<PAGE> 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 31, 1998
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 1, 1998
------------------------ ------------------------------------
$.01 Par Value 51,401,826 Shares
<PAGE> 2
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen and Thirty-nine Weeks Ended
October 31, 1998 and November 1, 1997..................3
Consolidated Balance Sheets
October 31, 1998 and January 31, 1998..................4
Consolidated Statements of Cash Flows
Thirty-nine Weeks Ended
October 31, 1998 and November 1, 1997..................5
Notes to Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.........11
Part II. Other Information
Item 1. Legal Proceedings.........................................18
Item 6. Exhibits and Reports on Form 8-K..........................18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ABERCROMBIE & FITCH CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 229,869 $148,516 $ 511,226 $309,472
Cost of Goods Sold, Occupancy and Buying Costs 140,425 95,526 317,377 204,755
--------- -------- --------- --------
GROSS INCOME 89,444 52,990 193,849 104,717
General, Administrative and Store Operating
Expenses 48,661 34,581 125,629 79,738
--------- -------- --------- --------
OPERATING INCOME 40,783 18,409 68,220 24,979
Interest (Income)/Expense, Net (780) 1,076 (1,519) 3,278
--------- -------- --------- --------
INCOME BEFORE INCOME TAXES 41,563 17,333 69,739 21,701
Provision for Income Taxes 16,620 6,930 27,890 8,680
--------- -------- --------- --------
NET INCOME $ 24,943 $ 10,403 $ 41,849 $ 13,021
========= ======== ========= ========
NET INCOME PER SHARE:
Basic $ .48 $ .20 $ .81 $ .26
========= ======== ========= ========
Diluted $ .47 $ .20 $ .79 $ .25
========= ======== ========= ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 51,509 51,007 51,450 51,012
========= ======== ========= ========
Diluted 53,046 51,594 52,879 51,328
========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
ABERCROMBIE & FITCH CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash & Equivalents $ 74,728 $ 42,667
Accounts Receivable 2,675 1,695
Inventories 75,340 33,927
Store Supplies 5,815 5,592
Intercompany Receivable -- 23,785
Other 693 1,296
--------- ---------
TOTAL CURRENT ASSETS 159,251 108,962
PROPERTY AND EQUIPMENT, NET 74,991 70,517
DEFERRED INCOME TAXES 3,792 3,759
OTHER ASSETS 668 --
--------- ---------
TOTAL ASSETS $ 238,702 $ 183,238
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 38,574 $ 15,968
Accrued Expenses 61,966 35,143
Income Taxes Payable 4,986 15,851
--------- ---------
TOTAL CURRENT LIABILITIES 105,526 66,962
LONG-TERM DEBT -- 50,000
OTHER LONG-TERM LIABILITIES 17,125 7,501
SHAREHOLDERS' EQUITY:
Common Stock 517 511
Paid-In Capital 143,933 117,972
Retained Deficit (17,082) (58,931)
--------- ---------
127,368 59,552
Less: Treasury Stock, at Average Cost (11,317) (777)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 116,051 58,775
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 238,702 $ 183,238
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
ABERCROMBIE & FITCH CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
--------------------------
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 41,849 $ 13,021
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 14,603 11,764
Non-Cash Charge for Deferred Compensation 8,905 4,258
Changes in Assets and Liabilities:
Inventories (41,413) (20,640)
Accounts Payable and Accrued Expenses 49,429 24,874
Income Taxes (10,898) (3,520)
Other Assets and Liabilities 1,367 (4,409)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63,842 25,348
-------- --------
CASH USED FOR INVESTING ACTIVITIES
Capital Expenditures (20,993) (19,892)
-------- --------
FINANCING ACTIVITIES:
Issuance of Common Stock 25,875 --
Settlement of Intercompany Balance, Net 23,785 --
Stock Options and Other 792 --
Decrease in Intercompany Balance -- (3,976)
Other Equity Changes -- (802)
Purchase of Treasury Stock (11,240) --
Repayment of Long-Term Debt (50,000) --
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES (10,788) (4,778)
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS 32,061 678
Cash and Equivalents, Beginning of Year 42,667 1,945
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 74,728 $ 2,623
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
ABERCROMBIE & FITCH CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Abercrombie & Fitch Co. (the "Company") is a specialty retailer of high
quality, casual apparel for men and women with an active, youthful
lifestyle.
