6/1/2012 Consumer Goods

Abercrombie & Fitch Co.

Ticker: ANF Current Price: $36.23 Recommendation: Hold Implied Price: $50.12

Investment Thesis
Key Statistics
52 Week Price Range 50-Day Moving Average Estimated Beta Dividend Yield Market Capitalization 3-Year Revenue CAGR $34.45 - $78.25 $XX$XX.XX $45.82 1.79 1.93 $2.97 billion 12.39%

Abercrombie & Fitch has upheld its brand image through economic recessions and continues to operate as a forward-looking company under guidance of CEO Michael S. Jeffries Recent and forecasted international expansion proves to be very promising in European and Asian markets Domestic consolidation and the reassessment of efficiency levels have demonstrated to be rewarding and has also led to comparable store growth

Trading Statistics
Diluted Shares Outstanding Average Volume (3-Month) Institutional Ownership Insider Ownership EV/EBITDA 84.7 million 2.996 million 93% 1% 5.11x
$90.00 $80.00 $70.00 $60.00

Abercrombie & Fitch Co. Price (5- Year) )(5- Year)

25000000

20000000

Margins and Ratios

Gross Margin EBITDA Margin Net Margin Debt to Enterprise Value Leverage Ratio 60.58% 11.40% 3.07% 2.39% 0.12x

15000000
$50.00 $40.00

10000000
$30.00

$20.00 $10.00 $0.00 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11
Volume Price 50-Day Avg 200-Day Avg

5000000

Covering Analyst: Dan Dang ddang@uoregon.edu

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Business Overview
Founded in 1892, Abercrombie & Fitch has gone through many transformations since its inception. Once known for being a notable outfitter of outdoor and hunting equipment, Abercrombie & Fitch has made the transition to becoming a specialty retailer of apparel. The Ohio-based company has gone through many dramatic turns which include filing for chapter 11 bankruptcy in 1976, and a short-lived acquisition by Limited Brands in 1988. However, thanks to the direction of CEO Michael Jeffries, Abercrombie & Fitch has firmly established itself in the apparel industry. The company is unique in that it views its brand image and in-store experience as its greatest marketing vehicles. There are a total of four brands that the company operates as sources of revenue: Abercrombie & Fitch, abercrombie, Hollister, and Gilly Hicks. Each brand has a unique client base and targets separate demographic and psychographic audiences in order to avoid the cannibalization of sales.

Abercrombie & Fitch

This is the companys flagship brand in terms of recognition. Abercrombie & Fitch stores sell knit and woven shirts, jackets, polos, jeans, skirts, and fragrances among other product lines. The brand has made a name for itself for being timeless yet trendy. Abercrombie & Fitch aims to target 18-22 year olds, which fits its Ivy League inspirations well. At the end of Fiscal 2011, there were 294 Abercrombie & Fitch stores in operation, a decrease from previous years.

abercrombie
Much like Abercrombie & Fitch in terms of style and product offerings, abercrombie differs by targeting kids ages 7 to 14. This brand aspires to adhere directly to the All-American vibe that resonates with Hollister and Abercrombie & Fitch, while keeping a strong emphasis on its East Coast heritage. At the end of Fiscal 2011, there were 159 abercrombie stores in operation, a decrease from previous years.

Hollister
The Hollister brand aims to capture the laidback spirit of Southern California in its product offerings. Hollister brings the beach to the world, targeting 14-18 year olds in the United States and abroad. Its product mix includes jeans, shorts, t-shirts, dress shirts, dresses, and fragrances. Since Fiscal 2009, Hollister has become the companys largest source of revenue and shows no sign of relinquishing the lead position. At the end of Fiscal 2011, there were 571 Hollister stores in operation, an increase from previous years.

Gilly Hicks
Gilly Hicks is the companys newest endeavor and most unique; the brand specializes in making bras and underwear for young women. The target demographic is very similar to that of Limited Brands lingerie superpower, Victorias Secret. Gilly Hicks cites Sydney, Australia as the main source of its carefree and sexy inspiration. At the end of Fiscal 2011, there were 21 Gilly Hicks stores in operation, an increase from previous years.

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Strategic Positioning
Brand Image
Abercrombie & Fitch views brand image as its most important asset; it is because of their positioning that they are able to charge a premium on their apparel. Many of Abercrombie & Fitchs competitors have been quick to lower prices in slow economic times. However, Abercrombie & Fitch has continually refused, believing that doing so would permanently tarnish their iconic brands. The company has stayed true to its philosophy of only providing quality products to the customer, and believes that their efforts will be rewarded in the years to come.

In-Store Experience
Abercrombie & Fitch considers itself one of the pioneers of using the in-store experience as a marketing vehicle. Because the company prefers to limit its outreaching marketing efforts, Abercrombie & Fitch regards their in-store experience as the greatest medium for each brand to communicate its ethos. Upon entering a store, customers are greeted with scents, music, lighting, furnishings, and sales associates that all encompass the culture of that stores brand. Merchandise is meticulously placed and presented as well, maximizing the use of subliminal marketing. Attention to detail and uniformity across each store ensures that a consistent atmosphere is projected, regardless of location.

Direct-to-Consumer
Direct-to-consumer is considered an online extension of the companys trademark in-store experience. Through independent websites, customers are reintroduced to each brands personality. These websites allow domestic and international customers to view and purchase products directly. Alongside social media, direct-to-consumer websites are used as a means of exposure in international markets. .

