For the transition period from                      to                     

Commission File Number 1-12107

ABERCROMBIE & FITCH CO.

(Exact name of Registrant as specified in its charter)

Delaware		31-1469076
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6301 Fitch Path, New Albany, Ohio 43054

Registrant’s telephone number, including area code ( 614) 283-6500 _

Not Applicable

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).) þ Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A Common Stock		Outstanding at September 2, 2011
$.01 Par Value		86,940,167 Shares

 

 

ABERCROMBIE & FITCH CO.

TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations and Comprehensive Income Thirteen and Twenty-Six Weeks Ended July 30, 2011 and July 31, 2010			3
Consolidated Balance Sheets July 30, 2011 and January 29, 2011			4
Consolidated Statements of Cash Flows Twenty-Six Weeks Ended July 30, 2011 and July 31, 2010			5
Notes to Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			47
Part II. Other Information
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 6. Exhibits			52
Exhibit 3.2
Exhibit 4.3
Exhibit 15
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ABERCROMBIE & FITCH CO.

Long-lived assets in the table above include primarily property and equipment (net), store supplies and lease deposits.

3. SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $13.5 million and $24.4 million for the thirteen and twenty-six week periods ended July 30, 2011, respectively, and $10.4 million and $19.9 million for the thirteen and twenty-six week periods ended July 31, 2010, respectively. The Company also recognized $5.1 million and $9.2 million in tax benefits related to share-based compensation expense for the thirteen and twenty-six week periods ended July 30, 2011, respectively, and $3.8 million and $7.1 million for the thirteen and twenty-six week periods ended July 31, 2010, respectively.

The fair value of share-based compensation awards is recognized as compensation expense on a straight-line basis over the awards’ requisite service period, net of forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. If the tax deduction, which arises upon the vesting of restricted stock units or the exercise of stock options/stock appreciation rights, which is principally measured at the award’s intrinsic value, is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged first to additional paid-in capital, to the extent of the pool of “windfall tax benefits”, with any remainder recognized as tax expense. The amount of the Company’s pool of “windfall tax benefits” was approximately $83.8 million as of July 30, 2011, which is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.

The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures during the twenty-six weeks ended July 30, 2011 was an expense of $1.5 million. The effect of adjustments for forfeitures during the twenty-six weeks ended July 31, 2010 was income of $3.2 million.

Pursuant to an employment agreement, the Chairman and Chief Executive Officer (“CEO”) is eligible to receive “semi-annual grants,” as defined in the agreement. The semi-annual grants vest in equal annual installments over the four year period following the grant date, with the condition that each award becomes fully vested no later than February 1, 2014, except for the final semi-annual grant, which will become fully vested on the date of the grant.

A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units. As of July 30, 2011, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and restricted stock units outstanding. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in stockholder-approved plans at the applicable time.

In the event, at any reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the 2005 Long-Term Incentive Plan (the “2005 LTIP”) and the Amended and Restated 2007 Long-Term Incentive Plan (the “Amended and Restated 2007 LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards.

Plans

As of July 30, 2011, A&F had two primary share-based compensation plans: the 2005 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors, and the Amended and Restated 2007 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company. A&F also has four other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors in prior years.

The Amended and Restated 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant awards of up to 2.0 million underlying shares of A&F’s Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits A&F to annually grant awards of up to 250,000 underlying shares of A&F’s Common Stock for each award type to any associate of the Company (other than the CEO) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. In addition, any non- associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans, stock options, stock appreciation rights and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP, restricted stock units typically vest over one year for non-associate directors of A&F. Awards for Michael S. Jeffries have a vesting period defined as the shorter of four years or the award date through the end of the employment agreement. Under both plans, stock options have a ten-year term and stock appreciation rights have up to a ten-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control as defined in the plans.

Fair Value Estimates

The Company estimates the fair value of stock options and stock appreciation rights granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock options and stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock options and stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of A&F’s Common Stock price for the most recent historical period equal to the expected term of the stock option or stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.

In the case of restricted stock units, the Company calculates the fair value of the restricted stock units granted using the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period.

Stock Options

The Company did not grant any stock options during the twenty-six weeks ended July 30, 2011 or July 31, 2010.

Below is a summary of stock option activity for the twenty-six weeks ended July 30, 2011:

The total intrinsic value of stock options exercised during the twenty-six weeks ended July 30, 2011 was $27.0 million. The total intrinsic value of stock options exercised during the twenty-six weeks ended July 31, 2010 was immaterial.

The grant date fair value of stock options vested during the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $2.3 million and $3.7 million, respectively.

As of July 30, 2011, there was $0.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.4 years.

Stock Appreciation Rights

The weighted-average estimated fair value of stock appreciation rights granted during the twenty-six weeks ended July 30, 2011 and July 31, 2010, and the weighted-average assumptions used in calculating such fair value, on the date of grant, were as follows:

Below is a summary of stock appreciation rights activity for the twenty-six weeks ended July 30, 2011:

The total intrinsic value of stock appreciation rights exercised during the twenty-six weeks ended July 30, 2011 was $10.7 million and was immaterial for the twenty-six weeks ended July 31, 2010.

The grant date fair value of stock appreciation rights vested during the twenty-six weeks ended July 30, 2011 was $20.4 million.

As of July 30, 2011, there was $81.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.3 years.

Restricted Stock Units

Below is a summary of restricted stock unit activity for the twenty-six weeks ended July 30, 2011:

The total fair value of restricted stock units granted during the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $29.8 million and $16.6 million, respectively.

The total grant date fair value of restricted stock units and restricted shares vested during the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $20.8 million and $21.1 million, respectively.

As of July 30, 2011, there was $45.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.1 years.

4. NET INCOME PER SHARE

Net income per basic share is computed based on the weighted-average number of outstanding shares of Common Stock. Net income per diluted share includes the weighted-average dilutive effect of stock options, stock appreciation rights and restricted stock units outstanding.

Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):

(1)		Reflects the number of stock options, stock appreciation rights and restricted stock units outstanding, but excluded from the computation of net income per diluted share because the impact would be anti-dilutive.