The 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 consolidated financial statements as of October 31, 1998 and for the
thirteen and thirty-nine week periods ended October 31, 1998 and November
1, 1997 are unaudited and are presented pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
Company's 1997 Annual Report on Form 10-K. In the opinion of management,
the accompanying 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 consolidated financial statements as of October 31, 1998, and for the
thirteen and thirty-nine week periods ended October 31, 1998 and November
1, 1997 included herein have been reviewed by the independent accounting
firm of PricewaterhouseCoopers LLP and the report of such firm follows the
notes to consolidated financial statements.
2. ADOPTION OF ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The SOP requires that certain external costs
and internal payroll and payroll related costs be capitalized during the
application development stage of a software development project and
amortized over the software's useful life. The Company will adopt the SOP
in the first quarter of 1999. The Company does not anticipate the adoption
of this SOP will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
was issued in April 1998. This SOP requires that entities expense start-up
costs and organization costs as they are incurred. This SOP is effective in
the first quarter of 1999. The Company
6
<PAGE> 7
currently expenses all start-up costs and does not anticipate an impact on
the Company's financial condition related to this SOP.
3. CONSUMMATION OF EXCHANGE OFFER
On May 19, 1998, The Limited, Inc. ("The Limited") completed a tax-free
exchange offer to establish the Company as an independent company. The
Limited accepted 47,075,052 shares of its common stock that were exchanged
at a ratio of .86 of a share of Abercrombie & Fitch stock for each Limited
share accepted for exchange. In addition, on June 1, 1998, The Limited
effected a pro rata spin-off to its shareholders of its remaining 3,115,455
Abercrombie & Fitch shares. Limited shareholders of record at the close of
trading on May 29, 1998 received .013673 of a share of Abercrombie & Fitch
stock for each Limited share owned at that time.
4. EARNINGS PER SHARE
Weighted Average Common Shares Outstanding (thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------
October 31, November 1,
1998 1997
------------ -----------
<S> <C> <C>
Common shares issued 51,650 51,050
Treasury shares (141) (43)
--------- ---------
Basic shares 51,509 51,007
Dilutive effect of stock options and restricted shares 1,537 587
--------- ---------
Diluted shares 53,046 51,594
========= =========
Thirty-nine Weeks Ended
------------------------------
October 31, November 1,
1998 1997
----------- -----------
Common shares issued 51,511 51,050
Treasury shares (61) (38)
-------- ---------
Basic shares 51,450 51,012
Dilutive effect of stock options and restricted shares 1,429 316
-------- ---------
Diluted shares 52,879 51,328
======== =========
</TABLE>
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.
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<PAGE> 8
Inventory valuation at the end of the first and third quarters reflects
adjustments for inventory markdowns and shrinkage estimates for the total
selling season.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
--------------- ---------------
<S> <C> <C>
Property and equipment, at cost $131,708 $124,000
Accumulated depreciation and amortization (56,717) (53,483)
---------- ----------
Property and equipment, net $ 74,991 $ 70,517
========== ==========
</TABLE>
7. INCOME TAXES
The Company was included in The Limited's consolidated federal and certain
state income tax groups for income tax reporting purposes through the
completion of the split-off. Under this arrangement, the Company is
responsible for its proportionate share of income taxes calculated upon its
federal taxable income at a current estimate of the Company's annual
effective tax rate. Income taxes paid during the thirty-nine weeks ended
October 31, 1998 and November 1, 1997 approximated $41.1 million and $12.2
million respectively.
8. LONG-TERM DEBT
The Company entered into a $150 million syndicated unsecured credit
agreement (the "Agreement"), on April 30, 1998 (the "Effective Date").
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 .275% 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 and 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 31, 1998.
Long-term debt at January 31, 1998 consisted of a 7.80% unsecured note in
the amount of $50 million that represented the Company's proportionate
share of certain long-term debt of The Limited. The interest rate and
maturity of the note paralleled that of corresponding debt of The Limited.
8
<PAGE> 9
During the first quarter of 1998, the Company repaid the $50 million
long-term note owed to The Limited, Inc. by issuing 600,000 shares of Class
A common stock at a price of $43.125 per share and paid $24,125,000 in
cash.
9. RELATIONSHIP WITH THE LIMITED
Subsequent to the exchange offer, The Limited continues to provide various
services to the Company including, but not limited to, information
technology, tax, store planning/design, transportation and import and
shipping services. The cost of these services generally is equal to The
Limited's cost in providing the relevant services plus 5% of such costs.
