Investments
BUY: ABERCROMBIE AND FITCH
Analyst: Steve Bright
The Midriff Exposed
March 26, 2004

We recommend
ANF as a hold. Our
price target of $34.23
is 6% below the
current share price.

We believe the stock
is fairly valued and
should be purchased
on dips. We remain
cautious on the
shares longer-term;
we desire continued
strong execution
from Hollister and
await ANF’s new
concept store
rollout.
Source STOCKVAL

ANF continues to build cash and recently announced it will begin to pay a dividend
in 04. Though beneficial to shareholders, we prefer to see management reduce prices
with the intent to increase foot traffic and potential sales. We believe several competitors
have begun to price apparel below that of ANF to increase their ROE. With regard to the
dividend payment, we would have preferred for management to use the cash to
repurchase shares, although the dividend is likely to appeal to value investors.

We believe ANF will continue to grow due to the overall structure of the industry.
As teen spending continues to grow in proportion to the population, we believe there will
be consolidation in the specialty retailers to leverage operations and brand recognition.
Based upon the cash position of ANF, we expect ANF to be an acquirer of companies.

ANF has demonstrated the ability to successfully execute on its key critical success
factors, including inventory management. We believe the recent changes in management
will also benefit ANF; we suspect that management will refocus on ROE/ROA.

We remain cautious due to the decline in sales growth as assets have increased. We
believe ANF will benefit from the pick-up in the economy, but question the expected
long-term street growth rate of 15%.
Company Background
Abercrombie and Fitch (ANF) is headquartered in New Albany, OH. The name Abercrombie and Fitch
originated in 1892, but in 1988 it was sold by Oshman’s to the Limited. In 1992 Mike Jeffries and Seth
Johnson joined the company and transformed it from a sporting goods/outdoor-indoor apparel outlet to a
lifestyle brand concept selling upscale men’s, women’s, and kids casual clothing and accessories.
Abercrombie and Fitch began trading on the NYSE in 1996, but remained a division of The Limited until it
was spun-off in 1998. At the time of the initial public offering, ANF had 196 stores and $800M in
revenue; as of November 2003, ANF operated 651 stores with $1.682B in revenue. ANF has three store
concepts: A&F, abercrombie, and Hollister. A&F targets college students, abercrombie the pre-teen crowd,
and Hollister, a new concept store that was opened in July of 2000, has a west coast focus and targets 14 to
18 yr. olds.
ANF’s brand strategy is high-quality apparel, loud music, and exposed midriffs. The company creates a
fraternity environment with carefully selected college-age sales staff and photos of college models. ANF
charges a 20 to 30% premium over comparable merchandise at Gap (GPS) and American Eagle (AEOS); as
a result the company has industry-leading operating margins and sales productivity. While predominately
in malls, ANF also sells its clothing through an on-line website.
Retail 101
The retail industry is a mature, cyclical, fragmented industry in which consumer spending tends to be
discretionary; according to government data sales represented $248B in 2002, up 3% from 2001.
Additionally, though the cost of most goods has continued to increase, apparel prices have declined due to
increased manufacturing in Asia.
Importing completed goods, once a competitive advantage, has now become a necessity. Use of
technology, inventory management, and bargaining power of suppliers are concepts that once were
advantages yet now have become a requirement for retailers to remain competitive. Companies attempt to
differentiate themselves via design, label, price points, gender, and by being quick-to-market with fashion
trends.
Apparel retailers can be categorized into several groups: catalog, mall based, off-mall based, wholesale,
and specialty. Abercrombie and Fitch is considered to be a specialty, mall based retailer. We believe
ANF’s direct competition is from specialty retailers and the location, mall-based vs. off-mall, only
categorizes the cost structure.
Specialty stores such as Gap, American Eagle, and Aeropostale compete with Target, JC Penny, and
Kohl’s, but we believe cross-over competition is minimal. The specialty retail market is more fragmented
than the wholesale retail market; Wal-mart, the largest of the apparel retailers, represents over 12% of sales
while Gap, the largest specialty, garnishes only 3.1% of retail sales.
Figure 1: 12-24 Yr Old Demographics
Source: NPD
Demographics
Though the percentages are small,
Teen Market: A Significant Portion of
significant amounts of money are at stake;
Annual Apparel Sales
in 2002 consumers spent $324B on
Total 2000 Aparel Sales $180 billion
footwear and apparel. The majority of
specialty retailers target teens to young
adults, ages 12-24, due to the additional
disposable funds available to this age
group. According to the US Census
Bureau, 14 to 24 year olds currently
represent 18% of the US population,
however, in 2000, this group accounted
for 29% of all apparel sales in the US and
31% of overall mall spending (NPD). The US Census Bureau has estimated that over the next several years
the growth of this group will outpace the general population at a 2-to-1 ratio. We conclude this will
provide significant growth opportunities for the specialty retailers, however, we believe competition will
cap margins; growth in revenues and earnings will likely be the result of the expansions in the number of
stores and mergers.
0-11
12%
51+
20%
41-50
15%
30-40
16%
25-29
8%
Te ens are the
large st single
segment
12-24
29%
Specialty stores win over 40% of each
dollar spent by 14-24 year olds,
department stores follow with 17%, and
mass merchants such as Target and WalMart retain 16% of overall retail sales.
The strength in specialty stores is because
this age group is less immune to changes
in the economy and typically has the
highest degree of discretionary dollars.
Even though teens make several trips to
the mall each week, the trips typically
result in only one to two purchases
because the journey tends to be more of
an extension of a teen social life.
50%
Specialty Stores Continue to Rank as the #1 Place for Teens
to Shop
1998
1999
2000
40%
40%
30%
20%
17%
16%
11%
8%
10%
3%
2%
4%
0%
Department
Stores
National
Chains
Specialty
Stores
M ass
M erchants
Direct M ail
Retail
Off-Price
Retail
Factory
Outlets
All Other
Figure 2: Teens and Apparel Distribution Points
Source NPD
Studies by NPD have determined that teens have no brand loyalty and are considered extremely fickle
when defining current ‘hot’ fashions. This creates a dilemma for shops catering to teens: what merchandise
to present in order to remain in the groups good graces. The supply chain of the retail business typically
requires a very short lead time from ordering to production to inventory. In fact, the dynamics of the
supply chain are critical to a company’s success because if garments are not quickly inventoried and sold,
the retailer may be stuck with last year’s fashions and forced to liquidate the items below cost.
We believe retailers will be forced to maintain an efficient supply chain or else face possible extinction.
We expect that as new store concepts are added, the industry will be ripe for consolidation; as companies
begin to reach critical mass, cash flow can be used to merge companies that provide synergies. Specialty
retailers will then leverage synergies created in the supply chain to improve their margins, and grow
earnings.
The Apparel Economy
The increase in the overseas supply of available labor and production facilities has led to apparel deflation.
Originally this excess supply resulted in a lower cost of goods sold (COGS) and higher margins, but as
retailers continued to be price competitive, apparel deflation occurred. Now it is a concern for the overall
industry; as the cost of fixed assets and SG&A have increased, the cost per garment has declined (see
Figure 3). As a result of the deflation, stores are required to sell more items per customer to maintain
profitability. From this insight into a stores ability to starve off deflation, we look towards a company’s
sales per square foot and sales per employee as a metric of the retailer’s ability to increase sales and push
additional merchandise.
Figure 3: Apparel Price Percent Change According to the CPI
Source: Ned Davis
On a more macro scale, the economy is strong indicator of the retail industry’s overall health. Consumer
debt/savings, real wage growth, consumer confidence, and energy prices are factors which we believe have
a significant impact on the industry. Consumer debt purchases can be a positive impact as consumers are
borrow to purchase additional goods, however, the spending comes at a price of future growth. The debt,
plus the interest, must be paid off eventually requiring more of the consumer’s discretionary money than
the original purchase. Consumer debt-service levels are currently near all-time high levels, 14% of
disposable personal income (Stockval). As a result, we believe the near term effect of debt will be to limit
consumer spending on specialty apparel.
Although consumer confidence numbers remain below those from the beginning of the decade, the recent
up turns are an indication that consumers feel more confident in their jobs and the economy. We expect
that consumers will continue to remain cautious in spending their disposable income on big ticket items,
but have already begun to loosen up their purse strings when at the mall and off-mall stores. The other two
factors, real wage growth and energy prices, are typically out of the control of the individual consumers.
Consumers are price takers when purchasing energy and any increase in the price of these commodities
should be considered a tax on the consumer.
In 2000 and 2001 oil prices plummeted to just over $17 per barrel but today’s oil prices are hover above the
historic $40 per barrel level (Bloomberg). OPEC is meeting at the end of June to discuss increasing oil
production, however the continued instability in the region and China’s staggering economic growth are
likely to keep oil prices at historically-high levels. We believe that this will equate to an economic tax;
however, OPEC has become weakened by independent members of the cartel cheating on quotas and the
discovery of significant oil fields outside of the Middle East questions the impact OPEC will have on the
long-term.
Our expectations for the industry consider these economic factors; our long term industry/company
projections assume a normalization of these factors.
Figure 4: Retail Market Share
Source : NPD
As previously stated, we believe
the dynamics of the young adult
segment, 14-24 yr olds, presents
the greatest growth opportunity.
In dissecting the retail market,
we look at the market share of
each segment as well as the
growth of each segment. From
this we can see that for every $1
a male spends, a female spends
$1.5; on a dollar basis, juniors
(11 – 17 yr. olds) has been the
only segment to grow sales each
year since 1999 in a deflationary
industry.
Within the specialty retail
segment, there are several
classifications: Trend/Youth,
Upscale, Moderate, Special
Sizes, Sports, Children’s, and
Other. Although ANF can be
placed into several of these
categories, we believe ANF best
fits the fast growing segment
Trend/Youth. Upscale has the
majority of the specialty market
share followed by moderate. However, Trend/Youth has garnished the greatest amount of growth since
1998 – geometric average of 22% per year.
The specialty retailers often differentiate themselves by price and marketing. As the price of goods
increase, typically the marketing efforts must also be increased to sustain the sales. The majority of
specialty shops spend 3%-to-4% of sales on advertising. However, ANF spends below 2.5% on advertising
even though it has higher price points than its competition. (Goldman Sachs)
In reviewing the industry, we can plot a company’s price points to its branding strategy. This allows us to
compare companies and determine which of the companies in the industry are competitively aligned to one
another. For instance, Cherokee, Wrangler, and Faded Glory are all priced for the ‘masses’, considered
very basic, and do not compete in the same arena as Abercrombie and Fitch, DKNY, Kenneth Cole et. al.
See Figure 5.
The Industry Structure
Key critical success
Figure 5: Brand Positioning
Source: Goldman Sachs
factors for the retail
specialty shop are:
expertise in real
estate, ability to
maintain inventory
flow at numerous
stores, in-store
presentations,
successful new stores
additions, ability to
quickly identify key
trends and turn the
trends into saleable
merchandise.
Specialty retail stores
typically garnish a
higher price point
than other garment
stores. As a result,
these stores look to
develop a foothold in
“A” malls. Although
no clear definition
exists for an “A” mall
vs. “B”, “C”, “D”,
retailers generally look to the sales per sq. foot, occupancy, types of anchors, local economy, and
demographics to define each category.
As would be expected, the Northeast represents a significant portion of the distribution, 21%; the two
coasts, the South, and Great Lakes areas represent the majority of the malls. Gap, Limited, and
Abercrombie & Fitch are equally distributed by the mall locations. Thus the heartland of the US is not the
heartland of the retail industry; this area lacks both disposable income and population to justify additional
mall space.
Figure 6: Mall Distribution Source: Bureau of Labor Statistics, company data, International Council of Shopping Centers.
Seasonality
Abercrombie and Fitch, like any other retailer, is subject to seasonality of sales which make quarter by
quarter comparisons difficult (Figure 7). The result is a metric called same store sales (SSS) or comps; the
current quarter’s sales is compared to the previous quarter’s sales, but only for stores open 12 to 18 months
and longer. Each retailer uses this metric as an indication of how successful the company is relative to its
most recent year.
Figure 7: Quarterly Same Store Sales Growth
Source: Company data
Quarterly Same Store Sales Growth
50%
1994
1997
2000
2003
40%
1995
1998
2001
1996
1999
2002
30%
20%
10%
0%
(10%)
(20%)
Apr
Jul
Oct
Jan
Porters 5 and Bright’s 1 Force
Evaluating retail companies should be done on the backdrop of Porters 5 forces and Messer Bright’s 1
force:
1) Barriers to Entry
2) Rivalry
3) Substitute Goods
4) Power of Suppliers
5) Power of Buyers
6) Power of Employees/Management (Bright)
The barriers to entry are relatively low as the cost to purchase and produce garments is minimal. In the
specialty retail industry, economies of scale provide a significant advantage over the local stores. The
rivalry between competitors is intense and forces each company to reinvention itself to maintain
efficiencies and inventory control. Though some goods may not be considered direct substitutes due to
brand identification, once the name brand has been removed, one article of clothing becomes difficult to
tell apart from a similarly looking article of clothing. Consumers, however, are willing to pay a premium
for perceived quality and ‘fashion recognition’, but the pricing points tend to be very elastic.
Our view is that the consumers hold significant power over the merchants; retail consumers are price
sensitive and increases can push consumers to competitors. One would expect buyers to hold minimal
power over their suppliers because of the fragmentation of the retail industry. However, large retailers are
able to exert significant influence on the suppliers due to the mass ordering of garments; Wal-Mart and
Target have significantly more influence then the specialty shops which claim only a fraction of the market
share. The suppliers also hold little power due to the numerous factories located in Central America and
the Far East, thereby allowing retailers leverage in negotiating prices.
Because employees are not unionized and the majority of workers receive hourly pay, we do not believe the
employees are able to exert significant pressure on the retailers. The majority of specialty retail workers
fall into the targeted age group, 14 - 24 yrs. old, and because of the substantial availability of workers,
employees become (price) wage-takers.
The dynamics of the industry are significant factors to consider. We make our recommendation against the
backdrop of these factors and recommend investors pay attention to industry dynamics as much as the
individual financial statements.
Retail Stocks
Figure 8: Specialty Apparel Stocks (5 yr Beta)
Specialty retail stocks normally provide
monthly sales data which results in a
higher degree of volatility in the stock
(Figure 8), but caps unexpected earnings
announcements by increasing sales
visibility. Sales of one quarter are
Company
Beta
Aberombie & Fithc
1.6
Gap
1.62
Aeropostale
n/a
Source: Stockval
Company
Beta
American Eagle
1.79
Pacific Sunwear
1.3
compared to sales of the same quarter in the previous year. The comparison, referred to as ‘comps’, ‘SSS’,
or ‘Same Store Sales’, is a measure of how each store (that has been open a year or longer) has done
against the previous year’s sales for the same store. By comparing to the previous year, instead of last
quarter’s sales, the comparison adjusts for seasonality. Numerous factors can influence comps: weather,
fashion, economy, strikes, et al. All too often, retailers will blame a bad month on weather or some other
variable; this then requires some investigation as to how much loss in sales was related to the variable and
how much to a change in the demand of the stores products. Investors should be aware that comps are
significant, short-term drivers of a company’s stock price. But we need to point out that, just as with any
stock, it is not the absolute number that maters, instead it is the reported number compared to the expected.
Industry Competitors (Descriptions from Stockval)
American Eagle (AEOS) AEOS is a mall-based, private label retailer that specializes in casual apparel for
men and women between 16 and 34. Primary revenue is comprised of jeans, sweaters, skirts, shirts,
footwear, belts, and bags. AEOS increases name brand recognition through the promotion of its web-site
and AE Magazine. The company strategically prices its apparel below that of Abercrombie. In 2000 AEOS
entered into the Canadian market; expanding from their first store opening in 1977 to over 790 stores
Gap (GPS) Gap has built its brand on basic, casual styles for men, women, and children. The company’s
product is focused on T-shirts, jeans, and khakis, but it has expanded its appeal by opening new-concept
stores: Banana Republic (urban crowd), Old Navy (price conscious consumer), GapKids and BabyGap
(children’s wear). Gap has grown to nearly 4,250 stores worldwide in Canada, France, Germany, Japan,
and the UK, however, each chain has its own online appeal. All Gap clothing is private-label merchandise
made specifically for the company.
Pacific Sunwear (PSUN) Targeting trendy young men and women with name-brand casual apparel has
been the strategy of this California based store. PSUN sells jeans, shorts, T-shirts, swimwear, shoes, and
accessories and associates its image with surfing, skateboarding, and snowboarding. PSUN stores target
adolescents between the ages of 12 and 22. From its first store opening in 1980, the company has expanded
to over 800 stores in the U.S. and Puerto Rico.
Aeropostale (ARO) Federated Department Stores sold Aeropostale to new management in 1998. ARO now
independently runs about 370 mall-based stores across 35 states in the U.S. and targets the teen market
with moderately priced casual clothing. ARO emphasizes their private label merchandise so it can quickly
respond to market trends.
Figure 9: ANF Dupont Model / Operating Ratios Source: Company Financials and Merrill Lynch
Profitability
Profit Margin
Asset Turnover
Leverage
Return on Equity
Return on Invested Capital
Return on Average Assets
Operating
Asset Turnover
Accounts Payable Turnover
Average Payment Period
Receivables Turnover
Average Collection Period
Inventory Turnover
Avg Days in Inventory
Fixed Asset Turnover
1997
9.3%
3.6
4.2
138.0%
77.3%
33.2%
1997
3.6
28.6
12.7
274.8
1.3
9.4
38.6
7.4
1998
12.5%
3.2
2.1
83.4%
53.8%
40.5%
1998
3.2
23.2
15.8
281.5
1.3
10.7
34.0
9.1
1999
14.5%
2.7
1.6
60.2%
46.7%
38.5%
1999
2.7
26.7
13.7
132.6
2.8
7.7
47.3
7.0
2000
12.8%
2.4
1.4
43.1%
36.3%
30.2%
2000
2.4
27.7
13.2
90.7
4.0
6.0
60.6
4.4
2001
12.4%
2.0
1.3
33.1%
27.8%
24.8%
2001
2.0
24.5
14.9
75.2
4.9
7.4
49.3
3.7
2002
12.2%
1.8
1.3
29.0%
25.7%
22.1%
2002
1.8
38.9
9.4
103.2
3.5
6.5
56.0
4.1
2003
12.0%
1.6
1.4
25.3%
23.3%
18.7%
2003
1.6
24.1
15.1
193.4
1.9
5.8
62.9
3.8
Mr. Watson. Come Look at This
As evidenced by the decline in ROE, Abercrombie & Fitch’s performance has continued to decline over the
last few years. The decline in ROA and ROE (Figure 9) is the result of the significant decline in asset
turnover, more specifically a combination of the decline in sales and a significant increase in the number of
stores: 156 in 1997 to 651 in 2003. While we believe the downturn in profitability is also the result of the
economy and consumers heavily burdened by debt, we believe there are also company specific issues at
play. Inventory turns declined from 9.4 in FY 1997 to 5.8 in FY 2003, still over two times that of their
competitors (Figure 10), but the sharp decline draws the question: Is Abercrombie and Fitch beginning to
mature?