5. CASH AND EQUIVALENTS

Cash and equivalents consisted of (in thousands):

Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, with original maturities of less than three months. Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $30.9 million on July 30, 2011 and $26.3 million on January 29, 2011. Restricted cash includes various cash deposits with international banks that are used as collateralization for customary non-debt banking commitments and deposits into trust accounts to conform with standard insurance security requirements.

6. INVESTMENTS

(1)		Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use.

At July 30, 2011, the Company’s investment grade auction rate securities (“ARS”) consisted of insured student loan backed securities and municipal authority bonds, with maturities ranging from 17 to 32 years. Each investment in student loans is insured by (1) the U.S. government under the Federal Family Education Loan Program, (2) a private insurer or (3) a combination of both. The percentage of insurance coverage of the outstanding principal and interest of the ARS varies by security.

The par and carrying values, and related cumulative temporary impairment charges for the Company’s available-for-sale marketable securities as of July 30, 2011 were as follows:

See Note 7, “ Fair Value, ” for further discussion on the valuation of the ARS.

An impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis, even if there is no intent to sell the security. The Company has not incurred any credit-related losses on available-for-sale ARS and furthermore, the issuers continued to perform under the obligations, including making scheduled interest payments, and the Company expects that this will continue going forward.

The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Chief Executive Officer Supplemental Executive Retirement Plan. The Rabbi Trust assets are consolidated and recorded at fair value, with the exception of the trust-owned life insurance policies which are recorded at cash surrender value. The Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted as to their use as noted above. Net unrealized gains and losses related to the municipal notes and bonds held in the Rabbi Trust were not material for the thirteen and twenty-six week periods ended July 30, 2011 and July 31, 2010. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.7 million and $0.6 million for the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively, and realized gains of $1.4 million and $1.1 million for the twenty-six weeks ended July 30, 2011 and July 31, 2010, respectively, recorded as part of Interest Expense, Net on the Consolidated Statements of Operations and Comprehensive Income.

7. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows:

•

Level 1 — inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets.

•

Level 2 — inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly.

•

Level 3 — inputs to the valuation methodology are unobservable.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities, measured at fair value, within it were as follows:

(1)		Includes $161.0 million of money market funds included in Cash and Equivalents and $0.6 million of money market funds held in the Rabbi Trust included in Other Assets on the Consolidated Balance Sheet.

The level 2 liabilities consist of derivative financial instruments, primarily forward foreign exchange contracts. The fair value of forward foreign exchange contracts is determined by using quoted market prices of the same or similar instruments, adjusted for counterparty risk.

The level 3 assets include investments in insured student loan backed ARS and insured municipal authority bond ARS which are available-for-sale.

The Company measures the fair value of its ARS primarily using a discounted cash flow model as well as a comparison to similar securities in the market. Certain significant inputs into the model are unobservable in the market including the periodic coupon rate, market rate of return and expected term.

As of July 30, 2011, approximately 45% of the Company’s ARS were “AAA” rated, approximately 20% were “AA” rated, and approximately 35% were “A-” rated, in each case as rated by one or more of the major credit rating agencies.

The table below includes a roll-forward of the Company’s level 3 assets and liabilities from January 29, 2011 to July 30, 2011. When a determination is made to classify an asset or liability within level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for level 3 financial assets and liabilities may include observable components.

8. INVENTORIES

Inventories are principally valued at the lower of average cost or market utilizing the retail method. The Company determines market value as the anticipated future selling price of the merchandise less a normal margin. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost components of inventory on-hand so as to maintain the already established cost-to-retail relationship. At first and third fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the expected future permanent markdowns necessary to sell through the current season inventory. At second and fourth fiscal quarter end, the Company reduces inventory value by recording a valuation reserve that represents the expected future permanent markdowns necessary to sell through any remaining carryover inventory from the season then ending. The valuation reserve was $17.4 million, $24.4 million and $20.6 million at July 30, 2011, January 29, 2011 and July 31, 2010, respectively.

Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. The shrink reserve was $9.1 million, $7.6 million and $7.9 million at July 30, 2011, January 29, 2011 and July 31, 2010, respectively.

The inventory balance, net of the above mentioned reserves, was $516.1 million, $385.9 million and $480.1 million at July 30, 2011, January 29, 2011 and July 31, 2010, respectively.

9. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of (in thousands):

Long-lived assets, primarily comprised of property and equipment, are reviewed periodically for impairment or whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows.

Store-related assets are considered level 3 assets in the fair value hierarchy and the fair values were determined at the store level, primarily using a discounted cash flow model. The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales, gross margin performance and operating expenses. In instances where the discounted cash flow analysis indicated a negative value at the store level, the market exit price based on historical experience was used to determine the fair value by asset type. Included in property and equipment, net, are store-related assets previously impaired and measured at fair value of $11.9 million and $14.6 million, net of accumulated depreciation, as of July 30, 2011 and January 29, 2011, respectively.

10. DEFERRED LEASE CREDITS

Deferred lease credits are derived from payments received from landlords to wholly or partially offset store construction costs and are classified between current and long-term liabilities. The amounts, which are amortized over the respective lives of the related leases, consisted of the following (in thousands):

11. INCOME TAXES

The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the impact of items discrete to the thirteen weeks ended July 30, 2011. The effective tax rate for continuing operations for the thirteen weeks ended July 30, 2011 was an expense of 30.7% as compared to an expense of 27.2% for the Fiscal 2010 comparable period. The effective tax rate for continuing operations for the twenty-six weeks ended July 30, 2011 was an expense of 33.0% compared to a benefit of 6.0% for the twenty-six weeks ended July 31, 2010. The second quarter 2010 rate was favorably impacted by the provision-to-return adjustments for certain jurisdictions and the resolution of tax controversies including the Company’s Advanced Pricing Agreement negotiation that was before the U.S. Competent Authority.

Cash payments of income taxes made during the thirteen weeks ended July 30, 2011 and July 31, 2010 were approximately $34.3 million and $14.3 million, respectively. Cash payments of income taxes made during the twenty-six weeks ended July 30, 2011 and July 31, 2010 were approximately $101.6 million and $17.9 million respectively.

