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 consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to "Fiscal 2012" represent the 53-week fiscal year that will end on February 2, 2013, and to "Fiscal 2011" represent the 52-week fiscal year that ended January 28, 2012.
The Company is a specialty retailer that operates stores in North America, Europe, and Asia and direct-to-consumer operations in North America and Europe that service all brands throughout the world. The Company sells casual sportswear apparel, including knit tops 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 kids and Hollister brands. In addition, the Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering bras, underwear, personal care products, sleepwear and at-home products for girls. 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 kids directly follows in the footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids 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. 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 third quarter of Fiscal 2012, net sales increased 9% to $1.170 billion from $1.076 billion for the third quarter of Fiscal 2011. Changes in foreign currency adversely impacted net sales by approximately 0.7% of net sales (based on converting prior year sales at current year exchange rates). The gross profit rate for the third quarter of Fiscal 2012 was 62.5% compared to 60.1% for the third quarter of Fiscal 2011. Operating income was $112.4 million for the third quarter of Fiscal 2012 compared to $79.9 million for the third quarter of Fiscal 2011. The Company had net income of $71.5 million for the third quarter of Fiscal 2012 compared to $50.9 million for the third quarter of Fiscal 2011. Net income per diluted share was $0.87 for the third quarter of Fiscal 2012 compared to $0.57 for the third quarter of Fiscal 2011.
During the Fiscal 2012 year-to-date period, net sales increased 8% to $3.042 billion from $2.829 billion in Fiscal 2011. Changes in foreign currency adversely impacted net sales by approximately 1.0% of net sales. The gross profit rate for the Fiscal 2012 year-to-date period was 62.5% compared to 62.7% for the comparable year-to-date period for Fiscal 2011. Operating income was $145.7 million for the Fiscal 2012 year-to-date period compared to $165.8 million in Fiscal 2011. The Company had net income of $90.0 million for the Fiscal 2012 year-to-date period compared to $108.1 million in Fiscal 2011. Net income per diluted share was $1.07 for the Fiscal 2012 year-to-date period compared to $1.20 in Fiscal 2011.
As of October 27, 2012, the Company had $349.7 million in cash and equivalents, $19.9 million of current marketable securities and $60.0 million in borrowings outstanding under the Amended and Restated Credit Agreement. Net cash provided by operating activities was $219.3 million for the thirty-nine weeks ended October 27, 2012. The Company used cash of $278.0 million for capital expenditures, $265.5 million to repurchase 6.3 million shares of A&F's Common Stock and $43.7 million for dividends during the thirty-nine weeks ended October 27, 2012. The Company also had cash proceeds of $80.7 million from the sale of marketable securities during the thirty-nine weeks ended October 27, 2012. Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. 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 Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended October 27, 2012 and October 29, 2011, expressed as a percentage of net sales:

                                                          Thirteen Weeks Ended                     Thirty-Nine Weeks Ended
                                                 October 27, 2012      October 29, 2011     October 27, 2012      October 29, 2011
NET SALES                                              100.0  %               100.0  %           100.0  %                100.0  %
Cost of Goods Sold                                      37.5  %                39.9  %            37.5  %                 37.3  %
GROSS PROFIT                                            62.5  %                60.1  %            62.5  %                 62.7  %
Stores and Distribution Expense                         42.5  %                42.9  %            46.4  %                 45.5  %
Marketing, General and Administrative Expense           10.5  %                10.0  %            11.6  %                 11.5  %
Other Operating Income, Net                             (0.1 )%                (0.3 )%            (0.2 )%                 (0.1 )%
OPERATING INCOME                                         9.6  %                 7.4  %             4.8  %                  5.9  %
Interest Expense, Net                                    0.1  %                 0.0  %             0.1  %                  0.1  %
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES           9.5  %                 7.4  %             4.6  %                  5.8  %
Tax Expense from Continuing Operations                   3.4  %                 2.6  %             1.7  %                  2.0  %
NET INCOME FROM CONTINUING OPERATIONS                    6.1  %                 4.7  %             3.0  %                  3.8  %
INCOME FROM DISCONTINUED OPERATIONS, Net of Tax            -  %                   -  %               -  %                  0.0  %
NET INCOME                                               6.1  %                 4.7  %             3.0  %                  3.8  %