Figure 10: Competitors Inventory Turnover
Inventory Turnover
1997
AEOS
GPS
PSUN
1998
3.2
2.1
2.7
3.2
2.2
2.4
ARO
1999
2000
3.3
2.5
2.4
2.09
Source: Stockval
2001
2.9
2.5
2.5
2.65
2002
2.4
2.2
2.4
2.8
2003
2.3
1.9
2.2
2.84
2.1
1.6
2.2
3.2
To answer this question we look first to
two industry metrics: sales per
employee, and assets per employee.
Our analysis suggests that ANF has
failed to maintain its sales per employee
while increasing the amount of assets
per employee (Figure 11).
Figure 11: Sales per Employee and Assets per Employee
ANF
GPS
AEOS
PSUN
ARO
2004
NA
NA
NA
90.04
131.98
Sales per Employee
2003
2002
2001
72.53
81.73
89.04
123.99
416.48
92.02
85.53
83.93
82.37
253.64
256.28
242.67
NA
NA
2000
91.23
102.11
83.11
236.47
ANF
GPS
AEOS
PSUN
ARO
Source: Bloomberg
2004
NA
NA
NA
42.53
53.43
Assets per Employee
2003
2002
2001
45.22
46.14
42.27
62.83
204.58
45.70
58.59
46.56
42.25
131.64
120.63
116.30
NA
NA
2000
40.55
43.52
37.06
108.82
The Smoking Gun
We believe this is the smoking gun to the company’s decline in ROE/ROA; additional assets have not
provided the expected increase in sales, but instead have resulted in a drag on earnings and lowered
ROE/ROA. But to provide a complete picture we must understand the structure of ANF: its finances, sales
efforts, and management.
Operations, Sales, and Financials
ANF has three existing store concepts and is expected to open a fourth concept later this year: target will be
older customers. Figure 12 provides a break down of the stores. In 2003, square footage increased by 15%
and ANF ended the year with 700 stores across all three brands; at the end of the year 172 Hollister stores
were open and the company expects to build-out to a total of 600-800 store fronts.
Figure 12: Store Growth
Source: 2003 Annual Report
Store Growth
Abercrombie & Fitch
Abercrombie
Hollister
Concept IV
Number of
Stores
340
164
93
0
February 1, 2003
Sq. Ft Percent of
Millions
Stores
3,036
57%
727
27%
595
16%
0
0%
Percent of
Sq. Ft
70%
17%
14%
0%
Number of
Stores
357
171
172
0
January 31, 2004
Sq. Ft Percent of Percent of Net New Planned
Millions
Stores
Sq. Ft
in 2004
3,154
51%
51%
11
753
24%
24%
8
1,114
25%
25%
85
0
0%
0%
5
Comps for Abercrombie and Fitch declined 14% with men’s comps still falling hard into the negative, low
twenties; woman’s comps declined into the negative, high-single digits. At Abercrombie, the kid’s store,
comps were stronger with girls section posting positive single digits and boys negative 7%. Hollister
arrived with positive girls comps of low-single digits and guys came in with negative, mid-single digits.
Store sales continue to remain strongest on the two coasts and weakest in the Midwest.
The overall trend has been for men’s/boy’s to post disappointing results while women’s/girl’s support sales
growth. We would like to see ANF leverage its talent and increase the male side of the checkbook; though
we do confess this is easier said than done. We find that a strong reliance upon the female shopper does
increase the potential risk of a miss on sales should a new line be poorly received.
ANF has historically offered several promotions to help drive sales: direct mail, 15%-off bag stuffer
coupons, and seasonal mark-downs. In 2003 the company bucked its own trend by not offering stuffer
coupons, doing less mark-downs, and it discontinued the controversial magalog (magazine catalog). ANF
has stated it will continue to advertise through direct mail, large-city outdoor ads, and magazine
advertising. In light of the change in marketing, sales trends have continued to remain in-line with
historical norms, women/girls sales stronger then men/boys: 57% of sales were from women/girls.
ANF’s management stated it believes the decline in sales per square foot, from FY 1999’s high of $505 to
$345 in FY2003, is the result of the slow down in the economy, however, we are perplexed at ANF’s
decision to increase prices and decrease promotions in light of the difficult competitive environment.
In the last several years fixed costs have continued to climb. Occupancy costs, as a percent of net sales,
have increased which point to management’s inability to leverage fixed costs in the face of decreasing same
store sales. As expected, SG&A also increased, as a percentage of total sales, to 22.6% from 21.5% as
lower comps ate into variable costs.
Off-setting much of the negative trends were a decline in average store-weekly-hours worked, down 2%
and an increase in the distribution center’s productivity: units processed per labor hour. Also, the
division’s ecommerce sales increase approximately 25% to represent 6% of total sales; web-site sales have
greater profit margin and an increase in this sales channel, as a total of all sales, increases margins.
In addition, ANF has been able
to continue to sell its inventory
Current Ratio FY end
2003
2002
2001
at a faster rate than its
2.69
2.57
2.48
competitors which helped the
company retain a strong cash and current ratio (Figure 13). ANF’s cash-conversion rate was 52 days, only
second to PSUN’s 76 days. We believe ANF has been pushing sales on credit in order to prop sales and
retain margins. As evidence of this, ANF’s receivables grew significantly between 1999 and 2000 (Figure
14). Between 1999 and 2002 receivables increased a total of 497%; we believe the decline in 2003 is the
result of the staggering build of credit sales and points to a possible top of credit sales.
Figure 13: Current Ratio
Source: 2003 10k
We point out that at the end of
FY2003, inventories were 3%
2003
2002
2001
2000
higher, on a square footage
Revenue Growth
17%
10%
19%
28% basis, than at the end of
Accounts Receivables Growth
-49%
29%
38%
179% FY2002. Although the profit
margins remain the same, we highlight that ROE/ROA (ANF has little debt), has trended down
significantly (Figure 10) due to lower sales on higher assets. As in the last several years, 2003 saw a
decline in profit margins as inventories climbed in response to the increase of 103 stores: 663,000 square
feet. We believe that focusing on this developing trend is just as important as comparing ANF’s results to
that of its competitors. This becomes a concern when viewed with the increase in credit sales; although
credit sales did boost sales in down times, we believe ANF has stretched its credit sales at the risk of
increasing bad debt write-offs.
Figure 14: Revenue and A/R Growth
Source: 2003 10k
We believe that moving forward, ANF’s margins and metrics will continue to trend to the industry norm,
but Hollister’s popularity will potentially add margin padding. In the near term, we doubt that the new,
adult-concept store will generate enough sales to be a significant add. Though longer-term, with regard to
ANF’s new concept, we remain cautious, waiting to see if ANF can acquire customers from the upscale
Banana Republic crowd, the assumed target market of the new concept.
For FY2004, ANF anticipates adding 110 stores, 745,000 square feet – a 15% increase from 2003: 10
abercrombie, 15 Abercrombie & Fitch, 85 Hollister. The expected cost of the build-out is $90 million of
the $115 million 2004 capital expenditures.
Suppliers, Employees, and Management
During FY2003, ANF diversified its purchases among 210 factories and suppliers; 9% of its purchases
were derived from Far East Ltd. We believe the diversity of suppliers, in today’s environment, is a
necessity to prevent breaks in the supply chain as a result of geographic instability and natural disasters.
The company makes the majority of all purchases in US dollars, thereby eliminating foreign-currency
translation risk. All shipments are sent to and inspected at the company’s headquarters in New Albany,
OH. We do believe that ANF’s reliance upon one import-receiver facility is a potential negative due to the
possible disruption in supply should the facility be closed even temporarily.
At the close of FY03, ANF had 30,200 associates, 26,400 were part-time, and none of which were
unionized. The majority of these associates are college-age individuals and represent the clientele ANF
targets. ANF is currently involved in several employee-related lawsuits, but we do not believe a negative
outcome in any of these to be a material event.
Recently executive management has had several changes. We believe these changes to be a positive for the
company. Seth Johnson, EVP and COO will be replaced by Robert Singer, EVP and COO of Gucci Group;
Mssr. Singer will take the position of President and COO and Seth Johnson will stay with Abercrombie and
Fitch until June 18th 2004. We believe that Mssr. Singer is a fantastic fit for ANF and is the right
individual to drive sales higher and expenses lower.
Accounting Policies
Revenue Recognition: ANF realizes revenue when the customer takes possession of the merchandise. For
sales derived from ecommerce, ANF includes monies received from shipping/handling charges as revenue
and the associated costs are classified as COGS. As ecommerce sales increase, the corresponding addition
of shipping/handling charges will artificially boost total revenues. We suggest shareholders remember this
when comparing increases in YOY (year over year) revenues.
Returns: ANF reserves for returns based upon historical experience.
Inventory Valuation: ANF uses the retail method of inventory valuation and the lower of average cost or
market on a FIFO (first-in first-out basis). The retail method averages total costs for each SKU (stock
keeping unit) and then ads initial mark-up to establish a cost-to-retail ratio. When inventory mark-downs
occur, the reduction is taken from both sides of the ratio, maintaining this relationship.
As a normal course of business, ANF also estimates regular shrinkage as a result of lost, damaged, or stolen
items.
Plant, Property, and Equipment: For reporting purposes, ANF uses straight-line, 30 years, for buildings, 10
to 15 years for leasehold improvements, and 3 to 10 years for all other property/equipment improvements.
Income Taxes: ANF calculates income taxes using SFAS No. 109, “Accounting for Income Taxes”.
Deferred taxes are recorded based upon the difference between the financial statement carrying amounts
and the corresponding tax liability/base. Management believes the full amount of deferred taxes will be
realized in the future. The effective tax rate used by ANF is reflective of management’s assessment of the
composite effect of taxes levied by all jurisdictions.
Share Repurchase and Dividend
During 2001-2003, ANF continued to repurchase shares. In 2003 ANF had repurchased all except 599,000
shares of the 5,000,000 million authorized by the Board of Directors in 2002. The Board, on February 17,
2003, also approved the payment of a $0.50 dividend, to be paid on a quarterly basis. We believe the
company will likely maintain the dividend for the near-term, but will begin to increase it after Hollister’s
stores have gained traction.
Financial Statement Analysis
We have used several modeling techniques to derive our expected price target $34.23; we have provided
ANF’s annual statements in the appendix. Figure 15 (next page) depicts the common sized balance sheet.
From this we highlight that cash & cash equivalents have continued to increase as a portion of operating
assets while inventories have decreased, but we believe this is misleading. ANF has continued to increase
inventories; however, cash has increased at a faster rate. We are concerned with the increase in accounts
payable, almost doubling from 1999’s level before coming down in 2004, and outpacing accounts
receivable growth. We do believe this is a trend that bears continued observation; the company is
stretching payments to finance its increase in credit sales, forcing its creditors to finance the additional
sales. We view this use of net-working capital as a positive approach to financing, but creditors are likely
to have reached a limit of their willingness to stretch out their receipt of cash from ANF.
Figure 15: Common Sized Balance Sheet
Source: Company Financials
Abercrombie & Fitch (ANF)
Common size Balance Sheet
Feb. 2004 Feb. 2003
Net Operating Assets
Cash and Cash Equivalents
Receivables
Inventories - Total
Store Supplies
Other Current Assets
Total Current Assets
Property, Plant, and Equipment
- Total (Net)
Deferred Income Taxes
Other Assets
TOTAL OPERATING ASSETS
$511,073
7,197
170,703
25,671
19,770
734,414
445,956
0
552
1,180,922
420,063
10,572
143,306
25,671
19,770
619,382
392,941
0
725
1,013,048
Feb. 2002
Feb. 2001
Feb. 2000
Feb. 1999
Feb-04 Feb-03
137,581
15,829
120,997
17,817
11,338
303,562
147,908
11,447
75,262
0
19,999
254,616
163,564
4,101
43,992
5,887
691
218,235
43.28
0.61
14.46
2.17
1.67
62.19
41.47
1.04
14.15
2.53
1.95
61.14
23.98
2.93
15.57
3.08
2.21
47.76
23.42
2.69
20.59
3.03
1.93
51.67
35.85
2.77
18.24
0.00
4.85
61.72
51.25
1.28
13.78
1.84
0.22
68.38
365,112
0
239
699,326
278,785
4,788
381
587,516
146,403
11,060
486
412,565
89,558
10,737
631
319,161
37.76
0.00
0.05
100.00
38.79
0.00
0.07
100.00
52.21
0.00
0.03
100.00
47.45
0.81
0.06
100.00
35.49
2.68
0.12
100.00
28.06
3.36
0.20
100.00
27.86
15.37
42.16
85.39
0.00
5.95
8.66
100.00
33.08
19.39
49.86
88.22
0.00
6.34
5.44
100.00
18.22
12.62
62.58
93.41
0.00
0.67
5.92
100.00
20.59
11.72
61.46
93.78
0.00
0.00
6.22
100.00
12.72
58.05
22.97
93.74
0.00
0.00
6.26
100.00
18.61
48.01
25.24
91.86
0.00
0.00
8.14
100.00
Operating Liabilities
Accounts Payable
Income Taxes Payable
Accrued Expense
Total Operating Liabilities
91,364
50,406
138,232
280,002
79,291
46,471
119,526
211,470
31,897
22,096
109,586
163,579
33,942
19,318
101,302
154,562
18,714
85,373
33,779
137,866
24,759
63,882
33,587
122,228
Deferred Taxes
Other Liabilities
Total Operating Liabilities
Net Operating Assets
19,516
28,388
327,906
$ 853,016 $
15,189
13,044
239,703
773,345
1,165
10,368
175,112
$524,214
0
10,254
164,816
$422,700
0
9,206
147,072
$265,493
0
10,828
133,056
$186,105
10,000
10,000
10,000
10,000
71,220
71,220
45,601
45,601
0
0
0
0
10,000
$1,429,379
10,000
$1,023,048
71,220
$770,546
0
$587,516
45,601
$458,166
0
$319,161
Net Financial Assets
Financial Assets
Marketable Securities
Total Financial Assets
Financial Liabilities
Total Financial Liabilities
Net Financial Assets
Common Shareholders Equity
Feb-02 Feb-01 Feb-00 Feb-99
167,664
20,456
108,876
21,524
15,455
333,975
100
100
Figure 16: Common Sized Income Sheet
100
100
100
100
100
100
100
100
100
100
Source: Company Financials
Abercrombie & Fitch (ANF)
Common Size Income Statement
2003
Operating Income
Revenues
Cost of Sales
Gross Margin
Operating Expenses
Administrative Expenses
Catalogue & Advertising Costs
Operating Income from Sales
(Before Tax)
Taxes
Tax as reported
Tax on financial items
Operating Income
Financing Expense (Income)
Interest Expense
Tax benefit of debt
Net Interest Expense (after tax)
Preferred Dividends
Comprehensive Income to
Common
1707810
990,412
717,398
2002
$1,595,757
939,708
656,049
2001
$1,364,853
806,819
558,034
2000
$1,237,604
728,229
509,375
1999
$1,042,056
576,473
465,583
1998
$815,804
471,853
343,951
2003
2002
100.00 100.00
57.99 58.89
42.01 41.11
2001
2000
1999
1998
100.00 100.00 100.00 100.00
59.11 58.84 55.32 57.84
40.89 41.16 44.68 42.16
385,764
310,032
33,400
255,876
30,700
225,323
30,400
193,219
30,300
152,093
24,900
22.59
0.00
19.43
2.09
18.75
2.25
18.21
2.46
18.54
2.91
18.64
3.05
331,634
312,617
271,458
253,652
242,064
166,958
121,450
(1,447)
$192,614
107,850
(1,975)
$165,583
103,320
(3,081)
$153,413
99,730
(2,908)
$145,242
68,040
(1,258)
$100,176
19.59
0.00
39.17
(0.09)
12.07
19.89
0.00
7.90
(0.14)
12.13
20.50
122,594
(1669)
$ 207,371
19.42
0.00
31.78
(0.10)
12.14
8.35
(0.25)
12.40
23.23
0.00
9.57
(0.28)
13.94
20.47
0.00
8.34
(0.15)
12.28
(3,708)
1439
(2,269)
0
(4,539)
(3,768)
1,447
(2,321)
0
(2,321)
(5,064)
1,975
(3,089)
0
(3,089)
(7,801)
3,081
(4,720)
0
(4,720)
(7,270)
2,908
(4,362)
0
(4,362)
(3,144)
1,258
(1,886)
0
(1,886)
(0.22)
0.08
(0.13)
0.00
(0.27)
(0.24)
0.09
(0.15)
0.00
(0.15)
(0.37)
0.14
(0.23)
0.00
(0.23)
(0.63)
0.25
(0.38)
0.00
(0.38)
(0.70)
0.28
(0.42)
0.00
(0.42)
(0.39)
0.15
(0.23)
0.00
(0.23)
$194,935
$168,672
$158,133
$149,604
$102,062
12.01
12.22
12.36
12.78
14.36
12.51
$ 205,102
Our review of the trend analysis on the Income Statement indicates that the COGS have remained in-line
with the revenues received. Though, as discussed earlier, administrative expenses have increase on a
percentage of total revenues, we believe that the number is representative of the decrease in sales and
increase in overhead that has continued to plaque ANF. Looking forward, we believe new management
will focus on reducing overhead and increasing sales.
We have noticed that the expenses, as a percentage of operating income, have continued to increase (figure
17). Again, we attribute this to the declining sales adding less to variable profit. The decline in revenues is
also a possible indication that the company’s total growth is beginning to slow, however, considering the
recent economic downturn, we prefer to wait before making such a claim.
