UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                          

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, OH		43054
(Address of principal executive offices)		(Zip Code)

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. Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

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

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 December 1, 2006
$.01 Par Value		88,246,110 Shares

 

 

ABERCROMBIE & FITCH CO.

TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Net Income and Comprehensive Income Thirteen and Thirty-Nine Weeks Ended October 28, 2006 and October 29, 2005			3
Condensed Consolidated Balance Sheets October 28, 2006 and January 28, 2006			4
Condensed Consolidated Statements of Cash Flows Thirty-Nine Weeks Ended October 28, 2006 and October 29, 2005			5
Notes to Condensed Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			41
Part II. Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			47
Item 4. Submission of Matters to a Vote of Security Holders			48
Item 5. Other Information			49
Item 6. Exhibits			50
EX-15
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ABERCROMBIE & FITCH

CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME

AND COMPREHENSIVE INCOME

(Thousands, except per share data)

(Unaudited)

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
NET SALES		$	863,448			$	704,918			$	2,179,415			$	1,823,319
Cost of Goods Sold			295,250				239,832				726,043				611,321
GROSS PROFIT			568,198				465,086				1,453,372				1,211,998
Stores and Distribution Expense			308,456				252,947				837,302				707,267
Marketing, General and Administrative Expense			97,167				97,644				272,206				232,674
Other Operating Income, Net			(266	)			(1,379	)			(5,392	)			(3,193	)
OPERATING INCOME			162,841				115,874				349,256				275,250
Interest Income, Net			(3,252	)			(1,516	)			(9,183	)			(4,296	)
INCOME BEFORE INCOME TAXES			166,093				117,390				358,439				279,546
Provision for Income Taxes			64,062				45,790				134,445				110,186
NET INCOME		$	102,031			$	71,600			$	223,994			$	169,360
NET INCOME PER SHARE:
BASIC		$	1.16			$	0.81			$	2.55			$	1.95
DILUTED		$	1.11			$	0.79			$	2.44			$	1.87
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC			88,106				87,862				87,982				87,002
DILUTED			92,146				90,458				91,675				90,422
DIVIDENDS DECLARED PER SHARE		$	0.175			$	0.175			$	0.525			$	0.425
OTHER COMPREHENSIVE INCOME
Cumulative Foreign Currency Translation Adjustments		$	469			$	—			$	579			$	—
Unrealized Gain/(Loss) on Marketable Securities, net of taxes of $207 and ($6) for the thirteen and thirty-nine week periods ended October 28, 2006, respectively			309				—				(14	)			—
Other Comprehensive Income		$	778			$	—			$	565			$	—
COMPREHENSIVE INCOME		$	102,809			$	71,600			$	224,559			$	169,360

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

ABERCROMBIE & FITCH

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands)

(Unaudited)

		October 28, 2006				January 28, 2006
ASSETS
CURRENT ASSETS:
Cash and Equivalents		$	65,466			$	50,687
Marketable Securities			308,906				411,167
Receivables			59,495				41,855
Inventories			431,002				362,536
Deferred Income Taxes			29,698				29,654
Other Current Assets			60,716				51,185
TOTAL CURRENT ASSETS			955,283				947,084
PROPERTY AND EQUIPMENT, NET			1,058,740				813,603
OTHER ASSETS			51,808				29,031
TOTAL ASSETS		$	2,065,831			$	1,789,718
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts Payable and Outstanding Checks		$	178,700			$	145,313
Accrued Expenses			259,543				215,034
Deferred Lease Credits			35,160				31,727
Income Taxes Payable			50,939				99,480
TOTAL CURRENT LIABILITIES			524,342				491,554
LONG-TERM LIABILITIES:
Deferred Income Taxes			28,641				38,496
Deferred Lease Credits			208,373				191,225
Other Liabilities			92,596				73,326
TOTAL LONG-TERM LIABILITIES			329,610				303,047
SHAREHOLDERS’ EQUITY:
Class A Common Stock — $0.01 par value: 150,000 shares authorized and 103,300 shares issued at each of October 28, 2006 and January 28, 2006			1,033				1,033
Paid-In Capital			282,138				229,261
Retained Earnings			1,463,539				1,290,208
Accumulated Other Comprehensive Loss, Net of Tax			(231	)			(796	)
Deferred Compensation			—				26,206
Treasury Stock, at Average Cost - 15,108 and 15,574 shares at October 28, 2006 and January 28, 2006, respectively			(534,600	)			(550,795	)
TOTAL SHAREHOLDERS’ EQUITY			1,211,879				995,117
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,065,831			$	1,789,718

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

ABERCROMBIE & FITCH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands)

(Unaudited)

		Thirty-Nine Weeks Ended
		October 28,				October 29,
		2006				2005
OPERATING ACTIVITIES:
Net Income		$	223,994			$	169,360
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization			104,979				90,866
Amortization of Deferred Lease Credits			(25,510	)			(23,756	)
Share-Based Compensation			28,717				23,190
Tax Benefit from Share-Based Compensation			4,239				51,162
Excess Tax Benefit from Share-Based Compensation			(2,972	)			—
Deferred Taxes			(9,899	)			(13,309	)
Loss on Disposal of Assets			6,034				6,043
Lessor Construction Allowances			32,940				28,662
Changes in Assets and Liabilities:
Inventories			(68,528	)			(191,147	)
Other Assets and Liabilities			5,376				12,085
Accounts Payable and Accrued Expenses			18,680				36,313
Income Taxes			(48,541	)			1,348
NET CASH PROVIDED BY OPERATING ACTIVITIES			269,509				190,817
INVESTING ACTIVITIES:
Capital Expenditures			(302,852	)			(185,776	)
Contribution to Rabbi Trust			(22,000	)			—
Investments Activity
Purchases			(986,143	)			(456,605	)
Proceeds from Sales			1,088,429				277,674
Net Investments Activity			102,286				(178,931	)
NET CASH USED FOR INVESTING ACTIVITIES			(222,566	)			(364,707	)
FINANCING ACTIVITIES:
Proceeds from Share-Based Compensation			9,541				73,070
Excess Tax Benefit from Share-Based Compensation			2,972				—
Purchase of Treasury Stock			—				(103,296	)
Change in Outstanding Checks and Other			1,507				(9,762	)
Dividends Paid			(46,184	)			(36,882	)
NET CASH USED FOR FINANCING ACTIVITIES			(32,164	)			(76,870	)
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS:			14,779				(250,760	)
Cash and Equivalents, Beginning of Year			50,687				350,368
CASH AND EQUIVALENTS, END OF PERIOD		$	65,466			$	99,608
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
Change in Accrual for Construction in Progress		$	53,340			$	24,619

