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EX-23.1 - EX-23.1 - ABERCROMBIE & FITCH CO /DE/l38903exv23w1.htm
EX-21.1 - EX-21.1 - ABERCROMBIE & FITCH CO /DE/l38903exv21w1.htm
EX-32.1 - EX-32.1 - ABERCROMBIE & FITCH CO /DE/l38903exv32w1.htm
EX-12.1 - EX-12.1 - ABERCROMBIE & FITCH CO /DE/l38903exv12w1.htm
EX-24.1 - EX-24.1 - ABERCROMBIE & FITCH CO /DE/l38903exv24w1.htm
EX-31.1 - EX-31.1 - ABERCROMBIE & FITCH CO /DE/l38903exv31w1.htm
EX-31.2 - EX-31.2 - ABERCROMBIE & FITCH CO /DE/l38903exv31w2.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended January 30, 2010
OR
o
  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
incorporation or organization)
  (I.R.S. Employer
Identification No.)
6301 Fitch Path, New Albany, Ohio
(Address of principal executive offices)
  43054
(Zip Code)
 
Registrant’s telephone number, including area code (614) 283-6500
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Class A Common Stock, $.01 Par Value   New York Stock Exchange
Series A Participating Cumulative Preferred
Stock Purchase Rights
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 þ     No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
Aggregate market value of the Registrant’s Class A Common Stock (the only outstanding common equity of the Registrant) held by non-affiliates of the Registrant (for this purpose, executive officers and directors of the Registrant are considered affiliates) as of July 31, 2009: $2,513,290,835.
 
Number of shares outstanding of the Registrant’s common stock as of March 19, 2010: 88,171,337 shares of Class A Common Stock.
 
DOCUMENT INCORPORATED BY REFERENCE:
 
Portions of the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders, to be held on June 9, 2010, are incorporated by reference into Part III of this Annual Report on Form 10-K.
 


TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS.
PART II
FINANCIAL SUMMARY
CURRENT TRENDS AND OUTLOOK
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A. CONTROLS AND PROCEDURES.
ITEM 9B. OTHER INFORMATION.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EX-12.1
EX-21.1
EX-23.1
EX-24.1
EX-31.1
EX-31.2
EX-32.1


Table of Contents

 
PART I
 
ITEM 1.   BUSINESS.
 
General.
 
Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer that operates stores and direct-to-consumer operations 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 kids, and Hollister brands. In addition, the Company operates stores and direct-to-consumer operations offering bras, underwear, personal care products, sleepwear and at-home products for women under the Gilly Hicks brand. As of January 30, 2010, the Company operated 1,096 stores in North America, Europe and Asia.
 
On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The determination to take this action was based on a comprehensive review and evaluation of the performance of the RUEHL branded stores and related direct-to-consumer operations, as well as the related real estate portfolio. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the results of operations of RUEHL are reflected in Net Loss from Discontinued Operations on the Consolidated Statements of Operations and Comprehensive Income for all periods presented.
 
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. 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 2009” represent the results of the 52-week fiscal year ended January 30, 2010; to “Fiscal 2008” represent the results of the 52-week fiscal year ended January 31, 2009; and to “Fiscal 2007” represent the results of the 52-week fiscal year ended February 2, 2008. In addition, all references herein to “Fiscal 2010” represent the 52-week fiscal year that will end on January 29, 2011.
 
A&F makes available free of charge on its website, www.abercrombie.com, under “Investors, SEC Filings”, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as A&F’s definitive annual meeting proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains electronic filings at www.sec.gov. In addition, the public may read and copy any materials A&F files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
The Company has included its website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.


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Description of Operations.
 
Brands.
 
Abercrombie & Fitch.  Rooted in East Coast traditions and Ivy League heritage, Abercrombie & Fitch is the essence of privilege and casual luxury. The Adirondacks supply a clean and rugged inspiration to this youthful All-American lifestyle. A combination of classic and sexy creates a charged atmosphere that is confident and just a bit provocative. Idolized and respected, Abercrombie & Fitch is timeless and always cool.
 
abercrombie kids.  The essence of privilege and prestigious East Coast prep schools, abercrombie kids directly follows in the footsteps of Abercrombie & Fitch. With a flirtatious and energetic attitude, abercrombie kids is popular, wholesome and athletic. Rugged and casual with a vintage-inspired style, abercrombie kids aspires to be like its older sibling, Abercrombie & Fitch. The perfect combination of maturity and mischief, abercrombie kids is the signature of All-American cool.
 
Hollister.  Hollister is the fantasy of Southern California. It is the feeling of chilling on the beach with your friends. Young, spirited, and with a sense of humor, Hollister never takes itself too seriously. The laidback lifestyle and wholesome image combine to give Hollister an energy that’s effortlessly cool. Hollister brings Southern California to the world.
 
Gilly Hicks.  Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly makes cute bras and underwear for the young, naturally beautiful and always confident girl. Classic and vibrant with a little tomboy sexiness, Gilly never takes herself too seriously. It’s the wholesome, All-American brand with a Sydney sensibility.
 
Though each of the Company’s brands embodies its own heritage and handwriting, they share common elements and characteristics. The brands are classic, casual, confident, intelligent, privileged and possess a sense of humor.
 
Refer to the “Financial Summary” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K for information regarding net sales and other financial and operational data by brand.
 
In-Store Experience and Store Operations.
 
The Company views the customer’s in-store experience as the primary vehicle for communicating the spirit of each brand. The Company emphasizes the senses of sight, sound, smell, touch and energy by utilizing visual presentation of merchandise, in-store marketing, music, fragrances, rich fabrics and its sales associates to reinforce the aspirational lifestyles represented by the brands.
 
The Company’s in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a shopping experience that reflects the Abercrombie & Fitch, abercrombie kids, Hollister or Gilly Hicks lifestyle.
 
The Company’s sales associates and managers are a central element in creating the atmosphere of the stores. In addition to providing a high level of customer service, sales associates and managers reflect the casual, energetic and aspirational attitude of the brands.
 
Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure


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coordinated execution of the Company-wide merchandising strategy. In addition, standardization of each brand’s store design and merchandise presentation enables the Company to open new stores efficiently.
 
At the end of Fiscal 2009, the Company operated 1,096 stores. The following table details the number of retail stores operated by the Company for the past two fiscal years:
 
                                         
    Abercrombie &
    abercrombie
                   
    Fitch     kids     Hollister     Gilly Hicks     Total  
 
Fiscal 2008
                                       
Beginning of Year
    359       201       450       3       1,013  
New
    2       12       66       11       91  
Remodels/Conversions (net
activity as of year-end)
    2       1                   3  
Closed
    (7 )     (2 )     (1 )           (10 )
                                         
End of Year
    356       212       515       14       1,097  
                                         
Fiscal 2009
                                       
Beginning of Year
    356       212       515       14       1,097  
New
    2       5       14       2       23  
Remodels/Conversions (net
activity as of year-end)
                             
Closed
    (12 )     (8 )     (4 )           (24 )
                                         
End of Year
    346       209       525       16       1,096  
                                         
 
At the end of Fiscal 2009, the Company operated 340 Abercrombie & Fitch stores, 205 abercrombie kids stores, 507 Hollister stores and 16 Gilly Hicks stores domestically. The Company also operated six Abercrombie & Fitch stores, four abercrombie kids stores and 18 Hollister stores internationally. At the end of Fiscal 2008, the Company operated 352 Abercrombie & Fitch stores, 210 abercrombie kids stores, 507 Hollister stores and 14 Gilly Hicks stores domestically. The Company also operated four Abercrombie & Fitch stores, two abercrombie kids stores and eight Hollister stores internationally.
 
Direct-to-Consumer Business.
 
During Fiscal 2009, the Company operated, and continues to operate a number of websites, including: www.abercrombie.com; www.abercrombiekids.com; www.hollisterco.com; and www.gillyhicks.com. Products offered at individual stores can be purchased through the respective websites. Each of the four websites reinforces the particular brand’s lifestyle and is designed to complement the in-store experience. Aggregate total net sales through direct-to-consumer operations, including shipping and handling revenue, was $290.1 million for Fiscal 2009, representing 9.9% of total net sales. The Company believes its direct-to-consumer operations have broadened its market and brand recognition worldwide.
 
Marketing and Advertising.
 
The Company considers the in-store experience to be its main form of marketing. The Company emphasizes the senses to reinforce the aspirational lifestyles represented by the brands. The Company’s flagship stores represent the pinnacle of the Company’s in-store branding efforts. The Company also engages its customers through social media and mobile commerce in ways that reinforce the aspirational lifestyle of the brands. Flagship stores and social media both attract a substantial number of international consumers, and have significantly contributed to the Company’s worldwide status as an iconic brand.


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Merchandise Suppliers.
 
During Fiscal 2009, the Company purchased merchandise from approximately 209 vendors located throughout the world; primarily in Asia and Central and South America. In Fiscal 2009, the Company did not source more than 5% of its merchandise from any single factory or supplier. The Company pursues a global sourcing strategy that includes relationships with vendors in 37 countries and the United States (the “U.S.”). The Company’s foreign purchases of merchandise are negotiated and settled in U.S. dollars.
 
All product sources, including independent manufacturers and suppliers, must achieve and maintain the Company’s high quality standards, which are an integral part of the Company’s identity. The Company has established supplier product quality standards to ensure the high quality of fabrics and other materials used in the Company’s products. The Company utilizes both home office and field employees to help monitor compliance with the Company’s product quality standards.
 
Distribution and Merchandise Inventory.
 
A majority of the Company’s merchandise and related materials is shipped to the Company’s two distribution centers (“DCs”) in New Albany, Ohio where they are received and inspected. The Company also uses a third-party DC in the Netherlands for the distribution of merchandise to stores located in Europe and Asia. The Company uses primarily one contract carrier to ship merchandise and related materials to its North American stores and all direct-to-consumer customers, and a separate contract carrier for its European and Asian stores.
 
The Company maintains sufficient quantities of inventory on hand in its retail stores and DCs to offer customers a full selection of current merchandise. The Company attempts to balance in-stock levels and inventory turnover, and to take markdowns when required to keep merchandise fresh and current with fashion trends.
 
Information Systems.
 
The Company’s management information systems consist of a full range of retail, financial and merchandising systems. The systems include applications related to point-of-sale, inventory management, supply chain, planning, sourcing, merchandising and financial reporting. The Company continues to invest in technology to upgrade core systems to make the Company scalable, efficient and more accurate in the production and delivery of merchandise to stores, including to support its international roll-out.
 
Seasonal Business.
 
The retail apparel market 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 the Back-to-School (August) and Holiday (November and December) selling periods.
 
Trademarks.
 
The Abercrombie & Fitch®, abercrombie®, Hollister Co.®, Gilly Hicks® and Gilly Hicks Sydney® trademarks have been registered with the U.S. Patent and Trademark Office and the registries of countries where stores are located or likely to be located in the future. These trademarks are either registered, or have applications for registration pending with the registries of many of the foreign countries in which the


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manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes that its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of ten to 20 years, depending on the date it was registered and the country in which it is registered, and is subject to an infinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to renew each of its registered trademarks that remain in use.
 
Financial Information about Segments.
 
The Company determines its operating segments on the same basis that it uses to evaluate performance internally. The operating segments identified by the Company are Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks. The operating segments have been aggregated and are reported as one reportable segment because they have similar economic characteristics and meet the required aggregation criteria. The Company believes its operating segments may be aggregated for financial reporting purposes because they are similar in each of the following areas: class of consumer, economic characteristics, nature of products, nature of production processes, and distribution methods. Refer to Note 1, “Basis of Presentation” of Notes to Consolidated Financial Statements for further discussion, including the break-out of geographic information for net sales and long-lived assets.
 
Other Information.
 
Additional information about the Company’s business, including its revenues and profits for the last three fiscal years and gross square footage of stores, is set forth under “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K.
 
Competition.
 
The sale of apparel and personal care products through brick-and-mortar stores and direct-to-consumer channels is a highly competitive business with numerous participants, including individual and chain fashion specialty stores, as well as regional and national department stores. As the Company continues expanding internationally, it also faces competition in European, Asian and other international markets from established regional and national chains, as well as specialty stores. Brand recognition, fashion, price, service, store location, selection and quality are the principal competitive factors in retail store and direct-to-consumer sales.
 
The competitive challenges facing the Company include anticipating and quickly responding to changing fashion trends; and maintaining the aspirational positioning of its brands so it can sustain its premium pricing position. Furthermore, the Company faces additional competitive challenges as many retailers continue promotional activities as a result of economic conditions. In response to these conditions, the Company has increased its promotional activity while continuing to focus on preserving the value of its brands.


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Associate Relations.
 
As of March 19, 2010, the Company employed approximately 80,000 associates, only 855 of whom were party to a collective bargaining agreement in Italy. Approximately 71,000 of these associates were part-time employees.
 
On average, including employees from RUEHL operations, the Company employed approximately 19,000 full-time equivalents during Fiscal 2009 which included approximately 10,000 full-time equivalents comprised of part-time employees, including temporary associates hired during peak periods, such as the Back-to-School and Holiday seasons.
 
The Company believes it maintains a good relationship with its associates. However, in the normal course of business, the Company is party to lawsuits involving former and current associates. Refer to “ITEM 3. LEGAL PROCEEDINGS” in this Annual Report on Form 10-K.
 
Environmental Matters.
 
Compliance with federal, state and local regulations related to environmental matters has not had, nor is it expected to have, any material effect on capital expenditures, earnings or competitive position based on information and circumstances known to us at this time.
 
ITEM 1A.   RISK FACTORS.
 
Forward-Looking Statements And Risk Factors.
 
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 Annual Report on Form 10-K or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements.
 
The following factors could affect the Company’s financial performance and could cause actual results to differ materially from those expressed or implied in any of the forward-looking statements:
 
  •  effects of general economic and financial conditions which impact consumer behavior and spending and may exacerbate some of the risks noted below including consumer demand, strain on available resources, international growth strategy, store growth, interruption of the flow of merchandise from key vendors and manufacturers and foreign currency exchange rate fluctuations;
 
  •  changes in consumer spending patterns and consumer preferences, including changes as a result of instability in economic conditions, which could affect the reputation and appeal of the Company’s brands;
 
  •  the impact of competition and pricing pressures;
 
  •  inability to achieve acceptable operating profits from the execution of the Company’s international expansion as a result of many factors, including the inability to successfully penetrate new markets and the potential strain on resources caused by the expansion;
 
  •  effects of changes in credit and lending market conditions;
 
  •  loss of services of skilled senior executive officers and/or inadequate succession planning for key positions;


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  •  ability to hire, train and retain qualified associates;
 
  •  ability to develop innovative, high-quality new merchandise in response to changing fashion trends;
 
  •  availability and market prices of key raw materials;
 
  •  interruption of the flow of merchandise from key vendors and manufacturers and the flow of merchandise to and from distributors;
 
  •  ability of manufacturers to comply with applicable laws and regulations and ethical business practices;
 
  •  availability of suitable store locations under appropriate terms;
 
  •  currency and exchange risks and changes in existing or potential duties, tariffs or quotas;
 
  •  effects of political and economic events and conditions domestically, and in foreign jurisdictions in which the Company operates, including, but not limited to, acts of terrorism or war;
 
  •  unseasonable weather conditions affecting consumer preferences;
 
  •  disruptive weather conditions affecting consumers’ ability to shop;
 
  •  effect of litigation or adversary proceeding exposure potentially exceeding expectations; and
 
  •  potential disruption of the Company’s business due to the occurrence of, or fear of, a health pandemic.
 
The following sets forth a description of certain risk factors that the Company believes may be relevant to an understanding of the Company and its business. These risk factors, in addition to the factors set forth above, could cause actual results to differ materially from those expressed or implied in any of the Company’s forward-looking statements.
 
General Economic and Financial Conditions Could Have a Material Adverse Effect on the Company’s Business, Results of Operations and Liquidity.
 
Consumer purchases of discretionary items, including the Company’s merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. The Company’s performance is subject to factors that affect worldwide economic conditions including employment, consumer debt, reductions in net worth based on declines in the financial, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the U.S. dollar versus foreign currencies and other macroeconomic factors. Over the past several years, the combination of these factors has caused consumer spending to deteriorate significantly and may cause levels of spending to remain depressed for the foreseeable future. These factors may cause consumers to purchase products from lower priced competitors or to defer purchases of apparel and personal care products altogether.
 
The economic uncertainty could have a material effect on the Company’s results of operations and its liquidity and capital resources. It could also impact the Company’s ability to fund its growth and/or result in the Company becoming reliant on external financing, the availability of which may be uncertain.
 
In addition, the economic environment may exacerbate some of the risks noted below, including consumer demand, strain on available resources, international growth strategy, store growth, interruption of the flow of merchandise from key vendors and manufacturers, and foreign exchange rate fluctuations. The risks could be exacerbated individually or collectively.


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The Loss of the Services of Skilled Senior Executive Officers Could Have a Material Adverse Effect on the Company’s Business.
 
The Company’s senior executive officers closely supervise all aspects of its business — in particular, the design of its merchandise and the operation of its stores. The Company’s senior executive officers have substantial experience and expertise in the retail business and have made significant contributions to the growth and success of the Company’s brands. If the Company were to lose the benefit of their involvement, in particular the services of any one or more of Michael S. Jeffries, Chairman and Chief Executive Officer, Diane Chang, Executive Vice President — Sourcing, Leslee K. Herro, Executive Vice President — Planning and Allocation, Jonathan E. Ramsden, Executive Vice President and Chief Financial Officer and David S. Cupps, Senior Vice President, General Counsel and Secretary, its business could be adversely affected. Competition for such senior executive officers is intense, and the Company cannot be sure it will be able to attract, retain and develop a sufficient number of qualified senior executive officers in future periods.
 
Equity-Based Compensation Awarded Under the Employment Agreement with the Company’s Chief Executive Officer Could Adversely Impact the Company’s Cash Flows, Financial Position or Results of Operations and Could Have a Dilutive Effect on the Company’s Outstanding Common Stock.
 
Under the Employment Agreement, entered into as of December 19, 2008, between the Company and Michael S. Jeffries, the Company’s Chairman and Chief Executive Officer (the “Jeffries Employment Agreement”), Mr. Jeffries received grants (the “Retention Grants”) of stock appreciation rights. In addition to the Retention Grants, Mr. Jeffries is also eligible to receive two equity-based grants during each fiscal year of the term of the Jeffries Employment Agreement starting with Fiscal 2009 (the “Semi-Annual Grant”). If a Semi-Annual Grant is earned, it will be awarded within 75 days following the end of the Company’s second quarter or fiscal year, as applicable, subject to Mr. Jeffries’ continuous employment with the Company (and, with respect to the final Semi-Annual Grant, continued service on the Company’s Board of Directors) through the applicable grant date. The value of the Semi-Annual Grants are uncertain and dependent on future market price of the Company’s Common Stock and the financial performance of the Company.
 
In connection with the Semi-Annual Grants contemplated by the Jeffries Employment Agreement, the related compensation expense could significantly impact the Company’s results of operations. Further, the significant number of shares of Common Stock which could be issued upon exercise and/or vesting of the Retention Grant and the Semi-Annual Grants is uncertain and dependent on the future market price of the Company’s Common Stock and the financial performance of the Company, and would, if issued, have a dilutive effect with respect to the Company’s outstanding shares of Common Stock, which may adversely affect the market price of the Company’s Common Stock. Depending on the number of shares of Common Stock which could be issued under the Retention Grant and Semi-Annual Grants, the Company may deem it necessary or appropriate to seek shareholder approval of additional long-term incentive compensation plans in order to be able to settle the awards in Common Stock.
 
