10-Q 1 l85310ae10-q.txt ABERCROMBIE & FITCH CO. 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 28, 2000 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------ Commission file number 1-12107 ------- ABERCROMBIE & FITCH CO. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 31-1469076 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Four Limited Parkway East, Reynoldsburg, OH 43068 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 577-6500 ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock Outstanding at December 4, 2000 ---------------------------- ------------------------------- $.01 Par Value 98,780,179 Shares 2 ABERCROMBIE & FITCH CO. TABLE OF CONTENTS
Page No. -------- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income Thirteen and Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999.....................3 Condensed Consolidated Balance Sheets October 28, 2000 and January 29, 2000.....................4 Condensed Consolidated Statements of Cash Flows Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999.....................5 Notes to Condensed Consolidated Financial Statements...............6 Report of Independent Accountants.................................12 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............13 Part II. Other Information Item 1. Legal Proceedings............................................18 Item 6. Exhibits and Reports on Form 8-K.............................20
2 3 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ABERCROMBIE & FITCH CO. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended ------------------------ ------------------------- October 30, October 30, October 28, 1999 October 28, 1999 2000 (Restated) 2000 (Restated) ----------- ----------- ----------- ----------- NET SALES $366,885 $286,983 $805,053 $674,172 Cost of Goods Sold, Occupancy and Buying Costs 218,688 165,097 487,341 399,661 -------- -------- -------- -------- GROSS INCOME 148,197 121,886 317,712 274,511 General, Administrative and Store Operating Expenses 77,014 58,476 188,154 157,787 -------- -------- -------- -------- OPERATING INCOME 71,183 63,410 129,558 116,724 Interest Income, Net 1,469 1,684 5,300 4,742 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 72,652 65,094 134,858 121,466 Provision for Income Taxes 29,060 26,035 53,940 48,586 -------- -------- -------- -------- NET INCOME $ 43,592 $ 39,059 $ 80,918 $ 72,880 ======== ======== ======== ======== NET INCOME PER SHARE: Basic $ 0.44 $ 0.38 $ 0.81 $ 0.71 ======== ======== ======== ======== Diluted $ 0.43 $ 0.36 $ 0.79 $ 0.67 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 98,969 102,917 100,491 103,098 ======== ======== ======== ======== Diluted 101,548 107,578 102,375 108,287 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 ABERCROMBIE & FITCH CO. CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands)
October 28, January 29, 2000 2000 ----------- ----------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash and Equivalents $ 94,162 $147,908 Marketable Securities -- 45,601 Accounts Receivable 14,596 11,447 Inventories 122,374 75,262 Store Supplies 13,845 11,674 Other 2,960 8,325 -------- -------- TOTAL CURRENT ASSETS 247,937 300,217 PROPERTY AND EQUIPMENT, NET 268,607 146,403 DEFERRED INCOME TAXES 11,060 11,060 OTHER ASSETS 420 486 -------- -------- TOTAL ASSETS $528,024 $458,166 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 54,766 $ 18,714 Accrued Expenses 112,943 85,373 Income Taxes Payable 8,427 33,779 -------- -------- TOTAL CURRENT LIABILITIES 176,136 137,866 OTHER LONG-TERM LIABILITIES 8,290 9,206 SHAREHOLDERS' EQUITY: Common Stock 1,033 1,033 Paid-In Capital 137,612 147,305 Retained Earnings 273,653 192,735 -------- -------- 412,298 341,073 Less: Treasury Stock, at Average Cost (68,700) (29,979) -------- -------- TOTAL SHAREHOLDERS' EQUITY 343,598 311,094 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $528,024 $458,166 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 ABERCROMBIE & FITCH CO. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited)
Thirty-nine Weeks Ended -------------------------- October 30, October 28, 1999 2000 (Restated) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 80,918 $ 72,880 Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 21,112 20,919 Non-Cash Charge for Deferred Compensation 3,386 4,791 Changes in Assets and Liabilities: Inventories (47,112) (53,303) Accounts Payable and Accrued Expenses 34,496 31,362 Income Taxes (25,352) (14,395) Other Assets and Liabilities 2,195 (1,589) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 69,643 60,665 --------- --------- CASH USED FOR INVESTING ACTIVITIES Capital Expenditures (114,190) (56,555) Purchase of Marketable Securities -- (44,853) Proceeds from Maturities of Marketable Securities 45,601 -- Issuance of Notes (3,000) -- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (71,589) (101,408) FINANCING ACTIVITIES: Purchase of Treasury Stock (43,929) (29,884) Other Changes in Shareholders' Equity (7,871) 2,925 --------- --------- NET CASH USED FOR FINANCING ACTIVITIES (51,800) (26,959) --------- --------- NET DECREASE IN CASH AND EQUIVALENTS (53,746) (67,702) Cash and Equivalents, Beginning of Year 147,908 163,564 --------- --------- CASH AND EQUIVALENTS, END OF PERIOD $ 94,162 $ 95,862 --------- --------- SIGNIFICANT NON-CASH INVESTING ACTIVITIES: Accrual for Construction in Progress $ 29,126 $ 16,380 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 ABERCROMBIE & FITCH CO. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Abercrombie & Fitch Co. (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 the Company and all significant subsidiaries which 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 October 28, 2000 and for the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 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 the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (the "1999 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 October 28, 2000, and for the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 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 meanings of Sections 7 and 11 of the Act. During the fourth quarter of the 1999 fiscal year, the Company changed its accounting for gift certificates. Under the new method, the Company establishes a liability upon the sale of a gift certificate. The liability is reduced when the gift certificate is redeemed and the customer takes possession of the merchandise. The impact of this change was not significant to the years prior to 1999 and had no impact on cash flows. The change was retroactively applied to the first three quarters of the 1999 fiscal year. 6 7 The impact of the change on the thirteen week period ended October 30, 1999 is (in thousands except per share amounts):
Impact of Change in Gift As Previously Certificate As Reported Accounting Restated ------------- --------------- -------- Net Sales $286,983 -- $286,983 Gross Income 121,886 -- 121,886 General, Administrative and Store Operating Expenses 58,663 $ 187 58,476 Interest Income, Net 1,684 -- 1,684 Provision for Income Taxes 25,960 (75) 26,035 -------- ----- -------- Net Income $ 38,947 $ 112 $ 39,059 ======== ===== ======== Net Income Per Share: Basic $ .38 $ .00 $ .38 ======== ===== ======== Diluted $ .36 $ .00 $ .36 ======== ===== ========
The impact of the change on the thirty-nine week period ended October 30, 1999 is (in thousands except per share amounts):
Impact of Change in Gift As Previously Certificate As Reported Accounting Restated ------------- --------------- -------- Net Sales $674,172 -- $674,172 Gross Income 274,511 -- 274,511 General, Administrative and Store Operating Expenses 162,752 $ 4,965 157,787 Interest Income, Net 4,742 -- 4,742 Provision for Income Taxes 46,600 (1,986) 48,586 -------- ------- -------- Net Income $ 69,901 $ 2,979 $ 72,880 ======== ======= ======== Net Income Per Share: Basic $ .68 $ .03 $ .71 ======== ======= ======== Diluted $ .65 $ .02 $ .67 ======== ======= ========
In addition, certain amounts in prior period financial statements have been reclassified to conform with current year presentation. 7 8 2. ADOPTION OF ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (February 4, 2001 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that the adoption of SFAS 133 will not have a significant effect on the Company's results of operations or its financial position. In September 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs". The effective date of EITF Issue 00-10 is no later than the fourth quarter of fiscal years beginning after December 15, 1999. EITF 00-10 requires that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, should be classified as revenue. EITF 00-10 also states that the classification of shipping and handling costs is an accounting policy decision that should be disclosed. A policy of including shipping and handling costs in cost of sales may be adopted. If shipping costs or handling costs are significant and are not included in cost of sales (that is, if those costs are accounted for together or separately on other income statement line items), the amount(s) of such costs and the line item(s) on the income statement that include them should both be disclosed. Currently, the Company classifies shipping and handling revenues and costs as operating expenses. The Company does not expect EITF Issue 00-10 to have a significant effect on its consolidated financial statements. 3. MARKETABLE SECURITIES All investments with original maturities of greater than 90 days are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company determines the appropriate classification at the time of purchase. No marketable securities were held at October 28, 2000. At January 29, 2000, the Company held investments in marketable securities which were classified as held to maturity based on the Company's positive intent and ability to hold the securities to maturity. All securities held by the Company at January 29, 2000 were corporate debt securities which matured within one year and were stated at amortized cost which approximated market value. 8 9 4. EARNINGS PER SHARE Weighted Average Shares Outstanding (in thousands):
Thirteen Weeks Ended -------------------------- October 28, October 30, 2000 1999 ----------- ----------- Shares of Class A Common Stock issued 103,300 103,300 Treasury shares (4,331) (383) ------- ------- Basic shares 98,969 102,917 Dilutive effect of options and restricted shares 2,579 4,661 ------- ------- Diluted shares 101,548 107,578 ======= =======
Thirty-nine Weeks Ended ------------------------- October 28, October 30, 2000 1999 ----------- ----------- Shares of Class A Common Stock issued 103,300 103,300 Treasury shares (2,809) (202) ------- ------- Basic shares 100,491 103,098 Dilutive effect of options and restricted shares 1,884 5,189 ------- ------- Diluted shares 102,375 108,287 ======= =======