12. LONG-TERM DEBT

On July 28, 2011, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) under which up to $350 million is available. This Amended and Restated Credit Agreement serves to amend and restate in its entirety the syndicated unsecured credit agreement dated April 15, 2008 as previously amended (the “Prior Credit Agreement”). The primary reasons for entering into this agreement are to extend the termination date from April 12, 2013 to July 27, 2016 and to reduce fees and interest rates. As stated in the Amended and Restated Credit Agreement, the primary purposes of the agreement are for trade and stand-by letters of credit in the ordinary course of business, as well as to fund working capital, capital expenditures, acquisitions and investments, and other general corporate purposes.

The facility fees payable under the Amended and Restated Credit Agreement are based on the Company’s Leverage Ratio (i.e., the ratio, on a consolidated basis, of (a) the sum of total debt (excluding trade letters of credit) plus 600% of forward minimum rent commitments to (b) consolidated earnings, as adjusted, before interest, taxes, depreciation, amortization and rent (“Consolidated EBITDAR”) for the trailing four-consecutive-fiscal-quarter periods. The facility fees accrue at a rate of 0.125% to 0.30% per annum based on the Leverage Ratio for the most recent determination date. The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement also requires that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination and (z) the sum of minimum rent and contingent store rent, not be less than 2.00 to 1.00. The Company was in compliance with the applicable ratio requirements and other covenants at July 30, 2011. Interest rates on borrowings under the Amended and Restated Credit Agreement are generally based upon market rates plus a margin based on the Leverage Ratio.

The terms of the Amended and Restated Credit Agreement include customary events of default such as payment defaults, cross-defaults to other material indebtedness, undischarged material judgments, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation and conduct of the business of A&F and its subsidiaries. Upon an event of default, the lenders will not be obligated to make loans or other extensions of credit and may, among other things, terminate their commitments to the Company, and declare any then outstanding loans due and payable immediately.

The Amended and Restated Credit Agreement will mature on July 27, 2016. The Company had no trade letters of credit outstanding at July 30, 2011 and January 29, 2011. Stand-by letters of credit outstanding, under either the Amended and Restated Credit Agreement or Prior Credit Agreement as applicable, on July 30, 2011 and January 29, 2011 were immaterial.

As of July 30, 2011 the Company did not have any borrowing under the Amended and Restated Credit Agreement and had $43.8 million outstanding under the Prior Credit Agreement as of January 29, 2011. The amounts outstanding under the Prior Credit Agreement were denominated in Japanese Yen and were fully repaid during the thirteen weeks ended July 30, 2011.

As of July 30, 2011 and January 29, 2011, the Company also had $26.3 million and $24.8 million, respectively, of long-term debt related to the landlord financing obligation for certain leases where the Company is deemed the owner of the project for accounting purposes, as substantially all of the risk of ownership during construction of a leased property is held by the Company. The landlord financing obligation is amortized over the life of the related lease.

As of July 30, 2011, the carrying value of the Company’s long-term debt approximated fair value. Total interest expense was $2.2 million and $1.9 million for the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively, and $4.4 million and $3.8 million for the twenty-six weeks ended July 30, 2011 and July 31, 2010, respectively. The average interest rate for the long-term debt recorded under the Prior Credit Agreement was 2.2% and 2.4% for the thirteen and twenty-six weeks ended July 30, 2011, respectively.

13. DERIVATIVES

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivatives, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

In order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative is not highly effective.

For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded as a component of Other Comprehensive Income (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative’s time value are recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative contract related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.

The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated inter-company receivable. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows and affect the Company’s U.S. dollar earnings. Gains or losses on the foreign exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. As of July 30, 2011, the maximum length of time over which forecasted foreign-currency-denominated inter-company inventory sales were hedged was twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in Accumulated Other Comprehensive Income (Loss). Substantially all of the remaining unrealized gains or losses related to foreign-currency-denominated inter-company inventory sales that have occurred as of July 30, 2011 will be recognized in costs of goods sold over the following two months at the values at the date the inventory was sold to the respective subsidiary.

The Company nets derivative assets and liabilities on the Consolidated Balance Sheets to the extent that master netting arrangements meet the specific accounting requirements set forth by U.S. GAAP.

As of July 30, 2011, the Company had the following outstanding foreign exchange forward contracts that were entered to hedge either a portion of forecasted foreign-currency-denominated inter-company inventory sales, the resulting settlement of the foreign-currency-denominated inter-company accounts receivable, or both:

(1)		Amounts are reported in thousands and in U.S. Dollars equivalent as of July 30, 2011.

The Company also uses foreign exchange forward contracts to hedge certain foreign currency denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables, payables, and debt. Fluctuations in exchange rates result in transaction gains/(losses) being recorded in earnings as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instrument and the hedged item.

As of July 30, 2011, the Company had the following outstanding currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:

(1)		Amounts are reported in thousands and in U.S. Dollars equivalent as of July 30, 2011.

The location and amounts of derivative fair values on the Consolidated Balance Sheets as of July 30, 2011 and January 29, 2011 were as follows:

Refer to Note 7, “ Fair Value, ” for further discussion of the determination of the fair value of derivatives.

The location and amounts of derivative gains and losses for the thirteen and twenty-six weeks ended July 30, 2011 and July 31, 2010 on the Consolidated Statements of Operations and Comprehensive Income are as follows:

(a)		The amount represents the change in fair value of derivative contracts due to changes in spot rates.
(b)		The amount represents reclassification from OCI into earnings that occurs when the hedged item affects earnings, which is when merchandise is sold to the Company’s customers.
(c)		The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.

14. DISCONTINUED OPERATIONS

On June 16, 2009, A&F’s Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The Company completed the closure of the RUEHL branded stores and related direct-to-consumer operations during the fourth quarter of Fiscal 2009. Accordingly, the results of operations of RUEHL are reflected in Income from Discontinued Operations, Net of Tax on the Consolidated Statements of Operations and Comprehensive Income for the twenty-six weeks ended July 30, 2011 and July 31, 2010. Net income for the twenty-six weeks ended July 30, 2011, included net income per diluted share of $0.01 from discontinued operations related to the settlement of outstanding lease obligations. Results from discontinued operations for the twenty-six weeks ended July 31, 2010, were immaterial.