Business Growth Strategies

International Expansion
As of January 28, 2012, Abercrombie & Fitch operated 1,045 stores around the world. Although this is an overall downgrade from Fiscal 2010, which boasted 1,069 stores worldwide, Abercrombie & Fitch has managed to greatly increase its number of international stores. Leaping from 52 to 99 stores in the past year alone, the company plans to continue its aggressive international expansion. A projected 40 new Hollister stores are due to open this year, along with 5 new flagship stores in Hong Kong, Munich, Amsterdam, Dublin, and Hamburg. Flagships are standalone stores in prestigious districts that carry everything under the Abercrombie & Fitch name. These stores typically have disproportionate sales in comparison to normal stores because of their increased square footage and placement. However, per square foot, international stores are still outperforming domestic stores by a ratio that exceeds 2:1. This is an encouraging sign for the company as it sets its sights on more European and Asian markets.

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Domestic Consolidation
The company has found that it has saturated many of its domestic markets, and has been in the process of closing underperforming stores through natural lease expirations. A total of 68 stores were closed in Fiscal 2011, reaching a sum of 135 stores since Fiscal 2010. Along with the closures, Abercrombie & Fitch is attempting to focus its efforts on increasing sales in comparable stores (a store that has been in operation under the same brand for over one year). After a 23% decrease in comparable store sales in Fiscal 2009, the company has seen an increase of 7% and 5% for fiscal years 2010 and 2011, respectively. Abercrombie & Fitch has also extended its domestic efforts to its two distribution centers in New Albany, Ohio. By the end of Fiscal 2012, the company expects to finish consolidating the distribution centers into one, and foster the sale or lease of the second facility. This decision is projected to increase efficiencies and lower future operating costs.

US Store Closings Fiscal 2011

80 70 60 50 40

30
20 10 0 A&F abercrombie Hollister Gilly Hicks Total

Industry
Overview
Ironically, one of the most consistent aspects of the Specialty Apparel Retail Industry is that there will always be change. Consumer tastes can shift on a weekly or monthly basis, requiring companies to anticipate and quickly respond to changing fashion trends in order to stay relevant. Specialty apparel is unique in that there are usually premiums associated with products due to the luxurious nature of the industry. Although this is a gateway to other macroeconomic disadvantages, it also leads to higher profit margins relative to the apparel industry as a whole.

Int'l Store Openings Fiscal 2011

50 45 40 35 30 25 20 15 10 5 0

The Apparel Industry is a very seasonal business and is divided into two primary seasons: Spring (Q1 and Q2) and Fall (Q3 and Q4). Fall is always guaranteed to be the more lucrative of the two seasons, with back-to-school shopping and holiday season as the main drivers behind this. Specialty retailers of apparel have always operated through traditional brickand-mortar stores. Often times, the success of a brick-and-mortar store is reliant on how their respective malls perform. With a general decline in the popularity of malls, the application of direct-to-consumer websites and social media has become a necessity.

Macro factors
A&F abercrombie Hollister Gilly Hicks Total
The Specialty Apparel Retail Industry is observed to be directly correlated with many macroeconomic factors. As with most industries, when disposable income levels decrease, consumers turn to cheaper substitutes. However, when there is an economic recovery, specialty apparel retailers outperform the industry overall. The industry is also seen to be in direct correlation with consumer sentiment, which has reached a four year high of 79.3 (previous high was recorded in October 2007) according to the Thomson Reuters/University of Michigan index.

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Other microeconomic factors include input costs, with a heavy emphasis on the price of cotton, which drives average unit costs up; cotton prices reached an alltime high during Fiscal 2011, but are projected to decrease in the second half of Fiscal 2012. Also, increasing transportation costs are not helped by continued unrest in the Middle East. However, futures curves project oil prices to trend downwards in the coming years. An important industry trend to note is international expansion, a concept that was very foreign to specialty retailers until recent years. Also, consumers are beginning to favor direct-to-consumer systems, which have rapidly gained popularity and are continuing to generate a higher percent of revenue every year.

Competition
Abercrombie & Fitch has many competitors in the Specialty Apparel Retail Industry, most of them being mid cap companies. In some cases, competitors even have identical business models. American Eagle Outfitters currently operates three brands that align directly with Abercrombie & Fitchs brands: AE targets the demographics covered by both the Hollister and Abercrombie & Fitch brands; the aerie brand sells intimates and competes directly with Gilly Hicks; and 77kids is a direct competitor for abercrombie. There are many other direct and indirect players in the industry, which consists of companies like Urban Outfitters, Express, Gap, H&M, Ralph Lauren, Buckle, Zumiez, Guess?, and Aeropostale. The main determinant of success among competitors is the ability to predict and adapt to the changing fashion trends in order to maintain a reputable brand image.

Management and Employee Relations

Michael S. Jeffries, CEO and Chairman
Mr. Michael S. Jeffries is Chairman of the Board, Chief Executive Officer of Abercrombie & Fitch Co. Mr. Jeffries has served as Chairman of the Company since May 1998, and as Chief Executive Officer of the Company since February 1992. From February 1992 until May 1998, Mr. Jeffries held the title of President of the Company. Reuters Michael S. Jeffries was the brilliant mind behind Abercrombie & Fitchs complete transformation from a quickly failing outfitter of miscellaneous supplies to the successful specialty retailer of apparel it is today. He has firmly stood by his intentions of preserving the companys prestigious brand image , refusing to cut corners even during economic recessions. In Fiscal 2011, Jefferies received $48,069,500 in total compensation.

