Abercrombie & Fitch 2006 Annual Report Download - page 9

Abercrombie &Fitch
expense for Fiscal 2006 was $1.187 billion compared to $1.001 billion for
Fiscal 2005. For Fiscal 2006, the stores and distribution expense rate was
35.8% compared to 35.9% in the previous year. The decrease in the rate
primarily resulted from the Company’s ability to leverage store-related
costs on a 2% increase in comparable store sales.
The DC’s UPH rate for the year was flat in Fiscal 2006 versus
Fiscal 2005. During Fiscal 2006, while the second DC was being built,
the overall DC’s UPH was impacted by the Company’s first DC
reaching near capacity, a result of the Company’s focus on strategically
flowing inventory to stores throughout the year. The Company expects
the UPH level to increase during Fiscal 2007.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE
Marketing, general and administrative expense during Fiscal 2006 was
$373.8 million compared to $313.5 million in Fiscal 2005. For the current
year, the marketing, general and administrative expense rate was 11.3%,
flat compared to Fiscal 2005. Fiscal 2006 included a charge of $13.6
million related to the adoption of SFAS 123(R). Fiscal 2005 included a
non-recurring charge of $13.5 million related to a severance agreement
of an executive officer.
OTHER OPERATING INCOME, NET Other operating income
for Fiscal 2006 was $10.0 million compared to $5.5 million for Fiscal
2005. The increase was related to gift cards for which the Company
has determined the likelihood of redemption to be remote and insur-
ance reimbursements received during the first and second quarters for
Fiscal 2006 related to stores damaged by fire and Hurricane Katrina,
respectively.
OPERATING INCOME Fiscal 2006 operating income was $658.1
million compared to $542.7 million for Fiscal 2005, an increase of
21.3%. The operating income rate for Fiscal 2006 was 19.8% versus
19.5% in the previous year.
INTEREST INCOME, NET AND INCOME TAXES Net interest
income for Fiscal 2006 was $13.9 million compared to $6.7 million for
Fiscal 2005. The increase in net interest income was due to higher
interest rates and higher available investment balances during Fiscal
2006 compared to Fiscal 2005.
The effective tax rate for Fiscal 2006 was 37.2% compared to 39.2% for
Fiscal 2005. The decrease in the effective tax rate related primarily to favor-
able settlements of tax audits, favorable changes in estimates of potential
outcomes of certain state tax matters and an increase in tax exempt income
during Fiscal 2006. Fiscal 2005 tax expense reflected a charge related to the
Company’s change in estimate of the potential outcome of certain state tax
matters. The Company estimates that the annual effective tax rate for
Fiscal 2007 will be approximately 39%.
NET INCOME AND NET INCOME PER SHARE Net income
for Fiscal 2006 was $422.2 million versus $334.0 million in Fiscal 2005,
an increase of 26.4%. Net income included after-tax charges of $9.9
million in Fiscal 2006 related to the adoption of SFAS 123(R) and
non-recurring charges of $8.2 million in Fiscal 2005 related to a sever-
ance agreement of an executive officer. Net income per diluted
weighted-average share was $4.59 in Fiscal 2006 versus $3.66 in Fiscal
2005, an increase of 25.4%.
FISCAL 2005 COMPARED TO FISCAL 2004: FOURTH
QUARTER RESULTS: NET SALES
Net sales for the fourth quar-
ter of Fiscal 2005 were $961.4 million, up 39.9% versus net sales of
$687.3 million in the fourth quarter of Fiscal 2004. The net sales
increase was primarily attributable to a comparable store sales increase
of 28% for the quarter, the net addition of 63 stores during Fiscal 2005,
and an increase in direct-to-consumer business net sales (including
shipping and handling revenue) of $8.1 million versus the comparable
period in the fourth quarter of Fiscal 2004.
By merchandise brand, comparable store sales for the quarter were as
follows: Abercrombie & Fitch increased 18% with women’s comparable
store sales increasing by a low-twenties percentage and mens increasing
by a mid-teen percentage; abercrombie achieved a 59% increase in
comparable store sales with girls achieving a high-sixties increase and
boys posting a high-thirties increase; and Hollister increased by 34%
for the fourth quarter with bettys increasing comparable store sales
by a mid-thirties percentage and dudes realizing an increase in the
low-thirties. In RUEHL, there were eight stores open in Fiscal 2005
and four stores open in Fiscal 2004. As a result comparable store sales
results were not meaningful.
On a regional basis, comparable store sales increases for the Company
ranged from the mid-twenties to the low-thirties across the United States.
Stores located in the North Atlantic and Southwest had the best compa-
rable store sales performance on a consolidated basis.
In Abercrombie & Fitch, the women’s comparable store sales increase
for the quarter was driven by strong performances in polos, fleece, outer-
wear and sweaters. The men’s comparable store sales growth was driven
by increases in polos, graphic tees, jeans and personal care, offset by
decreases in woven shirts and accessories.
In the kids’ business, the girls’ comparable store sales increased as a
result of strong sales performances across the majority of the categories,
led by polos, fleece, graphic tees and jeans. Boys’ comparable store sales
increase was driven by the following categories: polos, jeans, graphic
tees and fleece, offset by slight decreases in the woven shirt and
activewear categories.
In Hollister, bettys had strong comparable store sales increases in polos,
fleece, sweaters and graphic tees. The increase in dudes’ comparable store
sales was the result of strong performance in polos, graphic tees, fleece and
personal care categories for the quarter, offset by decreases in woven shirts
and sweaters.