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Financial Summary The following summarized financial and statistical data compare the thirteen and thirty-nine weeks ended October 27, 2012 to the thirteen and thirty-nine week period ended October 29, 2011:

                                          Thirteen Weeks Ended                     Thirty-Nine Weeks Ended
                                  October 27, 2012     October 29, 2011     October 27, 2012      October 29, 2011
Net sales by segment (millions)  $       1,169.6      $        1,075.9     $        3,042.3      $        2,829.3
U.S. Stores                      $         709.4      $          725.4     $        1,813.8      $        1,905.1
International Stores             $         299.0      $          215.0     $          778.7      $          571.6
Direct-to-Consumer               $         158.3      $          132.4     $          434.2      $          340.3
Other                            $           3.0      $            3.1     $           15.5      $           12.2
Net sales as a % of total sales
U.S. Stores                                   61  %                 67 %                 60  %                 67 %
International Stores                          26  %                 20 %                 26  %                 20 %
Direct-to-Consumer                            14  %                 12 %                 14  %                 12 %
Other                                          0  %                  0 %                  1  %                  0 %
Net sales by brand (millions)    $       1,169.6      $        1,075.9     $        3,042.3      $        2,829.3
Abercrombie & Fitch              $         440.0      $          436.1     $        1,162.9      $        1,161.1
abercrombie                      $          99.8      $          104.2     $          253.8      $          274.1
Hollister                        $         602.5      $          518.0     $        1,551.8      $        1,346.7
Gilly Hicks**                    $          27.3      $           17.6     $           73.8      $           47.7
Increase (decrease) in
comparable store sales*                       (3 )%                  7 %                 (6 )%                  8 %
Abercrombie & Fitch                           (4 )%                  4 %                 (6 )%                  5 %
abercrombie                                   (3 )%                  6 %                 (8 )%                  8 %
Hollister                                     (1 )%                  8 %                 (5 )%                 10 %

* 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 the thirteen and thirty-nine week periods ended October 27, 2012 and October 29, 2011, reflect the activity of 25 and 19 stores, respectively.

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CURRENT TRENDS AND OUTLOOK Our results for the third quarter of Fiscal 2012 included a 9% increase in net sales and a 53% increase in diluted earnings per share compared to the same period last year.
We saw sequential trend improvement as compared to the second quarter in same store sales in both the U.S. and international businesses and the direct-to-consumer business continued to perform well, posting sales growth of 20% for the quarter. U.S. same store sales increased 2%, with chain stores up 6% and flagship and tourist stores down 12% and international same store sales down 18%. Overall international sales grew 37% for the third quarter and we saw sequential same store sales improvement in all markets other than the UK. We believe the improvement in sales trend during the quarter is attributable to our inventory flow getting back on track, which produced newer more trend-right merchandise. In addition, we believe we have begun to see a year over year benefit as we have begun to anniversary macro-economic declines in Europe. We are also encouraged by the trend of our business in Asia.
With regard to merchandise margin, we saw improvement across all segments of our business, which was driven by a significant tailwind from lower product cost. Going forward, we intend to remain highly disciplined with regard to our strategy of starting with conservative merchandising plans, shortening lead times and increasing the percentage of our "open-to-buy" that is available to chase current trends. In addition, we have sharpened our focus on capturing current street and runway trends.
Overall we are pleased with the improved results during the third quarter. However, with the critical holiday selling season still largely ahead of us and significant macroeconomic uncertainty remaining, we continue to be cautious in our near-term outlook.
Based on having exceeded our objectives for the third quarter, we are now projecting full year diluted earnings per share of approximately $2.85 to $3.00, including the effect of a 53 week fiscal year in 2012. This projection assumes a mid single digit percentage decrease in comparable store sales for the fourth quarter and a slightly higher gross margin rate for the quarter relative to our year-to-date rate of 62.5%. Our projected diluted earnings per share guidance does not include the impact of potential impairment or other real estate charges. In addition, it assumes a full year diluted weighted average share count of approximately 83.1 million shares and does not include the impact of any potential share repurchases during the fourth quarter.
Going forward, we continue to focus on our key strategic initiatives with regard to merchandising, inventory productivity, expense and average unit cost, insight and intelligence, customer engagement and targeted closures of under-performing U.S. stores. We are confident that our focus on these initiatives, allied with our iconic brands and a continued judicious use of shareholder capital, will drive significant long-term value.

