Abercrombie & Fitch Co. (ANF) Business, 2018

GENERAL.

Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as the “Company” and “we”), is a global, multi-brand specialty retailer, which primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The brands share a commitment to offering products of enduring quality and exceptional comfort that allows customers around the world to express their own individuality and style. The Company has operations in North America, Europe, Asia and the Middle East. For the fifty-three week period ended February 3, 2018, 63.2% of the Company’s net sales were attributable to the United States (“U.S.”).

The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year, as was the case for the year ended February 3, 2018. Fiscal years are designated in the consolidated financial statements and notes, as well as the remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows:

Fiscal year Year ended Number of weeks Fiscal 2015 January 30, 2016 52 Fiscal 2016 January 28, 2017 52 Fiscal 2017 February 3, 2018 53 Fiscal 2018 February 2, 2019 52

A&F makes available free of charge on its website, corporate.abercrombie.com, under “Investors, Financials, SEC Filings,” its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as A&F’s definitive proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains electronic filings by A&F and other issuers at www.sec.gov. In addition, the public may read and copy any materials A&F files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Company has included certain of its website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.

BRANDS.

Hollister. The quintessential apparel brand of the global teen consumer, Hollister celebrates the liberating spirit of the endless summer inside everyone. Inspired by California’s laidback attitude, Hollister’s clothes are designed to be lived in and made your own, for wherever life takes you. Hollister provides an engaging, welcoming and unique shopping experience around the globe. Hollister also carries intimates brand, Gilly Hicks, “the brand to start and end your day with.” Gilly Hicks product is designed to be effortless and comfortable to align with customers’ on-the-go, busy lifestyle.

Abercrombie & Fitch. Abercrombie & Fitch is a specialty retailer of high-quality apparel and accessories for men and women. For 125 years, the iconic brand has outfitted innovators, explorers and entrepreneurs. Today, it reflects an updated attitude of the 21 to 24-year old customer, while remaining true to its heritage of creating expertly crafted products with an effortless, American style.

abercrombie kids. abercrombie kids creates smart and creative apparel of enduring quality that celebrates the wide-eyed wonder of children from 5 to 14 years. Its products are made for play — tough enough to stand up to everyday adventures.

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SEASONAL BUSINESS.

The retail industry 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 common in the retail industry, the Company experiences its greatest sales activity during the Fall season due to Back-to-School and Back-to-Fall in August for Hollister and Abercrombie, respectively, and the holiday sales periods in November and December.

COMPETITION.

The Company operates in a rapidly evolving and highly competitive retail business environment. Competitors include individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online businesses. Additionally, the Company competes for consumers’ discretionary spending with businesses in other product and experiential categories, such as technology, restaurants, travel and media content. The Company competes primarily on the basis of quality, fashion, brand experience and selection.

Operating in a highly competitive industry environment can cause the Company to engage in greater promotional activity, resulting in pressure on average unit retail and gross profit. Refer to “ITEM 1A. RISK FACTORS,” for further discussion of the potential impacts competition may have on the Company.

STRATEGIC INITIATIVES.

The Company is focused on putting the customer at the center of everything it does and engaging with them wherever, whenever and however they choose to shop, through its three strategic pillars:

• inspiring customers;

• innovating relentlessly; and

• developing leaders.

Through the continued execution of the Company's brand playbooks, the Company is aligning product, brand voice and experience around the customer and is building and enhancing capabilities to react to a rapidly evolving retail landscape.

FINANCIAL INFORMATION ABOUT SEGMENTS.

The Company determines its segments on the same basis that it uses to allocate resources and assess performance. The Company’s two operating segments as of February 3, 2018 are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. Both of the Company’s operating segments sell a similar group of products — apparel, personal care products and accessories for men, women and kids. These operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Refer to “ITEM 6. SELECTED FINANCIAL DATA,” “RESULTS OF OPERATIONS” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and Note 17, “SEGMENT REPORTING,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of this Annual Report on Form 10-K for for further discussion and information of the Company’s operating segments and reportable segment as well as information about the geographic areas in which the Company operates.

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The following charts illustrate the Company’s net sales by brand and geography for Fiscal 2017:

(1) Includes Abercrombie & Fitch and abercrombie kids brands.

CHANNELS OF OPERATIONS.

Stores. The Company continues to evaluate and manage its store fleet through its ongoing channel optimization program to address shifts in customer preferences. Actions taken to optimize store productivity include remodeling, relocating, downsizing and store closings. At the end of Fiscal 2017, the Company operated 868 stores. The following table details the number of retail stores operated by the Company as of February 3, 2018:

Hollister (1) Abercrombie (2) Total United States 394 285 679 International 144 45 189 Total 538 330 868

(1) Excludes five international franchise stores as of February 3, 2018.

