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ANF > SEC Filings for ANF > Form 10-K on 2-Apr-2013All Recent SEC Filings

Show all filings for ABERCROMBIE & FITCH CO /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-K for ABERCROMBIE & FITCH CO /DE/


2-Apr-2013

Annual Report


ITEM 7. 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, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year as was the case for Fiscal 2012. A store is included in comparable sales when it has been open as the same brand at least one year and its square footage has not been expanded or reduced by more than 20% within the past year. Additionally, beginning with Fiscal 2012, comparable direct-to-consumer sales were included in comparable sales.
For purposes of this "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," the fifty-three week period ended February 2, 2013 is compared to the fifty-two week period ended January 28, 2012 and the fifty-two week period ended January 28, 2012 is compared to the fifty-two week period ended January 29, 2011.
The Company has changed its method of accounting for inventory from the lower of cost or market utilizing the retail method to the weighted average cost method ("cost method") effective in the fourth quarter of Fiscal 2012. Results discussed in this "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," reflect the cost method of accounting for inventory. Refer to Note 4, "CHANGE IN ACCOUNTING PRINCIPLE," of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." All references to historical amounts reflect the effects of the change to the cost method.
The Company had net sales of $4.511 billion for Fiscal 2012, an increase of 8% from $4.158 billion for Fiscal 2011. Operating income for Fiscal 2012 was $374.2 million, which increased 69% from the Fiscal 2011 operating income of $221.4 million.
Net income from continuing operations was $237.0 million and net income from continuing operations per diluted share was $2.85 in Fiscal 2012, compared to net income from continuing operations of $143.1 million and net income from continuing operations per diluted share of $1.60 in Fiscal 2011.
Excluding charges for impairments, the Company reported adjusted, non-GAAP net income per diluted share of $2.90 for the Fiscal 2012. Excluding charges for impairments and write-downs of store-related long-lived assets, charges related to store closures and lease exits, and other charges associated with legal settlements and a change in intent regarding the Company's auction rate securities ("ARS"), the Company reported non-GAAP net income per diluted share of $2.49 for Fiscal 2011.
The Company believes that the non-GAAP financial measures are useful to investors as they provide the ability to measure the Company's operating performance and compare it against that of prior periods without reference to the Consolidated Statements of Operations and Comprehensive Income impact of non-cash, store-related asset impairment charges, charges related to store closures and lease exits, and other charges associated with legal settlements and a change in intent regarding the Company's ARS. These non-GAAP financial measures should not be used as alternatives to net income per diluted share or as indicators of the ongoing operating performance of the Company and are also not intended to supersede or replace the Company's GAAP financial measures. The table below reconciles the GAAP financial measures to the non-GAAP financial measures discussed above.

                                                                Fiscal 2012             Fiscal 2011
                                                             February 2, 2013        January 28, 2012
Net income per diluted share on a GAAP basis               $              2.85     $              1.61
Add back: Asset impairment charges(1)                                     0.06                    0.49
Add back: Asset write-downs(2)                                               -                    0.10
Add back: Store closure and lease exit charges(3)                            -                    0.13
Add back: Legal charges(4)                                                   -                    0.07
Add back: ARS charges(5)                                                     -                    0.09
Net income per diluted share on a non-GAAP basis           $              2.90     $              2.49

(1) The store-related asset impairment charges relate to stores whose asset carrying value exceeded their fair value. For Fiscal 2012, the charge was primarily associated with one Abercrombie & Fitch, three abercrombie kids, 12 Hollister and one Gilly Hicks store. For Fiscal 2011, the charge was associated with 14 Abercrombie & Fitch, 21 abercrombie kids, 42 Hollister and two Gilly Hicks stores.

(2) For Fiscal 2011, the charge associated with the asset write-downs was related to the reconfiguration of three flagship stores and a small write-off related to a cancelled flagship project.


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(3) For Fiscal 2011, the charges for store closures and lease exits were associated with lease buyouts and other lease obligations related to stores closing prior to natural lease expirations, other lease terminations, and other incidental costs associated with store closures.

(4) For Fiscal 2011, the charge was related to legal settlements during the fourth quarter.

(5) For Fiscal 2011, the charge associated with the ARS was related to a change in intent with regard to the Company's auction rate securities portfolio, which resulted in recognition of an other-than-temporary impairment.