Costs associated with exit or disposal activities are recorded when the liability is incurred. Below is a roll forward from January 29, 2011 of the liabilities recognized on the Consolidated Balance Sheet as of July 30, 2011 related to the closure of RUEHL branded stores and related direct-to-consumer operations (in millions):

(1)		Other includes an accrual adjustment related to the settlement of outstanding lease obligations.
(2)		Ending balance reflects the net present value of obligations due under signed lease termination agreements. As of July 30, 2011, the entire amount is recorded as a current liability in Accrued Expenses on the Consolidated Balance Sheet.

15. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Effective February 2, 2003, the Company established a Chief Executive Officer Supplemental Executive Retirement Plan (the “SERP”) to provide additional retirement income to its Chairman and Chief Executive Officer (“CEO”). Subject to service requirements, the CEO will receive a monthly benefit equal to 50% of his final average compensation (as defined in the SERP) for life. The final average compensation used for the calculation is based on actual compensation, base salary and cash incentive compensation, averaged over the last 36 consecutive full calendar months ending before the CEO’s retirement. The Company recorded expense of $0.9 million and $1.5 million for the thirteen and twenty-six weeks ended July 30, 2011, respectively, associated with the SERP. The Company recorded expense of $2.0 million and $1.9 million for the thirteen and twenty-six weeks ended July 31, 2010, respectively, associated with the SERP.

The expense for the thirteen weeks ended July 31, 2010, included an expense of $2.1 million to correct a cumulative under accrual of the SERP relating to prior periods, primarily Fiscal 2008. The Company does not believe this correction was material to the periods affected.

16. CONTINGENCIES

A&F is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s identified contingencies include the following matters:

On June 23, 2006, Lisa Hashimoto, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., was filed in the Superior Court of the State of California for the County of Los Angeles. In that action, plaintiffs alleged, on behalf of a putative class of California store managers employed in Hollister and abercrombie kids stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaint sought injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The defendants answered the complaint on August 21, 2006, denying liability. On June 23, 2008, the defendants settled all claims of Hollister and abercrombie kids store managers who served in stores from June 23, 2002 through April 30, 2004, but continued to oppose the plaintiffs’ remaining claims. On January 29, 2009, the Court certified a class consisting of all store managers who served at Hollister and abercrombie kids stores in California from May 1, 2004 through the future date upon which the action concludes. The parties then continued to litigate the claims of that putative class. On May 24, 2010, plaintiffs filed a notice that they did not intend to continue to pursue their claim that members of the class did not exercise independent managerial judgment and discretion. They also asked the Court to vacate the August 9, 2010 trial date previously set by the Court. On July 20, 2010, the trial court vacated the trial date and the defendants then moved to decertify the putative class. On April 7, 2011, the trial court granted defendants’ motion and decertified the putative class. The parties are continuing to litigate the claims of the individual plaintiffs.

On September 16, 2005, a derivative action, styled The Booth Family Trust v. Michael S. Jeffries, et al., was filed in the United States District Court for the Southern District of Ohio, naming A&F as a nominal defendant and seeking to assert claims for unspecified damages against nine of A&F’s present and former directors, alleging various breaches of the directors’ fiduciary duty and seeking equitable and monetary relief. In the following three months, four similar derivative actions were filed (three in the United States District Court for the Southern District of Ohio and one in the Court of Common Pleas for Franklin County, Ohio) against present and former directors of A&F alleging various breaches of the directors’ fiduciary duty allegedly arising out of antecedent employment law and securities class actions brought against the Company. A consolidated amended derivative complaint was filed in the federal proceeding on July 10, 2006. On February 16, 2007, A&F announced that its Board of Directors had received a report of the Special Litigation Committee established by the Board to investigate and act with respect to claims asserted in the derivative cases, which concluded that there was no evidence to support the asserted claims and directed the Company to seek dismissal of the derivative cases. On September 10, 2007, the Company moved to dismiss the federal derivative cases on the authority of the Special Litigation Committee Report. On March 12, 2009, the Company’s motion was granted and, on April 10, 2009, plaintiffs filed an appeal from the order of dismissal in the United States Court of Appeals for the Sixth Circuit. On April 5, 2011, a panel of the United States Court of Appeals for the Sixth Circuit reversed the decision of the District Court and remanded the action for further proceedings. The state court has stayed further proceedings in the state-court derivative action until resolution of the consolidated federal derivative cases.

On December 21, 2007, Spencer de la Cruz, a former employee, filed an action against Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc. (collectively, the “Defendants”) in the Superior Court of Orange County, California. He sought to allege, on behalf of himself and a putative class of past and present employees in the period beginning on December 19, 2003, claims for failure to provide meal breaks, for waiting time penalties, for failure to keep accurate employment records, and for unfair business practices. By successive amendments, plaintiff added 10 additional plaintiffs and additional claims seeking injunctive relief, unpaid wages, penalties, interest, and attorney’s fees and costs. Defendants have denied the material allegations of plaintiffs’ complaints throughout the litigation and have asserted numerous affirmative defenses. On July 23, 2010, plaintiffs moved for class certification in the action. On December 9, 2010, after briefing and argument, the trial court granted in part and denied in part plaintiffs’ motion, certifying sub-classes to pursue meal break claims, meal premium pay claims, work related travel claims, travel expense claims, termination pay claims, reporting time claims, bag check claims, pay record claims, and minimum wage claims. The parties are continuing to litigate questions relating to the Court’s certification order and to the merits of plaintiffs’ claims.

The Company intends to defend the aforesaid pending matters vigorously, as appropriate. The Company is unable to quantify the potential exposure of the aforesaid pending matters. However, the Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of the claims.

17. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Codification 820-10 “Fair Value Measurements and Disclosures,” (“ASC 820-10”) was amended in January 2010 to require additional disclosures related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Levels 1 and 2 of the fair value hierarchy, including the reasons and the timing of the transfers; and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value hierarchy. The guidance was effective for the Company beginning on January 31, 2010. The disclosure guidance adopted on January 31, 2010 did not have a material impact on our consolidated financial statements.

