Abercrombie & Fitch 2004 Annual Report Download - page 18

Abercrombie &Fitch Abercrombie &Fitch
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5. LEASED FACILITIES AND COMMITMENTS Annual store rent
is comprised of a fixed minimum amount, plus contingent rent
based on a percentage of sales exceeding a stipulated amount.
Store lease terms generally require additional payments covering
taxes, common area costs and certain other expenses.
A summary of rent expense follows (thousands):
2004 2003 2002
Store rent:
Fixed minimum $141,450 $122,001 $106,053
Contingent 6,932 5,194 4,886
Total store rent $148,382 $127,195 $110,939
Buildings, equipment and other 1,663 1,219 1,133
Total rent expense $150,045 $128,414 $112,072
At January 29, 2005, the Company was committed to noncancelable
leases with remaining terms of one to fifteen years. These commit-
ments include store leases with initial terms ranging primarily from
ten to fifteen years. A summary of minimum commitments under
noncancelable leases follows (thousands):
2005 $164,577 2008 145,506
2006 $166,688 2009 137,019
2007 $156,567 Thereafter 485,750
6. ACCRUED EXPENSES Accrued expenses consisted of the follow-
ing (thousands):
2004 2003
Legal $ 54,252 $ 9,248
Rent and landlord charges 46,739 42,846
Current portion of unredeemed gift card revenue 31,283 20,417
Accrual for construction in progress 15,756 31,269
Employee bonuses and incentive compensation 13,959 1,742
Other 72,221 57,867
Total $234,210 $163,389
The accrued legal expense included $49.1 million related to the
settlement of three related class action employment discrimination
lawsuits.
7. INCOME TAXES The provision for income taxes consisted of
(thousands):
2004 2003 2002
Currently payable:
Federal $112,537 $101,692 $ 88,238
State 19,998 18,248 13,865
$132,535 $119,940 $102,103
Deferred:
Federal $ 2,684 $ 8,601 $ 16,629
State 1,258 1,517 2,597
$ 3,942 $ 10,118)$ 19,226
Total provision $136,477 $130,058 $121,329
A reconciliation between the statutory Federal income tax rate and
the effective income tax rate follows:
2004 2003 2002
Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal
income tax effect 3.9% 3.8% 3.5%
Other items, net (0.2%) 0.0% (0.1%)
Total 38.7% 38.8% 38.4%
Income taxes payable included net current deferred tax assets of
$44.4 million and $24.2 million at January 29, 2005 and January 31,
2004, respectively.
Under a tax sharing arrangement with The Limited, which
owned 84.2% of the outstanding Common Stock through May 19,
1998, the Company was responsible for and paid to The Limited its
proportionate share of income taxes calculated upon its separate tax-
able income at the estimated annual effective tax rate for periods
prior to May 19, 1998. In 2002, a final tax sharing payment was
made to The Limited pursuant to an agreement to terminate the tax
sharing agreement. As a result, the Company has been indemnified
by The Limited for any federal, state or local taxes asserted with
respect to The Limited for all periods prior to May 19, 1998.
Amounts paid to The Limited totaled $1.4 million in 2002.
Amounts paid directly to taxing authorities were $114.0 million,
$113.0 million and $82.3 million in 2004, 2003, and 2002, respectively.
The effect of temporary differences which give rise to deferred
income tax assets (liabilities) was as follows (thousands):
2004 2003
Deferred tax assets:
Deferred compensation $ 16,205 $ 10,208
Rent 98,793 86,746
Accrued expenses 7,194 2,502
Inventory 3,268 1,717
Legal expense 15,288 3,234
Total deferred tax assets $ 140,748 $ 104,407
Deferred tax liabilities:
Store supplies $ (10,542) $ (9,384)
Property and equipment (141,147) (102,022)
Total deferred tax liabilities $(151,689) $(111,406)
Net deferred income tax liabilities $ (10,941) $ (6,999)
No valuation allowance has been provided for deferred tax
assets because management believes that it is more likely than
not that the full amount of the net deferred tax assets will be real-
ized in the future.
8. LONG-TERM DEBT On December 15, 2004, the Company
entered into an amended and restated $250 million syndicated
unsecured credit agreement (the “Credit Agreement”). The pri-
mary purposes of the Credit Agreement are for trade, stand-by let-
ters of credit and working capital. The Credit Agreement has sev-
eral borrowing options, including interest rates that are based on
the agent bank’s “Alternate Base Rate”. Facility fees payable
under the Amended Credit Agreement will be based on the
Company’s ratio (the “leverage ratio”) of the sum of total debt
plus 600% of forward minimum rent commitments to consolidat-
ed EBITDAR for the trailing four-fiscal-quarter period and the
facility fees are projected to accrue at .175% of the committed
amounts per annum. The Credit Agreement contains limitations
on indebtedness, liens, sale-leaseback transactions, significant
corporate changes including mergers and acquisitions with third
parties, investments, restricted payments (including dividends
and stock repurchases), hedging transactions and transactions
with affiliates. The Amended Credit Agreement will mature on
December 15, 2009. Letters of credit totaling approximately $49.6
million and $42.8 million were outstanding under the Credit
Agreement at January 29, 2005 and at January 31, 2004. No bor-
rowings were outstanding under the Credit Agreement at January
29, 2005 and at January 31, 2004.
9. RELATED PARTY TRANSACTIONS Shahid & Company, Inc.
has provided advertising and design services for the Company
since 1995. Sam N. Shahid Jr., who serves on A&F’s Board of
Directors, has been President and Creative Director of Shahid &
Company, Inc. since 1993. Fees paid to Shahid & Company, Inc.
for services provided during the 2004, 2003 and 2002 fiscal years
were approximately $2.1 million, $2.0 million and $1.9 million,
respectively. These amounts do not include reimbursements to
Shahid & Company, Inc. for expenses incurred while performing
these services.
On January 1, 2002, A&F loaned $4,953,833 to its Chairman, pur-
suant to the terms of a replacement promissory note, which provid-
ed that such amount was due and payable on December 31, 2002.
The outstanding principal under the note did not bear interest as the
net sales threshold, per the terms of the note, was met. This note
was paid in full by the Chairman on December 31, 2002. This note
constituted a replacement of, and substitute for, several promissory
notes dated from November 17, 1999 through May 18, 2001.
10. STOCK OPTIONS AND RESTRICTED SHARES Under the
Under the Company’s stock plans, associates and non-associate
directors may be granted up to a total of 24.0 million restricted
shares and options to purchase A&F’s common stock at the market
price on the date of grant. In 2004, associates of the Company were
granted options covering approximately 444,000 shares, with a vest-
ing period of four years. Options covering a total of 40,000 shares
were granted to non-associate directors in 2004. Options granted to
the non-associate directors vest on the first anniversary of the grant
date. All options have a maximum term of ten years.