Abercrombie & Fitch 2007 Annual Report Download - page 16

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million, $7.7 million and $3.8 million at February 2, 2008, February
3, 2007 and January 28, 2006, respectively.
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.
In lieu of amortizing the initial balances over their estimated useful
lives, the Company expenses all subsequent replacements and
adjusts the initial balance, as appropriate, for changes in store quan-
tities or replacement cost. This policy approximates the expense that
would have been recognized under accounting principles generally
accepted in the United States of America (“GAAP”). Store supply
categories are classified as current or non-current based on their
estimated useful lives. Packaging is expensed as used. Current
store supplies were $22.5 million and $20.0 million at February 2,
2008 and February 3, 2007, respectively. Non-current store sup-
plies were $21.7 million and $20.6 million at February 2, 2008 and
February 3, 2007, respectively.
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 30 years for buildings; the lesser of the useful life of
the asset, which ranges from three to 15 years, or the term of the
lease for leasehold improvements; the lesser of the useful life of the
asset, which ranges from three to seven years, or the term of the
lease when applicable for information technology; and three to 20
years for other property and equipment. The cost of assets sold or
retired and the related accumulated depreciation or amortization
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 at the store level periodically for
impairment or whenever events or changes in circumstances indicate
that full recoverability of net assets through future cash flows is in
question. Factors used in the evaluation include, but are not limited
to, management’s plans for future operations, recent operating results
and projected cash flows. The Company incurred impairment charg-
es of approximately $2.3 million for Fiscal 2007, including $1.6 mil-
lion of non-store impairment charges compared to $0.3 million for
Fiscal 2006.
INCOME TAXES Income taxes are calculated in accordance with
SFAS No. 109, “Accounting for Income Taxes,” which requires the use
of the asset and liability method. Deferred tax assets and liabilities
are recognized based on the difference between the financial state-
ment carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using current enacted tax rates in effect for the years in which those
temporary differences are expected to reverse. Inherent in the mea-
surement of deferred balances are certain judgments and interpretations
of enacted tax law and published guidance with respect to applicability
to the Company’s operations. A valuation allowance is established
against deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
Company has recorded a valuation allowance against the deferred
tax asset arising from the net operating loss of a foreign subsidiary.
Supplemental Retirement Plan and the Chief Executive Officer
Supplemental Executive Retirement Plan. As of February 2, 2008,
total assets held in the Rabbi Trust were $51.3 million, which includ-
ed $18.6 million of available-for-sale municipal notes and bonds with
maturities that ranged from four to six years, trust-owned life insur-
ance policies with a cash surrender value of $31.3 million and $1.4
million held in money market accounts. As of February 3, 2007, total
assets held in the Rabbi Trust were $33.5 million, which included
$18.3 million of available-for-sale municipal notes and bonds and
trust-owned life insurance policies with a cash surrender value of
$15.3 million. The Rabbi Trust assets are consolidated in accordance
with Emerging Issues Task Force 97-14, “Accounting for Deferred
Compensation Agreements Where Amounts Earned Are Held in a Rabbi
Trust and Invested” (“EITF 97-14”) and recorded at fair value in other
assets on the Consolidated Balance Sheets and are restricted as to their
use as noted above.
There were $0.4 million in realized losses for the fifty-two weeks
ended February 2, 2008 and no realized gains or losses for the
fifty-three weeks ended February 3, 2007, all related to available-
for-sale securities. Net unrealized gains were approximately $.01
million as of February 2, 2008 and net unrealized losses were
approximately $0.7 million as of February 3, 2007, all related to
available-for-sale securities.
CREDIT CARD RECEIVABLES As part of the normal course of
business, the Company has approximately three to four days of sales trans-
actions outstanding with its third-party credit card vendors at any point.
The Company classifies these outstanding balances as receivables.
INVENTORIES Inventories are principally valued at the lower
of average cost or market utilizing the retail method. The Company
determines market value as the anticipated future selling price of the
merchandise less a normal margin. Therefore, an initial markup is
applied to inventory at cost in order to establish a cost-to-retail ratio.
Permanent markdowns, when taken, reduce both the retail and cost
components of inventory on hand so as to maintain the already estab-
lished cost-to-retail relationship. The inventory balance was $333.2
million and $427.4 million at February 2, 2008 and February 3, 2007,
respectively. The markdown reserve was $5.4 million, $6.8 million
and $10.0 million at February 2, 2008, February 3, 2007 and January
28, 2006, respectively.
The fiscal year is comprised of two principal selling seasons: Spring
(the first and second fiscal quarters) and Fall (the third and fourth
fiscal quarters). The Company classifies its inventory into three cat-
egories: spring fashion, fall fashion and basic. The Company reduces
inventory valuation at the end of the first and third fiscal quarters to
reserve for projected inventory markdowns required to sell through
the current season inventory prior to the beginning of the following
season. Additionally, the Company reduces inventory at season end
by recording a markdown reserve at the end of the second and fourth
fiscal quarters that represents the estimated future anticipated sell-
ing price decreases necessary to sell through the remaining carryover
inventory for the season just passed.
Further, as part of inventory valuation, inventory shrinkage esti-
mates, based on historical trends from actual physical inventories, are
made that reduce the inventory value for lost or stolen items. The
Company performs physical inventories throughout the year and
adjusts the shrink reserve accordingly. The shrink reserve was $11.5
28
1. BASIS OF PRESENTATION Abercrombie & Fitch Co.
(“A&F”), through its wholly-owned subsidiaries (collectively, A&F and
its wholly-owned 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 accompanying consolidated financial statements include the his-
torical financial statements of, and transactions applicable to, the Company
and reflect the assets, liabilities, results of operations and cash flows.
