Abercrombie & Fitch (anf) Profile In Portfolio Manager's Review, August 2009

Reduced or Eliminated Superinvestor Holdings Abercrombie & Fitch (ANF) – Mandel  Services: Retail (Apparel), Member of S&P 500 Trading Data

New Albany, OH, 614-283-6500 http://www.abercrombie.com Valuation

Note: Steve Mandel sold out of ANF in 1Q09. Consensus EPS Estimates

Price: $34.25 (as of 8/14/09) 52-week range: $13.66 - $55.83 Market value: $3.0 billion Enterprise value: $2.6 billion Shares out: 87.9 million Ownership Data Insider ownership: 1% Insider buys (last six months): 0

This quarter Next quarter

Latest -$0.07 0.25

Month Ago -$0.03 0.27

# of Ests 31 28

FYE 1/31/10

0.84

0.90

FYE 1/31/11 FYE 1/31/12

1.51 1.83

1.54 1.85

10

P / tangible book 1.7x Greenblatt Criteria

LT EPS growth 11.0% 11.0% Latest Quarterly EPS Surprise

Insider sales (last six months): 0 Institutional ownership: 95%

Date

# of institutional owners: 829

Actual

P/E FYE 1/31/09 P/E FYE 1/31/10 P/E FYE 1/31/11 P/E FYE 1/31/12

11x 41x 23x 19x

32

EV / LTM revenue

0.8x

32 8

EV / LTM EBITDA EV / LTM EBIT

n/m 24x

Estimate

5/14/09 -$0.31 -$0.14 Operating Performance and Financial Position

($ millions, except per share data) Revenue Gross profit EBIT Net income Diluted EPS Cash from ops Capex Free cash flow Cash & investments Total current assets Intangible assets Total assets Short-term debt Total current liabilities Long-term debt Total liabilities Preferred stock Common equity

2/1/03 1,596 656 312 195 1.94 346 146 200 430 629 0 1,173 0 272 0 437 0 736

EBIT/capital employed

1/31/04 1,708 1,083 331 205 2.06 341 160 181 521 753 0 1,383 33 311 0 525 0 858

Fiscal Years Ended 1/29/05 1/28/06 2/3/07 2,021 2,785 3,318 1,341 1,851 2,209 348 543 658 216 334 422 2.28 3.66 4.59 424 454 582 185 256 404 239 197 179 339 462 530 671 947 1,092 0 0 0 1,387 1,790 2,248 54 59 27 429 492 511 0 0 0 718 795 843 0 0 0 669 995 1,405

2/2/08 3,750 2,511 740 476 5.20 818 403 414 649 1,140 0 2,568 43 543 0 949 0 1,618

1/31/09 3,540 2,362 439 272 3.05 491 368 123 522 1,085 0 2,848 57 450 100 1,003 0 1,846

LTM EBIT yield

4%

LTM pre-tax ROC

7%

LTME 8/1/09 3,155 2,053 110 46 0.51 n/a n/a n/a 426 981 0 2,639 0 441 37 898 0 1,741

FQE 8/2/08 846 593 124 78 0.87 89 109 (20) 301 971 0 2,763 132 573 0 1,018 0 1,746

FQE 8/1/09 649 431 (22) (27) (0.30) n/a n/a n/a 426 981 0 2,639 0 441 37 898 0 1,741

7%

n/m

n/m

66% 63% 57% 72% 65% 60% 31% Ten-Year Stock Price Performance and Trading Volume Dynamics

$100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jul 00

Jul 01

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August 21, 2009 – Page 96 of 126

BUSINESS OVERVIEW



Abercrombie & Fitch retails teenage apparel. It sells t-shirts, sportswear, jeans, underwear, and outerwear under the Abercrombie & Fitch, Hollister, and Gilly Hicks brands. A&F operates ~1,100 stores in the U.S., Canada and U.K.

SELECTED OPERATING DATA FYE December 31 2005 2006 Stores (period end) 851 944 8% 11%  stores 26% 2%  same store sales Revenue ($ mn) 2,785 3,318 38% 19%  revenue 1 % of revenue by brand: A&F 51% 46% Abercrombie 12% 12% Hollister 36% 41% RUEHL, Gilly Hicks 1% 1% 1 Revenue growth by major brand: A&F 18% 6% Abercrombie 52% 18% Hollister 72% 36% Selected items as % of revenue: Gross profit 66% 67% 2 19% 20% EBIT 1 4% 4% D&A 1 9% 12% Capex Sales per gross sq. ft $464 $500 Gross sq. ft (mn) 6.0 6.7 3 Online sales ($mn) 123 174 11% 42%  online sales -6% 1%  shares out (avg)