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

ABERCROMBIE & FITCH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.		BASIS OF PRESENTATION
		Abercrombie & Fitch Co. (“A&F”), through its wholly-owned subsidiaries (collectively, A&F and its wholly-owned subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a specialty retailer of high quality, casual apparel for men, women and kids with an active, youthful lifestyle. The business was established in 1892.
		The accompanying consolidated financial statements include the historical financial statements of, and transactions applicable to, A&F and its wholly-owned subsidiaries and reflect the assets, liabilities, results of operations and cash flows on a historical cost basis.
		The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2006” represent the 53-week fiscal year that will end on February 3, 2007, and “Fiscal 2005” represents the 52-week fiscal year that ended January 28, 2006.
		Certain amounts have been reclassified to conform with the current year presentation. The Company periodically acquires shares of its Class A Common Stock, par value $0.01 per share (“Common Stock”) under various Board of Directors authorized share buy-back plans. The shares acquired are held as treasury stock and are not retired. The Company utilizes the treasury stock when issuing shares for stock options exercises and restricted stock unit vestings. In accordance with the Accounting Principles Board (“APB”) Opinion No. 6, “Status of Accounting Research Bulletins,” “gains” on sales of treasury stock not previously accounted for as constructively retired should be credited to paid-in capital; “losses” may be charged to paid-in capital to the extent of previous net “gains” from sales or retirements of the same class of stock, otherwise to retained earnings. On the Consolidated Balance Sheet for the year ended January 28, 2006, the Company reclassified cumulative treasury stock “losses” of $67.6 million to retained earnings, that were previously netted against paid-in capital. Amounts reclassified did not have an effect on the Company’s results of operations, total shareholders’ equity or Consolidated Statements of Cash Flows.
		In accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), the Company determined its operating segments on the same basis it uses internally to evaluate performance. The operating segments identified by the Company – Abercrombie & Fitch, abercrombie, Hollister and RUEHL – have been aggregated and are reported as one reportable financial segment. The Company aggregates its operating segments because they meet the aggregation criteria set forth in paragraph 17 of SFAS No. 131. The Company believes its operating segments may be aggregated for financial reporting purposes because they are similar in each of the following areas: class of consumer, economic characteristics, nature of products, nature of production processes and distribution methods.

		The condensed consolidated financial statements as of October 28, 2006 and for the thirteen and thirty-nine week periods ended October 28, 2006 and October 29, 2005 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2005. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
		In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2006.
		The condensed consolidated financial statements as of October 28, 2006 and for the thirteen and thirty-nine week periods ended October 28, 2006 and October 29, 2005 included herein have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and the report of such firm follows the notes to the condensed consolidated financial statements. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the unaudited financial information because their report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
2.		SHARE-BASED COMPENSATION
		On January 29, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires share-based compensation to be measured based on estimated fair values at the date of grant using an option pricing model. Previously, the Company accounted for share-based compensation using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, for which no expense was recognized for stock options if the exercise price was equal to the market value of the underlying Common Stock on the date of grant, and if the Company provided the required pro forma disclosures in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended.
		The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires share-based compensation to be recognized for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, prior period information presented in this Report on Form 10-Q has not been restated to reflect the fair value method of expensing stock options. Under the modified prospective method, compensation expense recognized for the thirteen and thirty-nine weeks ended October 28, 2006 includes compensation expense for: a) all share-based awards granted prior to, but not yet vested as of, January 29, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and b) all share-based awards granted subsequent to January 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

The following table summarizes the incremental effect of the adoption of SFAS No. 123(R) to the Company’s consolidated financial statements for the thirteen and thirty-nine weeks ended October 28, 2006:

		Thirteen				Thirty-Nine
		Weeks Ended				Weeks Ended
(Thousands, except per share amounts)		October 28, 2006				October 28, 2006
Stores and Distribution Expense		$	110			$	338
Marketing, General and Administrative Expense			1,547				12,608
Share-based compensation effect in income before taxes			1,657				12,946
Provision for Income Taxes			(323	)			(4,182	)
Net share-based compensation effects in net income		$	1,334			$	8,764
Effect on net income per basic share		$	0.02			$	0.10
Effect on net income per diluted share		$	0.01			$	0.10
Effect on cash flow from operating activities		$	(574	)		$	(2,972	)
Effect on cash flow from financing activities		$	574			$	2,972

The following table is presented for comparative purposes and illustrates the pro forma effect on net income and net income per share for the thirteen and thirty-nine weeks ended October 29, 2005, as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options granted under the Company’s share-based compensation plans prior to January 29, 2006:

		Thirteen				Thirty-Nine
		Weeks Ended				Weeks Ended
(Thousands except per share amounts)		October 29, 2005				October 29, 2005
Net income:
As reported		$	71,600			$	169,360
Share-based compensation expense included in reported net income, net of tax(1)			7,022				12,027
Share-based compensation expense determined under fair value based method, net of tax			(12,733	)			(28,595	)
Pro forma		$	65,889			$	152,792
Net income per basic share:
As reported		$	0.81			$	1.95
Pro forma		$	0.75			$	1.76
Net income per diluted share:
As reported		$	0.79			$	1.87
Pro forma		$	0.72			$	1.67

		Total share-based compensation expense recognized under SFAS No. 123(R) was $8.1 million and $28.7 million for the thirteen and thirty-nine week periods ended October 28, 2006, respectively. Share-based compensation expense of $11.5 million and $19.7 million was recognized for the thirteen and thirty-nine week periods ended October 29, 2005, respectively, under APB 25. The Company also realized $1.2 million and $4.2 million in tax benefits for the thirteen and thirty-nine week periods ended October 28, 2006, respectively, and $2.6 million and $51.2 million in tax benefits for the thirteen and thirty-nine week periods ended October 29, 2005, respectively, related to share-based compensation.
		Share-based compensation expense is recognized, net of estimated forfeitures, over the requisite service period on a straight line basis. The Company adjusts share-based compensation on a quarterly basis for actual forfeitures and on an annual basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after January 29, 2006 is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments during the thirteen and thirty-nine week periods ended October 28, 2006 was immaterial.
		Upon adoption of SFAS No. 123(R), the Company began presenting the liability for share-based compensation in the Condensed Consolidated Balance Sheet as part of paid-in capital and the related tax benefit in paid-in capital. Additionally, the Company began presenting the excess tax benefit in the Consolidated Statement of Cash Flows as part of the financing activities. Prior to adoption of SFAS No. 123(R), the liability was presented in the Condensed Consolidated Balance Sheet as deferred compensation and the related tax benefit was presented in the Condensed Consolidated Statement of Cash Flows in operating activities.
		As of October 28, 2006, the Company had two primary share-based compensation plans, the 2002 Stock Plan for Associates (the “2002 Plan”) and the 2005 Long-Term Incentive Plan (the “2005 LTIP”), under which it grants stock options and restricted stock units to its associates and non-associate board members. The Company also has three other share-based compensation plans under which it granted stock options and restricted stock units to its associates and non-associate Board members in prior years.
		The 2005 LTIP, which is a shareholder approved plan, permits the Company to grant up to approximately 2.0 million shares of A&F’s Common Stock to the majority of associates who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, and any non-associate directors of the Company. The 2002 Plan, which is not a shareholder approved plan, permits the Company to grant up to 7.0 million shares of A&F’s Common Stock to any associate. Under both plans, stock options and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP, stock options and restricted stock units vest over one year for non-associate directors. Stock options have a ten year contractual term and the plans provide for accelerated vesting if there is a change of control as defined in the plans.
		The Company issues shares for stock option exercises and restricted stock unit vestings from treasury stock. As of October 28, 2006, the Company had enough treasury stock available to cover stock options and restricted stock units outstanding without having to repurchase additional treasury stock.

		The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will be outstanding based on historical experience. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s stock for the period equal to the expected term of the stock option. The Company calculates the historic volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits.
		The weighted-average estimated fair values of stock options granted during the thirty-nine weeks ended October 28, 2006 and October 29, 2005, as well as the weighted-average assumptions used in calculating such values, on the date of grant, were as follows:

		Thirty-Nine Weeks Ended
		October 28, 2006								October 29, 2005
		Executive				Other
		Officers				Associates
Exercise price		$	58.22			$	58.04			$	67.36
Fair value		$	24.92			$	20.67			$	24.43
Assumptions:
Price volatility			47	%			42	%			44	%
Expected term (Years)			5				4				4
Risk-free interest rate			4.9	%			4.9	%			4.1	%
Dividend yield			1.2	%			1.2	%			1.1	%

In the case of restricted stock units, the Company calculates the fair value of the restricted stock units granted as the market price of the underlying Common Stock on the date of issuance adjusted for anticipated dividend yields.