FISCAL YEAR The Company’s fiscal year ends on the Saturday
closest to January 31, typically resulting in a fifty-two week year,
but occasionally giving rise to an additional week, resulting in a
fifty-three week year. Fiscal years are designated in the consoli-
dated financial statements and notes by the calendar year in which
the fiscal year commences. All references herein to “Fiscal 2007”
represent the results of the 52-week fiscal year ended February
2, 2008; to “Fiscal 2006” represent the 53-week fiscal year ended
February 3, 2007; and to “Fiscal 2005” represent the 52-week fis-
cal year ended January 28, 2006. In addition, all references herein
to “Fiscal 2008” represent the 52-week fiscal year that will end on
January 31, 2009.
RECLASSIFICATIONS Certain amounts have been reclassi-
fied to conform to the current year presentation. A&F periodi-
cally acquires shares of its Class A Common Stock, par value $0.01
per share (“Common Stock”) under various Board of Directors-
authorized share buy-back plans. The shares acquired are held as
treasury stock and are not retired. A&F utilizes the treasury stock
when issuing shares for stock option exercises and restricted stock unit
vestings. In accordance with Accounting Principles Board (“APB”)
Opinion No. 6, “Status of Accounting Research Bulletins,” “gains” on
sales of treasury stock not previously accounted for as constructively
retired should be credited to paid-in capital; “losses” may be charged
to paid-in capital to the extent of previous net “gains” from sales or
retirements of the same class of stock, otherwise to retained earn-
ings. On the Consolidated Statements of Shareholders’ Equity for
the year ended January 28, 2006, the Company reclassified treasury
stock “losses” of $31.3 million to retained earnings that were previ-
ously netted against paid-in capital. Amounts reclassified did not
have an effect on the Company’s results of operations or Consolidated
Statement of Cash Flows.
In connection with the Company’s adoption of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement
No. 109” (“FIN 48”) on February 4, 2007, a $2.8 million cumulative
effect adjustment was recorded as a reduction to beginning of the year
retained earnings. The Company’s unrecognized tax benefits as of
February 4, 2007 were reclassified from current taxes payables to other
long-term liabilities. See Note 10, “Income Taxes” for information
about the adoption of FIN 48.
SEGMENT REPORTING In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 131, “Disclosures
about Segments of an Enterprise and Related Information,” (“SFAS
No. 131”), the Company determines its operating segments on the
same basis that it uses internally to evaluate performance. The
operating segments identified by the Company include Abercrombie
& Fitch, abercrombie, Hollister, RUEHL and Gilly Hicks. The
operating segments have been aggregated and are reported as one
reportable financial segment. RUEHL and Gilly Hicks were deter-
mined to be immaterial for segment reporting purposes, and are
therefore included in the one reportable segment as they have similar
economic characteristics and meet the majority of the aggregation
criteria in paragraph 17 of SFAS No. 131. The Company aggregates
its operating segments because they meet the aggregation criteria
set forth in paragraph 17 of SFAS No. 131. The Company believes
its operating segments may be aggregated for financial reporting
purposes because they are similar in each of the following areas:
class of consumer, economic characteristics, nature of products,
nature of production processes and distribution methods. Revenues
and long-lived assets relating to the Company’s international opera-
tions in each of Fiscal 2007, Fiscal 2006 and Fiscal 2005 were not
material and were not reported separately from domestic revenues
and long-lived assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated finan-
cial statements include the accounts of A&F and its subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND EQUIVALENTS Cash and equivalents include
amounts on deposit with financial institutions and investments, pri-
marily held in money market accounts, with original maturities of less
than 90 days. Outstanding checks at year-end are reclassified from
cash to liabilities in the Condensed Consolidated Balance Sheet.
INVESTMENTS Investments with original maturities greater
than 90 days are accounted for in accordance with SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,”
and are classified accordingly by the Company at the time of pur-
chase. At February 2, 2008, the Company’s investments in marketable
securities consisted of investment grade auction rate securities
(“ARS”), all classified as available-for-sale and reported at fair value
based on the Dutch auction market as of February 2, 2008, with
maturities that range from eight to 34 years. As of February 2, 2008,
the Company held approximately $530.5 million in ARS as market-
able securities. Approximately $272.1 million of the securities were
invested in closed end municipal bond funds and approximately
$258.4 million were invested in securities issued by state agencies
which issue student loans. At February 3, 2007, the Company’s
investments in marketable securities consisted primarily of invest-
ment grade municipal notes and bonds and investment grade ARS,
all classified as available-for-sale and reported at fair value based on
the market, with maturities that could range from one month to
forty years. As of February 3, 2007, the marketable securities con-
sisted of approximately $346.1 million of ARS, approximately $97.1
million of municipal notes and bonds and approximately $4.6 mil-
lion of dividend received deduction.
The interest rates of ARS reset through an auction process at pre-
determined periods ranging from seven to 35 days.
The Company established an irrevocable rabbi trust (the “Rabbi
Trust”) during the third quarter of Fiscal 2006, the purpose of which
is to be a source of funds to match respective funding obligations to
participants in the Abercrombie & Fitch Nonqualified Savings and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS