10-Q 1 anf-20121027x10q.htm 10-Q ANF-2012.10.27-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 27, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-12107
 
ABERCROMBIE & FITCH CO.
(Exact name of Registrant as specified in its charter)
 
Delaware
31-1469076
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
6301 Fitch Path, New Albany, Ohio
43054
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (614) 283-6500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
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.    x  Yes    ¨  No
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    ¨  No
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.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A Common Stock
 
Outstanding at November 23, 2012
$.01 Par Value
 
79,562,699 Shares




ABERCROMBIE & FITCH CO.
TABLE OF CONTENTS
 

2


PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Thousands, except share and per share amounts)
(Unaudited)
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
NET SALES
$
1,169,649

 
$
1,075,856

 
$
3,042,274

 
$
2,829,292

Cost of Goods Sold
438,082

 
429,334

 
1,139,941

 
1,056,067

GROSS PROFIT
731,567

 
646,522

 
1,902,333

 
1,773,225

Stores and Distribution Expense
496,942

 
461,683

 
1,410,759

 
1,286,108

Marketing, General and Administrative Expense
123,381

 
107,844

 
351,562

 
325,493

Other Operating Income, Net
(1,154
)
 
(2,855
)
 
(5,671
)
 
(4,146
)
OPERATING INCOME
112,398

 
79,850

 
145,683

 
165,770

Interest Expense, Net
1,584

 
533

 
4,219

 
2,469

INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
110,814

 
79,317

 
141,464

 
163,301

Tax Expense from Continuing Operations
39,307

 
28,412

 
51,453

 
56,019

NET INCOME FROM CONTINUING OPERATIONS
$
71,507

 
$
50,905

 
$
90,011

 
$
107,282

INCOME FROM DISCONTINUED OPERATIONS, Net of Tax
$

 
$

 
$

 
$
796

NET INCOME
$
71,507

 
$
50,905

 
$
90,011

 
$
108,078

NET INCOME PER SHARE FROM CONTINUING OPERATIONS:
 
 
 
 
 
 
 
BASIC
$
0.88

 
$
0.59

 
$
1.09

 
$
1.23

DILUTED
$
0.87

 
$
0.57

 
$
1.07

 
$
1.19

NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS:
 
 
 
 
 
 
 
BASIC
$

 
$

 
$

 
$
0.01

DILUTED
$

 
$

 
$

 
$
0.01

NET INCOME PER SHARE:
 
 
 
 
 
 
 
BASIC
$
0.88

 
$
0.59

 
$
1.09

 
$
1.24

DILUTED
$
0.87

 
$
0.57

 
$
1.07

 
$
1.20

WEIGHTED-AVERAGE SHARES OUTSTANDING:
 
 
 
 
 
 
 
BASIC
81,669

 
86,962

 
82,939

 
87,170

DILUTED
82,522

 
89,707

 
84,049

 
90,167

DIVIDENDS DECLARED PER SHARE
$
0.175

 
$
0.175

 
$
0.525

 
$
0.525

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
$
13,904

 
$
(6,012
)
 
$
(2,164
)
 
$
10,492

Gain (Loss) on Marketable Securities, net of taxes of $513 for the thirteen-week period ended October 29, 2011 and $(444) for the thirty-nine week period ended October 29, 2011.

 
(873
)
 

 
757

Unrealized Gain (Loss) on Derivative Financial Instruments, net of taxes of $1,331 and $(589) for the thirteen-week periods ended October 27, 2012 and October 29, 2011, respectively, and $1,543 and $(326) for the thirty-nine week periods ended October 27, 2012 and October 29, 2011, respectively.
(12,797
)
 
2,914

 
(10,711
)
 
2,467

Other Comprehensive Income (Loss)
$
1,107

 
$
(3,971
)
 
$
(12,875
)
 
$
13,716

COMPREHENSIVE INCOME
$
72,614

 
$
46,934

 
$
77,136

 
$
121,794



The accompanying Notes are an integral part of these Consolidated Financial Statements
3


ABERCROMBIE & FITCH CO.
CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
 
 
(unaudited)
 
 
 
October 27, 2012
 
January 28, 2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and Equivalents
$
349,670

 
$
583,495

Marketable Securities
19,903

 
84,650

Receivables
91,412

 
89,350

Inventories
536,315

 
569,818

Deferred Income Taxes
82,835

 
77,120

Other Current Assets
81,632

 
84,342

TOTAL CURRENT ASSETS
1,161,767

 
1,488,775

PROPERTY AND EQUIPMENT, NET
1,313,132

 
1,197,271

NON-CURRENT MARKETABLE SECURITIES

 
14,858

OTHER ASSETS
374,549

 
347,249

TOTAL ASSETS
$
2,849,448

 
$
3,048,153

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts Payable
$
165,394

 
$
211,368

Accrued Expenses
358,477

 
369,073

Deferred Lease Credits
39,822

 
41,047

Borrowings
60,000

 

Income Taxes Payable
74,102

 
77,918

TOTAL CURRENT LIABILITIES
697,795

 
699,406

LONG-TERM LIABILITIES:
 
 
 
Deferred Lease Credits
174,736

 
183,022

Leasehold Financing Obligations
64,477

 
57,851

Other Liabilities
249,672

 
245,418

TOTAL LONG-TERM LIABILITIES
488,885

 
486,291

STOCKHOLDERS’ EQUITY:
 
 
 
Class A Common Stock - $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of October 27, 2012 and January 28, 2012
1,033

 
1,033

Paid-In Capital
390,410

 
369,171

Retained Earnings
2,366,671

 
2,320,571

Accumulated Other Comprehensive (Loss) Income, net of tax
(6,420
)
 
6,455

Treasury Stock, at Average Cost - 23,743 and 17,662 shares at October 27, 2012 and January 28, 2012, respectively
(1,088,926
)
 
(834,774
)
TOTAL STOCKHOLDERS’ EQUITY
1,662,768

 
1,862,456

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,849,448

 
$
3,048,153



The accompanying Notes are an integral part of these Consolidated Financial Statements
4


ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
 
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
OPERATING ACTIVITIES:
 
 
 
Net Income
$
90,011

 
$
108,078

Impact of Other Operating Activities on Cash Flows:
 
 
 
Depreciation and Amortization
165,516

 
173,569

Loss on Disposal / Write-off of Assets
8,145

 
5,128

Lessor Construction Allowances
14,668

 
30,976

Amortization of Deferred Lease Credits
(34,185
)
 
(33,019
)
Deferred Taxes
(25,756
)
 
6,623

Share-Based Compensation
38,620

 
38,089

Net Tax (Deficiency) Benefit from Share-Based Compensation
(492
)
 
3,031

Excess Tax Benefit from Share-Based Compensation
(1,080
)
 
(4,756
)
Changes in Assets and Liabilities:
 
 
 
Inventories
33,444

 
(292,839
)
Accounts Payable and Accrued Expenses
(56,502
)
 
102,741

Income Taxes
(3,708
)
 
(30,209
)
Other Assets and Liabilities
(9,357
)
 
(47,711
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
219,324

 
59,701

INVESTING ACTIVITIES:
 
 
 
Capital Expenditures
(277,951
)
 
(227,574
)
Proceeds from Sales of Marketable Securities
80,693

 
1,700

Other Investing
(6,237
)
 
