Abercrombie & Fitch 2009 Annual Report Download - page 59

COST OF GOODS SOLD
Cost of goods sold is primarily comprised of the following: cost of merchandise, markdowns, inventory
shrink, valuation reserves and freight expenses.
STORES AND DISTRIBUTION EXPENSE
Stores and distribution expense includes store payroll, store management, rent, utilities and other
landlord expenses, depreciation and amortization, repairs and maintenance and other store support functions,
as well as Direct-to-Consumer and Distribution Center (“DC”) expenses.
MARKETING, GENERAL & ADMINISTRATIVE EXPENSE
Marketing, general and administrative expense includes photography and media ads; store marketing; home
office payroll, except for those departments included in stores and distribution expense; information technology;
outside services such as legal and consulting; relocation, as well as recruiting, samples and travel expenses.
OTHER OPERATING INCOME, NET
Other operating income consists primarily of: income related to gift card balances whose likelihood of
redemption has been determined to be remote; gains and losses on foreign currency transactions; and the net
impact of the change in valuation on other-than-temporary gains and losses on auction rate securities; and
changes in the value of the UBS Put Option. See Note 4, “Cash and Equivalents and Investments”.
WEBSITE AND ADVERTISING COSTS
Website costs, including photography, mail list expense and other production and miscellaneous
expenses, are expensed as incurred as a component of Stores and Distribution Expense on the Consolidated
Statements of Operations and Comprehensive Income. Fiscal 2007 also included costs related to catalogue
production and mailing costs of catalogues. Advertising costs consist of in-store photographs and advertising
in selected national publications and billboards, and are expensed as incurred as a component of Marketing,
General and Administrative Expense on the Consolidated Statements of Operations and Comprehensive
Income. Direct-to-consumer and advertising costs, including photo shoot costs, amounted to $17.7 million,
$28.7 million and $31.3 million in Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
LEASES
The Company leases property for its stores under operating leases. Most lease agreements contain
construction allowances, rent escalation clauses and/or contingent rent provisions.
For construction allowances, the Company records a deferred lease credit on the Consolidated Balance
Sheets and amortizes the deferred lease credit as a reduction of rent expense on the Consolidated Statements
of Operations and Comprehensive Income over the terms of the leases. For scheduled rent escalation clauses
during the lease terms, the Company records minimum rental expenses on a straight-line basis over the terms
of the leases on the Consolidated Statements of Operations and Comprehensive Income. The term of the lease
over which the Company amortizes construction allowances and minimum rental expenses on a straight-line
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ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)