Below is the summary of stock option activity for the Fiscal 2006 year-to-date period:

		Thirty-Nine Weeks Ended October 28, 2006
														Weighted-Average
		Number				Weighted-Average				Aggregate Intrinsic				Remaining
Stock Options		of Shares				Exercise Price				Value				Contractual Life
Outstanding at January 29, 2006			9,060,831			$	37.18
Granted			401,100				58.15
Exercised			(336,407	)			28.36
Forfeited or expired			(87,700	)			51.18
Outstanding at October 28, 2006			9,037,824			$	38.31			$	353,220,266				4.1
Options exercisable at October 28, 2006			8,179,622			$	36.70			$	332,802,355				3.6

		The total intrinsic value of stock options exercised during the thirteen and thirty-nine weeks ended October 28, 2006 was $6.0 million and $11.9 million, respectively.
		As of October 28, 2006, there was $14.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options. The unrecognized cost is expected to be recognized over a weighted-average period of 1.5 years.
		A summary of the status of the Company’s restricted stock units as of October 28, 2006 and changes during the thirty-nine week period ended October 28, 2006 were as follows:

						Weighted-Average
Restricted Stock Units		Number of Shares				Grant Date Fair Value
Non-vested at January 29, 2006			1,856,847			$	36.54
Granted			577,162			$	58.22
Vested			(197,722	)		$	41.65
Forfeited			(143,332	)		$	53.87
Non-vested at October 28, 2006			2,092,955			$	40.85

Restricted stock units with a fair value of $0.9 million and $8.0 million completed vesting during the thirteen and thirty-nine weeks ended October 28, 2006, respectively. As of October 28, 2006, there was $53.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 1.4 years.

3.		NET INCOME PER SHARE
		Net income per share is computed in accordance with SFAS No. 128, “Earnings 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 effect of dilutive stock options and restricted stock units.

Weighted-Average Shares Outstanding (in thousands):

		Thirteen Weeks Ended
		October 28, 2006				October 29, 2005
Shares of Common Stock issued			103,300				103,300
Treasury shares outstanding			(15,194	)			(15,438	)
Basic shares outstanding			88,106				87,862
Dilutive effect of stock options and restricted stock units			4,040				2,596
Diluted shares outstanding			92,146				90,458

Weighted-Average Shares Outstanding (in thousands):

		Thirty-Nine Weeks Ended
		October 28, 2006				October 29, 2005
Shares of Common Stock issued			103,300				103,300
Treasury shares outstanding			(15,318	)			(16,298	)
Basic shares outstanding			87,982				87,002
Dilutive effect of stock options and restricted stock units			3,693				3,420
Diluted shares outstanding			91,675				90,422

		Options to purchase 119,000 and 430,000 shares of Common Stock during the thirteen week periods ended October 28, 2006 and October 29, 2005, respectively, and 167,000 and 140,000 shares of Common Stock during the thirty-nine week periods ended October 28, 2006 and October 29, 2005, respectively, were outstanding, but not included in the computation of net income per diluted share because the options’ exercise prices were greater than the average market price of the underlying shares for the respective periods.
4.		INVESTMENTS
		As of October 28, 2006, the Company’s investments in marketable securities consisted primarily of investment grade municipal notes and bonds and investment grade auction rate securities, all classified as available-for-sale and reported at fair value, with maturities of one month to 40 years. Investments with original maturities greater than 90 days are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and are classified accordingly by the Company at the time of purchase.

		The Company began investing in municipal notes and bonds during Fiscal 2005. These investments may have early redemption provisions at predetermined prices. For the thirteen and thirty-nine week periods ended October 28, 2006, there were no realized gains or losses and, as of October 28, 2006, cumulative net unrealized holding losses were $0.7 million.
		The interest rates of auction rate securities reset through an auction process at predetermined periods ranging from seven to 49 days. Due to the frequent nature of the reset feature, the investments’ market prices approximate their fair value; therefore, there are no realized or unrealized gains or losses associated with these marketable securities.
		The Company held approximately $308.9 million and $411.2 million in marketable securities as of October 28, 2006 and January 28, 2006, respectively.
		The Company established an irrevocable rabbi trust (the “Rabbi Trust”) during the third quarter of Fiscal 2006, the purpose of which is to be a source of funds to match respective funding obligations to participants in the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan and the Chief Executive Officer Supplemental Executive Retirement Plan. As of October 28, 2006, the Company’s investments held in the Rabbi Trust consisted primarily of money market funds and are recorded at fair value in other assets. Investments held in the Rabbi Trust were $22.0 million as of October 28, 2006.
5.		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. Therefore, 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.
		The fiscal year is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). The Company classifies its inventory into three categories: spring fashion, fall fashion and basic. The Company reduces inventory valuation at the end of the first and third quarters to reserve for projected inventory markdowns required to sell through the current season inventory valuation prior to the beginning of the following season. Additionally, the Company reduces inventory at season end by recording a markdown reserve that represents the estimated future selling price decreases necessary to sell through the remaining carryover fashion inventory for the season just passed. Further, 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 throughout the year and adjusts the shrink reserve accordingly.
		The markdown reserve was $28.5 million, $10.0 million and $27.1 million at October 28, 2006, January 28, 2006 and October 29, 2005, respectively. The inventory valuation at January 28, 2006 reflects the estimated markdowns necessary to sell through fashion carryover inventory on hand at the end of the Fall season. The shrink reserve was $5.4 million, $3.8 million and $4.7 million at October 28, 2006, January 28, 2006 and October 29, 2005, respectively.

6.		PROPERTY AND EQUIPMENT, NET
		Property and equipment, net, consisted of (in thousands):

		October 28, 2006				January 28, 2006
Property and equipment, at cost		$	1,602,104			$	1,286,383
Accumulated depreciation and amortization			(543,364	)			(472,780	)
Property and equipment, net		$	1,058,740			$	813,603

7.		DEFERRED LEASE CREDITS
		Deferred lease credits are derived from payments received from landlords to partially offset store construction costs and are amortized over the life of the related leases. Deferred lease credits are classified between current and long-term liabilities. The current portion represents the amount expected to be amortized over the next 12 months. The current balance as of October 28, 2006 and January 28, 2006 was $35.2 million and $31.7 million, respectively. The deferred lease credits amounts consisted of the following (in thousands):

		October 28, 2006				January 28, 2006
Deferred lease credits		$	420,001			$	376,460
Amortized deferred lease credits			(176,468	)			(153,508	)
Total deferred lease credits, net		$	243,533			$	222,952

8.		INCOME TAXES
		The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the thirteen weeks ended October 28, 2006. Cash payments of income taxes made during the thirty-nine weeks ended October 28, 2006 and October 29, 2005 were approximately $190.7 million and $71.5 million, respectively.
		The effective tax rate for the thirteen weeks ended October 28, 2006 was 38.6% as compared to 39.0% for the Fiscal 2005 comparable period. The decrease in the effective tax rate relates primarily to an increase in tax-exempt income and a tax provision benefit related to the settlement of a tax audit.
		The effective tax rate for the thirty-nine weeks ended October 28, 2006 was 37.5% compared to 39.4% for the Fiscal 2005 comparable period. The Fiscal 2006 tax rate includes tax benefits related to tax audit settlements and the resulting changes in reserve estimates and an increase in tax exempt income during the thirty-nine weeks ended October 28, 2006 as compared to the Fiscal 2005 comparable period. In addition, the Fiscal 2005 comparable period tax rate reflected a charge related to the Company’s change in estimate of the potential outcome of certain state matters.