In the event that there are not sufficient shares of Common Stock available to be issued under the Company’s 2007 Long-Term Incentive Plan (the “2007 LTIP”), or under a successor or replacement plan at the time these equity-based awards are ultimately settled, the Company will be required to settle some portion of the awards in cash, which could have an adverse impact on the Company’s cash flow from operations, financial position, results of operations. Furthermore, the awards may not be deductible pursuant to Internal Revenue Code Section 162(m). In addition, under applicable accounting rules, if the Company’s stock price increases to a point where, as of any measurement date, the Company would be unable to settle outstanding equity-based awards in shares of Common Stock from its existing plans, the Company will be required to


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classify and account for all or a portion of the equity-based awards as liabilities. This could further adversely impact the Company’s results of operations.
 
The Failure to Anticipate, Identify and Respond to Changing Consumer Preferences and Fashion Trends in a Timely Manner Could Cause the Company’s Profitability to Decline.
 
The Company’s success largely depends on its ability to anticipate and gauge the fashion preferences of its customers and provide merchandise that satisfies constantly shifting demands in a timely manner. The merchandise must appeal to each brand’s corresponding target market of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Because the Company enters into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, it is vulnerable to changes in consumer preference and demand, pricing shifts, and the sub-optimal selection and timing of merchandise purchases. There can be no assurance that the Company will continue to anticipate consumer demands successfully in the future. To the extent that the Company fails to anticipate, identify and respond effectively to changing consumer preferences and fashion trends, its sales will be adversely affected. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to reduce excess inventory or increases in inventory valuation reserves. A distressed economic and retail environment, in which many of the Company’s competitors are engaging in aggressive promotional activities, increases the importance of reacting appropriately to changing consumer preferences and fashion trends. Each of these could have a material adverse effect on the Company’s financial condition or results of operations.
 
The Company’s Market Share may be Adversely Impacted at any Time by a Significant Number of Competitors.
 
The sale of apparel and personal care products through brick-and-mortar stores and direct-to-consumer channels is a highly competitive business with numerous participants, including individual and chain fashion specialty stores, as well as regional and national department stores. The Company faces a variety of competitive challenges, including:
 
  •  maintaining favorable brand recognition and effectively marketing its products to consumers in several diverse demographic markets;
 
  •  sourcing merchandise efficiently; and
 
  •  countering the aggressive promotional activities of many of the Company’s competitors without diminishing the aspirational nature of the Company’s brands and brand equity.
 
There can be no assurance that the Company will be able to compete successfully in the future.
 
The Company’s International Expansion Plan is Dependent on a Number of Factors, any of Which Could Delay or Prevent Successful Penetration into New Markets and Strain its Resources.
 
As the Company expands internationally, it may incur significant costs related to starting up and maintaining foreign operations. Costs may include, but are not limited to, obtaining prime locations for stores, setting up foreign offices and DCs, as well as hiring experienced management. The Company may be unable to open and operate new stores successfully, and its growth will be limited, unless it can:
 
  •  identify suitable markets and sites for store locations;
 
  •  negotiate acceptable lease terms;


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  •  hire, train and retain competent store personnel;
 
  •  gain acceptance from foreign customers;
 
  •  foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise;
 
  •  manage inventory effectively to meet the needs of new and existing stores on a timely basis;
 
  •  expand infrastructure to accommodate growth;
 
  •  generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund its expansion plan;
 
  •  manage foreign currency exchange risks effectively; and
 
  •  achieve acceptable operating margins from new stores.
 
In addition, the Company’s international expansion plan will place increased demands on its operational, managerial and administrative resources. These increased demands may cause the Company to operate its business less efficiently, which in turn could cause deterioration in the performance of its existing stores. Furthermore, the Company’s ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks. The Company’s international expansion strategy and success could also be adversely impacted by the global economy.
 
The Company’s Growth Strategy Relies on the Addition of New Stores, Which May Strain the Company’s Resources and Adversely Impact Current Store Performance.
 
The Company’s growth strategy largely depends on the opening of new stores, particularly internationally; and remodeling existing stores in a timely manner and operating them profitably. Additional factors required for successful implementation of the Company’s growth strategy include, but are not limited to: obtaining desirable prime store locations; negotiating acceptable leases; completing projects on budget; supplying proper levels of merchandise; and successfully hiring and training store managers and sales associates. Additionally, the Company’s growth strategy may place increased demands on the Company’s operational, managerial and administrative resources, which could cause the Company to operate less efficiently. Furthermore, there is a possibility new stores opening in existing markets may have an adverse effect on previously existing stores in such markets. Failure to properly implement the Company’s growth strategy could have a material adverse effect on the Company’s financial condition or results of operations.
 
The Company May Incur Costs Related to Store Closures.
 
The Company may incur costs associated with store closures resulting from, among other things, lease termination agreements associated with closing stores prior to the store’s lease expiration date. These costs could be significant and could have a material adverse effect on the Company’s financial condition or results of operations.
 
The Interruption of the Flow of Merchandise from Key Vendors and International Manufacturers Could Disrupt the Company’s Supply Chain.
 
The Company purchases the majority of its merchandise outside of the U.S. through arrangements with approximately 209 vendors which include 305 foreign manufacturers located throughout the world, primarily


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in Asia and Central and South America. In addition, many of the Company’s domestic manufacturers maintain production facilities overseas. Political, social or economic instability in Asia, Central or South America, or in other regions in which the Company’s manufacturers are located, could cause disruptions in trade, including exports to the U.S. Other events that could also cause disruptions to exports to the U.S. include:
 
  •  the imposition of additional trade law provisions or regulations;
 
  •  the imposition of additional duties, tariffs and other charges on imports and exports;
 
  •  quotas imposed by bilateral textile agreements;
 
  •  foreign currency fluctuations;
 
  •  restrictions on the transfer of funds;
 
  •  the potential of manufacturer financial instability, inability to access needed liquidity or bankruptcy; and
 
  •  significant labor disputes, such as dock strikes.
 
In addition, the Company cannot predict whether the countries in which its merchandise is manufactured, or may be manufactured in the future, will be subject to new or additional trade restrictions imposed by the U.S. or other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, embargoes, safeguards and customs restrictions against apparel items, as well as U.S. or foreign labor strikes and work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to the Company and adversely affect its business, financial condition or results of operations.
 
The Company Does not Own or Operate any Manufacturing Facilities and Therefore Depends Upon Independent Third Parties for the Manufacture of all its Merchandise.
 
The Company does not own or operate any manufacturing facilities. As a result, the continued success of the Company’s operations is tied to its timely receipt of quality merchandise from third-party manufacturers. A manufacturer’s inability to ship orders in a timely manner or meet the Company’s quality standards could cause delays in responding to consumer demands and negatively affect consumer confidence in the quality and value of the Company’s brands or negatively impact the Company’s competitive position, all of which could have a material adverse effect on the Company’s financial condition or results of operations. Furthermore, the Company is susceptible to increases in sourcing costs from manufacturers which the Company may not be able to pass on to the customer and could adversely affect the Company’s financial condition or results of operations.
 
Additionally, while the Company utilizes third-party compliance auditors to visit and monitor the operations of the Company’s manufacturers, the Company does not have control of the independent manufacturers or their labor practices. A violation of labor laws or other laws, including consumer and product safety laws, by the Company or its manufacturers, could adversely affect the Company’s reputation and sales.


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The Company’s Reliance on Two Distribution Centers Domestically Located in the Same Vicinity, and One Distribution Center Internationally, Makes it Susceptible to Disruptions or Adverse Conditions Affecting its Distribution Centers.
 
The Company’s two domestic DCs, located in New Albany, Ohio, manage the receipt, storage, sorting, packing and distribution of merchandise to its stores and direct-to-consumer customers, both regionally and internationally. The Company also uses a third-party DC in the Netherlands for the distribution of merchandise delivered to its stores located outside of North America. As a result, the Company’s operations are susceptible to local and regional factors, such as system failures, accidents, economic and weather conditions, natural disasters, and demographic and population changes, as well as other unforeseen events and circumstances. If the Company’s distribution operations were disrupted, its ability to replace inventory in its stores and process direct-to-consumer orders could be interrupted and sales could be negatively impacted.
 
The Company’s Reliance on Third Parties to Deliver Merchandise from its Distribution Centers to its Stores and Direct-to-Consumer Customers Could Result in Disruptions to its Business.
 
The efficient operations of the Company’s stores and direct-to-consumer operations depend on the timely receipt of merchandise from the Company’s DCs. The Company delivers its merchandise to its stores and direct-to-consumer customers using independent third parties. The Company uses primarily one contract carrier for domestic store deliveries and all direct-to-consumer deliveries and a separate contract carrier for international store deliveries. The independent third parties employ personnel that may be represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees or contractors of any of these third parties could delay the timely receipt of merchandise. There can be no assurance that such stoppages or disruptions will not occur in the future. Any failure by a third party to respond adequately to the Company’s distribution needs would disrupt the Company’s operations and could have a material adverse effect on its financial condition or results of operations. Furthermore, the Company is susceptible to increases in fuel costs which may increase the cost of distribution which the Company may not be able to pass onto the customer and could adversely affect the Company’s financial condition or results of operations.
 
The Company’s Development of New Brand Concepts Could Have a Material Adverse Effect on the Company’s Financial Condition or Results of Operations.
 
Historically, the Company has internally developed and launched new brands that have contributed to sales growth. The Company’s most recent brand is Gilly Hicks which offers bras, underwear, personal care products, sleepwear and at-home products for women. Brand concepts such as Gilly Hicks require management’s focus and attention, as well as significant capital investments. Furthermore, a new brand concept is susceptible to risks that include lack of customer acceptance, competition from existing or new retailers, product differentiation, production and distribution inefficiencies and unanticipated operating issues. There is no assurance that a new brand concept, including Gilly Hicks, will achieve successful results. The failure of Gilly Hicks or another new brand concept to be successfully launched could have a material adverse effect on the Company’s financial condition or results of operations. In addition, the ongoing development of new concepts may place a strain on available resources.
 
Fluctuations in Foreign Currency Exchange Rates Could Adversely Impact Financial Results.
 
The Company’s international subsidiaries generally use local currencies as the functional currency, which includes Euros, Canadian Dollars, Japanese Yen, Hong Kong Dollars and British Pounds. The Company’s Consolidated Financial Statements are presented in U.S. dollars (“USD”). Therefore, the


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Company must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. The fluctuation in the value of the U.S. dollar against other currencies could impact the Company’s financial results.
 
Furthermore, the Company purchases substantially all of its inventory in USD. Therefore, the Company’s gross margin rate from international operations is subject to volatility from movements in exchange rates over time, which could have an adverse effect on the Company’s financial condition or results of operations.
 
The Company’s Net Sales and Inventory Levels Fluctuate on a Seasonal Basis, Causing its Results of Operations to be Particularly Susceptible to Changes in Back-to-School and Holiday Shopping Patterns.
 
Historically, the Company’s operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, due to the increased sales during the Holiday selling season and, to a lesser extent, the third fiscal quarter, reflecting increased sales during the Back-to-School selling season. The Company’s net sales and net income during the first and second fiscal quarters are typically lower, due, in part, to the traditional slowdown in retail sales immediately following the Holiday season. As a result of this seasonality, net sales and net income during any fiscal quarter cannot be used as an accurate indicator of the Company’s annual results. Any factors negatively affecting the Company during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on its financial condition or results of operations for the entire year.
 
Furthermore, in order to prepare for the Back-to-School and Holiday selling seasons, the Company must order and keep significantly more merchandise in stock than it would carry during other parts of the year. Therefore, the inability to accurately plan for product demand and allocate merchandise effectively could have a material adverse effect on the Company’s financial condition or results of operations. High inventory levels due to unanticipated decreases in demand for the Company’s products during peak selling seasons, misidentification of fashion trends, or excess inventory purchases could require the Company to sell merchandise at a substantial markdown, which could reduce its net sales and gross margins and negatively impact its profitability. Low levels of inventory due to conservative planning could also affect product offering in the stores and affect net sales and negatively impact profitability.
 
The Company’s Ability to Attract Customers to its Stores Depends Heavily on the Success of the Shopping Centers in Which They are Located.
 
In order to generate customer traffic, the Company locates many of its stores in prominent locations within successful shopping centers. The Company cannot control the development of new shopping centers; the availability or cost of appropriate locations within existing or new shopping centers; competition with other retailers for prominent locations; or the success of individual shopping centers. All of these factors may impact the Company’s ability to meet its growth targets and could have a material adverse effect on its financial condition or results of operations.
 
Comparable Store Sales will Continue to Fluctuate on a Regular Basis.
 
The Company’s comparable store sales, defined as year-over-year sales for a store that has been open as the same brand at least one year and the square footage of which has not been expanded or reduced by more than 20%, have fluctuated significantly in the past on an annual, quarterly and monthly basis and are expected


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to continue to fluctuate in the future. During the past three fiscal years, comparable sales results have fluctuated as follows: (a) from (23)% to (1)% for annual results; (b) from (30)% to 1% for quarterly results; and (c) from (34%) to 8% for monthly results. The Company’s comparable store sales were adversely affected by, among other factors, the economy and competitors’ promotional activities throughout Fiscal 2008 and Fiscal 2009. The Company believes that a variety of factors affect comparable store sales results including, but not limited to, fashion trends, actions by competitors, economic conditions, weather conditions, opening and/or closing of Company stores near each other, and the calendar shifts of tax free and holiday periods.
 
Comparable store sales fluctuations may impact the Company’s ability to leverage fixed direct expenses, including store rent and store asset depreciation, which may adversely affect the Company’s financial condition or results of operations.
 
In addition, comparable store sales fluctuations may have been an important factor in the volatility of the price of the Company’s Class A Common Stock in the past, and it is likely that future comparable store sales fluctuations will contribute to stock price volatility in the future.
 
The Company’s Net Sales are Affected by Direct-to-Consumer Sales.
 
The Company sells merchandise over the Internet through its websites: www.abercrombie.com; www.abercrombiekids.com; www.hollisterco.com; and www.gillyhicks.com. The Company’s Internet operations may be affected by reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems that operate the Internet business, telecommunications failures, electronic break-ins, security breaches and similar disruptions. Furthermore, the Company’s ability to conduct business on the Internet may be affected by liability for on-line content and state, federal and international privacy laws. The Company’s failure to successfully respond to these risks might adversely affect sales in the Company’s Internet business, as well as damage the Company’s reputation and brands.
 
The Company May be Exposed to Risks and Costs Associated with Credit Card Fraud and Identity Theft.
 
The Company collects certain customer data during the course of business, such as credit card information. The Company and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. Although the Company has security measures related to its systems and the privacy of its customers, the Company cannot guarantee these measures will effectively prevent a security breach of customer transaction data. A security breach could cause customers to lose confidence in the security of the Company’s systems and could expose the Company to risks of data loss, litigation and liability and could seriously disrupt operations and harm the Company’s reputation, any of which could adversely affect the Company’s financial condition or results of operations.
 
In addition, states and federal government are enacting laws and regulations to protect consumers against identity theft. These laws will likely increase the costs of doing business and if the Company fails to implement appropriate security measures, the Company could be subject to potential claims for damages and other remedies, which could adversely affect the Company’s business or results from operations.


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The Company’s Litigation Exposure Could Exceed Expectations, Having a Material Adverse Effect on the Company’s Financial Condition or Results of Operations.
 
The Company is involved, from time-to-time, in litigation incidental to its business, such as litigation regarding overtime compensation and other employment related matters. Additionally, the Company is involved in several purported class action lawsuits and several shareholder derivative actions alleged to have arisen out of trading in the Company’s Class A Common Stock in the summer of Fiscal 2005 (collectively, the “Securities Matters,” see “ITEM 3. LEGAL PROCEEDINGS” of this Annual Report on Form 10-K). Management is unable to assess the potential exposure of the aforesaid matters. The Company’s current exposure could change in the event of the discovery of damaging facts with respect to legal matters pending against the Company or determinations by judges, juries or other finders of fact that are not in accordance with management’s evaluation of the claims. Should management’s evaluation prove incorrect, the Company’s exposure could greatly exceed expectations and have a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
 
The Company’s Failure to Adequately Protect Its Trademarks Could Have a Negative Impact on Its Brand Image and Limit Its Ability to Penetrate New Markets.
 
The Company believes its trademarks, Abercrombie & Fitch®, abercrombie®, Hollister Co.®, Gilly Hicks®, Gilly Hicks Sydney® and the “Moose,” “Seagull” and “Koala” logos, are an essential element of the Company’s strategy. The Company has obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries of countries where stores are located or likely to be located in the future. In addition, the Company owns registrations and pending applications for other trademarks in the U.S. and has applied for or obtained registrations from the registries in many foreign countries in which its manufacturers are located. There can be no assurance that the Company will obtain registrations that have been applied for or that the registrations the Company obtains will prevent the imitation of its products or infringement of its intellectual property rights by others. If any third party copies the Company’s products in a manner that projects lesser quality or carries a negative connotation, the Company’s brand image could be materially adversely affected.
 
Because the Company has not yet registered all of its trademarks in all categories, or in all foreign countries in which it sources or offers its merchandise now, or may in the future, its international expansion and its merchandising of products using these marks could be limited. For example, the Company cannot ensure that others will not try to block the manufacture, export or sale of its products as a violation of their trademarks or other proprietary rights. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom the Company is not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. If the Company is unable to reach an arrangement with any such party, the Company’s manufacturers may be unable to manufacture its products, and the Company may be unable to sell in those countries. The Company’s inability to register its trademarks or purchase or license the right to use its trademarks or logos in these jurisdictions could limit its ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should the Company’s business plan include selling its merchandise in those non-U.S. jurisdictions.
 
The Company has an anti-counterfeiting program, under the auspices of the Abercrombie & Fitch Brand Protection Team, whose goal is to eliminate the supply of illegal pieces of the Company’s products. The Brand


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Protection Team interacts with investigators, customs officials and law enforcement entities throughout the world to combat the illegal use of the Company’s trademarks. Although brand security initiatives are being taken, the Company cannot guarantee that its efforts against the counterfeiting of its brands will be successful.
 
The Company’s Unsecured Credit Agreement Includes Financial and Other Covenants that Impose Restrictions on its Financial and Business Operations.
 
The Company’s unsecured credit agreement expires on April 12, 2013 and market conditions could potentially impact the size and terms of a replacement facility.
 
In addition, the unsecured credit agreement contains financial covenants that require the Company to maintain a minimum coverage ratio and a maximum leverage ratio. If the Company fails to comply with the covenants and is unable to obtain a waiver or amendment, an event of default would result, and the lenders could declare outstanding borrowings immediately due and payable. If that should occur, the Company cannot guarantee that it would have sufficient liquidity at that time to repay or refinance borrowings under the unsecured credit agreement.
 
The inability to obtain credit on commercially reasonable terms, or a default under the current unsecured credit agreement, could adversely impact liquidity and results of operations.
 
Changes in Taxation Requirements Could Adversely Impact Financial Results.
 
The Company is subject to income tax in numerous jurisdictions, including international and domestic locations. In addition, the Company’s products are subject to import and excise duties, and/or sales, consumption, or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties could have a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
 
The Company’s Inability to Obtain Commercial Insurance at Acceptable Prices or Failure to Adequately Reserve for Self-Insured Exposures Might Increase Expenses and Adversely Impact Financial Results.
 
The Company believes that commercial insurance coverage is prudent for risk management in certain areas of the business. Insurance costs may increase substantially in the future and may be affected by natural catastrophes, fear of terrorism, financial irregularities and other fraud at publicly-held companies, intervention by the government and a decrease in the number of insurance carriers. In addition, for certain types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, the Company may determine that we cannot obtain commercial insurance at acceptable prices, if at all. Therefore, the Company may choose to forego or limit the purchase of relevant commercial insurance, choosing instead to self-insure one or more types of risk. The Company is primarily self-insured for workers’ compensation and employee health benefits. If the Company suffers a substantial loss that is not covered by commercial insurance or self-insurance reserves, the loss and attendant expenses could harm its business and operating results. In addition, exposures exist for which no insurance may be available and for which the Company has not reserved.
 