(22,267
)
NET CASH USED FOR INVESTING ACTIVITIES
(203,495
)
 
(248,141
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from Share-Based Compensation
217

 
33,779

Excess Tax Benefit from Share-Based Compensation
1,080

 
4,756

Purchase of Treasury Stock
(265,498
)
 
(98,703
)
Repayments of Borrowings Under the Credit Agreement
(75,000
)
 
(45,002
)
Proceeds from Borrowings Under the Credit Agreement
135,000

 

Change in Outstanding Checks and Other
(2,216
)
 
(1,083
)
Dividends Paid
(43,710
)
 
(45,847
)
NET CASH USED FOR FINANCING ACTIVITIES
(250,127
)
 
(152,100
)
EFFECT OF EXCHANGE RATES ON CASH
473

 
2,528

NET DECREASE IN CASH AND EQUIVALENTS:
(233,825
)
 
(338,012
)
Cash and Equivalents, Beginning of Period
583,495

 
826,353

CASH AND EQUIVALENTS, END OF PERIOD
$
349,670

 
$
488,341

SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
 
 
 
Change in Accrual for Construction in Progress
$
(1,005
)
 
$
31,593



The accompanying Notes are an integral part of these Consolidated Financial Statements
5


ABERCROMBIE & FITCH CO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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.
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2012” represent the 53-week fiscal year that will end on February 2, 2013, and to “Fiscal 2011” represent the 52-week fiscal year that ended January 28, 2012.
The Consolidated Financial Statements as of October 27, 2012 and for the thirteen and thirty-nine week periods ended October 27, 2012 and October 29, 2011 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2011 filed on March 27, 2012. The January 28, 2012 consolidated balance sheet data were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly, in all material respects, the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2012.
Certain prior period amounts have been reclassified to conform to current year presentation. In addition, the classification of the Excess Tax Benefit from Share-Based Compensation was corrected on the Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 29, 2011, which resulted in a decrease in cash flows from operating activities of $4.8 million and an increase in cash flows from financing activities of $4.8 million. The Company believes these classification errors were immaterial to the previously issued financial statements.
The Consolidated Financial Statements as of October 27, 2012 and for the thirteen and thirty-nine week periods ended October 27, 2012 and October 29, 2011 included herein have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of such firm follows the Notes to Consolidated Financial Statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the consolidated financial statements because their report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2. SEGMENT REPORTING
The Company determines its segments on the same basis that it uses to allocate resources and assess performance. All of the Company’s segments sell a similar group of products—casual sportswear apparel, personal care products and accessories for men, women and kids and bras, underwear and sleepwear for girls. The Company has three reportable segments: U.S. Stores, International Stores, and Direct-to-Consumer. Corporate functions, interest income and expense, and other income and expense are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included in Other.
The U.S. Stores reportable segment includes the results of store operations in the United States and Puerto Rico. The International Stores reportable segment includes the results of store operations in Canada, Europe and Asia. The Direct-to-Consumer reportable segment includes the results of operations directly associated with the on-line operations, both domestic and international.

6


Operating income is the primary measure of profit the Company uses to make decisions on allocating resources to its operating segments. For the U.S. Stores and International Stores reportable segments, operating income is defined as aggregate income directly attributable to individual stores on a four-wall basis. Four-wall expense includes all expenses contained “within the four walls of the stores.” These include expenses such as cost of merchandise, selling payroll and related costs, rent, utilities, depreciation, repairs and maintenance, supplies and packaging and other store sales-related expenses including credit card and bank fees and taxes. Operating income also reflects pre-opening charges related to stores not yet in operation and period-end markdown reserves. For the Direct-to-Consumer reportable segment, operating income is defined as aggregate income attributable to the direct-to-consumer business, less call center, fulfillment and shipping expense, charge card fees and direct-to-consumer operations management and support expenses. The U.S. Stores, International Stores and Direct-to-Consumer segments exclude marketing, general and administrative expense, store management and support functions such as regional and district management and other functions not dedicated to an individual store, distribution center costs and markdowns on merchandise held in distribution centers. All costs excluded from the three reportable segments are included in Other.
Reportable segment assets include those used directly in or resulting from the operations of each reportable segment. Total assets for the U.S. Stores and International Stores reportable segments primarily consist of store cash, credit card receivables, prepaid rent, store packaging and supplies, lease deposits, merchandise inventory, leasehold acquisition costs, restricted cash and the net book value of store long-lived assets. Total assets for International Stores also include VAT receivables. Total assets for the Direct-to-Consumer reportable segment primarily consist of credit card receivables, merchandise inventory, and the net book value of long-lived assets. Total assets for Other include cash, investments, distribution center inventory, the net book value of home office and distribution center long-lived assets, foreign currency hedge assets and tax-related assets.
The following table provides the Company’s segment information as of, and for the thirteen and thirty-nine week periods ended October 27, 2012 and October 29, 2011:
 
 
U.S. Stores
 
International
Stores
 
Direct-to-
Consumer
Operations
 
Segment Total
 
Other(1)
 
Total
 
(in thousands):
Thirteen Weeks Ended October 27, 2012
 
 
 
 
 
 
 
 
 
 
 
Net Sales
$
709,368

 
$
298,959

 
$
158,314

 
$
1,166,641

 
$
3,008

 
$
1,169,649

Operating Income (Loss)
162,360

 
87,163

 
69,647

 
319,170

 
(206,772
)
 
112,398

Thirteen Weeks Ended October 29, 2011
 
 
 
 
 
 
 
 
 
 
 
Net Sales
$
725,351

 
$
214,959

 
$
132,446

 
$
1,072,756

 
$
3,100

 
$
1,075,856

Operating Income (Loss)
139,841

 
58,929

 
58,983

 
257,753

 
(177,903
)
 
79,850

 
U.S. Stores
 
International
Stores
 
Direct-to-
Consumer
Operations
 
Segment Total
 
Other(1)
 
Total
 
(in thousands):
Thirty-Nine Weeks Ended October 27, 2012
 
 
 
 
 
 
 
 
 
 
 
Net Sales
$
1,813,757

 
$
778,750

 
$
434,220

 
$
3,026,727

 
$
15,547

 
$
3,042,274

Operating Income (Loss)
329,969

 
204,690

 
190,194

 
724,853

 
(579,170
)
 
145,683

Thirty-Nine Weeks Ended October 29, 2011
 
 
 
 
 
 
 
 
 
 
 
Net Sales
$
1,905,147

 
$
571,615

 
$
340,307

 
$
2,817,069

 
$
12,223

 
$
2,829,292

Operating Income (Loss)
345,299

 
173,973

 
159,511

 
678,783

 
(513,013
)
 
165,770

 
(1) 
Includes corporate functions such as Design, Merchandising, Sourcing, Planning, Allocation, Store Management and Support, Marketing, Distribution Center Operations, Information Technology, Real Estate, Finance, Legal, Human Resources and other corporate overhead. Net Sales consist of third party sell-off of inventory. Operating Income includes: marketing, general and administrative expense, store management and support functions such as regional and district management and other functions not dedicated to an individual store; distribution center costs; and markdowns on merchandise held in distribution centers.
Total assets as of October 27, 2012, were approximately $549.7 million for U.S. Stores, $834.0 million for International Stores, $78.5 million for Direct-to-Consumer Operations and $1.387 billion for Other.