9.		LONG-TERM DEBT
		On December 15, 2004, the Company entered into an amended and restated $250 million syndicated unsecured credit agreement (the “Amended Credit Agreement”). The primary purposes of the Amended Credit Agreement are for trade and stand-by letters of credit and working capital. The Amended Credit Agreement has several borrowing options, including an option where interest rates are based on the agent bank’s “Alternate Base Rate,” and another using the London Interbank Offered Rate. The facility fees payable under the Amended Credit Agreement are based on the ratio of the Company’s leverage total debt plus 600% of forward minimum rent commitments to consolidated earnings before interest, taxes, depreciation, amortization and rent for the trailing four fiscal quarter periods. The facility fees are projected to accrue at either 0.15% or 0.175% on the committed amounts per annum. The Amended Credit Agreement contains limitations on indebtedness, liens, sale-leaseback transactions, significant corporate changes including mergers and acquisitions with third parties, investments, restricted payments (including dividends and stock repurchases) and transactions with affiliates. The Amended Credit Agreement will mature on December 15, 2009. Letters of credit totaling approximately $83.4 million and $70.6 million were outstanding under the Amended Credit Agreement on October 28, 2006 and October 29, 2005, respectively. No borrowings were outstanding under the Amended Credit Agreement on October 28, 2006 or on October 29, 2005.
10.		CONTINGENCIES
		A&F is a defendant in lawsuits arising in the ordinary course of business.
		The Company previously reported that it was aware of 20 actions that had been filed against it and certain of its current and former officers and directors on behalf of a purported class of shareholders who purchased A&F’s Common Stock between October 8, 1999 and October 13, 1999. These actions originally were filed in the United States District Courts for the Southern District of New York and the Southern District of Ohio, Eastern Division, alleging violations of the federal securities laws and seeking unspecified damages, and were later transferred to the Southern District of New York for consolidated pretrial proceedings under the caption In re Abercrombie & Fitch Securities Litigation. The parties have reached a settlement-in-principle of these matters. According to the terms of the settlement-in-principle, the Company’s insurance company, on behalf of the defendants, will cause to be paid $6.1 million into a settlement fund in full consideration for the settlement and release of all claims that were asserted or could have been asserted in the action by the plaintiffs and the other members of the settlement class. The settlement is not expected to have a material effect on the Company’s financial statements. The settlement will become final and binding only upon approval thereof by the judge who is presiding over the cases, after notice to the settlement class and a hearing (scheduled to be held on January 30, 2007) to determine whether the proposed settlement is fair, reasonable and adequate.

		There have been developments in three class actions filed against the Company involving overtime compensation which were previously reported. In addition, a fourth class action has been filed against the Company involving overtime compensation. In each overtime compensation action, the plaintiffs, on behalf of their respective purported class, seek injunctive relief and unspecified amounts of economic and liquidated damages.
		In Melissa Mitchell, et al. v. Abercrombie & Fitch Co. and Abercrombie & Fitch Stores, Inc., which was filed on June 13, 2003 in the United States District Court for the Southern District of Ohio, the plaintiffs allege that assistant managers and store managers were not paid overtime compensation in violation of the Fair Labor Standards Act (“FLSA”) and Ohio law. The plaintiffs filed an amended complaint to add Scott Oros as a named plaintiff on October 28, 2004. On June 17, 2005, plaintiffs filed a motion to further amend the complaint to add claims under the laws of a number of states, and the United States District Court for the Southern District of Ohio granted that motion on November 8, 2005. On June 24, 2005, the defendants filed motions seeking summary judgment on all of the claims of each of the three plaintiffs. On July 1, 2005, the plaintiffs filed a Rule 23 Motion for Certification of a Class of State Wage Act Claimants and a Motion for Designation of FLSA Claims as Collective Action and Authority to Send Notice to Similarly Situated Employees. The defendants filed their opposition to both motions on December 8, 2005. On March 27, 2006, the Court issued an order indicating it intended to rule on the defendants’ motions for summary judgment forthwith and, for purposes of docket administration, denied the plaintiffs motions to certify their class. The Court also indicated it will reactivate, as appropriate, the motions to certify following resolution of the defendants’ motions for summary judgment. On March 31, 2006, the Court issued an order granting defendants’ motions for summary judgment on all of the claims of each of the three plaintiffs. All three plaintiffs filed a Notice of Appeal to the Sixth Circuit Court of Appeals on April 28, 2006. The matter was fully briefed on October 26, 2006. An oral argument has not yet been scheduled.
		In Eltrich v. Abercrombie & Fitch Stores, Inc., which was filed on November 22, 2005 in the Washington Superior Court of King County, the plaintiff alleges that store managers, assistant managers and managers in training were misclassified as exempt from the overtime compensation requirements of the State of Washington, and improperly denied overtime compensation. The complaint seeks relief on a class-wide basis for unpaid overtime compensation, liquidated damages, attorneys’ fees and costs and injunctive relief. The defendant filed an answer to the complaint on or about January 27, 2006. The defendant filed a motion for summary judgment as to all of Eltrich’s claims on July 5, 2006. The court granted the motion for summary judgment to Eltrich’s individual claims on October 6, 2006, dismissing Eltrich’s individual claims with prejudice. On October 30, 2006, the court dismissed the claims of putative class members without prejudice.
		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 on June 23, 2006. Three plaintiffs allege, on behalf of a putative class of California store managers employed in Hollister and abercrombie stores, that they were entitled to receive overtime pay as “non-exempt” employees under California wage and hour laws. The complaint seeks injunctive relief, equitable relief, unpaid overtime compensation, unpaid benefits, penalties, interest and attorneys’ fees and costs. The defendants filed an answer to the complaint on August 21, 2006. The parties are engaging in discovery. The Company plans to defend the case vigorously. The outcome of the case cannot be predicted by the Company.

		Mitchell Green, et al. v. Abercrombie & Fitch Co., Abercrombie & Fitch Stores, Inc. and Abercrombie & Fitch Trading Co., was filed in the United States District Court for the Southern District of New York on November 22, 2006. Five plaintiffs allege, on behalf of putative class of nation-wide loss prevention agents employed by the Company, that they were entitled to receive overtime pay as “non-exempt” employees under the FLSA and New York wage and hour laws. The complaint seeks injunctive relief, unpaid overtime compensation, liquidated damages, interest, and attorneys’ fees and costs. The Company plans to defend the case vigorously. The outcome of the case cannot be predicted by the Company.
		On September 2, 2005, a purported class action, styled Robert Ross v. Abercrombie & Fitch Company, et al., was filed against A&F and certain of its officers in the United States District Court for the Southern District of Ohio on behalf of a purported class of all persons who purchased or acquired shares of A&F’s Common Stock between June 2, 2005 and August 16, 2005. In September and October of 2005, five other purported class actions were subsequently filed against A&F and other defendants in the same Court. All six cases allege claims under the federal securities laws, and seek unspecified monetary damages, as a result of a decline in the price of A&F’s Common Stock during the summer of 2005. On November 1, 2005, a motion to consolidate all of these purported class actions into the first-filed case was filed by some of the plaintiffs. A&F joined in that motion. On March 22, 2006, the motions to consolidate were granted, and these actions (together with the federal court derivative cases described in the following paragraph) were consolidated for purposes of motion practice, discovery and pretrial proceedings. A consolidated amended complaint was filed on August 14, 2006. All defendants have moved to dismiss that complaint.
		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 (October, November and December of 2005), 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 and seeking equitable and monetary relief. A&F is also a nominal defendant in each of the four later derivative actions. On November 4, 2005, a motion to consolidate all of the federal court derivative actions with the purported securities law class actions described in the preceding paragraph was filed. On March 22, 2006, the motion to consolidate was granted, and the federal court derivative actions have been consolidated with the aforesaid purported securities law class actions for purposes of motion practice, discovery and pretrial proceedings. A consolidated amended complaint was filed in the federal proceeding on July 10, 2006. A&F has filed a motion to stay the consolidated federal derivative case and the time for all other defendants to respond has been extended pending decision of A&F’s motion. The state court action has been stayed by order of court pending the report of a Special Litigation Committee of the Company’s Board of Directors.