Figure 17: Income Statement Trend Analysis
Source: Company Financials
Abercrombie & Fitch (ANF)
Trend Analysis Income Statement
Operating Income
Revenues
Cost of Sales
Gross Margin
Operating Expenses
Administrat
ive
Expenses
Catalogue & Advertising Costs
$
2002
1,707,810 $
990,412
717,398
1,595,757
939,708
656,049
$1,364,853
806,819
558,034
$1,237,604
728,229
509,375
310,032
33,400
255,876
30,700
225,323
30,400
193,219
30,300
385,764
Operating Income from Sales (Before Tax)
Taxes
Tax as reported
Tax on financial items
Operating Income
$
Financing Expense (Income)
Interest Expense
Tax benefit of debt
Net Interest Expense (after tax)
Preferred Dividends
Comprehensive Income to Common
2003
$
2001
2000
1999
1998
2003
2002
2001
2000
1999
7%
5%
9%
17%
16%
18%
10%
11%
10%
19%
26%
9%
28%
22%
35%
152,093
24,900
24%
-100%
21%
9%
14%
1%
17%
0%
27%
22%
$1,042,056 $815,804
576,473 471,853
465,583 343,951
331,634
346,017
271,458
253,652
242,064
166,958
-4%
27%
7%
5%
45%
122,594
(1669)
207,371
121,450
(1,447)
192,614
107,850
(1,975)
165,583
103,320
(3,081)
153,413
99,730
68,040
(2,908)
(1,258)
145,242 100,176
1%
15%
8%
13%
-27%
16%
4%
-36%
8%
4%
6%
6%
47%
131%
45%
(3,708)
1439
(2,269)
0
(4,539)
205,102
(3,768)
1,447
(2,321)
0
(2,321)
$194,935
(5,064)
1,975
(3,089)
0
(3,089)
$168,672
(7,801)
3,081
(4,720)
0
(4,720)
$158,133
(7,270)
(3,144)
2,908
1,258
(4,362)
(1,886)
0
0
(4,362)
(1,886)
$149,604 $102,062
-2%
-1%
-2%
NA
96%
5%
-26%
-27%
-25%
NA
-25%
16%
-35%
-36%
-35%
NA
-35%
7%
7%
6%
8%
NA
8%
6%
131%
131%
131%
NA
131%
47%
Figure 18 addresses the trend analysis of the balance sheet. We reiterate the growth of accounts payable as
receivable decrease.
Figure 18: Balance Sheet Trend Analysis
Source: Company Financials
Abercrombie & Fitch (ANF)
Trend Analysis Balance Sheet
Feb. 2004
Feb. 2003
Feb. 2002
Feb. 2001
Feb. 2000
Feb. 1999
Feb-04
Feb-03
Feb-02
Feb-01
Feb-00
163,564
4,101
43,992
5,887
691
218,235
22%
-32%
19%
0%
0%
19%
151%
-48%
32%
19%
28%
85%
22%
29%
-10%
21%
36%
10%
-7%
38%
61%
-43%
19%
-10%
179%
71%
-100%
2794%
17%
278,785
4,788
381
$587,516
146,403
89,558
11,060
10,737
486
631
$412,565 $319,161
13%
NA
-24%
17%
8%
NA
203%
45%
31%
-100%
-37%
19%
90%
-57%
-22%
42%
63%
3%
-23%
29%
31,897
22,096
109,586
163,579
33,942
19,318
101,302
154,562
18,714
85,373
33,779
137,866
24,759
63,882
33,587
122,228
15%
8%
16%
32%
149%
110%
9%
29%
-6%
14%
8%
6%
81%
-77%
200%
12%
-24%
34%
1%
13%
15,189
13,044
239,703
773,345
1,165
10,368
175,112
$524,214
0
10,254
164,816
$422,700
0
0
9,206
10,828
147,072 133,056
$265,493 $186,105
28%
118%
37%
10%
1204%
26%
37%
48%
NA
1%
6%
24%
NA
11%
12%
59%
NA
-15%
11%
43%
10,000
10,000
10,000
10,000
71,220
71,220
45,601
45,601
0
0
0%
0%
-86%
-86%
56%
56%
NA
NA
NA
NA
10,000
$1,429,379
10,000
$1,023,048
71,220
$770,546
0
$587,516
45,601
0
$458,166 $319,161
0%
40%
-86%
33%
NA
31%
-100%
28%
NA
44%
Net Operating Assets
Cash and Cash Equivalents
Receivables
Inventories - Total
Store Supplies
Other Current Assets
Total Current Assets
$511,073
7,197
170,703
25,671
19,770
734,414
420,063
10,572
143,306
25,671
19,770
619,382
167,664
20,456
108,876
21,524
15,455
333,975
137,581
15,829
120,997
17,817
11,338
303,562
147,908
11,447
75,262
0
19,999
254,616
Property,
Plant, and
Equipmen
t - Total
(Net)
Deferred Income Taxes
Other Assets
TOTAL OPERATING ASSETS
445,956
0
552
1,180,922
392,941
0
725
1,013,048
365,112
0
239
$699,326
Operating Liabilities
Accounts Payable
Income Taxes Payable
Accrued Expense
Total Operating Liabilities
91,364
50,406
138,232
280,002
79,291
46,471
119,526
211,470
Deferred Taxes
Other Liabilities
Total Operating Liabilities
Net Operating Assets
19,516
28,388
327,906
853,016 $
Net Financial Assets
Financial Assets
Marketable Securities
Total Financial Assets
Financial Liabilities
Total Financial Liabilities
Net Financial Assets
Common Shareholders Equity
$
0
0
Figure 19 (next page) reviews the ratios and their trends. ROCE has continued to decrease, again a
symptom of declining sales and increasing assets. The company’s return on operating assets, RNOA, a
measure of ANF’s operating returns over operating assets, have also continued to decline. Here again we
see an increase in the administrative expense ratio and SG&A in the face of decreasing cash turnover (in
Figure 19 the turnover ratios are inverted), decreasing inventory turnover, and increasing PPE turnover.
Figure 19: Balance Sheet Trend Analysis
Source: Company Financials
Abercrombie & Fitch (ANF)
Ratio Analysis
Payout and Retention Ratios
Total Payout Ratio
Total Payout -to-Book Value
Retention Ratio
Shareholder Profitability
ROCE
Operating Profitability
RNOA
Financing Profitability
RNFA
Growth Ratios
Net Investment Rate
Growth rate of CSE
Growth rate in NOA
Growth rate in sales
Growth rate in Operating Income
Decomposition of ROCE
Level 1
RNOA
ROCE (Basic)
Financial Leverage Drivers
RNFA
Spread
FLEV
ROCE (combining drivers)
Level 2
PM
ATO
RNOA (combining drivers)
ROCE
Level 3
Profit Margin Drivers
Gross Margin Ratio
Administrative Expense Ratio
Advertising Expense Ratio
SG&A
Sales PM before tax
Tax Expense Ratio
Sales PM
Asset Turnover Drivers (inverse)
Cash Turnover
Accounts Receivable Turnover
Inventory Turnover
Supplies Turnover
Other Current Assets Turnover
PPE Turnover
Other Assets Turnover
Operating Asset Turnover
Accounts Payable Turnover
Accrued Expenses Turnover
Taxes Payable Turnover
Other Liabilities Turnover
Deferred Taxes Turnover
1/ ATO
2004
2003
2002
2001
2000
1999
45.3%
6.1%
100.0%
21.0%
3.9%
100.0%
0.6%
0.6%
100.0%
29.7%
22.9%
100.0%
16.5%
14.1%
100.0%
0.6%
0.6%
100.0%
16.7%
21.7%
24.8%
30.2%
38.5%
N/A
25.5%
29.7%
35.0%
44.6%
64.3%
N/A
22.7%
5.7%
8.7%
20.7%
19.1%
N/A
12.4%
15.0%
10.3%
7.0%
7.7%
6.9%
25.9%
47.5%
16.9%
16.3%
0.2%
39.7%
24.0%
10.3%
7.9%
15.1%
35.7%
59.2%
18.8%
5.6%
13.2%
67.2%
42.7%
27.7%
45.0%
43.0%
216.6%
N/A
N/A
N/A
24.3%
16.7%
24.9%
21.7%
31.6%
24.8%
36.3%
30.2%
54.7%
38.5%
53.8%
N/A
22.7%
1.6%
0.7%
24.3%
23.2%
1.7%
1.0%
24.9%
4.3%
27.2%
9.2%
34.1%
0.0%
36.3%
0.0%
36.3%
9.6%
45.1%
10.0%
59.2%
0.0%
53.8%
0.0%
53.8%
2004
2003
2002
2001
2000
1999
12.1%
2.0021
24.3%
24.3%
12.1%
2.0634
24.9%
24.9%
12.1%
2.6036
31.6%
34.1%
12.4%
2.9279
36.3%
36.3%
13.9%
3.9250
54.7%
59.2%
12.3%
4.3836
53.8%
53.8%
42.0%
22.6%
3.2%
25.8%
19.4%
0.0%
16.2%
41.1%
19.4%
2.1%
21.5%
19.6%
7.5%
12.1%
40.9%
18.7%
2.2%
21.0%
19.9%
7.8%
12.1%
41.2%
18.2%
2.5%
20.7%
20.5%
8.1%
12.4%
44.7%
18.5%
2.9%
21.4%
23.2%
9.3%
13.9%
42.2%
18.6%
3.1%
21.7%
20.5%
8.2%
12.3%
0.2993
0.0042
0.1000
0.0150
0.0116
0.2611
0.0003
0.6915
0.0535
0.0809
0.0295
0.0166
0.0114
0.4995
0.2632
0.0066
0.0898
0.0161
0.0124
0.2462
0.0005
0.6348
0.0497
0.0749
0.0291
0.0082
0.0095
0.4634
0.1228
0.0150
0.0798
0.0158
0.0113
0.2675
0.0002
0.5124
0.0234
0.0803
0.0162
0.0076
0.0000
0.3849
0.1112
0.0128
0.0978
0.0144
0.0092
0.2253
0.0003
0.4709
0.0274
0.0819
0.0156
0.0083
0.0000
0.3377
0.1419
0.0110
0.0722
0.0000
0.0192
0.1405
0.0005
0.3853
0.0180
0.0324
0.0819
0.0088
0.0000
0.2442
0.2005
0.0050
0.0539
0.0072
0.0008
0.1098
0.0008
0.3781
0.0303
0.0412
0.0783
0.0133
0.0000
0.2150
Competitive Analysis
We believe a competitive analysis is very useful in identifying areas that ANF excels and areas in which
ANF must improve. Additionally it provides insight into how other companies look compared to our target
company, ANF. Figures 20-22 compare ANF to its strongest competitors.
Figure 20a: Competitive Income Statement Analysis 2002-2003
In Thousands
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Operating Income
Non-operating income
ANF
1,595,800
939,708
656,092
ARO
304,800
218,600
86,200
3,900,500
202,400
110,500
286,600
339,000
3,806,000
175,900
65,900
312,660
191,700
1,793,500
113,700
52,100
312,600
208,400
1,148,000
71,400
20,300
56,900
312,660
3,768
50,700
141,000
2,500
780,900
1,012,600
36,800
32,500
81,200
100
900
51,200
1,000
41,200
271,400
5,100
41,900
166,500
2,800
810,500
337,500
13,300
27,100
44,300
500
3,900
16,400
2,000
(100)
248,600
600
0
0
109,200
0
0
143,600
54,900
$88,700
800,800
323,400
$477,400
80,700
31,000
$49,700
52,200
20,900
$31,300
169,300
63,800
$105,500
241,600
249,400
-$7,800
44,800
17,200
$27,600
18,400
7,100
$11,300
NA
316,428
121,450
$194,978
Abercrombie
100%
59%
41%
Vertical Analysis
American
Gap
Pac Sun Aeropostale
100%
100%
100%
100%
63%
61%
63%
70%
37%
39%
37%
30%
NA
276,500
107,900
$168,600
Vertical Analysis
Abercrombie American
Gap
Pac Sun Aeropostale
100%
100%
100%
100%
100%
56%
60%
64%
64%
72%
44%
40%
36%
36%
28%
22%
24%
27%
24%
20%
21%
25%
27%
26%
22%
20%
13%
12%
13%
9%
23%
15%
8%
10%
7%
4%
20%
0%
NA
20%
8%
12%
0%
3%
10%
0%
0%
10%
4%
6%
0%
5%
7%
0%
2%
6%
2%
3%
0%
4%
10%
0%
0%
10%
4%
6%
0%
0%
9%
0%
0%
9%
4%
6%
0%
3%
20%
0%
NA
20%
8%
12%
0%
3%
12%
0%
0%
12%
5%
8%
0%
6%
2%
0%
1%
2%
2%
0%
0%
4%
6%
0%
0%
7%
3%
4%
0%
1%
5%
1%
0%
6%
2%
4%
0%
Figure 20b: Competitive Income Statement Analysis
1999-2000
Comparative Income Statement
January 2001
ANF
AEOS
GPS
PSUN
$1,237,604 1,093,500 13,673,500 589,400
728,229
657,300
8,009,100 371,900
509,375
436,200
5,664,400 217,500
Source: Company Financials
ARO
213,400
151,700
61,700
ANF
1,030,900
580,500
450,400
Comparative Income Statement
January 2000
AEOS
GPS
PSUN
832,100 11,635,400 436,800
475,600
6,775,300 284,200
356,500
4,860,100 152,600
ARO
152,500
110,500
42,000
255,723
266,500
3,629,300
134,000
45,700
208,300
194,800
3,043,400
96,100
32,400
253,652
169,700
2,035,100
83,500
16,000
242,100
161,700
1,816,700
56,500
9,600
30,700
253,652
7,801
23,200
146,500
6,200
590,400
1,444,700
12,000
19,900
63,600
1,300
3,800
12,200
5,000
27,700
242,100
7,200
12,200
149,500
0
14,300
56,500
900
200
9,400
200
57,400
22,100
$35,300
9,500
3,500
$6,000
Non-operating expenses/Int. Exp
NA
Pretax Income
Income Taxes - Total
Net Income
261,453
103,320
$158,133
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Interest Expense
Operating Income
Non-operating income
Non-operating expenses
Pretax Income
Income Taxes - Total
Net Income
ARO
550,900
388,300
162,600
Comparative Income Statement
January 2002
ANF
AEOS
GPS
PSUN
$1,364,900 1,371,900 13,847,900 684,800
765,700
824,500
8,893,900 437,500
599,200
547,400
4,954,000 247,300
350,800
Pretax Income
Income Taxes - Total
Net Income
In Thousands
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Operating Income
Non-operating income
Source: Company Financials
343,432
Non-operating expenses/Int. Exp
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Interest Expense
Operating Income
Non-operating income
Non-operating expenses
Pretax Income
Income Taxes - Total
Net Income
Comparative Income Statement
January 2003
AEOS
GPS
PSUN
1,463,100
14,454,700 846,400
920,600
8,760,700 530,300
542,500
5,694,000 316,100
(100)
152,800
59,000
$93,800
74,900
1,381,800
504,400
$877,400
(100)
100
65,000
25,200
$39,800
17,100
5,700
$11,400
Vertical Analysis
Abercrombie American
Gap
Pac Sun Aeropostale
100%
100%
100%
100%
100%
59%
60%
59%
63%
71%
41%
40%
41%
37%
29%
NA
249,300
99,700
$149,600
31,800
1784900
0
0
0
149,400
58,700
$90,700
1,784,900
657,900
$1,127,000
100
Vertical Analysis
Abercrombie American
Gap
Pac Sun Aeropostale
100%
100%
80%
100%
100%
36%
57%
47%
65%
72%
28%
43%
34%
35%
28%
21%
24%
27%
23%
21%
13%
23%
21%
22%
21%
20%
16%
15%
14%
7%
15%
19%
13%
13%
6%
2%
20%
1%
NA
21%
8%
13%
0%
2%
13%
1%
0%
14%
5%
9%
0%
4%
11%
0%
1%
10%
4%
6%
0%
3%
11%
0%
0%
11%
4%
7%
0%
2%
6%
2%
0%
8%
3%
5%
0%
2%
15%
0%
NA
16%
6%
9%
0%
1%
18%
0%
0%
18%
7%
11%
0%
0%
12%
0%
0%
12%
5%
8%
0%
3%
13%
0%
0%
13%
5%
8%
0%
0%
6%
0%
0%
6%
2%
4%
0%
The highlights to figure 20 are from the vertical analysis comparison and trends. ANF has demonstrated,
over the last few years, that it has kept costs at a lower level than that of its competitors. We believe the
lower cost of goods sold is the result of ANF selling its articles of clothing at a significant premium.
