Abercrombie & Fitch 2010 Annual Report Download - page 16

Table of Contents
Our failure to successfully respond to these risks might adversely affect sales in our Internet business, as well as damage our
reputation and brands.
We Have Incurred, and May Continue to Incur, Significant Costs Related to Store Closures.
We may incur costs associated with store closures resulting from, among other things, lease termination agreements associated
with closing stores prior to the stores' lease expiration date. These costs could be significant and could have a material adverse effect
on our financial condition and results of operations. We previously announced our intention to close underperforming domestic stores
as part of our efforts to increase domestic store productivity toward our roadmap goals. In Fiscal 2010, we incurred $4.4 million of
expenses in connection with the closings of 64 domestic stores.
Our Development of a New Brand Concept Such as Gilly Hicks Could Have a Material Adverse Effect on Our Financial
Condition or Results of Operations.
Historically, we have internally developed and launched new brands that have contributed to our sales growth. Our most recently
added brand is Gilly Hicks, which offers bras, underwear, personal care products, sleepwear and at-home products for girls. The
development of new brand concepts such as Gilly Hicks requires management's focus and attention, as well as significant capital
investments. Furthermore, a new brand concept is susceptible to risks that include lack of customer acceptance, competition from
existing or new retailers, product differentiation, production and distribution inefficiencies and unanticipated operating issues. There is
no assurance that a new brand concept, including Gilly Hicks, will achieve successful results. The failure of Gilly Hicks to be
successfully launched and to achieve profitability could have a material adverse effect on our financial condition and results of
operations. The costs of exiting a brand are significant. In Fiscal 2009, we incurred pre-tax exit costs of $56.1 million and pre-tax
impairment charges of $51.5 million associated with the closure of RUEHL. In addition, the ongoing development of new concepts
may place a strain on available resources.
Fluctuations in Foreign Currency Exchange Rates Could Adversely Impact Our Financial Condition and Results of
Operations.
The functional currency of our international subsidiaries is generally the local currency in which each operates, which includes
Euros, Canadian Dollars, Japanese Yen, Danish Kroner, Hong Kong Dollars and British Pounds. Our consolidated financial
statements are presented in U.S. dollars. Therefore, we must translate revenues, expenses, assets and liabilities from functional
currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. In addition, our international
subsidiaries transact in currencies other than their functional currency, including intercompany transactions, which could result in
foreign currency transaction gains or losses. The fluctuation in the value of the U.S. dollar against other currencies could impact our
financial results.
Furthermore, we purchase substantially all of our inventory in U.S. dollars. As a result, our gross margin rate from international
operations is subject to volatility from movements in exchange rates over time, which could have an adverse effect on our financial
condition and results of operations and profitability of the growth desired from international operations.
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