2007 1,035 10% -1% 3,750 13%

2008 1,125 9% -13% 3,540 -6%

1H09 1,132 5% -30% 1,261 -23%

44% 13% 42% 1%

43% 12% 43% 3%

43% 11% 43% 3%

8% 16% 17%

-7% -11% -5%

-26% -28% -21%

67% 20% 5% 11% $489 7.3 259 49% -1%

67% 13% 6% 10% $425 8.0 271 5% 0%

65% -3% 10% 10% n/a 8.1 98 -17% 0%

Source: Company filings, Manual of Ideas analysis. 1 1H09 data based on 1Q09 figures. 2 Excludes $31 million store-related charge in 2008 and $75 million impairment of RUEHL stores in 1H09. 3 Direct-to-consumer properties include: Abercrombie.com, abercrombiekids.com, hollisterco.com, ruehl.com, and gillyhicks.com.

INVESTMENT HIGHLIGHTS  



 

Aspirational brands with global appeal, targeting teenagers pursuing a lifestyle of casual luxury. Hollister concept recently proven in U.K., where stores operate at productivity levels “significantly higher than the average U.S. store.” The company plans to open 7 Hollister stores in the U.K. in 2009 and believes the market can handle up to 30. Store count may have room to double, primarily via international expansion. A&F plans to open nine domestic and 11 international stores in 2009 (unclear how many stores may close this year). Mike Jefferies (64) became CEO in 1992 and chairman in 2002. Jefferies turned around the company after it emerged from bankruptcy in 1988. Strong balance sheet, with cash and marketable securities of $570 million and debt of $37 million. $203 million of the cash is tied up in illiquid ARS.



Repurchased 4.3 million shares for $338 million in 2007-08 (no buybacks in 1H09). A&F has paid an annual of dividend of $.70 per share since 2006. Shares trade at .8x enterprise value to trailing revenue and 1.7x price to tangible book value.

INVESTMENT RISKS & CONCERNS 



 

Missed fashion cycle in female dresses, contributing to 1H09 weakness. Revenue and samestore sales declined 23% and 30%, respectively. Regionally, SSS were down in all U.S. regions and Canada while the A&F flagship in London was positive. No guidance was provided for 2009. Difficult environment could cause further spending cut by 12-24 year-old core demographic. “Consumer spending patterns domestically continue to be dictated by cost and value propositions and this is clearly a headwind for our premium brands.” Fierce competition and promotional activities by American Eagle and Aeropostale may cause customer losses and force A&F to respond in kind. To close all 29 RUEHL stores. The brand posted a pre-tax loss of $58 million in 2008 and management expects to take a pre-tax charge of $65 million to exit the business. The RUEHL concept targeted post-graduates, i.e., individuals aged 22-35.

COMPARABLE PUBLIC COMPANY ANALYSIS GPS AEO ARO JCG PSUN ANF

MV ($mn)

EV ($mn)

EV / Rev.

P / T. Book

This FY P/E

Next FY P/E

13,090 3,040 2,420 1,900 280 3,010

11,380 2,670 2,170 1,850 250 2,620

.8x .9x 1.1x 1.3x .2x .8x

3.0x 2.1x 6.1x 7.6x .8x 1.7x

14x 19x 12x 31x n/m 41x

14x 15x 11x 24x n/m 23x

MAJOR HOLDERS CEO Jefferies 7% | Other insiders <1% | FMR 13% | Cap Re 8% | Edinburgh Partners 5%

RATINGS VALUE Intrinsic value materially higher than market value?  MANAGEMENT Capable and properly incentivized?  FINANCIAL STRENGTH Solid balance sheet?  MOAT Able to sustain high returns on invested capital?  EARNINGS MOMENTUM Fundamentals improving?  MACRO Poised to benefit from economic and secular trends?  EXPLOSIVENESS 5%+ probability of 5x upside in one year? 

THE BOTTOM LINE Abercrombie & Fitch enjoys premium brand equity in the teen apparel market, propelling the company’s stores to industryleading returns in normal times. A&F as a company has achieved returns on capital in excess of 30% in recent years. However, profitability has imploded on weak spending by the key customer demographic in 1H09. While A&F is wellpositioned to reestablish strong profitability — perhaps more than $3.50 per share — when consumer spending recovers, the latter could take years to materialize. As a result, we do not find A&F shares sufficiently compelling at the recent stock price.

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August 21, 2009 – Page 97 of 126

…additional insight into ANF: SLIDES FROM COMPANY PRESENTATION, APRIL 2009

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