The Limited will cease to provide a substantial majority of these services
on May 19, 1999 (the first anniversary of the closing of the exchange offer
establishing the Company as an independent company).
Prior to the completion of the exchange offer, cash activity was provided
through The Limited's centralized cash management systems and was reflected
in the Company's intercompany account. On May 19, 1998, all intercompany
balances were settled.
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Audit Committee of
The Board of Directors of
Abercrombie & Fitch Co.
We have reviewed the condensed consolidated balance sheet of Abercrombie & Fitch
Co. and Subsidiaries (the Company) at October 31, 1998, and the related
condensed consolidated statements of income and cash flows for the thirteen-week
and thirty-nine-week periods ended October 31, 1998 and November 1, 1997. 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 financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
20, 1998, 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 January 31, 1998, 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 10, 1998
10
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
During the third quarter of 1998, net sales increased 55% to $229.9 million from
$148.5 million a year ago. Operating income improved to $40.8 million in the
third quarter of 1998 from $18.4 million in the third quarter of 1997. Earnings
per diluted share were $.47 in the third quarter of 1998 compared to $.20 a year
ago. Year-to-date earnings per diluted share were $.79 in 1998 compared to $.25
in 1997.
Financial Summary
- - -----------------
The following summarized financial and statistical data compares the thirteen
and thirty-nine week periods ended October 31, 1998 to the comparable 1997
periods:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR - to - DATE
-------------------------------- -----------------------------
1998 1997 CHANGE 1998 1997 CHANGE
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase in comparable store 35% 25% 41% 19%
sales
Retail sales increase 20% 44% 24% 39%
attributable to new and
remodeled stores
Retail sales per average selling $ 174 $ 130 34% $ 395 $ 283 40%
square foot
Retail sales per average store $1,301 $1,031 26% $3,017 $2,243 35%
(thousands)
Average store size at end of 7,418 7,906 (6%)
quarter (selling square feet)
Selling square feet at end of 1,313 1,178 11%
quarter (thousands)
Number of stores:
Beginning of period 171 139 156 127
Opened 6 10 23 22
Closed -- -- (2) --
------ ------ ----- ------
End of period 177 149 177 149
====== ====== ===== ======
</TABLE>
11
<PAGE> 12
Net Sales
- - ---------
Net sales for the third quarter of 1998 increased 55% to $229.9 million from
$148.5 million in 1997. The increase was due to a comparable store sales
increase of 35%, driven primarily by significantly higher transactions per store
as compared to the third quarter of 1997. Comparable store sales increases were
strong in both the men's and women's businesses with strong performances in
tops, bottoms and accessories. Additionally, the A&F Quarterly accounted for
1.5% of net sales in the third quarter of 1998.
Year-to-date net sales were $511.2 million, an increase of 65%, from $309.5
million for the same period in 1997. Sales growth resulted from a comparable
store sales increase of 41% and the net addition of 28 new stores. Net retail
sales per average selling square foot for the Company increased 40%, principally
from an increase in the number of transactions per store. The A&F Quarterly
represented 1.7% of 1998 year-to-date net sales.
Gross Income
- - ------------
Gross income, expressed as a percentage of net sales, increased to 38.9% for the
third quarter of 1998 from 35.7% for the same period in 1997. The increase was
attributable to significant leverage in buying and occupancy costs, as a
percentage of net sales, associated with increased comparable store sales as
well as improved merchandise margins (representing gross income before the
deduction of buying and occupancy costs).
The 1998 year-to-date gross income, expressed as a percentage of net sales,
increased to 37.9% from 33.8% for the comparable period in 1997. Merchandise
margins increased as a percentage of net sales due to higher initial markups
(IMU) while buying and occupancy costs declined due to leverage achieved from
comparable store sales increases.
General, Administrative and Store Operating Expenses
- - ----------------------------------------------------
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 21.2% in the third quarter of 1998 as compared to 23.3% for
the same period in 1997. The improvement resulted primarily from expense
leverage associated with the strong comparable store sales growth.
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 24.6% and 25.8% for the year-to-date periods in 1998 and
1997, respectively. The improvement resulted from management's continued
emphasis on expense control and the favorable leveraging of expenses, primarily
store expenses, over higher sales volume.
