Abercrombie & Fitch 2007 Annual Report Download - page 8

OVERVIEW 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. A
store is included in comparable store sales when it has been open as the
same brand at least one year and its square footage has not been expanded
or reduced by more than 20% within the past year.
Fiscal 2007 includes fifty-two weeks and Fiscal 2006 includes fifty-
three weeks. For purposes of MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, the thirteen and fifty-two week periods ended
February 2, 2008 are compared to the fourteen and fifty-three week
periods ended February 3, 2007. For Fiscal 2007, comparable store sales
compare the thirteen and fifty-two week periods ended February 2,
2008 to the thirteen and fifty-two week periods ended February 3,
2007. For Fiscal 2006, comparable store sales compare the fourteen
and fifty-three week periods ended February 3, 2007 to the fourteen
and fifty-three week periods ended February 4, 2006.
The Company had net sales of $3.750 billion for the fifty-two
weeks ended February 2, 2008, up 13.0% from $3.318 billion for the
fifty-three weeks ended February 3, 2007. Operating income for
Fiscal 2007 increased 12.5% to $740.5 million from $658.1 million for
Fiscal 2006. Net income was $475.7 million in Fiscal 2007, up 12.7%
from $422.2 million in Fiscal 2006. Net income per diluted weighted-
average share was $5.20 for Fiscal 2007 compared to $4.59 in Fiscal
2006, an increase of 13.3%.
The Company generated cash from operations of $817.8 million in
Fiscal 2007 versus $582.2 million in Fiscal 2006, resulting primarily
from a reduction in inventory and sales and earnings growth. During
Fiscal 2007, the Company used cash from operations to finance its
growth strategy, including the opening of 58 new Hollister stores, 25 new
abercrombie stores, seven new RUEHL stores, six new Abercrombie &
Fitch stores and three new Gilly Hicks stores, as well as the remodeling,
converting or refreshing of existing Abercrombie & Fitch, abercrombie,
Hollister and RUEHL stores.
The Company also used excess cash in Fiscal 2007 to pay dividends
of $0.70 per share, for a total of $61.3 million and to repurchase
approximately 3.6 million shares of A&F Common Stock with a value
of approximately $287.9 million. The Company believes that share
repurchases and dividends are an important way for the Company to
deliver shareholder value, but the Company’s priority will be to invest
in the business to support its domestic and international growth plans.
The Company continues to be committed to maintaining sufficient
cash on the balance sheet to support daily operations, fund growth
initiatives and provide a degree of protection against unanticipated
business volatility. In addition, the Company has $250 million avail-
able, less outstanding letters of credit, under its unsecured credit
agreement to support operations.
FINANCIAL SUMMARY The following summarized financial
and operational data compares Fiscal 2007 to Fiscal 2006 and Fiscal
2006 to Fiscal 2005:
% Change
2007- 2006-
2007 2006* 2005 2006 2005
Net sales (thousands) $3,749,847 $ 3,318,158 $ 2,784,711 13% 19%
Net sales by brand (thousands)
Abercrombie & Fitch $ 1,638,929 $ 1,515,123 $1,424,013 8% 6%
abercrombie $ 471,045 $ 405,820 $ 344,938 16% 18%
Hollister $1,589,452 $ 1,363,233 $ 999,212 17% 36%
RUEHL $ 50,191 $ 33,982 $ 16,548 48% 105%
Gilly Hicks*** $ 230 n / a n / a n / a n / a
Increase (decrease) in
comparable store sales** (1)% 2 % 26%
Abercrombie & Fitch 0 % (4)% 18%
abercrombie 0 % 10 % 54%
Hollister (2)% 5 % 29%
RUEHL (9)% 14 % n / a
Net retail sales increase attributable
to new and remodeled stores,
websites and catalogue 14 % 17% 12%