Figure 21a: Competitive Balance Sheet Analysis
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
Source: Company Financials
Comparative Balance Sheet
January 2003
AEOS
GPS
ANF
PSUN
ARO
ANF
Comparative Balance Sheet
January 2002
AEOS
GPS
PSUN
ARO
391,000
10,500
144,200
55,400
601,100
194,500
13,600
124,700
95,000
427,900
3,388,500
NA
2,047,900
303,300
5,739,700
36,400
2,900
123,400
19,900
182,600
87,500
NA
46,700
10,700
144,900
167,700
20,500
108,900
108,200
405,300
180,400
17,600
91,100
88,900
378,000
1,035,700
NA
1,677,100
331,700
3,044,600
23,100
3,000
102,500
16,200
144,800
6,500
NA
58,700
7,500
72,700
392,900
267,500
3,776,800
201,500
69,400
365,100
257,700
4,161,300
195,000
42,300
700
994,700
46,000
741,300
385,400
9,902,000
15,700
399,800
8,800
223,100
200
770,600
37,000
672,700
385,500
7,591,300
15,600
355,400
6,100
121,100
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
50,200
0
161,300
211,500
50,600
4,200
86,700
141,500
1,159,300
500,000
1,067,300
2,726,600
28,500
2,400
42,500
73,400
18,000
0
40,000
58,000
31,900
0
131,700
163,600
39,100
4,000
106,700
149,800
1,105,100
41,900
909,200
2,056,200
37,500
1,300
27,100
65,900
13,300
35,300
13,300
61,900
Long-term Debt
Other Liabilities
Total Liabilities
0
33,700
245,200
16,400
5,900
163,800
2,895,800
621,400
6,243,800
3,300
17,700
97,400
0
37,100
95,100
0
11,600
175,200
19,400
1,400
170,600
1,961,400
564,100
4,581,700
25,300
16,200
107,400
0
23,900
85,800
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
749,500
577,500
3,658,200
302,400
128,000
595,400
502,100
3,009,600
248,000
35,300
749,500
577,500
3,658,200
302,400
128,000
595,400
502,100
3,009,600
248,000
35,300
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$994,700
$741,300
$9,902,000
$399,800 $223,100
$770,600
$672,700
$7,591,300
$355,400
$121,100
22%
4%
40%
6%
1%
29%
5%
41%
5%
0%
48%
6%
60%
Vertical Analysis
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
39%
1%
14%
6%
60%
26%
2%
17%
13%
58%
39%
0%
100%
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Accrued Expense
Total Current Liabilities
Vertical Analysis
21%
3%
58%
9%
1%
31%
5%
46%
39%
0%
21%
5%
65%
22%
3%
14%
14%
53%
27%
3%
14%
13%
56%
36%
38%
50%
31%
47%
38%
55%
55%
35%
6%
100%
4%
100%
4%
100%
4%
100%
0%
100%
6%
100%
5%
100%
4%
100%
5%
100%
5%
0%
16%
0%
21%
7%
1%
12%
0%
19%
12%
5%
11%
0%
28%
7%
1%
11%
0%
18%
8%
0%
18%
0%
26%
4%
0%
17%
0%
21%
6%
1%
16%
0%
22%
15%
1%
12%
0%
27%
11%
0%
8%
0%
19%
Long-term Debt
Other Liabilities
Total Liabilities
0%
3%
25%
2%
1%
22%
29%
6%
63%
1%
4%
24%
0%
2%
23%
3%
0%
25%
26%
7%
60%
7%
5%
30%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
0%
0%
75%
0%
0%
78%
0%
0%
37%
0%
0%
76%
0%
17%
43%
0%
0%
0%
57%
0%
0%
77%
0%
0%
75%
0%
0%
40%
0%
0%
70%
11%
29%
11%
0%
51%
0%
0%
20%
71%
0%
0%
0%
29%
75%
78%
37%
76%
57%
77%
75%
40%
70%
29%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
34%
NA
14%
NA
Figure 21b: Competitive Balance Sheet Analysis
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
Comparative Balance Sheet
January 2001
ANF
AEOS
GPS
Source: Company Financials
PSUN
ARO
ANF
Comparative Balance Sheet
January 2000
AEOS
GPS
PSUN
ARO
137,600
15,800
121,000
29,200
303,600
133,400
29,500
84,100
71,700
318,700
408,800
NA
1,904,200
335,100
2,648,100
29,000
2,800
82,700
13,200
127,600
3,700
NA
48,000
10,700
62,400
193,500
11,400
75,300
20,000
300,300
168,500
13,500
60,400
20,200
262,600
450,400
NA
1,462,000
285,300
2,197,700
32,400
2,200
60,000
9,600
104,200
NA
NA
NA
NA
NA
278,700
183,400
4,007,700
135,800
23,000
146,400
84,900
2,715,300
93,200
NA
5,200
587,500
41,000
543,000
357,200
7,013,000
14,100
277,500
8,100
93,500
11,500
458,200
7,100
354,600
275,700
5,188,700
11,900
209,300
NA
NA
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
33,900
0
120,600
154,500
42,000
4,300
102,800
149,100
1,067,200
1,029,900
702,000
2,799,100
31,600
500
15,700
47,800
15,800
27,000
11,400
54,200
18,700
0
119,200
137,900
30,700
0
57,700
88,400
805,900
169,000
778,000
1,752,900
20,100
0
16,700
36,800
NA
NA
NA
NA
Long-term Debt
Other Liabilities
Total Liabilities
0
10,300
164,800
24,900
1,300
175,300
780,400
505,300
4,084,800
2,100
14,500
64,400
0
15,300
69,500
0
9,200
147,100
0
1,700
90,100
784,900
417,900
2,955,700
400
10,300
47,500
NA
NA
NA
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
422,700
367,700
2,928,200
213,100
24,000
311,100
264,500
2,233,000
161,800
NA
422,700
367,700
2,928,200
213,100
24,000
311,100
264,500
2,233,000
161,800
NA
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$587,500
$543,000 $7,013,000 $277,500
$93,500
$458,200
$354,600
$5,188,700 $209,300
4%
0%
51%
11%
67%
42%
2%
16%
4%
66%
48%
4%
17%
6%
74%
Vertical Analysis
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
Vertical Analysis
23%
3%
21%
5%
52%
25%
5%
15%
13%
59%
6%
NA
27%
5%
38%
10%
1%
30%
5%
46%
47%
34%
57%
49%
25%
32%
1%
100%
8%
100%
5%
100%
5%
100%
9%
100%
3%
100%
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Accrued Expense
Total Current Liabilities
6%
0%
22%
21%
26%
8%
1%
19%
0%
27%
15%
15%
10%
0%
40%
11%
0%
6%
0%
17%
Long-term Debt
Other Liabilities
Total Liabilities
0%
2%
28%
5%
0%
32%
11%
7%
58%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
0%
0%
72%
0%
0%
68%
0%
0%
42%
1%
5%
23%
0%
0%
0%
77%
17%
29%
12%
0%
58%
0%
0%
16%
74%
0%
0%
0%
26%
72%
68%
42%
77%
26%
9%
28%
5%
42%
15%
1%
29%
5%
50%
24%
52%
45%
2%
100%
5%
100%
6%
100%
4%
0%
34%
26%
30%
9%
0%
16%
0%
25%
16%
3%
15%
0%
34%
10%
0%
8%
0%
18%
0%
2%
32%
0%
0%
0%
68%
0%
0%
25%
0%
0%
0%
75%
15%
8%
57%
0%
0%
0%
43%
0%
5%
23%
0%
0%
0%
77%
68%
75%
43%
77%
100%
100%
100%
100%
NA
0%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
100%
100%
100%
100%
100%
In comparing the balance sheets (Figure 21a and 21b) we point out that ANF has a lower level of inventory
on its balance sheet, as a percentage, than its competitors. In an industry that is highly competitive, and in
which last quarters merchandise is significantly marked-down, ANF has demonstrated a strong ability to
control inventory. We view this as a key factor of ANF’s ability to remain competitively successful and
able to maintain premium pricing.
On a relative basis, ANF’s accounts payable is also lower, but we believe this is offset by the greater than
normal “other current liabilities”. The additional level of cash and no long-term debt points to ANF having
significant ability to maneuver during economic slow/fast times and quickly adjust inventories for changes
in the fashion market.
Figure 22a and 22b (next page) is a side-by-side comparison of competitor’s ratios. We believe the slower
inventory turnover is a concern and needs to be brought closer to that of its competitors. ANF may likely
have to lower its profitability margin in order to increase its turnover ratio. We do point out that the
company does have significant room for movement, as the ROE/ROA remains well above that of its
competitors.
NA
Figure 22a: Competitive Ratio Analysis
Source: Company Financials
Abercrombie & Fitch (ANF)
Annual Ratio Analysis
Short-term Liquidity Ratios
Liquidity stock measure
Cash ratio
Current ratio
Liquidity flow measure
FCF/Share
Long-term Solvency Ratios
Solvency stock measure
Debt to total assets
Debt to equity
Solvency flow measures
Interest coverage
Activity Ratios
Inventory Turnover
Days in Inventory
Receivable Turnover
Days in A/R
Total Conversion Period
Asset Turnover
Days in Accounts Payable
Profitability Ratios
Gross Margin
Profit Margin
Return on Assets
Return on Equity
Earnings per Share
American Eagle
Annual Ratio Analysis
2003
2002
2001
2000
1999
2003
2002
2001
2000
1999
1.86
2.69
1.90
2.84
1.46
2.48
0.89
1.96
1.40
2.18
1.79
2.78
1.71
3.02
1.49
2.49
1.08
2.14
1.91
2.97
NA
2.04
1.08
-0.02
0.68
NA
0.60
0.78
0.90
1.26
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2.16
2.91
2.78
3.56
3.47
4.66
5.38
7.94
0.00
0.00
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
6.29
58.03
193.42
1.89
59.92
1.56
7.43
49.02
103.23
3.53
52.54
1.81
7.02
51.85
75.23
4.84
56.69
2.01
7.42
49.99
90.75
4.09
54.08
2.37
9.74
37.29
132.60
2.74
40.03
2.65
7.86
46.23
223.56
1.63
47.86
1.89
8.53
42.66
93.72
3.88
46.55
2.07
9.41
38.66
58.26
6.25
44.91
2.25
9.10
40.77
50.93
7.28
48.05
2.44
8.64
42.12
75.54
4.82
46.94
2.94
42.01
12.01
18.70
25.31
2.06
41.11
12.22
22.08
28.99
1.94
40.89
12.36
24.84
33.13
1.65
41.16
12.78
30.24
43.10
1.55
43.69
14.51
38.49
60.18
1.39
36.46
3.95
7.47
9.83
0.83
37.08
6.06
12.54
16.44
1.22
39.90
7.69
17.34
24.26
1.43
39.89
8.57
20.89
29.66
1.30
42.84
10.90
32.06
43.20
1.24
NA
NA
72.53
45.22
81.73
46.14
89.04
42.27
91.23
40.55
NA
NA
123.99
62.83
416.48
204.58
92.02
45.70
102.11
43.52
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Industry Ratios
Sales per Employee
Assets per Employee
Figure 22b: Competitive Ratio Analysis
Source: Company Financials
Gap
Annual Ratio Analysis
2003
Short-term Liquidity Ratios
Liquidity stock measure
Cash ratio
Current ratio
Liquidity flow measure
FCF/Share
Long-term Solvency Ratios
Solvency stock measure
Debt to total assets
Debt to equity
Solvency flow measures
Interest coverage
Activity Ratios
Inventory Turnover
Days in Inventory
Receivable Turnover
Days in A/R
Total Conversion Period
Asset Turnover
Days in Accounts Payable
Profitability Ratios
Gross Margin
Profit Margin
Return on Assets
Return on Equity
Earnings per Share
2002
2001
Pacific Sunwear
Annual Ratio Analysis
2000
1999
Aeropostale
Annual Ratio Analysis
2003
2002
2001
2000
1999
2003
2002
2001
1.34
2.68
1.22
2.11
0.49
1.48
0.15
0.95
0.26
1.25
0.50
2.49
0.35
2.20
0.61
2.67
0.88
2.83
0.84
3.11
1.51
2.50
0.87
1.74
0.11
1.17
2.12
1.07
0.44
-0.67
0.28
0.49
-0.47
-0.14
0.13
-0.02
0.66
NA
NA
26.78
57.92
34.29
92.83
26.07
66.56
25.81
61.82
18.38
42.72
1.42
1.88
7.48
10.72
0.57
0.75
0.00
0.00
0.00
0.00
0.00
0.00
0.00 29.12
0.00 134.15
8.00
4.07
3.09
19.29
40.40
NA
NA
NA
NA
NA
151.89
NA
5.27
69.07
NA
NA
NA
1.57
5.00
72.80
NA
NA
NA
1.64
5.28
68.88
NA
NA
NA
1.88
5.11
72.61
NA
NA
NA
2.24
5.38
67.65
NA
NA
NA
2.54
4.98
73.08
284.02
1.28
74.36
2.24
5.02
72.34
236.23
1.54
73.88
2.16
5.49
67.56
239.03
1.55
69.11
2.42
5.55
65.63
282.92
1.28
66.91
2.45
5.71
63.78
336.43
1.08
54.86
2.38
9.18
39.66
NA
NA
NA
2.98
5.60 4.10
64.37 89.27
NA
NA
NA
NA
NA
NA
3.02 2.84
37.64
6.50
10.18
24.41
1.09
33.99
3.30
5.43
14.32
0.54
29.92
-0.60
-0.10
-0.20
-0.01
37.11
6.42
14.38
34.00
1.00
41.77
9.69
24.63
59.21
1.26
33.52
5.87
13.16
18.05
0.66
32.15
4.03
8.71
11.96
0.37
33.53
6.74
16.33
21.20
0.54
34.94
8.08
19.77
25.35
0.49
33.71
0.32
17.45
22.04
0.32
29.52
5.68
16.92
33.26
0.82
32.24 28.27
6.55 3.71
19.78 10.55
61.30 53.52
0.71
85.53
58.59
83.93
46.56
82.37
42.25
83.11
37.06
90.04
42.53
253.64
131.64
256.28
120.63
242.67
116.30
236.47
108.82
131.98
53.43
NA
NA
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-03
10.52
Industry Ratios
Sales per Employee
Assets per Employee
NA
NA
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
NA
NA
Dec-02 Dec-01
MODELS
In order to determine a reasonable valuation, we reviewed several different models. Figure 23 is based
upon the company’s free cash flow. This model is based upon the assumption that a majority shareholder
has significant ability to control the free cash flow and the value of the company should be based upon this
ability. In our last model we have forecasted earnings, balance sheet items, income statement, and FCF.
The discount factor is based upon the cost of equity. The model discounts back the cash flow to this level
and derives a price of $28.84, significantly below the current $34.23 price.
Figure 23: Free Cash Flow
Source: Company Financials
Free Cash Flows
Abercrombie & Fitch (ANF)
(fiscal years ending February 1 ; amounts in thousands of dollars except per-share data)
2004E
Free cash flow
203,648.40
Discount Factor
1.1425
PV of Cash Flows
178,248.05
Total PV of cash flows
Continuing Value
PV of CV
1,045,748.08
Value of the Firm
1,045,748.08
BV of debt and PS
Value of Equity
1,045,748.08
Value per share
11.05
Price per share
28.84
2005E
2006E
2007E
53,747.19
1.3053
41,175.93
192,171.29
1.4913
128,860.52
210,777.56
1.7038
123,708.50
2008E
147,586.33
1.9466
75,816.74
2,035,673.48
Figure 24: Residual Income Model
Source: Company Financials
Residual Earnings Model
Abercrombie & Fitch (ANF)
(fiscal years ending February 1; amounts in thousands of dollars except per share data)
EPS
DPS
BPS
ROCE
RE (.1425)**
Discount Factor
PV of RE
Total PV of RE
Continuing Value
PV of CV
Value per Share
2004E
2.58
0.50
2.08
1.1509
2.2644
1.1425
2.0852
19.31
2005E
2.93
0.50
2.43
1.4056
2.6329
1.3053
2.1009
2006E
3.32
0.50
2.82
1.3662
2.9734
1.4913
2.0794
2007E
3.73
0.50
3.23
1.3226
3.3276
1.7038
2.0399
2008E
4.13
0.50
3.63
1.2804
3.6748
1.9466
1.9749
50.69
26.04
54.07
*Constant Growth rate of 7%
**RE = Ke
The residual income model, figure 24, is based upon valuing the retained earnings: the forecasted earnings
are added to the company’s book value, minus dividends. The following years return is figured by
multiplying an estimated ROCE to the book value. We then value the retained earnings using a discount
factor, cost of capital, to derive the present value of the retained earnings. This amount is then discounted
back to today’s value and from this model ANF earns a valuation of $54.07 per share. We used an
estimated constant growth rate of 7%.
The residual earnings model (figure 25) is based upon the same assumptions and uses the same basic
approach. The difference is the residual earnings model estimates the growth the company could achieve if
dividends, received by shareholders, were reinvested at ANF’s ROCE.
Figure 25: Residual Earnings Model
Source: Company Financials
Residual Earnings Model
Abercrombie
2002 2004
EPS
$
2.54
DPS
$
0.50
DPS reinvested at 14.25%
$
0.07
Cum-dividend
2.61
Normal Earnings
2.57
Abnormal Earnings Growth
0.05
Discount Rate
14.25%
PV of AEG
$0.35
Total PV of AEG
Continuing Value
PV of Continuing value
Total
Value Per Share
$0.29
$
$
$
2005
2.95
0.50
0.07
3.02
2.91
0.12
14.25%
$0.09
$
$
$
2006
3.24
0.50
0.07
3.31
3.37
(0.06)
14.25%
($0.04)
2007
3.59
0.50
0.07
3.67
3.70
(0.04)
14.25%
($0.04)
$
$
$
$
$
$
2008
3.98
0.50
0.07
4.06
4.11
(0.05)
14.25%
($0.03)
($0.10)
$
$
(0.70)
(0.70)
$20.68
Reinvestment of DPS
Capitalization Rate
14.25%
14.25%
Figure 26: Multiple Analysis
Source: Company Financials
Multiple Analysis
Price
PE FY1
P/CF
P/B
P/S
ARO
26.29
16.64
24.9
8.33
1.86
AEOS
28.96
15.40
14.22
2.74
1.31
GPS
24.15
15.48
10.53
4.25
1.34
PSUN
21.75
14.31
18.04
4.1
1.53
ANF Multiples
Average Multiple
PE FY1
13.59
15.46
P/CF
11.92
16.92
2.645134228
P/B
3.54
4.86
8.906779661
P/S
2.01
1.51
18.12437811
Price based on Average of Multiples
Suggested Value
$34.57
$44.21
$35.99
$27.37
$35.53
ANF Current Price
$36.43
The multiple analysis takes different comparable multiples from ANF’s competitors and applies the
average to ANF. From this we receive an estimated price of $35.53.
To compute the expected returns, beta, and other needed factors used in the last model, we need to
determine the estimated return expectations required by current shareholders. For this we used the CAPM
(figure 27).
Figure 27: CAPM
Source: Company Financials and Stockval
CAPM
Denoted as
kE
Formula
rf + beta*(rm-rf)
Cost of capital for debt
kD
Cost of operations
kF
NBC
kE*VE/VF + kD*VD/VF
Cost of capital for equity
For ANF in 2004
riskfree rate (T-bill rate)
Beta
Market risk premium (rm-rf)
kE
kD
Market value of equity*
Market value of debt
Market value of the firm
kF
* using ANF market close on MAR. 27, 2004 of $36.43 per share.