Modifications and/or Upgrades to Information Technology Systems may Disrupt Operations.
 
The Company regularly evaluates its information technology systems and requirements and is currently implementing modifications and/or upgrades to the information technology systems that support the business. Modifications include replacing legacy systems with successor systems, making changes to legacy systems, or acquiring new systems with new functionality. The Company is aware of inherent risks associated with


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replacing and modifying these systems, including inaccurate system information and system disruptions. The Company believes it is taking appropriate action to mitigate the risks through testing, training, and staging implementation, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. Information technology system disruptions and inaccurate system information, if not anticipated and appropriately mitigated, could have a material adverse effect on the Company’s financial condition or results of operations. Additionally, there is no assurance that a successfully implemented system will deliver value to the Company.
 
The Company Could Suffer if the Company’s Computer Systems are Disrupted or Cease to Operate Effectively.
 
The Company relies heavily on its computer systems to record and process transactions and manage and operate the Company’s operations. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of the computer hardware and software systems. Despite efforts to prevent such an occurrence, the Company’s systems are vulnerable from time-to-time to damage or interruption from computer viruses, power outages, third party intrusions and other technical malfunctions. If the Company’s systems are damaged or fail to function properly, the Company may have to make monetary investments to repair or replace the systems and the Company could endure delays in its operations. Any material interruption could have a material adverse effect on the Company’s business or results of operations.
 
Changes in the Regulatory or Compliance Landscape Could Adversely Affect the Company’s Business or Results of Operations.
 
Laws and regulations at the state, federal and international levels frequently change and the ultimate cost of compliance cannot be precisely estimated. Changes in regulations, the imposition of additional regulations, or the enactment of any new legislation including those related to health care, taxes, environmental issues, trade, product safety and employment labor, could adversely affect the Company’s business or results of operations.
 
The Company’s Operations may be Effected by Greenhouse Emissions and Climate Change.
 
The Company’s operations may be effected by regulatory changes related to climate change and greenhouse gas emissions. The Company is uncertain how the United States and international economies will be affected by potential legislation and public reactions. As a result, the affect this could have on the Company’s operations is currently unknown.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES.
 
The Company’s headquarters and support functions occupy 474 acres, consisting of the home office, distribution and shipping facilities centralized on a campus-like setting in New Albany, Ohio and an additional small distribution and shipping facility located in the Columbus, Ohio area, all of which are owned by the Company. Additionally, the Company leases small facilities to house its design and sourcing support centers in Hong Kong, New York City and Los Angeles, California, as well as offices in the United Kingdom and Switzerland for its European operations.


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All of the retail stores operated by the Company, as of March 19, 2010, are located in leased facilities, primarily in shopping centers in North America, Europe and Asia. The leases expire at various dates, between 2010 and 2028.
 
The Company’s home office, distribution and shipping facilities, design support centers and stores are generally suitable and adequate.
 
As of March 19, 2010, the Company’s 1,098 stores were located in North America, Europe and Asia as follows:
 
                                 
Alabama
    13     Kentucky     14     North Dakota     2  
Alaska
    1     Louisiana     15     Ohio     40  
Arizona
    17     Maine     4     Oklahoma     10  
Arkansas
    7     Maryland     19     Oregon     14  
California
    133     Massachusetts     33     Pennsylvania     48  
Colorado
    12     Michigan     33     Rhode Island     4  
Connecticut
    22     Minnesota     22     South Carolina     15  
Delaware
    4     Mississippi     5     South Dakota     2  
District of Columbia
    1     Missouri     18     Tennessee     24  
Florida
    73     Montana     3     Texas     98  
Georgia
    25     Nebraska     5     Utah     7  
Hawaii
    4     Nevada     14     Vermont     2  
Idaho
    4     New Hampshire     11     Virginia     28  
Illinois
    48     New Jersey     41     Washington     24  
Indiana
    26     New Mexico     4     West Virginia     5  
Iowa
    8     New York     56     Wisconsin     16  
Kansas
    6     North Carolina     30              
                                 
Canada
    12                          
United Kingdom
    11                          
Germany
    1                          
Italy
    3                          
Japan
    1                          
 
ITEM 3.   LEGAL PROCEEDINGS.
 
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business.
 
On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In that action, plaintiffs alleged, on behalf of a putative class of California store managers employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaint seeks injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The defendants answered the complaint on August 21, 2006, denying liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to oppose the plaintiffs’


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remaining claims. On January 29, 2009, the Court certified a class consisting of all store managers who served at Hollister and abercrombie kids stores in California from May 1, 2004 through the future date upon which the action concludes. The parties are continuing to litigate the claims of that putative class.
 
On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company, et al., was filed against A&F and certain of its officers in the United States District Court for the Southern District of Ohio on behalf of a purported class of all persons who purchased or acquired shares of A&F’s Common Stock between June 2, 2005 and August 16, 2005. In September and October of 2005, five other purported class actions were subsequently filed against A&F and other defendants in the same Court. All six securities cases allege claims under the federal securities laws related to sales of Common Stock by certain defendants and to a decline in the price of A&F’s Common Stock during the summer of 2005, allegedly as a result of misstatements attributable to A&F. Plaintiffs seek unspecified monetary damages. On November 1, 2005, a motion to consolidate all of these purported class actions into the first-filed case was filed by some of the plaintiffs. A&F joined in that motion. On March 22, 2006, the motions to consolidate were granted, and these actions (together with the federal court derivative cases described in the following paragraph) were consolidated for purposes of motion practice, discovery and pretrial proceedings. A consolidated amended securities class action complaint (the “Complaint”) was filed on August 14, 2006. On October 13, 2006, all defendants moved to dismiss that Complaint. On August 9, 2007, the Court denied the motions to dismiss. On September 14, 2007, defendants filed answers denying the material allegations of the Complaint and asserting affirmative defenses. On October 26, 2007, plaintiffs moved to certify their purported class. After briefing and argument, the motion was submitted on March 24, 2009, and granted on May 21, 2009. On June 5, 2009, defendants petitioned the Sixth Circuit for permission to appeal the class certification order and on August 24, 2009, the Sixth Circuit granted leave to appeal.
 
On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries, et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&F’s present and former directors, alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. In the following three months, four similar derivative actions were filed (three in the United States District Court for the Southern District of Ohio and one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F alleging various breaches of the directors’ fiduciary duty allegedly arising out of the same matters alleged in the Ross case and seeking equitable and monetary relief on behalf of A&F. In March of 2006, the federal court derivative actions were consolidated with the Ross actions for purposes of motion practice, discovery and pretrial proceedings. A consolidated amended derivative complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, A&F announced that its Board of Directors had received a report of the Special Litigation Committee established by the Board to investigate and act with respect to claims asserted in the derivative lawsuit, which concluded that there was no evidence to support the asserted claims and directed the Company to seek dismissal of the derivative cases. On September 10, 2007, the Company moved to dismiss the federal derivative cases on the authority of the Special Litigation Committee report. On March 12, 2009, the Company’s motion was granted and, on April 10, 2009, plaintiffs filed an appeal from the order of dismissal. The state court has stayed further proceedings in the state-court derivative action until resolution of the consolidated federal derivative cases.
 
Management intends to defend the aforesaid matters vigorously, as appropriate. Management is unable to quantify the potential exposure of the aforesaid matters. However, management’s assessment of the Company’s current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with management’s evaluation of the claims.


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ITEM 4.   [Reserved]
 
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
 
Set forth below is certain information regarding the executive officers of A&F as of March 19, 2010:
 
Michael S. Jeffries, 65, has been Chairman of A&F since May 1998. Mr. Jeffries has been Chief Executive Officer of A&F since February 1992. From February 1992 to May 1998, Mr. Jeffries held the position of President of A&F. Under the terms of the Employment Agreement, entered into as of December 19, 2008, between A&F and Mr. Jeffries, A&F is obligated to cause Mr. Jeffries to be nominated as a director of A&F during his employment term.
 
Diane Chang, 54, has been Executive Vice President — Sourcing of A&F since May 2004. Prior thereto, Ms. Chang held the position of Senior Vice President — Sourcing of A&F from February 2000 to May 2004 and the position of Vice President — Sourcing of A&F from May 1998 to February 2000.
 
Leslee K. Herro, 49, has been Executive Vice President — Planning and Allocation of A&F since May 2004. Prior thereto, Ms. Herro held the position of Senior Vice President — Planning and Allocation of A&F from February 2000 to May 2004 and the position of Vice President — Planning & Allocation of A&F from February 1994 to February 2000.
 
Jonathan E. Ramsden, 45, joined A&F in December 2008 as Executive Vice President and Chief Financial Officer. From December 1998 to December 2008, Mr. Ramsden served as Chief Financial Officer and a member of the Executive Committee of TBWA Worldwide, a large advertising agency network and a division of Omnicom Group Inc. Prior to becoming Chief Financial Officer of TWBA Worldwide, he served as Controller and Principal Accounting Officer of Omnicom Group Inc. from June 1996 to December 1998.
 
David S. Cupps, 73, has been Senior Vice President, General Counsel and Secretary of A&F since April 2007. Prior thereto, he was a partner in the law firm of Vorys, Sater, Seymour and Pease LLP from January 1974 through December 2006 and Of Counsel to that law firm from January 2007 through March 2007.
 
The executive officers serve at the pleasure of the Board of Directors of A&F and, in the case of Mr. Jeffries, pursuant to an employment agreement.


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
A&F’s Class A Common Stock (the “Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.” The table below sets forth the high and low sales prices of A&F’s Common Stock on the New York Stock Exchange for Fiscal 2009 and Fiscal 2008:
 
                 
    Sales Price  
    High     Low  
 
Fiscal 2009
               
4th Quarter
  $ 42.31     $ 29.88  
3rd Quarter
  $ 37.80     $ 28.76  
2nd Quarter
  $ 32.83     $ 22.70  
1st Quarter
  $ 28.06     $ 16.95  
Fiscal 2008
               
4th Quarter
  $ 29.97     $ 13.66  
3rd Quarter
  $ 56.74     $ 23.75  
2nd Quarter
  $ 77.25     $ 51.45  
1st Quarter
  $ 82.06     $ 69.55  
 
A quarterly dividend, of $0.175 per share, was paid in March, June, September and December of Fiscal 2007, Fiscal 2008 and Fiscal 2009. A&F expects to continue to pay a dividend, subject to the Board of Directors’ review of the Company’s cash position and results of operations.
 
As of March 19, 2010, there were approximately 4,413 stockholders of record. However, when including investors holding shares in broker accounts under street name, active associates of the Company who participate in A&F’s stock purchase plan, and associates of the Company who own shares through A&F-sponsored retirement plans, A&F estimates that there are approximately 53,100 stockholders.
 
The following table provides information regarding the purchase of shares of the Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the quarterly period ended January 30, 2010:
 
                                 
                Total Number of
       
                Shares Purchased as
    Maximum Number of
 
    Total Number
    Average
    Part of Publicly
    Shares that May Yet Be
 
    of Shares
    Price Paid
    Announced Plans or
    Purchased under the
 
Fiscal Month
  Purchased(1)     per Share(2)     Programs(3)     Plans or Programs(4)  
 
November 1, 2009 — November 28, 2009
    1,838     $ 40.36             11,346,900  
November 29, 2009 — January 2, 2010
    2,375     $ 39.85             11,346,900  
January 3, 2010 — January 30, 2010
    1,322     $ 34.71             11,346,900  
                                 
Total
    5,535     $ 38.79             11,346,900  
                                 


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(1) Included in the total number of shares of A&F’s Common Stock purchased during the quarterly period (thirteen-week period) ended January 30, 2010 were an aggregate of 5,535 shares which were withheld for tax payments due upon the vesting of employee restricted stock units and restricted stock awards.
 
(2) The average price paid per share includes broker commissions, as applicable.
 
(3) There were no shares purchased pursuant to A&F’s publicly announced stock repurchase authorizations during the quarterly period (thirteen-week period) ended January 30, 2010. On August 16, 2005, A&F announced the August 15, 2005 authorization by A&F’s Board of Directors to repurchase 6.0 million shares of A&F’s Common Stock. On November 21, 2007, A&F announced the November 20, 2007 authorization by A&F’s Board of Directors to repurchase 10.0 million shares of A&F’s Common Stock, in addition to the approximately 2.0 million shares of A&F’s Common Stock which remained available under the August 2005 authorization as of November 20, 2007.
 
(4) The figure shown represents, as of the end of each period, the maximum number of shares of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorizations described in footnote 3 above. The shares may be purchased, from time-to-time, depending on market conditions.
 
A&F did not repurchase any shares of A&F’s Common Stock in the open market during Fiscal 2009. During Fiscal 2008, A&F repurchased approximately 0.7 million shares of A&F’s Common Stock in the open market with a value of approximately $50.0 million. During Fiscal 2007, A&F repurchased approximately 3.6 million shares of A&F’s Common Stock in the open market with a value of approximately $287.9 million. Both the Fiscal 2008 and the Fiscal 2007 repurchases were pursuant to A&F Board of Directors’ authorizations.


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The following graph shows the changes, over the five-year period ended January 30, 2010 (the last day of A&F’s 2009 fiscal year), in the value of $100 invested in (i) shares of A&F’s Common Stock; (ii) the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and (iii) the Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail Index”), including reinvestment of dividends. The plotted points represent the closing price on the last day of the fiscal year indicated (and if such day was not a trading day, the closing price on the last day immediately preceding a trading day).
 
PERFORMANCE GRAPH1
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index
 
(PERFORMANCE GRAPH)
 
$100 invested on 1/29/05 in stock or 1/31/05 in index, including reinvestment of dividends.
 
Indexes calculated on month-end basis.
 
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
 
1 This graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to SEC Regulation 14A or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that A&F specifically requests that the graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.


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ITEM 6.   SELECTED FINANCIAL DATA.
 
ABERCROMBIE & FITCH CO.
FINANCIAL SUMMARY
 
Summary of Operations
 
(Information below excludes amounts related to discontinued operations, except where otherwise noted)
 
                                         
    2009     2008     2007     2006(1)     2005  
    (Thousands, except per share and per square foot amounts, ratios and store and associate data)  
 
Net Sales
  $ 2,928,626     $ 3,484,058     $ 3,699,656     $ 3,284,176     $ 2,768,164  
Gross Profit
  $ 1,883,598     $ 2,331,095     $ 2,488,166     $ 2,200,668     $ 1,854,186  
Operating Income
  $ 117,912     $ 498,262     $ 778,909     $ 697,990     $ 577,817  
Net Income from Continuing Operations
  $ 78,953     $ 308,169     $ 499,127     $ 446,525     $ 355,382  
Net Loss from Discontinued Operations (net of taxes)(2)
  $ (78,699 )   $ (35,914 )   $ (23,430 )   $ (24,339 )   $ (21,398 )
Net Income(2)
  $ 254     $ 272,255     $ 475,697     $ 422,186     $ 333,984  
Dividends Declared Per Share
  $ 0.70     $ 0.70     $ 0.70     $ 0.70     $ 0.60  
Net Income Per Share from Continuing Operations
                                       
Basic
  $ 0.90     $ 3.55     $ 5.72     $ 5.07     $ 4.08  
Diluted
  $ 0.89     $ 3.45     $ 5.45     $ 4.85     $ 3.90  
Net Loss Per Share from Discontinued Operations (2)
                                       
Basic
  $ (0.90 )   $ (0.41 )   $ (0.27 )   $ (0.28 )   $ (0.25 )
Diluted
  $ (0.89 )   $ (0.40 )   $ (0.26 )   $ (0.26 )   $ (0.23 )
Net Income Per Share (2)
                                       
Basic
  $ 0.00     $ 3.14     $ 5.45     $ 4.79     $ 3.83  
Diluted
  $ 0.00     $ 3.05     $ 5.20     $ 4.59     $ 3.66  
Basic Weighted-Average Shares Outstanding
    87,874       86,816       87,248       88,052       87,161  
Diluted Weighted-Average Shares Outstanding
    88,609       89,291       91,523       92,010       91,221  
Other Financial Information
                                       
Total Assets (including discontinued operations)
  $ 2,821,866     $ 2,848,181     $ 2,567,598     $ 2,248,067     $ 1,789,718  
Return on Average Assets(3)
    0 %     10 %     20 %     21 %     21 %
Working Capital(4)
  $ 786,474     $ 622,213     $ 585,575     $ 571,089     $ 447,102  
Current Ratio(5)
    2.75       2.38       2.08       2.12       1.91  
Net Cash Provided by Operating Activities(2)
  $ 402,200     $ 490,836     $ 817,524     $ 582,171     $ 453,590  
Capital Expenditures
  $ 175,472     $ 367,602     $ 403,345     $ 403,476     $ 256,422  
Long-Term Debt
  $ 71,213     $ 100,000                    
Shareholders’ Equity (including discontinued operations)
  $ 1,827,917     $ 1,845,578     $ 1,618,313     $ 1,405,297     $ 995,117  
Return on Average Shareholders’ Equity(6)
    0 %     16 %     31 %     35 %     40 %
Comparable Store Sales(7)
    (23 )%     (13 )%     (1 )%     1 %     26 %
Net Retail Sales Per Average Gross Square Foot
  $ 339     $ 432     $ 503     $ 509     $ 474  
Stores at End of Year and Average Associates
                                       
Total Number of Stores Open
    1,096       1,097       1,013       930       843  
Gross Square Feet
    7,848       7,760       7,133       6,563       5,956  
Average Number of Associates(8)
    83,000       96,200       94,600       80,100       69,100  
 
 
(1) Fiscal 2006 was a fifty-three week year.
 
(2) Includes results of operations from RUEHL branded stores and related direct-to-consumer operations.


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(3) Return on average assets is computed by dividing net income (including discontinued operations) by the average asset balance (including discontinued operations).
 
(4) Working capital is computed by subtracting current liabilities (including discontinued operations) from current assets (including discontinued operations).
 
(5) Current Ratio is computed by dividing current assets (including discontinued operations) by current liabilities (including discontinued operations).
 
(6) Return on Average Shareholders’ Equity is computed by dividing net income (including discontinued operations) by the average shareholders’ equity balance (including discontinued operations).
 
(7) A store is included in comparable store 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. Note that Fiscal 2006 comparable store sales are compared to store sales for the comparable fifty-three weeks ended February 4, 2006.
 
(8) Includes employees from RUEHL operations.
 
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. A store is included in comparable store 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.
 
For purposes of this “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” the fifty-two week period ended January 30, 2010 is compared to the fifty-two week period ended January 31, 2009. Fiscal 2009 comparable store sales compare the fifty-two week period ended January 30, 2010 to the fifty-two week period ended January 31, 2009. Fiscal 2008 comparable store sales compare the fifty-two week period ended January 31, 2009 to the fifty-two week period ended February 2, 2008. For Fiscal 2007, the fifty-two week period ended February 2, 2008 is compared to the fifty-three week period ended February 3, 2007.
 
On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The determination to take this action was based on a comprehensive review and evaluation of the performance of the RUEHL branded stores and related direct-to-consumer operations, as well as the related real estate portfolio. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the results of operations of RUEHL are reflected in Net Loss from Discontinued Operations on the Consolidated Statements of Operations and Comprehensive Income for all periods presented.
 