In May 2011, ASC 820-10 was further amended to clarify certain disclosure requirements and improve consistency with international reporting standards. This amendment is to be applied prospectively and is effective for the Company beginning January 28, 2012. The Company does not expect its adoption to have a material effect on its consolidated financial statements.

Accounting Standards Codification Topic 220, “Comprehensive Income,” was amended in June 2011 to require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income under current GAAP. This guidance is effective for the Company’s fiscal year and interim periods beginning January 29, 2012. The Company does not expect its adoption to have a material effect on its consolidated financial statements.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Abercrombie & Fitch Co.:

We have reviewed the accompanying consolidated balance sheet of Abercrombie & Fitch Co. and its subsidiaries as of July 30, 2011 and the related consolidated statements of operations and comprehensive income for each of the thirteen and twenty-six week periods ended July 30, 2011 and July 31, 2010 and the consolidated statements of cash flows for the twenty-six week periods ended July 30, 2011 and July 31, 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of January 29, 2011, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated March 29, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 29, 2011, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
Columbus, Ohio

September 7, 2011

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the consolidated financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2011” represent the 52-week fiscal year that will end on January 28, 2012, and to “Fiscal 2010” represent the 52-week fiscal year that ended January 29, 2011.

The Company is a specialty retailer that operates stores and direct-to-consumer operations selling casual sportswear apparel, including knit tops and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, abercrombie kids and Hollister brands. In addition, the Company operates stores and direct-to-consumer operations under the Gilly Hicks brand offering bras, underwear, personal care products, sleepwear and at-home products for women.

Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, the essence of privilege and casual luxury. Abercrombie & Fitch is a combination of classic and sexy creating an atmosphere that is confident and just a bit provocative. abercrombie kids directly follows in the footsteps of its older sibling, Abercrombie & Fitch. abercrombie kids has an energetic attitude and is popular, wholesome and athletic — the signature of All-American cool. Hollister is young, spirited, with a sense of humor and brings Southern California to the world. Gilly Hicks is the cheeky cousin of Abercrombie & Fitch, inspired by the free spirit of Sydney, Australia. Gilly Hicks is classic and vibrant, always confident and is the All-American brand with a Sydney sensibility.

RESULTS OF OPERATIONS

During the second quarter of Fiscal 2011, net sales increased 23% to $916.8 million from $745.8 million for the second quarter of Fiscal 2010. The impact of foreign currency on sales (based on converting prior year sales at current year exchange rates) for the thirteen weeks ended July 30, 2011 was a benefit of approximately 1.6% of sales. The gross profit rate for the second quarter of Fiscal 2011 was 63.6% compared to 65.1% for the second quarter of Fiscal 2010. Operating income was $47.2 million for the second quarter of Fiscal 2011 compared to $27.6 million for the second quarter of Fiscal 2010. The Company had net income of $32.0 million for the second quarter of Fiscal 2011 compared to a net income of $19.5 million for the second quarter of Fiscal 2010. Net income per diluted share was $0.35 for the second quarter of Fiscal 2011 compared to $0.22 for the second quarter of Fiscal 2010. Net income for the second quarter of Fiscal 2010 included a charge of $0.02 per diluted share associated with store closures. Results from discontinued operations were immaterial for the thirteen weeks ended July 30, 2011 and July 31, 2010.

During the Fiscal 2011 year-to-date period, net sales increased 22% to $1.753 billion from $1.434 billion in Fiscal 2010. The impact of foreign currency on sales for the twenty-six weeks ended July 30, 2011 was a benefit of approximately 1.2% of sales. The gross profit rate for the Fiscal 2011 year-to-date period was 64.3% compared to 63.9% for the comparable year-to-date period for Fiscal 2010. Operating income was $85.9 million in the Fiscal 2011 year-to-date period, compared to $8.8 million in Fiscal 2010. The Company had net income of $57.2 million in the Fiscal 2011 year-to-date period compared to $7.7 million in Fiscal 2010. Net income per diluted share was $0.63 in the Fiscal 2011 year-to-date period compared to $0.09 in Fiscal 2010. Net income for the second quarter of Fiscal 2010 included a charge of $0.02 per diluted share associated with store closures. Fiscal 2011 year-to-date net income per share included a benefit of $0.01 per diluted share from discontinued operations. Results from discontinued operations were immaterial for the Fiscal 2010 year-to-date period.

Total inventory, at cost, was $516.1 million as of July 30, 2011, compared to $480.1 million as of July 31, 2010, an 8% increase. The increase in inventory was attributable to higher sales levels, but increased at a rate lower than the sales trend.

Net cash used for operating activities was $0.6 million for the twenty-six weeks ended July 30, 2011. In addition, the Company used cash of $133.0 million for capital expenditures, $43.8 million for the repayment of the outstanding balance under the credit agreement, $30.6 million for dividends, and $89.9 million to repurchase 1.4 million shares of A&F’s Common Stock during the twenty-six weeks ended July 30, 2011. As of July 30, 2011, the Company had $539.6 million in cash and equivalents, no borrowings under the credit agreement and immaterial outstanding letters of credit, compared to $596.5 million in cash and equivalents, borrowings under the credit agreement of $53.2 million and outstanding letters of credit of $24.4 million as of July 31, 2010. The decrease in letters of credit outstanding is related to an adjustment to vendor payment terms.

Due to seasonal variations in the retail industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.

The following data represents the amounts shown in the Company’s Consolidated Statements of Operations and Comprehensive Income for the thirteen and twenty-six week periods ended July 30, 2011 and July 31, 2010, expressed as a percentage of net sales:

Financial Summary

The following summarized financial and statistical data compare the thirteen and twenty-six week periods ended July 30, 2011 to the thirteen and twenty-six week periods ended July 31, 2010:

*		Net sales for the thirteen and twenty-six week periods ended July 30, 2011, and July 31, 2011, reflect the activity of 19 and 16 stores, respectively. Other operational data was deemed immaterial for inclusion in the table.
**		A store is included in comparable store sales when it has been open as the same brand 12 months or more and its square footage has not been expanded or reduced by more than 20% within the past year.
***		Includes direct-to-consumer sales.