Direct-to-consumer merchandise net sales, which are sold through the
Company’s web sites and catalogue, in the fourth quarter of Fiscal 2005
were $47.5 million, an increase of 18.5% versus net sales of $40.1 million
in the fourth quarter of Fiscal 2004. Shipping and handling revenue for
the corresponding periods was $6.2 million in Fiscal 2005 and $5.5 mil-
lion in Fiscal 2004. The direct-to-consumer business, including shipping
and handling revenue, accounted for 5.6% of net sales in the fourth quar-
ter of Fiscal 2005 compared to 6.6% in the fourth quarter of Fiscal 2004.
The decrease in sales penetration was due to the implementation of brand
protection initiatives that reduced the amount of sale merchandise avail-
able on the web sites and limited the customer’s ability to purchase large
quantities of the same item.
GROSS PROFIT Gross profit during the fourth quarter of Fiscal
2005 was $639.4 million compared to $455.8 million in Fiscal 2004.
The gross profit rate for the fourth quarter of Fiscal 2005 was 66.5%,
up 20 basis points from a rate of 66.3% in the fourth quarter of Fiscal
2004. The increase in gross profit rate resulted largely from a higher
IMU during the fourth quarter of Fiscal 2005 and a reduction in
shrink versus the fourth quarter of Fiscal 2004, partially offset by a
slightly higher markdown rate. The improvement in IMU during the
fourth quarter was a result of higher average unit retail pricing across
all brands. Abercrombie & Fitch, abercrombie and Hollister all oper-
ated at similar IMU margins.
STORES AND DISTRIBUTION EXPENSE Stores and distribu-
tion expense for the fourth quarter of Fiscal 2005 was $293.5 million
compared to $223.8 million for the comparable period in Fiscal 2004.
The stores and distribution expense rate for the fourth quarter of Fiscal
2005 was 30.5% compared to 32.6% in the fourth quarter of Fiscal 2004.
The Company’s total store and distribution expense, as a percent of
net sales, during the fourth quarter of Fiscal 2005 decreased 210 basis
points versus the comparable period during Fiscal 2004 as a result
of the Company’s ability to leverage fixed costs due to significant
comparable store sales increases partially offset by increases in store
management and loss prevention programs during Fiscal 2005. The
leveraging of fixed costs included store payroll expense, rent, utilities
and other landlord expense, depreciation and amortization and
repairs and maintenance expense. The Company believes increases in
store management and loss prevention programs were key in driving
sales and reducing shrink levels during the quarter, which had a favor-
able impact on the Company’s gross profit rate.
The DC productivity level, measured in UPH, was 20% lower in the
fourth quarter of Fiscal 2005 versus the fourth quarter of Fiscal 2004. The
UPH rate decrease resulted from increases in inventory and from a
change in the way the Company flowed merchandise to its stores.
Merchandise was routed to the stores in a more gradual process in order
to avoid stockroom congestion at the stores. This resulted in the DC
approaching capacity levels, which in turn resulted in a lower productivity
rate due to an increased handling of inventory.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE
Marketing, general and administrative expense during the fourth
quarter of Fiscal 2005 was $80.8 million compared to $66.1 million
during the same period in Fiscal 2004. For the fourth quarter of
Fiscal 2005, the marketing, general and administrative expense rate
was 8.4% compared to 9.6% in the fourth quarter of Fiscal 2004.
The decrease in the marketing, general and administrative expense
rate was due to the Company’s ability to leverage home office pay-
roll, and a reduction in sample expenses and marketing expenses
due to timing of photo shoots, offset by increases in outside services
mostly due to legal costs.
OTHER OPERATING INCOME, NET Fourth quarter other
operating income for Fiscal 2005 was $2.3 million compared to $4.3 mil-
lion for the fourth quarter of Fiscal 2004. The decrease was related to
gift cards for which the Company has determined the likelihood of
redemption to be remote.
OPERATING INCOME Operating income during the fourth quarter
of Fiscal 2005 increased to $267.5 million from $170.2 million in Fiscal
2004, an increase of 57.2%. The operating income rate for the fourth
quarter of Fiscal 2005 was 27.8% compared to 24.8% for the fourth
quarter of Fiscal 2004.
INTEREST INCOME, NET AND INCOME TAXES Fourth
quarter net interest income was $2.4 million in Fiscal 2005 com-
pared to $1.3 million during the comparable period in Fiscal 2004.
The increase in net interest income was due to higher rates on
investments, partially offset by lower average investment balances
during the fourth quarter of Fiscal 2005 when compared to the same
period in Fiscal 2004. The Company continued to invest in invest-
ment grade municipal notes and bonds and investment grade auc-
tion rate securities. The effective tax rate for the fourth quarter of
Fiscal 2005 was 39.0% compared to 39.2% for the Fiscal 2004 com-
parable period.
NET INCOME AND NET INCOME PER SHARE Net income for
the fourth quarter of Fiscal 2005 was $164.6 million versus $104.3 million
for the fourth quarter of Fiscal 2004, an increase of 57.8%. Net income
per diluted weighted-average share outstanding for the fourth quarter
of Fiscal 2005 was $1.80 versus $1.15 for the comparable period in Fiscal
2004, an increase of 56.5%.
Abercrombie &Fitch
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