Abercrombie & Fitch 2004 Annual Report Download - page 9

Abercrombie &Fitch
Administrative and Store Operating Expenses” section below).
Gross income during the fourth quarter of the 2004 fiscal year
was $336.6 million compared to $261.5 million in the 2003 fiscal
year. The gross income rate (gross income divided by net sales)
for the fourth quarter of the 2004 fiscal year was 49.0%, up 230
basis points from last year’s rate of 46.7%. The increase in gross
income rate resulted largely from lower markdowns and an increase
in initial markup (IMU) during the fourth quarter of fiscal 2004
versus fourth quarter of fiscal 2003, partially offset by the lower
margin of RUEHL. The improvement in IMU during the fourth
quarter was a result of higher unit retail pricing in Abercrombie &
Fitch, abercrombie and Hollister. The three brands had IMU
improvements compared to the fourth quarter of 2003 and oper-
ated at similar margins.
The Company ended the fourth quarter of the 2004 fiscal
year with inventories, at cost, up 11% per gross square foot versus the
fourth quarter of the 2003 fiscal year. The inventory increase
reflected a planned shift in the timing of Spring and denim mer-
chandise deliveries.
GENERAL, ADMINISTRATIVE AND STORE OPERATING
EXPENSES General, administrative and store operating expenses
during fourth quarter of the 2004 fiscal year were $166.4 million
compared to $106.7 million during the same period in 2003.
During the fourth quarter of the 2004 fiscal year, the general,
administrative and store operating expense rate (general, adminis-
trative and store operating expenses divided by net sales) was 24.2%
compared to 19.0% in the fourth quarter of the 2003 fiscal year.
The increase in the percentage of net sales versus the 2003 compa-
rable period was primarily related to the following: higher store
expenses due to an increase in aggregate payroll which represented
250 basis points of the increase and higher incentive compensation
bonus accruals resulting from improved financial performance,
which represented 160 basis points of the increase. Wage levels, in
Abercrombie & Fitch, abercrombie and Hollister, decreased com-
pared to the fourth quarter of 2003. The decrease in wage levels was
due to an increase in part-time hours in order to provide better cus-
tomer service at the stores which resulted in a higher proportion
of part-time employees at lower rates of pay than the comparable
period last year.
The distribution center continued to achieve record levels of
productivity during the fourth quarter of the 2004 fiscal year.
Productivity, as measured in units processed per labor hour, was 10%
higher than the fourth quarter of the 2003 fiscal year. Costs related
to the distribution center, excluding direct shipping costs related to
the direct-to-consumer sales, included in general, administrative and
store operating expenses were $6.1 million for the fourth quarter of
the 2004 fiscal year compared to $5.5 million for the fourth quarter of
the 2003 fiscal year.
OPERATING INCOME Operating income during the fourth
quarter of the 2004 fiscal year increased to $170.2 million from
$154.8 million in the 2003 fiscal year fourth quarter, an increase of
10.0%. The operating income rate (operating income divided by
net sales) was 24.8% for the fourth quarter of the 2004 fiscal year
compared to 27.6% for the fourth quarter of the 2003 fiscal year.
The decrease in the operating income rate during the fourth quarter
of fiscal 2004 was a result of higher general, administrative and store
operating expenses during the quarter, partially offset by higher gross
income resulting from higher unit retail pricing in Abercrombie &
Fitch, abercrombie and Hollister.
INTEREST INCOME AND INCOME TAXES Fourth quarter net
interest income was $1.3 million in fiscal 2004 compared to $1.1 million
during the comparable period in fiscal 2003. The increase in net inter-
est income was due to higher rates during the fourth quarter of the 2004
fiscal year when compared to the same period in the prior year. The
Company continued to invest in tax-free securities for the majority of
the quarter and then changed its investing strategy to taxable money
market investments. The effective tax rate for the fourth quarter was
39.2% compared to 39.3% for the 2003 comparable period.
NET INCOME AND NET INCOME PER SHARE Net income for the
fourth quarter of the 2004 fiscal year was $104.3 million versus
$94.6 million for the fourth quarter of fiscal 2003, an increase of 10.3%.
The increase in net income was the result of higher net sales and
higher gross income partially offset by increased spending in general,
administrative and store operating expenses.
Net income per weighted-average diluted share outstanding
for the fourth quarter of fiscal 2004 was $1.15 versus $0.97 for the
same period last year, an increase of 18.6%. Net income per share
increased by more than net income as a result of the Company’s
share repurchase program. In the fourth quarter of the 2004 fiscal
year the Company had weighted-average basic shares outstanding
of 87.6 million versus 96.1 million in the fourth quarter of 2003.
FISCAL 2004 RESULTS: NET SALES Net sales for the 2004 fiscal
year were $2.021 billion, an increase of 18.3% versus the 2003 fis-
cal year net sales of $1.708 billion. The net sales increase was
attributable to the net addition of 88 stores during the 2004 fiscal
year, an increase in comparable stores sales of 2% for the year and
an increase in the direct-to-consumer business net sales of $35.6
million versus the 2003 fiscal year.
