Summary of ABERCROMBIE & FITCH CO /DE/

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the condensed consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to "Fiscal 2009" represent the 52-week fiscal year that will end on January 30, 2010, and to "Fiscal 2008" represent the 52-week fiscal year that ended January 31, 2009.
The Company is a specialty retailer that operates stores and websites selling casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie, Hollister and RUEHL brands. In addition, the Company operates stores under the Gilly Hicks brand offering bras, underwear, personal care products, sleepwear and at-home products for women.
Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an atmosphere that is confident and just a bit provocative. abercrombie directly follows in the footsteps of its older sibling, Abercrombie & Fitch. abercrombie has an energetic attitude and is popular, wholesome and athletic - the signature of All-American cool. Hollister is young, spirited, with a sense of humor and brings Southern California to the world. RUEHL personifies the post-grad that has arrived in Greenwich Village, New York City to live the dream. RUEHL embraces its culture and artistic nature and defines the aspirational New York City lifestyle. Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney sensibility.
RESULTS OF OPERATIONS
During the second quarter of Fiscal 2009, net sales decreased 23% to $648.5 million from $845.8 million in the second quarter of Fiscal 2008. Operating loss was $21.5 million in the second quarter of Fiscal 2009, including net lease termination charges of $23.0 million and severance charges of $0.6 million associated with the exit of RUEHL branded stores and related direct-to-consumer operations and a related non-cash impairment charge of $0.8 million, compared to operating income of $124.0 million in the second quarter of Fiscal 2008. The Company had a net loss of $26.7 million in the second quarter of Fiscal 2009 compared to net income of $77.8 million in the second quarter of Fiscal 2008. Net loss per basic and diluted share was $0.30 in the second quarter of Fiscal 2009 compared to net income per diluted share of $0.87 in the second quarter of Fiscal 2008. The second quarter net loss and net loss per basic and diluted share included pre-tax charges of $24.4 million associated with the exit of RUEHL branded stores and direct-to-consumer operations and the related store impairment charges and an $11.5 million charge to tax expense related to a true-up of the first quarter tax provision.

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Net cash provided by operating activities, the Company's primary source of liquidity, was $47.0 million for the twenty-six weeks ended August 1, 2009. This source of cash was primarily driven by results from operations adjusted for non-cash items including depreciation and amortization, impairment charges and deferred taxes, and the decrease in inventories on hand in response to declining sales, partially offset by an increase in other assets and liabilities including cash outflows for lease deposits and pre-paid rent. The Company also had a use of cash of $106.7 million primarily related to capital expenditures. During the second quarter of Fiscal 2009, the Company repaid U.S. dollar denominated borrowings of $100.0 million under the unsecured Amended Credit Agreement and separately drew down approximately $36.4 million in foreign currency denominated borrowings used to fund international lease and capital expenditure commitments. The Company also paid dividends totaling $30.7 million during the twenty-six weeks ended August 1, 2009. As of August 1, 2009, the Company had $366.5 million in cash and equivalents, and outstanding debt and letters of credit of $79.6 million.
Due to seasonal variations in the retail industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year or of future financial results. The seasonality of the Company's operations may also lead to significant fluctuations in certain asset and liability accounts.

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The following data represents the amounts shown in the Company's Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen and twenty-six week periods ended August 1, 2009 and August 2, 2008, expressed as a percentage of net sales:

                                                              Thirteen Weeks Ended                        Twenty-Six Weeks Ended
                                                     August 1, 2009          August 2, 2008        August 1, 2009         August 2, 2008
NET SALES                                                      100.0 %                 100.0 %               100.0 %                100.0 %

Cost of Goods Sold                                              33.5 %                  29.9 %                35.1 %                 31.5 %


GROSS PROFIT                                                    66.5 %                  70.1 %                64.9 %                 68.5 %

Stores and Distribution Expense (1)                             56.6 %                  42.6 %                60.0 %                 42.7 %
Marketing, General and Administrative Expense (2)               13.7 %                  12.9 %                14.4 %                 13.0 %
Other Operating Income, Net                                     (0.5 )%                 (0.1 )%               (0.4 )%                (0.2 )%