The Company had net sales of $2.929 billion for the fifty-two weeks ended January 30, 2010, down 15.9% from $3.484 billion for the fifty-two weeks ended January 31, 2009. Operating income for Fiscal 2009 was $117.9 million, which was down from $498.3 million in Fiscal 2008. Net income from continuing operations was $79.0 million and net income per diluted share from continuing operations was $0.89 in Fiscal 2009, compared to net income from continuing operations of $308.2 million and net income per diluted share from continuing operations of $3.45 in Fiscal 2008. Net income per diluted share from continuing operations


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included non-cash, store-related asset impairment charges of $0.23 and $0.06 for Fiscal 2009 and Fiscal 2008, respectively.
 
Net loss from discontinued operations was $78.7 million in Fiscal 2009 and net loss per diluted share from discontinued operations was $0.89 in Fiscal 2009, compared to net loss from discontinued operations of $35.9 million and net loss per diluted share from discontinued operations of $0.40 in Fiscal 2008. Net loss from discontinued operations included an after-tax charge of $34.2 million, or $0.39 per diluted share, associated with the closure of the RUEHL business in Fiscal 2009, and after-tax charges of $31.4 million, or $0.35 per diluted share, and $13.6 million, or $0.15 per diluted share, associated with the impairment of Ruehl-related store assets for Fiscal 2009 and Fiscal 2008, respectively.
 
Net income was $0.3 million and net income per diluted share was $0.00 in Fiscal 2009, compared to net income of $272.3 million and net income per diluted share of $3.05 in Fiscal 2008.
 
Excluding net loss from discontinued operations and non-cash impairment charges, the Company reported non-GAAP net income per diluted share of $1.12 for Fiscal 2009 compared to non-GAAP net income per diluted share of $3.51 for Fiscal 2008. The Company believes that this non-GAAP financial measure is useful to investors as it provides 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 Net Loss from Discontinued Operations and non-cash, store related asset impairment charges. This non-GAAP financial measure should not be used as an alternative to net income per diluted share as an indicator of the ongoing operating performance of the Company and is 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.
 
                                 
    Fifty-Two Weeks Ended              
    January 30, 2010     January 31, 2009              
 
Net income per diluted share on a GAAP basis
  $ 0.00     $ 3.05                  
Plus: Net loss from discontinued operations(1)
  $ 0.89     $ 0.40                  
Plus: Non-cash, store-related asset impairment charges(2)
  $ 0.23     $ 0.06                  
                                 
Net income per diluted share on a non-GAAP basis
  $ 1.12     $ 3.51                  
 
 
 
(1) Net loss from discontinued operations for the fiscal year includes the operating results, exit charges and non-cash impairment charges associated with RUEHL branded stores and related direct-to-consumer operations, as summarized in Note 14, “Discontinued Operations” of the Consolidated Financial Statements.
 
(2) The non-cash, store-related asset impairment charges relate to stores whose asset carrying value exceeded the fair value. For Fiscal 2009 the charge was associated with 34 Abercrombie & Fitch, 46 abercrombie kids and 19 Hollister stores. For Fiscal 2008 the charge was associated with 11 Abercrombie & Fitch, six abercrombie kids and three Hollister stores.
 
Net cash provided by operating activities, the Company’s primary source of liquidity, was $402.2 million for Fiscal 2009. This source of cash was primarily driven by results from operations adjusted for non-cash items including depreciation and amortization and impairment charges. The Company used $175.5 million of cash for capital expenditures and had proceeds from the sale of marketable securities of $77.5 million during Fiscal 2009. During Fiscal 2009, the Company repaid U.S. dollar denominated borrowings of $100.0 million


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under the unsecured Amended Credit Agreement and separately drew down approximately $48.0 million in borrowings denominated in Japanese Yen, used to fund international lease and capital expenditure commitments. The Company also paid dividends totaling $61.5 million during Fiscal 2009. As of January 30, 2010, the Company had $680.1 million in cash and equivalents, and outstanding debt and letters of credit of $100.9 million.
 
The following data represents the Company’s Consolidated Statements of Operations for the last three fiscal years, expressed as a percentage of net sales:
 
                         
    2009     2008     2007  
 
NET SALES
    100.0 %     100.0 %     100.0 %
Cost of Goods Sold
    35.7       33.1       32.7  
                         
GROSS PROFIT
    64.3       66.9       67.3  
Stores and Distribution Expense
    48.7       41.2       36.3  
Marketing, General and Administrative Expense
    12.1       11.6       10.2  
Other Operating Income, Net
    (0.5 )     (0.3 )     (0.3 )
                         
OPERATING INCOME
    4.0       14.3       21.1  
Interest Income, Net
    (0.1 )     (0.3 )     (0.5 )
                         
Income from Continuing Operations before Income Taxes
    4.1       14.6       21.6  
Income Tax Expense from Continuing Operations
    1.4       5.8       8.1  
Net Income from Continuing Operations
    2.7       8.8       13.5  
Net Loss from Discontinued Operations
    (2.7 )     (1.0 )     (0.6 )
                         
NET INCOME
    0.0 %     7.8 %     12.9 %
                         


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FINANCIAL SUMMARY
 
The following summarized financial and statistical data compares Fiscal 2009 to Fiscal 2008 and Fiscal 2008 to Fiscal 2007:
                                         
    2009     2008     2007              
 
Net sales by brand (thousands)
  $ 2,928,626     $ 3,484,058     $ 3,699,656                  
Abercrombie & Fitch
  $ 1,272,287     $ 1,531,480     $ 1,638,929                  
abercrombie kids
  $ 343,164     $ 420,518     $ 471,045                  
Hollister
  $ 1,287,241     $ 1,514,204     $ 1,589,452                  
Gilly Hicks**
  $ 25,934     $ 17,856     $ 230                  
Increase (decrease) in net sales from prior year
    (16 )%     (6 )%     13 %                
Abercrombie & Fitch
    (17 )%     (7 )%     8 %                
abercrombie kids
    (18 )%     (11 )%     16 %                
Hollister
    (15 )%     (5 )%     17 %                
Gilly Hicks**
    45 %     NM       NM                  
Decrease in comparable store sales*
    (23 )%     (13 )%     (1 )%                
Abercrombie & Fitch
    (19 )%     (8 )%     0 %                
abercrombie kids
    (23 )%     (19 )%     0 %                
Hollister
    (27 )%     (17 )%     (2 )%                
Net retail sales increase attributable to new and remodeled stores, and websites
    7 %     7 %     14 %                
Net retail sales per average store (thousands)
  $ 2,412     $ 3,041     $ 3,546                  
Abercrombie & Fitch
  $ 3,193     $ 3,878     $ 4,073                  
abercrombie kids
  $ 1,453     $ 1,823     $ 2,230                  
Hollister
  $ 2,299     $ 2,962     $ 3,550                  
Net retail sales per average gross square foot
  $ 339     $ 432     $ 503                  
Abercrombie & Fitch
  $ 359     $ 438     $ 463                  
abercrombie kids
  $ 313     $ 397     $ 493                  
Hollister
  $ 338     $ 442     $ 531                  
Change in transactions per average retail store
    (14 )%     (16 )%     (2 )%                
Abercrombie & Fitch
    (14 )%     (11 )%     (2 )%                
abercrombie
    (14 )%     (20 )%     (2 )%                
Hollister
    (16 )%     (18 )%     (4 )%                
Change in average retail transaction value
    (7 )%     2 %     1 %                
Abercrombie & Fitch
    (4 )%     5 %     5 %                
abercrombie
    (7 )%     1 %     1 %                
Hollister
    (8 )%     1 %     (1 )%                
Change in average units per retail transaction
    0 %     0 %     2 %                
Abercrombie & Fitch
    (2 )%     0 %     3 %                
abercrombie
    (1 )%     (2 )%     2 %                
Hollister
    0 %     (1 )%     2 %                
Change in average unit retail sold
    (7 )%     2 %     (1 )%                
Abercrombie & Fitch
    (2 )%     5 %     2 %                
abercrombie
    (7 )%     3 %     0 %                
Hollister
    (8 )%     1 %     (2 )%                
 
 
A store is included in comparable store 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.
 
** Net sales for the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008 reflect the activity of 16, 14 and three stores, respectively. In Fiscal 2007, all three stores opened in January 2008. Operational data was deemed immaterial for inclusion in the table above.


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CURRENT TRENDS AND OUTLOOK
 
While 2009 was a challenging year for the Company, it was one in which the Company believes it made significant progress in laying the foundations for future success. The Company continues to work hard to improve the performance of its domestic business while continuing to be pleased with the progress of its international rollout strategy.
 
The Company’s objective in Fiscal 2010 and subsequent years is to increase its operating margin back towards historical levels, which the Company believes will require a combination of the following factors.
 
First, returning gross margin to historic levels. The Company believes the factors in achieving this will be optimizing its average unit retails, achieving further reductions in average unit cost, and benefiting from international operations with higher gross margins. In the short-term there may be further erosion of the gross profit rate, to the extent that the Company believes that further reduction in average unit retail can enable the Company to improve productivity levels.
 
Second, improvements in domestic productivity levels and the closure of negative contribution stores. The Company is in the process of reviewing negative contribution stores and, to the extent it does not foresee a recovery for applicable stores, plans to address these stores through a combination of natural lease expirations, rent relief negotiations with landlords and, potentially early closures of certain underperforming stores.
 
Third, the Company continues with its plan for accelerated international openings in Fiscal 2010, and will potentially accelerate further beyond that to achieve profitable international growth. In Fiscal 2010, the Company remains on track to open Abercrombie & Fitch flagship stores in Fukuoka and Copenhagen. Going forward, the format of flagship stores is likely to be a combination of the original flagship model and a smaller store format similar to the template being used in Copenhagen. The Company currently plans to open approximately 30 international mall-based Hollister stores, including in two or more new countries, in 2010. The Hollister openings will predominantly be in the third, and particularly the fourth quarters.
 
The Company is also focusing significant attention on improving the productivity of its Gilly Hicks brand, which the Company believes is a necessary precursor to expanding the store count for the brand and having a path to profitability.
 
Finally, the Company will continue to maintain tight control over expenses and to seek greater efficiencies in its operations.
 
In Fiscal 2010, the Company will continue to concentrate on protecting the brands, while seeking to drive improvement in its domestic business, and continue its international growth.


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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 store sales by brand, by product, and by store, 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;
 
  •  Direct-to-consumer sales growth;
 
  •  International and flagship store performance;
 
  •  Store productivity;
 
  •  Initial Mark Up (“IMU”);
 
  •  Markdown rate;
 
  •  Gross profit rate;
 
  •  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 cash provided by operations; 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 running 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 2009 COMPARED TO FISCAL 2008
 
Net Sales
 
Net sales for Fiscal 2009 were $2.929 billion, a decrease of 15.9% from Fiscal 2008 net sales of $3.484 billion. The net sales decrease was attributed primarily to a 23% decrease in comparable store sales and a 5.6% decrease in net direct-to-consumer sales, including shipping and handling revenue.
 
Comparable store sales by brand for Fiscal 2009 were as follows: Abercrombie & Fitch decreased 19% with men’s decreasing by a low double-digit and women’s decreasing by a mid twenty; abercrombie kids decreased 23% with boys’ decreasing by a mid teen and girls’ decreasing by a mid twenty; and Hollister decreased 27% with dudes’ decreasing by a high teen and bettys’ decreasing by a low thirty.


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On a regional basis for Fiscal 2009, comparable store sales were down in all U.S. regions and Canada. Comparable store sales were positive in the United Kingdom.
 
For Fiscal 2009, across all brands, the masculine categories continued to out-pace the feminine categories. From a merchandise classification standpoint, across all brands, for the male business, fragrance and sweaters were stronger performing categories, while knit tops and graphic tees were the weaker performing categories. For the female business, woven shirts and dresses were stronger performing categories, while sweaters and knit tops were weaker categories.
 
Direct-to-consumer net merchandise sales in Fiscal 2009 were $249.4 million, a decrease of 5.6% from Fiscal 2008 net merchandise sales of $264.3 million. Shipping and handling revenue was $40.7 million in Fiscal 2009 and $42.9 million in Fiscal 2008. The direct-to-consumer business, including shipping and handling revenue, accounted for 9.9% of total net sales in Fiscal 2009 compared to 8.8% of total net sales in Fiscal 2008.
 
Gross Profit
 
Gross profit during Fiscal 2009 decreased to $1.884 billion from $2.331 billion in Fiscal 2008. The gross profit rate (gross profit divided by net sales) for Fiscal 2009 was 64.3% versus 66.9% the previous year, a decrease of 260 basis points. The decrease in the gross profit rate was primarily driven by a lower average unit retail, partially offset by a reduction in average unit cost.
 
Stores and Distribution Expense
 
Stores and distribution expense for Fiscal 2009 was $1.426 billion compared to $1.436 billion in Fiscal 2008. For Fiscal 2009, the stores and distribution expense rate (stores and distribution expense divided by net sales) was 48.7% compared to 41.2% for Fiscal 2008. For the fifty-two weeks ended January 30, 2010 and January 31, 2009, stores and distribution expense included non-cash, pre-tax asset impairment charges related to 99 stores of $33.2 million, or 1.1% of net sales, and non-cash, pre-tax asset impairment charges related to 20 stores of $8.3 million, or 0.2% of net sales, respectively. Excluding the effect of impairment charges, the increase in the stores and distribution expense rate was primarily attributable to higher store occupancy costs, including rent, depreciation and other occupancy costs.
 
Marketing, General and Administrative Expense
 
Marketing, general and administrative expense for Fiscal 2009 decreased 12.8% to $353.3 million compared to $405.2 million in Fiscal 2008. The decrease in expense was related to reductions in employee compensation and benefits, travel, and outside services. The marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 12.1% for Fiscal 2009, an increase of 50 basis points compared to 11.6% for Fiscal 2008.
 
Other Operating Income, Net
 
Other operating income for Fiscal 2009 was $13.5 million compared to $8.8 million for Fiscal 2008. The increase was primarily driven by gains on foreign currency transactions for Fiscal 2009 compared to losses on foreign currency transactions for Fiscal 2008, as well as an increase in income related to gift cards for which the Company has determined the likelihood of redemption to be remote. In Fiscal 2009, other operating income also included a $9.2 million reduction of other-than-temporary impairments related to the Company’s trading auction rate securities, partially offset by a reduction of the related put option of $7.7 million as


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compared to an other-than-temporary impairment of $14.0 million related to the Company’s trading auction rate securities, offset by a gain on the related put option of $12.3 million in Fiscal 2008.
 
Interest Income, Net and Income Tax Expense
 
Fiscal 2009 interest income was $8.2 million, offset by interest expense of $6.6 million compared to interest income of $14.8 million, offset by interest expense of $3.4 million for Fiscal 2008. The decrease in interest income was due primarily to a lower average rate of return on investments. The increase in interest expense was due primarily to imputed interest expense related to certain store lease transactions.
 
The income tax expense rate for continuing operations for Fiscal 2009 was 33.9% compared to 39.5% for Fiscal 2008. The Fiscal 2009 rate benefited from foreign operations. Additionally, Fiscal 2008 included a $9.9 million charge related to the execution of the Chairman and Chief Executive Officer’s new employment agreement, which resulted in certain non-deductible amounts pursuant to Section 162(m) of the Internal Revenue Code.
 
Net Loss from Discontinued Operations
 
The Company completed the closure of its RUEHL branded stores and related direct-to-consumer operations in the fourth quarter of Fiscal 2009. Accordingly, the after-tax operating results appear in Net Loss from Discontinued Operations on the Consolidated Statements of Operations and Comprehensive Income for all fiscal years presented. Net loss from discontinued operations, net of tax, was $78.7 million and $35.9 million for Fiscal 2009 and Fiscal 2008, respectively. Net loss from discontinued operations includes after-tax charges of $34.2 million associated with the closure of the RUEHL business for 2009, and after-tax charges of $31.4 million and $13.6 million associated with the impairment of RUEHL-related store assets for Fiscal 2009 and Fiscal 2008, respectively.
 
Refer to Note 14, “Discontinued Operations” of the Notes to Consolidated Financial Statements for further discussion.
 
Net Income and Net Income per Share
 
Net income for Fiscal 2009 was $0.3 million compared to $272.3 million for Fiscal 2008. Net income per diluted share was $0.00 in Fiscal 2009 versus $3.05 in Fiscal 2008. Net income per diluted share included $0.89 of net loss per diluted share from discontinued operations and an after-tax charge of approximately $0.23 per diluted share associated with the impairment of store-related assets for Fiscal 2009 and $0.40 of net loss per diluted share from discontinued operations and an after-tax charge of approximately $0.06 per diluted share associated with the impairment of store-related assets for Fiscal 2008.
 
FISCAL 2008 COMPARED TO FISCAL 2007
 
Net Sales
 
Net sales for Fiscal 2008 were $3.484 billion, a decrease of 5.8% from Fiscal 2007 net sales of $3.700 billion. The net sales decrease was attributed primarily to the 13% decrease in comparable store sales, partially offset by a net addition of 84 stores and a 3.1% increase in direct-to-consumer business, including shipping and handling revenue.
 
For Fiscal 2008, comparable store sales by brand were as follows: Abercrombie & Fitch decreased 8%; abercrombie kids decreased 19%; and Hollister decreased 17%.


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On a regional basis for Fiscal 2008, comparable store sales were down in all U.S. regions and Canada. Comparable store sales were stronger in the flagship stores, particularly in the United Kingdom.
 
Direct-to-consumer net merchandise sales in Fiscal 2008 were $264.3 million, an increase of 2.1% over Fiscal 2007 net merchandise sales of $258.8 million. Shipping and handling revenue was $42.9 million in Fiscal 2008 and $39.1 million in Fiscal 2007. The direct-to-consumer business, including shipping and handling revenue, accounted for 8.8% of total net sales in Fiscal 2008 compared to 8.1% of total net sales in Fiscal 2007.
 
Gross Profit
 
Gross profit for Fiscal 2008 decreased to $2.331 billion from $2.488 billion in Fiscal 2007. The gross profit rate for Fiscal 2008 was 66.9% versus 67.2% the previous year, a decrease of 30 basis points. The decrease in gross profit rate was attributable to a higher IMU rate being more than offset by an increase in markdown rate versus Fiscal 2007. The higher markdown rate resulted from the need to clear through seasonal merchandise as a result of declining sales and the Company’s limited ability to reduce fourth quarter of Fiscal 2008 deliveries.
 
Stores and Distribution Expense
 
Stores and distribution expense for Fiscal 2008 was $1.436 billion compared to $1.344 billion for Fiscal 2007. For Fiscal 2008, the stores and distribution expense rate was 41.2% compared to 36.3% for Fiscal 2007. The increase in rate resulted primarily from the Company’s limited ability to leverage fixed expenses due to negative comparable store sales. Additionally, stores and distribution expense in Fiscal 2008 also included additional direct expenses related to flagship pre-opening rent expenses, as well as minimum wage and manager salary increases and an $8.3 million non-cash impairment charge associated with store-related assets.
 
Marketing, General and Administrative Expense
 
Marketing, general and administrative expense for Fiscal 2008 increased 7.5% to $405.2 million compared to $376.8 million in Fiscal 2007. The increase in expense reflected investments in home office resources necessary for flagship and international expansion, partially offset by savings in incentive compensation and benefits and other home office expenses in the second half of Fiscal 2008. The marketing, general and administrative expense rate was 11.6% for Fiscal 2008, an increase of 1.4 percentage points compared to 10.2% for Fiscal 2007.
 
Other Operating Income, Net
 
Other operating income for Fiscal 2008 was $8.8 million compared to $11.7 million for Fiscal 2007. The decrease was primarily driven by losses on foreign currency transactions for Fiscal 2008 compared to gains on foreign currency transactions for Fiscal 2007, as well as a decrease in income related to gift cards for which the Company has determined the likelihood of redemption to be remote.
 