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THIRD QUARTER AND YEAR-TO-DATE RESULTS
Net Sales
Net sales for the third quarter of Fiscal 2012 were $1.170 billion, an increase of 9% from net sales of $1.076 billion during the third quarter of Fiscal 2011. The net sales increase was attributable to new international stores and a 20% increase in the direct-to-consumer business, including shipping and handling revenue, partially off-set by a 3% decrease in total comparable store sales. Including direct-to-consumer sales, U.S. sales were approximately flat at $818.6 million and international sales increased 37% to $351.1 million. The impact of changes in foreign currency adversely affected sales by approximately $7.9 million for the thirteen weeks ended October 27, 2012.
Year-to-date net sales in Fiscal 2012 were $3.042 billion, an increase of 8% from net sales of $2.829 billion during the comparable period in Fiscal 2011. The net sales increase was attributable to new international stores and a 28% increase in the direct-to-consumer business, including shipping and handling revenue, partially off-set by a 6% decrease in total comparable store sales. Including direct-to-consumer sales, U.S. sales decreased 2% to $2.111 billion and international sales increased 36% to $931.4 million. The impact of changes in foreign currency adversely affected sales by approximately $28.7 million for the thirty-nine weeks ended October 27, 2012.
Comparable store sales by brand for the third quarter of Fiscal 2012 were as follows: Abercrombie & Fitch decreased 4%, abercrombie kids decreased 3% and Hollister decreased 1%. Across the brands, male performed slightly better than female.
For the third quarter, U.S. comparable store sales increased 2%, with chain stores up 6% while flagship and tourist stores were down 12%. U.S. chain stores coupled with U.S. direct-to-consumer sales increased 7%. International comparable store sales were down 18%.
Direct-to-consumer net merchandise sales for the third quarter of Fiscal 2012 were $144.4 million, an increase of 21% from Fiscal 2011 third quarter direct-to-consumer net merchandise sales of $119.6 million. Shipping and handling revenue for the corresponding periods was $13.9 million in Fiscal 2012 and $12.8 million in Fiscal 2011. The direct-to-consumer business, including shipping and handling revenue, accounted for 13.5% of total net sales in the third quarter of Fiscal 2012 compared to 12.3% in the third quarter of Fiscal 2011.
Direct-to-consumer net merchandise sales for the Fiscal 2012 year-to-date period were $392.2 million, an increase of 30% from Fiscal 2011 year-to-date direct-to-consumer net merchandise sales of $302.4 million. Shipping and handling revenue for the corresponding periods was $42.0 million in Fiscal 2012 and $37.9 million in Fiscal 2011. The direct-to-consumer business, including shipping and handling revenue, accounted for 14.3% of total net sales for the year-to-date Fiscal 2012 compared to 12.0% in the Fiscal 2011 year-to-date period.
From a merchandise classification standpoint, for the male business, outerwear, fleece and rugged knits were stronger performing categories; while woven shirts, graphic shirts and polos were weaker performing categories. In the female business, jeans and outerwear were stronger performing categories; while graphic tees, shirts, sweaters and fleece were weaker performing categories. Gross Profit
Gross profit for the third quarter of Fiscal 2012 was $731.6 million compared to $646.5 million for the comparable period in Fiscal 2011. The gross profit rate (gross profit divided by net sales) for the third quarter of Fiscal 2012 was 62.5%, up 240 basis points from the third quarter of Fiscal 2011 rate of 60.1%. The increase in the gross profit rate for the third quarter was primarily driven by a decrease in average unit cost and an international mix benefit, partially offset by a slight decrease in average unit retail and the adverse effect of exchange rates.
Year-to date gross profit for Fiscal 2012 was $1.902 billion compared to $1.773 billion for the comparable period in Fiscal 2011. The gross profit rate for the year-to-date period of Fiscal 2012 was 62.5%, down 20 basis points from the year-to-date Fiscal 2011 rate of 62.7%.
Stores and Distribution Expense
Stores and distribution expense for the third quarter of Fiscal 2012 was $496.9 million compared to $461.7 million for the comparable period in Fiscal 2011. The stores and distribution expense rate (stores and distribution expense divided by net sales) for the third quarter of Fiscal 2012 was 42.5% compared to 42.9% in the third quarter of Fiscal 2011.
The decrease in the stores and distribution expense rate as a percentage of sales for the third quarter was primarily the result of lower store pre-opening costs offset by the deleveraging effect of negative comparable store sales. In addition, stores and