Jonathan E. Ramsden, CFO and Vice President

Mr. Jonathan E. Ramsden is Chief Financial Officer, Executive Vice President of Abercrombie & Fitch Co., since December 8, 2008. From December 1998 to December 2008, Mr. Ramsden served as Chief Financial Officer and a member of the Executive Committee of TBWA Worldwide, an advertising agency network and a division of Omnicom Group Inc. Prior to becoming Chief

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Financial Officer of TWBA Worldwide, he served as Controller and Principal Accounting Officer of Omnicom Group Inc. from June 1996 to December 1998. Reuters In Fiscal 2011, Ramsden received $4,043,170 in total compensation.

Portfolio History
Svigals Portfolio
On May 2, 2011, the Svigals portfolio purchased 50 shares of ANF at $71.16 for a cost basis of $3,566. Since then, 33 shares have been shed at $45.0201 for a market value of $1,477.66. There are 17 shares remaining, with a current market value of $615.91.

Tall Firs Portfolio

On May 12, 2011, the Tall Firs portfolio purchased 165 shares of ANF at $75.325 for a cost basis of $12,433.58.

Recent News
May 25, 2012 Abercrombie & Fitch drops price, entertains lease option on huge warehouse In March, Abercrombie & Fitch put its second distribution center up for sale as part of its attempt to reduce distribution expense and increase efficiency. With an initial asking price of $90 million, it has dropped down significantly to $50 million. This is most likely due to Abercrombie & Fitchs thirst for extra cash to help fund its international efforts. Holding the property does not hurt Abercrombie, but any extra revenue is gladly accepted. May 27, 2012 PayPal Expands Technology to These 15 New Retailers PayPal has recently developed in-store payment technology, giving customers the option to access their PayPal sources at the register. At their most recent press conference, PayPal announced that Abercrombie & Fitch is one of 15 new retailers to be added onboard. This introduces yet another method of payment for customers to choose from, and can prove to help Abercrombie & Fitchs direct-to-consumer websites as well as their brick-and-mortar stores.

Catalysts
Upside
Decrease in Cotton and Petroleum prices could expand margins Success/Continuation of international expansion Longevity of Gilly Hicks brand Decrease in Unemployment Rate Increase in Consumer Sentiment and Disposable Income per Capita

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Downside
Increases in costs of Cotton, Petroleum, and Labor Potential failure of Gilly Hicks brand Inability to preserve brand image could result in adverse effects Closing too many domestic stores could potentially decrease margins

Comparable Analysis
Abercrombie & Fitch has many competitors, but few that obtained similar growth patterns. In the selection process for the comparable analysis, the basic aspects I first noted were companies size, business models, risks relative to the market, debt to equity, and price to earnings. Afterwards, I looked at the 3-year historical and 3-year estimated growth rates for every company in each of the following categories: EBITDA, Free Cash Flow, Revenue, Gross Income, and Earnings Per Share. After mapping everything out, I rewarded a point towards whichever company had the rate most similar to Abercrombie & Fitchs in each year (historical and estimate) and category. From my list of highest ranking companies, I then made qualitative assessments and chose Urban Outfitters, Zumiez, Guess?, and American Eagle Outfitters as my comparables. Company weightings were also assigned using ratios from the system aforementioned, along with qualitative reasoning.

Urban Outfitters, Inc. (URBN) 40%

Urban Outfitters, Inc. (Urban Outfitters) is a lifestyle specialty retail company, which operates under the Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands. The Company also operates a wholesale segment under the Free People brand. In addition to its retail stores, it offers its products and markets its brands directly to the consumer through its e-commerce Websitesand also through its Urban Outfitters, Anthropologie and Free People catalogs. Its Urban Outfitters stores, Websites and catalogs offer a range of eclectic merchandise, including womens and mens fashion apparel, footwear and accessories and an eclectic mix of apartment wares and gifts. Reuters Urban Outfitters was weighted at 40% because it showed growth rates most similar to Abercrombie & Fitch and targets the same demographics, among other factors.

Zumiez Inc. (ZUMZ) 34%

Zumiez Inc. (Zumiez) is a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of January 28, 2012, the Company operated 434 stores in the United States and 10 stores in Canada. In addition, the Company operates a Website that sells merchandise online. At January 28, 2012, its stores averaged approximately 2,900 square feet. Its apparel offerings include tops, bottoms, outerwear and accessories, such as caps, bags and backpacks, belts, jewelry and sunglasses. Zumiezs footwear offerings primarily consist of action sports related athletic shoes and sandals. Its equipment offerings, or hardgoods, include skateboards,

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snowboards and ancillary gear, such as boots and bindings. The Company also offers a selection of other items, such as miscellaneous novelties. Reuters Zumiez was chosen and weighted at 34% after calculations stemming from the selection process were made.

American Eagle Outfitters (AEO) 13%

American Eagle Outfitters, Inc. (AEO, Inc) is a specialty retailer that operates in the United States and Canada, and online at ae.com. AEO, Inc operates under the American Eagle (AE), aerie by American Eagle (aerie), and 77kids by american eagle (77kids) brands. Through the Companys family of brands, it offers clothing, accessories and personal care products. Its online business, AEO Direct, ships to 77 countries worldwide. As of January 28, 2012, the Company operated 1,090 stores in the United States and Canada under the American Eagle Outfitters, aerie and 77kids brands. AEO Direct is its e-commerce operations, ae.com, aerie.com and 77kids.com. During the fiscal year ended December 31, 2011, the Company opened 33 new stores, which consisted of 11 AE stores, 10 aerie stores and 12 77kids stores. As of December 31, 2011, it operated in all 50 states, Puerto Rico and Canada. During fiscal 2011, the Company remodeled and refurbished a total of 106 AE stores. Reuters Although American Eagle had fewer matching growth rates, it was chosen because of its uncannily identical business model. However, the 13% weighting is due to its absence of international expansion, which only occurs through franchising third party entrepreneurs.