Net retail sales per
average store (thousands) $ 3,470 $ 3,533 $ 3,284 (2)% 8 %
Abercrombie & Fitch $ 4,073 $ 3,945 $ 3,784 3 % 4 %
abercrombie $ 2,230 $ 2,251 $ 1,957 (1)% 15 %
Hollister $ 3,550 $ 3,732 $ 3,442 (5)% 8 %
RUEHL $ 2,602 $ 3,248 $ 2,903 (20)% 12 %
Net retail sales per average
gross square foot $ 489 $ 500 $ 464 (2) % 8 %
Abercrombie & Fitch $ 463 $ 450 $ 432 3 % 4 %
abercrombie $ 493 $ 513 $ 446 (4)% 15 %
Hollister $ 531 $ 568 $ 528 (7)% 7 %
RUEHL $ 282 $ 363 $ 315 (22)% 15 %
Transactions per average retail store 53,152 55,142 50,863 (4)% 8 %
Abercrombie & Fitch 49,915 51,704 49,685 (3)% 4 %
abercrombie 33,907 34,786 30,356 (3)% 15 %
Hollister 65,564 68,740 64,913 (5)% 6 %
RUEHL 31,880 38,554 26,215 (17)% 47 %
Average retail transaction value $ 65.29 $ 64.07 $ 64.56 2 % (1)%
Abercrombie & Fitch $ 81.59 $ 76.30 $ 76.16 7 % 0 %
abercrombie $ 65.76 $ 64.72 $ 64.47 2 % 0 %
Hollister $ 54.15 $ 54.30 $ 53.03 0 % 2 %
RUEHL $ 81.61 $ 84.24 $ 110.74 (3)% (24)%
Average units per retail transaction 2.42 2.35 2.25 3 % 4 %
Abercrombie & Fitch 2.37 2.26 2.18 5 % 4 %
abercrombie 2.82 2.78 2.66 1 % 5 %
Hollister 2.36 2.32 2.21 2 % 5 %
RUEHL 2.48 2.57 2.28 (4)% 13 %
Average unit retail sold $ 26.98 $ 27.26 $ 28.69 (1)% (5)%
Abercrombie & Fitch $ 34.43 $ 33.76 $ 34.94 2 % (3)%
abercrombie $ 23.32 $ 23.28 $ 24.24 0 % (4)%
Hollister $ 22.94 $ 23.41 $ 24.00 (2)% (2)%
RUEHL $ 32.91 $ 32.78 $ 48.57 0 % (33)%
*Fiscal 2006 was a fifty-three week year.
**A store is included in comparable store sales when it has been open as the same brand at least one
year and its square footage has not been expanded or reduced by more than 20% within the past year.
Note Fiscal 2007 comparable store sales are compared to store sales for the comparable fifty-two
weeks ended February 3, 2007. Note that Fiscal 2006 comparable store sales are compared to store
sales for the comparable fifty-three weeks ended February 4, 2006.
*** Net sales for Gilly Hicks during Fiscal 2007 reflect the activity of 3 stores opened in January 2008.
to open in Spring 2009. The Company anticipates the Hollister flag-
ship to fortify the iconic status of the brand in order to support its
international growth. Construction is also currently underway for the
Abercrombie & Fitch flagship in Tokyo’s Ginza district, with a planned
opening in late 2009. Opportunities are also being assessed for the
Abercrombie & Fitch and Hollister brands in continental Europe and
other sites in Japan.
In addition to a focus on the domestic and international expansion
of existing iconic brands, the Company also views new concepts as an
integral part of its long-term strategy.
In January 2008, the Company launched its fifth concept, Gilly
Hicks. This concept provides the opportunity to expand the existing
emotional connection with the Company’s female customers by offering
bras, underwear, personal care products, sleepwear and at-home products.
The Company operated three Gilly Hicks stores at the end of Fiscal
2007 and plans to open 15 stores in Fiscal 2008.
Although profitability was not achieved as originally expected,
RUEHL made significant progress in Fiscal 2007 with improvements to
gross margin and reductions in store operating and store construction
costs. In Fiscal 2008, the Company will continue to focus on improving
the quality level of the merchandise in order to be consistent with the
brand’s positioning and pricing strategy. The Company expects brand
awareness to grow from the RUEHL website which has offered a full
product assortment since January 2008. However, the Company will
moderate the pace of new store openings until RUEHL can be estab-
lished as a proven concept.