Net cash provided by operating activities, the Company's primary source of liquidity, was $684.2 million for Fiscal 2012. This source of cash was primarily driven by a change in inventories partially offset by a change in accounts payable. The Company used $339.9 million of cash for capital expenditures partially offset by cash proceeds of $102.0 million from the sale of marketable securities. The Company also repurchased $321.7 million of Common Stock and paid dividends totaling $57.6 million. As of February 2, 2013, the Company had $643.5 million in cash and equivalents, no outstanding debt aside from that related to landlord financing obligations, and immaterial stand-by letters of credit. The following data represents the amounts shown in the Company's Consolidated Statements of Operations and Comprehensive Income for the last three fiscal years, expressed as a percentage of net sales:

                                                     2012     2011     2010
NET SALES                                           100.0%   100.0%   100.0%
Cost of Goods Sold                                   37.6     38.7     36.1
GROSS PROFIT                                         62.4     61.3     63.9
Stores and Distribution Expense                      44.1     45.4     45.8
Marketing, General and Administrative Expense        10.5     10.5     11.6
Other Operating Expense (Income), Net               (0.4)     0.1     (0.3)
OPERATING INCOME                                     8.3      5.3      6.8
Interest Expense, Net                                0.2      0.1      0.1
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES       8.1      5.2      6.7
Tax Expense from Continuing Operations               2.9      1.8      2.3
NET INCOME FROM CONTINUING OPERATIONS                5.3      3.4      4.5
INCOME FROM DISCONTINUED OPERATIONS, Net of Taxes     -       0.0       -
NET INCOME                                           5.3%     3.5%     4.5%


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FINANCIAL SUMMARY
The following summarized financial and statistical data compares Fiscal 2012,
Fiscal 2011 and Fiscal 2010:
                                                2012            2011            2010
Net sales by segment (in thousands)        $ 4,510,805      $ 4,158,058     $ 3,468,777
U.S. Stores                                $ 2,615,138      $ 2,710,842     $ 2,546,798
International Stores                       $ 1,195,016      $   894,616     $   517,005
Direct-to-consumer                         $   700,651      $   552,600     $   404,974
Net sales as a % of total sales
U.S. Stores                                         58  %            65 %            73 %
International Stores                                26  %            22 %            15 %
Direct-to-consumer                                  16  %            13 %            12 %
Net sales by brand (in thousands)          $ 4,510,805      $ 4,158,058     $ 3,468,777
Abercrombie & Fitch                        $ 1,704,190      $ 1,665,135     $ 1,493,101
abercrombie                                $   382,509      $   397,904     $   382,579
Hollister                                  $ 2,314,462      $ 2,022,002     $ 1,552,814
Gilly Hicks**                              $   109,644      $    73,017     $    40,283
Increase (decrease) in comparable sales*            (1 )%             5 %             7 %
Abercrombie & Fitch                                 (3 )%             3 %             9 %
abercrombie                                          0  %             4 %             5 %
Hollister                                           (1 )%             8 %             6 %
U.S.                                                 1  %
International                                       (8 )%
Stores                                              (5 )%             5 %             7 %
Direct-to-Consumer                                  24  %            36 %            40 %

* Beginning with 2012, comparable sales were reported including comparable direct-to-consumer sales. Prior year figures were not restated. A store is included in comparable 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. The Fiscal 2012 retail year included a fifty-third week and, therefore, Fiscal 2012 comparable sales are compared to the fifty-three week period ended February 4, 2012.

** Net sales for the year-to-date periods ended February 2, 2013, January 28, 2012 and January 29, 2011 reflect the activity of 27, 21 and 19 stores, respectively.