		In December 2005, the Company received a formal order of investigation from the SEC concerning trading in shares of A&F’s Common Stock. The SEC has requested information from A&F and certain of its current and former officers and directors. The Company and its personnel are cooperating fully with the SEC.
		Management intends to defend the aforesaid matters vigorously, as appropriate, and believes the outcome of its pending litigation and administrative investigation will not have a material adverse effect upon the financial condition or results of operations of the Company. However, management’s assessment of the Company’s 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 or other finders of fact that are not in accord with management’s evaluation of the claims. Should management’s evaluation prove incorrect, particularly in regard to the overtime compensation claims and the securities matters, the Company’s exposure could have a material adverse effect upon the Condensed Consolidated Financial Statements.
11.		RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
		On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 provides a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 defines the threshold for recognizing tax return positions in the financial statements as “more likely than not” that the position is sustainable, based on its merits. FIN 48 also provides guidance on the measurement, classification and disclosure of tax return positions in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to the beginning balance of retained earnings in the period of adoption. The Company is evaluating the impact of implementing FIN 48 on its consolidated financial statements.
		On September 13, 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 requires a “dual approach” for quantifications of errors using both a method that focuses on the income statement impact, including the cumulative effect of prior years’ misstatements, and a method that focuses on the period-end balance sheet. SAB No. 108 will be effective for the Company on February 3, 2007. The Company does not expect the adoption of SAB No. 108 will have a material impact on its consolidated financial statements.

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheet of Abercrombie & Fitch Co. and its subsidiaries as of October 28, 2006, and the related condensed consolidated statements of net income and comprehensive income for each of the thirteen and thirty-nine week periods ended October 28, 2006 and October 29, 2005 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 28, 2006 and October 29, 2005. 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, 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 condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of January 28, 2006, and the related consolidated statements of net income and comprehensive income, of shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006 and the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006; and in our report dated April 3, 2006, we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 28, 2006, 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
December 4, 2006

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^st. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year commences. All references herein to “Fiscal 2006” represent the 53-week fiscal year that will end on February 3, 2007, and “Fiscal 2005” represents the 52-week fiscal year that ended January 28, 2006.

The Company operates four brands: Abercrombie & Fitch, a fashion-oriented casual apparel business directed at 18 to 22 year-old collegiate men and women with a youthful lifestyle, abercrombie, a fashion-oriented casual apparel brand in the tradition of Abercrombie & Fitch style and quality, targeted at seven to 14 year-old boys and girls; Hollister, a West Coast-oriented lifestyle brand targeted at 14 to 17 year-old high school guys (“dudes”) and girls (“bettys”), at lower price points than Abercrombie & Fitch; and RUEHL, a fashion-oriented mix of traditional casual and trend fashion displaying high quality clothing, leather goods and lifestyle accessories, targeted at 22 to 35 year-old modern-minded, post-college consumers. In addition to predominantly mall-based store locations, Abercrombie & Fitch, abercrombie and Hollister also offer websites, where products comparable to those carried at the stores can be purchased.

RESULTS OF OPERATIONS

During the third quarter of Fiscal 2006, net sales increased 22% to $863.4 million from $704.9 million in the third quarter of Fiscal 2005. Operating income increased to $162.8 million in the third quarter of Fiscal 2006 from $115.9 million in the third quarter of Fiscal 2005. Net income increased to $102.0 million in the third quarter of Fiscal 2006 compared to $71.6 million in the third quarter of Fiscal 2005. Net income per diluted weighted-average share was $1.11 in the third quarter of Fiscal 2006, including $0.01 per diluted share related to SFAS No. 123(R), compared to $0.79 in the third quarter of Fiscal 2005, including a $0.09 charge per diluted share related to an executive officer’s severance agreement.

Due to the 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 or of future financial results. The seasonality of the Company’s operations may also lead to significant fluctuations in certain asset and liability accounts.

The following data represent the amounts shown in the Company’s Condensed Consolidated Statements of Income for the thirteen and thirty-nine week periods ended October 28, 2006 and October 29, 2005, expressed as a percentage of net sales:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
NET SALES			100.0	%			100.0	%			100.0	%			100.0	%
Cost of Goods Sold			34.2	%			34.0	%			33.3	%			33.5	%
GROSS PROFIT			65.8	%			66.0	%			66.7	%			66.5	%
Stores and Distribution Expense			35.7	%			35.9	%			38.4	%			38.8	%
Marketing, General and Administrative Expense			11.3	%			13.9	%			12.5	%			12.8	%
Other Operating Income, Net			(0.0	)%			(0.2	)%			(0.2	)%			(0.2	)%
OPERATING INCOME			18.9	%			16.4	%			16.0	%			15.1	%
Interest Income, Net			(0.4	)%			(0.2	)%			(0.4	)%			(0.2	)%
INCOME BEFORE INCOME TAXES			19.2	%			16.7	%			16.4	%			15.3	%
Provision for Income Taxes			7.4	%			6.5	%			6.2	%			6.0	%
NET INCOME			11.8	%			10.2	%			10.3	%			9.3	%

Financial Summary

The following summarized financial and statistical data compare the thirteen and thirty-nine week periods ended October 28, 2006 to the comparable periods ended October 29, 2005:

