Abercrombie & Fitch 2000 Annual Report Download - page 10

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Abercrombie &Fitch
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1. BASIS OF PRESENTATION Abercrombie & Fitch Co. (“A&F”)
was incorporated on June 26, 1996, and on July 15, 1996, acquired
the stock of Abercrombie & Fitch Holdings, the parent company
of the Abercrombie & Fitch business, and A&F Trademark, Inc.,
in exchange for 43 million shares of Class B Common Stock
issued to The Limited, Inc. (“The Limited”). A&F, through its
subsidiaries (collectively, A&F and its subsidiaries are referred
to as “Abercrombie & Fitch” or the “Company”), is a specialty
retailer of high quality, casual apparel for men, women and kids
with an active, youthful lifestyle. The business was established
in 1892 and subsequently acquired by The Limited in 1988.
An initial public offering (the “Offering”) of 16.1 million
shares of A&F’s Class A Common Stock, including the sale of
2.1 million shares pursuant to the exercise by the underwriters
of their options to purchase additional shares, was consum-
mated on October 1, 1996. The net proceeds received by A&F
from the Offering, approximating $118.2 million, and cash
from operations were used to repay the borrowings under a
$150 million credit agreement. As a result of the Offering,
84.2% of the outstanding common stock of A&F was owned by
The Limited, until the completion of a tax-free exchange offer
(the “Exchange Offer”) on May 19, 1998, to establish A&F as an
independent company.
In the Exchange Offer, The Limited accepted 94,150,104
shares of its common stock that were exchanged at a ratio of .86
of a share of A&F stock for each Limited share. On June 1, 1998,
The Limited effected a pro rata spin-off to its shareholders
of its remaining 6,230,910 A&F shares. Limited shareholders
of record at the close of trading on May 29, 1998 received .027346
of a share of A&F stock for each Limited share owned at that time.
The accompanying consolidated financial statements include
the historical financial statements of, and transactions applicable
to, A&F and its subsidiaries and reflect the assets, liabilities, results
of operations and cash flows on a historical cost basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial
statements include the accounts of A&F and all significant
subsidiaries that are more than 50% owned and controlled.
All significant intercompany balances and transactions have
been eliminated in consolidation.
FISCAL YEAR The Company’s fiscal year ends on the Saturday
closest to January 31. Fiscal years are designated in the financial
statements and notes by the calendar year in which the fiscal year
commences. The results for fiscal year 2000 represent the fifty-
three week period ended February 3, 2001. The results for fiscal
years 1999 and 1998 represent the fifty-two week periods ended
January 29, 2000 and January 30, 1999.
CASH AND EQUIVALENTS Cash and equivalents include
amounts on deposit with financial institutions and investments
with original maturities of less than 90 days.
MARKETABLE SECURITIES All investments with original matu-
rities of greater than 90 days are accounted for in accordance with
Statement of Financial Accounting Standards (“SFAS”) No.
115, “Accounting for Certain Investments in Debt and Equity
Securities.” The Company determines the appropriate classifi-
cation at the time of purchase. At January 29, 2000, the Company
held investments in marketable securities which were classified
as held to maturity based on the Company’s positive intent and
ability to hold the securities to maturity. All securities held by the
Company at January 29, 2000 were corporate debt securities
which matured within one year and were stated at amortized cost
which approximated market value.
INVENTORIES Inventories are principally valued at the lower of
average cost or market, on a first-in first-out basis, utilizing the
retail method.
STORE SUPPLIES The initial inventory of supplies for new
stores including, but not limited to, hangers, signage, security tags
and point-of-sale supplies are capitalized at the store opening date.
Subsequent shipments are expensed except for new merchandise
presentation programs which are capitalized.
PROPERTY AND EQUIPMENT Depreciation and amortization
of property and equipment are computed for financial reporting
purposes on a straight-line basis, using service lives ranging prin-
cipally from 10-15 years for leasehold improvements and 3-10
years for other property and equipment. Beneficial leaseholds
represent the present value of the excess of fair market rent over
contractual rent of existing stores at the 1988 purchase of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Abercrombie &Fitch
Abercrombie & Fitch business by The Limited and are being
amortized over the lives of the related leases. The cost of assets sold
or retired and the related accumulated depreciation or amortiza-
tion are removed from the accounts with any resulting gain or loss
included in net income. Maintenance and repairs are charged to
expense as incurred. Major renewals and betterments that extend
service lives are capitalized. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate
that full recoverability is questionable. Factors used in the valua-
tion include, but are not limited to, management’s plans for future
operations, recent operating results and projected cash flows.
INCOME TAXES Income taxes are calculated in accordance
with SFAS No. 109, “Accounting for Income Taxes,” which
requires the use of the liability method. Deferred tax assets and
liabilities are recognized based on the difference between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates in effect in the years in which those temporary differ-
ences are expected to reverse. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
Prior to the Exchange Offer, the Company was included in The
Limited’s consolidated federal and certain state income tax groups
for income tax reporting purposes and was responsible for its
proportionate share of income taxes calculated upon its federal tax-
able income at a current estimate of the Company’s annual
effective tax rate. Subsequent to the Exchange Offer, the Company
began filing its tax returns on a separate basis.
SHAREHOLDERS’ EQUITY The Board of Directors declared
a two-for-one stock split on A&F’s Class A Common Stock,
distributed on June 15, 1999 to shareholders of record at the close
of business on May 25, 1999. All share and per share amounts
in the accompanying consolidated financial statements for all
periods have been restated to reflect the stock split.
At February 3, 2001, there were 150 million shares of $.01 par
value Class A Common Stock authorized, of which 98.8 million
and 102.0 million shares were outstanding at February 3, 2001 and
January 29, 2000, respectively, and 106.4 million shares of $.01 par
value Class B Common Stock authorized, none of which were
outstanding at February 3, 2001 or January 29, 2000. In addition,
15 million shares of $.01 par value Preferred Stock were authorized,
none of which have been issued. See Note 13 for information about
Preferred Stock Purchase Rights.
Holders of Class A Common Stock generally have identical
rights to holders of Class B Common Stock, except that holders
of Class A Common Stock are entitled to one vote per share
while holders of Class B Common Stock are entitled to three votes
per share on all matters submitted to a vote of shareholders.
REVENUE RECOGNITION The Company recognizes retail
sales at the time the customer takes possession of the merchan-
dise and purchases are paid for via cash, credit card or gift
certificate and gift card redemption. Catalogue and e-com-
merce sales are recorded upon shipment of merchandise.
Amounts relating to shipping and handling billed to customers
in a sale transaction are classified as revenue and the related costs
are classified as cost of goods sold. Employee discounts are
classified as a reduction of revenue.
CATALOGUE AND ADVERTISING COSTS Costs related to
the A&F Quarterly, a catalogue/magazine, primarily consist of
catalogue production and mailing costs and are expensed as
incurred. Advertising costs consist of in-store photographs and
advertising in selected national publications and are expensed
when the photographs or publications first appear. Catalogue
and advertising costs amounted to $30.4 million in 2000, $30.3
million in 1999 and $24.9 million in 1998.
STORE PREOPENING EXPENSES Preopening expenses related
to new store openings are charged to operations as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded
values of current assets and current liabilities, including receivables,
marketable securities and accounts payable, approximate fair
value due to the short maturity and because the average interest
rate approximates current market origination rates.