Abercrombie & Fitch 2006 Annual Report Download - page 19

Abercrombie &Fitch
37
At February 3, 2007, the Company had foreign net operating loss
carryovers that could be utilized to reduce future years’ tax liabilities.
A portion of these net operating losses begin expiring in the year 2012,
and some have an indefinite carryforward period. The Company has
established a valuation allowance to reflect the uncertainty of realizing
the benefits of these net operating losses in foreign jurisdictions. No
other 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 realized in the future.
11. LONG-TERM DEBT On December 15, 2004, the Company
entered into an amended and restated $250 million syndicated unse-
cured credit agreement (the “Amended Credit Agreement”). The pri-
mary purposes of the Amended Credit Agreement are for trade and
stand-by letters of credit and working capital. The Amended Credit
Agreement has several borrowing options, including an option where
interest rates are based on the agent bank’s “Alternate Base Rate,” and
another using the London Interbank Offered Rate. The facility fees
payable under the Amended Credit Agreement are based on the ratio
of the Company’s leveraged total debt plus 600% of forward minimum
rent commitments to consolidated earnings before interest, taxes,
depreciation, amortization and rent for the trailing four fiscal quarter
periods. The facility fees are projected to accrue at either 0.15% or
0.175% on the committed amounts per annum. The Amended 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) and transactions with
affiliates. The Amended Credit Agreement will mature on December
15, 2009. Letters of credit totaling approximately $53.7 million and
$45.1 million were outstanding under the Amended Credit Agreement
on February 3, 2007 and January 28, 2006, respectively. No borrowings
were outstanding under the Amended Credit Agreement on February
3, 2007 or on January 28, 2006.
12. RELATED PARTY TRANSACTIONS There were no materi-
al related party transactions in Fiscal 2006. Shahid & Company, Inc. has
provided advertising and design services for the Company since 1995.
Sam N. Shahid, Jr., who served on A&F’s Board of Directors until June
15, 2005, has been President and Creative Director of Shahid &
Company, Inc. since 1993. Fees paid to Shahid & Company, Inc. for
services provided during his tenure as a Director in Fiscal 2005 and
Fiscal 2004 were approximately $0.9 million and $2.1 million respec-
tively. These amounts do not include reimbursements to Shahid &
Company, Inc. for expenses incurred while performing these services.
13. RETIREMENT BENEFITS The Company maintains the
Abercrombie & Fitch Co. Savings & Retirement Plan, a qualified plan.
All associates are eligible to participate in this plan if they are at least
21 years of age and have completed a year of employment with 1,000
or more hours of service. In addition, the Company maintains the
Abercrombie & Fitch Co. Nonqualified Savings and Supplemental
Retirement Plan. Participation in this plan is based on service and
compensation. The Company’s contributions are based on a percent-
age of associates’ eligible annual compensation. The cost of these
plans was $15.0 million in Fiscal 2006, $10.5 million in Fiscal 2005 and
$9.9 million in Fiscal 2004.
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 SERP has been
actuarially valued by an independent third party and the expense asso-
ciated with the SERP is being accrued over the stated term of the
Amended and Restated Employment Agreement, dated as of August
15, 2005, between the Company and its CEO. The cost of this plan
was $6.6 million in Fiscal 2006, $2.5 million in Fiscal 2005 and $1.9
million in Fiscal 2004.
The Company established the rabbi trust during the third quarter
of Fiscal 2006, the purpose is to be a source of funds to match respec-
tive funding obligations to participants in the Abercrombie & Fitch
Nonqualified Savings and Supplemental Retirement Plan and the
Chief Executive Officer Supplemental Executive Retirement Plan. As
of February 3, 2007, total assets related to the Rabbi Trust were $33.5
million, which included $18.3 million of available-for-sale securities
and $15.3 million related to the cash surrender value of trust owned life
insurance policies.
14. CONTINGENCIES A&F is a defendant in lawsuits arising in the
ordinary course of business.
The Company previously reported that it was aware of 20 actions
that had been filed against it and certain of its current and former offi-
cers and directors on behalf of a purported class of shareholders who
purchased A&F’s Common Stock between October 8, 1999 and October
13, 1999. These actions originally were filed in the United States District
Courts for the Southern District of New York and the Southern District
of Ohio, Eastern Division, alleging violations of the federal securities
laws and seeking unspecified damages, and were later transferred to the
Southern District of New York for consolidated pretrial proceedings
under the caption In re Abercrombie & Fitch Securities Litigation. The
parties have reached a settlement of these matters. According to the
terms of the settlement, the Company’s insurance company, on behalf
of the defendants, has paid $6.1 million into a settlement fund in full
consideration for the settlement and release of all claims that were
asserted or could have been asserted in the action by the plaintiffs and
the other members of the settlement class. The settlement will not have
a material effect on the Company’s financial statements. The judge
who was presiding over the cases, after notice to the settlement class and
a hearing held on January 30, 2007, determined that the proposed set-
tlement was fair, reasonable and adequate and approved the settlement
as final and binding.