		Thirteen Weeks Ended												Thirty-Nine Weeks Ended
		October 28,				October 29,								October 28,				October 29,
		2006				2005				% Change				2006				2005				% Change
Net sales by brand (in thousands)		$	863,448			$	704,918				22	%		$	2,179,415			$	1,823,319				20	%
Abercrombie & Fitch		$	382,136			$	347,723				10	%		$	1,011,112			$	950,441				6	%
abercrombie		$	109,129			$	96,789				13	%		$	261,334			$	223,122				17	%
Hollister		$	364,034			$	261,274				39	%		$	886,396			$	640,329				38	%
RUEHL*		$	8,149			$	4,132				97	%		$	20,573			$	9,427				118	%
Increase/(decrease) in comparable store sales**			5	%			25	%							4	%			24	%
Abercrombie & Fitch			1	%			16	%							(2	)%			19	%
abercrombie			8	%			62	%							15	%			51	%
Hollister			8	%			27	%							8	%			26	%
RUEHL			20	%			n/a								20	%			n/a
Retail sales increase attributable to new and remodeled stores, catalogue and websites			17	%			10	%							16	%			13	%
Net retail sales per average store (in thousands)		$	916			$	835				10	%		$	2,339			$	2,184				7	%
Abercrombie & Fitch		$	1,002			$	924				8	%		$	2,659			$	2,542				5	%
abercrombie		$	610			$	561				9	%		$	1,463			$	1,274				15	%
Hollister		$	974			$	886				10	%		$	2,442			$	2,280				7	%
RUEHL*		$	798			$	689				16	%		$	1,949			$	1,861				5	%
Net retail sales per average gross square foot		$	129			$	119				8	%		$	331			$	309				7	%
Abercrombie & Fitch		$	114			$	106				8	%		$	303			$	290				4	%
abercrombie		$	139			$	128				9	%		$	333			$	290				15	%
Hollister		$	148			$	136				9	%		$	372			$	351				6	%
RUEHL*		$	89			$	72				24	%		$	218			$	196				11	%
Transactions per average retail store			13,326				11,856				12	%			37,153				34,597				7	%
Abercrombie & Fitch			12,540				11,099				13	%			35,956				34,294				5	%
abercrombie			8,625				7,765				11	%			22,819				19,996				14	%
Hollister			16,382				15,253				7	%			45,575				44,178				3	%
RUEHL*			8,986				5,511				63	%			22,858				17,348				32	%
Average retail transaction value		$	68.71			$	70.46				(2	)%		$	62.95			$	63.13			nm
Abercrombie & Fitch		$	79.90			$	83.23				(4	)%		$	73.94			$	74.13			nm
abercrombie		$	70.72			$	72.23				(2	)%		$	64.12			$	63.72				1	%
Hollister		$	59.48			$	58.11				2	%		$	53.57			$	51.61				4	%
RUEHL*		$	88.79			$	124.95				(29	)%		$	85.27			$	107.25				(20	)%
Average units per retail transaction			2.42				2.26				7	%			2.37				2.26				5	%
Abercrombie & Fitch			2.28				2.13				7	%			2.27				2.19				4	%
abercrombie			2.95				2.71				9	%			2.82				2.70				4	%
Hollister			2.40				2.24				7	%			2.34				2.20				6	%
RUEHL*			2.53				2.22				14	%			2.54				2.29				11	%
Average unit retail sold		$	28.39			$	31.18				(9	)%		$	26.56			$	27.93				(5	)%
Abercrombie & Fitch		$	35.04			$	39.08				(10	)%		$	32.57			$	33.85				(4	)%
abercrombie		$	23.97			$	26.65				(10	)%		$	22.74			$	23.60				(4	)%
Hollister		$	24.78			$	25.94				(4	)%		$	22.89			$	23.46				(2	)%
RUEHL*		$	35.09			$	56.28				(38	)%		$	33.57			$	46.83				(28	)%

CURRENT TRENDS AND OUTLOOK

The Company is pleased with the sales and profit growth it achieved during the third quarter of Fiscal 2006. Strong back to school business is exhibited by increases in transactions per average store across all brands. An increase of 12% in transactions per average store offset a 2% reduction in average transaction value and resulted in a comparable store sales growth of 5%. Increases in transactions per average store by brand were as follows: Abercrombie & Fitch 13%, abercrombie 11%, Hollister 7% and RUEHL 63%. The reduction in average transaction value in Abercrombie & Fitch, abercrombie and Hollister was primarily driven by a product mix shift away from jeans into lower retail fashion tops. The reduction in average transaction value in RUEHL reflects pricing strategy changes implemented earlier in the year.

The Company continues to perform well financially while strategically investing with the objective of long-term growth. Two major areas of investment are store presentation and operations and information technology infrastructure.

In stores, the Company is refreshing and adding flagship fixtures in select Abercrombie & Fitch stores as part of its existing Fiscal 2006 capital expenditure budget. The continuation of these projects will be included in the next fiscal year’s capital plan. In addition, in the fourth quarter of Fiscal 2006, the Company plans to increase salary levels in several store manager categories in an effort to attract and retain strong management teams. The in-store environment is vital to the continued strength of the brands and thus requires on-going development and improvement.

In information technology, the Company is investing in new and enhanced systems in the areas of planning and allocation, sourcing and product replenishment. These systems are expected to improve access to data, automate key functions and enhance decision making. These technology improvements will help support the on-going growth of the Company and generate long-term effectiveness.

The Company ended the third quarter of Fiscal 2006 with a decrease in inventory per square foot, at cost, of approximately 7% compared to the third quarter of Fiscal 2005. The Company expects to end the fourth quarter of Fiscal 2006 with a single-digit increase in inventory per gross square foot, at cost, compared to the fourth quarter of Fiscal 2005. This comparison reflects the strategy to accelerate deliveries of Spring merchandise in order to ensure optimal positioning for post Christmas business.

In other developments, the new distribution center is expected to begin operations in December 2006 and the Company plans to open a store in London in the next fiscal year.

The Company expects net income per diluted share for the second half of Fiscal 2006 to be in the range of $3.25 to $3.30, including stock option expense of approximately $0.02 per diluted share attributable to SFAS No. 123(R). The low end of the second half of Fiscal 2006 guidance reflects a flat comparable store sales scenario for the fourth quarter.

THIRD QUARTER RESULTS

Net Sales

Net sales for the third quarter of Fiscal 2006 were $863.4 million, an increase of 22% over net sales of $704.9 million during the third quarter of Fiscal 2005. The net sales increase was attributed to the combination of a 5% comparable store sales increase, the net addition of 92 stores, including the Abercrombie & Fitch Fifth Avenue Flagship store and six stores in Canada, and a 54% increase in the direct-to-consumer business.

Comparable store sales by brand for the third quarter of Fiscal 2006 versus the same quarter in Fiscal 2005 were as follows: Abercrombie & Fitch comparable store sales increased 1% with women’s comparable store sales increasing by a low single-digit and men’s comparable store sales decreasing by a low single-digit. In abercrombie, comparable store sales increased 8% with girls realizing a low double-digit increase and boys achieving a mid single-digit increase. In Hollister, comparable store sales increased 8% with bettys realizing a high single-digit comparable store sales increase and dudes posting a low single-digit increase. RUEHL comparable store sales increased 20% with men’s comparable store sales increasing by the mid-twenties and women posting a low double-digit increase.

Regionally, comparable store sales were strongest in the Midwest and weakest in the West. All the regions’ achieved positive comparable store sales.

In Abercrombie & Fitch, women had comparable store sales increases in fleece and knits, and decreases in jeans. Men had comparable store sales decreases in jeans and fleece, and increases in knits and wovens.

In abercrombie, girls had comparable store sales increases in knits and fleece and decreases in jeans and graphic tees. Boys had comparable store sales increases in knits and wovens, and decreases in pants.

In Hollister, bettys had comparable store sales increases in knits and fleeces, and decreases in jeans and graphic tees. Dudes had comparable store sales increases in wovens and fleece, and decreases in jeans.

In RUEHL, men had comparable store sales increases in knits and fleece, and decreases in sweaters and wovens. Women had comparable store sales increases in knits and fleece and decreases in jeans and graphic tees.

Net direct-to-consumer merchandise sales through the Company’s websites and catalogue for the third quarter of Fiscal 2006 were $41.3 million, an increase of 54% over Fiscal 2005 third quarter net sales of $26.9 million. Shipping and handling revenue for the third quarter of Fiscal 2006 was $5.9 million compared to $3.8 million for the corresponding period in Fiscal 2005. The direct-to-consumer business accounted for 5.5% of net sales in the third quarter of Fiscal 2006 compared to 4.4% in the third quarter of Fiscal 2005.

Gross Profit

Gross profit for the third quarter of Fiscal 2006 was $568.2 million compared to $465.1 million for the comparable period in Fiscal 2005. The gross profit rate (gross profit divided by net sales) for the third quarter of Fiscal 2006 was 65.8%, down 20 basis points from the third quarter Fiscal 2005 rate of 66.0%. The decrease in the gross profit rate primarily reflects a higher markdown rate compared to the third quarter of Fiscal 2005.