Guess?, Inc. (GES) 13%

Guess?, Inc. (GUESS?) designs, markets, distributes and licenses apparel and accessories for men, women and children. The Company operates in five: Europe, North American Retail, Asia, North American Wholesale and Licensing. Its products are sold through retail, wholesale, e-commerce and licensing distribution channels. The lines include full collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. It also grant licenses to manufactures and distributes a range of products, including eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry and other fashion accessories. In fiscal 2012, it, along with its distributors and licensees, opened 224 stores in all concepts combined outside of the United States and Canada, which consisted of 120 stores in Europe and the Middle East, 89 stores in Asia and 15 stores in the combined area of Central and South America. Reuters GUESS? was chosen as a comparable company and weighted at 13% due to some identical growth rates, but mainly because of its great international exposure, which Abercrombie & Fitch is striving towards.

Discounted Cash Flow Analysis

Revenue Model

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Revenue is segmented by brand, as it is in the companys SEC filings, and then projected on a per store basis. Since international stores have vastly outperformed domestic stores, separate calculations were done for more accurate estimates. Previous years growth from comparable stores was accounted for when calculating revenues generated by each new store. Analysts estimates and company guidance was also taken into consideration. Abercrombie & Fitch Abercrombie & Fitch was projected to grow at a healthy 10% for Fiscal 2012 following the introduction of 5 new flagship stores in unsaturated European and Asian markets. Estimated growth is also fueled by the implementation of similar comparable store growth rates from Fiscal 2011, since domestic consolidation and international expansion rates remains constant. I have progressively trended Abercrombie & Fitch so that it is at 3% in the terminal year. Hollister Hollister was estimated to grow at a 25% rate for Fiscal 2012. This was based on per store revenue projections of 40 confirmed new international Hollister stores, in addition to increased revenue from comparable store growth and consolidation. I gradually trend down because I do not believe Hollister can sustain its ridiculous growth rates, especially amid the uncertainties from the European debt crisis. abercrombie Based on my interpretation of current store trends and historical rates, abercrombie was only estimated to grow 3.75% in Fiscal 2012. Of the companys four brands, abercrombie reported the lowest growth rates for total sales and comparable store sales in Fiscal 2011. Gilly Hicks Gilly Hicks has experienced great year-over-year growth; only a total of 21 stores have been opened, thus each store accounts for a greater percentage of its total revenue. I have projected a decreased growth rate for Gilly Hicks in Fiscal 2012. The downward trend is due to my belief that Gilly Hicks will not be able to capture sufficient market share from Victorias Secret to sustain its current growth rates.

COGS
Costs of Goods Sold was projected as a percent of revenue and slightly decreased in Fiscal 2012. This follows management guidance on average per unit costs dropping in Q3 and Q4. The rationale behind the slight downward trend is economies to scale coming into effect as the company expands internationally.

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Beta
Six different betas were calculated using a regression against the S&P 500: 3 year daily, 1 year weekly, 3 year weekly, 5 year weekly, 3 year monthly, and 5 year monthly. Volatility from consolidation from the last 3 years, and aggressive international expansion from last year, has facilitated the decision to choose the 3 year weekly and 1 year weekly regressions. Each were weighted an even 50%. Hamada betas were omitted since each companys capital structure was similar in that there was little to no debt.

Beta 3 YR Daily 1 YR Weekly 3 YR Weekly 5 YR Weekly 3 YR Monthly 5 YR Monthly 1.36 1.70 1.87 1.72 2.15 1.67

SD

Weighting 0.00% 50.00% 50.00% 0.00% 0.00% 0.00%

Stores and Distribution Expense

Stores and Distribution Expense is forecasted to decrease in Fiscal 2012, and especially in Fiscal 2013, as the process of consolidating their domestic distribution centers finishes at the end of this year. However, after efficiency benefits are realized, Stores and Distribution Expense (which is mainly comprised of labor and transportation costs) is projected to trend upwards as a percent of revenue.

Abercrombie & Fitch Co. Beta 1.785

Selling, General, and Administrative Expense

SG&A, which encompasses marketing and IT expenses, is estimated to decrease over the long run as a percent of revenue since it is a relatively fixed cost. With international expansion, top line growth will presumably exceed growth from SG&A.

Capital Expenditures
Capital Expenditures for Fiscal 2012 were forecasted to be $400 million, which follows specific management expectations. For future years projections, a downward trending percent of revenue was used based on my belief that Abercrombie & Fitch will not be able to sustain its current level of expansion.

Tax Rate
Abercrombie & Fitchs tax rate was trended downwards because the respective international rates are lower than the 35% domestic rate. As the companys revenue shifts from domestic to international, they will experience a pull towards lower rates.

Recommendation
Although Abercrombie & Fitch experienced unfavorable growth rates in Fiscal 2008 and Fiscal 2009, a dramatic turnaround in the last 2 years reflects positively on its future. Domestic consolidation and further expansion into international markets will continue to help Abercrombie & Fitch achieve high gross margins.

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The Discounted Cash Flow Analysis gives Abercrombie & Fitch an implied price of $40.26, and the Comparable Analysis has implied a price of $59.99. When assigned an even 50-50 weighting, the final implied price is $50.12, yielding an undervaluation of 38.35%. I recommend a hold for both Svigals and Tall Firs portfolios.