(2) Includes Abercrombie & Fitch and abercrombie kids brands. Excludes four international franchise stores as of February 3, 2018.

Omnichannel and direct-to-consumer operations. As customers increasingly shop across multiple channels, the Company has developed, and continues to expand, its omnichannel capabilities. These capabilities include purchase-online-pickup-in-store, reserve-in-store, order-in-store, ship-from-store, and online and in-store returns. The Company continues to invest in these and other omnichannel initiatives in order to create a more seamless shopping experience for its customers.

The Company operates 20 desktop and mobile websites for its brands globally, which are available in several languages and accept multiple currencies, that ship to more than 120 countries. Total net sales through direct-to-consumer operations, including shipping and handling revenue, were $973.9 million for Fiscal 2017, representing approximately 28% of total net sales. Mobile engagement continues to grow, with more than two-thirds of direct-to-consumer traffic was generated from mobile devices in Fiscal 2017. To improve the overall mobile experience, the Company continues to develop and expand its mobile capabilities, including streamlined mobile checkout and ease of navigation.

Wholesale, franchise and licensing operations. The Company continues to expand its international brand reach and create brand awareness through various wholesale, franchise and licensing arrangements. Total net sales from wholesale, franchise and licensing operations were $60.3 million for Fiscal 2017, representing approximately 2% of total net sales. As of February 3, 2018, the Company’s franchisees operated nine international franchise stores across the brands, located in Mexico, Qatar and Saudi Arabia.

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CUSTOMER ENGAGEMENT.

The Company engages with its customers through in-store and online interactions, loyalty programs, social media platforms, mobile applications, online surveys and customer reviews, and continues to evolve in response to the feedback it receives through these channels. The Hollister and Abercrombie customer relationship management programs provide a platform with which the Company can develop direct relationships with its customers and harness insights. Both brands have a strong global following on key social media platforms, and the Company also partners with key influencers, such as celebrities, bloggers and stylists, to share its products and communicate its brands’ identities. The Company aims to be at the forefront of customer engagement and continues to explore new methods to connect with its customers.

Store experience. The Company’s stores continue to play an essential role in creating brand awareness and have been imagined with the best customer experience in mind with a focus on inspiring customers and serving as physical gateways to the brands. The stores are tailored to reflect the personality of each brand, with unique furniture, fixtures, music and scent adding to a rich brand experience, that is focused on the customer. These stores also serve as local hubs for online engagement as the Company continues to implement its omnichannel capabilities to create a seamless shopping experience. In Fiscal 2017, the Abercrombie and abercrombie kids brands launched new store prototypes which are both open and inviting, and have accommodating features such as innovative fitting rooms and omni-channel capabilities. Through the enhanced store environment, the Company has seen improved store engagement and greater overall productivity on a smaller footprint.

Loyalty programs. The Company offers the Club Cali® and A&F Club® loyalty programs for Hollister and Abercrombie customers, respectively. Under these programs, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds, which can be redeemed for merchandise discounts. The loyalty programs continue to provide timely customer insights, while driving a higher average level of customer spend. In addition, the Company uses its loyalty programs as a tool to stay close to the customer by engaging with some of its most valuable customers through special offers, members-only items and access to unique members-only experiences, including early looks at collections.

MERCHANDISE VENDORS.

Global sourcing strategy. The Company depends on its network of third-party vendors to supply compelling, on-trend and high-quality product assortments to its customers. The Company partners with vendors that respect local laws and share its dedication to employing leading practices in human rights, labor rights, environmental responsibility and workplace safety. Maintaining close relationships with vendors allows the Company to be responsive and adaptable to customer feedback. During Fiscal 2017, the Company sourced merchandise through approximately 150 vendors located throughout the world, primarily in Asia and Central America, and did not source more than 10% of its merchandise from any single factory or supplier. The Company’s global sourcing strategy includes relationships with vendors in 18 countries, including the U.S. The Company’s global sourcing of merchandise is generally negotiated and settled in U.S. Dollars.