7


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.
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(in thousands):
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
United States
$
818,558

 
$
820,188

 
$
2,110,835

 
$
2,146,029

Europe
273,909

 
193,566

 
743,834

 
528,429

Other
77,182

 
62,102

 
187,605

 
154,834

Total
$
1,169,649

 
$
1,075,856

 
$
3,042,274

 
$
2,829,292

Long-Lived Assets:
(in thousands):
October 27, 2012

 
January 28, 2012

United States
$
769,292

 
$
794,723

Europe
480,440

 
366,647

Other
184,579

 
156,361

Total
$
1,434,311

 
$
1,317,731

Long-lived assets in the table above include primarily property and equipment (net), store supplies and lease deposits.

3. SHARE-BASED COMPENSATION
Financial Statement Impact
The Company recognized share-based compensation expense of $13.2 million and $38.6 million for the thirteen and thirty-nine week periods ended October 27, 2012, respectively, and $13.7 million and $38.1 million for the thirteen and thirty-nine week periods ended October 29, 2011, respectively. The Company also recognized $5.0 million and $14.7 million in tax benefits related to share-based compensation expense for the thirteen and thirty-nine week periods ended October 27, 2012, respectively, and $5.1 million and $14.3 million for the thirteen and thirty-nine week periods ended October 29, 2011, respectively.
The fair value of share-based compensation awards is recognized as compensation expense primarily on a straight-line basis over the awards’ requisite service period, net of forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock units or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged to additional paid in capital, to the extent of the pool of “windfall tax benefits,” with any remainder recognized as tax expense. The Company’s pool of “windfall tax benefits” as of October 27, 2012 is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.
The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. 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 thirty-nine weeks ended October 27, 2012 was immaterial. The effect of adjustments for forfeitures during the thirty-nine weeks ended October 29, 2011 was an expense of $1.3 million.
Pursuant to an employment agreement, the Chairman and Chief Executive Officer (“CEO”) is eligible to receive “semi-annual grants,” as defined in the agreement. The semi-annual grants vest in equal annual installments over the four-year period following the grant date except that each award becomes fully vested no later than February 1, 2014, except for the final semi-annual grant, which will become fully vested on the date of the grant. On May 7, 2012, the Company amended the CEO employment agreement and the portion of the semi-annual grant awarded in the form of restricted stock or restricted stock units

8


for future grants will now vest according to the above schedule if and to the extent the performance-based vesting criteria described in Amendment No. 3 to the employment agreement are met.
A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units. As of October 27, 2012, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and restricted stock units outstanding. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in stockholder-approved plans at the applicable time.
In the event, at any reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the 2005 Long-Term Incentive Plan (the “2005 LTIP”) and the Amended and Restated 2007 Long-Term Incentive Plan (the “Amended and Restated 2007 LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards.
Plans
As of October 27, 2012, A&F had two primary share-based compensation plans: 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 Amended and Restated 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 Amended and Restated 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 2.0 million of underlying shares of A&F’s Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits A&F to annually grant awards covering up to 250,000 of underlying shares of A&F’s Common Stock for each award type to any associate of the Company (other than the CEO) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. 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 after approximately one year for non-associate directors of A&F. Awards granted to the CEO under his employment agreement have a vesting period defined as the shorter of four years or the award date through the end of the agreement. Under both plans, stock options have a 10-year term and stock appreciation rights have up to a 10-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 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 using the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period. In determining the fair value of restricted stock units, the Company does not take into account any performance-based requirements. The performance-based requirements are taken into account in determining the number of awards expected to vest.
Stock Options
The Company did not grant any stock options during the thirty-nine weeks ended October 27, 2012 or October 29, 2011.

9


Below is a summary of stock option activity for the thirty-nine weeks ended October 27, 2012:

Stock Options
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 28, 2012
714,997

 
$
60.72

 
 
 
 
Granted

 

 
 
 
 
Exercised
(8,000
)
 
27.53

 
 
 
 
Forfeited or cancelled
(41,675
)
 
75.13

 
 
 
 
Outstanding at October 27, 2012
665,322

 
$
60.21

 
$
970,104

 
3.9

Stock options exercisable at October 27, 2012
649,322

 
$
61.19

 
$
810,294

 
3.9

Stock options expected to become exercisable in the future as of October 27, 2012
15,880

 
$
20.59

 
$
158,667

 
6.1

The total intrinsic value of stock options which were exercised during the thirty-nine weeks ended October 27, 2012 was immaterial. The total intrinsic value of stock options exercised during the thirty-nine weeks ended October 29, 2011 was $38.6 million.
The grant date fair value of stock options which vested during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $1.2 million and $2.3 million, respectively.
As of October 27, 2012, there was an immaterial amount of total unrecognized compensation cost, net of estimated forfeitures, related to stock options.
Stock Appreciation Rights
The weighted-average estimated fair value of stock appreciation rights granted during the thirty-nine weeks ended October 27, 2012 and October 29, 2011, and the weighted-average assumptions used in calculating such fair value, on the date of grant, were as follows:
 
Thirty-Nine Weeks Ended
 
Chairman and Chief Executive
Officer
 
Other Executive Officers
 
All Other Associates
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
Grant date market price

 
$
56.86

 
$
52.89

 
$
54.87

 
$
52.02

 
$
54.93

Exercise price

 
$
56.86

 
$
52.89

 
$
54.87

 
$
52.02

 
$
54.93

Fair value

 
$
22.99

 
$
23.53

 
$
22.29

 
$
22.21

 
$
21.89

Assumptions:
 
Price volatility

 
53
%
 
56
%
 
53
%
 
59
%
 
55
%
Expected term (Years)

 
4.6

 
5.0

 
4.7

 
4.1

 
4.1

Risk-free interest rate

 
1.8
%
 
1.3
%
 
2.0
%
 
0.9
%
 
1.7
%
Dividend yield

 
1.5
%
 
1.1
%
 
1.6
%
 
1.1
%
 
1.6
%

10


Below is a summary of stock appreciation rights activity for the thirty-nine weeks ended October 27, 2012:
 
Stock Appreciation Rights
Number of
Underlying
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted-Average
Remaining
Contractual Life
Outstanding at January 28, 2012
9,039,334

 
$
39.66

 
 
 
 
Granted:
 
 
 
 
 
 
 
Chairman and Chief Executive Officer

 

 
 
 
 
Other Executive Officers
212,500

 
52.89

 
 
 
 
All Other Associates
143,100

 
52.02

 
 
 
 
Exercised
(37,875
)
 
30.74

 
 
 
 
Forfeited or cancelled
(89,175
)
 
44.39

 
 
 
 
Outstanding at October 27, 2012
9,267,884

 
$
40.15

 
$
15,107,804

 
4.6

Stock appreciation rights exercisable at October 27, 2012
2,156,146

 
$
42.40

 
$
744,507

 
5.1

Stock appreciation rights expected to become exercisable in the future as of October 27, 2012
7,044,778

 
$
39.37

 
$
14,347,187

 
4.4

The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended October 27, 2012 was immaterial. The total intrinsic value of stock appreciation rights exercised during the thirty-nine weeks ended October 29, 2011 was $11.0 million.
The grant date fair value of stock appreciation rights which vested during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $24.0 million and $11.2 million, respectively.
As of October 27, 2012, there was $51.6 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.7 years.
Restricted Stock Units
Below is a summary of restricted stock unit activity for the thirty-nine weeks ended October 27, 2012:
Restricted Stock Units
Number of Underlying
Shares
 
Weighted-Average
Grant Date
Fair Value
Non-vested at January 28, 2012
1,189,292

 
$
49.11

Granted
579,865

 
48.65

Vested
(355,831
)
 
52.45

Forfeited
(210,681
)
 
53.55

Non-vested at October 27, 2012
1,202,645

 
$
47.13


The total fair value of restricted stock units granted during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $28.2 million and $30.4 million, respectively.
The total grant date fair value of restricted stock units and restricted shares which vested during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 was $18.7 million and $23.5 million, respectively.
As of October 27, 2012, there was $43.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.7 years.