Final Valuation Comparable Analysis DCF Analysis Implied Price Current Price Undervalued

Implied Price $59.99 $40.26 $50.12 $36.23 38.35%

Weighting 50% 50%

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Appendix 1 Comparables Analysis

Comparables Analysis ($ in millions) Stock Characteristics Current Price 50 Day Moving Average 200 Day Moving Average Beta Size Short-Term Debt Long-Term Debt Cash and Cash Equivalent Non-Controlling Interest Preferred Stock Diluted Basic Shares Market Capitalization Enterprise Value Profitability Margins Gross Margin EBIT Margin EBITDA Margin Net Margin Credit Metrics Interest Expense Debt/EV Leverage Ratio Interest Coverage Ratio Operating Results Revenue Gross Profit EBIT EBITDA Net Income Valuation EV/Revenue EV/Gross Profit EV/EBIT EV/EBITDA EV/Net Income ANF URBN AEO Abercrombie & Urban Outfitters, American Eagle Fitch Co. Inc. Outfitters 40.00% 13.00% $36.23 $28.42 $19.99 45.82 28.21 18.59 47.72 27.63 15.68 1.79 0.95 0.89 0.00 57.85 668.15 0.00 0.00 84.72 3,031.08 2,420.78 60.58% 5.80% 11.40% 3.07% $3.58 2.39% 0.12 13253.54% $4,158.06 2,518.87 241.12 474.08 127.66 0.58x 0.96x 10.04x 5.11x 18.96x 0.00 0.00 235.13 0.00 0.00 149.85 4,126.91 3,891.79 34.79% 11.45% 15.82% 7.49% $0.00 0.00% 0.00 NA $2,473.80 860.54 283.16 391.27 185.25 1.57x 4.52x 13.74x 9.95x 21.01x 0.00 0.00 719.55 0.00 0.00 194.54 3,888.90 3,169.36 35.71% 7.31% 11.77% 4.80% $0.00 0.00% 0.00 NA $3,159.82 1,128.34 231.14 371.78 151.71 1.00x 2.81x 13.71x 8.52x 20.89x ZUMZ Zumiez Inc. 34.00% $35.64 35.53 31.21 2.03 0.00 0.00 172.80 0.00 0.00 31.17 1,110.91 938.11 36.28% 11.72% 15.27% 6.72% $0.00 0.00% 0.00 NA $555.87 201.68 65.16 84.90 37.35 1.69x 4.65x 14.40x 11.05x 25.12x GES Guess?, Inc. 13.00% $27.11 27.95 30.33 1.61 0.00 0.00 491.81 8.29 0.00 89.71 2,398.22 1,914.71 43.31% 14.78% 17.64% 10.07% $2.00 0.00% 0.00 23690.26% $2,688.05 1,164.29 397.24 474.28 270.65 0.71x 1.64x 4.82x 4.04x 7.07x

Max $36.23 45.82 47.72 2.03 0.00 57.85 719.55 8.29 0.00 194.54 4,126.91 3,891.79 60.58% 14.78% 17.64% 10.07% $3.58 2.39% 0.12 23690.26% $4,158.06 2,518.87 397.24 474.28 270.65 1.69x 4.65x 14.40x 11.05x 25.12x

Min Weight Avg. $19.99 $29.61 18.59 29.41 15.68 27.64 0.89 1.39 0.00 0.00 172.80 0.00 0.00 31.17 1,110.91 938.11 34.79% 5.80% 11.40% 3.07% $0.00 0.00% 0.00 13253.54% $555.87 201.68 65.16 84.90 37.35 0.58x 0.96x 4.82x 4.04x 7.07x 0.00 0.00 310.28 1.08 0.00 107.49 2,845.80 2,536.60 36.52% 11.44% 15.34% 7.21% $0.26 0.00% 0.00 3079.73% $1,938.74 710.83 217.10 295.36 141.71 1.43x 3.97x 12.80x 9.37x 20.58x

Median $27.77 28.08 28.98 1.28 0.00 0.00 363.47 0.00 0.00 119.78 3,143.56 2,542.03 35.99% 11.58% 15.54% 7.10% $0.00 0.00% 0.00 23690.26% $2,580.92 994.44 257.15 381.53 168.48 1.29x 3.67x 13.73x 9.24x 20.95x

Multiple EV/Revenue EV/Gross Profit EV/EBIT EV/EBITDA EV/Net Income Price Target Current Price Undervalued

Implied Price Weight $77.19 33% $125.22 0.00% $43.64 34% $59.63 33% $38.21 0.00% $59.99 36.23 65.57%

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Appendix 2 Discounted Cash Flows Analysis