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distribution expense for the third quarter of Fiscal 2011 included approximately $4.0 million of accelerated depreciation related to the consolidation of the distribution centers.
Stores and distribution expense for the Fiscal 2012 year-to-date period was $1.411 billion compared to $1.286 billion for the comparable period in Fiscal 2011. The stores and distribution expense rate for the year-to-date period of Fiscal 2012 was 46.4% compared to 45.5% for the Fiscal 2011 year-to-date period. The increase in the stores and distribution expense rate for the year to date period was primarily the result of the deleveraging effect of negative comparable store sales.
Shipping and handling costs, including costs incurred to store, move and prepare the products for shipment and costs incurred to physically move the product to the customer, associated with direct-to-consumer operations were $16.4 million for the thirteen weeks ended October 27, 2012 compared to $12.9 million for the thirteen weeks ended October 29, 2011 and $47.7 million for the thirty-nine weeks ended October 27, 2012 compared to $32.3 million for the thirty-nine weeks ended October 29, 2011.
The increase in shipping and handling costs for the third quarter and the year-to-date periods was driven primarily by volume, including a higher international mix component.
Handling costs, including costs incurred to store, move and prepare the products for shipment to stores were $15.1 million for the thirteen weeks ended October 27, 2012 compared to $17.2 million for the thirteen weeks ended October 29, 2011 and $44.1 million for the thirty-nine weeks ended October 27, 2012 compared to $45.9 million for the thirty-nine weeks ended October 29, 2011. These amounts are recorded in Stores and Distribution Expense in the Consolidated Statements of Operations and Comprehensive Income. Marketing, General and Administrative Expense Marketing, general and administrative expense during the third quarter of Fiscal 2012 was $123.4 million compared to $107.8 million during the same period in Fiscal 2011. For the third quarter of Fiscal 2012, the marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 10.5% compared to 10.0% for the third quarter of Fiscal 2011.
The increase in marketing, general and administrative expense for the third quarter was primarily due to increases in marketing, incentive compensation related expenses, information technology and other expenses. The increase in marketing for the third quarter included approximately $5.0 million in costs related to the new customer relationship marketing and club programs and the Hong Kong flagship store opening.
Marketing, general, and administrative expense during the Fiscal 2012 year-to-date period was $351.6 million compared to $325.5 million during the same period in Fiscal 2011. For the year-to-date period of Fiscal 2012, the marketing, general and administrative expense rate was 11.6% compared to 11.5% for the Fiscal 2011 year-to-date period.
The increase in marketing, general and administrative expense for the year-to-date period was driven by increases in marketing, information technology, travel and other expenses.
Other Operating Income, Net
Third quarter other operating income, net for Fiscal 2012 was $1.2 million compared to other operating income, net, of $2.9 million for the third quarter of Fiscal 2011.
Year-to-date other operating income, net for Fiscal 2012 was $5.7 million compared to $4.1 million for the year-to-date period of Fiscal 2011. Operating Income
Operating income for the third quarter of Fiscal 2012 was $112.4 million, an increase of 41% from operating income of $79.9 million during the third quarter of Fiscal 2011. Operating income generated by new international stores, existing U.S. stores and direct-to-consumer operations more than off-set declines in existing international stores driven by negative comparable store sales and an adverse foreign currency impact.
Year-to-date operating income in Fiscal 2012 was $145.7 million, a decrease of 12% from operating income of $165.8 million during the comparable period of Fiscal 2011.
Interest Expense, Net and Tax Expense from Continuing Operations