Interest Income, Net and Income Tax Expense
 
Fiscal 2008 interest income was $14.8 million, offset by interest expense of $3.4 million compared to interest income of $19.8 million, offset by interest expense of $1.0 million for Fiscal 2007. The decrease in interest income in Fiscal 2008 was primarily due to a lower average rate of return on investments. The


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increase in interest expense in Fiscal 2008 was due to borrowings made under the Company’s unsecured amended credit agreement in Fiscal 2008.
 
The effective tax rate for Fiscal 2008 was 39.5% compared to 37.4% for Fiscal 2007. Fiscal 2008 included a $9.9 million charge related to the execution of the Chairman and Chief Executive Officer’s new employment agreement, which resulted in certain non-deductible amounts pursuant to Section 162(m) of the Internal Revenue Code.
 
Net Loss from Discontinued Operations
 
Net loss from discontinued operations, net of tax, was $35.9 million and $23.4 million for Fiscal 2008 and Fiscal 2007, respectively. The results for Fiscal 2008 included $13.6 million of after-tax non-cash asset impairment charges related to RUEHL assets as a result of the determination that the carrying value of the assets exceeded the fair value of those assets.
 
Refer to Note 14, “Discontinued Operations” of the Notes to Consolidated Financial Statements for further discussion.
 
Net Income and Net Income per Share
 
Net income for Fiscal 2008 was $272.3 million compared to $475.7 million for Fiscal 2007. Net income per diluted weighted-average share was $3.05 in Fiscal 2008 versus $5.20 in Fiscal 2007. For Fiscal 2008, net income per diluted share included $0.40 of net loss per diluted share from discontinued operations and an after-tax charge of approximately $0.06 per diluted share associated with the impairment of store-related assets. Fiscal 2007 included $0.26 of net loss per diluted share from discontinued operations.
 
FINANCIAL CONDITION
 
Liquidity and Capital Resources
 
The Company had $680.1 million in cash and equivalents available as of January 30, 2010, as well as an additional $299.1 million available (less outstanding letters of credit of $50.0 million) under its unsecured Amended Credit Agreement (as amended in June 2009) and $26.3 million available under the UBS Credit Line, both described in Note 12, “Long-Term Debt” of the Notes to Consolidated Financial Statements. The unsecured Amended Credit Agreement contains financial covenants that require the Company to maintain a minimum coverage ratio and a maximum leverage ratio and also limits the Company’s consolidated capital expenditures to $325 million in Fiscal 2010 plus the unused portion from Fiscal 2009 of $99.5 million, all defined in the Amended Credit Agreement. If circumstances occur that would lead to the Company failing to meet the covenants under the Amended Credit Agreement and the Company is unable to obtain a waiver or amendment, an event of default would result and the lenders could declare outstanding borrowings immediately due and payable. The Company believes it is likely that it would either obtain a waiver or amendment in advance of a default, or would have sufficient cash available to repay borrowings in the event a waiver was not obtained.


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A summary of the Company’s working capital (current assets less current liabilities) and capitalization at the end of each of the last three fiscal years follows (thousands):
 
                         
    2009     2008     2007  
 
Working capital
  $ 786,474     $ 622,213     $ 585,575  
                         
Capitalization:
                       
Shareholders’ equity
  $ 1,827,917     $ 1,845,578     $ 1,618,313  
                         
 
The Company considers the following to be measures of its liquidity and capital resources for the last three fiscal years:
 
                         
    2009     2008     2007  
 
Current ratio (current assets divided by current liabilities)
    2.75       2.38       2.08  
                         
Net cash provided by operating activities (thousands)
  $ 402,200     $ 490,836     $ 817,524  
                         
 
Operating Activities
 
Net cash provided by operating activities, the Company’s primary source of liquidity, was $402.2 million for Fiscal 2009 compared to $490.8 million for Fiscal 2008. In Fiscal 2009, the decrease in cash provided by operating activities was primarily driven by a reduction in net income for Fiscal 2009 compared to Fiscal 2008, adjusted for non-cash impairment charges. Operating cash flows for Fiscal 2009 included payments of approximately $22.6 million related primarily to lease termination agreements associated with the closure of RUEHL branded stores and related direct-to-consumer operations. Additionally, Fiscal 2009 operating cash flows benefited from a reduction in inventory in reaction to the declining sales trend, partially offset by an increase in lease related assets, including lease deposits and prepaid rent, associated with new flagship stores. In Fiscal 2008, the decrease in cash provided by operating activities compared to Fiscal 2007 was driven by a decrease in net income and incremental cash outflow associated with changes in assets and liabilities.
 
Investing Activities
 
Cash outflows from investing activities in Fiscal 2009 were used primarily for capital expenditures related to new store construction and information technology investments. The decrease in capital expenditures compared to Fiscal 2008 related primarily to a reduction in new domestic mall-based store openings in Fiscal 2009. The Company also had cash inflows from the sale of marketable securities.
 
Cash outflows from investing activities in Fiscal 2008 were used for capital expenditures related primarily to new store construction, store remodels and refreshes and information technology. Cash flows from investing activities included sales and purchases of marketable securities.
 
Cash outflows from investing activities in Fiscal 2007 were used primarily for purchases of marketable securities and trust-owned life insurance policies, and capital expenditures related primarily to new store construction; store remodels and refreshes; the purchase of an airplane; and other various store, home office and DC projects, partially offset by cash inflows related to proceeds from the sale of marketable securities.


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Financing Activities
 
In Fiscal 2009, financing activities consisted of repayment of $100.0 million borrowed under the Company’s unsecured credit agreement, denominated in U.S. Dollars, and separate borrowings of $48.0 million denominated in Japanese Yen under the Company’s unsecured Amended Credit Agreement, and payment of dividends. In Fiscal 2008, financing activities consisted primarily of the repurchase of the Company’s Common Stock, the payment of dividends, proceeds from share-based compensation, and proceeds from borrowing under the Company’s unsecured credit agreement. In Fiscal 2007, financing activities consisted of the repurchase of the Company’s Common Stock, and the payment of dividends as well as proceeds from share-based compensation and the related excess tax benefits. A&F’s Board of Directors will review the Company’s cash position and results of operations and address the appropriateness of future dividend amounts.
 
A&F did not repurchase any shares of A&F’s Common Stock in the open market during Fiscal 2009. During Fiscal 2008, A&F repurchased approximately 0.7 million shares of A&F’s Common Stock in the open market with a value of approximately $50.0 million. During Fiscal 2007, A&F repurchased approximately 3.6 million shares of A&F’s Common Stock in the open market with a value of approximately $287.9 million. Both the Fiscal 2008 and Fiscal 2007 repurchases were pursuant to A&F Board of Directors’ authorizations.
 
As of January 30, 2010, A&F had approximately 11.3 million shares available for repurchase as part of the August 15, 2005 and November 20, 2007 A&F Board of Directors’ authorizations to repurchase 6.0 million shares and 10.0 million shares, respectively, of A&F’s Common Stock.
 
The Company had $50.9 million and $100.0 million outstanding under its unsecured Amended Credit Agreement on January 30, 2010 and January 31, 2009, respectively. The $50.9 million outstanding as of January 30, 2010 was denominated in Japanese Yen. The average interest rate for Fiscal 2009 was 2.0%. As of January 30, 2010, the Company had an additional $299.1 million available (less outstanding letters of credit) under its unsecured Amended Credit Agreement.
 
The Amended Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Company’s Leverage Ratio was 2.95 as of January 30, 2010. The Amended Credit Agreement also requires that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination and (z) the sum of minimum rent and contingent store rent, not be less than 1.65 to 1.00 at January 30, 2010. The minimum Coverage Ratio varies over time based on the terms set forth in the Amended Credit Agreement. The Amended Credit Agreement amended the definition of Consolidated EBITDAR to add back the following items, among others, (a) recognized losses arising from investments in certain auction rate securities to the extent such losses do not exceed a defined level of impairments for those investments, (b) non-cash charges in an amount not to exceed $50 million related to the closure of RUEHL branded stores and related direct-to-consumer operations, (c) non-recurring cash charges in an aggregate amount not to exceed $61 million related to the closure of RUEHL branded stores and related direct-to-consumer operations, (d) additional non-recurring non-cash charges in an amount not to exceed $20 million in the aggregate over the trailing four fiscal quarter period and (e) other non-recurring cash charges in an amount not to exceed $10 million in the aggregate over the trailing four fiscal quarter period. The Company’s Coverage Ratio was 2.10 as of January 30, 2010. The Amended Credit Agreement also limits the Company’s consolidated capital expenditures to $275 million in Fiscal 2009 and to $325 million in Fiscal 2010 plus any unused portion from Fiscal 2009. The Company was in compliance with the applicable ratio requirements and other covenants at January 30, 2010.


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The unsecured Amended Credit Agreement is more fully described in Note 12, “Long-Term Debt” of the Notes to Consolidated Financial Statements.
 
Trade letters of credit totaling approximately $35.9 million and $21.1 million were outstanding on January 30, 2010 and January 31, 2009, respectively. Stand-by letters of credit totaling approximately $14.1 million and $16.9 million were outstanding on January 30, 2010 and January 31, 2009, respectively. The stand-by letters of credit are set to expire primarily during the fourth quarter of Fiscal 2010. To date, no beneficiary has drawn upon the stand-by letters of credit.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
The Company does not have any off-balance sheet arrangements or debt obligations.
 
CONTRACTUAL OBLIGATIONS
 
As of January 30, 2010, the Company’s contractual obligations were as follows:
 
                                         
          Payments Due by Period (Thousands)  
Contractual Obligations
  Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
 
Operating Lease Obligations
  $ 2,598,875     $ 324,280     $ 606,269     $ 521,739     $ 1,146,587  
Purchase Obligations
    79,767       79,767                    
Other Obligations
    119,540       85,292       15,257       3,748       15,243  
                                         
Totals
  $ 2,798,182     $ 489,339     $ 621,526     $ 525,487     $ 1,161,830  
                                         
 
Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases. See Note 8, “Leased Facilities and Commitments” of the Notes to Consolidated Financial Statements, for further discussion. Operating lease obligations do not include common area maintenance (“CAM”), insurance, marketing or tax payments for which the Company is also obligated. Total expense related to CAM, insurance, marketing and taxes was $156.6 million in Fiscal 2009. The purchase obligations category represents purchase orders for merchandise to be delivered during Spring 2010 and commitments for fabric expected to be used during upcoming seasons. Other obligations are primarily letters of credit outstanding as of January 30, 2010, lease termination costs related to the closure of RUEHL branded stores, construction debt, capital leases, asset retirement obligations, and information technology contracts for Fiscal 2010. See Note 12, “Long-Term Debt”, of the Notes to Consolidated Financial Statements, for further discussion on the letters of credit.
 
The obligations in the table above do not include the payment of principal with respect to the outstanding long-term debt of $50.9 million under the Company’s unsecured Amended Credit Agreement as the Company is unable to estimate the timing of the payment. Also, the table does not include payments of interest under the terms of the unsecured Amended Credit Agreement as the Company is unable to determine the amount of these payments due to the variable interest rate and timing of the principal payment. The interest rate at January 30, 2010 was 2.6%. The payment of the $50.9 million in principal outstanding and the related interest would not extend beyond April 12, 2013, the expiration date of the unsecured Amended Credit Agreement. Unrecognized tax benefits at January 30, 2010 of $29.4 million are also excluded. Additionally, the table above does not include estimated future retirement payments under the Chief Executive Officer Supplemental Executive Retirement Plan (the “SERP”) for the Company’s Chief Executive Officer with a present value of $10.5 million at January 30, 2010. See Note 15, “Retirement Benefits”, of the Notes to Consolidated Financial Statements and the description of the SERP in the text under the caption “EXECUTIVE OFFICER COMPENSATION” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be


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held on June 9, 2010, incorporated by reference in “ITEM 11. EXECUTIVE COMPENSATION” of this Annual Report on Form 10-K.
 
Store count and gross square footage by brand were as follows for the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively:
 
                                         
Store Activity
  Abercrombie & Fitch     abercrombie kids     Hollister     Gilly Hicks     Total  
 
January 31, 2009
    356       212       515       14       1,097  
New
    2       5       14       2       23  
Remodels/Conversions (net activity)
                             
Closed
    (12 )     (8 )     (4 )             (24 )
                                         
January 30, 2010
    346       209       525       16       1,096  
                                         
Gross Square Feet (thousands)
                                       
January 31, 2009
    3,164       976       3,474       146       7,760  
New
    49       40       152       15       256  
Remodels/Conversions (net activity)
                (2 )           (2 )
Closed
    (103 )     (37 )     (27 )           (167 )
                                         
January 30, 2010
    3,110       979       3,597       161       7,847  
                                         
Average Store Size
    8,988       4,684       6,851       10,063       7,160  
 
                                         
Store Activity
  Abercrombie & Fitch     abercrombie kids     Hollister     Gilly Hicks     Total  
 
February 2, 2008
    359       201       450       3       1,013  
New
    2       12       66       11       91  
Remodels/Conversions (net activity)
    2       1                   3  
Closed
    (7 )     (2 )     (1 )           (10 )
                                         
January 31, 2009
    356       212       515       14       1,097  
                                         
Gross Square Feet (thousands)
                                       
February 2, 2008
    3,167       917       3,015       34       7,133  
New
    26       59       446       112       643  
Remodels/Conversions (net activity)
    28       7       19             54  
Closed
    (57 )     (7 )     (6 )           (70 )
                                         
January 31, 2009
    3,164       976       3,474       146       7,760  
                                         
Average Store Size
    8,888       4,604       6,746       10,429       7,074  


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CAPITAL EXPENDITURES
 
Capital expenditures totaled $175.5 million, $367.6 million and $403.3 million for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. A summary of capital expenditures for the last three fiscal years is as follows:
 
                         
Capital Expenditures
  2009     2008     2007  
    (In millions)  
 
New Store Construction, Store Refreshes and Remodels
  $ 137.0     $ 286.4     $ 252.8  
Home Office, Distribution Centers and Information Technology
    38.5       81.2       150.5  
                         
Total Capital Expenditures
  $ 175.5     $ 367.6     $ 403.3  
                         
 
During Fiscal 2010, based on expected store openings, the Company anticipates capital expenditures between approximately $250 million and $260 million. Approximately $215 to $225 million of this amount is allocated to new store construction, full store remodels and store refreshes. The Company is planning approximately $35 million in capital expenditures at the home office related to information technology, distribution center and other home office projects.
 
During Fiscal 2010, the Company plans to open Abercrombie & Fitch flagship stores in Copenhagen, Denmark and Fukuoka, Japan and a Hollister Epic store on Fifth Avenue in New York. Additionally, the Company plans to open one Abercrombie & Fitch mall-based store, three Hollister stores, two Gilly Hicks stores, and a number of outlet stores in the United States. The Company also plans to open approximately 30 international Hollister mall-based stores in Fiscal 2010, including locations in two or more new countries.
 
CLOSURE OF RUEHL BRANDED STORES AND RELATED DIRECT-TO-CONSUMER OPERATIONS
 
On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The determination to take this action was based on a comprehensive review and evaluation of the performance of RUEHL branded stores and related direct-to-consumer operations, as well as the related real estate portfolio. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the results of operations of RUEHL are reflected in Net Loss from Discontinued Operations for all periods presented on the Consolidated Statements of Operations and Comprehensive Income.


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Costs associated with exit or disposal activities are recorded when the liability is incurred. The Company expects to make gross cash payments of approximately $29.5 million in Fiscal 2010 and an aggregate of $19.2 million in fiscal years thereafter, related primarily to lease termination agreements associated with the closure of RUEHL branded stores.
 
Below is a roll forward of the present value of liabilities recognized on the Consolidated Balance Sheet as of January 30, 2010 related to the closure of the RUEHL branded stores and related direct-to-consumer operations (in thousands):
 
         
    Fifty-Two
 
    Weeks Ended
 
    January 30, 2010  
 
Beginning Balance
  $  
Cash Charges
    68,363  
Interest Accretion
    358  
Cash Payments
    (22,635 )
         
Ending Balance(1)
  $ 46,086  
         
 
 
(1) Ending balance primarily reflects the net present value of obligations due under signed lease termination agreements and obligations due under a lease, for which no agreement exists, less estimated sublease income. As of January 30, 2010, there were $29.6 million of lease termination charges and $0.1 million of severance charges recorded as a current liability in Accrued Expenses and $16.4 million of lease termination charges recorded as a long-term liability in Other Liabilities on the Consolidated Balance Sheet.
 
Below is a summary of charges related to the closure of the RUEHL branded stores and related direct-to-consumer operations (in thousands):
 
         
    Fifty-Two
 
    Weeks Ended
 
    January 30, 2010  
 
Asset Impairments(1)
  $ 51,536  
Lease Terminations, net(2)
    53,916  
Severance and Other(3)
    2,189  
         
Total Charges
  $ 107,641  
         
 
 
(1) Asset impairment charges primarily related to store furniture, fixtures and leasehold improvements.
 
(2) Lease terminations reflect the net present value of obligations due under signed lease termination agreements and obligations due under a lease, for which no agreement exists, less estimated sublease income. The charges are presented net of the reversal of non-cash credits.
 
(3) Severance and other reflects charges primarily related to severance and merchandise and store supply inventory.


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The table below presents the significant components of RUEHL’s results included in Net Loss from Discontinued Operations on the Consolidated Statements of Operations and Comprehensive Income for fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008.
 
                         
    2009     2008     2007  
 
NET SALES
  $ 48,393     $ 56,218     $ 50,192  
Cost of Goods Sold
    22,037       25,621       26,990  
                         
GROSS PROFIT
    26,356       30,597       23,202  
Stores and Distribution Expense
    146,826       75,148       42,668  
Marketing, General and Administrative Expense
    8,556       14,411       18,978  
Other Operating Income, Net
    (11 )     (86 )     (28 )
                         
NET LOSS BEFORE INCOME TAXES(1)
  $ (129,016 )   $ (58,876 )   $ (38,416 )
Income Tax Benefit
    (50,316 )     (22,962 )     (14,982 )
                         
NET LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
  $ (78,699 )   $ (35,914 )   $ (23,434 )
                         
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
                       
BASIC
  $ (0.90 )   $ (0.41 )   $ (0.27 )
                         
DILUTED
  $ (0.89 )   $ (0.40 )   $ (0.26 )
                         
 
 
(1) Includes non-cash pre-tax asset impairment charges of approximately $51.5 million and $22.3 million during the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively, and net costs associated with the closure of the RUEHL business, primarily net lease termination costs of approximately $53.9 million and severance and other charges of $2.2 million during the fifty-two weeks ended January 30, 2010.
 
CRITICAL ACCOUNTING ESTIMATES
 
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
 
The Company’s significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements. The Company believes the


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following policies and estimates are most critical to the portrayal of the Company’s financial condition and results of operations.
 
     
Policy
  Effect if Actual Results Differ from Assumptions
 
Revenue Recognition
   
The Company recognizes retail sales at the time the customer takes possession of the merchandise. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable.

The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. The liability remains on the Company’s books until the earlier of redemption (recognized as revenue) or when the Company determines the likelihood of redemption is remote, known as breakage (recognized as other operating income), based on historical redemption patterns.
 
The Company has not made any material changes in the accounting methodology used to determine the sales return reserve and revenue recognition for gift cards over the past three fiscal years.

The Company does not expect material changes in the near term to the underlying assumptions used to measure the sales return reserve or to measure the timing and amount of future gift card redemptions as of January 30, 2010. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.

A 10% change in the sales return rate as of January 30, 2010 would have affected pre-tax income by approximately $0.7 million in Fiscal 2009.