Operating Income
- - ----------------
Third quarter and year-to-date operating income, expressed as a percentage of
net sales, were 17.7% and 13.3%, in 1998, up from 12.4% and 8.1% for the
comparable periods in 1997. The improvement in operating income in these periods
is a result of higher gross income and lower general, administrative and store
operating expenses, expressed as a percentage of net sales.
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<PAGE> 13
Interest Expense
- - ----------------
Third quarter and year-to-date 1998 net interest income was $780 thousand and
$1,519 thousand as compared with net interest expense of $1.1 million and $3.3
million for the comparable periods last year. Net interest income in 1998 was
primarily from short-term investments. Interest expense in 1997 consisted of
$975 thousand per quarter on the $50 million long-term debt that was repaid
during the first quarter of 1998 in addition to interest on short-term
borrowings.
FINANCIAL CONDITION
Liquidity and Capital Resources
- - -------------------------------
Cash provided from operating activities and the Company's $150 million credit
agreement provide the resources to support operations, including projected
growth, seasonal requirements and capital expenditures. A summary of the
Company's working capital position and long-term ongoing capitalization follows
(thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- ----------
<S> <C> <C>
Working capital $ 53,725 $ 42,000
======== ========
Capitalization:
Long-term debt -- $ 50,000
Shareholders' equity $116,051 58,775
-------- --------
Total capitalization $116,051 $108,775
======== ========
</TABLE>
Net cash provided by operating activities totaled $63.8 million for the
thirty-nine weeks ended October 31, 1998 versus $25.3 million in the comparable
period in 1997. The improvement in cash provided by operating activities was
largely due to increases in net income and accounts payable and accrued
expenses. Cash requirements for inventory increased over the period, supporting
the 65% sales growth from a year ago. Correspondingly, accounts payable and
accrued expenses increased, supporting the growth in inventories and sales.
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.
Investing activities were all for capital expenditures, which are primarily for
new stores.
In 1998, financing activities consisted primarily of the repayment of $50
million long-term debt to The Limited. This occurred through the issuance of
600,000 shares of Class A common stock to The Limited with the remaining balance
paid with cash from operations. Additionally,
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<PAGE> 14
settlement of the intercompany balance between the Company and The Limited
occurred as of the split-off date.
On July 16, 1998, the Board of Directors authorized the repurchase of up to 1.0
million shares of the Company's common stock for general corporate purposes.
During the third quarter, the Company repurchased 245 thousand shares of common
stock.
Capital Expenditures
- - --------------------
Capital expenditures, primarily for new and remodeled stores, totaled $21.0
million for the thirty-nine weeks ended October 31, 1998 compared to $19.9
million for the comparable period of 1997.
During the third quarter, the Company opened four Abercrombie & Fitch stores and
two "abercrombie" kids stores.
The Company anticipates spending $40-$43 million in 1998 for capital
expenditures, of which $33-$35 million will be for new stores, remodeling and/or
expansion of existing stores and related improvements. The Company intends to
add approximately 200,000 net selling square feet in 1998, which will represent
a 16% increase over year-end 1997. It is anticipated that the increase will
result from the addition of 30 new Abercrombie & Fitch stores and the remodeling
and/or expansion of three stores.
The Company estimates that the average cost for leasehold improvements and
furniture and fixtures for Abercrombie & Fitch stores opened in 1998 will
approximate $710,000 per store, after giving effect to landlord allowances. In
addition, inventory purchases are expected to average approximately $275,000 per
store.
Additionally, the Company plans to open 14 "abercrombie" stores by the end of
fiscal year 1998. The planned store size is approximately 3,300 selling square
feet and the average cost for leasehold improvements and furniture and fixtures
will be approximately $530,000.
The Company expects capital expenditures will be funded principally by net cash
provided by operating activities.
Information Systems and "Year 2000" Compliance; Year 2000 Readiness Disclosures
- - -------------------------------------------------------------------------------
Potential Year 2000 issues will arise primarily from computer programs which
only have a two-digit date field, rather than four, to define the applicable
year of business transactions. Because such computer programs will be unable to
properly interpret dates beyond the year 1999, a systems failure or other
computer errors may ensue. Abercrombie & Fitch relies on computer-based
technology and utilizes a variety of proprietary and third party hardware and
software. The Company's critical information technology (IT) functions include
point-of-sale equipment, merchandise and non-merchandise procurement, and
business and accounting management.
In order to address the Year 2000 issue for Abercrombie & Fitch, the Company has
developed a Year 2000 plan that focuses on three areas; IT systems, facilities
and
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<PAGE> 15
distribution equipment, and vendor relations. The implementation includes five
stages, including (i) awareness, (ii) assessment, (iii) renovation, (iv)
validation, and (v) implementation. In addition to renovation of legacy systems,
new financial software packages are being implemented. The Company is using both
internal and external resources to complete its Year 2000 initiatives.
Year 2000 remediation of existing systems and implementation of new systems is
expected to be complete by the end of fiscal year 1998. The Company expects to
be fully compliant with Year 2000, including validation and implementation, by
the end of the current fiscal year.
The Company procures its merchandise and supplies from a vast network of vendors
located both within and outside the United States. The Company is in the process
of identifying key vendors and suppliers and will be making inquiries prior to
the end of fiscal year 1998 to determine their Year 2000 compliance status. The
Company is looking to obtain appropriate assurances from these vendors regarding
their Year 2000 compliance status.
The Company also utilizes various facilities, distribution equipment, and
transportation and logistic services from The Limited, Inc. and is in the
process of assessing their Year 2000 compliance status.
The Company believes that the most likely worst case scenario is that there will
be some minor disruption of systems that will affect the supply and distribution
channels on a short-term basis rather than impacting the Company in the
long-term. The Company is in the early stages of developing contingency plans,
such as alternative sourcing, and identifying the necessary actions that would
need to be taken if critical systems or service providers were not Year 2000
compliant. Given the uncertainty as to the exact nature and extent of problems
that may arise and the incomplete status of the Company's inquiries to its key
vendors, the Company's contingency planning will focus on minimizing any
significant disruptions by committing resources to respond to specific problems
that may arise. The Company expects to finalize these plans, where needed, by
the end of the first quarter of 1999. At the present time, the Company is not
aware of any Year 2000 issues that it expects might materially affect its
products, services, competitive position or financial performance. However,
despite the Company's significant efforts to make its systems and facilities
Year 2000 compliant, the ability of third party service providers, vendors and
certain other third parties, including governmental entities and utility
companies to be Year 2000 compliant is beyond the Company's control.
Accordingly, the Company can give no assurances that the failure of systems of
other companies on which the Company's systems rely or that the failure of key
suppliers or other third parties to comply with Year 2000 requirements will not
have a material adverse effect on the Company.
Total expenditures related to remediation, testing, conversion, replacement and
upgrading system applications are expected to range from $3.7 to $4.0 million.
Of the total, approximately $1.0 million will be expenses associated with
remediation and testing of existing systems. Total incremental expenses,
including depreciation and amortization of new package systems, remediation to
bring current systems into compliance and writing off legacy systems are not
expected to have a material impact on the Company's financial condition in any
year during the conversion process through 2000. As of October 31, 1998, the
Company has incurred expenses of approximately $3.6 million, consisting of
internal staff costs as well as outside consulting and other expenditures. In
1998, a significant amount of total internal staff resources were directed
towards Year 2000 projects. In 1999, internal resources and costs are not
expected to change significantly but will be redirected from Year 2000 projects
to other Company initiatives.
15
<PAGE> 16
Relationship with The Limited
- - -----------------------------
Subsequent to the split-off, the Company and The Limited entered into service
agreements which include among other things, tax, information technology and
store design and construction. These agreements are generally for a term of one
year. 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 are generally for a term of three years.
Costs for these services will generally be the costs and expenses incurred by
The Limited plus five percent of such amounts. Upon expiration of these
agreements with The Limited, the Company may bring certain services in-house,
contract with other outside parties or take other actions the Company deems
appropriate at that time.
The Company does not anticipate that costs associated with these service
agreements or costs to be incurred upon their expiration will have a material
adverse impact on its financial condition.
Adoption of Accounting Standards
- - --------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP requires that certain external costs, internal payroll
and payroll related costs be capitalized during the application development
stage of a software development project and amortized over the software's useful
life. The Company will adopt the SOP in the first quarter of 1999. The Company
does not anticipate the adoption of this SOP will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows.
Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was
issued in April 1998. This SOP requires that entities expense start-up costs and
organization costs as they are incurred. This SOP is effective in the first
quarter of 1999. The Company currently expenses all start-up costs and does not
anticipate an impact on the Company's financial condition related to this SOP.
