SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $13.3 million and $40.2 million for the thirteen and thirty-nine week periods ended November 2, 2013, respectively, and $13.2 million and $38.6 million for the thirteen and thirty-nine week periods ended October 27, 2012, respectively. The Company also recognized $5.0 million and $15.3 million in tax benefits related to share-based compensation expense for the thirteen and thirty-nine week periods ended November 2, 2013, respectively, and $5.0 million and $14.7 million for the thirteen and thirty-nine week periods ended October 27, 2012, 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, with the exception of performance share awards. Performance share award expense is primarily recognized in the performance period of the awards' requisite service period. 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 and performance share awards 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 November 2, 2013 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 week periods ended November 2, 2013 and October 27, 2012 was $1.2 million and insignificant, respectively.

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, including those converted from performance share awards. As of November 2, 2013, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights, restricted stock units and performance share awards 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 each reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan (the “2007 LTIP”) and the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan (the “2005 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. The fair value of liability-classified awards is re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered.

Plans

As of November 2, 2013, A&F had two primary share-based compensation plans: the 2005 LTIP, under which A&F grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company and non-associate members of the A&F Board of Directors, and the 2007 LTIP, under which A&F grants stock appreciation rights, restricted stock units and performance share awards 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 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 Chairman and Chief Executive Officer (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 appreciation rights and restricted stock units vest primarily over four years for associates, while performance share awards are primarily earned and vest over the performance period. 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 the 2007 LTIP have a vesting period defined as the shorter of four years or the period from the award date through the end of the CEO's employment agreement subject to the satisfaction of performance-based criteria for awards granted subsequent to May 7, 2012. 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 appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the 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 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 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 and performance share awards, the Company calculates the fair value of awards granted using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining the fair value, 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 week periods ended November 2, 2013 or October 27, 2012.

Below is a summary of stock option activity for the thirty-nine weeks ended November 2, 2013:



Stock Options	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at February 2, 2013	569,400		$	65.40
Granted	—		—
Exercised	(7,500	)	28.24
Forfeited or expired	(23,800	)	76.01
Outstanding at November 2, 2013	538,100		$	65.44	$	1,048,700	3.5
Stock options exercisable at November 2, 2013	538,100		$	65.44	$	1,048,700	3.5
Stock options expected to become exercisable in the future as of November 2, 2013	—		—		—		—

The total intrinsic value of stock options which were exercised during the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was insignificant.

The grant date fair value of stock options which vested during the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was insignificant and $1.2 million, respectively.

As of November 2, 2013, all compensation cost related to stock options had been recognized.

Stock Appreciation Rights

The weighted-average estimated fair value of stock appreciation rights granted during the thirty-nine week periods ended November 2, 2013 and October 27, 2012, 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
	November 2, 2013	October 27, 2012			November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
Grant date market price	—	$	—		$	46.57		$	52.89		$	45.46		$	52.02
Exercise price	—	$	—		$	46.57		$	52.89		$	45.46		$	52.02
Fair value	—	$	—		$	20.34		$	23.53		$	16.82		$	22.21
Assumptions:
Price volatility	—	—		%	61		%	56		%	54		%	59		%
Expected term (years)	—	—			4.7			5.0			4.1			4.1
Risk-free interest rate	—	—		%	0.7		%	1.3		%	0.6		%	0.9		%
Dividend yield	—	—		%	1.8		%	1.1		%	1.8		%	1.1		%

Below is a summary of stock appreciation rights activity for the thirty-nine weeks ended November 2, 2013:



Stock Appreciation Rights	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at February 2, 2013	9,246,859		$	40.17
Granted:
Chairman and Chief Executive Officer	—		—
Other Executive Officers	189,700		46.57
All Other Associates	105,500		45.46
Exercised	(510,875	)	31.99
Forfeited or expired	(33,600	)	49.97
Outstanding at November 2, 2013	8,997,584		$	40.80	$	34,277,453	3.7
Stock appreciation rights exercisable at November 2, 2013	2,991,261		$	46.03	$	3,696,298	4.4
Stock appreciation rights expected to become exercisable in the future as of November 2, 2013	5,957,158		$	38.11	$	30,578,924	3.4

The total intrinsic value of stock appreciation rights exercised during the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was $8.5 million and insignificant, respectively.

The grant date fair value of stock appreciation rights which vested during the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was $25.0 million and $24.0 million, respectively.

As of November 2, 2013, there was $18.4 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 11 months.

Restricted Stock Units

Below is a summary of restricted stock unit activity for the thirty-nine weeks ended November 2, 2013:



Restricted Stock Units	Number of Underlying Shares		Weighted-Average Grant Date Fair Value
Unvested at February 2, 2013	1,198,680		$	46.88
Granted ⁽¹⁾	782,400		42.52
Vested	(358,728	)	40.65
Forfeited	(135,479	)	45.68
Unvested at November 2, 2013	1,486,873		$	46.29

⁽¹⁾

Number of shares granted includes approximately 240,000 shares related to the grant of performance share awards ("PSAs") in Fiscal 2013. This reflects the target amount granted; however, the number of PSAs that ultimately are earned would vary from 0% - 200% of target depending on the level of growth of adjusted diluted earnings per share. The number also includes 15,000 of additional shares earned above the Fiscal 2012 target due to the achievement above target.

The total fair value of restricted stock units and performance share awards granted during the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was $33.3 million and $28.2 million, respectively.

The total grant date fair value of restricted stock units and performance share awards which vested during the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was $14.6 million and $18.7 million, respectively.

As of November 2, 2013, there was $36.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units and performance share awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 16 months.