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CURRENT TRENDS AND OUTLOOK
Our results for Fiscal 2012 included an 8% increase in net sales and a 78% increase in diluted earnings per share compared to last year. We have made progress in our operating income the past couple of years, including improvement in gross margin in Fiscal 2012 driven by a reduction in average unit cost. However, our operating margins remain well below historical levels, despite our highly profitable international business, which presents opportunities in two specific areas.
First, we will be revisiting our operating model and identifying processes and investments we make in our business that may have had a return in the past but no longer do today. We have established a cross-functional team to simplify processes, eliminate low value added components of our model, increase efficiencies and lower expenses.
Second, we will be seeking to identify ways to increase our average unit retail, particularly in the U.S. stores and U.S. direct-to-consumer operations. Growth in our average unit retail will help our gross margins and contribute to expense leverage.
Beyond the two initiatives above, our focus remains on key strategic initiatives with regard to merchandising, inventory productivity, expense and average unit cost, insight and intelligence, customer engagement and targeted closure of under-performing U.S. stores. We are confident that our focus on these initiatives, allied with our iconic brands and continued judicious use of shareholder capital, will drive significant long-term value.
With regard to real estate plans for Fiscal 2013, we expect to open Abercrombie & Fitch flagship locations in Seoul and Shanghai and approximately 20 international Hollister stores. The Hollister openings will include our first stores in Australia, our first store in the Middle East in Dubai through a joint venture and entry into the Japanese market for Hollister. Additionally, we are contemplating opening international mall-based Abercrombie & Fitch stores within the next 12 months. We expect capital expenditures to be approximately $200 million for the year, with estimated store pre-opening costs of around $30 million.
We are confident that we are on track in regard to our long-term strategy of leveraging the international appeal of our brands to build a highly profitable, sustainable, global business.
We continue to target annual EPS growth of approximately 15%. As in the past, our earnings are sensitive to changes in comparable sales trends. Our capital allocation philosophy continues to be highly disciplined in allocating capital to where it will derive the greatest return on a risk-adjusted basis. After allocating capital to new stores and other internal projects that provide superior returns, we continue to expect to return excess cash to shareholders.


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The following measurements are among the key business indicators reviewed by various members of management to gauge the Company's results:

Comparable sales, defined as year-over-year sales for a store that has been open as the same brand at least one year and its square footage has not been expanded or reduced by more than 20% within the past year combined with direct to consumer sales;

Direct-to-consumer sales growth;

U.S. and International store performance;

Store productivity;

Selling margin, defined as sales price less original cost, by brand and by product category;

Stores and distribution expense as a percentage of net sales;

Marketing, general and administrative expense as a percentage of net sales;

Operating income and operating income as a percentage of net sales;

Net income;

Inventory per gross square foot;

Cash flow and liquidity determined by the Company's current ratio and free cash flow; and

Store metrics such as sales per gross square foot, sales per selling square foot, average unit retail, average number of transactions per store, average transaction values, store contribution (defined as store sales less direct costs of operating the store), and average units per transaction.

While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics as part of its "Financial Summary" and in several sections within this Management's Discussion and Analysis of Financial Condition and Results of Operations.
FISCAL 2012 COMPARED TO FISCAL 2011
Net Sales
Net sales for Fiscal 2012 were $4.511 billion, an increase of 8% from Fiscal 2011 net sales of $4.158 billion. The net sales increase was attributable to new stores, primarily international and a 27% increase in the direct-to-consumer business, including shipping and handling revenue offset by a decrease of 5% from comparable store sales. The impact of foreign currency on sales (based on converting prior year sales at current year exchange rates) adversely affected Fiscal 2012 by $26.3 million and benefited Fiscal 2011 by $21.6 million. The Fiscal 2012 retail year includes a fifty-third week and, therefore, Fiscal 2012 comparable sales are compared to the fifty-three week period ended February 4, 2012. The fifty-third week added approximately $62.8 million of sales to the comparable base, being sales for the week ended February 4, 2012. Total U.S. sales, including direct-to-consumer, for Fiscal 2012 were $3.087 billion, a decrease of 1% from Fiscal 2011 sales of $3.108 billion. Total international sales, including direct-to-consumer, for Fiscal 2012 were $1.424 billion, an increase of 36% from Fiscal 2011 sales of $1.050 billion. Direct-to-consumer sales in Fiscal 2012, including shipping and handling revenue, were $700.7 million, an increase of 27% from Fiscal 2011 direct-to-consumer sales of $552.6 million. The direct-to-consumer business, including shipping and handling revenue, accounted for 16% of total net sales in Fiscal 2012 compared to 13% in Fiscal 2011.
Total comparable sales for the year, including direct-to-consumer sales, decreased 1% with comparable store sales decreasing 5% and comparable direct-to-consumer sales increasing by 24%. Comparable sales for Fiscal 2012 increased 1% for the U.S., with comparable store sales decreasing by 1% and comparable direct-to-consumer sales up 15%. Comparable sales for the full year decreased 8% for international, with comparable store sales decreasing by 19% and comparable direct-to-consumer sales up 46%.
For Fiscal 2012, comparable sales by brand, including direct-to-consumer sales, decreased 3% for Abercrombie & Fitch, were flat for abercrombie kids, and decreased 1% for Hollister Co. Across the brands, male performed better than female.
From a merchandise classification standpoint, outerwear and jeans were stronger performing categories for the male business while polos and sport shirts were weaker performing categories. In the female business, woven shirts, sweaters, and knit tops were stronger performing categories, while fleece, sweatpants and graphics were weaker performing categories. Gross Profit