OPERATING (LOSS) INCOME                                         (3.3 )%                 14.7 %                (9.1 )%                13.0 %
Interest Income, Net                                            (0.3 )%                 (0.2 )%               (0.3 )%                (0.6 )%


(LOSS) INCOME BEFORE TAXES                                      (3.0 )%                 14.9 %                (8.8 )%                13.6 %
Tax (Benefit) Expense (3)                                        1.1 %                   5.7 %                (2.0 )%                 5.1 %


NET (LOSS) INCOME                                               (4.1 )%                  9.2 %                (6.8 )%                 8.5 %

(1) Includes net lease termination charges of $23.0 million, 3.5% of net sales, and a non-cash impairment charge of $0.8 million, 0.1% of net sales, for the thirteen weeks ended August 1, 2009 and non-cash impairment charges of $48.5 million, 3.8% of net sales, and lease termination charges of $23.0 million, 1.8% of net sales, for the twenty-six weeks ended August 1, 2009, associated with the exit of the RUEHL business.

(2) Includes severance charges of $0.6 million, 0.1% of net sales, for the thirteen weeks ended August 1, 2009 and severance charges of $0.6 million, 0.05% of net sales, and a non-cash impairment charge of $3.0 million, 0.2% of net sales, for the twenty-six weeks ended August 1, 2009, related to the exit of the RUEHL business.

(3) For the thirteen week period ended August 1, 2009, tax expense includes $11.5 million of expense related to a true-up of the first quarter income tax provision in accordance with Financial Accounting Standards Board Interpretation No. 18, "Accounting for Income Taxes in Interim Periods," offset by $4.5 million of benefit associated with the second quarter loss before income taxes.

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Financial Summary The following summarized financial and statistical data compares the thirteen and twenty-six week periods ended August 1, 2009 to the thirteen and twenty-six week periods ended August 2, 2008:

                                              Thirteen Weeks Ended                                             Twenty-Six Weeks Ended
                                     August 1, 2009          August 2, 2008          % Change          August 1, 2009          August 2, 2008          % Change
Net sales by brand (in
thousands)                          $        648,459        $        845,799               (23 )%     $      1,260,595        $      1,645,977               (23 )%
Abercrombie & Fitch                 $        285,313        $        383,587               (26 )%     $        549,978        $        741,311               (26 )%
abercrombie                         $         71,453        $         94,753               (25 )%     $        140,554        $        190,932               (26 )%
Hollister                           $        274,281        $        350,773               (22 )%     $        536,708        $        680,940               (21 )%
RUEHL                               $         11,237        $         12,501               (10 )%     $         21,644        $         25,540               (15 )%
Gilly Hicks**                       $          6,175        $          4,185                48 %      $         11,711        $          7,254                61 %

Increase/(decrease) in
comparable store sales*                          (30 )%                   (4 )%                                    (30 )%                   (4 )%
Abercrombie & Fitch                              (27 )%                    3 %                                     (26 )%                    3 %
abercrombie                                      (29 )%                  (11 )%                                    (31 )%                   (9 )%
Hollister                                        (33 )%                   (9 )%                                    (32 )%                   (9 )%
RUEHL                                            (31 )%                  (22 )%                                    (33 )%                  (20 )%

Retail sales increase
attributable to new and
remodeled stores and websites                      7 %                     9 %                                       7 %                    10 %

Net retail sales per average
store (in thousands)                $            526        $            740               (29 )%     $          1,019        $          1,443               (29 )%
Abercrombie & Fitch                 $            718        $            990               (27 )%     $          1,376        $          1,888               (27 )%
abercrombie                         $            306        $            420               (27 )%     $            600        $            849               (29 )%
Hollister                           $            502        $            707               (29 )%     $            976        $          1,386               (30 )%
RUEHL                               $            322        $            493               (35 )%     $            637        $          1,000               (36 )%

Net retail sales per average
gross square foot                   $             74        $            104               (29 )%     $            143        $            203               (30 )%
Abercrombie & Fitch                 $             81        $            112               (28 )%     $            155        $            213               (27 )%
abercrombie                         $             66        $             92               (28 )%     $            130        $            186               (30 )%
Hollister                           $             74        $            106               (30 )%     $            144        $            207               (30 )%
RUEHL                               $             35        $             52               (33 )%     $             69        $            107               (36 )%

Transactions per average retail
store                                          8,966                  11,558               (22 )%               17,065                  22,622               (25 )%
Abercrombie & Fitch                            9,241                  11,850               (22 )%               17,517                  22,600               (22 )%
abercrombie                                    5,282                   6,586               (20 )%               10,139                  13,198               (23 )%
Hollister                                     10,625                  13,847               (23 )%               20,182                  27,348               (26 )%
RUEHL                                          3,545                   5,949               (40 )%                7,482                  12,067               (38 )%

Average retail transaction
value                               $          58.71        $          64.04                (8 )%     $          59.69        $          63.79                (6 )%
Abercrombie & Fitch                 $          77.70        $          83.52                (7 )%     $          78.57        $          83.56                (6 )%
abercrombie                         $          58.00        $          63.79                (9 )%     $          59.14        $          64.33                (8 )%
Hollister                           $          47.28        $          51.04                (7 )%     $          48.36        $          50.67                (5 )%
RUEHL                               $          90.83        $          82.83                10 %      $          85.09        $          82.89                 3 %

Average units per retail
transaction                                     2.38                    2.45                (3 )%                 2.36                    2.45                (4 )%
Abercrombie & Fitch                             2.31                    2.43                (5 )%                 2.32                    2.43                (5 )%
abercrombie                                     2.79                    2.84                (2 )%                 2.78                    2.82                (1 )%
Hollister                                       2.30                    2.38                (3 )%                 2.28                    2.37                (4 )%
RUEHL                                           2.26                    2.33                (3 )%                 2.29                    2.38                (4 )%

Average unit retail sold            $          24.71        $          26.14                (5 )%     $          25.26        $          26.04                (3 )%
Abercrombie & Fitch                 $          33.58        $          34.37                (2 )%     $          33.87        $          34.39                (2 )%
abercrombie                         $          20.77        $          22.46                (8 )%     $          21.30        $          22.81                (7 )%
Hollister                           $          20.59        $          21.45                (4 )%     $          21.23        $          21.38                (1 )%
RUEHL                               $          40.25        $          35.55                13 %      $          37.11        $          34.83                 7 %

* A store is included in comparable store sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year.

** Net sales for
Gilly Hicks
for the
thirteen-week
periods ended
August 1,
2009 and
August 2,
2008 reflect
the activity
of 16 and
eight stores,
respectively.
Operational
data were
deemed
immaterial
for inclusion
in the table.

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CURRENT TRENDS AND OUTLOOK The second quarter retail environment continued to present challenges to the Company. Consumer spending patterns domestically continue to be dictated by cost and value, which are headwinds facing the Company's premium brand positioning. As a result, Fiscal 2009 continues to be viewed as a transitional year in which the Company will continue working to affect things within its control, and seeking to be positioned to take advantage of an eventual turnaround in domestic conditions.
The Company believes that its international expansion will be a critical component of its future growth and is encouraged by its international performance to date. The Abercrombie & Fitch London flagship continues to perform well and U.K. Hollister mall-based stores opened at productivity levels significantly higher than the average U.S. Hollister store. These results are consistent with the Company's belief in the international appeal of its brand and store experience, based on an appreciation of the Company's core values of optimism, confidence and aspiration. The Company anticipates an accelerated opening schedule for international mall-based Hollister stores in 2010 and 2011. In addition to the focus on international expansion, the Company believes that it is continuing to make progress on product offerings. The Company believes it has improved the fashion component of its offering, with dresses and plaids performing well in the most recent quarter. The Company will continue to focus on product offerings in the Fall, including additions of fashion elements to the assortments for back-to-school and Christmas, particularly for the female business.
The Company recognizes that price is an important component of its business model, especially in the current economic environment. Greater reductions in average unit retail are planned for the Fall season, and prices will continue to be reviewed on an on-going basis. However, the Company believes that the primary drivers of its business will continue to be fashion, quality and aspiration. The Company ended the second quarter with inventory per gross square foot at cost down 35%. The Company expects the decrease to moderate in fourth quarter of Fiscal 2009.
In managing the business in 2009, the Company will continue to concentrate on protecting the brands, growing internationally, and preserving cash, in a disciplined and controlled way.

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SECOND QUARTER RESULTS
Net Sales
Net sales for the second quarter of Fiscal 2009 were $648.5 million, a decrease of 23% from net sales of $845.8 million during the second quarter of Fiscal 2008. The net sales decrease was attributed to a 30% decrease in comparable store sales and a 13% decrease in the direct-to-consumer business, partially offset by the net addition of 51 stores.
Abercrombie & Fitch comparable store sales decreased 27%, with women's comparable store sales decreasing by a low thirty and men's comparable store sales decreasing by a low twenty. abercrombie comparable store sales decreased 29%, with guys posting a low twenty decrease and girls posting a low thirty decrease. Hollister comparable store sales decreased 33%, with bettys declining by a high thirty and dudes posting a mid twenty decrease. RUEHL comparable store sales decreased 31%, with women's comparable store sales decreasing by mid thirties and men's comparable store sales decreasing by a mid twenty. Regionally, comparable store sales were down in all U.S. regions and Canada. Comparable store sales were positive in the Abercrombie & Fitch London flagship store.
From a merchandise classification standpoint, across all brands, for both the male and female business, graphic tees, knit tops and shorts were the weakest performing categories. In the female business, woven shirts and dresses performed stronger. The masculine categories continue to out-pace the feminine categories; however the gap began to narrow in the current quarter as the female consumer responded positively to new fashion woven plaids and dresses. Direct-to-consumer net merchandise sales, which are sold through the Company's websites, for the second quarter of Fiscal 2009 were $48.7 million, a decrease of 13% from Fiscal 2008 second quarter net merchandise sales of $55.9 million. Shipping and handling revenue for the corresponding periods was $8.5 million in Fiscal 2009 and $9.9 million in Fiscal 2008. The direct-to-consumer business, including shipping and handling revenue, accounted for 8.8% of total net sales in the second quarter of Fiscal 2009 compared to 7.8% in the second quarter of Fiscal 2008.
Gross Profit
Gross profit for the second quarter of Fiscal 2009 was $431.0 million compared to $593.0 million for the comparable period in Fiscal 2008. The gross profit rate (gross profit divided by net sales) for the second quarter of Fiscal 2009 was 66.5%, down 360 basis points from the second quarter of Fiscal 2008 rate of 70.1%. The decrease in the gross profit rate was primarily attributable to a higher markdown rate for the second quarter of Fiscal 2009 compared to the second quarter of Fiscal 2008.
Stores and Distribution Expense
Stores and distribution expense for the second quarter of Fiscal 2009 was $367.2 million compared to $360.7 million for the comparable period in Fiscal 2008. The stores and distribution expense rate (stores and distribution expense divided by net sales) for the second quarter of Fiscal 2009 was 56.6% compared to 42.6% in the second quarter of Fiscal 2008. Although the Company was able to achieve savings in store payroll, direct to consumer and other variable expenses, the reduction in those expenses was less than the rate of sales decline and not enough to offset increases in rent, depreciation and other occupancy costs, as well as $23.0 million of net lease termination costs, 3.5% of net sales, and $0.8 million of store asset impairment charges, 0.1% of net sales, associated with the exit of RUEHL branded stores and related direct-to-consumer operations. The increase in rent, depreciation and other occupancy costs was primarily attributed to new store openings during Fiscal 2008.