16
<PAGE> 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 foregoing
statements as to costs and dates relating to the Year 2000 effort are forward
looking and are based on the Company's best estimates that may be updated as
additional information becomes available. The Company's forward looking
statements are also based on assumptions about many important factors, including
the technical skills of employees and independent contractors, the
representations and preparedness of third parties, the failure of vendors to
deliver merchandise or perform services required by the Company and the
collateral effects of the Year 2000 issues on the Company's business partners
and customers. While the Company believes its assumptions are reasonable, it
cautions that it is impossible to predict the impact of certain factors that
could cause actual costs or timetables to differ materially from the expected
results. In addition to Year 2000 issues, 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 1998
and beyond to differ materially from those expressed or implied in any such
forward-looking statements: changes in consumer spending patterns, consumer
preferences and overall economic conditions, the impact of competition and
pricing, changes in weather patterns, political stability, currency and exchange
risks and changes in existing or potential duties, tariffs or quotas,
availability of suitable store locations at appropriate terms, ability to
develop new merchandise and ability to hire and train associates.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in a variety of lawsuits arising in the
ordinary course of business. On November 13, 1997, the United States
District Court for the Southern District of Ohio, Eastern Division,
dismissed with prejudice an amended complaint previously transferred to
that court by the United States District Court for the Central District
of California. The amended complaint, which had been filed against the
Company, The Limited, and certain of The Limited's other subsidiaries by
the American Textile Manufacturers Institute ("ATMI"), a textile
industry trade association, alleged that the defendants violated the
federal False Claims Act by submitting false country of origin records
to the U.S. Customs Service. On November 26, 1997, ATMI served a motion
to alter or amend judgment and a motion to disqualify the presiding
judge and to vacate the order of dismissal. The motion to disqualify was
denied on December 22, 1997, but as a matter of his personal discretion,
the presiding judge elected to recuse himself from further proceedings
and this matter was transferred to a judge of the United States District
Court for the Southern District of Ohio, Western Division. On May 21,
1998, this judge denied all pending motions seeking to alter, amend or
vacate the judgment that had been entered in favor of the Company. On
June 5, 1998, ATMI filed a notice of appeal to the United States Court
of Appeals for the Sixth Circuit.
On June 2, 1998, Abercrombie & Fitch filed suit against American Eagle
Outfitters 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 was filed in Federal District Court in
Columbus, Ohio and seeks to enjoin American Eagle's practices, recover
lost profits and obtain punitive damages.
Although it is not possible to predict with certainty the eventual
outcome of any litigation, in the opinion of management, the foregoing
proceedings are not expected to have a material adverse effect on the
Company's financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
3. Articles of Incorporation and Bylaws
3.1 Amended and Restated Certificate of Incorporation of the Company
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 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.
4. Instruments Defining the Rights of Security Holders
4.1 Specimen Certificate of Class A Common Stock of the Company
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 333-8231) (the
"Form S-1").
18
<PAGE> 19
4.2 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.
4.3 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.
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, incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1998.
10.3 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan
for Non-Associate Directors incorporated by reference to Exhibit
B to the Company's Proxy Statement dated May 29, 1998.
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 Employment Agreement by and between the Company and Michele
Donnan-Martin dated December 5, 1997 incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement on Form
S-4 (File No. 333-46423) (the "Form S-4").
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 Form S-4.
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 Form S-1.
19
<PAGE> 20
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.
15. Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Incorporation of Independent Accountants' Report
27. Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
19
<PAGE> 21
SIGNATURE
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,
Vice President and Chief
Financial Officer*
Date: December 11, 1998
- - ----------------
* Mr. Johnson is the principal financial officer and has been duly authorized to
sign on behalf of the Registrant.
20
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Document
---------- ----------------------
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of
Independent Accountants' Report.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 15
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
We are aware that our report dated November 10, 1998, on our review of the
interim consolidated financial information of Abercrombie & Fitch Co. and
Subsidiaries for the thirteen-week and thirty-nine-week periods ended October
31, 1998 and included in this Form 10-Q is incorporated by reference in the
Company's registration statements on Form S-8, Registration Nos. 333-15941,
333-15943, 333-15945, 333-60189 and 333-60203. Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of this Act.
PricewaterhouseCoopers LLP
Columbus, Ohio
December 11, 1998
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF ABERCROMBIE & FITCH CO. AND
SUBSIDIARIES FOR THE QUARTER ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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