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Gross profit during Fiscal 2012 was $2.817 billion compared to gross profit of $2.550 billion during Fiscal 2011. The gross profit rate (gross profit divided by net sales) for Fiscal 2012 was 62.4%, up 110 basis points from the Fiscal 2011 rate of 61.3%.
The increase in the gross profit rate for Fiscal 2012 was primarily driven by a decrease in average unit cost.
Stores and Distribution Expense
Stores and distribution expense for Fiscal 2012 was $1.988 billion compared to $1.888 billion in Fiscal 2011. The stores and distribution expense rate (stores and distribution expense divided by net sales) for Fiscal 2012 was 44.1% compared to 45.4% in Fiscal 2011.
Stores and distribution expense for Fiscal 2012 included store-related asset impairment charges of $7.4 million primarily associated with 17 stores. For Fiscal 2011, stores and distribution expense included store-related asset impairment charges of $68.0 million associated with 79 stores, asset write-down charges of $14.6 million related to the reconfiguration of three flagship stores and a small write-off related to a cancelled flagship project, and store exit charges of $19.0 million, associated with lease buyouts and other lease obligations related to stores closing prior to natural lease expirations, other lease terminations, and other incidental costs associated with store closures. Excluding the effect of these charges, the stores and distribution expense rate was 43.9% for Fiscal 2012 compared to 43.0% last year. The increase in stores and distribution expense rate for Fiscal 2012 was primarily the result of deleveraging on negative comparable store sales and higher direct-to-consumer expense.
Shipping and handling costs, including costs incurred to store, move and prepare merchandise for shipment and costs incurred to physically move the product to the customer, associated with direct-to-consumer operations were $78.6 million and $53.6 million for Fiscal 2012 and Fiscal 2011, respectively. The increase in shipping and handling costs in Fiscal 2012 was primarily driven by increased sales volume and a higher international mix component. These amounts are recorded in Stores and Distribution Expense in our Consolidated Statements of Operations and Comprehensive Income.
Handling costs, including costs incurred to store, move and prepare merchandise for shipment to the stores were $59.4 million and $62.8 million for Fiscal 2012 and Fiscal 2011, respectively. These amounts are recorded in Stores and Distribution Expense in our Consolidated Statements of Operations and Comprehensive Income.
Marketing, General and Administrative Expense Marketing, general and administrative expense during Fiscal 2012 was $473.9 million compared to $437.1 million in Fiscal 2011. The marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 10.5% in Fiscal 2012 and Fiscal 2011. Marketing, general and administrative expense for Fiscal 2011 included $10.0 million in connection with legal settlements.
The increase in marketing, general, and administrative expenses was due to increases in incentive and other compensation related expenses, IT, marketing and other expenses.
Other Operating Expense (Income), Net
Other operating income, net was $19.3 million for Fiscal 2012 compared to other operating expense, net of $3.5 million for Fiscal 2011. Other operating income, net for Fiscal 2012, included income of $4.8 million related to business interruption insurance recoveries associated with Superstorm Sandy. Other operating expense included a charge of $13.4 million related to the Company's change of intent regarding the sale of its ARS portfolio, which resulted in recognition of an other-than-temporary impairment in Fiscal 2011. Operating Income
Operating income for Fiscal 2012 was $374.2 million compared to operating income of $221.4 million for Fiscal 2011. Operating income growth 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 higher non-four wall expenses. Non-four wall expenses include:
marketing, general and administrative expense; store management and support functions such as regional and district management and other functions not dedicated to an individual store; and distribution center costs. Interest Expense (Income), Net and Tax Expense Fiscal 2012 interest expense was $10.5 million, offset by interest income of $3.2 million, compared to interest expense of $7.9 million, offset by interest income of $4.3 million for Fiscal 2011.
The effective tax rate for Fiscal 2012 was 35.4% compared to 34.3% for Fiscal 2011.
As of February 2, 2013, there were approximately $22.2 million of net deferred tax assets in Japan. The realization of the net deferred tax assets is dependent upon the future generation of sufficient taxable profits in Japan. While the Company