4. NET INCOME PER SHARE
Net income per basic share is computed based on the weighted-average number of outstanding shares of Common Stock. Net income per diluted share includes the weighted-average dilutive effect of stock options, stock appreciation rights and restricted stock units outstanding.

11


Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
Shares of Common Stock issued
103,300

 
103,300

 
103,300

 
103,300

Treasury shares
(21,631
)
 
(16,338
)
 
(20,361
)
 
(16,130
)
Weighted-Average—Basic Shares
81,669

 
86,962

 
82,939

 
87,170

Dilutive effect of stock options, stock appreciation rights and restricted stock units
853

 
2,745

 
1,110

 
2,997

Weighted-Average—Diluted Shares
82,522

 
89,707

 
84,049

 
90,167

Anti-Dilutive Shares (1)
6,114

 
2,403

 
5,398

 
2,137

(1) 
Reflects the number of shares of Common Stock subject to outstanding stock options, stock appreciation rights and restricted stock units, but excluded from the computation of net income per diluted share because the impact would be anti-dilutive.

5. CASH AND EQUIVALENTS
Cash and equivalents consisted of (in thousands):
 
 
October 27, 2012
 
January 28, 2012
Cash and equivalents:
 
 
 
Cash
$
349,670

 
$
374,479

Cash equivalents

 
209,016

Total cash and equivalents
$
349,670

 
$
583,495

Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, with original maturities of less than three months. Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $29.6 million on October 27, 2012 and $30.0 million on January 28, 2012, respectively. Restricted cash includes various cash deposits with international banks that are used as collateralization for customary non-debt banking commitments and deposits into trust accounts to conform with standard insurance security requirements.

12


6. INVESTMENTS
Investments consisted of (in thousands):
 
October 27, 2012
 
January 28, 2012
Marketable securities:
 
 
 
Available-for-sale securities:
 
 
 
Auction rate securities—student loan backed (2)
$
4,755

 
$
84,650

Auction rate securities—municipal authority bonds (3)
15,148

 
14,858

Total available-for-sale securities
19,903

 
99,508

Rabbi Trust assets: (1)
 
 
 
Money market funds
23

 
23

Trust-owned life insurance policies (at cash surrender value)
87,648

 
85,126

Total Rabbi Trust assets
87,671

 
85,149

Total Investments
$
107,574

 
$
184,657

(1) 
Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use.
(2) As of October 27, 2012 and January 28, 2012, student loan backed auction rate securities were included in current assets.
(3) As of October 27, 2012 and January 28, 2012, municipal authority bond auction rate securities were included in current assets and non-current marketable securities, respectively.
At October 27, 2012, the Company’s investment grade auction rate securities (“ARS”) consisted of one student loan backed security and two municipal authority bonds, with maturities ranging from 22 to 28 years.
The par and carrying values, and related cumulative other-than-temporary impairment charges for the Company’s available-for-sale marketable securities as of October 27, 2012 were as follows:
(in thousands)
Par Value
 
Other-than-
Temporary
Impairment
 
Carrying
Value
Available-for-sale securities:
 
 
 
 
 
Auction rate securities—student loan backed
$
5,200

 
$
(445
)
 
$
4,755

Auction rate securities—municipal authority bonds
19,975

 
(4,827
)
 
15,148

Total available-for-sale securities
$
25,175

 
$
(5,272
)
 
$
19,903

See Note 7, “Fair Value,” for further discussion on the valuation of the ARS.
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 October 27, 2012, the Company intended to sell the remaining ARS.
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 primarily consist of 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 as to their use as noted above. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.8 million and $0.7 million for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively, and realized gains of $2.5 million and $2.2 million for the thirty-nine weeks ended October 27, 2012 and October 29, 2011, respectively, recorded in Interest Expense, Net on the Consolidated Statements of Operations and Comprehensive Income.

7. 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.

13


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.
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 and liabilities, measured at fair value, within it were as follows:
 
Assets and Liabilities at Fair Value as of October 27, 2012
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS:
 
 
 
 
 
 
 
ARS—available-for-sale—student loan backed
$

 
$

 
$
4,755

 
$
4,755

ARS—available-for-sale—municipal authority bonds

 

 
15,148

 
15,148

Derivative financial instruments

 
2,887

 

 
2,887

Total assets measured at fair value
$

 
$
2,887

 
$
19,903

 
$
22,790

LIABILITIES:
 
 
 
 
 
 
 
Derivative financial instruments

 
2,954

 

 
2,954

Total liabilities measured at fair value
$

 
$
2,954

 
$

 
$
2,954

 
Assets and Liabilities at Fair Value as of January 28, 2012
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS:
 
 
 
 
 
 
 
Money market funds
$
209,039

 
$

 
$

 
$
209,039

ARS—available-for-sale—student loan backed

 

 
84,650

 
84,650

ARS—available-for-sale—municipal authority bonds

 

 
14,858

 
14,858

Derivative financial instruments

 
10,770

 

 
10,770

Total assets measured at fair value
$
209,039

 
$
10,770

 
$
99,508

 
$
319,317

LIABILITIES:
 
 
 
 
 
 
 
Derivative financial instruments

 
1,458

 

 
1,458

Total liabilities measured at fair value
$

 
$
1,458

 
$

 
$
1,458


The level 2 assets and liabilities consist of derivative financial instruments, primarily forward foreign currency exchange contracts. The fair value of forward foreign currency exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.
The level 3 assets include available-for-sale investments in insured student loan backed ARS and insured municipal authority bond ARS.
The Company measures the fair value of its ARS primarily using a discounted cash flow model, as well as a comparison to similar securities in the market. Certain significant inputs into the model for Level 3 assets are unobservable in the market. The table below provides quantitative information on the unobservable inputs discussed above:
Quantitative information about Level 3 fair value measurements (in thousands)
 
Fair Value at
October 28,  2012
 
Valuation Technique
 
Unobservable Inputs
 
Range
(weighted average)
Student loan ARS
 
 
 
 
Periodic coupon rate
 
0.51% - 3.79%
 
$
4,755

 
Discounted cash flow
 
Market rate of return
 
0.21% - 2.34%
 
 
 
 
 
Expected term
 
15.0
Municipal authority ARS
 
 
 
 
Periodic coupon rate
 
0.30% - 6.90%
 
$
15,148

 
Discounted cash flow
 
Market rate of return
 
0.00% - 4.04%
 
 
 
 
 