CURRENT TRENDS AND OUTLOOK

During the second quarter of Fiscal 2011, we exceeded our internal objectives in terms of sales, operating income and net income per share, and did this while continuing to focus on the long-term drivers of the business.

We have a long-term strategic objective to leverage the global power of our brands to build a highly profitable, sustainable global business. Our second quarter marks the midpoint of the three-year “roadmap” we have previously set out. We have identified a number of growth vehicles that will support our strategic objective over the next few years and our focus remains on execution against our strategy and the key roadmap components. We believe maintaining a long-term outlook is even more critical today, given the uncertainty in the macro-economic environment.

First, we plan to continue opening Abercrombie & Fitch international flagship stores in key locations around the world. During the second quarter, we opened an Abercrombie & Fitch flagship store in Paris, and we expect to open four additional international Abercrombie & Fitch flagship locations in Fiscal 2011, which will bring us to a total of ten locations by the end of the fiscal year. The additional four international flagship locations will be in Madrid, Dusseldorf, Brussels and Singapore.

Second, we continue to expect to open up to 40 international mall-based Hollister stores during Fiscal 2011, of which six had opened as of the end of the second quarter. The majority of the stores will be opened in Europe and the total also includes our first stores in mainland China and Hong Kong.

Third, recognizing the profitable growth potential of the direct-to-consumer business, we have a number of initiatives that we are working on to drive this business and increase the share of our business mix it represents. One of the initiatives completed during the quarter was the redesign and relaunch of our web sites. In addition, we expect the direct-to-consumer business to continue to benefit from our growing international presence.

Fourth, improving average U.S. store productivity levels, both through same store sales growth and as a result of the closure of underperforming stores. The Company is targeting to return to 90% or greater of 2007 U.S. store productivity levels by 2012. The U.S. chain stores, particularly Hollister, performed well during the second quarter of Fiscal 2011 fueled by what we believe is a compelling assortment and effective pricing and promotional strategies. The Company expects to close approximately 60 to 65 U.S. stores during Fiscal 2011, predominantly at the end of the year through natural lease expirations.

Finally, we believe that Gilly Hicks has significant potential as an additional long-term growth vehicle.

From a margin standpoint, the greatest challenge the Company faces remains the impact of increases in raw material costs, particularly cotton, and other input costs. The consumer response to price increases to offset these cost increases remains unclear. In addition, the global macroeconomic environment and possible exchange rate volatility add to this uncertainty.

However, the Company expects that continued sales growth, coupled with disciplined control of expenses, will enable it to continue growing its operating income. The Company continues to believe that its diluted earnings per share target of $4.75 for Fiscal 2012 is a realistic objective.

SECOND QUARTER AND YEAR-TO-DATE RESULTS

Net Sales

Net sales for the second quarter of Fiscal 2011 were $916.8 million, an increase of 23% from net sales of $745.8 million during the second quarter of Fiscal 2010. The net sales increase was attributable to a 9% increase in total comparable store sales, a 28% increase in the direct-to-consumer business, including shipping and handling revenue, and 31 new stores, primarily international, net of store closures. The impact of foreign currency on sales (based on converting prior year sales at current year exchange rates) for the thirteen weeks ended July 30, 2011 was a benefit of approximately $11.7 million. Including direct-to-consumer sales, U.S. sales increased 12% to $684.9 million and international sales increased 74% to $231.9 million.

Year-to-date net sales in Fiscal 2011 were $1.753 billion, an increase of 22% from net sales of $1.434 billion during the comparable period in Fiscal 2010. The net sales increase was attributable to a 9% increase in total comparable store sales, a 30% increase in the direct-to-consumer business, including shipping and handling revenue, and new stores, primarily international. The impact of foreign currency on sales for the twenty-six weeks ended July 30, 2011 was approximately a benefit of $17.6 million. Including direct-to-consumer sales, U.S. sales increased 12% to $1.326 billion and international sales increased 70% to $427.6 million.

Comparable store sales by brand for the second quarter of Fiscal 2011 were as follows: Abercrombie & Fitch increased 5%, abercrombie kids increased 7% and Hollister increased 12%. Male and female comparable store sales both increased by a high single digit.

On a comparable store sales basis, Europe was the strongest performing region while Canada, and more significantly Japan, had negative comparative store sales. U.S. comparable store sales were approximately in-line with overall Company same store sales.

Direct-to-consumer net merchandise sales for the second quarter of Fiscal 2011 were $90.4 million, an increase of 31% from Fiscal 2010 second quarter direct-to-consumer net merchandise sales of $69.0 million. Shipping and handling revenue for the corresponding periods was $11.6 million in Fiscal 2011 and $11.0 million in Fiscal 2010. The direct-to-consumer business, including shipping and handling revenue, accounted for 11.1% of total net sales in the second quarter of Fiscal 2011 compared to 10.7% in the second quarter of Fiscal 2010.

Direct-to-consumer net merchandise sales for the Fiscal 2011 year-to-date period were $182.8 million, an increase of 33% from Fiscal 2010 year-to-date direct-to-consumer net merchandise sales of $137.7 million. Shipping and handling revenue for the corresponding periods was $25.1 million in Fiscal 2011 and $22.3 million in Fiscal 2010. The direct-to-consumer business, including shipping and handling revenue, accounted for 11.9% of total net sales for the year-to-date Fiscal 2011 compared to 11.2% in the Fiscal 2010 year-to-date period.

From a merchandise classification standpoint, for the male business, knit tops and fleece were stronger performing categories; while graphics was a weaker performing category. In the female business, woven shirts, sweaters, fleece and knit tops were stronger performing categories; while graphics and dresses were weaker performing categories.

Gross Profit

Gross profit for the second quarter of Fiscal 2011 was $583.0 million compared to $485.3 million for the comparable period in Fiscal 2010. The gross profit rate (gross profit divided by net sales) for the second quarter of Fiscal 2011 was 63.6%, down 150 basis points from the second quarter of Fiscal 2010 rate of 65.1%.