The Company also views product line expansion through its existing
brands as another promising growth opportunity. In October 2007, the
Company launched a body care line in 93 Hollister stores for both Dudes
and Bettys. Holiday purchases of body care products were primarily
incremental transaction units indicating the product line is a way to help
fuel organic sales growth. As a result, the Company has decided to expand
the body care products to all Hollister stores in Fiscal 2008.
The Company is in the midst of an investment and expansion phase
targeted at driving consistent and sustainable long-term value growth.
The Company believes strongly in its brands and in the potential for its
international expansion plan, and will continue to invest during economic
cycles. If the current general macro-economic downturn persists and
negatively impacts sales, the Company’s cost structure will be aligned
accordingly, but resource cuts that could jeopardize the ability to implement
the Company’s long-term growth initiatives will be avoided.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following data represents the Company’s Consolidated Statements of
Net Income for the last three fiscal years, expressed as a percentage of net sales:
2007 2006* 2005
Net Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 33.0 33.4 33.5
Gross Profit 67.0 66.6 66.5
Stores and Distribution Expense 37.0 35.8 35.9
Marketing, General and Administrative Expense 10.6 11.3 11.3
Other Operating Income, Net (0.3) (0.3) (0.2)
Operating Income 19.7 19.8 19.5
Interest Income, Net (0.5) (0.4) (0.2)
Income Before Income Taxes 20.2 20.3 19.7
Provision for Income Taxes 7.6 7.5 7.7
Net Income 12.7% 12.7% 12.0%
*Fiscal 2006 was a fifty-three week year.
CURRENT TRENDS AND OUTLOOK In Fiscal 2007, the
Company once again produced record sales and earnings, driven by
an increased gross profit rate and a lower marketing, general and
administrative expense rate. The Company maintained high store
sales productivity and a high operating margin, even as the Company
continued to invest in the long-term positioning of its brands. The Company
believes its ability to maintain the sale of full-priced merchandise and
consistent high store sales productivity is a result of its commitment to
offer trend-right merchandise, with the highest level of quality, and to
create an exceptional in-store experience, which establishes an emo-
tional connection with its customers.
The Company’s commitment to its brands is demonstrated by strategic
investments made in the areas of stores, merchandise development and
home office infrastructure, which the Company believes will enhance
quality, improve productivity and support future growth. Specifically,
major implementations in planning, merchandising and allocation
information systems over the next year should generate supply chain
improvements and serve as a platform for future growth and expansion,
both domestically and internationally.
The Company believes it has significant growth potential both domesti-
cally and internationally. Domestically, the Company believes its growth
potential will come from proven brands like Hollister and developing concepts
like Gilly Hicks. Internationally, the Company believes its growth will
come from its Abercrombie & Fitch, abercrombie and Hollister brands.
Recent international performance highlights the opportunity for
expansion. In Fiscal 2007, the three Abercrombie & Fitch and three
Hollister stores located in Canada continued to generate more than
three times the sales productivity of the average U.S. counterpart and
the Abercrombie & Fitch London flagship generated substantial sales
per selling square foot similar to the strong performance of the Fifth
Avenue flagship. “Tourist” stores, such as Fifth Avenue in New York,
Ala Moana in Hawaii and Aventura Mall in Miami, are among the top
performing stores in the chain. Additionally, international direct-to-
consumer sales increased 72.4% from Fiscal 2006.
In 2008, the Company plans to open one Abercrombie & Fitch
store, three abercrombie stores and three Hollister stores in Canada.
The Company also plans to enter the U.K. market with Hollister with
the opening of four shopping center-based stores in 2008. The first
store is scheduled to open in October at Brent Cross Shopping Centre,
outside of London.
Construction is currently underway for the first Hollister flagship
in the SoHo area of New York City. The multi-level flagship is scheduled