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Third quarter interest expense was $2.6 million in Fiscal 2012, offset by interest income of $1.0 million, compared to interest expense of $1.8 million, offset by interest income of $1.2 million in the third quarter of Fiscal 2011. Year-to-date interest expense was $7.3 million in Fiscal 2012, offset by interest income of $3.1 million, compared to interest expense of $6.2 million in Fiscal 2011, offset by interest income of $3.7 million.
The effective tax rate for continuing operations for the third quarter of Fiscal 2012 was 35.5% compared to 35.8% for the Fiscal 2011 comparable period. The effective tax rate for continuing operations for the thirty-nine weeks ended October 27, 2012 was 36.4% compared to 34.3% for the thirty-nine weeks ended October 29, 2011.
The increase in the effective tax rate for the year-to-date period was primarily due to a change in the mix of income from different taxing jurisdictions. On a full-year basis, the Company expects the effective tax rate to be around 37%. The rate remains sensitive to the domestic/international profit mix, including the effect of foreign currencies. Net Income and Net Income per Share
Net income for the third quarter of Fiscal 2012 was $71.5 million compared to $50.9 million for the third quarter of Fiscal 2011. Net income per diluted share for the third quarter of Fiscal 2012 was $0.87 compared to $0.57 for the same period of Fiscal 2011.
Net income for the year-to-date period of Fiscal 2012 was $90.0 million compared to net income of $108.1 million for the year-to-date period of Fiscal 2011. Net income per diluted share for the year-to-date period of Fiscal 2012 was $1.07 compared to $1.20 for the same period of Fiscal 2011.

FINANCIAL CONDITION
Liquidity and Capital Resources
Historical Sources and Uses of Cash
Seasonality of Cash Flows
The Company's business has two principal selling seasons: the Spring season which includes the first and second fiscal quarters ("Spring") and the Fall season which includes the third and fourth fiscal quarters ("Fall"). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Holiday sales periods, particularly in the U.S. The Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operating expenses throughout the year and to reinvest in the business to support future growth. The Company also has a credit facility and a term loan agreement available as sources of additional funding.
Credit Agreements
On July 28, 2011, the Company entered into an unsecured amended and restated credit agreement (the "Amended and Restated Credit Agreement") under which up to $350 million is available. The Company had $60.0 million of borrowings outstanding under the Amended and Restated Credit Agreement on October 27, 2012. The Company had no borrowings outstanding under the Amended and Restated Credit Agreement on January 28, 2012.
On February 24, 2012, the Company entered into a $300 million Term Loan Agreement to increase its flexibility and liquidity. The Company had no borrowings outstanding under the Term Loan Agreement on October 27, 2012. The Amended and Restated Credit Agreement and the Term Loan Agreement are described in Note 12, "Borrowings," of the Notes to Consolidated Financial Statements.
The Amended and Restated Credit Agreement and the Term Loan Agreement have a Leverage Ratio covenant and a Coverage Ratio financial covenant. The Company was in compliance with the applicable ratio requirements and other covenants at October 27, 2012.
Stand-by letters of credit outstanding on October 27, 2012 and January 28, 2012 were immaterial.

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Operating Activities
Net cash provided by operating activities was $219.3 million million for the thirty-nine weeks ended October 27, 2012 compared to $59.7 million for the thirty-nine weeks ended October 29, 2011. The increase in cash provided by operating activities was primarily driven by a decrease in ending inventory partially offset by a related decrease in accounts payable. Investing Activities
Cash outflows for investing activities for the thirty-nine weeks ended October 27, 2012 and October 29, 2011 were used primarily for capital expenditures related to new store construction and information technology investments. Cash outflows for capital expenditures were higher in Fiscal 2012 than in Fiscal 2011, due to an increase in the spend for new international retail locations, as well as Home Office, Distribution Centers and Information Technology infrastructure projects. Cash inflows from investing activities for the thirty-nine weeks ended October 27, 2012 included proceeds from sales of auction rate marketable securities.
Financing Activities
For the thirty-nine week period ended October 27, 2012 and October 29, 2011, cash outflows for financing activities consisted primarily of the repurchase of A&F's Common Stock, the payment of dividends and the repayment of borrowings. For the thirty-nine weeks ended October 27, 2012, cash inflows from financing activities consisted primarily of proceeds from borrowings under the Amended and Restated Credit Agreement. For the thirty-nine weeks ended October 29, 2011, cash inflows from financing activities resulted primarily from proceeds from the exercise of share-based compensation awards.
During the thirty-nine weeks ended October 27, 2012, A&F repurchased . . .