Stores and Distribution Expense

Stores and distribution expense for the third quarter of Fiscal 2006 was $308.5 million compared to $252.9 million for the comparable period in Fiscal 2005. For the third quarter of Fiscal 2006, the stores and distribution expense rate (stores and distribution expenses divided by net sales) was 35.7% compared to 35.9% in the third quarter of Fiscal 2005. The decrease in the rate resulted primarily from the Company’s ability to leverage store payroll, partially offset by increases in repairs and maintenance expenses.

The distribution center productivity, as measured in units processed per labor hour (“UPH”), decreased during the third quarter of Fiscal 2006 by 5% as compared to the third quarter of Fiscal 2005. The decrease resulted from increased capacity utilization at the distribution center and the impact of the Company’s focus on strategically flowing inventory to stores during Fiscal 2006. The Company expects the UPH level to continue to decrease until the second distribution center at the Company’s New Albany campus is fully operational.

Marketing, General and Administrative Expense

Marketing, general and administrative expense during the third quarter of Fiscal 2006 was $97.2 million compared to $97.6 million during the same period in Fiscal 2005. For the third quarter of Fiscal 2006, the marketing, general and administrative expense rate (marketing, general and administrative expenses divided by net sales) was 11.3% compared to 13.9% for the third quarter of Fiscal 2005. The decrease in the rate was due to a non-recurring charge of $13.5 million related to an executive severance agreement in the third quarter of Fiscal 2005 and decreases in home office and marketing expense.

Other Operating Income, Net

Third quarter other operating income for Fiscal 2006 was $0.3 million compared to $1.4 million for the third quarter of Fiscal 2005. The decrease was primarily related to the favorable settlement of a class action lawsuit during the third quarter of Fiscal 2005 related to credit card fees to which the Company was a class member.

Operating Income

Operating income for the third quarter of Fiscal 2006 increased to $162.8 million from $115.9 million in the third quarter of Fiscal 2005, an increase of 41%. The operating income rate (operating income divided by net sales) was 18.9% for the third quarter of Fiscal 2006 compared to 16.4% for the third quarter of Fiscal 2005.

Interest Income, Net and Income Tax Expense

Third quarter net interest income was $3.3 million in Fiscal 2006 compared to $1.5 million in the third quarter of Fiscal 2005. The increase in net interest income was due to higher interest rates and a higher available investment balance during the third quarter of Fiscal 2006 when compared to the third quarter of Fiscal 2005.

The effective tax rate for the third quarter of Fiscal 2006 was 38.6% as compared to 39.0% for the Fiscal 2005 comparable period. The decrease in the effective tax rate relates primarily to an increase in tax-exempt income and a tax provision benefit related to the settlement of a tax audit.

The Company estimates that the annual effective tax rate for Fiscal 2006 will be 39.2%, exclusive of the impact of any items that are discrete to the interim periods. However, the Company estimates that the full year effective tax rate for Fiscal 2006 will be approximately 38.1%, including the benefits recognized as discrete items through the third quarter, but excluding any items that may be recognized discretely in the fourth quarter.

Net Income and Net Income per Share

Net income for the third quarter of Fiscal 2006 was $102.0 million versus $71.6 million for the third quarter of Fiscal 2005, an increase of 43%. Net income per diluted weighted-average share outstanding for the third quarter of Fiscal 2006 was $1.11, including $0.01 related to
SFAS 123(R) versus $0.79 for the same period of Fiscal 2005, including $0.09 related to a non-recurring charge for an executive severance agreement in the third quarter of Fiscal 2005.

YEAR-TO-DATE RESULTS

Net Sales

Year-to-date net sales in Fiscal 2006 were $2.179 billion, an increase of 20% over Fiscal 2005 net sales of $1.823 billion for the same period. The net sales increase was attributed to the combination of a 4% comparable stores sales increase, the net addition of 92 stores, including the Abercrombie & Fitch Fifth Avenue Flagship store and six stores in Canada, and a 32% increase in the direct-to-consumer business.

Year-to-date comparable store sales by brand were as follows: Abercrombie & Fitch decreased 2%, abercrombie increased 15%, Hollister increased 8% and RUEHL posted a 20% increase. The women’s business in each concept continued to be more significant than the men’s business. Year-to-date, women, bettys and girls represented over 60% of net sales for each of the brands. Abercrombie & Fitch women posted a low single-digit increase, abercrombie girls achieved a mid double-digit comparable stores sales increase, Hollister bettys had a low-twenties comparable store sales increase and RUEHL women had a low-forties comparable store sales increase.

Net direct-to-consumer merchandise sales through the Company’s websites and catalogue for the year-to-date period for Fiscal 2006 were $99.3 million, an increase of 32% over Fiscal 2005 comparable period net sales of $75.0 million. Shipping and handling revenue for the corresponding periods was $15.2 million in Fiscal 2006 and $11.4 million in Fiscal 2005. The direct-to-consumer business accounted for 5.3% of net sales for the Fiscal 2006 year-to-date period compared to 4.7% in the Fiscal 2005 year-to-date period.

Gross Profit

Year-to-date gross profit during Fiscal 2006 was $1.453 billion compared to $1.212 billion in the comparable period during Fiscal 2005. The gross profit rate for the year-to-date period of Fiscal 2006 was 66.7%, up 20 basis points from last fiscal year-to-date’s rate of 66.5%. The increase in the gross profit rate resulted primarily from a lower markdown rate combined with a slightly higher initial markup.

Stores and Distribution Expense

Stores and distribution expense for the Fiscal 2006 year-to-date period was $837.3 million compared to $707.3 million for the comparable period in Fiscal 2005. The stores and distribution expense rate was 38.4% compared to 38.8% in the corresponding period of Fiscal 2005. The decrease in the rate resulted primarily from the Company’s ability to leverage store-related fixed costs and a reduction in store repairs and maintenance expense.

The distribution center productivity, as measured in UPH, for the Fiscal 2006 year-to-date period decreased 11%. The decrease resulted from increased capacity utilization at the distribution center. The Company expects the UPH level to continue to decrease until the second distribution center at the Company’s New Albany campus is fully operational.

Marketing, General and Administrative Expense

Marketing, general and administrative expense for the Fiscal 2006 year-to-date period was $272.2 million compared to $232.7 million during the same period in Fiscal 2005. The marketing, general and administrative expense rate was 12.5% compared to 12.8% for the year-to-date period of Fiscal 2005. The decrease in the rate is primarily attributable to a $13.5 million charge related to an executive severance agreement in the third quarter of Fiscal 2005, partially offset by $12.9 million of incremental compensation charges due to SFAS 123(R) expense and increased investments in information technology.

Other Operating Income, Net

Year-to-date net other operating income for Fiscal 2006 was $5.4 million compared to $3.2 million for the second quarter of Fiscal 2005. The increase was primarily related to insurance reimbursements received during the first and second quarters of Fiscal 2006 for fire damage and Hurricane Katrina, respectively.

Operating Income

For the Fiscal 2006 year-to-date period, operating income was $349.3 million compared to $275.3 million for the Fiscal 2005 comparable period, an increase of 27%. The operating income rate for the Fiscal 2006 year-to-date period was 16.0% versus 15.1% for the Fiscal 2005 year-to-date period.

Interest Income, Net and Income Tax Expense

Year-to-date net interest income for Fiscal 2006 was $9.2 million compared to $4.3 million for the Fiscal 2005 comparable period. The increase in net interest income was due to higher interest rates and a higher available investment balance during Fiscal 2006 when compared to Fiscal 2005.