Expected term
 
21.5 - 27.0
Disclosures of Fair Value of Other Assets and Liabilities:
The Company’s borrowings under its Amended and Restated Credit Agreement are carried at historical cost in the accompanying Consolidated Balance Sheets. For disclosure purposes, the Company estimates the fair value of borrowings under the Amended and Restated Credit Agreement using discounted cash flow analysis based on market rates obtained from

14


independent third parties for similar types of debt. The inputs used to value the borrowings under the Amended and Restated Credit Agreement are considered to be Level 2 instruments. The carrying amount of borrowings outstanding under the Amended and Restated Credit Agreement as of October 27, 2012 was approximately $60.0 million. The fair value of borrowings outstanding under the Amended and Restated Credit Agreement as of October 27, 2012 was approximately $60.0 million. There were no borrowings outstanding under the Amended and Restated Credit Agreement at January 28, 2012. See Note 12, “Borrowings” for further discussion on the Amended and Restated Credit Agreement.
The table below includes a roll-forward of the Company’s level 3 assets and liabilities from January 28, 2012 to October 27, 2012. 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.
(in thousands)
Available-for-sale ARS - Student Loans
 
Available-for-sale ARS - Muni Bonds
 
Total
Fair value, January 28, 2012
$
84,650

 
$
14,858

 
$
99,508

Redemptions / Settlements
(80,693
)
 

 
(80,693
)
Gains, net:
 
 
 
 
 
Reported in Net Income
798

 
290

 
1,088

Fair value, October 27, 2012
$
4,755

 
$
15,148

 
$
19,903


8. 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 the 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 expected future markdowns on current season inventory. At second and fourth fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the expected future markdowns on any remaining carryover inventory from the season then ending. The valuation reserve was $45.2 million, $72.3 million and $38.1 million at October 27, 2012January 28, 2012 and October 29, 2011, respectively.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made 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 $6.9 million, $9.3 million and $4.4 million at October 27, 2012January 28, 2012 and October 29, 2011, respectively.
The inventory balance, net of the above-mentioned reserves, was $536.3 million, $569.8 million and $679.3 million at October 27, 2012January 28, 2012 and October 29, 2011, respectively.

9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (in thousands):
 
 
October 27, 2012
 
January 28, 2012
Property and equipment, at cost
$
2,906,559

 
$
2,655,219

Accumulated depreciation and amortization
(1,593,427
)
 
(1,457,948
)
Property and equipment, net
$
1,313,132

 
$
1,197,271

Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows.
The Company has adopted Accounting Standards Codification 820-10 “Fair Value Measurements and Disclosures.” Store-related assets are considered level 3 assets in the fair value hierarchy and the fair values are determined at the store level, primarily using a discounted cash flow model. The estimation of future cash 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 indicates a negative value at the store level, when impairment charges are taken, the market exit price based on historical experience is used to determine the fair value by asset type. Significant unobservable inputs of store-

15


related assets will be disclosed when required due to impairment. There were no impairments during the thirty-nine weeks ended October 27, 2012.
In certain lease arrangements, the Company is involved with the construction of the building. If the Company determines that it has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing, leased building in Property and Equipment, Net and the related financing obligation in Leasehold Financing Obligations 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-leaseback treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company had $54.5 million and $47.5 million of construction project assets in Property and Equipment, Net at October 27, 2012 and January 28, 2012, respectively.

10. DEFERRED LEASE CREDITS
Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective lives of the related leases, consisted of the following (in thousands):

 
October 27, 2012
 
January 28, 2012
Deferred lease credits
$
561,278

 
$
551,468

Amortized deferred lease credits
(346,720
)
 
(327,399
)
Total deferred lease credits, net
$
214,558

 
$
224,069


11. INCOME TAXES
The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. The effective tax rates from continuing operations for the thirteen weeks ended October 27, 2012 and October 29, 2011 were 35.5% and 35.8%, respectively. The effective tax rates from continuing operations for the thirty-nine weeks ended October 27, 2012 and October 29, 2011 were 36.4% and 34.3%, respectively. Tax expense for the thirty-nine weeks ended October 27, 2012 included $0.9 million of benefit to correct deferred tax assets established during the thirteen weeks ended January 28, 2012. The Company does not believe this correction was material to the periods affected.
Cash payments of income taxes made during the thirteen weeks ended October 27, 2012 and October 29, 2011 were approximately $6.1 million and $6.2 million, respectively. Cash payments of income taxes made during the thirty-nine weeks ended October 27, 2012 and October 29, 2011 were approximately $85.7 million and $107.8 million, respectively.

12. BORROWINGS
On July 28, 2011, the Company entered into an unsecured Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) under which up to $350 million is available. As stated in the Amended and Restated Credit Agreement, the primary purposes of the agreement are for trade and stand-by letters of credit in the ordinary course of business, as well as to fund working capital, capital expenditures, acquisitions and investments, and other general corporate purposes, including repurchases of A&F’s Common Stock.
The Amended and Restated Credit Agreement has several borrowing options, including interest rates that are based on: (i) a defined Base Rate, plus a margin based on the Leverage Ratio, payable quarterly; (ii) an Adjusted Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) plus a margin based on the Leverage 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; or (iii) an Adjusted Foreign Currency Rate (as defined in the Amended and Restated Credit Agreement) plus a margin based on the Leverage 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 highest of (a) PNC Bank, National Association’s then publicly announced prime rate, (b) the Federal Funds Open Rate (as defined in the Amended and Restated Credit Agreement) as then in effect plus 1/2 of 1.0% or (c) the Daily Adjusted Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) as then in effect plus 1.0%.

16


The facility fees payable under the Amended and Restated Credit Agreement are based on the Company’s Leverage Ratio (i.e., the ratio, on a consolidated basis, of (a) the sum of total debt (excluding specified permitted foreign bank guarantees and trade letters of credit) plus 600% of forward minimum rent commitments to (b) consolidated earnings, as adjusted, before interest, taxes, depreciation, amortization and rent (“Consolidated EBITDAR”) for the trailing four-consecutive-fiscal-quarter periods. The facility fees accrue at a rate of 0.125% to 0.30% per annum based on the Leverage Ratio for the most recent determination date. The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Amended and Restated 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 2.00 to 1.00. The Company was in compliance with the applicable ratio requirements and other covenants at October 27, 2012. Interest rates on borrowings under the Amended and Restated Credit Agreement are generally based upon market rates plus a margin based on the applicable Leverage Ratio.
The terms of the Amended and Restated Credit Agreement include customary events of default such as payment defaults, cross-defaults to other material indebtedness, undischarged material judgments, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation and conduct of the business of A&F and its subsidiaries. Upon an event of default, the lenders will not be obligated to make loans or other extensions of credit and may, among other things, terminate their commitments to the Company, and declare any then outstanding loans due and payable immediately.
The Amended and Restated Credit Agreement will mature on July 27, 2016. The Company had no trade letters of credit outstanding at October 27, 2012 and January 28, 2012. Stand-by letters of credit outstanding under the Amended and Restated Credit Agreement on October 27, 2012 and January 28, 2012 were immaterial.
As of October 27, 2012 the Company had $60.0 million of borrowings outstanding under the Amended and Restated Credit Agreement. As of January 28, 2012, the Company did not have any borrowings outstanding under the Amended and Restated Credit Agreement.
On February 24, 2012, the Company entered into a $300 million Term Loan Agreement to increase its flexibility and available liquidity. In conjunction with the Term Loan Agreement, the Company amended the Amended and Restated Credit Agreement on February 24, 2012, principally to be able to enter into the Term Loan Agreement. The Company is not required to draw down all, or any portion, of the Term Loan Agreement. Proceeds from the Term Loan Agreement may be used for any general corporate purpose. Depending on market conditions, liquidity and other factors, the Company may use all, or a portion, of the Term Loan Agreement to accelerate A&F’s previously announced stock repurchase program. Each loan will mature on February 23, 2017, with quarterly amortization payments of principal beginning in May 2013. Interest on borrowings may be determined under several alternative methods including LIBOR plus a margin based upon the Company’s Leverage Ratio, which represents the ratio of (a) the sum of total debt (excluding specified permitted foreign bank guarantees) plus 600% of forward minimum rent commitments to (b) Consolidated EBITDAR (as defined in the Term Loan Agreement) for the trailing four-consecutive-fiscal-quarter period. Covenants are generally consistent with those in the Company’s Amended and Restated Credit Agreement.
As of October 27, 2012, the Company did not have any borrowings outstanding under the Term Loan Agreement.
Total interest expense on borrowings was $0.9 million and $0.4 million for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively, and $2.3 million and $2.2 million for the thirty-nine weeks ended October 27, 2012 and October 29, 2011, respectively.