A 10% change in the assumption of the redemption pattern for gift cards as of January 30, 2010 would have affected pre-tax income by approximately $0.9 million in Fiscal 2009.
Auction Rate Securities (“ARS”)
   
As a result of the market failure and lack of liquidity in the current ARS market, the Company measured the fair value of its ARS primarily using a discounted cash flow model. Certain significant inputs into the model are unobservable in the market including the periodic coupon rate adjusted for the marketability discount, market required rate of return and expected term.  
The Company has not made any material changes in the accounting methodology used to determine the fair value of the ARS.

The Company does not expect material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of January 30, 2010. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.

Assuming all other assumptions disclosed in Note 5, “Fair Value” of the Notes to Consolidated Financial Statements, being equal, a 50 basis point increase in the market required rate of return will yield an 18% decrease in impairment and a 50 basis point decrease in the market required rate of return will yield an 18% increase in impairment.


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Policy
  Effect if Actual Results Differ from Assumptions
 
Inventory Valuation
   
Inventories are principally valued at the lower of average cost or market utilizing the retail method.

The Company reduces inventory value by recording a valuation reserve that represents estimated future anticipated selling price decreases necessary to sell-through the inventory.

Additionally, as part of inventory valuation, an inventory shrink estimate is made each period that reduces the value of inventory for lost or stolen items.
 
The Company has not made any material changes in the accounting methodology used to determine the shrink reserve or valuation allowance over the past three fiscal years.

The Company does not expect material changes in the near term to the underlying assumptions used to determine the shrink reserve or valuation allowance as of January 30, 2010. However, changes in these assumptions do occur, and, should those changes be significant, they could significantly impact the ending inventory valuation at cost, as well as the resulting gross margins.

An increase or decrease in the inventory shrink accrual of 10% would have affected pre-tax income by approximately $0.8 million in Fiscal 2009.

An increase or decrease in the valuation allowance of 10% would have affected pre-tax income by approximately $1.1 million in Fiscal 2009.
Property and Equipment
   
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question.

The Company’s impairment calculation requires management to make assumptions and judgments related to factors used in the evaluation for impairment, including, but not limited to, management’s expectations for future operations and projected cash flows.
 
The Company has not made any material changes in the accounting methodology used to determine impairment loss over the past three fiscal years.

The Company does not expect material changes in the near term to the assumptions underlying its impairment calculations as of January 30, 2010. However, changes in these assumptions do occur, and, should those changes be significant, they could have a material impact on the Company’s determination of whether or not there has been an impairment.
     
Income Taxes
   
Income taxes are calculated with the use of the asset and liability method. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse.

Inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations.
 
The Company’s effective tax rate is also affected by changes in law, the tax jurisdiction of new stores, the level of earnings and the results of tax audits.

The Company does not expect material changes in the judgements and interpretations used to calculate income taxes as of January 30, 2010. However, actual results could differ, and the Company may be exposed to gains or losses that could be material.

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Policy
  Effect if Actual Results Differ from Assumptions
 
Equity Compensation Expense
   
The Company’s equity compensation expense related to stock options and stock appreciation rights is estimated using the Black-Scholes option-pricing model to determine the fair value of the stock option and stock appreciation right grants, which requires the Company to estimate the expected term of the stock option and stock appreciation right grants and expected future stock price volatility over the expected term.  
The Company does not expect material changes in the near term to the underlying assumptions used to calculate equity compensation expense for the fifty-two weeks ended January 30, 2010. However, changes in these assumptions do occur, and, should those changes be significant, they could have a material impact on the Company’s equity compensation expense.

A 10% increase in term would yield a 4% increase in the Black-Scholes valuation for stock options and stock appreciation rights, while a 10% increase in volatility would yield a 9% increase in the Black-Scholes valuation for stock options and a 10% increase for stock appreciation rights.
Supplemental Executive Retirement Plan
   
Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental Executive Retirement Plan (the “SERP”) to provide additional retirement income to its Chairman and Chief Executive Officer (“CEO”). Subject to service requirements, the CEO will receive a monthly benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final average compensation used for the calculation is based on actual compensation, base salary and cash incentive compensation for the past three fiscal years.

The Company’s accrual for the SERP requires management to make assumptions and judgments related to the CEO’s final average compensation, life expectancy and discount rate.
 
The Company does not expect material changes in the near term to the underlying assumptions used to determine the accrual for the SERP as of January 30, 2010. However, changes in these assumptions do occur, and, should those changes be significant, the Company may be exposed to gains or losses that could be material.

A 10% increase in final average compensation as of January 30, 2010 would increase the SERP accrual by approximately $1.0 million. A 50 basis point increase in the discount rate as of January 30, 2010 would decrease the SERP accrual by approximately $0.3 million.

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ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Investment Securities
 
The Company maintains its cash equivalents in financial instruments, primarily money market funds, with original maturities of 90 days or less. The Company also holds investments in investment grade auction rate securities (“ARS”) that have maturities ranging from 17 to 33 years. The par and fair values, and related cumulative impairment charges for the Company’s marketable securities as of January 30, 2010 were as follows:
 
                                 
    Par
    Temporary
    Other-Than-Temporary-
    Fair
 
    Value     Impairment     Impairment (“OTTI”)     Value  
    (In thousands)  
 
Trading securities:
                               
Auction rate securities — UBS — student loan backed
  $ 22,100     $     $ (2,051 )   $ 20,049  
Auction rate securities — UBS — municipal authority bonds
    15,000             (2,693 )     12,307  
                                 
Total trading securities
    37,100             (4,744 )     32,356  
                                 
Available-for-sale securities:
                               
Auction rate securities — student loan backed
    128,099       (9,709 )           118,390  
Auction rate securities — municipal authority bonds
    28,575       (5,171 )           23,404  
                                 
Total available-for-sale securities
    156,674       (14,880 )           141,794  
                                 
Total
  $ 193,774     $ (14,880 )   $ (4,744 )   $ 174,150  
                                 
 
As of January 30, 2010, approximately 70% of the Company’s ARS were “AAA” rated and approximately 14% of the Company’s ARS were “AA” or “A” rated, with the remaining ARS having an “A−” or “BBB+” rating, in each case as rated by one or more of the major credit rating agencies. The ratings take into account insurance policies guaranteeing both the principal and accrued interest. Each investment in student loans is insured by (1) the U.S. government under the Federal Family Education Loan Program, (2) a private insurer or (3) a combination of both. The percentage coverage of the outstanding principal and interest of the ARS varies by security. The credit ratings may change over time and would be an indicator of the default risk associated with the ARS and could have a material effect on the value of the ARS. If the Company expects that it will not recover the entire cost basis of the available-for-sale ARS, intends to sell the available-for-sale ARS or it becomes more than likely that the Company will be required to sell the available-for-sale ARS before recovery of their cost basis, which may be at maturity, the Company may be required to record an other-than-temporary impairment or additional temporary impairment to write down the assets’ fair value. As of January 30, 2010, the Company did not incur any credit losses on available-for-sale ARS. Furthermore, as of January 30, 2010, the issuers continued to perform under the obligations, including making scheduled interest payments, and the Company expects that this will continue going forward.


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On November 13, 2008, the Company entered into an agreement with UBS, relating to ARS with a par value of $76.5 million, of which $37.1 million, at par value, are still held as of January 30, 2010. By entering into the agreement, UBS received the right to purchase the UBS ARS at par, at any time, commencing on November 13, 2008 and the Company received the right to sell (“Put Option”) the UBS ARS back to UBS at par, commencing on June 30, 2010. The UBS ARS were classified as trading securities as of January 30, 2010 and any future gains and losses related to changes in fair value will be recorded in the Consolidated Statement of Operations and Comprehensive Income in the period incurred. Furthermore, as the Company has the right to sell the UBS ARS back to UBS on June 30, 2010, the Company classified the UBS ARS as a current asset as of January 30, 2010. During the fifty-two weeks ended January 30, 2010, due to redemptions and changes in estimates of fair value, the Company recognized a net reduction of the other-than-temporary impairment of $9.2 million related to the UBS ARS which was partially offset by a corresponding realized loss of $7.7 million related to the Put Option. The fair value of the Put Option as of January 30, 2010 was $4.6 million and was recorded as an asset within Other Current Assets on the Consolidated Balance Sheet. The Company is subject to counter-party risk related to the agreement with UBS.
 
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement Plan. As of January 30, 2010, total assets held in the Rabbi Trust were $71.2 million, which included $18.5 million of available-for-sale municipal notes and bonds with maturities that ranged from two to four years, trust-owned life insurance policies with a cash surrender value of $51.4 million and $1.3 million held in money market funds. The Rabbi Trust assets are consolidated and recorded at fair value, with the exception of the trust-owned life insurance policies which are recorded at cash surrender value in Other Assets on the Consolidated Balance Sheet, and are restricted as to their use as noted above. Net unrealized gains or losses related to the available-for-sale securities held in the Rabbi Trust were not material for the fifty-two week periods ended January 30, 2010 and January 31, 2009, respectively. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in a realized gain of $5.3 million and a realized loss of $3.6 million for the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively.
 
Interest Rate Risks
 
As of January 30, 2010, the Company had $50.9 million in long-term debt outstanding under the unsecured Amended Credit Agreement. This borrowing and any future borrowings will bear interest at negotiated rates and would be subject to interest rate risk. The unsecured Amended Credit Agreement has several borrowing options, including interest rates that are based on (i) a Base Rate, plus a margin based on a Leverage Ratio, payable quarterly, (ii) an Adjusted Eurodollar Rate (as defined in the unsecured Amended Credit Agreement) plus a margin based on a Leverage Ratio, payable at the end of the applicable interest period for the borrowing, or (iii) an Adjusted Foreign Currency Rate (as defined in the Amended Credit Agreement) plus a margin based on the Coverage Ratio, payable at the end of the applicable interest period for the borrowing, and, for interest periods in excess of three months, on the date that is three months after the commencement of the interest period. The Base Rate represents a rate per annum equal to the higher of (a) PNC Bank’s then publicly announced prime rate or (b) the Federal Funds Effective Rate (as defined in the unsecured Amended Credit Agreement) as then in effect plus 1/2 of 1.0%. The average interest rate was 2.0% for the fifty-two week period ended January 30, 2010. Additionally, as of January 30, 2010, the Company had $299.1 million available, less outstanding letters of credit, under its unsecured Amended Credit Agreement.


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Assuming no changes in the Company’s financial structure as it stood at January 30, 2010, if the average market interest rates increased 100 basis points over the fifty-two week period for Fiscal 2010 compared to the interest rates incurred during the fifty-two week period ended January 30, 2010, there would be an immaterial change in interest expense. This amount was determined by calculating the effect of the average hypothetical interest rate increase on the Company’s variable rate unsecured Amended Credit Agreement. This hypothetical increase in interest rate for the fifty-two week period ended January 29, 2011 may be different from the actual increase in interest expense due to varying interest rate reset dates under the Company’s unsecured Amended Credit Agreement.
 
Foreign Exchange Rate Risk
 
The Company has exposure to changes in currency exchange rates associated with foreign currency transactions, including inter-company transactions and foreign denominated assets and liabilities. Such foreign currency transactions are denominated in Euros, Canadian Dollars, Japanese Yen, Danish Krones, Swiss Francs, Hong Kong Dollars and British Pounds. The Company has established a program that primarily utilizes foreign currency forward contracts to partially offset the risks associated with the effects of certain foreign currency exposures. Under this program, increases or decreases in foreign currency exposures are partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency forward contracts are recorded at fair value at the end of each fiscal period.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
ABERCROMBIE & FITCH CO.
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
                         
    2009     2008     2007  
    (Thousands, except per share amounts)  
 
NET SALES
  $ 2,928,626     $ 3,484,058     $ 3,699,656  
Cost of Goods Sold
    1,045,028       1,152,963       1,211,490  
                         
GROSS PROFIT
    1,883,598       2,331,095       2,488,166  
Stores and Distribution Expense
    1,425,950       1,436,363       1,344,178  
Marketing, General & Administrative Expense
    353,269       405,248       376,780  
Other Operating Income, Net
    (13,533 )     (8,778 )     (11,702 )
                         
OPERATING INCOME
    117,912       498,262       778,909  
Interest Income, Net
    (1,598 )     (11,382 )     (18,827 )
                         
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    119,510       509,644       797,737  
Income Tax Expense from Continuing Operations
    40,557       201,475       298,610  
                         
NET INCOME FROM CONTINUING OPERATIONS
  $ 78,953     $ 308,169     $ 499,127  
                         
NET LOSS FROM DISCONTINUED OPERATIONS (net of taxes)
  $ (78,699 )   $ (35,914 )   $ (23,430 )
                         
NET INCOME
  $ 254     $ 272,255     $ 475,697  
                         
NET INCOME PER SHARE FROM CONTINUING OPERATIONS:
                       
BASIC
  $ 0.90     $ 3.55     $ 5.72  
                         
DILUTED
  $ 0.89     $ 3.45     $ 5.45  
                         
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
                       
BASIC
  $ (0.90 )   $ (0.41 )   $ (0.27 )
                         
DILUTED
  $ (0.89 )   $ (0.40 )   $ (0.26 )
                         
NET INCOME PER SHARE:
                       
BASIC
  $ 0.00     $ 3.14     $ 5.45  
                         
DILUTED
  $ 0.00     $ 3.05     $ 5.20  
                         
WEIGHTED-AVERAGE SHARES OUTSTANDING:
                       
BASIC
    87,874       86,816       87,248  
                         
DILUTED
    88,609       89,291       91,523  
                         
DIVIDENDS DECLARED PER SHARE
  $ 0.70     $ 0.70     $ 0.70  
                         
OTHER COMPREHENSIVE INCOME
                       
Foreign Currency Translation Adjustments
  $ 5,942     $ (13,173 )   $ 7,328  
Unrealized Gains (Losses) on Marketable Securities, net of taxes of $(4,826), $10,312 and $(584) for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively
    8,217       (17,518 )     912  
Unrealized (Loss) Gain on Derivative Financial Instruments, net of taxes of $265, $(621) and $82 for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively
    (451 )     892       (128 )
                         
Other Comprehensive Income (Loss)
  $ 13,708     $ (29,799 )   $ 8,112  
                         
COMPREHENSIVE INCOME
  $ 13,962     $ 242,456     $ 483,809  
                         
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.


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ABERCROMBIE & FITCH CO.
 
CONSOLIDATED BALANCE SHEETS
 
                         
    January 30,
    January 31,
       
    2010     2009        
    (Thousands, except share amounts)  
 
ASSETS
CURRENT ASSETS:
                       
Cash and Equivalents
  $ 680,113     $ 522,122          
Marketable Securities
    32,356                
Receivables
    90,865       53,110          
Inventories
    310,645       372,422          
Deferred Income Taxes
    44,570       43,408          
Other Current Assets
    77,297       80,948          
                         
TOTAL CURRENT ASSETS
    1,235,846       1,072,010          
PROPERTY AND EQUIPMENT, NET
    1,244,019       1,398,655          
NON-CURRENT MARKETABLE SECURITIES
    141,794       229,081          
OTHER ASSETS
    200,207       148,435          
                         
TOTAL ASSETS
  $ 2,821,866     $ 2,848,181          
                         
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
                       
Accounts Payable
  $ 110,212     $ 92,814          
Outstanding Checks
    39,922       56,939          
Accrued Expenses
    246,289       241,231          
Deferred Lease Credits
    43,597       42,358          
Income Taxes Payable
    9,352       16,455          
                         
TOTAL CURRENT LIABILITIES
    449,372       449,797          
LONG-TERM LIABILITIES:
                       
Deferred Income Taxes
    47,142       34,085          
Deferred Lease Credits
    212,052       211,978          
Long-term Debt
    71,213       100,000          
Other Liabilities
    214,170       206,743          
                         
TOTAL LONG-TERM LIABILITIES
    544,577       552,806          
SHAREHOLDERS’ EQUITY:
                       
Class A Common Stock — $.01 par value: 150,000,000 shares authorized and 103,300,000 shares issued at January 30, 2010 and January 31, 2009, respectively
    1,033       1,033          
Paid-In Capital
    339,453       328,488          
Retained Earnings
    2,183,690       2,244,936          
Accumulated Other Comprehensive Loss, net of tax
    (8,973 )     (22,681 )        
Treasury Stock, at Average Cost 15,314,481 and 15,664,385 shares at January 30, 2010 and January 31, 2009, respectively
    (687,286 )     (706,198 )        
                         
TOTAL SHAREHOLDERS’ EQUITY
    1,827,917       1,845,578          
                         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 2,821,866     $ 2,848,181          
                         
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.


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ABERCROMBIE & FITCH CO.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
                                                                 
    Common Stock                 Other
    Treasury Stock     Total
 
    Shares
          Paid-In
    Retained
    Comprehensive
          At Average
    Shareholders’
 
    Outstanding     Par Value     Capital     Earnings     (Loss) Income     Shares     Cost     Equity  
(Thousands)                                                
 
                                                                 
Balance, February 3, 2007
    88,300     $ 1,033     $ 289,732     $ 1,646,290     $ (994 )     15,000     $ (530,764 )   $ 1,405,297  
                                                                 
FIN 48 Impact
                      (2,786 )                       (2,786 )
                                                                 
Net Income
                      475,697                         475,697  
                                                                 
Purchase of Treasury Stock
    (3,654 )                             3,654       (287,916 )     (287,916 )
                                                                 
Dividends ($0.70 per share)
                      (61,330 )                       (61,330 )
                                                                 
Share-based Compensation Issuances and Exercises
    1,513             (19,051 )     (6,408 )           (1,513 )     57,928       32,469  
                                                                 
Tax Benefit from Share-based Compensation Issuances and Exercises
                17,600                               17,600  
                                                                 
Share-based Compensation Expense
                31,170                               31,170  
                                                                 
Unrealized Gains on Marketable Securities
                            912                   912  
                                                                 
Net Change in Unrealized Gains or Losses on Derivative Financial Instruments
                            (128 )                 (128 )
                                                                 
Foreign Currency Translation Adjustments
                            7,328                   7,328  
                                                                 
                                                                 
Balance, February 2, 2008
    86,159     $ 1,033     $ 319,451     $ 2,051,463     $ 7,118       17,141     $ (760,752 )   $ 1,618,313  
                                                                 
                                                                 
Net Income
                      272,255                         272,255  
                                                                 
Purchase of Treasury Stock
    (682 )                             682       (50,000 )     (50,000 )
                                                                 
Dividends ($0.70 per share)
                      (60,769 )                       (60,769 )
                                                                 
Share-based Compensation Issuances and Exercises
    2,159             (49,844 )     (18,013 )           (2,159 )     104,554       36,697  
                                                                 
Tax Benefit from Share-based Compensation Issuances and Exercises
                16,839                               16,839  
                                                                 
Share-based Compensation Expense
                42,042                               42,042  
                                                                 
Unrealized Losses on Marketable Securities
                            (17,518 )                 (17,518 )
                                                                 
Net Change in Unrealized Gains or Losses on Derivative Financial Instruments
                            892                   892  
                                                                 
Foreign Currency Translation Adjustments
                            (13,173 )                 (13,173 )
                                                                 
                                                                 
Balance, January 31, 2009
    87,636     $ 1,033     $ 328,488     $ 2,244,936     $ (22,681 )     15,664     $ (706,198 )   $ 1,845,578  
                                                                 
                                                                 
Net Income
                      254                         254  
                                                                 
Purchase of Treasury Stock
                                               
                                                                 
Dividends ($0.70 per share)
                      (61,500 )                       (61,500 )
                                                                 
Share-based Compensation Issuances and Exercises
    350             (19,690 )                 (350 )     18,912       (778 )
                                                                 
Tax Deficiency from Share-based Compensation Issuances and Exercises
                (5,454 )                             (5,454 )
                                                                 
Share-based Compensation Expense
                36,109                               36,109  
                                                                 
Unrealized Gains on Marketable Securities
                            8,217                   8,217  
                                                                 
Net Change in Unrealized Gains or Losses on Derivative Financial Instruments
                            (451 )                 (451 )
                                                                 
Foreign Currency Translation Adjustments
                            5,942                   5,942  
                                                                 
                                                                 
Balance, January 30, 2010
    87,986     $ 1,033     $ 339,453     $ 2,183,690     $ (8,973 )     15,314     $ (687,286 )   $ 1,827,917  
                                                                 
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.