Quality assurance. High quality standards are an integral part of the Company’s identity, and all product sources, including independent manufacturers and suppliers, must achieve and maintain these standards. The Company has established supplier product quality standards to ensure the high quality of fabrics and other materials used in the Company’s products. Both home office and field employees participate in monitoring suppliers’ compliance with the Company’s product quality standards. Before production begins, all factories, including subcontractors of the factories, undergo a quality assurance assessment to ensure they meet Company standards. All factories are contractually required to adhere to the Company’s Vendor Code of Conduct, go through social audits, which include on-site walk-throughs to appraise the physical working conditions and health and safety practices, and review payroll and age documentation. Social audits of the factories are performed at least every two years after the initial audit.

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DISTRIBUTION OF MERCHANDISE INVENTORY.

The Company’s distribution network is built to deliver inventory to its stores and fulfill direct-to-consumer orders with speed and efficiency. Merchandise is shipped to the Company’s distribution centers (“DCs”), where it is received and inspected before being shipped to stores or direct-to-consumer customers. The Company primarily uses one contract carrier to ship merchandise and related materials to its North American stores and direct-to-consumer customers, and several contract carriers for its European and Asian stores and direct-to-consumer customers.

The Company relies on DCs to manage the receipt, storage, sorting, packing and distribution of its merchandise. The Company’s DCs by geography as of February 3, 2018 were as follows:

Additional information pertaining to the Company’s DCs is as follows:

Location Company-owned or third-party Areas of service New Albany, Ohio Company-owned Stores and direct-to-consumer operations in North America New Albany, Ohio Company-owned Direct-to-consumer operations in North America Reno, Nevada Third-party Stores and direct-to-consumer operations in North America Bergen op Zoom, Netherlands Third-party Stores and direct-to-consumer operations in Europe Shanghai, China Third-party Stores and direct-to-consumer operations in China Hong Kong Third-party Stores and direct-to-consumer operations in Asia Dubai, United Arab Emirates Third-party Stores in the Middle East

INFORMATION SYSTEMS.

The Company’s management information systems consist of a full range of retail, merchandising, human resource and financial systems. The systems include applications related to point-of-sale, direct-to-consumer, inventory management, supply chain, planning, sourcing, merchandising, payroll, scheduling and financial reporting. The Company continues to invest in technology to upgrade its core systems to create efficiencies, including the support of its direct-to-consumer operations, omnichannel capabilities, customer relationship management tools and loyalty programs.

TRADEMARKS.

The trademarks Abercrombie & Fitch®, abercrombie®, Hollister®, Gilly Hicks® and the “Moose” and “Seagull” logos are registered with the U.S. Patent and Trademark Office and registered, or the Company has applications for registration pending, with the registries of countries where stores are located or likely to be located in the future. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered, and the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to timely renew each of its registered trademarks that remain in use.

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ASSOCIATE RELATIONS.

As of March 28, 2018, the Company employed approximately 38,000 associates, of whom approximately 31,000 were part-time associates, which equates to approximately 4,000 full-time equivalents. On average, the Company employed approximately 14,000 full-time equivalents during Fiscal 2017.

ENVIRONMENTAL MATTERS.

The Company has committed to advancing environmental initiatives in its internal practices, by increasing education and awareness throughout its partnership base, and through communities in which they make and sell products. Compliance with domestic and international regulations related to environmental matters has not had, nor is it expected to have, any material effect on the Company’s capital expenditures, earnings or competitive position based on information and circumstances known to the Company at this time.

OTHER INFORMATION.

Additional information about the Company’s business, including its results of operations for the last three fiscal years and gross square footage of stores, is set forth under “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below is certain information regarding the executive officers of A&F as of March 28, 2018:

Stacia Andersen, 47, has been Brand President of Abercrombie & Fitch and abercrombie kids since June 2016. Prior to joining A&F, Ms. Andersen served in various positions with Target Corporation (“Target”), a general merchandise retailer selling products through Target stores and digital channels, from 1993 until December 2015. Most recently, Ms. Andersen served as Senior Vice President Merchandising, Apparel, Accessories and Baby of Target, from May 2014 to December 2015, and as Senior Vice President Merchandising, Home and Seasonal of Target, from October 2009 to May 2014. Prior to serving as a Senior Vice President Merchandising at Target, Ms. Andersen served as President, Target Sourcing Services/Associated Merchandising Corporation, from February 2006 to October 2009, and before that, in various sourcing and merchandising positions.