3.15%
1.60
7.25%
14.75%
0.00%
3,636,989
3,636,989
14.75%
Figure 28: Financial Forecasting
Source: Company Financials and Stockval
Financial Statement Analysis and Valuation
Full-information forecasting: Abercrombie and Fitch
Forecasts of key income statement ratios
2004E
41.5%
22.0%
38.5%
8.0%
Fiscal Year Beginning
2005E
2006E
2007E
41.5%
41.5%
41.5%
22.0%
22.0%
22.0%
38.5%
38.5%
38.5%
10.0%
10.0%
11.0%
2008E
41.5%
22.0%
38.5%
11%
Cash Turnover
Accounts receivable turnover
Inventory turnover
Supplies turnover
PPE turnover
Other Asset Turns
2004E
0.123
0.011
0.090
0.016
0.255
0.029
Fiscal Year Beginning
2005E
2006E
2007E
0.123
0.123
0.123
0.011
0.011
0.011
0.090
0.090
0.090
0.016
0.016
0.016
0.310
0.310
0.315
0.029
0.029
0.029
2008E
0.123
0.011
0.090
0.016
0.350
0.029
Accounts Payable Turnover
Accrued Expenses Turnover
Taxes Payable Turnover
Other Liabilities Turnover
0.0497
0.0749
0.0291
0.0082
Gross margin
SG&A expense ratio
Tax rate
Sales growth
Forecasts of turnover
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
Pro forma financial statements
Fiscal Year Beginning
2005E
2006E
2007E
2004E
2008E
Income statement (in '000s)
Sales
Cost of sales
Gross margin
Total operating expenses (SG&A)
Core operating income before tax
Taxes
Operating income
1,973.3
1,154.4
818.9
434.1
384.8
148.1
236.6
2,170.6
1,269.8
900.8
477.5
423.3
163.0
260.3
2,387.7
1,396.8
990.9
525.3
465.6
179.3
286.3
2,650.4
1,550.5
1,099.9
583.1
516.8
199.0
317.8
2,941.9
1,721.0
1,220.9
647.2
573.7
220.9
352.8
Non-Operating Income/Expenses
Net Income
Number of Shares
EPS
4.0
240.6
94.6
2.54
4.2
264.5
89.6
2.95
4.2
290.5
89.6
3.24
4.2
322.0
89.6
3.59
4.2
357.0
89.6
3.98
Retention
DPS
Total Dividends
$
$
Balance sheet
Cash/ Market Securities
Account receivable
Inventory
Property, plant and equipment
Other Assets
Total Operating Assets
$
94%
0.50 $
47.30
$
94%
0.50 $
44.80
$
94%
0.50 $
44.80
$
94%
0.50 $
44.80
Fiscal Year Beginning
2005E
2006E
2007E
266.65
293.32
325.58
23.9
26.3
29.2
194.9
214.4
238.0
672.9
740.2
834.9
62.8
69.1
76.7
1,221.2
1,343.3
1,504.3
2004E
242.41
21.7
177.2
503.2
57.1
1,001.6
94%
0.50
44.80
2008E
361.39
32.4
264.2
1,029.7
85.1
1,772.7
Accounts Payable Turnover
Accrued Expenses Turnover
Taxes Payable Turnover
Other Liabilities Turnover
Total Operating Liabilities
98.1
147.8
57.5
16.3
319.7
107.9
162.6
63.2
19.2
352.8
118.6
178.8
69.5
31.7
398.7
Net operating assets (NOA)
702.1
891.7
980.9
1,102.0
1,326.2
236.6
2.7
234.0
2.47
186.67
1.97
260.3
189.6
70.7
0.79
25.91
0.29
286.3
89.2
197.2
2.20
152.37
1.70
317.8
121.1
196.7
2.20
151.89
1.70
352.8
224.2
128.6
1.44
83.81
0.94
Operating income
Change in NOA
Free cash flow
Free Cash Flow per share
Free Cash Flow after Dividends
Free Cash Flow per share after Dividends
RNOA
ReOI (at cost of operations 14.25%)
Growth in ReOI
$
$
33.8%
133.5
19.0%
$
$
32.7%
157.4
17.9%
Cost of operations
14.75%
Total PV of ReOI to 2005
599.5
Continuing value*
PV of CV
1,683.0
NOA as of 2000
739.5
Value of operations
3,022.0
NFA / NFO
10.0
Value of common equity
3,032.0
Number of shares outstanding (000'S)
94.61
Value per share
32.05
* Assume growth in ReOI remains constant at 7% into the future.
* using ANF market close on MAR. 27, 2004 of $36.43 per share.
Per share numbers are diluted values
$
$
30.6%
182.3
15.8%
131.7
198.5
77.2
0.0
407.4
$
$
30.5%
211.0
15.8%
146.2
220.4
85.7
0.0
452.2
$
$
29.1%
241.2
12.0%
8,772.5
Our Financial Forecast
This model presents the greatest
ability to vary inputs, but as such,
also allows for the greatest margin
of error.
In our assumptions, we estimated
that ANF would maintain the
majority of its intra-statement
relationships, e.g. gross margins,
tax rate, cash turnover, et al.
We used a variable growth rate,
starting 2004 with 8% and
climbing to 11% in 2008. The
upward shift is estimated to
account for two significant
factors: pick-up in the economy
and Hollister increasingly adding
to sales.
We also increased PPE turnover
in expectations that new
management will be able to
reverse the trend and to also
adjust for the pick-up in sales as a
result of a stronger economy.
With regard to the balance sheet,
we believe that ANF be
successful at maintaining its
current Net Working Capital
structure.
Using the information from the
CAPM model and using these
assumptions, we estimate ANF to
be worth $32.06 per share.
But, as discussed, this approach
has a significant margin of error.
To understand the main inputs
effect on the estimated value, we
have provided a sensitivity
analysis (figure 29).
Figure 29: Financial Forecasting
Source: Company Financials and Stockval
Assumption
Base Price
$36.43
Base Case (Used)
New Value Price Target Difference
Terminal Sales Growth (11%)
12% $
34.26
($2.17)
Terminal Sales Growth (11%)
10% $
34.20
($2.23)
Cost of Equity (14.75%)
15.75 $
32.60
($3.83)
Cost of Equity (14.75%)
13.75 $
37.82
$1.39
Beta (1.6)
1.5 $
36.47
$0.04
Beta (1.6)
1.7 $
32.95
($3.48)
Terminal Growth Rate (12%)
13% $
36.26
($0.17)
Terminal Growth Rate (12%)
11% $
33.28
($3.15)
* using ANF market close on MAR. 27, 2004 of $36.43 per share.
Figure 30: Forecasted Price
Our sensitivity analysis
indicates that the
estimated cost of equity
has the greatest effect on
determining the new price.
The range of the estimated
price moves from $32.60
to $37.82 with an increase
-decrease of one percent.
We also believe that the
terminal growth rate must
be carefully chosen.
Source: Company Financials and Stockval
Normalized Earnings
Figure 30 compares the
consensus of estimated earnings
to that of our estimates from this
model. We believe the
difference in values towards the
end is the result in our lower
growth expectations.
Consensus estimates
Our Estimates
2004
$2.68
$2.54
2005
$2.91
$2.95
2006
$3.29
$3.24
2007
$3.70
$3.59
2008
$4.20
$3.98
source: StockVal
Our decision to use a terminal
11% sales growth rate and 12% terminal growth rate in ROCE is based upon normalizing the recent trends
and expecting the firm to begin to slow in overall growth. We believe the company will still continue to do
well with the Hollister stores, but we prefer to see some execution on the new concept stores before
increasing our expectations.
Figure 31: Forecasted Price
MODELS
FCF
Residual
Abnormal Earnings Growth
Multiple Comps
Earnings Forecast
Implied Value
ANF stock price as of 25/2/04
Difference
Source: Company Financials and Stockval
Derived Price
$28.84
$54.07
$20.68
$35.53
$32.05
$34.23
$36.43
-6.0%
Our expected price of $34.23
(figure 31) is derived upon an
average of all prices. We believe
that no one model provides an
absolute definitive value, but that
a composite offers the ability to
remove input errors and allow for
the removal of any biases.
VALUATION
We believe that the current price
is over valued by roughly 6%, but that over the next year the stock could marginally appreciate if sales
come in at the higher range of our forecast. As a result, we remain cautious at current levels, but believe
the company is a near-term hold.
Exhibit 1: 12-24 Year Old Demographics
Source: NPD
Teen Market: A Significant Portion of
Annual Apparel Sales
Total 2000 Aparel Sales $180 billion
41-50
15%
Te e ns a re the
la rge st single
se gme nt
12-24
29%
0-11
12%
51+
20%
30-40
16%
25-29
8%
Exhibit 2: Teens and Apparel Distribution Points
50%
Source NPD
Specialty Stores Continue to Rank as the #1 Place for Teens
to Shop
1998
1999
2000
40%
40%
30%
20%
17%
16%
11%
8%
10%
3%
2%
4%
0%
Depart ment
St ores
Nat ional
Chains
Specialt y
St ores
M ass
M erchant s
Direct M ail
Ret ail
Of f -Price
Ret ail
Fact ory
Out let s
All Ot her
Figure 3: Mall Distribution
Source: Bureau of Labor Statistics, company data, International Council of Shopping Centers.
Figure 4: Apparel Price Percent Change According to the CPI
Exhibit 5: Retail Market Share
Figure 6: Brand Positioning
Source: Ned Davis
Source : NPD
Source: Goldman Sachs
Figure 7: Quarterly Same Store Sales Growth
Source: Company data
Quarterly Same Store Sales Growth
50%
1994
1997
2000
2003
40%
1995
1998
2001
1996
1999
2002
30%
20%
10%
0%
(10%)
(20%)
Apr
Jul
Oct
Jan
Figure 8: Specialty Apparel Stocks (5 yr Beta) Source: Stockval
Company
Beta
Aberombie & Fithc
1.6
Gap
1.62
Aeropostale
n/a
Company
Beta
American Eagle
1.79
Pacific Sunwear
1.3
Figure 9:
ANF Dupont Model / Operating Ratios
Profitability
Profit Margin
Asset Turnover
Leverage
Return on Equity
Return on Invested Capital
Return on Average Assets
Operating
Asset Turnover
Accounts Payable Turnover
Average Payment Period
Receivables Turnover
Average Collection Period
Inventory Turnover
Avg Days in Inventory
Fixed Asset Turnover
1997
9.3%
3.6
4.2
138.0%
77.3%
33.2%
1997
3.6
28.6
12.7
274.8
1.3
9.4
38.6
7.4
1998
12.5%
3.2
2.1
83.4%
53.8%
40.5%
1998
3.2
23.2
15.8
281.5
1.3
10.7
34.0
9.1
Source: Company Financials and Merrill Lynch
1999
14.5%
2.7
1.6
60.2%
46.7%
38.5%
1999
2.7
26.7
13.7
132.6
2.8
7.7
47.3
7.0
2000
12.8%
2.4
1.4
43.1%
36.3%
30.2%
2000
2.4
27.7
13.2
90.7
4.0
6.0
60.6
4.4
2001
12.4%
2.0
1.3
33.1%
27.8%
24.8%
2001
2.0
24.5
14.9
75.2
4.9
7.4
49.3
3.7
2002
12.2%
1.8
1.3
29.0%
25.7%
22.1%
2002
1.8
38.9
9.4
103.2
3.5
6.5
56.0
4.1
2003
12.0%
1.6
1.4
25.3%
23.3%
18.7%
2003
1.6
24.1
15.1
193.4
1.9
5.8
62.9
3.8
Figure 10: Competitors Inventory Turnover
Inventory Turnover
AEOS
GPS
PSUN
1997
1998
3.2
2.1
2.7
1999
3.2
2.2
2.4
Source: Stockval
2000
3.3
2.5
2.4
2.09
ARO
2001
2.9
2.5
2.5
2.65
2002
2.4
2.2
2.4
2.8
2.3
1.9
2.2
2.84
Figure 11: Sales per Employee and Assets per Employee
ANF
GPS
AEOS
PSUN
ARO
2004
NA
NA
NA
90.04
131.98
Sales per Employee
2003
2002
2001
72.53
81.73
89.04
123.99
416.48
92.02
85.53
83.93
82.37
253.64
256.28
242.67
NA
NA
2000
91.23
102.11
83.11
236.47
ANF
GPS
AEOS
PSUN
ARO
2004
NA
NA
NA
42.53
53.43
Figure 12: Store Growth
2003
2.1
1.6
2.2
3.2
Source: Bloomberg
Assets per Employee
2003
2002
2001
45.22
46.14
42.27
62.83
204.58
45.70
58.59
46.56
42.25
131.64
120.63
116.30
NA
NA
2000
40.55
43.52
37.06
108.82
Source: 2003 Annual Report
Store Growth
Abercrombie & Fitch
Abercrombie
Hollister
Concept IV
Number of
Stores
340
164
93
0
February 1, 2003
Sq. Ft Percent of
Millions
Stores
3,036
57%
727
27%
595
16%
0
0%
Percent of
Sq. Ft
70%
17%
14%
0%
Number of
Stores
357
171
172
0
Figure 13: Current Ratio
Current Ratio FY end
January 31, 2004
Sq. Ft Percent of Percent of Net New Planned
Millions
Stores
Sq. Ft
in 2004
3,154
51%
51%
11
753
24%
24%
8
1,114
25%
25%
85
0
0%
0%
5
Source: 2003 10k
2003
2.69
2002
2.57
2001
2.48
Figure 14: Revenue and A/R Growth
Revenue Growth
Accounts Receivables Growth
2003
17%
-49%
Source: 2003 10k
2002
10%
29%
2001
19%
38%
2000
28%
179%
Appendix 1 – INCOME STATEMENT
Abercrombie & Fitch (ANF)
Annual Income Statement
In Thousands
Sales
Cost of Goods Sold
Selling, General, and Administrative
Operating Income Before
Depreciation
Interest Expense
Pretax Income
Income Taxes - Total
Net Income (Loss)
2003
2002
2001
2000
1999
1998
$ 1,707,810 $1,595,757 $1,364,853 $1,237,604 $1,042,056 $815,804
990,412
939,708
806,819
728,229
576,473 471,853
385,764
343,432
286,576
255,723
223,519 176,993
331,634
(3,708)
335,342
130,240
$
205,102
312,617
(3,768)
316,385
121,450
271,458
(5,064)
276,522
107,850
253,652
(7,801)
261,453
103,320
242,064
(7,270)
249,334
99,730
166,958
(3,144)
170,102
68,040
$194,935
$168,672
$158,133
$149,604 $102,062
Appendix 2 – BALANCE
SHEET
Abercrombie & Fitch (ANF)
Annual Balance Sheet
In Thousands
Feb. 2004
Feb. 2003
Feb. 2002
Feb. 2001
Feb. 2000
Feb. 1999
ASSETS
Cash and Cash Equivalents
Marketable Securities
Receivables
Inventories - Total
Store Supplies
Other Current Assets
511,073
10,000
7,197
170,703
29,993
23,689
$420,063
10,000
10,572
143,306
25,671
19,770
$167,664
71,220
20,456
108,876
21,524
15,455
$137,581
0
15,829
120,997
17,817
11,338
$147,908
45,601
11,447
75,262
0
19,999
$163,564
0
4,101
43,992
5,887
691
Total Current Assets
Property, Plant, and
Equipment - Total (Gross)
752,655
$601,156
$405,195
$303,562
$300,217
$218,235
192,701
136,200
105,400
79,400
63,100
Depreciation, Depletion, and
Amortization (Accumulated)
Property, Plant, and
Equipment - Total (Net)
Deferred Income Taxes
Other Assets
TOTAL ASSETS
LIABILITIES
Accounts Payable
Income Taxes Payable
Accrued Expense
Total Current Liabilities
Deferred Taxes
Other Liabilities
EQUITY
Preferred Stock Redeemable
Preferred Stock Nonredeemable
Total Preferred Stock
Common Stock
Paid-In Capital
Retained Earnings
Less: Treasury Stock - at
average cost
TOTAL
STOCKHOLDERS'
EQUITY
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY
COMMON SHARES
OUTSTANDING
230,216
$
445,956
0
392,941
0
365,112
0
278,785
4,788
146,403
11,060
89,558
10,737
552
1,429,379
725
$1,023,048
239
$770,546
381
$587,516
486
$458,166
631
$319,161
91,364
50,406
138,232
280,002
79,291
46,471
119,526
211,470
31,897
22,096
109,586
163,579
33,942
19,318
101,302
154,562
18,714
85,373
33,779
137,866
24,759
63,882
33,587
122,228
19,516
28,388
15,189
13,044
1,165
10,368
0
10,254
0
9,206
0
10,828
0
0
0
0
0
0
0
0
1,033
139,139
919,577
0
0
0
0
0
1,033
142,577
714,475
1,033
141,394
519,540
1,033
136,490
350,868
1,033
147,305
192,735
517
144,142
43,131
(188,492)
(108,558)
(66,533)
(65,691)
(29,979)
(1,685)
871,267
749,527
595,434
422,700
311,094
186,105
1,429,379
$1,023,048
$770,546
$587,516
$458,166
$319,161
94,607
100,631
102,524
102,156
