Abercrombie & Fitch 1998 Annual Report Download - page 9

merchandise categories and a lower markdown rate. In addition,
buying and occupancy costs, expressed as a percentage of net
sales, declined due to leverage achieved from comparable store
sales increases.
In 1997, the gross income rate increased to 38.5% from 36.9%
in 1996. The improvement was the result of higher merchandise
margins, expressed as a percentage of net sales. Improved IMU,
in both the men’s and women’s businesses, drove the increase in
merchandise margins. In addition, buying and occupancy costs,
expressed as a percentage of net sales, declined slightly due to lever-
age achieved from comparable store sales increases.
GENERAL, ADMINISTRATIVE AND STORE OPERATING
EXPENSES General, administrative and store operating
expenses, expressed as a percentage of net sales, were 16.9%
in the fourth quarter of 1998 and 17.5% in the comparable
period in 1997. The improvement resulted primarily from
favorable leveraging of expenses due to higher sales volume.
Included in these expenses was approximately $2.6 million in
the fourth quarter of 1998 and 1997 of compensation expense
associated with restricted stock grants awarded to key execu-
tives of the Company.
General, administrative and store operating expenses for
the year, expressed as a percentage of net sales, were 21.7%,
22.4% and 23.2% in 1998, 1997 and 1996. The improvement
during the three-year period resulted from management’s
continued emphasis on expense control and favorable leverag-
ing of expenses, primarily store expenses, due to higher sales
volume. The 1998 improvement was offset by compensation
expense associated with restricted stock grants of approxi-
mately $11.5 million.
OPERATING INCOME Operating income, expressed as a per-
centage of net sales, was 32.4%, 27.9% and 25.4% for the fourth
quarter of 1998, 1997 and 1996 and 20.5%, 16.1% and 13.7% for
fiscal years 1998, 1997 and 1996. The improvement was the
result of higher gross income coupled with lower general, admin-
istrative and store operating expenses, expressed as a percentage
of net sales. Sales volume and gross income have increased at a
faster rate than general, administrative and store operating
expenses as the Company continues to emphasize cost controls.
15
Abercrombie &Fitch Co.
INTEREST INCOME/EXPENSE Net interest income was $1.6
million in the fourth quarter of 1998 and $3.1 million for all of
1998 compared with net interest expense of $305 thousand and
$3.6 million for the corresponding periods last year. Net interest
income in 1998 was primarily from short-term investments.
Net interest expense in 1997 included $975 thousand per quarter
associated with $50 million of long-term debt that was repaid
during the first quarter of 1998, offset by interest income on
short-term investments.
FINANCIAL CONDITION The Company’s continuing growth
in operating income provides evidence of financial strength and
flexibility. A more detailed discussion of liquidity, capital
resources and capital requirements follows.
LIQUIDITY AND CAPITAL RESOURCES Cash provided by
operating activities and the Company’s $150 million credit agree-
ment provide the resources to support operations, including
seasonal requirements and capital expenditures. A summary of
the Company’s working capital position and capitalization
follows (thousands):
1998 1997 1996
Working capital $096,007 $042,000 $1,288
Capitalization:
Long-term debt – $050,000 $50,000
Shareholders’ equity $186,105 58,775 11,238
Total capitalization $186,105 $108,775 $61,238
The Company considers the following to be measures of
liquidity and capital resources:
1998 1997 1996
Current ratio (current assets divided
by current liabilities) 1.79 1.63 1.03
Debt-to-capitalization ratio (long-term debt
divided by total capitalization) n/a 46% 82%
Cash flow to capital investment
(net cash provided by operating
activities divided by capital expenditures) 413% 340% 193%
n/a=not applicable