Discounted Cash Flow Analysis ($ in millions) Total Revenue % YoY Growth Cost of Goods Sold % Revenue Gross Profit Gross Margin Selling General and Administrative Expense % Revenue Depreciation and Amortization % Revenue Store and Distribution Expense % Revenue Earnings Before Interest & Taxes % Revenue Earnings Before Taxes % Revenue Less Taxes (Benefits) Tax Rate Net Income Net Margin Add Back: Depreciation and Amortization Add Back: Interest Expense*(1-Tax Rate) Operating Cash Flow % Revenue Current Assets % Revenue Current Liabilities % Revenue Net Working Capital % Revenue Change in Working Capital Capital Expenditures % Revenue Unlevered Free Cash Flow Discounted Free Cash Flow 2008A $3,484.06 -6.19% 1,152.96 33.09% $2,331.10 66.91% 179.91 5.16% 225.33 6.47% 1,436.36 41.23% $498.26 14.30% 509.64 14.63% 201.48 39.50% $308.17 8.85% 225.33 (6.89) $526.62 15.12% 1,084.83 31.14% 449.80 12.91% $635.03 18.23% 37.89 367.60 10.55% $121.13 2009A $2,928.63 -15.94% 1,045.03 35.68% $1,883.60 64.32% 114.52 3.91% 238.75 8.15% 1,425.95 48.69% $117.91 4.03% 119.51 4.08% 40.56 33.90% $78.95 2.70% 238.75 (1.06) $316.65 10.81% 1,225.68 41.85% 449.37 15.34% $776.31 26.51% 141.28 175.47 5.99% ($0.11) 2010A $3,468.78 18.44% 1,256.60 36.23% $2,212.18 63.77% 171.65 4.95% 229.15 6.61% 1,589.50 45.82% $231.93 6.69% 228.57 6.59% 78.29 34.30% $150.28 4.33% 229.15 2.21 $381.64 11.00% 1,426.78 41.13% 552.36 15.92% $874.42 25.21% 98.11 160.94 4.64% $122.60 2011A $4,158.06 19.87% 1,639.19 39.42% $2,518.87 60.58% 204.16 4.91% 232.96 5.60% 1,888.25 45.41% $190.03 4.57% 186.45 4.48% 59.59 32.00% $126.86 3.05% 232.96 2.43 $362.25 8.71% 1,488.78 35.80% 705.35 16.96% $783.42 18.84% (90.99) 318.60 7.66% $134.65 2012E $4,881.50 17.40% 1,854.97 38.00% $3,026.53 62.00% 239.19 4.90% 146.42 3.00% 2,147.86 44.00% $493.06 10.10% 488.18 10.00% 156.22 32.00% $331.96 6.80% 146.42 3.32 $481.70 9.87% 1,680.78 34.43% 803.49 16.46% $877.29 17.97% 93.87 400.00 8.19% ($12.17) ($10.69) 2013E $5,616.62 15.06% 2,120.27 37.75% $3,496.34 62.25% 266.79 4.75% 182.46 3.25% 2,415.15 43.00% $631.95 11.25% 626.34 11.15% 200.43 32.00% $425.91 7.58% 182.46 3.82 $612.18 10.90% 1,871.62 33.32% 927.51 16.51% $944.11 16.81% 66.82 393.16 7.00% $152.20 $117.31 2014E $6,309.80 12.34% 2,366.18 37.50% $3,943.63 62.50% 299.72 4.75% 217.16 3.44% 2,728.99 43.25% $697.76 11.06% 691.45 10.96% 221.26 32.00% $470.19 7.45% 217.16 4.29 $691.64 10.96% 2,061.71 32.67% 1,035.50 16.41% $1,026.21 16.26% 82.10 378.59 6.00% $230.95 $156.27 2015E $6,972.63 10.50% 2,597.30 37.25% $4,375.32 62.75% 331.20 4.75% 249.12 3.57% 3,033.09 43.50% $761.91 10.93% 754.94 10.83% 234.03 31.00% $520.91 7.47% 249.12 4.81 $774.84 11.11% 2,302.13 33.02% 1,140.60 16.36% $1,161.53 16.66% 135.33 348.63 5.00% $290.88 $172.80 2016E $7,552.59 8.32% 2,794.46 37.00% $4,758.13 63.00% 339.87 4.50% 276.81 3.67% 3,304.26 43.75% $837.20 11.08% 829.64 10.98% 257.19 31.00% $572.45 7.58% 276.81 5.21 $854.48 11.31% 2,516.58 33.32% 1,224.57 16.21% $1,292.01 17.11% 130.47 302.10 4.00% $421.90 $220.03 2017E $8,063.37 6.76% 2,963.29 36.75% $5,100.08 63.25% 362.85 4.50% 298.98 3.71% 3,547.88 44.00% $890.36 11.04% 882.30 10.94% 273.51 31.00% $608.79 7.55% 298.98 5.56 $913.33 11.33% 2,698.24 33.46% 1,306.49 16.20% $1,391.75 17.26% 99.75 241.90 3.00% $571.69 $261.75 2018E $8,567.23 6.25% 3,127.04 36.50% $5,440.19 63.50% 385.53 4.50% 322.54 3.76% 3,791.00 44.25% $941.12 10.99% 932.55 10.89% 289.09 31.00% $643.46 7.51% 322.54 5.91 $971.92 11.34% 2,875.76 33.57% 1,379.32 16.10% $1,496.44 17.47% 104.68 257.02 3.00% $610.22 $245.28 2019E $8,984.69 4.87% 3,256.95 36.25% $5,727.74 63.75% 381.85 4.25% 347.25 3.86% 3,998.19 44.50% $1,000.45 11.14% 991.47 11.04% 297.44 30.00% $694.03 7.72% 347.25 6.29 $1,047.57 11.66% 3,091.78 34.41% 1,441.80 16.05% $1,649.98 18.36% 153.55 269.54 3.00% $624.48 $220.37 2020E $9,379.39 4.39% 3,376.58 36.00% $6,002.81 64.00% 398.62 4.25% 363.07 3.87% 4,197.28 44.75% $1,043.84 11.13% 1,034.46 11.03% 310.34 30.00% $724.12 7.72% 363.07 6.57 $1,093.76 11.66% 3,303.39 35.22% 1,491.71 15.90% $1,811.68 19.32% 161.70 281.38 3.00% $650.68 $201.58 2021E $9,672.96 3.13% 3,458.08 35.75% $6,214.88 64.25% 411.10 4.25% 289.90 3.00% 4,352.83 45.00% $1,161.05 12.00% 1,151.38 11.90% 345.41 30.00% $805.96 8.33% 289.90 6.77 $1,102.63 11.40% 3,493.18 36.11% 1,532.37 15.84% $1,960.81 20.27% 149.13 290.19 3.00% $663.32 $180.41

EBITDA EBITDA Margin

723.6 20.77%

356.7 12.18%

461.1 13.29%

423.0 10.17%

639.5 13.10%

814.4 14.50%

914.9 14.50%

1011.0 14.50%

1114.0 14.75%

1189.3 14.75%

1263.7 14.75%

1347.7 15.00%

1406.9 15.00%

1450.9 15.00%

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Appendix 3 Revenue Model

Revenue Model ($ in millions) Abercrombie & Fitch % Growth abercrombie % Growth Hollister % Growth Gilly hicks % Growth Total Revenue % Growth 2008A 1531.48 (7.00%) 420.518 (11.00%) 1514.204 (5.00%) 17.856 NM 3483.058 (6.00%) 2009A 1272.287 (17.00%) 343.164 (18.00%) 1287.241 (15.00%) 25.934 45.00% 2928.626 (16.00%) 2010A 1493.101 17.00% 382.579 11.00% 1552.814 21.00% 40.283 55.00% 3468.777 18.00% 2011A 12.00% 397.904 4.00% 30.00% 73.017 81.00% 20.00% 2012E 10.00% 3.75% 25.00% 50.00% 17.40% 2013E 9.00% 3.75% 20.00% 45.00% 15.06% 2014E 8.00% 3.50% 15.00% 40.00% 12.34% 2015E 7.00% 3.50% 12.00% 35.00% 10.50% 2016E 6.00% 3.25% 9.00% 25.00% 8.32% 2017E 5.00% 489.1199 3.25% 7.00% 20.00% 6.76% 2018E 4.00% 3.00% 7.00% 15.00% 6.25% 2019E 4.00% 3.00% 5.00% 10.00% 4.87% 2020E 3.00% 3.00% 5.00% 7.00% 4.39% 2021E 3.00% 3.00% 3.00% 5.00% 3.13% 1665.135 1831.6485 1996.4969 2156.2166 2307.1518 2445.5809 2567.8599 2670.5743 2777.3973 2860.7192 2946.5408 412.8254 428.30635 443.29707 458.81247 473.72388 503.7935 518.90731 534.47453 550.50876

2022.002 2527.5025

3033.003 3487.9535 3906.5079 4258.0936 4556.1601 4875.0913 5118.8459 5374.7882 5536.0318

109.5255 158.81198 222.33677 300.15463 375.19329 450.23195 517.76674 569.54342 609.41145 639.88203

4158.058 4881.5019 5616.6182 6309.8039 6972.6267 7552.5916 8063.3719 8567.2259 8984.6939 9379.3934 9672.9634

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Appendix 4 Working Capital Model

Working Capital Model ($ in millions) Total Revenue Current Assets Cash & Cash Equivalents % of Revenue Accounts Receivable Days Sales Outstanding A/R % of Revenue Inventory Days Inventory Outstanding % of Revenue Deferred Income Taxes Days Prepaid Expense Outstanding % of Revenue Other Current Assets Days COGS Outstanding % of Revenue Total Current Assets % of Revenue Long Term Assets Net PP&E Beginning Capital Expenditures Depreciation and Amortization Net PP&E Ending Total Current Assets & Net PP&E % of Revenue Current Liabilities Accounts Payable Days Payable Outstanding % of Revenue Accrued Expenses Days Charges Outstanding % of Revenue Income Taxes Payable Days Taxes Outstanding % of Revenue Deferred Lease Credits % of Revenue Total Current Liabilities % of Revenue 2008A $3,483.06 2009A $2,928.63 2010A $3,468.78 2011A $4,158.06 2012E $4,881.50 2013E $5,616.62 2014E $6,309.80 2015E $6,972.63 2016E $7,552.59 2017E $8,063.37 2018E $8,567.23 2019E $8,984.69 2020E $9,379.39 2021E $9,672.96

$522.12 14.99% $53.11 5.6 1.52% $372.42 117.9 10.69% $43.41 13.7 1.25% $93.76 29.7 2.69% $1,084.83 31.15% $1,318.29 $367.60 ($225.33) $1,398.66 $2,483.48 40.16% $92.81 29.4 2.66% $241.23 76.4 6.93% $16.46 5.2 0.47% $42.36 1.22% $449.80 12.91%

$702.31 23.98% $90.87 11.4 3.10% $310.65 108.8 10.61% $44.57 15.6 1.52% $77.30 27.1 2.64% $1,225.68 41.85% $1,398.66 $175.47 ($238.75) $1,244.02 $2,469.70 42.48% $150.13 52.6 5.13% $246.29 86.3 8.41% $9.35 3.3 0.32% $43.60 1.49% $449.37 15.34%

$826.35 23.82% $74.78 7.9 2.16% $385.86 112.1 11.12% $60.41 17.5 1.74% $79.39 23.1 2.29% $1,426.78 41.13% $1,244.02 $160.94 ($229.15) $1,154.76 $2,581.54 33.29% $137.24 39.9 3.96% $300.10 87.2 8.65% $73.49 21.3 2.12% $41.54 1.20% $552.36 15.92%

$668.15 16.07% $89.35 7.8 2.15% $569.82 125.8 13.70% $77.12 17.0 1.85% $84.34 18.6 2.03% $1,488.78 35.80% $1,154.76 $318.60 ($232.96) $1,197.27 $2,686.05 28.79% $211.37 46.7 5.08% $375.02 82.8 9.02% $77.92 17.2 1.87% $41.05 0.99% $705.35 16.96%

$781.04 16.00% $104.03 7.8 2.13% $613.26 121.0 12.56% $86.16 17.0 1.77% $96.30 19.0 1.97% $1,680.78 34.43% $1,197.27 $400.00 ($146.42) $1,450.85 $3,131.64 29.72% $238.21 47.0 4.88% $425.73 84.0 8.72% $91.23 18.0 1.87% $48.33 0.99% $803.49 16.46%

$842.49 15.00% $120.03 7.8 2.14% $699.98 120.5 12.46% $98.75 17.0 1.76% $110.37 19.0 1.97% $1,871.62 33.32% $1,450.85 $393.16 ($182.46) $1,661.56 $3,533.18 29.58% $273.02 47.0 4.86% $493.76 85.0 8.79% $104.56 18.0 1.86% $56.17 1.00% $927.51 16.51%

$914.92 14.50% $134.84 7.8 2.14% $777.92 120.0 12.33% $110.21 17.0 1.75% $123.82 19.1 1.96% $2,061.71 32.67% $1,661.56 $378.59 ($217.16) $1,822.99 $3,884.70 28.89% $304.69 47.0 4.83% $551.03 85.0 8.73% $116.69 18.0 1.85% $63.10 1.00% $1,035.50 16.41%

$1,045.89 15.00% $149.00 7.8 2.14% $850.35 119.5 12.20% $120.97 17.0 1.73% $135.91 19.1 1.95% $2,302.13 33.02% $1,822.99 $348.63 ($249.12) $1,922.50 $4,224.64 27.57% $334.45 47.0 4.80% $604.85 85.0 8.67% $128.09 18.0 1.84% $73.21 1.05% $1,140.60 16.36%

$1,170.65 15.50% $160.96 7.8 2.13% $908.58 119.0 12.03% $129.80 17.0 1.72% $146.59 19.2 1.94% $2,516.58 33.32% $1,922.50 $302.10 ($276.81) $1,947.80 $4,464.38 25.79% $358.85 47.0 4.75% $648.99 85.0 8.59% $137.43 18.0 1.82% $79.30 1.05% $1,224.57 16.21%

$1,269.98 15.75% $172.31 7.8 2.14% $962.05 118.5 11.93% $138.02 17.0 1.71% $155.88 19.2 1.93% $2,698.24 33.46% $1,947.80 $241.90 ($298.98) $1,890.71 $4,588.96 23.45% $381.57 47.0 4.73% $690.08 85.0 8.56% $146.13 18.0 1.81% $88.70 1.10% $1,306.49 16.20%

$1,370.76 16.00% $183.08 7.8 2.14% $1,010.93 118.0 11.80% $145.64 17.0 1.70% $165.35 19.3 1.93% $2,875.76 33.57% $1,890.71 $257.02 ($322.54) $1,825.19 $4,700.95 21.30% $402.66 47.0 4.70% $728.21 85.0 8.50% $154.21 18.0 1.80% $94.24 1.10% $1,379.32 16.10%

$1,527.40 17.00% $192.00 7.8 2.14% $1,048.47 117.5 11.67% $151.69 17.0 1.69% $172.22 19.3 1.92% $3,091.78 34.41% $1,825.19 $269.54 ($347.25) $1,747.48 $4,839.26 19.45% $419.39 47.0 4.67% $758.47 85.0 8.44% $160.62 18.0 1.79% $103.32 1.15% $1,441.80 16.05%

$1,688.29 18.00% $199.89 7.8 2.13% $1,079.40 117.0 11.51% $156.84 17.0 1.67% $178.98 19.4 1.91% $3,303.39 35.22% $1,747.48 $281.38 ($363.07) $1,665.79 $4,969.18 17.76% $433.60 47.0 4.62% $784.18 85.0 8.36% $166.06 18.0 1.77% $107.86 1.15% $1,491.71 15.90%

$1,837.86 19.00% $206.71 7.8 2.14% $1,103.74 116.5 11.41% $161.06 17.0 1.67% $183.80 19.4 1.90% $3,493.18 36.11% $1,665.79 $290.19 ($289.90) $1,666.08 $5,159.26 17.22% $445.29 47.0 4.60% $805.31 85.0 8.33% $170.54 18.0 1.76% $111.24 1.15% $1,532.37 15.84%

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Appendix 5 Discounted Cash Flows Analysis Assumptions

Discounted Free Cash Flow Assumptions Tax Rate Risk Free Rate Beta Market Risk Premium % Equity % Debt Cost of Debt CAPM WACC 30.00% Terminal Growth Rate 1.71% Terminal Value 1.79 PV of Terminal Value 7.00% Sum of PV Free Cash Flows 97.61% Firm Value 2.39% Total Debt 2.40% Cash & Cash Equivalents 14.21% Market Capitalization 13.91% Fully Diluted Shares Implied Price Current Price Undervalued 3.00% 6,265 1,704 1,765 3,469 58 668 3,411 85 $40.26 $36.23 11.13% Considerations

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Appendix 8 Sources
SEC Filings Abercrombie & Fitch Investor Relations page Factset Yahoo! Finance Google Finance Thomson Reuters University of Michigan Seeking Alpha

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