13. LEASEHOLD FINANCING OBLIGATIONS
As of October 27, 2012 and January 28, 2012, the Company reported $64.5 million and $57.9 million, respectively, of long-term liabilities related to leasehold financing obligations. In certain lease arrangements, the Company is involved with the construction of the building. If the Company determines that it has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in Property and Equipment, Net and the related financing obligation in Leasehold Financing Obligations 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-leaseback treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company does not report rent expense for the portion of the rent payment determined to be related to the assets which are determined to be owned for accounting purposes. Rather, this portion of the rental payments under the lease are recognized as a reduction of the financing obligation and interest expense.

17


Total interest expense related to landlord financing obligations was $1.7 million and $1.4 million for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively. Total interest expense related to landlord financing obligations was $5.0 million and $4.0 million for the thirty-nine weeks ended October 27, 2012 and October 29, 2011, respectively.

14. DERIVATIVES
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivatives, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.
In order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative is not highly effective.
For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded as a component of Other Comprehensive Income (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative’s time value are recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative contract related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.
The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivable. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. The maximum length of time over which forecasted foreign-currency-denominated intercompany inventory sales are hedged is 13 months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in Accumulated Other Comprehensive Income (Loss). Substantially all of the remaining unrealized gains or losses related to foreign-currency-denominated intercompany inventory sales that have occurred as of October 27, 2012 will be recognized in cost of goods sold over the following two months at the values at the date the inventory was sold to the respective subsidiary.
The Company nets derivative assets and liabilities on the Consolidated Balance Sheets to the extent that master netting arrangements meet the specific accounting requirements set forth by U.S. GAAP.
As of October 27, 2012, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all of, forecasted foreign-currency-denominated intercompany inventory sales, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or both:
 
Notional Amount(1)

Euro
$
218,263

British Pound
$
142,873

Canadian Dollar
$
16,343

(1) 
Amounts are reported in thousands and in U.S. Dollar equivalent as of October 27, 2012.
The Company also uses foreign currency exchange forward contracts to hedge certain foreign currency denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that

18


monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instrument and the hedged item.
As of October 27, 2012, the Company had outstanding the following foreign currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:
 
Notional Amount(1)
Euro
$
27,521

British Pound
$
25,829

Swiss Franc
$
21,676

Canadian Dollar
$
4,064

Japanese Yen
$
3,175

(1) 
Amounts are reported in thousands and in U.S. Dollar equivalent as of October 27, 2012.
The location and amounts of derivative fair values on the Consolidated Balance Sheets as of October 27, 2012 and January 28, 2012 were as follows:
 
Balance Sheet
 
Asset Derivatives
 
Balance Sheet
 
Liability Derivatives
(in thousands)
Location
 
October 27,
2012
 
January 28,
2012
 
Location
 
October 27,
2012
 
January 28,
2012
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Exchange Forward Contracts
Other Current Assets
 
$
2,360

 
$
10,766

 
Other Liabilities
 
$
2,668

 
$
874

Derivates Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Exchange Forward Contracts
Other Current Assets
 
$
527

 
$
4

 
Other Liabilities
 
$
286

 
$
584

Total
Other Current Assets
 
$
2,887

 
$
10,770

 
Other Liabilities
 
$
2,954

 
$
1,458

Refer to Note 7, “Fair Value,” for further discussion of the determination of the fair value of derivatives.
The location and amounts of derivative gains and losses for the thirteen and thirty-nine weeks ended October 27, 2012 and October 29, 2011 on the Consolidated Statements of Operations and Comprehensive Income were as follows:
 
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
 
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
(in thousands)
Location
 
Gain/(Loss)
 
Gain/(Loss)
 
Gain/(Loss)
 
Gain/(Loss)
Derivatives not designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Foreign Exchange Forward Contracts
Other Operating (Income) Expense, Net
 
$
(1,560
)
 
$
(150
)
 
$
2,897

 
$
(1,867
)
 
 
Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (Effective Portion) (a)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (b)
 
Location of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain  (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion  and Amount Excluded from Effectiveness Testing) (c)
 
Thirteen Weeks Ended
(in thousands)
October 27,
2012
 
October 29,
2011
 
 
 
October 27,
2012
 
October 29,
2011
 
 
 
October 27,
2012
 
October 29,
2011
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Exchange Forward Contracts
$
(8,147
)
 
$
2,907

 
Cost of Goods Sold
 
$
5,981

 
$
(596
)
 
Other Operating (Income) Expense, Net
 
$
221

 
$
(331
)

19


 
Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (Effective Portion) (a)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (b)
 
Location of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain  (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion  and Amount Excluded from Effectiveness Testing) (c)
 
Thirty-Nine Weeks Ended
(in thousands)
October 27,
2012
 
October 29,
2011
 
 
 
October 27,
2012

 
October 29,
2011

 
 
 
October 27,
2012

 
October 29,
2011

Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Forward Contracts
$
2,566

 
$
805

 
Cost of Goods Sold
 
$
14,820

 
$
(1,988
)
 
Other Operating (Income) Expense, Net
 
$
9

 
$
(830
)
(a)
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
(b)
The amount represents reclassification from OCI into earnings that occurs when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
(c)
The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.

15. DISCONTINUED 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 Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the residual income and expenses related to RUEHL are reflected in Income from Discontinued Operations, Net of Tax on the Consolidated Statement of Operations and Comprehensive Income for the thirty-nine weeks ended October 29, 2011.

16. 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, averaged over the last 36 consecutive full calendar months ending before the CEO’s retirement. The Company recorded expense of $1.3 million and $2.9 million for the thirteen and thirty-nine weeks ended October 27, 2012, respectively, associated with the SERP. The Company recorded expense of $0.1 million and $1.6 million for the thirteen and thirty-nine weeks ended October 29, 2011, respectively, associated with the SERP.

17. CONTINGENCIES
A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. Moreover, the Company’s assessment of the 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 the Company’s evaluation of claims. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
On December 21, 2007, Spencer de la Cruz, a former employee, filed an action against Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc. (collectively, the “Defendants”) in the Superior Court of Orange County, California (the “Court”). He sought to allege, on behalf of himself and a putative class of past and present employees in the period beginning on December 19, 2003, claims for failure to provide meal breaks, for waiting time penalties, for failure to keep accurate employment records, and for unfair business practices. By successive amendments, plaintiff added 10 additional plaintiffs and additional claims seeking injunctive relief, unpaid wages, penalties, interest, and attorney’s fees and costs. The Defendants denied the material allegations of plaintiffs’ complaints throughout the litigation and asserted numerous affirmative defenses. On July 23, 2010, plaintiffs moved for class certification in the action. On December 9, 2010, after briefing and argument, the Court granted in part and denied in part plaintiffs’ motion, certifying sub-classes to pursue meal break claims, meal premium pay claims, work related travel claims, travel expense claims, termination pay claims, reporting time claims, bag check claims,

20


pay record claims, and minimum wage claims. The parties continued to litigate questions relating to the Court’s certification order and to the merits of plaintiffs’ claims until January 25, 2012. On that date, the named plaintiffs and the Defendants signed a memorandum of understanding which, subject to final Court approval, was intended to result in a full and final settlement of all claims in the action on a class-wide basis. A formal Settlement Agreement and related papers were filed with the Court on February 21, 2012 and the Court scheduled a hearing on March 14, 2012 to determine whether to provide preliminary approval to the proposed settlement and to order that notice of the proposed settlement be given to the absent members of the settlement class. On March 14, 2012, the Court continued the hearing to April 18, 2012. On April 24, 2012, the Court granted preliminary approval to a revised proposed settlement, ordered notice to the settlement class and scheduled a hearing (the “Fairness Hearing”) to determine whether the settlement should be finally approved and the litigation dismissed. As of January 28, 2012, the Company increased its litigation reserve to cover the expected cost of the proposed settlement. The Fairness Hearing was held on September 12, 2012, and on November 5, 2012, the Court filed a final order approving the settlement.

18. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, Accounting Standards Codification 820-10, "Fair Value Measurements and Disclosures" ("ASC 820-10") was further amended to clarify certain disclosure requirements and improve consistency with international reporting standards. This amendment is to be applied prospectively and became effective for the Company beginning January 29, 2012. The adoption did not have a material effect on our consolidated financial statements.
Accounting Standards Codification Topic 220, “Comprehensive Income,” was amended in June 2011 to require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income under current U.S. GAAP. This guidance became effective for the Company’s fiscal year and interim periods beginning January 29, 2012. The adoption did not have a material effect on our consolidated financial statements.


21


Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Abercrombie & Fitch Co.:
We have reviewed the accompanying consolidated balance sheet of Abercrombie & Fitch Co. and its subsidiaries as of October 27, 2012 and the related consolidated statements of operations and comprehensive income for each of the thirteen and thirty-nine week periods ended October 27, 2012 and October 29, 2011 and the consolidated statements of cash flows for the thirty-nine-week periods ended October 27, 2012 and October 29, 2011. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of January 28, 2012, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated March 27, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 28, 2012, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
December 4, 2012


22


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

OVERVIEW
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2012” represent the 53-week fiscal year that will end on February 2, 2013, and to “Fiscal 2011” represent the 52-week fiscal year that ended January 28, 2012.
The Company is a specialty retailer that operates stores in North America, Europe, and Asia and direct-to-consumer operations in North America and Europe that service all brands throughout the world. The Company sells casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. In addition, the Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering bras, underwear, personal care products, sleepwear and at-home products for girls.
Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an atmosphere that is confident and just a bit provocative. abercrombie kids directly follows in the footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids has an energetic attitude and is popular, wholesome and athletic – the signature of All-American cool. Hollister is young, spirited, with a sense of humor and brings Southern California to the world. Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney sensibility.

RESULTS OF OPERATIONS

During the third quarter of Fiscal 2012, net sales increased 9% to $1.170 billion from $1.076 billion for the third quarter of Fiscal 2011. Changes in foreign currency adversely impacted net sales by approximately 0.7% of net sales (based on converting prior year sales at current year exchange rates). The gross profit rate for the third quarter of Fiscal 2012 was 62.5% compared to 60.1% for the third quarter of Fiscal 2011. Operating income was $112.4 million for the third quarter of Fiscal 2012 compared to $79.9 million for the third quarter of Fiscal 2011. The Company had net income of $71.5 million for the third quarter of Fiscal 2012 compared to $50.9 million for the third quarter of Fiscal 2011. Net income per diluted share was $0.87 for the third quarter of Fiscal 2012 compared to $0.57 for the third quarter of Fiscal 2011.
During the Fiscal 2012 year-to-date period, net sales increased 8% to $3.042 billion from $2.829 billion in Fiscal 2011. Changes in foreign currency adversely impacted net sales by approximately 1.0% of net sales. The gross profit rate for the Fiscal 2012 year-to-date period was 62.5% compared to 62.7% for the comparable year-to-date period for Fiscal 2011. Operating income was $145.7 million for the Fiscal 2012 year-to-date period compared to $165.8 million in Fiscal 2011. The Company had net income of $90.0 million for the Fiscal 2012 year-to-date period compared to $108.1 million in Fiscal 2011. Net income per diluted share was $1.07 for the Fiscal 2012 year-to-date period compared to $1.20 in Fiscal 2011.
As of October 27, 2012, the Company had $349.7 million in cash and equivalents, $19.9 million of current marketable securities and $60.0 million in borrowings outstanding under the Amended and Restated Credit Agreement. Net cash provided by operating activities was $219.3 million for the thirty-nine weeks ended October 27, 2012. The Company used cash of $278.0 million for capital expenditures, $265.5 million to repurchase 6.3 million shares of A&F’s Common Stock and $43.7 million for dividends during the thirty-nine weeks ended October 27, 2012. The Company also had cash proceeds of $80.7 million from the sale of marketable securities during the thirty-nine weeks ended October 27, 2012.
Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.

23


The following data represents the amounts shown in the Company’s Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended October 27, 2012 and October 29, 2011, expressed as a percentage of net sales:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
NET SALES
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of Goods Sold
37.5
 %
 
39.9
 %
 
37.5
 %
 
37.3
 %
GROSS PROFIT
62.5
 %
 
60.1
 %
 
62.5
 %
 
62.7
 %
Stores and Distribution Expense
42.5
 %
 
42.9
 %
 
46.4
 %
 
45.5
 %
Marketing, General and Administrative Expense
10.5
 %
 
10.0
 %
 
11.6
 %
 
11.5
 %
Other Operating Income, Net
(0.1
)%
 
(0.3
)%
 
(0.2
)%
 
(0.1
)%
OPERATING INCOME
9.6
 %
 
7.4
 %
 
4.8
 %
 
5.9
 %
Interest Expense, Net
0.1
 %
 
0.0
 %
 
0.1
 %
 
0.1
 %
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
9.5
 %
 
7.4
 %
 
4.6
 %
 
5.8
 %
Tax Expense from Continuing Operations
3.4
 %
 
2.6
 %
 
1.7
 %
 
2.0
 %
NET INCOME FROM CONTINUING OPERATIONS
6.1
 %
 
4.7
 %
 
3.0
 %
 
3.8
 %
INCOME FROM DISCONTINUED OPERATIONS, Net of Tax
 %
 
 %
 
 %
 
0.0
 %
NET INCOME
6.1
 %
 
4.7
 %
 
3.0
 %
 
3.8
 %

24



Financial Summary
The following summarized financial and statistical data compare the thirteen and thirty-nine weeks ended October 27, 2012 to the thirteen and thirty-nine week period ended October 29, 2011:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
Net sales by segment (millions)
$
1,169.6