The decrease in the gross profit rate for the second quarter of Fiscal 2011 was primarily driven by an increase in average unit cost partially offset by a higher average unit retail and an international mix benefit.

Year-to date gross profit for Fiscal 2011 was $1.127 billion compared to $916.8 million for the comparable period in Fiscal 2010. The gross profit rate for the year-to-date period of Fiscal 2011 was 64.3%, up 40 basis points from the year-to-date Fiscal 2010 rate of 63.9%.

The increase in the gross profit rate for the Fiscal 2011 year-to-date period was primarily driven by favorable international mix, including foreign currency impact, higher average unit retail, and benefits from other gross margin items, such as freight.

Stores and Distribution Expense

Stores and distribution expense for the second quarter of Fiscal 2011 was $425.3 million compared to $364.5 million for the comparable period in Fiscal 2010. The stores and distribution expense rate (stores and distribution expense divided by net sales) for the second quarter of Fiscal 2011 was 46.4% compared to 48.9% in the second quarter of Fiscal 2010.

Stores and distribution expense for the Fiscal 2011 year-to-date period was $824.4 million compared to $718.9 million for the comparable period in Fiscal 2010. The stores and distribution expense rate for the year-to-date period of Fiscal 2011 was 47.0% compared to 50.1% for the Fiscal 2010 year-to-date period.

The decrease in the stores and distribution expense rate for the second quarter and the Fiscal 2011 year-to-date period was primarily driven by lower store occupancy costs as a percentage of net sales.

Total direct-to-consumer expense included in stores and distribution expense was $17.8 million and $35.4 million for the thirteen and twenty-six weeks ended July 30, 2011, respectively, compared to $12.9 million and $25.7 million for the thirteen and twenty-six weeks ended July 31, 2010, respectively.

Marketing, General and Administrative Expense

Marketing, general and administrative expense during the second quarter of Fiscal 2011 was $110.0 million compared to $95.2 million during the same period in Fiscal 2010, a 16% increase. For the second quarter of Fiscal 2011, the marketing, general and administrative expense rate (marketing, general and administrative expense divided by net sales) was 12.0% compared to 12.8% for the second quarter of Fiscal 2010.

Marketing, general, and administrative expense during the Fiscal 2011 year-to-date period was $217.7 million compared to $191.8 million during the same period in Fiscal 2010, a 14% increase. For the year-to-date period of Fiscal 2011, the marketing, general and administrative expense rate was 12.4% compared to 13.4% for the Fiscal 2010 year-to-date period.

The increase in marketing, general and administrative expense for the thirteen and twenty-six weeks ended Fiscal 2011 was primarily due to increases in compensation and benefits, including incentive and equity compensation, marketing and other expenses, and the net effect of prior year favorable legal settlements, partially offset by a prior year charge to correct an under accrual of the supplemental executive retirement plan.

Other Operating Expense (Income), Net

Second quarter other operating expense, net for Fiscal 2011 was $0.5 million compared to other operating income, net, of $1.9 million for the second quarter of Fiscal 2010.

Other operating expense, net for the thirteen weeks ended July 30, 2011 was adversely impacted by losses related to foreign currency transactions and derivative contracts, while other operating income, net for the thirteen weeks ended July 31, 2010 benefitted from gains related to foreign currency translations and a favorable insurance reimbursement.

Year-to-date other operating income, net for Fiscal 2011 was $1.3 million compared to $2.8 million for the year-to-date period of Fiscal 2010.

Other operating income, net for Fiscal 2011 was impacted by losses from derivative contracts, while other operating income, net for Fiscal 2010 benefitted from favorable insurance reimbursement.

Interest Expense, Net and Tax Expense (Benefit) from Continuing Operations

Second quarter interest expense was $2.2 million in Fiscal 2011, offset by interest income of $1.2 million, compared to interest expense of $1.9 million, offset by interest income of $1.1 million in the second quarter of Fiscal 2010.

Year-to-date interest expense was $4.4 million in Fiscal 2011, offset by interest income of $2.5 million, compared to interest expense of $3.8 million in Fiscal 2010, offset by interest income of $2.2 million.

The increase in interest expense for the thirteen and twenty-six weeks ended July 30, 2011 was due to the increase in imputed interest related to certain store lease transactions, partially offset by lower letter of credit fees.

The effective tax rate for continuing operations for the second quarter of Fiscal 2011 was an expense of 30.7% compared to an expense of 27.2% for the Fiscal 2010 comparable period. The current rate reflects a lower than anticipated full year rate as a result of an increased share of the Company’s pre-tax income coming from international operations which have a lower effective tax rate. The tax rate for the thirteen weeks ended July 31, 2010 was favorably impacted by the provision-to-return adjustments for certain jurisdictions and the resolution of tax controversies including the Company’s Advanced Pricing Agreement negotiation that was before the U.S. Competent Authority.

The effective tax rate for continuing operations for the twenty-six weeks ended July 30, 2011 was a 33.0% expense compared to a 6.0% benefit for the twenty-six weeks ended July 31, 2010.

On a full-year basis, the Company expects the effective tax rate to be in the low to mid 30% range. The rate remains sensitive to the domestic/international profit mix, including the effect of foreign currencies. In addition, the rate does not include the potential valuation allowances related to net operating loss carry forwards.

Net Income from Discontinued Operations

The Company completed the closure of its RUEHL branded stores and related direct-to-consumer operations in the fourth quarter of Fiscal 2009. Accordingly, the after-tax operating results of RUEHL appear in Income from Discontinued Operations, Net of Tax on the Consolidated Statements of Operations and Comprehensive Income for the thirteen and twenty-six weeks ended July 30, 2011 and July 31, 2010. Net income from discontinued operations for the thirteen and twenty-six weeks ended July 30, 2011 and July 31, 2010 was immaterial.

Refer to Note 14, “ Discontinued Operations, ” of the Notes to Consolidated Financial Statements for further discussion.