Options to purchase 8,798,000 and 5,600,000 shares of Class A Common Stock were outstanding at October 28, 2000 and October 30, 1999, respectively, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares. 5. INVENTORIES The fiscal year of the Company 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. 9 10 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (in thousands):
October 28, January 29, 2000 2000 ----------- ----------- Property and equipment, at cost $364,398 $225,781 Accumulated depreciation and amortization (95,791) (79,378) -------- -------- Property and equipment, net $268,607 $146,403 ======== ========
7. INCOME TAXES The provision for income taxes is based on the current estimate of the annual effective tax rate. Income taxes paid during the thirty-nine weeks ended October 28, 2000 and October 30, 1999 approximated $80.0 million and $62.6 million, respectively. 8. LONG-TERM DEBT The Company entered into a $150 million syndicated unsecured credit agreement (the "Agreement"), on April 30, 1998. Borrowings outstanding under the Agreement are due April 30, 2003. The Agreement has several borrowing options, including interest rates that are based on the bank agent's "Alternate Base Rate", a LIBO Rate or a rate submitted under a bidding process. Facility fees payable under the Agreement are based on the Company's ratio (the "leverage ratio") of the sum of total debt plus 800% of forward minimum rent commitments to trailing four-quarters EBITDAR and currently accrues at .225% of the committed amount per annum. The Agreement contains limitations on debt, liens, restricted payments (including dividends), mergers and acquisitions, sale-leaseback transactions, investments, acquisitions, hedging transactions, and transactions with affiliates. It also contains financial covenants requiring a minimum ratio of EBITDAR to interest expense and minimum rent and a maximum leverage ratio. No amounts were outstanding under the Agreement at October 28, 2000 or January 29, 2000. 9. RELATED PARTY TRANSACTIONS Shahid & Company, Inc. has provided advertising and design services for the Company since 1995. Sam N. Shahid, Jr., who serves on the Company's Board of Directors, has been President and Creative Director of Shahid & Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for services provided during the thirty-nine weeks ended October 28, 2000 and October 30, 1999 were approximately $1.3 million and $1.2 million, respectively. On August 28, 2000, the Company loaned $4.5 million to its Chairman of the Board, a major shareholder of the Company, pursuant to the terms of a replacement promissory note, which provides that such amount is due and payable on May 18, 2001 together with interest at the rate of 6.5% per annum. This note constitutes a replacement of, and substitute for, the promissory notes dated March 1, 2000 and May 19, 2000 in the amounts of $1.5 million and $3.0 million, respectively, which were cancelled. 10 11 10. CONTINGENCIES The Company is involved in a number of legal proceedings. Although it is not possible to predict with any certainty the eventual outcome of any legal proceedings, it is the opinion of management that the ultimate resolution of these matters will not have a material impact on the Company's results of operations, cash flows or financial position. 11 12 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of Abercrombie & Fitch Co. We have reviewed the accompanying condensed consolidated balance sheet of Abercrombie & Fitch Co. and Subsidiaries (the "Company") as of October 28, 2000, and the related condensed consolidated statements of income for each of the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 28, 2000 and October 30, 1999. 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 generally accepted auditing standards, the consolidated balance sheet as of January 29, 2000, 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 15, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of January 29, 2000, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Columbus, Ohio November 7, 2000 12 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the third quarter of 2000, net sales increased 28% to $366.9 million from $287.0 million a year ago. Operating income improved to $71.2 million in the third quarter of 2000 from $63.4 million in the third quarter of 1999. Earnings per diluted share were $.43 in the third quarter of 2000 compared to $.36 a year ago. Year-to-date earnings per diluted share were $.79 in 2000 compared to $.67 in 1999. Financial Summary ----------------- The following summarized financial and statistical data compare the thirteen and thirty-nine week periods ended October 28, 2000 to the comparable 1999 periods:
Thirteen Weeks Ended Thirty-nine Weeks Ended ------------------------------------ ----------------------------------------- October 28, October 30, October 28, October 30, 2000 1999 Change 2000 1999 Change ----------- ----------- ------- ----------- ----------- ------- Comparable store sales (3)% 11% (5)% 15% Retail sales increase attributable to new and remodeled stores, magazine, catalogue and web sites 31% 14% 24% 17% Retail sales per average gross square foot $ 139 $ 147 (5)% $ 324 $ 352 (8)% Retail sales per average store (thousands) $1,155 $1,314 (12)% $2,724 $3,169 (14)% Average store size at end of quarter (gross square feet) 8,178 8,875 (8)% Gross square feet at end of quarter (thousands) 2,658 1,952 36% Number of stores: Beginning of period 294 208 250 196 Opened 31 12 75 24 Closed -- -- -- -- ------- ------ ------- ------ End of period 325 220 325 220 ======= ====== ======= ======
13 14 Net Sales --------- Net sales for the third quarter of 2000 increased 28% to $366.9 million from $287.0 million in 1999. The increase was due to the addition of new stores offset by a 3% decline in comparable store sales. The decline in comparable store sales was primarily due to comparable store sales decreases in the men's business. Comparable store sales were positive in the women's business for the quarter. The Company's catalogue, the A&F Quarterly (a catalogue/magazine) and the Company's web sites accounted for 2.5% of net sales in the third quarter of 2000 as compared to 2.0% last year. Year-to-date net sales were $805.1 million, an increase of 19%, from $674.2 million for the same period in 1999. Sales growth resulted from the addition of new stores offset by a 5% decline in comparable store sales. The Company's catalogue, A&F Quarterly and the Company's web sites represented 2.7% of 2000 year-to-date net sales as compared to 2.2% last year. Gross Income ------------ Gross income, expressed as a percentage of net sales, decreased to 40.4% for the third quarter of 2000 from 42.5% for the same period in 1999. The decrease was attributable to lower merchandise margins (representing gross income before the deduction of buying and occupancy costs) due to lower initial markups (IMU) and higher freight costs. The most significant reduction in IMU was a change in the sales mix. During the quarter, a lower proportion of sales were in higher IMU categories. The 2000 year-to-date gross income, expressed as a percentage of net sales, decreased to 39.5% from 40.7% for the comparable period in 1999. The decrease was attributable to lower merchandise margins. General, Administrative and Store Operating Expenses ---------------------------------------------------- General, administrative and store operating expenses, expressed as a percentage of net sales, were 21.0% in the third quarter of 2000 as compared to 20.4% for the same period in 1999. The increase in the percentage was primarily due to the inability to leverage fixed expenses as a result of the decrease in comparable store sales. General, administrative and store operating expenses, expressed as a percentage of net sales, were 23.4% for the year-to-date periods in 2000 and 1999. Operating Income ---------------- Third quarter and year-to-date operating income, expressed as a percentage of net sales, were 19.4% and 16.1%, in 2000, down from 22.1% and 17.3% for the comparable periods in 1999. The decline in operating income as a percentage of sales in these periods is primarily a result of lower gross income percentages. In the third quarter, higher general, administrative and store operating expenses, expressed as a percentage of net sales, also added to the decrease in the operating income percentage. 14 15 Interest Income, Net -------------------- Third quarter and year-to-date 2000 net interest income was $1.5 million and $5.3 million as compared with $1.7 million and $4.7 million for the comparable periods last year. Net interest income in 2000 and 1999 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 (in thousands):
October 28, January 29, 2000 2000 ----------- ----------- Working capital $ 71,801 $162,351 ======== ======== Capitalization: Shareholders' equity $343,598 $311,094 ======== ========
Net cash provided by operating activities totaled $69.6 million for the thirty-nine weeks ended October 28, 2000 versus $60.7 million in the comparable period in 1999. Cash was provided primarily by the increase in current year net income adjusted for depreciation and amortization and increased accounts payable and accrued expenses needed to support the growth in inventories from January 29, 2000. Cash was used primarily for higher tax payments on increased earnings and to fund inventory purchases required to support the addition of new stores. 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 primarily for capital expenditures related to new and remodeled stores (net of construction allowances) and the construction costs of the new office and distribution center. In 2000, capital expenditures were partially offset by maturities of marketable securities. Financing activities during 2000 and 1999 consisted primarily of the repurchase of 3,550,000 and 743,500 shares of the Company's Class A Common Stock pursuant to previously authorized stock repurchase programs. The Company is authorized to repurchase an additional 2,450,000 shares under the current repurchase program. 