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ABERCROMBIE & FITCH CO.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    2009     2008     2007  
    (Thousands)  
 
OPERATING ACTIVITIES:
                       
Net Income
  $ 254     $ 272,255     $ 475,697  
Impact of Other Operating Activities on Cash Flows:
                       
Depreciation and Amortization
    238,752       225,334       183,716  
Non-Cash Charge for Asset Impairment
    84,754       30,574       2,312  
Amortization of Deferred Lease Credits
    (47,182 )     (43,194 )     (37,418 )
Share-Based Compensation
    36,109       42,042       31,170  
Tax (Deficiency) Benefit from Share-Based Compensation
    (5,454 )     16,839       17,600  
Excess Tax Benefit from Share-Based Compensation
          (5,791 )     (14,205 )
Deferred Taxes
    7,605       14,005       1,342  
Loss on Disposal / Write-off of Assets
    10,646       7,607       7,205  
Lessor Construction Allowances
    47,329       55,415       43,391  
Changes in Assets and Liabilities:
                       
Inventories
    62,720       (40,521 )     87,657  
Accounts Payable and Accrued Expenses
    39,394       (23,875 )     22,375  
Income Taxes Payable
    (7,386 )     (55,565 )     (13,922 )
Other Assets and Liabilities
    (65,341 )     (4,289 )     10,604  
                         
NET CASH PROVIDED BY OPERATING ACTIVITIES
    402,200       490,836       817,524  
                         
INVESTING ACTIVITIES:
                       
Capital Expenditures
    (175,472 )     (367,602 )     (403,345 )
Purchases of Marketable Securities
          (49,411 )     (1,444,736 )
Proceeds from Sales of Marketable Securities
    77,450       308,673       1,362,911  
Purchases of Trust-Owned Life Insurance Policies
    (13,539 )     (4,877 )     (15,000 )
                         
NET CASH USED FOR INVESTING ACTIVITIES
    (111,561 )     (113,217 )     (500,170 )
                         
FINANCING ACTIVITIES:
                       
Proceeds from Borrowings under Credit Agreement
    48,056       100,000        
Repayment of Borrowings under Credit Agreement
    (100,000 )            
Dividends Paid
    (61,500 )     (60,769 )     (61,330 )
Proceeds from Share-Based Compensation
    2,048       55,194       38,750  
Excess Tax Benefit from Share-Based Compensation
          5,791       14,205  
Purchase of Treasury Stock
          (50,000 )     (287,916 )
Change in Outstanding Checks and Other
    (24,654 )     (19,747 )     13,536  
                         
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
    (136,050 )     30,469       (282,755 )
                         
EFFECT OF EXCHANGE RATES ON CASH
    3,402       (4,010 )     1,486  
NET INCREASE IN CASH AND EQUIVALENTS
    157,991       404,078       36,085  
Cash and Equivalents, Beginning of Year
    522,122       118,044       81,959  
                         
CASH AND EQUIVALENTS, END OF YEAR
  $ 680,113     $ 522,122     $ 118,044  
                         
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
                       
Change in Accrual for Construction in Progress
  $ (21,882 )   $ (27,913 )   $ 8,791  
                         
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   BASIS OF PRESENTATION
 
Abercrombie & Fitch Co. (“A&F”), through its wholly-owned subsidiaries (collectively, A&F and its wholly-owned subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer of high-quality, casual apparel for men, women and kids with an active, youthful lifestyle.
 
The accompanying consolidated financial statements include the historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.
 
On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The determination to take this action was based on a comprehensive review and evaluation of the performance of the RUEHL branded stores and related direct-to-consumer operations, as well as the related real estate portfolio. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the results of operations of RUEHL are reflected in Net Loss from Discontinued Operations for all periods presented on the Consolidated Statements of Operations and Comprehensive Income.
 
FISCAL YEAR
 
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. 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 2009” represent the results of the 52-week fiscal year ended January 30, 2010; to “Fiscal 2008” represent the results of the 52-week fiscal year ended January 31, 2009; and to “Fiscal 2007” represent the results of the 52-week fiscal year ended February 2, 2008. In addition, all references herein to “Fiscal 2010” represent the 52-week fiscal year that will end on January 29, 2011.
 
RECLASSIFICATIONS
 
Certain prior period amounts have been reclassified to conform to the current year presentation.
 
SEGMENT REPORTING
 
The Company determines its operating segments on the same basis that it uses to evaluate performance internally. The operating segments identified by the Company are Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks. The operating segments have been aggregated and are reported as one reportable segment because they have similar economic characteristics and meet the required aggregation criteria. The Company believes its operating segments may be aggregated for financial reporting purposes because they are similar in each of the following areas: class of consumer, economic characteristics, nature of products, nature of production processes, and distribution methods.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Geographic Information
 
Financial information relating to the Company’s operations by geographic area is as follows:
 
Net Sales:
 
Net sales includes net merchandise sales through stores and direct-to-consumer operations, including shipping and handling revenue. Net sales are reported by geographic area based on the location of the customer.
 
                 
    Fifty-Two Weeks Ended  
    January 30,
    January 31,
 
    2010     2009  
    (In thousands):  
 
United States
  $ 2,566,118     $ 3,219,624  
International
    362,508       264,434  
                 
Total
  $ 2,928,626     $ 3,484,058  
                 
 
Long-Lived Assets:
 
                 
    January 30,
    January 31,
 
    2010     2009  
    (In thousands):  
 
United States
  $ 1,137,844     $ 1,371,734  
International
    194,461       80,341  
                 
Total
  $ 1,332,305     $ 1,452,075  
                 
 
Long-lived assets included in the table above include primarily property and equipment, net, store supplies, and lease deposits.
 
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of A&F and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
 
CASH AND EQUIVALENTS
 
Cash and equivalents include amounts on deposit with financial institutions and investments, primarily held in money market accounts, with original maturities of less than 90 days. Outstanding checks are classified as current liabilities in the Consolidated Balance Sheets and changes in outstanding checks are reported in financing activities on the Consolidated Statements of Cash Flows.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
INVESTMENTS
 
See Note 4, “Cash and Equivalents and Investments”.
 
RECEIVABLES
 
Receivables include credit card receivables, construction allowances, value added tax (“VAT”) receivables and other tax receivable balances.
 
As part of the normal course of business, the Company has approximately three to four days of sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods and services that will be recovered as sales are made to customers.
 
INVENTORIES
 
Inventories are principally valued at the lower of average cost or market utilizing the retail method. The Company determines market value as the anticipated future selling price of merchandise less a normal margin. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost components of inventory on hand so as to maintain the already established cost-to-retail relationship. At first and third fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the estimated future anticipated selling price decreases necessary to sell-through the current season inventory. At second and fourth fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the estimated future selling price decreases necessary to sell-through any remaining carryover inventory from the season then ending. The valuation reserve was $11.4 million, $9.1 million and $5.4 million at January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
 
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each period that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. The shrink reserve was $8.1 million, $10.8 million and $11.5 million at January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
 
STORE SUPPLIES
 
Store supplies include in-store supplies and packaging, as well as replenishment inventory held on the Company’s behalf by a third party. The initial inventory of supplies for new stores including, but not limited to, hangers, frames, security tags and point-of-sale supplies are capitalized at the store opening date. In lieu of amortizing the initial balances over their estimated useful lives, the Company expenses all subsequent replacements and adjusts the initial balance, as appropriate, for changes in store quantities or replacement cost. The Company believes this policy approximates the expense that would have been recognized under accounting principles generally accepted in the United States of America (“GAAP”). Packaging and consumable store supplies are expensed as used. Current store supplies, including packaging and consumable


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
store supplies held at a third party replenishment center, were $11.1 million and $19.7 million at January 30, 2010 and January 31, 2009, respectively, and were classified as Other Current Assets on the Consolidated Balance Sheets. Non-current store supplies were $32.4 million and $35.7 million at January 30, 2010 and January 31, 2009, respectively, and were classified as Other Assets on the Consolidated Balance Sheets.
 
PROPERTY AND EQUIPMENT
 
Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from 30 years for buildings; the lesser of the useful life of the asset, which ranges from three to 15 years, or the term of the lease for leasehold improvements; the lesser of the useful life of the asset, which ranges from three to seven years, or the term of the lease when applicable for information technology; and from three to 20 years for other property and equipment. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend service lives of the assets are capitalized.
 
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results and projected cash flows. During Fiscal 2009, as a result of a strategic review of the RUEHL business, the Company determined that a triggering event occurred. As a result of that assessment, the Company incurred non-cash pre-tax impairment charges of $51.5 million, reported in Net Loss from Discontinued Operations on the Consolidated Statement of Operations and Comprehensive Income for the fifty-two weeks ended January 30, 2010. There was no remaining fair value of RUEHL long-lived assets as of January 30, 2010.
 
In the fourth quarter of Fiscal 2009, as part of the Company’s year-end review of assets, the Company incurred a non-cash pre-tax impairment charge of $33.2 million, reported in Stores and Distribution Expense on the Consolidated Statement of Operations and Comprehensive Income for the fifty-two weeks ended January 30, 2010. The charge was associated with 34 Abercrombie & Fitch stores, 46 abercrombie kids stores and 19 Hollister stores. In Fiscal 2008, the Company incurred a non-cash pre-tax impairment charge of approximately $8.3 million related to long-lived assets. The charge was associated with 11 Abercrombie & Fitch stores, six abercrombie kids stores and three Hollister stores and was reported in Stores and Distribution Expense on the Consolidated Statement of Operations and Comprehensive Income for the fifty-two weeks ended January 31, 2009.
 
The Company also incurred a non-cash pre-tax impairment charge of approximately $22.3 million related to long-lived assets associated with nine RUEHL stores which is reported in Net Loss from Discontinued Operations on the Consolidated Statement of Operations and Comprehensive Loss for the fifty-two weeks ended January 31, 2009.
 
The Company expenses all internal-use software costs incurred in the preliminary project stage and capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding seven years.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
OTHER ASSETS
 
Other assets include lease deposits, assets held in the rabbi trust, long-term store supplies, pre-paid foreign income tax and other miscellaneous non-current assets.
 
INCOME TAXES
 
Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has recorded a valuation allowance against the deferred tax asset arising from the net operating loss of certain foreign subsidiaries, for capital loss carryovers related to sales of securities and for unrealized losses on certain securities. No other valuation allowances have been provided for deferred tax assets. The effective tax rate utilized by the Company reflects management’s judgment of expected tax liabilities within the various tax jurisdictions.
 
See Note 11, “Income Taxes” for a discussion regarding the Company’s policies for uncertain tax positions.
 
FOREIGN CURRENCY TRANSLATION
 
Some of the Company’s international operations use local currencies as the functional currency. Assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies were translated into U.S. dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in the results of operations; whereas, related translation adjustments and inter-company loans of a long-term investment nature are reported as an element of Other Comprehensive Income. Gains and losses resulting from foreign currency transactions included in the results of operations were immaterial for the fifty-two weeks ended January 30, 2010 and January 31, 2009.
 
DERIVATIVES
 
See Note 13, “Derivatives” for further discussion.
 
CONTINGENCIES
 
In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities, which requires the use of management’s judgment on the outcome of various issues. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments may be required.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
SHAREHOLDERS’ EQUITY
 
At January 30, 2010 and January 31, 2009, there were 150 million shares of A&F’s $.01 par value Class A Common Stock authorized, of which 88.0 million and 87.6 million shares were outstanding at January 30, 2010 and January 31, 2009, respectively, and 106.4 million shares of $.01 par value Class B Common Stock authorized, none of which were outstanding at January 30, 2010 and January 31, 2009. In addition, 15 million shares of A&F’s $.01 par value Preferred Stock were authorized, none of which have been issued. See Note 17, “Preferred Stock Purchase Rights” for information about Preferred Stock Purchase Rights.
 
Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of shareholders.
 
REVENUE RECOGNITION
 
The Company recognizes retail sales at the time the customer takes possession of the merchandise. Direct-to-consumer sales are recorded based on an estimated date for customer receipt of merchandise. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as revenue and the related direct shipping and handling costs are classified as Stores and Distribution Expense. Associate discounts are classified as a reduction of revenue. The Company reserves for sales returns through estimates based on historical experience and various other assumptions that management believes to be reasonable. The sales return reserve was $11.7 million, $9.1 million and $10.7 million at January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
 
The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. Gift cards sold to customers do not expire or lose value over periods of inactivity. The liability remains on the Company’s books until the earlier of redemption (recognized as revenue) or when the Company determines the likelihood of redemption is remote (recognized as other operating income). The Company determines the probability of the gift card being redeemed to be remote based on historical redemption patterns. At January 30, 2010 and January 31, 2009, the gift card liabilities on the Company’s Consolidated Balance Sheets were $49.8 million and $57.5 million, respectively.
 
The Company is not required by law to escheat the value of unredeemed gift cards to the states in which it operates. During Fiscal 2009, Fiscal 2008 and Fiscal 2007, the Company recognized other operating income for adjustments to the gift card liability of $9.0 million, $8.2 million and $10.8 million, respectively.
 
The Company does not include tax amounts collected as part of the sales transaction in its net sales results.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
COST OF GOODS SOLD
 
Cost of goods sold is primarily comprised of the following: cost of merchandise, markdowns, inventory shrink, valuation reserves and freight expenses.
 
STORES AND DISTRIBUTION EXPENSE
 
Stores and distribution expense includes store payroll, store management, rent, utilities and other landlord expenses, depreciation and amortization, repairs and maintenance and other store support functions, as well as Direct-to-Consumer and Distribution Center (“DC”) expenses.
 
MARKETING, GENERAL & ADMINISTRATIVE EXPENSE
 
Marketing, general and administrative expense includes photography and media ads; store marketing; home office payroll, except for those departments included in stores and distribution expense; information technology; outside services such as legal and consulting; relocation, as well as recruiting, samples and travel expenses.
 
OTHER OPERATING INCOME, NET
 
Other operating income consists primarily of: income related to gift card balances whose likelihood of redemption has been determined to be remote; gains and losses on foreign currency transactions; and the net impact of the change in valuation on other-than-temporary gains and losses on auction rate securities; and changes in the value of the UBS Put Option. See Note 4, “Cash and Equivalents and Investments”.
 
WEBSITE AND ADVERTISING COSTS
 
Website costs, including photography, mail list expense and other production and miscellaneous expenses, are expensed as incurred as a component of Stores and Distribution Expense on the Consolidated Statements of Operations and Comprehensive Income. Fiscal 2007 also included costs related to catalogue production and mailing costs of catalogues. Advertising costs consist of in-store photographs and advertising in selected national publications and billboards, and are expensed as incurred as a component of Marketing, General and Administrative Expense on the Consolidated Statements of Operations and Comprehensive Income. Direct-to-consumer and advertising costs, including photo shoot costs, amounted to $17.7 million, $28.7 million and $31.3 million in Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
 
LEASES
 
The Company leases property for its stores under operating leases. Most lease agreements contain construction allowances, rent escalation clauses and/or contingent rent provisions.
 
For construction allowances, the Company records a deferred lease credit on the Consolidated Balance Sheets and amortizes the deferred lease credit as a reduction of rent expense on the Consolidated Statements of Operations and Comprehensive Income over the terms of the leases. For scheduled rent escalation clauses during the lease terms, the Company records minimum rental expenses on a straight-line basis over the terms of the leases on the Consolidated Statements of Operations and Comprehensive Income. The term of the lease over which the Company amortizes construction allowances and minimum rental expenses on a straight-line


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
basis begins on the date of initial possession, which is generally when the Company enters the space and begins to make improvements in preparation for intended use.
 
Certain leases provide for contingent rents, which are determined as a percentage of gross sales. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheets and the corresponding rent expense on the Consolidated Statements of Operations and Comprehensive Income when management determines that achieving the specified levels during the fiscal year is probable.
 
Under U.S. generally accepted accounting principles, the Company is considered to be the owner of certain store locations, primarily related to flagships, in which the Company is deemed to be involved in structural construction and has substantially all of the risks of ownership during construction of the leased property. Accordingly, the Company records a construction-in-progress asset which is included in Property and Equipment, Net and a related lease financing obligation which is included in Long-Term Debt on the Consolidated Balance Sheets. Once construction is complete, the Company determines if the asset qualifies for sale-leaseback accounting treatment. If the arrangement does not qualify for sale lease-back treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life.
 
STORE PRE-OPENING EXPENSES
 
Pre-opening expenses related to new store openings are charged to operations as incurred.
 
DESIGN AND DEVELOPMENT COSTS
 
Costs to design and develop the Company’s merchandise are expensed as incurred and are reflected as a component of “Marketing, General and Administrative Expense.”
 
NET INCOME PER SHARE
 
Net income per basic share is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Net income per diluted share includes the weighted-average effect of dilutive stock options, stock appreciation rights and restricted stock units.
 
Weighted-Average Shares Outstanding and Anti-dilutive Shares (in thousands):
 
                         
    2009     2008     2007  
 
Shares of Common Stock issued
    103,300       103,300       103,300  
Treasury shares
    (15,426 )     (16,484 )     (16,052 )
                         
Weighted-Average — basic shares
    87,874       86,816       87,248  
Dilutive effect of stock options, stock appreciation rights and restricted stock units
    735       2,475       4,275  
                         
Weighted-Average — diluted shares
    88,609       89,291       91,523  
                         
Anti-dilutive shares(1)
    6,698       3,746       404  
                         
 
 
(1) Reflects the number of stock options, stock appreciation rights, and restricted stock units oustanding, but is excluded from the computation of net income per diluted share because the impact would be anti-dilutive.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
SHARE-BASED COMPENSATION
 
See Note 3, “Share-Based Compensation”.
 
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
 
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
 
3.   SHARE-BASED COMPENSATION
 
Financial Statement Impact
 
The Company recognized share-based compensation expense, including expense for RUEHL associates, of $36.1 million, $42.0 million and $31.2 million for the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively. The Company also recognized $12.8 million, $15.4 million and $11.5 million in tax benefits related to share-based compensation, including benefit for RUEHL associates, for the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
 
A deferred tax asset is recorded on the compensation expense required to be accrued under the accounting rules. A current income tax deduction arises at the time the restricted stock unit vests or stock option/stock appreciation right is exercised. In the event the current income tax deduction is greater or less than the associated deferred tax asset, the difference is required under the accounting rules to be charged first to the “windfall tax benefit” account. In the event there is not a balance in the “windfall tax benefit” account, the shortfall is charged to tax expense. The amount of the Company’s “windfall tax benefit” account, which is recorded as a component of additional paid in capital, was approximately $86.0 million as of January 30, 2010. Based upon outstanding awards, the “windfall tax benefit” account is sufficient to fully absorb any shortfall which may develop.
 
Additionally, during Fiscal 2008, the Company recognized $9.9 million of non-deductible tax expense as a result of the execution of the Chairman and Chief Executive Officer’s new employment agreement on December 19, 2008, which pursuant to Section 162(m) of the Internal Revenue Code resulted in the exclusion of previously recognized tax benefits on share-based compensation.
 
Share-based compensation expense is recognized, net of estimated forfeitures, over the requisite service period on a straight-line basis. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures during the fifty-two week period ended January 30, 2010 was $6.7 million. The effect of adjustments for forfeitures during the fifty-two week period ended January 31, 2009 was immaterial.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A&F issues shares of Common Stock for stock option and stock appreciation right exercises and restricted stock unit vestings from treasury stock. As of January 30, 2010, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and restricted stock units outstanding without having to repurchase additional shares of Common Stock. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in shareholder-approved plans at the applicable time.
 
