SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $13.2 million and $38.6 million for the thirteen and thirty-nine week periods ended October 27, 2012, respectively, and $13.7 million and $38.1 million for the thirteen and thirty-nine week periods ended October 29, 2011, respectively. The Company also recognized $5.0 million and $14.7 million in tax benefits related to share-based compensation expense for the thirteen and thirty-nine week periods ended October 27, 2012, respectively, and $5.1 million and $14.3 million for the thirteen and thirty-nine week periods ended October 29, 2011, respectively.

The fair value of share-based compensation awards is recognized as compensation expense primarily on a straight-line basis over the awards’ requisite service period, net of forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock units or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged to additional paid in capital, to the extent of the pool of “windfall tax benefits,” with any remainder recognized as tax expense. The Company’s pool of “windfall tax benefits” as of October 27, 2012 is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.

The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures during the thirty-nine weeks ended October 27, 2012 was immaterial. The effect of adjustments for forfeitures during the thirty-nine weeks ended October 29, 2011 was an expense of $1.3 million.

Pursuant to an employment agreement, the Chairman and Chief Executive Officer (“CEO”) is eligible to receive “semi-annual grants,” as defined in the agreement. The semi-annual grants vest in equal annual installments over the four-year period following the grant date except that each award becomes fully vested no later than February 1, 2014, except for the final semi-annual grant, which will become fully vested on the date of the grant. On May 7, 2012, the Company amended the CEO employment agreement and the portion of the semi-annual grant awarded in the form of restricted stock or restricted stock units for future grants will now vest according to the above schedule if and to the extent the performance-based vesting criteria described in Amendment No. 3 to the employment agreement are met.

A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units. As of October 27, 2012, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and restricted stock units outstanding. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in stockholder-approved plans at the applicable time.

In the event, at any reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the 2005 Long-Term Incentive Plan (the “2005 LTIP”) and the Amended and Restated 2007 Long-Term Incentive Plan (the “Amended and Restated 2007 LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards.

Plans

As of October 27, 2012, A&F had two primary share-based compensation plans: the 2005 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors, and the Amended and Restated 2007 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company. A&F also has four other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors in prior years.

The Amended and Restated 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 2.0 million of underlying shares of A&F’s Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 250,000 of underlying shares of A&F’s Common Stock for each award type to any associate of the Company (other than the CEO) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. In addition, any non-associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans, stock options, stock appreciation rights and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP, restricted stock units typically vest after approximately one year for non-associate directors of A&F. Awards granted to the CEO under his employment agreement have a vesting period defined as the shorter of four years or the award date through the end of the agreement. Under both plans, stock options have a 10-year term and stock appreciation rights have up to a 10-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control as defined in the plans.

Fair Value Estimates

The Company estimates the fair value of stock options and stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock options and stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock options and stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of A&F’s Common Stock price for the most recent historical period equal to the expected term of the stock option or stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.

In the case of restricted stock units, the Company calculates the fair value of the restricted stock units granted using the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period. In determining the fair value of restricted stock units, the Company does not take into account any performance-based requirements. The performance-based requirements are taken into account in determining the number of awards expected to vest.

Stock Options

The Company did not grant any stock options during the thirty-nine weeks ended October 27, 2012 or October 29, 2011.

Below is a summary of stock option activity for the thirty-nine weeks ended October 27, 2012:



Stock Options	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at January 28, 2012	714,997		$	60.72
Granted	—		—
Exercised	(8,000	)	27.53
Forfeited or cancelled	(41,675	)	75.13
Outstanding at October 27, 2012	665,322		$	60.21	$	970,104	3.9
Stock options exercisable at October 27, 2012	649,322		$	61.19	$	810,294	3.9
Stock options expected to become exercisable in the future as of October 27, 2012	15,880		$	20.59	$	158,667	6.1

The total intrinsic value of stock options which were exercised during the thirty-nine weeks ended October 27, 2012 was immaterial. The total intrinsic value of stock options exercised during the thirty-nine weeks ended October 29, 2011 was $38.6 million.

The grant date fair value of stock options which vested during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $1.2 million and $2.3 million, respectively.

As of October 27, 2012, there was an immaterial amount of total unrecognized compensation cost, net of estimated forfeitures, related to stock options.

Stock Appreciation Rights

The weighted-average estimated fair value of stock appreciation rights granted during the thirty-nine weeks ended October 27, 2012 and October 29, 2011, and the weighted-average assumptions used in calculating such fair value, on the date of grant, were as follows:



	Thirty-Nine Weeks Ended
	Chairman and Chief Executive Officer				Other Executive Officers						All Other Associates
	October 27, 2012	October 29, 2011			October 27, 2012			October 29, 2011			October 27, 2012			October 29, 2011
Grant date market price	—	$	56.86		$	52.89		$	54.87		$	52.02		$	54.93
Exercise price	—	$	56.86		$	52.89		$	54.87		$	52.02		$	54.93
Fair value	—	$	22.99		$	23.53		$	22.29		$	22.21		$	21.89
Assumptions:
Price volatility	—	53		%	56		%	53		%	59		%	55		%
Expected term (Years)	—	4.6			5.0			4.7			4.1			4.1
Risk-free interest rate	—	1.8		%	1.3		%	2.0		%	0.9		%	1.7		%
Dividend yield	—	1.5		%	1.1		%	1.6		%	1.1		%	1.6		%

Below is a summary of stock appreciation rights activity for the thirty-nine weeks ended October 27, 2012:



Stock Appreciation Rights	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at January 28, 2012	9,039,334		$	39.66
Granted:
Chairman and Chief Executive Officer	—		—
Other Executive Officers	212,500		52.89
All Other Associates	143,100		52.02
Exercised	(37,875	)	30.74
Forfeited or cancelled	(89,175	)	44.39
Outstanding at October 27, 2012	9,267,884		$	40.15	$	15,107,804	4.6
Stock appreciation rights exercisable at October 27, 2012	2,156,146		$	42.40	$	744,507	5.1
Stock appreciation rights expected to become exercisable in the future as of October 27, 2012	7,044,778		$	39.37	$	14,347,187	4.4

The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended October 27, 2012 was immaterial. The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended October 29, 2011 was $11.0 million.

The grant date fair value of stock appreciation rights which vested during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $24.0 million and $11.2 million, respectively.

As of October 27, 2012, there was $51.6 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.7 years.

Restricted Stock Units

Below is a summary of restricted stock unit activity for the thirty-nine weeks ended October 27, 2012:



Restricted Stock Units	Number of Underlying Shares		Weighted-Average Grant Date Fair Value
Non-vested at January 28, 2012	1,189,292		$	49.11
Granted	579,865		48.65
Vested	(355,831	)	52.45
Forfeited	(210,681	)	53.55
Non-vested at October 27, 2012	1,202,645		$	47.13

The total fair value of restricted stock units granted during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $28.2 million and $30.4 million, respectively.

The total grant date fair value of restricted stock units and restricted shares which vested during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $18.7 million and $23.5 million, respectively.

As of October 27, 2012, there was $43.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.7 years.