15 16 Capital Expenditures -------------------- Capital expenditures, primarily for new and remodeled stores and the construction of a new office and distribution center, totaled $114.2 million for the thirty-nine weeks ended October 28, 2000 compared to $56.6 million for the comparable period in 1999. Additionally, the non-cash accrual for construction in progress totaled $29.1 million in 2000 and $16.4 million in 1999. Expenditures related to the new office and distribution center accounted for $76.6 million of total capital expenditures in 2000, of which $17.9 million was non-cash accrual for construction in progress. The Company anticipates spending $160 to $170 million in 2000 for capital expenditures, of which $65 to $70 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 construction of the new office and distribution center which is expected to be completed by early 2001. The Company intends to add approximately 670,000 gross retail square feet in 2000, which will represent a 31% increase over year-end 1999. It is anticipated that the increase will result from the net addition of approximately 49 new Abercrombie & Fitch stores, 49 abercrombie stores and the remodeling and/or expansion of four stores. Additionally, the Company has opened four Hollister Co. stores and plans to open one additional Hollister Co. store in 2000. Hollister Co. stores are expected to average approximately 6,000 gross retail square feet per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for Abercrombie & Fitch stores opened in 2000 will approximate $600,000 per store, after giving effect to landlord allowances. In addition, inventory purchases are expected to average approximately $300,000 per store. The Company estimates that the average cost for leasehold improvements and furniture and fixtures for abercrombie stores opened in 2000 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 expects that substantially all future capital expenditures will be funded with cash from operations. In addition, the Company has available the full amount of 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 the Company as an independent company. Subsequent to the exchange offer, the Company and The Limited entered into various service agreements for terms ranging from one to three years. The Company has 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. These agreements expire in May 2001. The cost of these services generally is equal to The Limited's cost in providing the relevant services plus 5% of such costs. The Company does not anticipate that costs associated with the services provided by The Limited, which expire in May 2001, or costs incurred to replace the services currently provided by The Limited will have a material adverse impact on its financial condition. 16 17 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 or made by management of the Company 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 2000 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 suitable store locations at appropriate terms, ability to develop new merchandise and ability to hire and train associates. 17 18 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 the Company and others as additional defendants. That motion was granted and, on April 28, 2000, an amended complaint was filed which adds the Company and others as defendants, but does not otherwise significantly alter either the claims alleged or the relief sought by the plaintiffs. The Company 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 transferred the case to the United States District Court for the District of the Northern Mariana Islands, and on July 7, 2000, denied plaintiffs' motion for reconsideration of the transfer order. Plaintiffs have filed a Petition for a Writ of Mandamus challenging the transfer order and Motion for Emergency Stay in the U.S. Ninth Circuit Court of Appeals. The Motion for Emergency Stay was granted on November 3, 2000. The Petition for a Writ of Mandamus remains pending. The motion to dismiss is still pending. On June 2, 1998, the Company 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. The Company filed a motion for reconsideration of the District Court judgment which was subsequently denied by court order dated September 10, 1999. In October 1999, the Company 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. The Company is awaiting a decision. The Company is aware of 20 actions that have been filed against the Company and certain of its officers and directors on behalf of a purported, but as yet uncertified, class of shareholders who purchased the Company's Class A Common Stock between October 8, 1999 and October 13, 1999. These 20 actions have been filed in the United States District Courts for the Southern District of New York and the Southern District of Ohio, Eastern Division alleging violations of the federal securities laws and seeking unspecified damages. On April 12, 2000, the Judicial Panel on Multidistrict Litigation issued a Transfer Order transferring the 20 pending actions to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities Litigation. On November 16, 2000, the 18 19 Court signed an Order appointing the Hicks Group, a group of seven unrelated investors in the Company's securities, as lead plaintiff, and appointing lead counsel in the consolidated action. The Company believes that the actions against it are without merit and intends to defend vigorously against them. However, the Company 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 has commenced a formal investigation regarding trading in the securities of the Company and the disclosure of sales forecasts in October 1999, and the Ohio Division of Securities has requested information from the Company regarding these same matters. These investigations are ongoing. The Company is cooperating in these investigations. 