Robert E. Bostrom, 65, has been Senior Vice President, General Counsel and Corporate Secretary of A&F since January 2014. Since August 2014, Mr. Bostrom has been a member of the Board of Directors of NeuLion, Inc. From December 2012 to December 2013, Mr. Bostrom was Co-Chairman of the Financial Regulatory and Compliance Practice of Greenberg Traurig LLP, an international law firm. From August 2011 to November 2012, Mr. Bostrom was Co-Head of the Global Financial Institutions and Funds Sector of Dentons US LLP (formerly, SNR Denton), an international law firm. From February 2006 to August 2011, Mr. Bostrom was Executive Vice President, General Counsel and Corporate Secretary of the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). Prior to his time with Freddie Mac, Mr. Bostrom was the Managing Partner of the New York office of Winston & Strawn LLP, a Member of that firm’s Executive Committee and Head of its Financial Institutions Practice.

Joanne C. Crevoiserat, 54, has been Executive Vice President and Chief Operating Officer of A&F since February 2017 and served as Executive Vice President and Chief Financial Officer of A&F from May 2014 to October 2017. In addition, Ms. Crevoiserat served as Interim Principal Executive Officer of A&F from June 2016 to February 2017 and was a member of the Office of the Chairman of A&F from October 2015 to February 2017. Prior to joining A&F, Ms. Crevoiserat served in a number of senior management roles at Kohl’s Inc., which operates family-oriented department stores and a website featuring apparel, footwear, accessories, soft home products and housewares. From June 2012 to April 2014, Ms. Crevoiserat was the Executive Vice President of Finance of Kohl’s and from November 2008 to June 2012, she served as the Executive Vice President of Merchandise Planning and Allocation of Kohl’s. Prior to her time with Kohl’s, Ms. Crevoiserat held senior finance positions with Wal-Mart Stores and May Department Stores, including Chief Financial Officer of the Filene’s, Foley’s and Famous-Barr brands.

Fran Horowitz, 54, has been Chief Executive Officer and a director of A&F since February 2017. In addition, Ms. Horowitz has been Principal Executive Officer of A&F since February 2017. Prior thereto, she had served as President & Chief Merchandising Officer for all brands of A&F since December 2015 and was a member of the Office of the Chairman of A&F from December 2014 to February 2017. Ms. Horowitz held the position of Brand President of Hollister from October 2014 to December 2015. Before joining Hollister, from October 2013 to October 2014, Ms. Horowitz served as the President of Ann Taylor Loft, a division of Ann Inc., the parent company of three specialty retail fashion brands in North America. Prior to her time with Ann Taylor Loft, from February 2005 to October 2012, she held various roles at Express, Inc., a specialty apparel and accessories retailer of women’s and men’s merchandise, including Executive Vice President of Women’s Merchandising and Design from May 2010 to November

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2012. Before her time with Express, Inc., Ms. Horowitz spent 13 years at Bloomingdale’s in various women’s merchandising roles, including Vice President Divisional Merchandise Manager. Since March 2017, Ms. Horowitz has served on the Board of Directors of SeriousFun Children’s Network, Inc., a Connecticut non-profit corporation.

Scott Lipesky, 43, has been Senior Vice President and Chief Financial Officer of A&F, as well as Principal Financial Officer and Principal Accounting Officer of A&F, since October 2017. Prior to joining A&F, Mr. Lipesky served as Chief Financial Officer of American Signature, Inc., a privately-held home furnishings company, from October 2016 to October 2017. Prior to his time with American Signature, Inc., Mr. Lipesky served in various finance positions with A&F from November 2007 to October 2016, including as Chief Financial Officer, Hollister Brand, from September 2014 to October 2016, Vice President, Merchandise Finance from March 2013 to September 2014, Vice President, Financial Planning and Analysis from November 2012 to March 2013 and Senior Director, Financial Planning and Analysis from November 2010 to November 2012.

Kristin Scott, 50, has been Brand President of Hollister since August 2016. Before joining Hollister, Ms. Scott served in various positions with Victoria’s Secret, a specialty retailer of women’s intimate and other apparel which sells products at Victoria’s Secret stores and online, from December 2007 until April 2016. Most recently, Ms. Scott served as Executive Vice President, GMM Merchandising from March 2013 to April 2016, Senior Vice President, GMM Merchandising from March 2009 to March 2013 and Senior Vice President, GMM Merchandising - Stores from December 2007 to March 2009. Prior to her time with Victoria’s Secret, Ms. Scott served in merchandising positions at the Vice President level with Gap Outlet, Marshall Fields and Target.

The Board of Directors of A&F dissolved the Office of the Chairman, effective February 1, 2017 with the appointment of Fran Horowitz as Chief Executive Officer of A&F. The Office of the Chairman was formed in December 2014 to allow for effective management of the Company during a transition in leadership. The executive officers serve at the pleasure of the Board of Directors of A&F.

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