107,641
106,202
Appendix 3 - SHAREHOLDERS EQUITY
Abercrombie & Fitch (ANF)
Consolidated Statements of Shareholders' Equity
Paid-in
Retained
Shares
Amount
Capital
Earnings
Balance, Feb. 1998
102,018
$1,022
$117,461
($58,931)
Purchase of Treasury Stock
(490)
Net Income
102,062
Issuance of New Stock
1,200
$11
25,870
Stock options, restricted stock, other
86
295
Balance, Feb. 1999
102,814
$1,033 $143,626
$43,131
Purchase of Treasury Stock
(1,510)
Net Income
149,604
Stock options, restricted stock, other
700
3,679
Balance, Feb. 2000
102,004
$1,033
$147,305
$192,735
Purchase of Treasury Stock
(3,550)
Net Income
158,133
Tax Benefit from exercise of options
462
Stock options, restricted stock, other
342
(11,277)
Balance, Feb. 2001
98,796
$1,033
$136,490
$350,868
Purchase of Treasury Stock
(600)
Net Income
168,672
Tax Benefit from exercise of options
5,056
Stock options, restricted stock, other
677
(152)
Balance, Feb. 2002
98,873
$1,033
$141,394
$519,540
Purchase of Treasury Stock
(1,850)
Net Income
194,935
Tax Benefit from exercise of options
164
Stock options, restricted stock, other
246
1,019
Balance, Feb. 2003
97,269
$1,033
$142,577
$714,475
Purchase of Treasury Stock
(4,401)
Net Income
205,102
Tax Benefit from exercise of options
9,505
Stock options, restricted stock, other
1,739
(12,943)
Balance, Feb. 2004
94,607
$1,033 $139,139
$919,577
Treasury
stock
($777)
(11,240)
10,332
($1,685)
(50,856)
22,562
($29,979)
(43,929)
8,217
($65,691)
(11,069)
10,227
($66,533)
(42,691)
666
($108,558)
(115,670)
35,736
$188,492
Total
$58,775
(11,240)
102,062
25,881
10,627
$186,105
(50,856)
149,604
26,241
$311,094
(43,929)
158,133
462
(3,060)
$422,700
(11,069)
168,672
5,056
10,075
$595,434
(42,691)
194,935
164
1,685
$749,527
(115,670)
205,102
9,505
22,793
$871,257
Appendix 4 – CASH FLOW STATEMENT
Abercrombie & Fitch (ANF)
Annual Cash Flow Statement
In Thousands
2004
INDIRECT OPERATING
ACTIVITIES
Income Before Extraordinary Items
Depreciation and Amortization
Noncash Charge for Deferred
Compensation
Inventory - Decrease (Increase)
Accounts Payable and Incrued Liab. Increase (Decrease)
Income Taxes - Accrued - Increase
(Decrease)
Other Assets and Liabilities - Net
Change
$
205,102 $194,935
66,604
56,925
5,310
(27397)
Operating Activities - Net Cash Flow
INVESTING ACTIVITIES
Capital Expenditures
Proceeds from Maturities of
Marketable Securities
Purchase of Marketable Securities
Collection (Issuance) of Note
Receivable
$
Investing Activities - Net Cash Flow
FINANCING ACTIVITIES
Settlement of Balance with The
Limited
Net proceeds from Issuance of
Common Stock
$
2002
2001
$168,672
41,155
$158,133
30,731
2000
1999
$149,604 $102,062
27,721
20,946
2,295
(35,342)
3,936
12,121
4,340
(45,735)
5,212
(31,270)
11,497
(10,065)
5,761
41,766
5,272
21,626
15,446
37,530
10,459
38,235
13,787
(8,420)
(131)
10,758
8,749
(5,668)
(11,741)
(9,486)
(12,773)
355
281,896 $293,146
$233,202
$151,189
(99,128)
(92,976)
(126,515)
(153,481)
(83,824)
10,000
10,000
(10,000)
71,220
0
(71,220)
45,601
0
11,332
(56,933)
0
0
(3,000)
(1,500)
0
0
4,954
(454)
$153,809 $173,083
(41,876)
(99,128) ($26,802) ($198,189) ($110,880) ($130,925) ($41,876)
23,785
25,875
(50,000)
Repayment of Long-term Debt
Purchase of Common and Preferred
Stock
Financing Activities - Other
Financing Activities - Net Cash Flow
2003
(115,670)
19,767
$
(42,691)
(282)
(11,069)
6,139
(43,929)
(6,707)
(95,903) ($42,973)
($4,930)
($50,636)
(10,327)
Cash and Cash Equivalents - Increase
(Decrease)
Noncash Investing Activities
91,010
223,371
30,083
Construction Allowance Receivables
5,730
8,778
14,030
Accrual for Construction in Progress
31,269
12,680
25,338
9,531
(50,856)
12,316
(11,240)
1,270
($38,540) ($10,310)
(15,656)
120,897
Appendix 5 – COMMON SIZED
INCOME STATEMENT
Abercrombie & Fitch (ANF)
Common Size Income Statement
2003
Operating Income
Revenues
Cost of Sales
Gross Margin
Operating Expenses
Administrative Expenses
Catalogue & Advertising Costs
Operating Income from Sales
(Before Tax)
Taxes
Tax as reported
Tax on financial items
Operating Income
Financing Expense (Income)
Interest Expense
Tax benefit of debt
Net Interest Expense (after tax)
Preferred Dividends
Comprehensive Income to
Common
2002
2001
2000
1999
1998
$1,364,853 $1,237,604 $1,042,056
806,819
728,229
576,473
558,034
509,375
465,583
2003
$815,804
471,853
343,951
2002
2001
2000
1999
1998
1707810
990,412
717,398
$1,595,757
939,708
656,049
100.00 100.00 100.00 100.00 100.00 100.00
57.99 58.89 59.11 58.84 55.32 57.84
42.01 41.11 40.89 41.16 44.68 42.16
385,764
310,032
33,400
255,876
30,700
225,323
30,400
193,219
30,300
152,093
24,900
22.59
0.00
331,634
312,617
271,458
253,652
242,064
166,958
122,594
(1669)
$ 207,371
121,450
(1,447)
$192,614
107,850
(1,975)
$165,583
103,320
(3,081)
$153,413
99,730
(2,908)
$145,242
68,040
(1,258)
$100,176
19.42 19.59
0.00
0.00
31.78 39.17
(0.10) (0.09)
12.14 12.07
19.89 20.50 23.23 20.47
0.00
0.00
0.00
7.90
8.35
9.57
8.34
(0.14) (0.25) (0.28) (0.15)
12.13 12.40 13.94 12.28
(3,708)
1439
(2,269)
0
(4,539)
(3,768)
1,447
(2,321)
0
(2,321)
(5,064)
1,975
(3,089)
0
(3,089)
(7,801)
3,081
(4,720)
0
(4,720)
(7,270)
2,908
(4,362)
0
(4,362)
(3,144)
1,258
(1,886)
0
(1,886)
(0.22)
0.08
(0.13)
0.00
(0.27)
(0.24)
0.09
(0.15)
0.00
(0.15)
(0.37)
0.14
(0.23)
0.00
(0.23)
(0.63)
0.25
(0.38)
0.00
(0.38)
(0.70)
0.28
(0.42)
0.00
(0.42)
(0.39)
0.15
(0.23)
0.00
(0.23)
$ 205,102
$194,935
$168,672
$158,133
$149,604
$102,062
12.01
12.22
12.36
12.78
14.36
12.51
19.43
2.09
18.75
2.25
18.21
2.46
18.54
2.91
18.64
3.05
BALANCE SHEET
Abercrombie & Fitch (ANF)
Common size Balance Sheet
Feb. 2004 Feb. 2003
Net Operating Assets
Cash and Cash Equivalents
Receivables
Inventories - Total
Store Supplies
Other Current Assets
Total Current Assets
Property, Plant, and Equipment
- Total (Net)
Deferred Income Taxes
Other Assets
TOTAL OPERATING ASSETS
Feb. 2002
Feb. 2001
Feb. 2000
Feb. 1999
Feb-04 Feb-03 Feb-02 Feb-01 Feb-00 Feb-99
$511,073
7,197
170,703
25,671
19,770
734,414
420,063
10,572
143,306
25,671
19,770
619,382
167,664
20,456
108,876
21,524
15,455
333,975
137,581
15,829
120,997
17,817
11,338
303,562
147,908
11,447
75,262
0
19,999
254,616
163,564
4,101
43,992
5,887
691
218,235
445,956
0
552
1,180,922
392,941
0
725
1,013,048
365,112
0
239
699,326
278,785
4,788
381
587,516
146,403
11,060
486
412,565
89,558
10,737
631
319,161
37.76 38.79
0.00
0.00
0.05
0.07
100.00 100.00
52.21 47.45 35.49 28.06
0.00
0.81
2.68
3.36
0.03
0.06
0.12
0.20
100.00 100.00 100.00 100.00
Operating Liabilities
Accounts Payable
Income Taxes Payable
Accrued Expense
Total Operating Liabilities
91,364
50,406
138,232
280,002
79,291
46,471
119,526
211,470
31,897
22,096
109,586
163,579
33,942
19,318
101,302
154,562
18,714
85,373
33,779
137,866
24,759
63,882
33,587
122,228
Deferred Taxes
Other Liabilities
Total Operating Liabilities
Net Operating Assets
19,516
28,388
327,906
$ 853,016 $
15,189
13,044
239,703
773,345
1,165
10,368
175,112
$524,214
0
10,254
164,816
$422,700
0
9,206
147,072
$265,493
0
10,828
133,056
$186,105
27.86 33.08
15.37 19.39
42.16 49.86
85.39 88.22
0.00
0.00
5.95
6.34
8.66
5.44
100.00 100.00
18.22 20.59 12.72 18.61
12.62 11.72 58.05 48.01
62.58 61.46 22.97 25.24
93.41 93.78 93.74 91.86
0.00
0.00
0.00
0.00
0.67
0.00
0.00
0.00
5.92
6.22
6.26
8.14
100.00 100.00 100.00 100.00
10,000
10,000
10,000
10,000
71,220
71,220
45,601
45,601
0
0
0
0
10,000
$1,429,379
10,000
$1,023,048
71,220
$770,546
0
$587,516
45,601
$458,166
0
$319,161
Net Financial Assets
Financial Assets
Marketable Securities
Total Financial Assets
Financial Liabilities
Total Financial Liabilities
Net Financial Assets
Common Shareholders Equity
43.28
0.61
14.46
2.17
1.67
62.19
100
100
41.47
1.04
14.15
2.53
1.95
61.14
100
100
23.98
2.93
15.57
3.08
2.21
47.76
100
100
23.42
2.69
20.59
3.03
1.93
51.67
100
100
35.85
2.77
18.24
0.00
4.85
61.72
100
100
51.25
1.28
13.78
1.84
0.22
68.38
100
100
$
Comprehensive Income to Common
Financing Expense (Income)
Interest Expense
Tax benefit of debt
Net Interest Expense (after tax)
Preferred Dividends
$
Operating Income from Sales (Before Tax)
Taxes
Tax as reported
Tax on financial items
Operating Income
$
Operating Income
Revenues
Cost of Sales
Gross Margin
Operating Expenses
Administrat
ive
Expenses
Catalogue & Advertising Costs
121,450
(1,447)
192,614
122,594
(1669)
207,371
(3,768)
1,447
(2,321)
0
(2,321)
$194,935
346,017
331,634
(3,708)
1439
(2,269)
0
(4,539)
205,102
255,876
30,700
310,032
33,400
385,764
(5,064)
1,975
(3,089)
0
(3,089)
$168,672
107,850
(1,975)
165,583
271,458
$1,364,853
806,819
558,034
2001
1,595,757
939,708
656,049
2002
1,707,810 $
990,412
717,398
2003
(7,801)
3,081
(4,720)
0
(4,720)
$158,133
103,320
(3,081)
153,413
253,652
225,323
30,400
$1,237,604
728,229
509,375
2000
Abercrombie & Fitch (ANF)
Trend Analysis Income Statement
1998
(7,270) (3,144)
2,908
1,258
(4,362) (1,886)
0
0
(4,362) (1,886)
$149,604 $102,062
99,730 68,040
(2,908) (1,258)
145,242 100,176
242,064 166,958
193,219 152,093
30,300 24,900
$1,042,056 $815,804
576,473 471,853
465,583 343,951
1999
-2%
-1%
-2%
NA
96%
5%
1%
15%
8%
-4%
24%
-100%
7%
5%
9%
2003
-26%
-27%
-25%
NA
-25%
16%
13%
-27%
16%
27%
21%
9%
17%
16%
18%
2002
-35%
-36%
-35%
NA
-35%
7%
4%
-36%
8%
7%
14%
1%
10%
11%
10%
2001
7%
6%
8%
NA
8%
6%
4%
6%
6%
5%
17%
0%
19%
26%
9%
2000
131%
131%
131%
NA
131%
47%
47%
131%
45%
45%
27%
22%
28%
22%
35%
1999
Appendix 6 - TREND ANALYSIS
INCOME STATEMENT
Net Financial Assets
Financial Assets
Marketable Securities
Total Financial Assets
Financial Liabilities
Total Financial Liabilities
Net Financial Assets
Common Shareholders Equity
10,000
10,000
10,000
$1,023,048
10,000
$1,429,379
15,189
13,044
239,703
773,345
79,291
46,471
119,526
211,470
392,941
0
725
1,013,048
10,000
10,000
19,516
28,388
327,906
853,016 $
Deferred Taxes
Other Liabilities
Total Operating Liabilities
Net Operating Assets
$
91,364
50,406
138,232
280,002
445,956
0
552
1,180,922
Property,
Plant, and
Equipmen
t - Total
(Net)
Deferred Income Taxes
Other Assets
TOTAL OPERATING ASSETS
420,063
10,572
143,306
25,671
19,770
619,382
Feb. 2003
Operating Liabilities
Accounts Payable
Income Taxes Payable
Accrued Expense
Total Operating Liabilities
$511,073
7,197
170,703
25,671
19,770
734,414
Feb. 2004
Net Operating Assets
Cash and Cash Equivalents
Receivables
Inventories - Total
Store Supplies
Other Current Assets
Total Current Assets
71,220
$770,546
71,220
71,220
1,165
10,368
175,112
$524,214
31,897
22,096
109,586
163,579
365,112
0
239
$699,326
167,664
20,456
108,876
21,524
15,455
333,975
Feb. 2002
0
$587,516
45,601
45,601
0
10,254
164,816
$422,700
33,942
19,318
101,302
154,562
278,785
4,788
381
$587,516
137,581
15,829
120,997
17,817
11,338
303,562
Feb. 2001
Abercrombie & Fitch (ANF)
Trend Analysis Balance Sheet
163,564
4,101
43,992
5,887
691
218,235
Feb. 1999
24,759
63,882
33,587
122,228
0
0
45,601
0
$458,166 $319,161
0
0
0
0
9,206
10,828
147,072 133,056
$265,493 $186,105
18,714
85,373
33,779
137,866
146,403
89,558
11,060
10,737
486
631
$412,565 $319,161
147,908
11,447
75,262
0
19,999
254,616
Feb. 2000
0%
40%
0%
0%
28%
118%
37%
10%
15%
8%
16%
32%
13%
NA
-24%
17%
22%
-32%
19%
0%
0%
19%
Feb-04
-86%
33%
-86%
-86%
1204%
26%
37%
48%
149%
110%
9%
29%
8%
NA
203%
45%
151%
-48%
32%
19%
28%
85%
Feb-03
NA
31%
56%
56%
NA
1%
6%
24%
-6%
14%
8%
6%
31%
-100%
-37%
19%
22%
29%
-10%
21%
36%
10%
Feb-02
-100%
28%
NA
NA
NA
11%
12%
59%
81%
-77%
200%
12%
90%
-57%
-22%
42%
-43%
19%
-7%
38%
61%
Feb-01
NA
44%
NA
NA
NA
-15%
11%
43%
-24%
34%
1%
13%
63%
3%
-23%
29%
-10%
179%
71%
-100%
2794%
17%
Feb-00
Appendix 7 -TREND ANALYSIS
BALANCE SHEET
NA
316,428
121,450
$194,978
Non-operating expenses/Int. Exp
Pretax Income
Income Taxes - Total
Net Income
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Interest Expense
Operating Income
Non-operating income
Non-operating expenses
Pretax Income
Income Taxes - Total
Net Income
50,700
141,000
2,500
56,900
312,660
3,768
800,800
323,400
$477,400
248,600
780,900
1,012,600
36,800
1,793,500
3,900,500
80,700
31,000
$49,700
600
32,500
81,200
100
113,700
202,400
52,200
20,900
$31,300
0
900
51,200
1,000
52,100
110,500
ARO
550,900
388,300
162,600
24%
13%
3%
10%
0%
0%
10%
4%
6%
0%
20%
4%
20%
0%
NA
20%
8%
12%
0%
5%
7%
0%
2%
6%
2%
3%
0%
12%
27%
4%
10%
0%
0%
10%
4%
6%
0%
13%
24%
0%
9%
0%
0%
9%
4%
6%
0%
9%
20%
Vertical Analysis
American
Gap
Pac Sun Aeropostale
100%
100%
100%
100%
63%
61%
63%
70%
37%
39%
37%
30%
143,600
54,900
$88,700
22%
Abercrombie
100%
59%
41%
191,700
312,660
(100)
350,800
343,432
ANF
1,595,800
939,708
656,092
In Thousands
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Operating Income
Non-operating income
Comparative Income Statement
January 2003
AEOS
GPS
PSUN
1,463,100 14,454,700 846,400
920,600
8,760,700 530,300
542,500
5,694,000 316,100
169,300
63,800
$105,500
0
41,900
166,500
2,800
208,400
339,000
241,600
249,400
-$7,800
109,200
810,500
337,500
13,300
1,148,000
3,806,000
44,800
17,200
$27,600
0
27,100
44,300
500
71,400
175,900
18,400
7,100
$11,300
0
3,900
16,400
2,000
20,300
65,900
ARO
304,800
218,600
86,200
3%
20%
0%
NA
20%
8%
12%
0%
23%
21%
3%
12%
0%
0%
12%
5%
8%
0%
15%
25%
6%
2%
0%
1%
2%
2%
0%
0%
8%
27%
4%
6%
0%
0%
7%
3%
4%
0%
10%
26%
1%
5%
1%
0%
6%
2%
4%
0%
7%
22%
Vertical Analysis
Abercrombie American
Gap
Pac Sun Aeropostale
100%
100%
100%
100%
100%
56%
60%
64%
64%
72%
44%
40%
36%
36%
28%
276,500
107,900
$168,600
NA
41,200
271,400
5,100
312,600
286,600
Comparative Income Statement
January 2002
ANF
AEOS
GPS
PSUN
$1,364,900 1,371,900 13,847,900 684,800
765,700
824,500
8,893,900 437,500
599,200
547,400
4,954,000 247,300
Appendix 8a – COMPARATIVE ANALYSIS
INCOME STATEMENT
2003 and 2002
23,200
146,500
6,200
30,700
253,652
7,801
NA
261,453
103,320
$158,133
Non-operating expenses/Int. Exp
Pretax Income
Income Taxes - Total
Net Income
*Year end is July
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Interest Expense
Operating Income
Non-operating income
Non-operating expenses
Pretax Income
Income Taxes - Total
Net Income
169,700
253,652
1,381,800
504,400
$877,400
74,900
590,400
1,444,700
12,000
2,035,100
3,629,300
65,000
25,200
$39,800
(100)
19,900
63,600
1,300
83,500
134,000
17,100
5,700
$11,400
100
3,800
12,200
5,000
16,000
45,700
ARO
213,400
151,700
61,700
24%
16%
2%
13%
1%
0%
14%
5%
9%
0%
21%
20%
2%
20%
1%
NA
21%
8%
13%
0%
4%
11%
0%
1%
10%
4%
6%
0%
15%
27%
3%
11%
0%
0%
11%
4%
7%
0%
14%
23%
2%
6%
2%
0%
8%
3%
5%
0%
7%
21%
Vertical Analysis
Abercrombie American
Gap
Pac Sun Aeropostale
100%
100%
100%
100%
100%
59%
60%
59%
63%
71%
41%
40%
41%
37%
29%
152,800
59,000
$93,800
(100)
266,500
255,723
In Thousands
Sales
Cost of Goods Sold
Gross Profit
Selling, General, and
Administrative Expense
Operating Income Before
Depreciation
Depreciation
Operating Income
Non-operating income
Comparative Income Statement
January 2001
ANF
AEOS
GPS
PSUN
$1,237,604 1,093,500 13,673,500 589,400
728,229
657,300
8,009,100 371,900
509,375
436,200
5,664,400 217,500
149,400
58,700
$90,700
0
12,200
149,500
0
161,700
194,800
1,784,900
657,900
$1,127,000
0
31,800
1784900
0
1,816,700
3,043,400
57,400
22,100
$35,300
14,300
56,500
900
56,500
96,100
9,500
3,500
$6,000
100
200
9,400
200
9,600
32,400
ARO
152,500
110,500
42,000
2%
15%
0%
NA
16%
6%
9%
0%
15%
13%
1%
18%
0%
0%
18%
7%
11%
0%
19%
23%
0%
12%
0%
0%
12%
5%
8%
0%
13%
21%
3%
13%
0%
0%
13%
5%
8%
0%
13%
22%
0%
6%
0%
0%
6%
2%
4%
0%
6%
21%
Vertical Analysis
Abercrombie American
Gap
Pac Sun Aeropostale
100%
100%
80%
100%
100%
36%
57%
47%
65%
72%
28%
43%
34%
35%
28%
249,300
99,700
$149,600
NA
27,700
242,100
7,200
242,100
208,300
ANF
1,030,900
580,500
450,400
Comparative Income Statement
January 2000
AEOS
GPS
PSUN
832,100 11,635,400 436,800
475,600
6,775,300 284,200
356,500
4,860,100 152,600
Appendix 8b – COMPARATIVE ANALYSIS
INCOME STATEMENT
2001 and 2000
Appendix 9a – COMPARATIVE ANALYSIS
BALANCE SHEET
2002 -2003
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
Comparative Balance Sheet
January 2003
AEOS
GPS
ANF
PSUN
ARO
ANF
Comparative Balance Sheet
January 2002
AEOS
GPS
PSUN
ARO
391,000
10,500
144,200
55,400
601,100
194,500
13,600
124,700
95,000
427,900
3,388,500
NA
2,047,900
303,300
5,739,700
36,400 87,500
2,900
NA
123,400 46,700
19,900 10,700
182,600 144,900
167,700
20,500
108,900
108,200
405,300
180,400
17,600
91,100
88,900
378,000
1,035,700
NA
1,677,100
331,700
3,044,600
23,100
3,000
102,500
16,200
144,800
6,500
NA
58,700
7,500
72,700
392,900
267,500
3,776,800
201,500
69,400
365,100
257,700
4,161,300
195,000
42,300
700
994,700
46,000
741,300
385,400
9,902,000
15,700
8,800
399,800 223,100
200
770,600
37,000
672,700
385,500
7,591,300
15,600
355,400
6,100
121,100
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
50,200
0
161,300
211,500
50,600
4,200
86,700
141,500
1,159,300
500,000
1,067,300
2,726,600
28,500
2,400
42,500
73,400
18,000
0
40,000
58,000
31,900
0
131,700
163,600
39,100
4,000
106,700
149,800
1,105,100
41,900
909,200
2,056,200
37,500
1,300
27,100
65,900
13,300
35,300
13,300
61,900
Long-term Debt
Other Liabilities
Total Liabilities
0
33,700
245,200
16,400
5,900
163,800
2,895,800
621,400
6,243,800
3,300
17,700
97,400
0
37,100
95,100
0
11,600
175,200
19,400
1,400
170,600
1,961,400
564,100
4,581,700
25,300
16,200
107,400
0
23,900
85,800
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
749,500
577,500
3,658,200
302,400 128,000
595,400
502,100
3,009,600
248,000
35,300
749,500
577,500
3,658,200
302,400 128,000
595,400
502,100
3,009,600
248,000
35,300
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$994,700
$741,300
$9,902,000
$399,800 $223,100
$770,600
$672,700
$7,591,300
$355,400
$121,100
22%
4%
40%
6%
1%
29%
5%
41%
5%
0%
48%
6%
60%
Vertical Analysis
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
21%
3%
58%
9%
1%
31%
5%
46%
39%
0%
21%
5%
65%
22%
3%
14%
14%
53%
27%
3%
14%
13%
56%
36%
38%
50%
31%
47%
38%
55%
55%
35%
0%
100%
6%
100%
4%
100%
4%
100%
4%
100%
0%
100%
6%
100%
5%
100%
4%
100%
5%
100%
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Accrued Expense
Total Current Liabilities
5%
0%
16%
0%
21%
7%
1%
12%
0%
19%
12%
5%
11%
0%
28%
7%
1%
11%
0%
18%
8%
0%
18%
0%
26%
4%
0%
17%
0%
21%
6%
1%
16%
0%
22%
15%
1%
12%
0%
27%
11%
0%
8%
0%
19%
Long-term Debt
Other Liabilities
Total Liabilities
0%
3%
25%
2%
1%
22%
29%
6%
63%
1%
4%
24%
0%
2%
23%
3%
0%
25%
26%
7%
60%
7%
5%
30%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
0%
0%
75%
0%
0%
78%
0%
0%
37%
0%
0%
76%
0%
17%
43%
0%
0%
0%
57%
0%
0%
77%
0%
0%
75%
0%
0%
40%
0%
0%
70%
11%
29%
11%
0%
51%
0%
0%
20%
71%
0%
0%
0%
29%
75%
78%
37%
76%
57%
77%
75%
40%
70%
29%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
39%
1%
14%
6%
60%
26%
2%
17%
13%
58%
39%
Vertical Analysis
34%
NA
14%
NA
Appendix 9b – COMPARATIVE ANALYSIS
BALANCE SHEET
2000 - 2001
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
Comparative Balance Sheet
January 2001
ANF
AEOS
GPS
PSUN
Comparative Balance Sheet
January 2000
ANF
AEOS
GPS
ARO
137,600
15,800
121,000
29,200
303,600
133,400
408,800 29,000
29,500
2,800
NA
84,100 1,904,200 82,700
71,700
335,100 13,200
318,700 2,648,100 127,600
3,700
NA
48,000
10,700
62,400
193,500
11,400
75,300
20,000
300,300
168,500
13,500
60,400
20,200
262,600
278,700
183,400 4,007,700 135,800
23,000
146,400
84,900
5,200
587,500
41,000
357,200 14,100
543,000 7,013,000 277,500
8,100
93,500
11,500
458,200
7,100
354,600
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
33,900
0
120,600
154,500
42,000
4,300
102,800
149,100
1,067,200
1,029,900
702,000
2,799,100
31,600
500
15,700
47,800
15,800
27,000
11,400
54,200
18,700
0
119,200
137,900
Long-term Debt
Other Liabilities
Total Liabilities
0
10,300
164,800
24,900
780,400
1,300
505,300
175,300 4,084,800
2,100
14,500
64,400
0
15,300
69,500
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
422,700
367,700 2,928,200 213,100
422,700
367,700 2,928,200 213,100
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$587,500
$543,000 $7,013,000 $277,500
450,400 32,400
2,200
NA
1,462,000 60,000
285,300
9,600
2,197,700 104,200
NA
NA
NA
NA
NA
2,715,300
93,200
NA
NA
NA
30,700
0
57,700
88,400
805,900
169,000
778,000
1,752,900
20,100
0
16,700
36,800
NA
NA
NA
NA
0
9,200
147,100
0
1,700
90,100
784,900
417,900
2,955,700
400
10,300
47,500
NA
NA
NA
24,000
311,100
264,500
2,233,000 161,800
NA
24,000
311,100
264,500
2,233,000 161,800
NA
$93,500
$458,200 $354,600
$5,188,700 $209,300
NA
Vertical Analysis
23%
3%
21%
5%
52%
25%
5%
15%
13%
59%
6%
NA
27%
5%
38%
10%
1%
30%
5%
46%
4%
0%
51%
11%
67%
42%
2%
16%
4%
66%
48%
4%
17%
6%
74%
47%
34%
57%
49%
25%
32%
1%
100%
8%
100%
5%
100%
5%
100%
9%
100%
3%
100%
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Accrued Expense
Total Current Liabilities
6%
0%
22%
21%
26%
8%
1%
19%
0%
27%
15%
15%
10%
0%
40%
11%
0%
6%
0%
17%
Long-term Debt
Other Liabilities
Total Liabilities
0%
2%
28%
5%
0%
32%
11%
7%
58%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
0%
0%
72%
0%
0%
68%
0%
0%
42%
1%
5%
23%
0%
0%
0%
77%
17%
29%
12%
0%
58%
0%
0%
16%
74%
0%
0%
0%
26%
72%
68%
42%
77%
26%
9%
28%
5%
42%
15%
1%
29%
5%
50%
24%
52%
45%
2%
100%
5%
100%
6%
100%
4%
0%
34%
26%
30%
9%
0%
16%
0%
25%
16%
3%
15%
0%
34%
10%
0%
8%
0%
18%
0%
2%
32%
0%
0%
0%
68%
0%
0%
25%
0%
0%
0%
75%
15%
8%
57%
0%
0%
0%
43%
0%
5%
23%
0%
0%
0%
77%
68%
75%
43%
77%
100%
100%
100%
100%
NA
0%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
100%
100%
100%
100%
ARO
275,700 11,900
5,188,700 209,300
Vertical Analysis
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
PSUN
100%
Appendix 10a – COMPARATIVE HORIZONTAL ANALYSIS
ANF
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
Inventories - Total
Feb. 2003
Abercrombie & Fitch
Balance Sheet
Feb. 2002
Feb. 2001
Feb. 2000
391,000
10,500
144,200
167,700
20,500
108,900
Other Current Assets
55,400
108,200
Total Current Assets
601,100
405,300
392,900
365,100
278,700
146,400
8%
31%
90%
700
994,700
200
770,600
5,200
587,500
11,500
458,200
250%
29%
-96%
31%
-55%
28%
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
0
50,200
161,300
211,500
0
31,900
131,700
163,600
0
33,900
120,600
154,500
0
18,700
119,200
137,900
57%
NA
22%
29%
-6%
NA
9%
6%
81%
NA
1%
12%
Long-term Debt
Other Liabilities
Total Liabilities
0
33,700
245,200
0
11,600
175,200
0
10,300
164,800
0
9,200
147,100
191%
40%
13%
6%
12%
12%
0
749,500
0
595,400
0
422,700
0
311,100
26%
41%
36%
749,500
595,400
422,700
311,100
26%
41%
36%
$994,700
$770,600
$587,500
$458,200
29%
31%
28%
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
137,600
15,800
121,000
Abercrombie & Fitch
Trend Analysis
Feb. 2003 Feb. 2002 Feb. 2001
193,500
11,400
75,300
133%
-49%
32%
22%
30%
-10%
-29%
39%
61%
29,200
20,000
-49%
271%
46%
303,600
300,300
48%
33%
1%
Appendix 10b – COMPARATIVE HORIZONTAL ANALYSIS
AEOS
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
American Eagle
Balance Sheet
Jan. 2002
Jan. 2001
Jan. 2003
Jan. 2000
American Eagle
Trend Analysis
Jan. 2003 Jan. 2002 Jan. 2001
194,500
13,600
180,400
17,600
133,400
29,500
168,500
13,500
8%
-23%
124,700
91,100
84,100
60,400
37%
8%
39%
95,000
88,900
71,700
20,200
7%
24%
255%
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
427,900
378,000
318,700
262,600
13%
19%
21%
267,500
257,700
183,400
84,900
4%
41%
116%
46,000
37,000
41,000
7,100
24%
-10%
477%
TOTAL ASSETS
741,300
672,700
543,000
354,600
10%
24%
53%
50,600
4,200
86,700
141,500
16,400
5,900
163,800
39,100
4,000
106,700
149,800
19,400
1,400
170,600
42,000
4,300
102,800
149,100
24,900
1,300
175,300
30,700
57,700
88,400
1,700
90,100
29%
5%
-19%
-6%
-7%
-7%
4%
0%
37%
-15%
321%
-4%
-22%
8%
-3%
-24%
95%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
577,500
502,100
367,700
264,500
15%
37%
39%
577,500
502,100
367,700
264,500
15%
37%
39%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$741,300
$672,700
$543,000
$354,600
10%
24%
53%
Inventories - Total
Other Current Assets
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-term Debt
Other Liabilities
Total Liabilities
35%
-40%
-21%
119%
78%
69%
Appendix 10c – COMPARATIVE HORIZONTAL ANALYSIS
GPS
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
Gap
Balance Sheet
Jan. 2002
Jan. 2001
Jan. 2003
Jan. 2000
3,388,500
NA
1,035,700
NA
408,800
NA
450,400
NA
2,047,900
1,677,100
1,904,200
303,300
331,700
335,100
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
5,739,700
3,044,600
3,776,800
Gap
Trend Analysis
Jan. 2003 Jan. 2002 Jan. 2001
2.27
1.53
1,462,000
22%
-12%
30%
285,300
-9%
-1%
17%
2,648,100
2,197,700
89%
15%
20%
4,161,300
4,007,700
2,715,300
-9%
4%
48%
385,400
385,500
357,200
275,700
0%
8%
30%
TOTAL ASSETS
9,902,000
7,591,300
7,013,000
5,188,700
30%
8%
35%
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
1,159,300
500,000
1,067,300
2,726,600
1,105,100
41,900
909,200
2,056,200
1,067,200
1,029,900
702,000
2,799,100
805,900
169,000
778,000
1,752,900
5%
1093%
17%
33%
4%
-96%
30%
-27%
32%
509%
-10%
60%
Long-term Debt
Other Liabilities
Total Liabilities
2,895,800
621,400
6,243,800
1,961,400
564,100
4,581,700
780,400
505,300
4,084,800
784,900
417,900
2,955,700
48%
10%
36%
151%
12%
12%
-1%
21%
38%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
3,658,200
3,009,600
2,928,200
2,233,000
22%
3%
31%
3,658,200
3,009,600
2,928,200
2,233,000
22%
3%
31%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$9,902,000
$7,591,300
$7,013,000
$5,188,700
30%
8%
35%
Inventories - Total
Other Current Assets
(0.09)
Appendix 10d – COMPARATIVE HORIZONTAL ANALYSIS
PSUN
Pacific Sunwear
Balance Sheet
Jan. 2002
Jan. 2001
Jan. 2003
In Thousands
ASSETS
Cash and Cash Equivalents
Jan. 2000
36,400
23,100
29,000
32,400
2,900
3,000
2,800
2,200
Inventories - Total
123,400
102,500
82,700
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
19,900
182,600
16,200
144,800
13,200
127,600
201,500
195,000
135,800
Receivables
Other Assets
Pacific Sunwear
Trend Analysis
Jan. 2003 Jan. 2002 Jan. 2001
58%
-20%
-10%
60,000
20%
24%
38%
9,600
104,200
23%
26%
23%
13%
38%
22%
93,200
3%
44%
46%
15,700
15,600
14,100
11,900
1%
11%
18%
399,800
355,400
277,500
209,300
12%
28%
33%
28,500
2,400
42,500
73,400
3,300
17,700
97,400
37,500
1,300
27,100
65,900
25,300
16,200
107,400
31,600
500
15,700
47,800
2,100
14,500
64,400
20,100
16,700
36,800
400
10,300
47,500
-24%
85%
57%
11%
19%
160%
73%
38%
57%
-87%
9%
-9%
1105%
12%
67%
425%
41%
36%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
302,400
248,000
213,100
161,800
22%
16%
32%
302,400
248,000
213,100
161,800
22%
16%
32%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$399,800
$355,400
$277,500
$209,300
12%
28%
33%
TOTAL ASSETS
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-term Debt
Other Liabilities
Total Liabilities
-6%
30%
Appendix 10e – COMPARATIVE HORIZONTAL ANALYSIS
ARO
Aeropostale
Balance Sheet
Jan. 2002
Jan. 2001
Jan. 2003