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Marketing, General and Administrative Expense Marketing, general and administrative expense during the second quarter of Fiscal 2009 was $88.7 million compared to $109.0 million during the same period in Fiscal 2008, a 19% decrease. For the second quarter of Fiscal 2009, the marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 13.7% compared to 12.9% for the second quarter of Fiscal 2008. The Company was able to achieve cost savings in the second quarter of Fiscal 2009 related to employee compensation and benefits, travel, outside services and marketing. The marketing, general and administrative expense for the second quarter of Fiscal 2009 included $0.6 million of severance charges, 0.1% of net sales, associated with the exit of RUEHL branded stores and related direct-to-consumer operations. Other Operating Income, Net
Second quarter other operating income for Fiscal 2009 was $3.3 million compared to $0.8 million for the second quarter of Fiscal 2008. The increase was driven primarily by gains on foreign currency transactions in the second quarter of Fiscal 2009 compared to losses on foreign currency transactions in the second quarter of Fiscal 2008, as well as gains from the change in the fair value of the Put Option related to the UBS ARS Agreement in Fiscal 2009, as further discussed in Note 6, "Fair Value," in Notes to Condensed Consolidated Financial Statements.
Operating (Loss) Income
Operating loss for the second quarter of Fiscal 2009 was $21.5 million compared to operating income of $124.0 million in the comparable period of Fiscal 2008. The operating (loss) income rate (operating (loss) income divided by net sales) was a loss of 3.3% for the second quarter of Fiscal 2009 compared to income of 14.7% for the second quarter of Fiscal 2008. Interest Income, Net and Tax (Benefit) Expense Second quarter interest income was $3.8 million in Fiscal 2009, offset by interest expense of $2.0 million, compared to interest income of $2.6 million, offset by interest expense of $0.8 million in the second quarter of Fiscal 2008. The effective tax rate for the second quarter of Fiscal 2009 was an expense of 35.4%, compared to an expense of 38.1% for the second quarter of Fiscal 2008. The Fiscal 2009 second quarter income tax expense was $7.0 million, which was comprised of $11.5 million of expense related to a true up of the first quarter tax expense and $4.5 million of benefit associated with the second quarter loss before income taxes. The income tax true up, as calculated in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 18, "Accounting for Income Taxes in Interim Periods," was the result of a reduction of the estimated annual effective rate. The lower projected rate is primarily due to a higher proportion of projected income before taxes coming from international operations with a lower overall effective rate, and a lower proportion of projected income before income taxes coming from domestic operations, partially resulting from the second quarter charges associated with the exit of RUEHL branded stores and related direct-to-consumer operations. Net (Loss) Income and Net (Loss) Income per Share Net loss for the second quarter of Fiscal 2009 was $26.7 million compared to net income of $77.8 million for the second quarter of Fiscal 2008. Net loss per basic and diluted share for the first quarter of Fiscal 2009 was $0.30 compared to net income per diluted share of $0.87 for the same period of Fiscal 2008. The second quarter net loss and net loss per basic and diluted share included pre-tax charges of $24.4 million associated with the exit of RUEHL branded stores and related direct-to-consumer operations and the related store impairment charges and an $11.5 million charge to tax expense related to a true-up of the first quarter tax provision.

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YEAR-TO-DATE RESULTS
Net Sales
Year-to-date net sales in Fiscal 2009 were $1.261 billion, a decrease of 23% from net sales of $1.646 billion for the comparable period of Fiscal 2008. The net sales decrease was attributed to a 30% decrease in comparable store sales and a 17% decrease in the direct-to-consumer business, partially offset by the net addition of 51 stores.
Year-to-date comparable store sales by brand were as follows: Abercrombie & Fitch decreased 26%, abercrombie decreased 31%, Hollister decreased 32% and RUEHL decreased 33%.
Direct-to-consumer net merchandise sales, which are sold through the Company's websites, for the year-to-date period of Fiscal 2009 were $97.8 million, a decrease of 17% over the Fiscal 2008 comparable period net merchandise sales of $118.4 million. Shipping and handling revenue for the corresponding periods was $17.2 million in Fiscal 2009 and $20.5 million in Fiscal 2008. The direct-to-consumer business, including shipping and handling revenue, accounted for 9.1% of net sales for the Fiscal 2009 year-to-date period compared to 8.4% in the Fiscal 2008 year-to-date period.
Gross Profit
Year-to-date gross profit in Fiscal 2009 was $818.7 million compared to $1.127 billion for the comparable period in Fiscal 2008. The gross profit rate . . .