 
$
1,075.9

 
$
3,042.3

 
$
2,829.3

U.S. Stores
$
709.4

 
$
725.4

 
$
1,813.8

 
$
1,905.1

International Stores
$
299.0

 
$
215.0

 
$
778.7

 
$
571.6

Direct-to-Consumer
$
158.3

 
$
132.4

 
$
434.2

 
$
340.3

Other
$
3.0

 
$
3.1

 
$
15.5

 
$
12.2

Net sales as a % of total sales
 
 
 
 
 
 
 
U.S. Stores
61
 %
 
67
%
 
60
 %
 
67
%
International Stores
26
 %
 
20
%
 
26
 %
 
20
%
Direct-to-Consumer
14
 %
 
12
%
 
14
 %
 
12
%
Other
0
 %
 
0
%
 
1
 %
 
0
%
Net sales by brand (millions)
$
1,169.6

 
$
1,075.9

 
$
3,042.3

 
$
2,829.3

Abercrombie & Fitch
$
440.0

 
$
436.1

 
$
1,162.9

 
$
1,161.1

abercrombie
$
99.8

 
$
104.2

 
$
253.8

 
$
274.1

Hollister
$
602.5

 
$
518.0

 
$
1,551.8

 
$
1,346.7

Gilly Hicks**
$
27.3

 
$
17.6

 
$
73.8

 
$
47.7

Increase (decrease) in comparable store sales*
(3
)%
 
7
%
 
(6
)%
 
8
%
Abercrombie & Fitch
(4
)%
 
4
%
 
(6
)%
 
5
%
abercrombie
(3
)%
 
6
%
 
(8
)%
 
8
%
Hollister
(1
)%
 
8
%
 
(5
)%
 
10
%
*
A store is included in comparable store sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year.
**
Net sales for the thirteen and thirty-nine week periods ended October 27, 2012 and October 29, 2011, reflect the activity of 25 and 19 stores, respectively.

25



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

26



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

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

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

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

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Operating Activities
Net cash provided by operating activities was $219.3 million million for the thirty-nine weeks ended October 27, 2012 compared to $59.7 million for the thirty-nine weeks ended October 29, 2011. The increase in cash provided by operating activities was primarily driven by a decrease in ending inventory partially offset by a related decrease in accounts payable.
Investing Activities
Cash outflows for investing activities for the thirty-nine weeks ended October 27, 2012 and October 29, 2011 were used primarily for capital expenditures related to new store construction and information technology investments. Cash outflows for capital expenditures were higher in Fiscal 2012 than in Fiscal 2011, due to an increase in the spend for new international retail locations, as well as Home Office, Distribution Centers and Information Technology infrastructure projects. Cash inflows from investing activities for the thirty-nine weeks ended October 27, 2012 included proceeds from sales of auction rate marketable securities.
Financing Activities
For the thirty-nine week period ended October 27, 2012 and October 29, 2011, cash outflows for financing activities consisted primarily of the repurchase of A&F’s Common Stock, the payment of dividends and the repayment of borrowings. For the thirty-nine weeks ended October 27, 2012, cash inflows from financing activities consisted primarily of proceeds from borrowings under the Amended and Restated Credit Agreement. For the thirty-nine weeks ended October 29, 2011, cash inflows from financing activities resulted primarily from proceeds from the exercise of share-based compensation awards.
During the thirty-nine weeks ended October 27, 2012, A&F repurchased approximately 6.3 million shares of A&F’s Common Stock in the open market with a market value of approximately $265.5 million. During the thirty-nine weeks ended October 29, 2011, A&F repurchased approximately 1.5 million shares of A&F’s Common Stock in the open market with a market value of approximately $98.7 million. Repurchases of A&F’s Common Stock were pursuant to the A&F Board of Directors’ authorizations.
As of October 27, 2012, A&F had approximately 19.9 million remaining shares available for repurchase as part of the A&F Board of Directors’ previously approved authorizations.
Future Cash Requirements and Sources of Cash
Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, rent, taxes and other operating activities, as well as to fund capital expenditures and quarterly dividends to stockholders subject to the A&F Board of Directors’ approval. The Company also has availability under the Amended and Restated Credit Agreement and the Term Loan Agreement as sources of additional funding.
Subject to suitable market conditions and available liquidity, A&F expects to continue to repurchase shares of its Common Stock. The Company anticipates funding these cash requirements with available cash and, as appropriate, the Amended and Restated Credit Agreement and the Term Loan Agreement.

The Company is not dependent on dividends from its foreign subsidiaries to fund its U.S. operations or make distributions to A&F's shareholders.
Off-Balance Sheet Arrangements
As of October 27, 2012, the Company did not have any off-balance sheet arrangements.
Contractual Obligations
The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short- and long-term liquidity and capital resource needs. During the thirty-nine weeks ended October 27, 2012, there were no material changes in the contractual obligations as of January 28, 2012, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations) and the borrowings under the Amended and Restated Credit Agreement.


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Third Quarter Store Count and Gross Square Feet
Store count and gross square footage by brand for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively, were as follows:
 
Store Activity
Abercrombie & Fitch
 
abercrombie
 
Hollister
 
Gilly Hicks
 
Total
U.S. Stores
 
 
 
 
 
 
 
 
 
July 28, 2012
278

 
154

 
486

 
18

 
936

New

 

 

 

 

Closed

 

 

 

 

October 27, 2012
278

 
154

 
486

 
18

 
936

Gross Square Feet at October 27, 2012
2,495

 
727

 
3,311

 
176

 
6,709

International Stores
 
 
 
 
 
 
 
 
 
July 28, 2012
15

 
5

 
92

 
7

 
119

New
2

 
1

 
9

 

 
12

Closed

 

 

 

 

October 27, 2012
17

 
6

 
101

 
7

 
131

Gross Square Feet at October 27, 2012
339

 
71

 
875

 
47

 
1,332

Total Stores
295

 
160

 
587

 
25

 
1,067

Total Gross Square Feet at October 27, 2012
2,834

 
798

 
4,186

 
223

 
8,041


Store Activity
Abercrombie & Fitch
 
abercrombie
 
Hollister
 
Gilly Hicks
 
Total
U.S. Stores
 
 
 
 
 
 
 
 
 
July 30, 2011
316

 
179

 
501

 
18

 
1,014

New

 

 

 

 

Closed

 

 

 

 

October 29, 2011
316

 
179

 
501

 
18

 
1,014

Gross Square Feet at October 29, 2011
2,806

 
836

 
3,417

 
176

 
7,235

International Stores
 
 
 
 
 
 
 
 
 
July 30, 2011
10

 
4

 
44

 
1

 
59

New

 

 
19

 

 
19

Closed

 

 
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