Aeropostale
Trend Analysis
Jan. 2003 Jan. 2002
In Thousands
ASSETS
Cash and Cash Equivalents
Receivables
87,500
NA
Inventories - Total
Other Current Assets
Total Current Assets
Property, Plant, and
Equipment - Total (Net)
Other Assets
TOTAL ASSETS
LIABILITIES
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-term Debt
Other Liabilities
Total Liabilities
6,500
NA
3,700
1246%
76%
22%
-30%
17%
NA
46,700
10,700
144,900
58,700
7,500
72,700
48,000
10,700
62,400
-20%
43%
99%
69,400
42,300
23,000
64%
84%
8,800
223,100
6,100
121,100
8,100
93,500
44%
84%
-25%
30%
18,000
40,000
58,000
13,300
35,300
13,300
61,900
15,800
27,000
11,400
54,200
35%
-100%
201%
-6%
-16%
31%
17%
14%
0
37,100
95,100
0
23,900
85,800
0
15,300
69,500
NA
55%
11%
NA
56%
23%
EQUITY
Total Preferred Stock
Common Stock
TOTAL STOCKHOLDERS'
EQUITY
128,000
35,300
24,000
263%
47%
128,000
35,300
24,000
263%
47%
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$223,100
$121,100
$93,500
84%
30%
Appendix 11 - RATIO ANALYSIS
Abercrombie & Fitch (ANF)
Ratio Analysis
Payout and Retention Ratios
Total Payout Ratio
Total Payout -to-Book Value
Retention Ratio
Shareholder Profitability
ROCE
Operating Profitability
RNOA
Financing Profitability
RNFA
Growth Ratios
Net Investment Rate
Growth rate of CSE
Growth rate in NOA
Growth rate in sales
Growth rate in Operating Income
Decomposition of ROCE
Level 1
RNOA
ROCE (Basic)
Financial Leverage Drivers
RNFA
Spread
FLEV
ROCE (combining drivers)
Level 2
PM
ATO
RNOA (combining drivers)
ROCE
Level 3
Profit Margin Drivers
Gross Margin Ratio
Administrative Expense Ratio
Advertising Expense Ratio
SG&A
Sales PM before tax
Tax Expense Ratio
Sales PM
Asset Turnover Drivers (inverse)
Cash Turnover
Accounts Receivable Turnover
Inventory Turnover
Supplies Turnover
Other Current Assets Turnover
PPE Turnover
Other Assets Turnover
Operating Asset Turnover
Accounts Payable Turnover
Accrued Expenses Turnover
Taxes Payable Turnover
Other Liabilities Turnover
Deferred Taxes Turnover
1/ ATO
2004
2003
2002
2001
2000
1999
45.3%
6.1%
100.0%
21.0%
3.9%
100.0%
0.6%
0.6%
100.0%
29.7%
22.9%
100.0%
16.5%
14.1%
100.0%
0.6%
0.6%
100.0%
16.7%
21.7%
24.8%
30.2%
38.5%
N/A
25.5%
29.7%
35.0%
44.6%
64.3%
N/A
22.7%
5.7%
8.7%
20.7%
19.1%
N/A
12.4%
15.0%
10.3%
7.0%
7.7%
6.9%
25.9%
47.5%
16.9%
16.3%
0.2%
39.7%
24.0%
10.3%
7.9%
15.1%
35.7%
59.2%
18.8%
5.6%
13.2%
67.2%
42.7%
27.7%
45.0%
43.0%
216.6%
N/A
N/A
N/A
24.3%
16.7%
24.9%
21.7%
31.6%
24.8%
36.3%
30.2%
54.7%
38.5%
53.8%
N/A
22.7%
1.6%
0.7%
24.3%
23.2%
1.7%
1.0%
24.9%
4.3%
27.2%
9.2%
34.1%
0.0%
36.3%
0.0%
36.3%
9.6%
45.1%
10.0%
59.2%
0.0%
53.8%
0.0%
53.8%
2004
2003
2002
2001
2000
1999
12.1%
2.0021
24.3%
24.3%
12.1%
2.0634
24.9%
24.9%
12.1%
2.6036
31.6%
34.1%
12.4%
2.9279
36.3%
36.3%
13.9%
3.9250
54.7%
59.2%
12.3%
4.3836
53.8%
53.8%
42.0%
22.6%
3.2%
25.8%
19.4%
0.0%
16.2%
41.1%
19.4%
2.1%
21.5%
19.6%
7.5%
12.1%
40.9%
18.7%
2.2%
21.0%
19.9%
7.8%
12.1%
41.2%
18.2%
2.5%
20.7%
20.5%
8.1%
12.4%
44.7%
18.5%
2.9%
21.4%
23.2%
9.3%
13.9%
42.2%
18.6%
3.1%
21.7%
20.5%
8.2%
12.3%
0.2993
0.0042
0.1000
0.0150
0.0116
0.2611
0.0003
0.6915
0.0535
0.0809
0.0295
0.0166
0.0114
0.4995
0.2632
0.0066
0.0898
0.0161
0.0124
0.2462
0.0005
0.6348
0.0497
0.0749
0.0291
0.0082
0.0095
0.4634
0.1228
0.0150
0.0798
0.0158
0.0113
0.2675
0.0002
0.5124
0.0234
0.0803
0.0162
0.0076
0.0000
0.3849
0.1112
0.0128
0.0978
0.0144
0.0092
0.2253
0.0003
0.4709
0.0274
0.0819
0.0156
0.0083
0.0000
0.3377
0.1419
0.0110
0.0722
0.0000
0.0192
0.1405
0.0005
0.3853
0.0180
0.0324
0.0819
0.0088
0.0000
0.2442
0.2005
0.0050
0.0539
0.0072
0.0008
0.1098
0.0008
0.3781
0.0303
0.0412
0.0783
0.0133
0.0000
0.2150
Industry Ratios
Sales per Employee
Assets per Employee
Short-term Liquidity Ratios
Liquidity stock measure
Cash ratio
Current ratio
Liquidity flow measure
FCF/Share
Long-term Solvency Ratios
Solvency stock measure
Debt to total assets
Debt to equity
Solvency flow measures
Interest coverage
Activity Ratios
Inventory Turnover
Days in Inventory
Receivable Turnover
Days in A/R
Total Conversion Period
Asset Turnover
Days in Accounts Payable
Profitability Ratios
Gross Margin
Profit Margin
Return on Assets
Return on Equity
Earnings per Share
7.43
49.02
103.23
3.53
52.54
1.81
41.11
12.22
22.08
28.99
1.94
6.29
58.03
193.42
1.89
59.92
1.56
42.01
12.01
18.70
25.31
2.06
Dec-02
NA
NA
Dec-03
0.00
0.00
0.00
0.00
72.53
45.22
2.04
NA
NA
NA
1.90
2.84
2002
1.86
2.69
2003
Dec-01
81.73
46.14
40.89
12.36
24.84
33.13
1.65
7.02
51.85
75.23
4.84
56.69
2.01
NA
0.00
0.00
1.08
1.46
2.48
2001
Dec-00
89.04
42.27
41.16
12.78
30.24
43.10
1.55
7.42
49.99
90.75
4.09
54.08
2.37
NA
0.00
0.00
-0.02
0.89
1.96
2000
Abercrombie & Fitch (ANF)
Annual Ratio Analysis
Dec-99
91.23
40.55
43.69
14.51
38.49
60.18
1.39
9.74
37.29
132.60
2.74
40.03
2.65
NA
0.00
0.00
0.68
1.40
2.18
1999
Dec-03
Dec-02
123.99
62.83
37.08
6.06
12.54
16.44
1.22
36.46
3.95
7.47
9.83
0.83
NA
NA
8.53
42.66
93.72
3.88
46.55
2.07
NA
2.78
3.56
0.60
1.71
3.02
2002
7.86
46.23
223.56
1.63
47.86
1.89
NA
2.16
2.91
NA
1.79
2.78
2003
Dec-01
416.48
204.58
39.90
7.69
17.34
24.26
1.43
9.41
38.66
58.26
6.25
44.91
2.25
NA
3.47
4.66
0.78
1.49
2.49
2001
American Eagle
Annual Ratio Analysis
Dec-00
92.02
45.70
39.89
8.57
20.89
29.66
1.30
9.10
40.77
50.93
7.28
48.05
2.44
NA
5.38
7.94
0.90
1.08
2.14
2000
Dec-99
102.11
43.52
42.84
10.90
32.06
43.20
1.24
8.64
42.12
75.54
4.82
46.94
2.94
NA
0.00
0.00
1.26
1.91
2.97
1999
Appendix 12 – COMPARATIVE RATIOS
Appendix 13a – EARNINGS MODELS
RESIDUAL
Residual Earnings Model
Abercrombie & Fitch (ANF)
(fiscal years ending February 1; amounts in thousands of dollars except per share data)
EPS
DPS
BPS
ROCE
RE (.1425)**
Discount Factor
PV of RE
Total PV of RE
Continuing Value
PV of CV
Value per Share
2004E
2.58
0.50
2.08
1.1509
2.2644
1.1425
2.0852
19.31
2005E
2.93
0.50
2.43
1.4056
2.6329
1.3053
2.1009
2006E
3.32
0.50
2.82
1.3662
2.9734
1.4913
2.0794
2007E
3.73
0.50
3.23
1.3226
3.3276
1.7038
2.0399
2008E
4.13
0.50
3.63
1.2804
3.6748
1.9466
1.9749
50.69
26.04
54.07
*Constant Growth rate of 7%
**RE = Ke
Appendix 13b – EARNINGS MODELS
ABNORMAL GROWTH
Residual Earnings Model
Abercrombie
2002 2004
2005
2006
2007
2008
EPS
$
2.54 $
2.95 $
3.24 $
3.59 $
3.98
DPS
$
0.50 $
0.50 $
0.50 $
0.50 $
0.50
DPS reinvested at 14.25%
$
0.07 $
0.07 $
0.07 $
0.07 $
0.07
Cum-dividend
2.61
3.02
3.31
3.67
4.06
Normal Earnings
2.57
2.91
3.37
3.70
4.11
Abnormal Earnings Growth
0.05
0.12
(0.06)
(0.04)
(0.05)
Discount Rate
14.25%
14.25%
14.25%
14.25%
14.25%
PV of AEG
$0.35
$0.09
($0.04)
($0.04)
($0.03)
Total PV of AEG
Continuing Value
PV of Continuing value
Total
Value Per Share
Reinvestment of DPS
Capitalization Rate
$0.29
($0.10)
$
$
(0.70)
$20.68
14.25%
14.25%
(0.70)
Appendix 13c – EARNINGS MODELS
FREE CASH FLOW MODEL
Free Cash Flows
Abercrombie & Fitch (ANF)
(fiscal years ending February 1 ; amounts in thousands of dollars except per-share data)
2004E
Free cash flow
203,648.40
Discount Factor
1.1425
PV of Cash Flows
178,248.05
Total PV of cash flows
Continuing Value
PV of CV
1,045,748.08
Value of the Firm
1,045,748.08
BV of debt and PS
Value of Equity
1,045,748.08
Value per share
11.05
Price per share
28.84
2005E
2006E
2007E
53,747.19
1.3053
41,175.93
192,171.29
1.4913
128,860.52
210,777.56
1.7038
123,708.50
2008E
147,586.33
1.9466
75,816.74
2,035,673.48
Appendix 14 – MULTIPLE COMPARISON AND DU PONT
MULTIPLE ANALYSES
Multiple Analyses
Price
PE FY1
P/CF
P/B
P/S
ARO
26.29
16.64
24.9
8.33
1.86
AEOS
28.96
15.40
14.22
2.74
1.31
GPS
24.15
15.48
10.53
4.25
1.34
PSUN
21.75
14.31
18.04
4.1
1.53
ANF Multiples
Average Multiple
PE FY1
13.59
15.46
P/CF
11.92
16.92
2.645134228
P/B
3.54
4.86
8.906779661
P/S
2.01
1.51
18.12437811
Price based on Average of Multiples
ANF Current Price
Suggested Value
$34.57
$44.21
$35.99
$27.37
$35.53
$36.43
DUPONT
ARO
2003
2002
2001
2000
Margin
Int. Burden Tax Burden
9.53
0.99
60.00
6.51
0.91
60.70
7.52
0.94
61.96
6.47
0.99
63.84
Asset Turns Leverage
3.20
2.11
2.84
3.62
2.80
3.66
2.65
29.97
ROE
38.22
36.97
44.88
324.76
AEOS
2003
2002
2001
2000
9.95
12.47
14.03
17.65
0.99
0.99
1.00
1.00
61.79
62.33
61.36
60.70
2.07
2.25
2.44
2.94
1.31
1.40
1.42
1.36
16.51
24.24
29.83
42.84
GPS
2003
2002
2001
2000
6.99
2.59
10.87
15.09
0.79
0.67
0.93
0.97
59.62
ALN
63.50
62.50
1.64
1.80
2.24
2.48
2.64
2.47
2.36
2.31
PSUN
2003
2002
2001
2000
9.64
6.61
11.02
13.15
0.99
0.99
1.00
1.00
61.60
61.60
61.19
61.48
2.24
2.16
2.42
2.45
1.37
1.37
1.30
1.28
14.25
(0.26)
33.93
52.41
18.04
11.93
21.21
25.35
ANF
2003
2002
2001
2000
19.83
20.26
21.13
24.19
1.00
1.00
1.00
1.00
61.61
61.00
60.48
60.00
1.81
2.01
2.37
2.65
1.31
1.33
1.43
1.56
28.97
33.04
43.31
60.00
Appendix 15 – CAPM ASSUMPTIONS
CAPM
Denoted as
kE
Formula
rf + beta*(rm-rf)
Cost of capital for debt
kD
Cost of operations
kF
NBC
kE*VE/VF + kD*VD/VF
Cost of capital for equity
For ANF in 2004
riskfree rate (T-bill rate)
Beta
Market risk premium (rm-rf)
kE
kD
Market value of equity*
Market value of debt
Market value of the firm
kF
* using ANF market close on MAR. 27, 2004 of $36.43 per share.
3.15%
1.60
7.25%
14.75%
0.00%
3,636,989
3,636,989
14.75%
Appendix 16 - VALUATION ANALYSIS
Financial Statement Analysis and Valuation
Full-information forecasting: Abercrombie and Fitch
Forecasts of key income statement ratios
Gross margin
SG&A expense ratio
Tax rate
Sales growth
2004E
41.5%
22.0%
38.5%
8.0%
Fiscal Year Beginning
2005E
2006E
2007E
41.5%
41.5%
41.5%
22.0%
22.0%
22.0%
38.5%
38.5%
38.5%
10.0%
10.0%
11.0%
2008E
41.5%
22.0%
38.5%
11%
2004E
0.123
0.011
0.090
0.016
0.255
0.029
Fiscal Year Beginning
2005E
2006E
2007E
0.123
0.123
0.123
0.011
0.011
0.011
0.090
0.090
0.090
0.016
0.016
0.016
0.310
0.310
0.315
0.029
0.029
0.029
2008E
0.123
0.011
0.090
0.016
0.350
0.029
Forecasts of turnover
Cash Turnover
Accounts receivable turnover
Inventory turnover
Supplies turnover
PPE turnover
Other Asset Turns
Accounts Payable Turnover
Accrued Expenses Turnover
Taxes Payable Turnover
Other Liabilities Turnover
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
0.0497
0.0749
0.0291
0.0082
Pro forma financial statements
Fiscal Year Beginning
2005E
2006E
2007E
2004E
2008E
Income statement (in '000s)
Sales
Cost of sales
Gross margin
Total operating expenses (SG&A)
Core operating income before tax
Taxes
Operating income
1,973.3
1,154.4
818.9
434.1
384.8
148.1
236.6
2,170.6
1,269.8
900.8
477.5
423.3
163.0
260.3
2,387.7
1,396.8
990.9
525.3
465.6
179.3
286.3
2,650.4
1,550.5
1,099.9
583.1
516.8
199.0
317.8
2,941.9
1,721.0
1,220.9
647.2
573.7
220.9
352.8
Non-Operating Income/Expenses
Net Income
Number of Shares
EPS
4.0
240.6
94.6
2.54
4.2
264.5
89.6
2.95
4.2
290.5
89.6
3.24
4.2
322.0
89.6
3.59
4.2
357.0
89.6
3.98
Retention
DPS
Total Dividends
$
$
Balance sheet
Cash/ Market Securities
Account receivable
Inventory
Property, plant and equipment
Other Assets
Total Operating Assets
94%
0.50
47.30
$
$
94%
0.50
44.80
$
$
94%
0.50
44.80
$
$
94%
0.50
44.80
$
$
Fiscal Year Beginning
2005E
2006E
2007E
266.65
293.32
325.58
23.9
26.3
29.2
194.9
214.4
238.0
672.9
740.2
834.9
62.8
69.1
76.7
1,221.2
1,343.3
1,504.3
2004E
242.41
21.7
177.2
503.2
57.1
1,001.6
94%
0.50
44.80
2008E
361.39
32.4
264.2
1,029.7
85.1
1,772.7
Accounts Payable Turnover
Accrued Expenses Turnover
Taxes Payable Turnover
Other Liabilities Turnover
Total Operating Liabilities
98.1
147.8
57.5
16.3
319.7
107.9
162.6
63.2
19.2
352.8
118.6
178.8
69.5
31.7
398.7
Net operating assets (NOA)
702.1
891.7
980.9
1,102.0
1,326.2
236.6
2.7
234.0
2.47
186.67
1.97
260.3
189.6
70.7
0.79
25.91
0.29
286.3
89.2
197.2
2.20
152.37
1.70
317.8
121.1
196.7
2.20
151.89
1.70
352.8
224.2
128.6
1.44
83.81
0.94
Operating income
Change in NOA
Free cash flow
Free Cash Flow per share
Free Cash Flow after Dividends
Free Cash Flow per share after Dividends
RNOA
ReOI (at cost of operations 14.25%)
Growth in ReOI
$
$
33.8%
133.5
19.0%
$
$
32.7%
157.4
17.9%
Cost of operations
14.75%
Total PV of ReOI to 2005
599.5
Continuing value*
PV of CV
1,683.0
NOA as of 2000
739.5
Value of operations
3,022.0
NFA / NFO
10.0
Value of common equity
3,032.0
Number of shares outstanding (000'S)
94.61
Value per share
32.05
* Assume growth in ReOI remains constant at 7% into the future.
* using ANF market close on MAR. 27, 2004 of $36.43 per share.
Per share numbers are diluted values
$
$
30.6%
182.3
15.8%
131.7
198.5
77.2
0.0
407.4
$
$
30.5%
211.0
15.8%
146.2
220.4
85.7
0.0
452.2
$
$
29.1%
241.2
12.0%
8,772.5
Appendix 17 – PRICE ESTIMATES
MODELS
FCF
Residual
Abnormal Earnings Growth
Multiple Comps
Earnings Forecast
Implied Value
ANF stock price as of 25/2/04
Difference
Derived Price
$28.84
$54.07
$20.68
$35.53
$32.05
$34.23
$36.43
-6.0%
Appendix 18 – SENSITIVITY ANALYSIS
Assumption
Base Price
$36.43
Base Case (Used)
New Value Price Target Difference
Terminal Sales Growth (11%)
12% $
34.26
($2.17)
Terminal Sales Growth (11%)
10% $
34.20
($2.23)
Cost of Equity (14.75%)
15.75 $
32.60
($3.83)
Cost of Equity (14.75%)
13.75 $
37.82
$1.39
Beta (1.6)
1.5 $
36.47
$0.04
Beta (1.6)
1.7 $
32.95
($3.48)
Terminal Growth Rate (12%)
13% $
36.26
($0.17)
Terminal Growth Rate (12%)
11% $
33.28
($3.15)
* using ANF market close on MAR. 27, 2004 of $36.43 per share.
Appendix 19 – OUR ESTIMATES vs. THE STREET
Normalized Earnings
Consensus estimates
2004
$2.68
2005
$2.91
2006
$3.29
2007
$3.70
2008
$4.20
source: StockVal
Our Estimates
$2.54
$2.95
$3.24
$3.59
$3.98