For the fiscal year, comparable store sales by brand were the
following: Abercrombie & Fitch declined 1%; abercrombie increased
1%; Hollister increased 13%; and the women’s and girls’ businesses
in each brand continued to be more significant than the men’s and
boys’. During the 2004 fiscal year, womens and girls represented
over 60% of the net sales for each of the brands. Hollister girls
achieved a mid-teen increase and abercrombie girls posted a mid-
single digit increase in comparable store sales for the 2004 fiscal year,
while Abercrombie & Fitch women’s had a low-single digit decrease.
For the 2004 fiscal year, sales per square foot in Hollister
stores were approximately 135% of the sales per square foot of
Abercrombie & Fitch stores in the same malls compared to 113%
for the 2003 fiscal year.
Direct-to-consumer merchandise net sales for the 2004 fiscal
year were $110.6 million, an increase of 37.6% versus last year’s
net sales of $80.4 million for the comparable period. Shipping
and handling revenue was $15.7 million in fiscal 2004 and $10.2
million in fiscal 2003. The direct-to-consumer business, includ-
ing shipping and handling revenue, accounted for 6.2% of net
sales compared to 5.3% of net sales for the 2004 and 2003 fiscal
years, respectively.
The impact of the four RUEHL stores opened during the fall
of fiscal 2004 was immaterial to the Company’s total net sales for
the 2004 fiscal year.
GROSS INCOME The Company’s gross income may not be com-
parable to those of other retailers since all significant costs related
to the Company’s distribution network, excluding direct shipping
costs related to the direct-to-consumer sales, are included in gen-
eral, administrative and store operating expenses (see “General,
Administrative and Store Operating Expenses” section below).
For the 2004 fiscal year, gross income increased to $909.8
million from $716.9 million in the 2003 fiscal year. The gross
income rate in the 2004 fiscal year was 45.0% versus 42.0% in the
2003 fiscal year. The increase was driven by improvements in IMU
across all three brands due to higher average unit retail pricing,
especially in Abercrombie & Fitch.
GENERAL, ADMINISTRATIVE AND STORE OPERATING
EXPENSES Full year general, administrative and store operating
expenses were $562.2 million in the 2004 fiscal year versus $385.8
million in the 2003 fiscal year. The general, administrative and
store operating expense rate in 2004 was 27.8% versus 22.6% in
2003. The increased rate during the 2004 fiscal year period was
primarily due to higher home office and store expenses. Home
office expenses increased largely due to the accrual for the settlement
of three related class action employment discrimination lawsuits
which represented 200 basis points and higher incentive compen-
sation accruals resulting from improved financial performance
during the year which represented 90 basis points. Store expenses
increased due to an increase in aggregate payroll which represented
150 basis points. Wage levels in Abercrombie & Fitch, abercrombie
and Hollister decreased in fiscal 2004 compared to fiscal 2003.
The decrease in wage levels was due to an increase in part-time
hours in order to provide better customer service at the stores which
resulted in a higher proportion of part-time employees at lower
rates of pay than last year.
Productivity at the distribution center, as measured in units
processed per labor hour, was 10% higher during the 2004 fiscal year
than during the 2003 fiscal year. Costs related to the distribution cen-
ter, excluding direct shipping costs related to the direct-to-consumer
sales, included in general, administrative and store operating
expenses were $20.3 million and $19.3 million for the 2004 and 2003
fiscal years, respectively.
OPERATING INCOME For the 2004 fiscal year, operating income
was $347.6 million compared to $331.2 million for the 2003 fiscal
year, an increase of 5.0%. The operating income rate for the 2004
fiscal year was 17.2% versus 19.4% in the 2003 fiscal year. The
decline was primarily due to the accrual for the settlement of three
related class action employment discrimination lawsuits and
higher payroll expense at both the home office and stores. The
decline was partially offset by sales increases, due to the increase
in comparable store sales and new stores, higher gross margin and
increases in average unit retail pricing in Abercrombie & Fitch,
abercrombie and Hollister.
INTEREST INCOME AND INCOME TAXES Net interest income for
the 2004 fiscal year was $5.2 million compared to $3.7 million for
the 2003 fiscal year. The increase in net interest income was due
to an increase in rates and average cash balances for the 2004 fiscal
year when compared to the 2003 fiscal year. Beginning in January
2005, the Company began investing in taxable money market invest-
ments; prior thereto, the Company invested in tax-free securities. The
effective tax rate for the 2004 fiscal year was 38.7% compared to 38.8%
for the 2003 fiscal year.
NET INCOME AND NET INCOME PER SHARE Net income for
the 2004 fiscal year was $216.4 million versus $204.8 million for the
2003 fiscal year, an increase of 5.6%. Net income for 2004 included the
after-tax impact of the settlement of three class action employment
discrimination lawsuits of $25.1 million.
Net income per weighted-average diluted share was $2.28 in
the fiscal 2004 year versus $2.06 in the fiscal 2003 year, an increase
of 10.7%. The increase in net income per diluted share outstanding
Abercrombie &Fitch
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