Net Income and Net Income per Share

Net income for the second quarter of Fiscal 2011 was $32.0 million compared to $19.5 million for the second quarter of Fiscal 2010. Net income per diluted share for the second quarter of Fiscal 2011 was $0.35 compared to $0.22 for the same period of Fiscal 2010. Net income for the second quarter of Fiscal 2010 included a charge of $0.02 per diluted share associated with store closures.

Net income for the year-to-date period of Fiscal 2011 was $57.2 million compared to net income of $7.7 million for the year-to-date period of Fiscal 2010. Net income per diluted share for the year-to-date period of Fiscal 2011 was $0.63 compared to $0.09 for the same period of Fiscal 2010. Net income per diluted share for the year-to-date period of Fiscal 2011 included net income of $0.01 per diluted share from discontinued operations related to the settlement of outstanding lease obligations.

FINANCIAL CONDITION

Liquidity and Capital Resources

Historical Sources and Uses of Cash

Seasonality of Cash Flows

The retail business has two principal selling seasons: the Spring season which includes the first and second fiscal quarters (“Spring”) and the Fall season which includes the third and fourth fiscal quarters (“Fall”). As is typical in the apparel industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Holiday sales periods, particularly in the United States. The Company relies on excess operating cash flows, which are largely generated in the Fall season, to fund operating expenses and to reinvest in the business to support future growth throughout the year. The Company also has available a credit facility as a source for additional funding.

Credit Agreement

On July 28, 2011, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) under which up to $350 million will be available. The Amended and Restated Credit Agreement serves to amend and restate in its entirety the credit agreement dated April 25, 2008 as previously amended (the “Prior Credit Agreement”). The primary reasons for entering into the Amended and Restated Credit Agreement were to extend the termination date from April 12, 2013 to July 27, 2016 and to reduce fees and interest rates.

As of September 2, 2011, the Company had approximately $350 million available under its unsecured Amended and Restated Credit Agreement. The Company had no borrowings outstanding under its Amended and Restated Credit Agreement on July 30, 2011. The Company had $43.8 million outstanding under the Prior Credit Agreement on January 29, 2011 denominated in Japanese Yen. The average interest rate for the thirteen weeks ended July 30, 2011 was 2.2%. The average interest rate for the twenty-six weeks ended July 30, 2011 was 2.4%.

The Amended and Restated Credit Agreement requires that the Leverage Ratio not be greater than 3.75 to 1.00 at the end of each testing period. The Amended and Restated Credit Agreement also requires that the Coverage Ratio for A&F and its subsidiaries on a consolidated basis of (i) Consolidated EBITDAR for the trailing four-consecutive-fiscal-quarter period to (ii) the sum of, without duplication, (x) net interest expense for such period, (y) scheduled payments of long-term debt due within twelve months of the date of determination and (z) the sum of minimum rent and contingent store rent, not be less than 2.00 to 1.00. The Company was in compliance with the applicable ratio requirements and other covenants at July 30, 2011.

The Amended and Restated Credit Agreement is described in Note 12, “ Long-Term Debt, ” of the Notes to Consolidated Financial Statements.

Stand-by letters of credit outstanding on July 30, 2011 and January 29, 2011 were immaterial.

Operating Activities

Net cash used for operating activities was $0.6 million for the twenty-six weeks ended July 30, 2011 compared to cash used of $38.9 million for twenty-six weeks ended July 31, 2010. The change in cash used for operating activities was primarily driven by the increase in net income and a reduction in the increase of inventory from year end due higher inventory turnover, partially off-set by a reduction in taxes payable due to the timing of tax payments.

Investing Activities

Cash outflows for investing activities for the twenty-six weeks ended July 30, 2011 and July 31, 2010 were used primarily for capital expenditures related to new store construction and information technology investments, as well as the acquisition of intangible assets. Cash outflows for capital expenditures were higher in Fiscal 2011 than in Fiscal 2010, due to an increase in the number of international retail locations, as well as IT and Home Office infrastructure projects. Cash inflows from investing activities were less in Fiscal 2011 due to a reduction in proceeds from the sales of marketable securities.

Financing Activities

For the twenty-six weeks ended July 30, 2011, financing activities consisted primarily of the repurchase of A&F’s Common Stock, the payment of dividends, repayments of outstanding borrowings under the Prior Credit Agreement and the receipt of proceeds associated with the exercise of share-based compensation awards. For the twenty-six weeks ended July 31, 2010, financing activities consisted mainly of the payment of dividends.

During the twenty-six weeks ended July 30, 2011, A&F repurchased approximately 1.4 million shares of A&F’s Common Stock in the open market with a market value of approximately $89.9 million. A&F did not repurchase any shares of A&F’s Common Stock in the open market during the twenty-six weeks ended July 31, 2010. The Fiscal 2011 repurchases were pursuant to the A&F Board of Directors’ November 20, 2007 authorization.

As of July 30, 2011, A&F had approximately 8.4 million remaining shares available for repurchase as part of the November 20, 2007 A&F Board of Directors’ authorization to repurchase 10.0 million shares of A&F’s Common Stock.

Future Cash Requirements and Sources of Cash

Over the next twelve months, the Company’s primary cash requirements will be to fund operating activities, including the acquisition of inventory, and obligations related to compensation, rent, taxes and other operating activities, as well as increasing capital expenditures and quarterly dividend payments to stockholders subject to A&F Board of Directors approval. Subject to the availability of cash and suitable market conditions, A&F expects to continue to repurchase shares of its Common Stock. The Company anticipates funding these cash requirements with cash generated from operations. The Company also has availability under the Amended and Restated Credit Facility as a source of additional funding.

Off-Balance Sheet Arrangements

As of July 30, 2011, the Company did not have any off-balance sheet arrangements.

Contractual Obligations

The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short- and long-term liquidity and capital resource needs. During the twenty-six weeks ended July 30, 2011, changes to the contractual obligations from those as of January 29, 2011 included the repayment of the outstanding balance of the credit facility and the payment of $15.0 million in previously accrued charges related to the closure of RUEHL branded stores and related direct-to-consumer operations. There were no other material changes in contractual obligations as of July 30, 2011, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations).

Second Quarter Store Count and Gross Square Feet

Store count and gross square footage by brand for the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively, were as follows: