
ordered the case to be transferred to the United States District Court
for the District of the Northern Mariana Islands. Plaintiffs filed a
Petition for Writ of Mandamus challenging the transfer and on March 22,
2001, the Ninth Circuit Court of Appeals issued an order denying the
Petition for Writ of Mandamus, thus allowing the case to be transferred
to the United States District Court for the Northern Mariana Islands.
The motion to dismiss is still pending. The Court has set a hearing for
class certification for February 14, 2002 and class certification
discovery is pending.
On June 2, 1998, A&F filed suit against American Eagle Outfitters, Inc.
alleging an intentional and systematic copying of the "Abercrombie &
Fitch" brand, its images and business practices, including the design
and look of the Company's merchandise, marketing and
catalogue/magazine. The lawsuit, filed in Federal District Court in
Columbus, Ohio, sought to enjoin American Eagle's practices, recover
lost profits and obtain punitive damages. In July 1999, the District
Court granted a summary judgment dismissing the lawsuit against
American Eagle. A&F filed a motion for reconsideration of the District
Court judgment which was subsequently denied by court order dated
September 10, 1999. In October 1999, A&F filed an appeal in the United
States Court of Appeals for the Sixth Circuit (the "Sixth Circuit")
regarding the decisions of the District Court on the motions for
summary judgment and reconsideration. The appeal has been fully briefed
and oral arguments were held before the Sixth Circuit on December 7,
2000. A&F is awaiting a written decision.
A&F is aware of 20 actions that have been filed against A&F and certain
of its officers and directors on behalf of a purported, but as yet
uncertified, class of shareholders who purchased A&F's Class A Common
Stock between October 8, 1999 and October 13, 1999. These 20 actions
have been filed in the United States District Courts for the Southern
District of New York and the Southern District of Ohio, Eastern
Division alleging violations of the federal securities laws and seeking
unspecified damages. On 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
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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 5. OTHER INFORMATION
Effective as of the close of business on October 5, 2001, First Chicago
Trust Company of New York (now a division of EquiServe ("First
Chicago/EquiServe")) will cease to serve as Transfer Agent and
Registrar of A&F's Class A Common Stock. National City Bank of
Cleveland, Ohio ("National City Bank") has been appointed as successor
Transfer Agent and Registrar effective as of the opening of business on
October 8, 2001.
A&F and First Chicago/EquiServe entered into a Rights Agreement, dated
as of July 16, 1998, which was subsequently amended by Amendment No. 1,
dated as of April 21, 1999 (collectively, the "Rights Agreement"),
pursuant to which First Chicago/EquiServe was appointed to act as
"Rights Agent" under the Rights Agreement. The terms of the Rights
Agreement have been described in A&F's Form 8-A filed with the SEC on
July 21, 1998 and Amendment No. 1 to Form 8-A filed with the SEC on
April 26, 1999, and in Item 5 of Part II of A&F's Quarterly Report on
Form 10-Q for the quarterly period ended July 31, 1999.
A&F has notified First Chicago/EquiServe that effective as of the close
of business on October 5, 2001, First Chicago/EquiServe will be removed
as Rights Agent under the Rights Agreement. National City Bank has been
appointed as successor Rights Agent effective as of the opening of
business on October 8, 2001. A copy of the Appointment and Acceptance
of Successor Rights Agent, effective as of the opening of business on
October 8, 2001, between A&F and National City Bank is being filed as
Exhibit 4.6 to this Form 10-Q.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
3. Certificate of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation of
A&F as filed with the Delaware Secretary of State on
August 27, 1996, incorporated by reference to Exhibit
3.1 to A&F's Quarterly Report on Form 10-Q for the
quarter ended November 2, 1996. (File No. 1-12107)
3.2 Certificate of Designation of Series A Participating
Cumulative Preferred Stock of A&F as filed with the
Delaware Secretary of State on July 21, 1998,
incorporated by reference to Exhibit 3.2 to A&F's
Annual Report on Form 10-K for the year ended January
30, 1999. (File No. 1-12107)
3.3 Certificate of Decrease of Shares Designated as Class B
Common Stock as filed with the Delaware Secretary of
State on July 30, 1999, incorporated by reference to
Exhibit 3.3 to A&F's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1999. (File No. 1-12107)
3.4 Amended and Restated Bylaws of A&F, incorporated by
reference to Exhibit 3.2 to A&F's Quarterly Report on
Form 10-Q for the quarter ended November 2, 1996. (File
No. 1-12107)
3.5 Certificate regarding adoption of amendment to
Subsection 1.10(c) of Amended and Restated Bylaws of
A&F by Board of Directors on April 4, 2000,
incorporated by reference to Exhibit 3.5 to A&F's
Annual Report on Form 10-K for the year ended January
29, 2000. (File No. 1-12107)
3.6 Amended and Restated Bylaws of A&F (reflecting
amendments through April 4, 2000) (for SEC reporting
compliance purposes only), incorporated by reference to
Exhibit 3.6 to A&F's Annual Report on Form 10-K for the
year ended January 29, 2000. (File No. 1-12107)