Plans
 
As of January 30, 2010, A&F had two primary share-based compensation plans: the 2005 Long-Term Incentive Plan (the “2005 LTIP”), under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors, and the 2007 Long-Term Incentive Plan (the “2007 LTIP”), under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company. A&F also has four other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors in prior years.
 
The 2007 LTIP, a shareholder-approved plan, permits A&F to grant up to 2.0 million shares annually, plus any unused eligibility from prior years, of A&F’s Common Stock to any associate of the Company eligible to receive awards under the 2007 LTIP. The 2005 LTIP, a shareholder-approved plan, permits A&F to grant up to approximately 250,000 shares of A&F’s Common Stock to any associate of the Company (other than Michael S. Jeffries) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant. In addition, any non-associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans, stock options, stock appreciation rights and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP, restricted stock units typically vest over one year for non-associate directors of A&F. Stock options have a ten-year term and stock appreciation rights have up to a ten-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control as defined in the plans.
 
Fair Value Estimates
 
The Company estimates the fair value of stock options and stock appreciation rights granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock options and stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock options and stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of A&F’s Common Stock price for the most recent historical period equal to the expected term of the stock option or stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.
 
In the case of restricted stock units, the Company calculates the fair value of the restricted stock units granted as the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Stock Options
 
The weighted-average estimated fair values of stock options granted during the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008, and the weighted-average assumptions used in calculating such fair values, on the date of grant, were as follows:
 
                         
    Fifty-Two Weeks Ended  
    January 30,
    January 31,
    February 2,
 
    2010     2009     2008  
 
Grant date market price
  $ 22.87     $ 67.63     $ 74.05  
Exercise price
  $ 22.87     $ 67.63     $ 74.05  
Fair value
  $ 8.26     $ 18.03     $ 22.56  
Assumptions:
                       
Price volatility
    50 %     33 %     34 %
Expected term (Years)
    4.1       4.0       4.0  
Risk-free interest rate
    1.6 %     2.3 %     4.5 %
Dividend yield
    1.7 %     1.0 %     1.0 %
 
Below is a summary of stock option activity for the fifty-two weeks ended January 30, 2010:
 
                                 
    Fifty-Two Weeks Ended January 30, 2010  
                Aggregate
    Weighted-Average
 
    Number of
    Weighted-Average
    Intrinsic
    Remaining
 
Stock Options
  Shares     Exercise Price     Value     Contractual Life  
 
Outstanding at January 31, 2009
    6,675,990     $ 41.70                  
Granted
    4,000       22.87                  
Exercised
    (79,552 )     24.51                  
Forfeited or expired
    (3,630,577 )     44.73                  
                                 
Outstanding at January 30, 2010
    2,969,861     $ 38.36     $ 10,644,614       3.6  
                                 
Stock options expected to become exercisable at January 30, 2010
    411,921     $ 66.59     $ 685,266       7.7  
                                 
Stock options exercisable at January 30, 2010
    2,527,786     $ 33.47     $ 9,868,334       2.9  
                                 
 
The total intrinsic value of stock options exercised during the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008 was $0.6 million, $40.3 million and $64.2 million, respectively.
 
The grant date fair value of stock options vested during the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008 was $5.0 million, $5.1 million and $5.1 million, respectively.
 
As of January 30, 2010, there was $5.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options. The unrecognized cost is expected to be recognized over a weighted-average period of 1.0 years.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Stock Appreciation Rights
 
The weighted-average estimated fair value of stock appreciation rights granted during the fifty-two week periods ended January 30, 2010 and January 31, 2009, as well as the weighted-average assumptions used in calculating such values, on the date of grant, were as follows. There were no stock appreciation rights granted in Fiscal 2007.
 
                                 
    Fifty-Two Weeks Ended        
    January 30, 2010     Fifty-Two Weeks Ended  
          Executive Officers
          January 31, 2009  
    Chairman and
    (excluding Chairman
          Chairman and
 
    Chief Executive
    and Chief Executive
    All Other
    Chief Executive
 
    Officer     Officer)     Associates     Officer  
 
Grant date market price
  $ 28.42     $ 25.77     $ 26.43     $ 22.84  
Exercise price
  $ 32.99     $ 25.77     $ 26.43     $ 28.55  
Fair value
  $ 9.67     $ 10.06     $ 10.00     $ 8.06  
Assumptions:
                               
Price volatility
    47 %     52 %     53 %     45 %
Expected term (Years)
    5.6       4.5       4.1       6.4  
Risk-free interest rate
    2.5 %     1.6 %     1.6 %     1.6 %
Dividend yield
    2.4 %     1.7 %     1.7 %     1.3 %
 
Below is a summary of stock appreciation rights activity for the fifty-two weeks ended January 30, 2010:
 
                                 
    Fifty-Two Weeks Ended January 30, 2010  
          Weighted-
    Aggregate
    Weighted-Average
 
    Number of
    Average
    Intrinsic
    Remaining
 
Stock Appreciation Rights
  Shares     Exercise Price     Value     Contractual Life  
 
Outstanding at January 31, 2009
    1,600,000     $ 28.55                  
Granted
    4,236,367       31.70                  
Exercised
                           
Forfeited or expired
    (47,500 )     25.77                  
                                 
Outstanding at January 30, 2010
    5,788,867     $ 30.88     $ 19,853,605       6.4  
                                 
Stock appreciation rights expected to become exercisable at January 30, 2010
    5,705,376     $ 31.00     $ 19,389,978       6.4  
                                 
Stock appreciation rights exercisable at January 30, 2010
                       
                                 


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of January 30, 2010, there was $45.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized cost is expected to be recognized over a weighted-average period of 1.9 years.
 
Restricted Stock Activity
 
Below is a summary of restricted stock unit activity for the fifty-two weeks ended January 30, 2010:
 
                 
          Weighted-Average
 
    Number of
    Grant Date
 
Restricted Stock Units
  Shares     Fair Value  
 
Non-vested at January 31, 2009
    1,498,355     $ 64.18  
Granted
    473,197       24.29  
Vested
    (411,308 )     64.26  
Forfeited
    (229,196 )     55.94  
                 
Non-vested at January 30, 2010
    1,331,048     $ 55.45  
                 
 
The total fair value of restricted stock units granted during the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008 was $11.5 million, $51.3 million and $53.9 million, respectively.
 
The total grant date fair value of restricted stock units vested during the fifty-two week periods ended January 30, 2010, January 31, 2009 and February 2, 2008 was $26.4 million, $54.8 million and $14.2 million, respectively.
 
As of January 30, 2010, there was $41.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 1.1 years.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
4.   CASH AND EQUIVALENTS AND INVESTMENTS
 
Cash and equivalents and investments consisted of (in thousands):
 
                 
    January 30, 2010     January 31, 2009  
 
Cash and equivalents:
               
Cash
  $ 196,496     $ 137,383  
Money market funds
    483,617       384,739  
                 
Total cash and equivalents
    680,113       522,122  
Marketable securities — Current:
               
Trading securities:
               
Auction rate securities — UBS — student loan backed
    20,049        
Auction rate securities — UBS — municipal authority bonds
    12,307        
                 
Total trading securities
    32,356        
Marketable securities — Non-Current:
               
Trading securities:
               
Auction rate securities — UBS — student loan backed
          50,589  
Auction rate securities — UBS — municipal authority bonds
          11,959  
                 
Total trading securities
          62,548  
Available-for-sale securities:
               
Auction rate securities — student loan backed
    118,390       139,239  
Auction rate securities — municipal authority bonds
    23,404       27,294  
                 
Total available-for-sale securities
    141,794       166,533  
Total non-current marketable securities
    141,794       229,081  
Rabbi Trust assets:(1)
               
Money market funds
    1,316       473  
Municipal notes and bonds
    18,537       18,804  
Trust-owned life insurance policies (at cash surrender value)
    51,391       32,549  
                 
Total Rabbi Trust assets
    71,244       51,826  
                 
Total cash and equivalents and investments
  $ 925,507     $ 803,029  
                 
 
 
(1) Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use.
 
At January 30, 2010 and January 31, 2009, the Company’s marketable securities consisted of investment grade auction rate securities (“ARS”) invested in insured student loan backed securities and insured municipal authority bonds, with maturities ranging from 17 to 33 years. Each investment in student loans is insured by


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(1) the U.S. government under the Federal Family Education Loan Program, (2) a private insurer, or (3) a combination of both. The percentage coverage of the outstanding principal and interest of the ARS varies by security.
 
The par and fair values, and related cumulative impairment charges for the Company’s marketable securities as of January 30, 2010 were as follows:
 
                                 
          Temporary
    Other-Than-Temporary
       
(In thousands)
  Par Value     Impairment     Impairment (“OTTI”)     Fair Value  
 
Trading securities:
                               
Auction rate securities — UBS — student loan backed
  $ 22,100     $     $ (2,051 )   $ 20,049  
Auction rate securities — UBS — municipal authority bonds
    15,000             (2,693 )     12,307  
                                 
Total trading securities
    37,100             (4,744 )     32,356  
                                 
Available-for-sale securities:
                               
Auction rate securities — student loan backed
    128,099       (9,709 )           118,390  
Auction rate securities — municipal authority bonds
    28,575       (5,171 )           23,404  
                                 
Total available-for-sale securities
    156,674       (14,880 )           141,794  
                                 
Total
  $ 193,774     $ (14,880 )   $ (4,744 )   $ 174,150  
                                 
 
See Note 5, “Fair Value,” for further discussion on the valuation of the ARS.
 
The temporary impairment related to available-for-sale ARS was reduced by $13.3 million for the fifty-two weeks ended January 30, 2010 due to redemptions and changes in fair value. An impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis, even if there is no intent to sell the security. As of January 30, 2010, the Company had not incurred any credit-related losses on available-for-sale ARS. Furthermore, as of January 30, 2010, the issuers continued to perform under the obligations, including making scheduled interest payments, and the Company expects that this will continue going forward.
 
On November 13, 2008, the Company entered into an agreement (the “UBS Agreement”) with UBS AG (“UBS”), a Swiss corporation, relating to ARS (“UBS ARS”) with a par value of $76.5 million, of which $37.1 million, at par value, are still held as of January 30, 2010. By entering into the UBS Agreement, UBS received the right to purchase these UBS ARS at par, at any time, commencing on November 13, 2008 and the Company received the right to sell (“Put Option”) the UBS ARS back to UBS at par, commencing on June 30, 2010. Upon acceptance of the UBS Agreement, the Company no longer had the intent to hold the UBS ARS until maturity. Therefore, the impairment could no longer be considered temporary. As a result, the Company transferred the UBS ARS from available-for-sale securities to trading securities and recognized an other-than-temporary impairment of $14.0 million in Other Operating (Income) Expense, Net in the


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Consolidated Statements of Operations and Comprehensive Income in the fourth quarter of Fiscal 2008. In addition, and simultaneously, the Company elected to apply fair value accounting for the related Put Option and recognized an asset of $12.3 million in Other Current Assets and a gain in Other Operating (Income) Expense, Net in the Consolidated Statements of Operations and Comprehensive Income in the fourth quarter of Fiscal 2008. During the fifty-two weeks ended January 30, 2010, the Company recognized, as a result of redemptions and changes in fair value of the UBS ARS, a reduction of the other-than-temporary impairment related to the UBS ARS of $9.2 million, and recognized a corresponding loss of $7.7 million related to the Put Option. As the Company has the right to sell the UBS ARS back to UBS on June 30, 2010, the remaining UBS ARS are classified as Current Assets on the Consolidated Balance Sheet as of January 30, 2010.
 
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement Plan. The Rabbi Trust assets are consolidated and recorded at fair value, with the exception of the trust-owned life insurance policies which are recorded at cash surrender value. The Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted to their use as noted above. Net unrealized gains and losses related to the available-for-sale securities held in the Rabbi Trust were not material for fifty-two week periods ended January 30, 2010 and January 31, 2009. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in a realized gain of $5.3 million and a realized loss of $3.6 million for the fifty-two weeks ended January 30, 2010 and January 31, 2009, respectively, recorded in Interest Income, Net on the Consolidated Statements of Operations and Comprehensive Income.
 
5.   FAIR VALUE
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:
 
  •  Level 1 — inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets.
 
  •  Level 2 — inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.
 
  •  Level 3 — inputs to the valuation methodology are unobservable.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets, measured at fair value, within it were as follows:
 
                                 
    Assets Fair Value as of January 30, 2010  
    Level 1     Level 2     Level 3     Total  
    (In thousands)  
 
ASSETS:
                               
Money market funds(1)
  $ 484,933     $     $     $ 484,933  
ARS — trading — student loan backed
                20,049       20,049  
ARS — trading — municipal authority bonds
                12,307       12,307  
ARS — available-for-sale — student loan backed
                118,390       118,390  
ARS — available-for-sale — municipal authority bonds
                23,404       23,404  
UBS put option
                4,640       4,640  
Municipal bonds held in the Rabbi Trust
    18,537                   18,537  
Derivative financial instruments
          1,348             1,348  
                                 
Total assets measured at fair value
  $ 503,470     $ 1,348     $ 178,790     $ 683,608  
                                 
 
 
(1) Includes $483.6 million in money market funds included in Cash and Equivalents and $1.3 million of money market funds held in the Rabbi Trust which are included in Other Assets on the Consolidated Balance Sheet.
 
The level 2 assets consist of derivative financial instruments, primarily forward foreign exchange contracts. The fair value of forward foreign exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
 
The level 3 assets primarily include investments in insured student loan backed ARS and insured municipal authority bonds ARS, which include both the available-for-sale and trading ARS. Additionally, level 3 assets include the Put Option related to the UBS Agreement.
 
As a result of the market failure and lack of liquidity in the current ARS market, the Company measured the fair value of its ARS primarily using a discounted cash flow model as of January 30, 2010. Certain significant inputs into the model are unobservable in the market including the periodic coupon rate adjusted for the marketability discount, market required rate of return and expected term. The coupon rate is estimated using the results of a regression analysis factoring in historical data on the par swap rate and the maximum coupon rate paid in the event of an auction failure. In making the assumption of the market required rate of return, the Company considered the risk-free interest rate and an appropriate credit spread, depending on the type of security and the credit rating of the issuer. The expected term is identified as the time the Company believes the principal will become available to the investor. The Company utilized a term of five years to value its securities. The Company also included a marketability discount which takes into account the lack of activity in the current ARS market.


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of January 30, 2010, approximately 70% of the Company’s ARS were “AAA” rated and approximately 14% of the Company’s ARS were “AA” or “A” rated with the remaining ARS having an “A−” or “BBB+” rating, in each case as rated by one or more of the major credit rating agencies.
 
In Fiscal 2008, the Company elected to apply fair value accounting for the Put Option related to the Company’s UBS ARS. The fair value of the Put Option was determined by calculating the present value of the difference between the par value and the fair value of the UBS ARS as of January 30, 2010, adjusted for counterparty risk. The present value was calculated using a discount rate that incorporates an investment grade corporate bond index rate and the credit default swap rate for UBS. The Put Option is recognized as an asset within Other Current Assets on the accompanying Consolidated Balance Sheets and the corresponding gains and losses within Other Operating Income, Net on the accompanying Consolidated Statements of Operations and Comprehensive Income.
 
The table below includes a roll forward of the Company’s level 3 assets from January 31, 2009 to January 30, 2010. When a determination is made to classify an asset or liability within level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for level 3 financial assets and liabilities may include observable components.
 
                                                 
    Trading ARS -
    Trading ARS -
    Available-for-sale
    Available-for-sale
    Put
       
    Student Loans     Muni Bonds     ARS - Student Loans     ARS - Muni Bonds     Option     Total  
    (In thousands)  
 
Fair value, January 31, 2009
  $ 50,589     $ 11,959     $ 139,239     $ 27,294     $ 12,309     $ 241,390  
Redemptions
    (39,400 )           (31,650 )     (6,400 )           (77,450 )
Transfers (out)/in
                                   
Gains and (losses), net:
                                               
Reported in Net Income
    8,860       348                   (7,669 )     1,539  
Reported in Other Comprehensive Income (Loss)
                10,801       2,510             13,311  
                                                 
Fair value, January 30, 2010
  $ 20,049     $ 12,307     $ 118,390     $ 23,404     $ 4,640     $ 178,790  
                                                 


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
6.   PROPERTY AND EQUIPMENT
 
Property and equipment, at cost, consisted of (thousands):
 
                 
    2009     2008  
 
Land
  $ 32,877     $ 32,302  
Building
    223,532       235,738  
Furniture, fixtures and equipment
    593,984       628,195  
Information technology
    211,461       138,096  
Leasehold improvements
    1,205,276       1,143,656  
Construction in progress
    48,352       114,280  
Other
    47,010       47,017  
                 
Total
  $ 2,362,492     $ 2,339,284  
Less: Accumulated depreciation and amortization
    1,118,473       940,629  
                 
Property and equipment, net
  $ 1,244,019     $ 1,398,655  
                 
 
Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results and projected cash flows. During Fiscal 2009, as a result of a strategic review of the RUEHL business, the Company determined that a triggering event occurred. As a result of that assessment, the Company incurred non-cash pre-tax impairment charges of $51.5 million, reported in Net Loss from Discontinued Operations on the Consolidated Statement of Operations and Comprehensive Income for the fifty-two weeks ended January 30, 2010. There was no remaining fair value of RUEHL long-lived assets as of January 30, 2010.
 
In the fourth quarter of Fiscal 2009, as a part of the Company’s year-end review for impairment of store related assets, the Company incurred a non-cash pre-tax impairment charge of $33.2 million, reported in Stores and Distribution Expense on the Consolidated Statements of Operations and Comprehensive Income for the fifty-two weeks ended January 30, 2010. The charge was associated with 34 Abercrombie & Fitch stores, 46 abercrombie kids stores and 19 Hollister stores. In Fiscal 2008, the Company incurred a non-cash pre-tax impairment charge of approximately $8.3 million related to long-lived assets. The charge was associated with 11 Abercrombie & Fitch stores, six abercrombie kids stores and three Hollister stores and was reported in Stores and Distribution Expense on the Consolidated Statement of Operations and Comprehensive Income for the fifty-two weeks ended January 31, 2009.
 
The Company also incurred a non-cash pre-tax impairment charge of approximately $22.3 million related to long-lived assets associated with nine RUEHL stores, which was reported in Net Loss from Discontinued Operations on the Consolidated Statement of Operations and Comprehensive Income for the fifty-two weeks ended January 31, 2009.
 
Store related assets are considered Level 3 assets in the fair value hierarchy and the fair values were determined at the store level primarily using a discounted cash flow model. The estimation of future cash


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ABERCROMBIE & FITCH CO.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
flows from operating activities requires significant estimates of factors that include future sales, gross margin performance and operating expenses. In instances where the discounted cash flow analysis indicated a negative value at the store level, the market exit price based on historical experience was used to determine the fair value by asset type. The Company had store related assets measured at fair value of $19.3 million on the Consolidated Balance Sheet at January 30, 2010.
 
7.   DEFERRED LEASE CREDITS, NET
 
Deferred lease credits are derived from payments received from landlords to partially offset store construction costs and are reclassified between current and long-term liabilities. The amounts, which are amortized over the life of the related leases, consisted of the following (thousands):
 
                 
    2009     2008  
 
Deferred lease credits
  $ 546,191     $ 514,041  
Amortization of deferred lease credits
    (290,542 )     (259,705 )
                 
Total deferred lease credits, net
  $ 255,649     $ 254,336  
                 
 
8.