<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 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
<PAGE> 2
ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
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
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ -------------------------
October 30, October 30,
October 28, 1999 October 28, 1999
2000 (Restated) 2000 (Restated)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
<TABLE>
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
<CAPTION>
October 28, January 29,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
<TABLE>
ABERCROMBIE & FITCH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<CAPTION>
Thirty-nine Weeks Ended
--------------------------
October 30,
October 28, 1999
2000 (Restated)
----------- -----------
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 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
<PAGE> 7
The impact of the change on the thirteen week period ended October 30,
1999 is (in thousands except per share amounts):
<TABLE>
<CAPTION>
Impact of
Change in Gift
As Previously Certificate As
Reported Accounting Restated
------------- --------------- --------
<S> <C> <C> <C>
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
======== ===== ========
</TABLE>
The impact of the change on the thirty-nine week period ended October
30, 1999 is (in thousands except per share amounts):
<TABLE>
<CAPTION>
Impact of
Change in Gift
As Previously Certificate As
Reported Accounting Restated
------------- --------------- --------
<S> <C> <C> <C>
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
======== ======= ========
</TABLE>
In addition, certain amounts in prior period financial statements have
been reclassified to conform with current year presentation.
7
<PAGE> 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
<PAGE> 9
4. EARNINGS PER SHARE
Weighted Average Shares Outstanding (in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------
October 28, October 30,
2000 1999
----------- -----------
<S> <C> <C>
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
======= =======
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------
October 28, October 30,
2000 1999
----------- -----------
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE> 10
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
<TABLE>
<CAPTION>
October 28, January 29,
2000 2000
----------- -----------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------ -----------------------------------------
October 28, October 30, October 28, October 30,
2000 1999 Change 2000 1999 Change
----------- ----------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
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
======= ====== ======= ======
</TABLE>
13
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
October 28, January 29,
2000 2000
----------- -----------
<S> <C> <C>
Working capital $ 71,801 $162,351
======== ========
Capitalization:
Shareholders' equity $343,598 $311,094
======== ========
</TABLE>
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
<PAGE> 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.
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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
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits arising in the ordinary course
of business.
On January 13, 1999, a complaint was filed against many national
retailers in the United States District Court for the Central District
of California. The complaint (1) purported to be filed on behalf of a
class of unnamed garment workers, (2) related to labor practices
allegedly employed on the island of Saipan, Commonwealth of the
Northern Mariana Islands, by apparel manufacturers unrelated to the
Company, some of which have sold goods to the Company, and (3) sought
injunctive, unspecified monetary and other relief.
On September 29, 1999, the action was transferred to the United States
District Court for the District of Hawaii. Thereafter, the plaintiffs
moved for leave to amend their complaint to add 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
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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.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Certificate of Incorporation and Bylaws
3.1 Amended and Restated Certificate of Incorporation of
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.
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<PAGE> 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).
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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).
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(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
October 28, 2000.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABERCROMBIE & FITCH CO.
(Registrant)
By /S/ Seth R. Johnson
----------------------------------
Seth R. Johnson,
Executive Vice President and Chief
Operating Officer*
Date: December 12, 2000
----------
* Mr. Johnson has been duly authorized to sign on behalf of the Registrant as
its principal financial officer.
24
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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).