4. Instruments Defining the Rights of Security Holders.
4.1 Credit Agreement, dated as of April 30, 1998, among
Abercrombie & Fitch Stores, Inc., as Borrower, A&F, as
Guarantor, the Lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent, and Chase
Securities, Inc., as Arranger, incorporated by
reference to Exhibit 4.1 to A&F's Current Report on
Form 8-K dated May 7, 1998. (File No. 1-12107)
4.2 First Amendment and Waiver, dated as of July 30, 1999,
to the Credit Agreement, dated as of April 30, 1998,
among Abercrombie & Fitch Stores, Inc., A&F, the
lenders party thereto and The Chase Manhattan Bank, as
Administrative Agent, incorporated by reference to
Exhibit 4.3 to A&F's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1999. (File No. 1-12107)
4.3 Rights Agreement, dated as of July 16, 1998, between
A&F and First Chicago Trust Company of New York, as
Rights Agent, incorporated by reference to Exhibit 1 to
A&F's Registration Statement on Form 8-A dated July 21,
1998. (File No. 1-12107)
4.4 Amendment No. 1 to Rights Agreement, dated as of April
21, 1999, between A&F and First Chicago Trust Company
of New York, as Rights
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Agent, incorporated by reference to Exhibit 2 to
A&F's Amendment No. 1 to Form 8-A dated April 23,
1999. (File No. 1-12107)
4.5 Certificate of adjustment of number of Rights
associated with each share of Class A Common Stock,
dated May 27, 1999, incorporated by reference to
Exhibit 4.6 to A&F's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1999. (File No. 1-12107)
4.6 Appointment and Acceptance of Successor Rights Agent,
effective as of the opening of business on October 8,
2001, between A&F and National City Bank.
10. Material Contracts.
10.1 Abercrombie & Fitch Co. Incentive Compensation
Performance Plan, incorporated by reference to Exhibit
A to A&F's Proxy Statement dated April 14, 1997. (File
No. 1-12107)
10.2 1998 Restatement of the Abercrombie & Fitch Co. 1996
Stock Option and Performance Incentive Plan (reflects
amendments through December 7, 1999 and the two-for-one
stock split distributed June 15, 1999 to stockholders
of record on May 25, 1999), incorporated by reference
to Exhibit 10.2 to A&F's Annual Report on Form 10-K for
the year ended January 29, 2000. (File No. 1-12107)
10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996
Stock Plan for Non-Associate Directors (reflects
amendments through October 26, 2000 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 October 28, 2000. (File No.
1-12107)
10.4 Employment Agreement by and between A&F and Michael S.
Jeffries dated as of May 13, 1997 with exhibits and
amendment, incorporated by reference to Exhibit 10.4 to
A&F's Quarterly Report on Form 10-Q for the quarter
ended November 1, 1997. (File No. 1-12107)
10.5 Employment Agreement by and between A&F and Seth R.
Johnson dated as of December 5, 1997, incorporated by
reference to Exhibit 10.10 to A&F's Amendment No. 4 to
Form S-4 Registration Statement filed on April 14, 1998
(Registration No. 333-46423).
10.6 Tax Disaffiliation Agreement dated as of May 19, 1998
between The Limited, Inc. and A&F, incorporated by
reference to Exhibit 10.7 to A&F's Quarterly Report on
Form 10-Q for the quarter ended May 2, 1998. (File No.
1-12107)
10.7 Abercrombie & Fitch, Inc. Directors' Deferred
Compensation Plan, incorporated by reference to Exhibit
10.14 to A&F's Annual Report on Form 10-K for the year
ended January 30, 1999. (File No. 1-12107)
10.8 Replacement Promissory Note, dated May 18, 2001, issued
by Michael S. Jeffries to A&F, incorporated by
reference to Exhibit 10.11 to A&F's Quarterly Report on
Form 10-Q for the quarter ended May 5, 2001. (File No.
1-12107)
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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 August 4,
2001.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABERCROMBIE & FITCH CO.
(Registrant)
By /s/ Seth R. Johnson
-------------------------------------
Seth R. Johnson,
Executive Vice President and Chief
Operating Officer*
Date: September 17, 2001
----------
* Mr. Johnson has been duly authorized to sign on behalf of the Registrant as
its principal financial officer.
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EXHIBIT INDEX
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EXHIBIT NO. DOCUMENT
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4.6 Appointment and Acceptance of Successor Rights Agent,
effective as of the opening of business on October 8,
2001, between A&F and National City Bank.
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Inclusion of
Report of Independent Accountants.