19 20 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3. Certificate of Incorporation and Bylaws 3.1 Amended and Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on August 27, 1996, incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 3.2 Certificate of Designation of Series A Participating Cumulative Preferred Stock of the Company as filed with the Delaware Secretary of State on July 21, 1998, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended January 30, 1999. 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 the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999. 3.4 Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 3.5 Certificate regarding adoption of amendment to Subsection 1.10(c) of Amended and Restated Bylaws of the Company by the Board of Directors on April 4, 2000, incorporated by reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the year ended January 29, 2000. 3.6 Amended and Restated Bylaws of the Company (reflecting amendments through April 4, 2000) (for SEC reporting compliance purposes only), incorporated by reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K for the year ended January 29, 2000. 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, the Company, 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 the Company's Current Report on Form 8-K dated April 30, 1998. 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., Abercrombie & Fitch Co., the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent, incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999. 4.3 Rights Agreement dated as of July 16, 1998 between Abercrombie & Fitch Co. and First Chicago Trust Company of New York, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-A dated July 21, 1998. 20 21 4.4 Amendment No. 1 to the Rights Agreement dated as of April 21, 1999 between Abercrombie & Fitch Co. and First Chicago Trust Company of New York, incorporated by reference to Exhibit 2 to the Company's Amendment No. 1 to Form 8-A dated April 23, 1999. 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 the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999. 10. Material Contracts 10.1 Abercrombie & Fitch Co. Incentive Compensation Performance Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 14, 1997. 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 the Company's Annual Report on Form 10-K for the year ended January 29, 2000. 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). 10.4 Employment Agreement by and between the Company and Michael S. Jeffries dated as of May 13, 1997 with exhibits and amendment incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 1, 1997. 10.5 Amended and Restated Employment Agreement by and between the Company and Michele S. Donnan-Martin, executed by the Company on November 18, 1999 and by Ms. Donnan-Martin on October 11, 1999, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 30, 1999. 10.6 Employment Agreement by and between the Company and Seth R. Johnson dated December 5, 1997, incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-4 (Registration No. 333-46423). 21 22 10.7 Tax Disaffiliation Agreement dated as of May 19, 1998 between The Limited, Inc. and the Company, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.8 Amended and Restated Services Agreement dated as of May 19, 1998 between The Limited, Inc. and the Company, incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.9 Shared Facilities Agreement dated September 27, 1996 by and between the Company and The Limited, Inc., incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.10 Sublease Agreement by and between Victoria's Secret Stores, Inc. and the Company, dated June 1, 1995 (the "Sublease Agreement"), incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-08231). 10.11 Amendment No. 1 to the Sublease Agreement dated as of May 19, 1998, incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1998. 10.12 Amended and Restated Employment Agreement by and between the Company and Charles W. Martin, executed by the Company on November 18, 1999 and by Mr. Martin on October 11, 1999, incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 30, 1999. 10.13 Abercrombie & Fitch, Inc. Directors' Deferred Compensation Plan, incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended January 30, 1999. 10.14 Replacement Promissory Note, dated August 28, 2000, issued by Michael S. Jeffries to the Company, incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 2000. 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Inclusion of Report of Independent Accountants. 27. Financial Data Schedule 27.1 Financial Data Schedule (Year-to-Date Period Ended October 28, 2000). 27.2 Restated Financial Data Schedule (Year-to-Date Period Ended October 30, 1999). 22 23 (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fiscal quarter ended October 28, 2000. 23 24 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABERCROMBIE & FITCH CO. (Registrant) By /S/ Seth R. Johnson ---------------------------------- Seth R. Johnson, Executive Vice President and Chief Operating Officer* Date: December 12, 2000 ---------- * Mr. Johnson has been duly authorized to sign on behalf of the Registrant as its principal financial officer. 24 25 EXHIBIT INDEX ------------- Exhibit No. Document ----------- -------- 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). 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Inclusion of Report of Independent Accountants. 27.1 Financial Data Schedule (Year-to-Date Period Ended October 28, 2000). 27.2 Restated Financial Data Schedule (Year-to-Date Period Ended October 30, 1999).