The Company has been named as a defendant in five class action
lawsuits (as described in more detail below) regarding overtime com-
pensation. Four of the cases were previously reported. Of these four,
one was dismissed and not appealed, another was dismissed and unsuc-
Abercrombie &Fitch
36
nized compensation cost, net of estimated forfeitures, related to non-
vested restricted stock units. The unrecognized cost is expected to be
recognized over a weighted-average period of 1.3 years.
5. PROPERTY AND EQUIPMENT Property and equipment, at
cost, consisted of (thousands):
2006 2005
Land $ 32,291 $ 15,985
Building 181,111 117,398
Furniture, fixtures and equipment 568,564 444,540
Leasehold improvements 754,224 625,732
Construction in progress 122,695 79,480
Other 10,168 3,248
Total $1,669,053 $1,286,383
Less: Accumulated depreciation and amortization (576,771) (472,780)
Property and equipment, net $1,092,282 $ 813,603
6. DEFERRED LEASE CREDITS, NET Deferred lease credits are
derived from payments received from landlords to partially offset store
construction costs and are reclassified between current and long-term
liabilities. The amounts, which are amortized over the life of the relat-
ed leases, consisted of the following (thousands):
2006 2005
Deferred lease credits $423,390 $376,460
Amortized deferred lease credits (184,024) (153,508)
Total deferred lease credits, net $239,366 $222,952
7. 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):
2006* 2005 2004
Store rent:
Fixed minimum $196,690 $170,009 $141,450
Contingent 20,192 16,178 6,932
Total store rent $216,882 $186,187 $148,382
Buildings, equipment and other 5,646 3,241 1,663
Total rent expense $222,528 $189,428 $150,045
*Fiscal 2006 is a fifty-three week year.
At February 3, 2007, the Company was committed to non-cancelable
leases with remaining terms of one to 15 years. A summary of operating
lease commitments under non-cancelable leases follows (thousands):
Fiscal 2007 $215,499 Fiscal 2010 $195,007
Fiscal 2008 $215,670 Fiscal 2011 $178,448
Fiscal 2009 $$206,830 Thereafter $660,227
8. ACCRUED EXPENSES Accrued expenses included gift card liabil-
ities of $65.0 million and construction in progress of $48.0 million at
February 3, 2007. Accrued expenses included gift card liabilities of $53.2
million and construction in progress of $19.5 million at January 28, 2006.
9. OTHER LIABILITIES Other liabilities included straight-line
rent of $45.8 million and $38.8 million at February 3, 2007 and
January 28, 2006, respectively.
10. INCOME TAXES The provision for income taxes consisted of
(thousands):
2006* 2005 2004
Currently payable:
Federal $236,553 $184,884 $112,537
State 24,885 32,641 19,998
$261,438 $217,525 $132,535
Deferred:
Federal $ (10,271) $ (5,980) $ 2,684
State (1,367) 3,881 1,258
$ (11,638) $ (2,099)) $ 3,942
Total provision $249,800 $215,426 $136,477
*Fiscal 2006 is a fifty-three week year.
A reconciliation between the statutory federal income tax rate and the
effective income tax rate follows:
2006 2005 2004
Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax effect 2.3 4.3 3.9
Other items, net (0.1) (0.1) (0.2)
Total 37.2% 39.2% 38.7%
Amounts paid directly to taxing authorities were $272.0 million,
$122.0 million and $114.0 million in Fiscal 2006, Fiscal 2005, and
Fiscal 2004, respectively.
The effect of temporary differences which give rise to deferred
income tax assets (liabilities) were as follows (thousands):
2006* 2005
Deferred tax assets:
Deferred compensation $ 37,725 $ 24,046
Rent 76,890 88,399
Accrued expenses 15,003 14,317
Inventory 5,642 3,982
Foreign net operation losses 2,709 –
Valuation allowance on foreign net
operation losses (2,709)
–
Total deferred tax assets $ 135,260 $ 130,744
Deferred tax liabilities:
Store supplies $ (11,578) $ (10,851)
Property and equipment (120,906) (128,735)
Total deferred tax liabilities $(132,484) $ (139,586)
Net deferred income tax liabilities $ 2,776 $ (8,842)
*Fiscal 2006 is a fifty-three week year