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believes it is more likely than not that the net deferred tax assets will be realized, it is not certain. Should circumstances change, the net deferred tax assets not currently subject to a valuation allowance may become subject to one in the future. Additional valuation allowances would result in additional tax expense.
Net Income and Net Income per Diluted Share Net income for Fiscal 2012 was $237.0 million compared to net income of $143.9 million for Fiscal 2011. Net income per diluted share for Fiscal 2012 was $2.85 compared to net income per diluted share of $1.61 for Fiscal 2011. Net income per diluted share for Fiscal 2012 included store-related asset impairment charges of approximately $0.06 per diluted share. Net income per diluted share for Fiscal 2011 included store-related asset impairment charges of approximately $0.49 per diluted share, asset write-down charges of approximately $0.10 per diluted share, store closure and exit charges of approximately $0.13 per diluted share, legal charges of approximately $0.07 per diluted share, and other-than-temporary impairment charges of approximately $0.09 per diluted share related to a change in intent regarding the Company's ARS portfolio. Refer to the GAAP reconciliation table in the "OVERVIEW" section of this "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a reconciliation of net income per diluted share on a GAAP basis to net income per diluted share on a non-GAAP basis, excluding charges for impairment and write-downs of store related long-lived assets, charges related to store closures and lease exits, and other charges associated with legal settlements and with a change in intent regarding the Company's ARS.
FISCAL 2011 COMPARED TO FISCAL 2010
Net Sales
Net sales for Fiscal 2011 were $4.158 billion, an increase of 20% from Fiscal 2010 net sales of $3.469 billion. The net sales increase was attributable to new stores, primarily international, a 5% increase in comparable store sales, and a 36% increase in the direct-to-consumer business, including shipping and handling revenue. The impact of foreign currency on sales (based on converting prior year sales at current year exchange rates) for Fiscal 2011 and Fiscal 2010 was a benefit of $21.6 million and $4.9 million, respectively.
Total Company U.S. store sales for Fiscal 2011 were $2.711 billion, an increase of 6% from Fiscal 2010 sales of $2.547 billion. Total Company international store sales for Fiscal 2011 were $894.6 million, an increase of 73% from Fiscal 2010 sales of $517.0 million.
Direct-to-consumer sales in Fiscal 2011, including shipping and handling revenue, were $552.6 million, an increase of 36% from Fiscal 2010 direct-to-consumer sales of $405.0 million. The direct-to-consumer business, including shipping and handling revenue, accounted for 13% of total net sales in Fiscal 2011 compared to 12% in Fiscal 2010.
Comparable store sales by brand for Fiscal 2011 were as follows: Abercrombie & Fitch increased 3%, with men's and women's increasing by a low single digit percent. abercrombie kids increased 4%, with guys increasing by a high single digit and girls increasing by a low single digit. Hollister increased 8%, with dudes and bettys increasing by a high single digit.
On a comparable store sales basis, the Southern and the Western regions of the U.S. were the strongest performing regions, while Canada and Japan were the weakest.
From a merchandise classification standpoint, fleece, active wear, and knit tops were stronger performing categories for the male business while graphics and woven shirts were weaker performing categories. In the female business, woven shirts, sweaters, and knit tops were stronger performing categories, while graphics and dresses were weaker performing categories. Gross Profit
Gross profit during Fiscal 2011 was $2.550 billion compared to gross profit of $2.217 billion during Fiscal 2010. The gross profit rate for Fiscal 2011 was 61.3%, down 260 basis points from the Fiscal 2010 rate of 63.9%.
The decrease in the gross profit rate for Fiscal 2011 was primarily driven by an increase in average unit cost.
Stores and Distribution Expense
Stores and distribution expense for Fiscal 2011 was $1.888 billion compared to $1.590 billion in Fiscal 2010. The stores and distribution expense rate for Fiscal 2011 was 45.4% compared to 45.8% in Fiscal 2010.
Stores and distribution expense for Fiscal 2011 included store-related asset impairment charges of $68.0 million associated with 79 stores, asset write-down charges of $14.6 million related to the reconfiguration of three flagship stores and a small write-off related to a cancelled flagship project, and store exit charges of $19.0 million, associated with lease buyouts and other lease obligations related to stores closing prior to natural lease expirations, other lease terminations, and other incidental costs associated with store closures. For Fiscal 2010, stores and distribution expense included store-related asset impairment

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