The effective tax rate for the Fiscal 2006 year-to-date period was 37.5% compared to 39.4% for the Fiscal 2005 comparable period. The Fiscal 2006 tax rate includes tax benefits related to the settlements of tax audits and the resulting changes in reserve estimates. The decrease in the effective tax rate is also a result of an increase in tax exempt income during the Fiscal 2006 year-to-date period as compared to the Fiscal 2005 year-to-date period. The Fiscal 2005 comparable period tax rate reflected a charge related to the Company’s change in estimate of the potential outcome of certain state tax matters.

The Company estimates that the annual effective tax rate for Fiscal 2006 will be 39.2%, exclusive of the impact of any items that are discrete to the interim periods. The Company estimates that the full year effective tax rate for Fiscal 2006 will be approximately 38.1%, including the benefits recognized as discrete items through the third quarter, but excluding any items that may be recognized discretely in the fourth quarter.

Net Income and Net Income per Share

For the Fiscal 2006 year-to-date period, net income was $224.0 million compared to $169.4 million for the Fiscal 2005 comparable period, an increase of 32%. Fiscal 2006 year-to-date net income per diluted weighted-average share outstanding was $2.44, including a $0.10 charge related to SFAS 123(R) versus $1.87, including $0.09 related to a non-recurring charge for executive severance agreement for the same period last fiscal year.

Off-Balance Sheet Arrangements

As of October 28, 2006, the Company did not have any off-balance sheet arrangements.

Contractual Obligations

As of October 28, 2006, the Company’s contractual obligations were as follows:

						Payments due by period (thousands)
						Less than 1												More than 5
Contractual Obligations		Total				year				1-3 years				3-5 years				years
Operating Lease Obligations		$	1,534,979			$	50,184			$	399,275			$	364,365			$	721,155
Purchase Obligations			290,986				282,347				8,639				—				—
Other Obligations			87,960				84,337				3,252				371				—
Totals		$	1,913,925			$	416,868			$	411,166			$	364,736			$	721,155

Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases (see Note 6 of the Notes to Consolidated Financial Statements contained in A&F’s Annual Report on Form 10-K for Fiscal 2005). Operating lease obligations do not include common area maintenance (“CAM”), insurance or tax payments for which the Company is also obligated. Total expense related to CAM, insurance and taxes was $80.5 million and $71.6 million for year-to-date periods in Fiscal 2006 and Fiscal 2005, respectively. The purchase obligations category represents purchase orders for merchandise to be delivered during Fall 2006 and commitments for fabric to be used during the next several seasons. Other obligations represent preventive maintenance contracts for Fiscal 2006 and letters of credit outstanding as of October 28, 2006 (see Note 9 of the Notes to Consolidated Financial Statements). The Company expects to fund all of these obligations with cash provided from operations.

FINANCIAL CONDITION

Liquidity and Capital Resources

Cash provided by operating activities provides the resources to support operations, including projected growth, seasonal requirements and capital expenditures. A summary of the Company’s working capital position and capitalization follows (in thousands):

		October 28, 2006				January 28, 2006
Working capital		$	430,941			$	455,530
Capitalization:
Shareholders’ equity		$	1,211,879			$	995,117

Operating Activities

Net cash provided by operating activities, the Company’s primary source of liquidity, totaled $269.5 million for the thirty-nine weeks ended October 28, 2006 versus $190.8 million in the comparable period in Fiscal 2005. Cash was provided primarily by current year net income, adjusted for depreciation and amortization, share-based compensation charges and lessor construction allowances collected and increases in accounts payable and accrued expenses. Uses of cash primarily consisted of increases in inventory and payments of income taxes.

Investing Activities

Cash outflows for investing activities were for purchases of marketable securities, the establishment of the Rabbi Trust and capital expenditures (see the discussion in “Capital Expenditures and Lessor Construction Allowances”) related primarily to new store construction and other construction in progress. Cash inflows from investing activities were generated by sales of marketable securities. As of October 28, 2006, the Company held $308.9 million of marketable securities with original maturities of greater than 90 days.

Financing Activities

Financing activities for the thirty-nine week period ended October 28, 2006 consisted of $46.2 million for the payment of $0.175 per share quarterly dividends on March 21, 2006, June 20, 2006 and September 19, 2006 and $9.5 million received in connection with stock option exercises.

During the third quarter of Fiscal 2006, the Company did not repurchase shares of A&F’s Common Stock. As of October 28, 2006, 5.7 million shares were available for repurchase as part of the August 2005 A&F Board of Directors’ authorization to repurchase six million shares of A&F’s Common Stock.

The Company has $250 million available (less outstanding letters of credit) under its Amended Credit Agreement to support operations. Trade letters of credit totaling approximately $78.6 million and $66.1 million were outstanding on October 28, 2006 and October 29, 2005, respectively. No loans were outstanding on October 28, 2006 or October 29, 2005.

Standby letters of credit totaling approximately $4.9 million and $4.5 million were outstanding on October 28, 2006 and October 29, 2005. The standby letters of credit are set to expire primarily during the fourth quarter of next fiscal year. The beneficiary, a merchandise supplier, has the right to draw upon the standby letters of credit if the Company declares bankruptcy. To date, the beneficiary has not drawn upon the standby letters of credit.

Store Count and Gross Square Feet

Store count and gross square footage by brand for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, were as follows:

		Abercrombie & Fitch				abercrombie				Hollister				RUEHL				Total
Store Activity
July 29, 2006			351				164				355				10				880
New			4				7				17				1				29
Remodels/Conversions (net)			3				—				—				—				3
Closed			—				—				—				—				—
October 28, 2006			358				171				372				11				912
Gross Square Feet (thousands)
July 29, 2006			3,085				719				2,329				89				6,222
New			30				34				119				11				194
Remodels/Conversions (net)			23				—				2				—				25
Closed			—				—				—				—				—
October 28, 2006			3,138				753				2,450				100				6,441
Average Store Size			8,765				4,404				6,586				9,091				7,063

		Abercrombie&Fitch				abercrombie				Hollister				RUEHL				Total
Store Activity
July 29, 2005			355				163				281				5				804
New			4				2				17				1				24
Remodels/Conversions (net)			2				—				2				—				4
Closed			(7	)(1)			(2	)			(3	)(1)			—				(12	)
October 29, 2005			354				163				297				6				820
Gross Square Feet (thousands)
July 29, 2005			3,086				714				1,826				47				5,673
New			35				8				122				11				176
Remodels/Conversions (net)			9				—				14				—				23
Closed			(53	)(1)			(9	)			(21	)(1)			—				(83	)
October 29, 2005			3,077				713				1,941				58				5,789
Average Store Size			8,692				4,374				6,535				9,667				7,060

Store count and gross square footage by brand for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively, were as follows:

		Abercrombie & Fitch				abercrombie				Hollister				RUEHL				Total
Store Activity
January 29, 2006			361				164				318				8				851
New			5				11				49				3				68
Remodels/Conversions (net)			(3	)(1)			—				5	(1)			—				2
Closed			(5	)			(4	)			—				—				(9	)
October 28, 2006			358				171				372				11				912
Gross Square Feet (thousands)
January 29, 2006			3,157				716				2,083				69				6,025
New			37				53				330				31				451
Remodels/Conversions (net)			(16	)			—				37				—				21
Closed			(40	)			(16	)			—				—				(56	)
October 28, 2006			3,138				753				2,450				100				6,441
Average Store Size			8,765				4,404				6,586				9,091				7,063